<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997
Commission file number 340-23520
QUINTILES TRANSNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
- ------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4709 Creekstone Dr., Suite 300
Durham, NC 27703-8411
- ------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(919) 941-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock, $.01 par value, outstanding as of April
30, 1997, was 34,842,729.
1
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -
March 31, 1997 and December 31, 1996 3
Condensed consolidated statements of
income - Three months ended
March 31, 1997 and 1996 4
Condensed consolidated statements of
cash flows - Three months ended
March 31, 1997 and 1996 5
Notes to condensed consolidated financial
statements - March 31, 1997 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 11
Signatures 13
Exhibit Index 14
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
--------- ---------
(Unaudited) (Note 1)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 128,894 $ 62,032
Accounts receivable and unbilled services 189,126 178,579
Investments 32,666 37,623
Other 15,637 12,656
--------- ---------
Total current assets 366,323 290,890
Property and equipment 194,433 178,466
Less accumulated depreciation 60,581 54,286
--------- ---------
133,852 124,180
Non-current assets:
Investments 26,214 25,083
Intangibles 70,913 66,804
Deferred income taxes 58,832 --
Deposits and other 11,272 11,048
--------- ---------
Total non-current assets 167,231 102,935
--------- ---------
Total assets $ 667,406 $ 518,005
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 88,115 85,366
Credit arrangements, current 17,005 22,614
Unearned income 76,481 77,825
Income taxes and other 11,236 9,077
--------- ---------
Total current liabilities 192,837 194,882
Long-term liabilities:
Credit arrangements, less current portion 152,673 146,869
Long-term obligation 21,112 21,823
Deferred income taxes and other 4,492 10,083
--------- ---------
178,277 178,775
--------- ---------
Total liabilities 371,114 373,657
Shareholders' equity:
Common Stock and additional paid-in capital,
34,794,633 and 33,149,962 shares issued and
outstanding at March 31, 1997 and December
31, 1996, respectively 289,283 139,221
Retained earnings 16,089 5,702
Other equity (9,080) (575)
--------- ---------
Total shareholders' equity 296,292 144,348
--------- ---------
Total liabilities and shareholders' equity $ 667,406 $ 518,005
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- --------
(In thousands, except per share data)
<S> <C> <C>
Net revenue $ 169,976 $110,592
Costs and expenses:
Direct 86,610 56,858
General and administrative 58,422 36,662
Depreciation and amortization 7,839 5,328
Non-recurring:
Restructuring -- 2,373
Special pension contribution -- 2,329
--------- --------
Total costs and expenses 152,871 103,550
--------- --------
Income from operations 17,105 7,042
Other (expense) income, net (683) 215
--------- --------
Income before income taxes 16,422 7,257
Income taxes 6,035 2,821
--------- --------
Net income $ 10,387 $ 4,436
========= ========
Net income per share $ 0.30 $ 0.13
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1997 1996
--------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,387 $ 4,436
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,839 5,328
Change in operating assets and liabilities (10,012) 10,949
Other (1,070) (135)
Change in fiscal year of pooled entity -- (9,378)
--------- --------
Net cash provided by operating activities 7,144 11,200
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 66 20
Acquisition of businesses, net of cash acquired -- (899)
Acquisition of intangible assets (4,795) --
Acquisition of property and equipment (17,587) (9,039)
Security investments, net 3,226 --
Dividend paid by pooled entity -- (9,162)
Change in fiscal year of pooled entity -- 11,768
--------- --------
Net cash used in investing activities (19,090) (7,312)
FINANCING ACTIVITIES
Proceeds from borrowings and line of credit 3,491 658
Principal payments on borrowings and line of credit (8,277) (884)
Principal payments on capital lease obligations (2,627) (1,398)
Proceeds from issuance of common stock 91,578 586
Stock issuance costs (4,207) --
Other -- (101)
Change in fiscal year of pooled entity -- 1,398
--------- --------
Net cash provided by financing activities 79,958 259
Effect of foreign currency exchange rate changes on cash (1,150) (84)
--------- --------
Increase in cash and cash equivalents 66,862 4,063
Cash and cash equivalents at beginning of period 62,032 80,061
--------- --------
Cash and cash equivalents at end of period $ 128,894 $ 84,124
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1997
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1996 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
Net income per share is based on the weighted average number of shares of common
stock outstanding during each period. Weighted average shares outstanding for
the three month periods ended March 31 were as follows:
<TABLE>
<CAPTION>
Weighted Average Shares Outstanding
1997 1996
---- ----
<S> <C> <C> <C>
Three months ended March 31 34,565,853 33,901,731
</TABLE>
2. Significant Customer
No customer accounted for greater than 10% of consolidated net revenue for the
three months ended March 31, 1997. One customer accounted for greater than 10%
of consolidated net revenue for the three months ended March 31, 1996, as
indicated below (in thousands):
Three months ended
March 31, 1996
------------------------------
Customer A $14,232
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) -- Continued
3. Shareholders' Equity
On March 12, 1997, the Company closed a public offering of 5,520,000
shares of common stock at a price to the public of $62.875 per share. Of
the 5,520,000 shares sold, 1,415,000 shares were sold by the Company. Net
proceeds to the Company which exclude underwriting discounts and offering
expenses amounted to approximately $84.6 million.
4. Income Taxes
In the first quarter of 1997, the Company recorded an estimate of the
deferred tax asset related to tax basis goodwill created by the Innovex
acquisition, which is amortizable for U.S. tax purposes starting January
1, 1997. The gross amount of this deferred tax asset is estimated to be
$99.5 million, for which a valuation allowance of $36.8 million was
recorded to reflect possible limitations in the use of these tax
benefits. A corresponding $62.7 million increase in additional paid in
capital was recorded in accordance with generally accepted accounting
principles.
5. Subsequent Event
On May 8, 1997, the Company announced the signing of a definitive
agreement to acquire CerebroVascular Advances, Inc. ("CVA"), a clinical
research company that is a leader in stroke clinical trials. The
agreement calls for the merger of CVA into a wholly-owned subsidiary of
the Company in exchange for approximately 251,000 shares of the Company's
common stock, subject to adjustment prior to closing, in a pooling of
interests transaction. Completion of the acquisition, subject to CVA
shareholder approval and other customary conditions, is expected during
the third quarter.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended March 31, 1997 and 1996
Net revenue increased 53.7% to $170.0 million for the first quarter of 1997, as
compared to $110.6 million for the first quarter of 1996. In general, growth
occurred across each of the Company's three geographic regions. Factors
contributing to this growth include the provision of increased services rendered
under existing contracts, the initiation of services under contracts awarded
subsequent to the first quarter of 1996 and the Company's acquisitions
accounted for as purchases subsequent to March 31, 1996 which contributed
approximately $6.9 million to the net revenue for the first quarter of 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and any other expenses directly related to contracts which
are not included as reimbursed costs, increased 52.3% to $86.6 million for the
quarter ended March 31, 1997 from $56.9 million for the quarter ended March 31,
1996 as a result of the increase in net revenue. Direct costs, as a percentage
of net revenue, decreased slightly to 51.0% for the first quarter of 1997 versus
51.4% for the first quarter of 1996.
General and administrative expense, which includes compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, increased 59.4% to $58.4
million from $36.7 million for the quarters ended March 31, 1997 and 1996,
respectively. This increase is primarily the result of growth and expansion, the
increased commitment to developing the Company's proprietary software systems
and an increase in the costs associated with personnel, facility management and
outside services brought on by the Company's growth. General and administrative
expense, as a percentage of net revenue, increased to 34.4% for the first
quarter of 1997 from 33.2% for the first quarter of 1996. This increase is
primarily the result of expenditures related to the development of a
transnational divisional management infrastructure to facilitate the Company's
management of future growth opportunities.
Depreciation and amortization increased to $7.8 million for the first quarter of
1997 from $5.3 million for the first quarter of 1996.
Income from operations was $17.1 million or 10.1% of net revenue for the first
quarter of 1997 versus $7.0 million or 6.4% of net revenue for the first quarter
of 1996. Excluding non-recurring costs, income from operations was $11.7
million or 10.6% of net revenue for the first quarter of 1996. During the first
quarter of 1996, two non-recurring charges were recognized: a $2.4 million
expense for an Innovex Limited internal reorganization and a related $2.3
million special pension contribution.
Other expense was $683,000 for the first quarter of 1997 as compared to other
income of $215,000 for the first quarter of 1996. This fluctuation is primarily
due to an increase of approximately $975,000 in net interest expense and a
decrease in other expense of approximately $77,000. Amortization of
8
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
the issuance costs and interest relating to the Company's May 1996 private
placement of its 4.25% Convertible Subordinated Notes due May 31, 2000 of
approximately $1.8 million is included in determining net interest expense for
the first quarter of 1997.
Income taxes, as a percentage of income before income taxes, decreased to 36.7%
for the first quarter of 1997 versus 38.9% for the first quarter of 1996. This
decrease is primarily due to an increase in profits in locations with lower tax
rates and a tax benefit of approximately $148,000 from tax advantaged investment
instruments.
Net income increased to $10.4 million for the first quarter of 1997 from $4.4
million for the first quarter of 1996. Excluding non-recurring costs, net income
was $10.4 million or 6.1% of net revenue for the first quarter of 1997 versus
$8.0 million or 7.2% of net revenue for the first quarter of 1996.
Liquidity and Capital Resources
Cash flows from operations were $7.1 million for the three months ended March
31, 1997 versus $11.2 million for the comparable period of 1996. Investing
activities, for the three months ended March 31, 1997, consisted primarily of
capital asset purchases, acquisition of Debra Chapman Consulting Group Pty
Limited and the Medical Alliances Australia Pty Limited, and investment
security purchases and maturities. These investing activities required an
outlay of cash of $19.1 million for the first three months of 1997 compared to
an outlay of $7.3 million for investing activities during the same period in
1996.
As of March 31, 1997, total working capital was $173.5 million versus $96.0
million as of December 31, 1996. Net receivables from clients (accounts
receivable and unbilled services net of unearned income) increased to $112.6
million at March 31, 1997 as compared to $100.8 million at the end of 1996.
On March 12, 1997, the Company closed a public offering of 5,520,000 shares of
its common stock at a price to the public of $62.875 per share. Of the 5,520,000
shares sold, 1,415,000 shares were sold by the Company and 4,105,000 shares were
sold by selling shareholders. Net proceeds to the Company amounted to
approximately $84.6 million.
The Company has a $4.0 million secured line of credit with a U.S. bank.
Additionally, the Company has a (pound)6.0 million (approximately $9.8 million)
unsecured line of credit with a U.K. bank and a (pound)5.0 million
(approximately $8.2 million) secured overdraft facility with a second U.K. bank.
A $15.0 million unsecured line of credit with a second U.S. bank expired in
accordance with its terms during the quarter. At March 31, 1997, the Company had
$518,000 and (pound)10.5 million (approximately $17.1 million) available under
these arrangements.
The Company's primary cash needs on both a short-term basis and a long-term
basis are for working capital, geographic expansion, addition of new services,
potential acquisitions, general corporate purposes and capital expenditures.
9
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Based on its current operating plan, the Company believes that its available
cash and cash equivalents as of March 31, 1997, together with cash flow from
operations and borrowings under its line of credit agreements, will be
sufficient to meet its foreseeable cash needs.
Currently, the Company is evaluating a number of acquisition and expansion
possibilities. The Company may from time to time seek to obtain debt or equity
financing to facilitate possible acquisitions or expansion.
In the first quarter of 1997, the Company recorded an estimate of the deferred
tax asset related to tax basis goodwill created by the Innovex acquisition,
which is amortizable for U.S. tax purposes starting January 1, 1997. The gross
amount of this deferred tax asset is estimated to be $99.5 million, for which a
valuation allowance of $36.8 million was recorded to reflect possible
limitations in the use of these tax benefits. A corresponding $62.7 million
increase in additional paid in capital was recorded in accordance with
generally accepted accounting principles.
Recent Events
On May 8, 1997, the Company announced the signing of a definitive agreement to
acquire CVA, a clinical research company that is a leader in stroke clinical
trials. The agreement calls for the merger of CVA into a wholly-owned
subsidiary of the Company in exchange for approximately 251,000 shares of the
Company's common stock, subject to adjustment prior to closing, in a pooling of
interests transaction. Completion of the acquisition, subject to CVA
shareholder approval and other customary conditions, is expected during the
third quarter.
Cautionary Statement for Forward-Looking Information
Information set forth in this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contain various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent the Company's actual operating results and financial position to
differ materially. Such forward looking statements can be identified by the use
of forward looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "believe," or "continue," or the negative thereof or other
variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the Company's dependence on certain industries and
clients, management of its growth, risks associated with acquisitions, risks
relating to contract sales services, competition within the industry, loss or
delay of large contracts, dependence on personnel and government regulation and
other Risk Factors described in Exhibit 99.01 filed with this report (and
incorporated herein by reference).
10
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings -- Not applicable
Item 2. Changes in Securities -- Not applicable
Item 3. Defaults upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- Not applicable
Item 5. Other Information
(a) On or about March 27, 1997, the Company's Board of
Directors mailed to Shareholders of Record at the
close of business on February 25, 1997, a proxy
statement and accompanying proxy card in connection
with the solicitation of proxies for use at the
Annual Meeting of Shareholders to be held on April
30, 1997 for the following purposes:
(1) To elect four nominees to serve as Class III
directors with terms continuing until the
Annual Meeting of Shareholders in 2000;
(2) To elect two nominees to serve as Class II
directors with terms continuing until the
Annual Meeting of Shareholders in 1999;
(3) To elect one nominee to serve as a Class I
director with a term continuing until the
Annual Meeting of Shareholders in 1998;
(4) To approve the Company's Employee Stock
Purchase Plan;
(5) To ratify the appointment of Ernst & Young
LLP as independent auditors for the Company
and its subsidiaries for the fiscal year
ending December 31, 1997; and
(6) To transact such other business as may
properly come before the meeting or any
adjournment or postponement thereof.
11
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.01 Financial Data Schedule
99.01* Risk Factors
- ------------
*Exhibit 99.01 to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 25, 1997 and incorporated herein by
reference.
(b) The Company filed one report on Form 8-K/A, dated January 16,
1997, one report on Form 8-K, dated February 7, 1997, and one
report on Form 8-K, dated March 5, 1997, during the three
months ended March 31, 1997. On the report on Form 8-K/A,
dated January 16, 1997, the Company filed Unaudited Interim
Condensed Financial Statements of Innovex Limited ("Innovex")
and BRI International, Inc. ("BRI") and Unaudited Proforma
Combined Condensed Financial Statements of the Company,
Innovex and BRI. On the report on Form 8-K, dated February 7,
1997, the Company reported information regarding certain
effects of government regulation on its business and filed the
Audited Consolidated Financial Statements of the Company for
the fiscal year ended December 31, 1996. On the report on Form
8-K, dated March 5, 1997, the Company filed a supplemental
agreement to the Registration Rights Agreement by and among
the Company and certain shareholders listed therein. No other
reports on Form 8-K have been filed.
12
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
--------------------------------------------
Registrant
Date May 15, 1997 Dennis B. Gillings
------------ --------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date May 15, 1997 Rachel R. Selisker
------------ --------------------------------------------
Rachel R. Selisker, Chief Financial Officer
13
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
27.01 Financial Data Schedule
99.01* Risk Factors
- ------------
*Exhibit 99.01 to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 25, 1997 and incorporated herein by
reference.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM _____
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH _______ .
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 128,894
<SECURITIES> 32,666
<RECEIVABLES> 190,101
<ALLOWANCES> 975
<INVENTORY> 0
<CURRENT-ASSETS> 366,323
<PP&E> 194,433
<DEPRECIATION> 60,581
<TOTAL-ASSETS> 667,406
<CURRENT-LIABILITIES> 192,837
<BONDS> 173,785
0
0
<COMMON> 348
<OTHER-SE> 295,944
<TOTAL-LIABILITY-AND-EQUITY> 667,406
<SALES> 0
<TOTAL-REVENUES> 169,976
<CGS> 0
<TOTAL-COSTS> 152,871
<OTHER-EXPENSES> (1,880)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,564
<INCOME-PRETAX> 16,422
<INCOME-TAX> 6,035
<INCOME-CONTINUING> 10,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,387
<EPS-PRIMARY> .30
<EPS-DILUTED> 0
</TABLE>
