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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 20, 1998
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 340-23520 56-1714315
(State or other (Commission File No.) I.R.S. Employer
jurisdiction Identification Number
of incorporation)
4709 CREEKSTONE DRIVE, RIVERBIRCH BUILDING, SUITE 200,
DURHAM, NORTH CAROLINA 27703-8411
(Address of principal executive offices)
(919) 941-2000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
Quintiles Transnational Corp. (the "Company") is filing on this report
the following consolidated financial statements and related information:
Item Description Page
---------------- ----
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Report of Independent Auditors 11
Consolidated Statements of Income for the three
years ended December 31, 1995, 1996 and 1997 12
Consolidated Balance Sheets as of December 31, 1996
and 1997 13
Consolidated Statements of Shareholders' Equity
for each of the three years ended December 31, 1997 15
Consolidated Statements of Cash Flows for each of the
three years ended December 31, 1997 16
Notes to Consolidated Financial Statements 17
Information set forth in this report, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which statements represent the Company's judgment concerning the
future and are subject to risks and uncertainties that could cause 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, the loss or delay of large contracts, dependence on personnel,
government regulation and other considerations described in connection with
specific forward looking statements, as well as other risk factors described in
the Company's filings with the Securities and Exchange Commission.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Quintiles Transnational Corp. ("Quintiles" or "the Company") is a
market leader in providing full-service contract research, sales, marketing and
healthcare policy consulting and health information management services to the
global pharmaceutical, biotechnology, medical device and healthcare industries.
During 1997, the Company completed several strategic acquisitions that
complimented its existing operations and expanded its array of services.
Specifically:
- -- On February 27, 1997, the Company acquired Debra Chapman Consulting
Group Pty Limited and the Medical Alliances Australia Pty Limited group
of companies (collectively "DCCG/MAA") located in Sydney and Melbourne,
Australia. The Company purchased 100% of the DCCG/MAA group of
companies' outstanding stock for an undisclosed amount of cash.
- -- On June 2, 1997, the Company acquired Butler Communications Inc.
("Butler") and its affiliated companies, including Butler Clinical
Recruitment, Inc., which specialize in communication programs to
accelerate the recruitment of patients for clinical trials. The Company
acquired the Butler businesses in exchange for 428,610 shares of the
Company's Common Stock. In addition, the Company assumed approximately
$2.8 million in existing Butler debt. The acquisition of Butler was
accounted for as a pooling of interests, and all consolidated financial
data for periods subsequent to January 1, 1997 have been restated to
include the results of the pooled company. The financial data of the
pooled companies prior to January 1, 1997 were not materially different
from that previously reported by the Company, and thus have not been
restated.
- -- On June 11, 1997, the Company acquired Action International Marketing
Services Limited and its subsidiaries, including Medical Actions
Communications Limited (collectively "MAC"), a leading international
strategic medical communications consultancy. The Company acquired MAC
in exchange for 1,131,394 shares and granted stock options exercisable
for an additional 125,700 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests, and as such,
all historical financial data have been restated to include the
historical financial data of MAC.
- -- On June 21, 1997, the Company acquired the operating assets of
Pharmacology Data Management Corporation ("PDMC"), a software services
company, for an undisclosed amount of cash.
- -- On July 2, 1997, the Company acquired CerebroVascular Advances, Inc.
("CVA"), a leader in stroke clinical trials. The Company acquired CVA
in exchange for 467,936 shares and stock options exercisable for an
additional 34,038 shares of the Company's Common Stock. The acquisition
was accounted for as a pooling of interests, and accordingly, the
Company restated all historical financial data to include the
historical financial data of CVA.
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- -- On August 29, 1997, the Company acquired Intelligent Imaging, Inc.
("Intelligent Imaging"), an information management company specializing
in providing digital medical imaging services for clinical trials and
the healthcare industry, in exchange for 171,880 shares of the
Company's Common Stock. The acquisition of Intelligent Imaging was
accounted for as a pooling of interests, and all consolidated financial
data for periods subsequent to January 1, 1997 have been restated to
include the results of the pooled company. The financial data of the
pooled companies prior to January 1, 1997 were not materially different
from that previously reported by the Company, and thus have not been
restated.
- -- On August 29, 1997, the Company acquired Clindepharm International
(Pty) Limited ("Clindepharm"), South Africa's leading contract research
organization, in exchange for 477,966 shares of the Company's Common
Stock. The acquisition was accounted for as a pooling of interests, and
as such, all historical financial data have been restated to include
the historical financial data of Clindepharm since its inception in
1996.
- -- On August 29, 1997, the Company acquired Rapid Deployment Services and
its affiliated companies ("RDS"), South Africa's leading contract sales
organization, in exchange for 121,668 shares of the Company's Common
Stock. The acquisition of RDS was accounted for as a pooling of
interests, and all consolidated financial data for periods subsequent
to January 1, 1997 have been restated to include the results of the
pooled company. The financial data of the pooled companies prior to
January 1, 1997 were not materially different from that previously
reported by the Company, and thus have not been restated.
In addition, on September 10, 1997, the Company officially opened its 171,000 -
square foot clinical trials material packaging and distribution facility in
Bathgate, Scotland. The facility, which includes a data management center,
opened with a staff of about 115, and it is expected to eventually employ
approximately 300 people.
Also, on December 1, 1997, the Company effected a two-for-one split of the
Company's Common Stock in the form of a 100% stock dividend. All references to
number of shares and per share amounts have been restated to reflect the stock
split.
CONTRACT REVENUE
Most of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Generally,
a portion of the contract fee is paid at the time the project is initiated with
performance-based installments payable over the contract duration. Most
contracts are terminable upon 15-90 days' notice by the customer, and typically
provide for termination or winding down fees. Also, some contracts call for the
customer to reimburse the Company at cost for certain items such as investigator
payments and travel. The Company recognizes net revenue from its contracts,
which excludes reimbursed costs, on a percentage-of-completion or per diem basis
as work is performed. The Company considers net revenue its primary measure of
revenue growth.
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The Company reports backlog based on anticipated net revenue from
uncompleted projects which have been authorized by the customer through a
written contract or otherwise. Using this method of reporting backlog, at
December 31, 1997, 1996 and 1995 the backlog was approximately $1.06 billion,
$708 million and $415 million, respectively. The Company believes that backlog
may not be a consistent indicator of future results because backlog can be
affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years, loss or significant
delay of contracts, or a change in the scope of a project during the course of a
study.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenue for the year ended December 31, 1997 was $814.5 million, an
increase of $260.2 million or 47.0% over fiscal 1996 net revenue of $554.2
million. Growth occurred across each of the Company's three geographic regions.
Factors contributing to the growth included an increase of contract service
offerings, the provision of increased services rendered under existing contracts
and the initiation of services under contracts awarded subsequent to January 1,
1997.
Direct costs, which include compensation and related fringe benefits
for billable employees and other expenses directly related to contracts, were
$421.9 million or 51.8% of 1997 net revenue versus $279.0 million or 50.3% of
1996 net revenue. The increase in direct costs as a percentage of net revenue
was primarily attributable to the increase in net revenue generated from
contract sales and marketing services, which incur a higher level of direct
costs (but lower general and administrative expenses) relative to net revenue
than contract research services.
General and administrative expenses, which include compensation and
fringe benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $267.5 million or
32.8% of 1997 net revenue versus $192.2 million or 34.7% of 1996 net revenue.
The $75.3 million increase in general and administrative expenses was primarily
due to an increase in personnel, facilities and locations and outside services
resulting from the Company's growth.
Depreciation and amortization were $37.5 million or 4.6% of 1997 net
revenue versus $25.2 million or 4.5% of 1996 net revenue.
Income from operations was $87.7 million or 10.8% of 1997 net revenue
versus $42.4 million or 7.7% of 1996 net revenue. Excluding non-recurring costs
incurred in 1996 as described below, income from operations was $57.9 million or
10.4% of net revenue.
Other expense decreased to $2.1 million in 1997 from $19.5 million in
1996. Excluding acquisition costs and non-recurring transaction costs, other
income was $100,000 in 1997 and other expense was $2.4 million in 1996. The $2.5
million change was primarily due to decreases in net interest expense of
approximately $2.3 million and other expense of approximately $100,000.
The effective tax rate for 1997 was 35.4% versus a 61.2% rate in 1996.
Excluding non-recurring transaction and restructuring costs which were not
deductible for tax purposes, the 1996 effective tax rate would have been 33.9%.
Since the Company conducts operations on a global basis, its effective tax rate
may vary. See "--Taxes."
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YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Prior to the Company's November 29, 1996 share exchange with Innovex
Limited ("Innovex"), Innovex had a fiscal year end of March 31, and the Company
had (and continues to have) a fiscal year end of December 31. As a result, the
pooled data prior to January 1, 1996 includes Innovex's March 31 fiscal year
data in combination with the Company's December 31 fiscal year data. In
connection with the share exchange, Innovex changed its fiscal year end to
December 31. Accordingly, the pooled data presented for 1996 include both
Innovex's and the Company's data on a December 31 year end basis. Because of the
difference between Innovex's fiscal year end in 1995 compared with 1996,
Innovex's quarter ended March 31, 1996 data are included in the Company's pooled
data for both 1995 and 1996.
Net revenue for the year ended December 31, 1996 was $554.2 million, an
increase of $217.2 million or 64.5% over fiscal 1995 net revenue of $337.0
million. In general, growth occurred across each of the Company's three
geographic regions and within each contract service sector. Factors contributing
to both the regional and service growth included the provision of increased
services rendered under existing contracts, the initiation of services under
contracts awarded subsequent to January 1, 1996 and the Company's acquisitions
(excluding BRI International, Inc. ("BRI") and Innovex) completed during 1996
and 1995 which contributed approximately $44.8 million in 1996 versus $11.7
million in 1995. Without these acquisitions, the Company's 1996 net revenue
increased by $184.1 million or 56.6% over comparable 1995 net revenue.
One customer accounted for 11.5% of the Company's 1996 net revenue.
Direct costs, which include compensation and related fringe benefits
for billable employees and other expenses directly related to contracts, were
$279.0 million or 50.3% of 1996 net revenue versus $171.6 million or 50.9% of
1995 net revenue. The decrease in direct costs as a percentage of net revenue
was primarily attributable to efficiency realized through the use of information
technology in the Company's provision of services related to global, long-term
contracts, offset by increased costs attributable to the increase in net revenue
generated from contract sales and marketing services, which incur a higher level
of direct costs (but lower general and administrative expenses) relative to net
revenue than contract research services.
General and administrative expenses, which include compensation and
fringe benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $192.2 million or
34.7% of 1996 net revenue versus $116.9 million or 34.7% of 1995 net revenue.
The $75.2 million increase in general and administrative expenses was primarily
due to an increase in personnel, facilities and locations, business development
and marketing activities, and outside services resulting from the Company's
growth.
Depreciation and amortization were $25.2 million or 4.5% of 1996 net
revenue versus $17.2 million or 5.1% of 1995 net revenue.
Income from operations was $42.4 million or 7.7% of 1996 net revenue
versus $26.5 million or 7.9% of 1995 net revenue. Net of non-recurring costs,
income from operations was $57.9 million or 10.4% of 1996 net revenue versus
$31.2 million or 9.3% of 1995 net revenue. During the quarter ended March 31,
1996, Innovex recognized two non-recurring charges: a $2.4 million expense for
an Innovex internal reorganization and a related $2.3 million special pension
contribution. Accordingly, the Company's pooled, consolidated financial results
include such charges, totaling $4.7 million, in both the fiscal years ended
December 31, 1996 and 1995. In the fourth quarter of 1996, the Company
recognized approximately $10.7 million in non-recurring restructuring costs
related to the BRI and Innovex transactions.
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Other expense increased to $19.5 million in 1996 from $1.2 million in
1995. Other expense includes approximately $17.1 million of non-recurring
transaction costs for the year ended December 31, 1996, most of which were not
deductible for tax purposes. Net of such non-recurring transaction costs, other
expense was $2.4 million for 1996 and $1.2 million in 1995. This increase of
approximately $1.2 million was primarily due to an increase of interest and
miscellaneous expense of $5.8 million which was offset by an increase in
interest income of approximately $4.5 million.
The effective tax rate for 1996 was 61.2% versus a 36.6% rate in 1995.
The increase in the 1996 effective tax rate was primarily attributable to the
non-tax deductible, non-recurring transaction costs incurred and a portion of
the non-recurring costs relating to the Innovex internal reorganization prior to
its pooling of interests with the Company. The lack of tax relief for the
Innovex internal reorganization costs was reflected in both the effective tax
rates for 1996 and 1995. The effective tax rate for 1996 was 33.9% versus a
34.6% rate in 1995 excluding the non-recurring costs. Since the Company conducts
operations on a global basis, its effective tax rate may vary. See "-- Taxes."
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations were $77.4 million in 1997 versus
$32.7 million and $35.8 million in 1996 and 1995, respectively. Cash flows from
investing activities in 1997 were $150.0 million, versus $144.9 million and
$38.3 million in 1996 and 1995, respectively. The change in the amount of cash
from investing activities from 1995 to 1996 was primarily due to the investment
of the Company's net proceeds from the May 1996 private placement of its 4.25%
Convertible Subordinated Notes due May 31, 2000. Capital asset purchases
required $78.7 million in 1997 versus $39.7 million and $26.0 million in 1996
and 1995, respectively. Capital asset expenditures in 1997 and 1996 included
(pound)15.8 million (approximately $26.5 million) and (pound)2.7 million
(approximately $5.0 million), respectively, related to the Company's purchase of
land and construction of a facility in Bathgate, Scotland. The remaining capital
expenditures were predominantly incurred in connection with the expansion of
existing operations, the enhancement of information technology capabilities and
the opening of new offices.
Total working capital was $164.9 million at December 31, 1997 compared
to $99.3 million at December 31, 1996. Including long-term cash investments of
$69.1 million and $25.1 million at December 31, 1997 and 1996, respectively, in
total working capital, the increase was $109.6 million. Total accounts
receivable and unbilled services increased 14.8% to $210.4 million at December
31, 1997 from $183.2 million at December 31, 1996, as a result of the growth in
net revenue. The number of days revenue outstanding in accounts receivable and
unbilled services, net of unearned income, was 42 and 48 days at December 31,
1997 and December 31, 1996, respectively.
During 1995, the Company acquired a drug development facility in
Edinburgh, Scotland. Related to this acquisition, the Company entered into a
purchase commitment valued at U.K. (pound)13.0 million (approximately $21.0
million) with payment due in December 1999. The Company has hedged this
commitment by purchasing forward contracts. The Company's forward contracts
mature on December 29, 1999, and as of December 31, 1997, the Company had
committed to purchasing approximately U.K. (pound)1.5 million (approximately
$2.3 million) under such contracts. The Company is obligated to purchase up to
an additional (pound)5.9 million through December 28, 1999 in varying amounts as
the daily dollar-to-pound exchange rate ranges between $1.5499 and $1.6800.
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The Company has available to it a U.K. (pound)15.0 million unsecured
line of credit with a U.K. bank and a U.K. (pound)5.0 million unsecured line of
credit with a second U.K. bank. At December 31, 1997, the Company had U.K.
(pound)13.8 million available under these credit agreements.
On March 12, 1997, the Company completed a public offering of
11,040,000 shares of its Common Stock at a price of $31.4375 per share. Of the
11,040,000 shares sold, 2,830,000 shares were sold by the Company and 8,210,000
shares were sold by selling shareholders. Net proceeds to the Company amounted
to approximately $84.3 million.
All foreign currency denominated amounts due, subsequent to December
31, 1997, have been translated using the Friday, December 26, 1997 foreign
exchange rates as published in the December 29, 1997 edition of the Wall Street
Journal.
Based on its current operating plan, the Company believes that its
available cash and cash equivalents, together with future cash flows from
operations and borrowings under its line of credit agreements will be sufficient
to meet its foreseeable cash needs in connection with its operations. As part of
its business strategy, the Company reviews many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, the
Company is continually evaluating new acquisition and expansion possibilities.
The Company may from time to time seek to obtain debt or equity financing in its
ordinary course of business or to facilitate possible acquisitions or expansion.
FOREIGN CURRENCY
Approximately 50.0%, 57.0% and 60.1% of the Company's net revenue for
the years ended December 31, 1997, 1996, and 1995, respectively, were derived
from the Company's operations outside the United States. The Company's financial
statements are denominated in U.S. dollars, and accordingly, changes in the
exchange rate between foreign currencies and the U.S. dollar will affect the
translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results.
The Company may be subject to foreign currency transaction risk when
the Company's service contracts are denominated in a currency other than the
currency in which the Company earns fees or incurs expenses related to such
contracts. The Company limits its foreign currency transaction risk through
exchange rate fluctuation provisions stated in its contracts with customers, or
the Company may hedge its transaction risk with foreign currency exchange
contracts or options. The Company recognizes changes in value in income only
when foreign currency exchange contracts or options are settled or exercised,
respectively. There were several foreign exchange contracts relating to service
contracts open at December 31, 1997, all of which are immaterial to the Company.
TAXES
Since the Company conducts operations on a global basis, the Company's
effective tax rate has depended and will continue to depend on the amount of
profits in locations with varying tax rates. The Company's results of operations
will be impacted by changes in the tax rates of the various jurisdictions and by
changes in any applicable tax treaties. In particular, as the portion of the
Company's non-U.S. business increases, the Company's effective tax rate may vary
significantly from period to period. The Company's effective tax rate may also
depend upon the extent to which the Company is allowed (and is able to use under
applicable limitations) United States foreign tax credits in respect of taxes
paid on its foreign operations.
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INFLATION
The Company believes the effects of inflation generally do not have a
material adverse impact on its operations or financial condition.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or data corruption causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar business activities.
The Company's computing infrastructure is based upon industry standard
systems. The Company is not dependent on large legacy systems and does not use
mainframes. Many of the specially developed systems the Company uses have been
developed within the past few years and are Year 2000 compliant.
The Company has appointed a Year 2000 Project Team to conduct an
assessment of the Company's operations worldwide from an internal, supplier and
customer perspective. The assessment, which is currently in progress, addresses
all computer systems, applications and any other systems that may be vulnerable
to the Year 2000 Issue. As part of the assessment, the Company is preparing
detailed plans to address Year 2000 Issues. The Company is utilizing both
internal and external resources to implement the plans. The Company currently
anticipates addressing all business critical systems during 1998 and will
address follow-up issues and all remaining systems during 1999. While the
Company currently does not believe that the costs associated with addressing
Year 2000 Issues will be material to the Company's financial statements,
business or operations, the Company's assessment of Year 2000 Issues is ongoing
and there can be no assurance that Year 2000 Issues or the costs of addressing
them will not have a material impact on the Company's financial statements,
business or operations.
RECENT EVENTS
On February 2, 1998, the Company acquired Pharma Networks N.V.
("Pharma"), a leading contract sales organization in Belgium. The Company
acquired Pharma in exchange for 132,000 shares of the Company's Common Stock.
The acquisition of Pharma will be accounted for as a pooling of interests.
On February 4, 1998, the Company acquired Technology Assessment Group
("TAG"), an international health outcomes assessment firm that specializes in
patient registries and in evaluating the economic, quality-of-life and clinical
effects of drug therapies and disease management programs. The Company acquired
TAG in exchange for 460,366 shares of the Company's Common Stock. The
acquisition of TAG will be accounted for as a pooling of interests.
On February 26, 1998, the Company acquired T2A S.A. ("T2A"), a leading
French contract sales organization. The Company acquired T2A in exchange for
311,899 shares of the Company's Common Stock. The acquisition of T2A will be
accounted for as a pooling of interests.
On February 27, 1998, the Company acquired More Biomedical Contract
Research Organization Ltd. ("More Biomedical"), a contract research organization
based in Taiwan. The Company acquired More Biomedical in exchange for 16,600
shares of the Company's Common Stock. The acquisition will be accounted for as a
pooling of interests.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" which is effective for fiscal years
beginning after December 15, 1997. Statement No. 130 establishes standards for
reporting and displaying of comprehensive income and its components in financial
statements. The Company will adopt Statement No. 130 in the first quarter 1998
and will provide the financial statement disclosures as required. The
application of the new rules will not have an impact on the Company's financial
position or results from operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which is effective for fiscal years beginning after December 15, 1997. Statement
No. 131 changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial statements to shareholders. Statement
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company will adopt
Statement No. 131 in 1998, which may result in additional disclosures. The
application of the new rules will not have an impact on the Company's financial
position or results from operations.
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Quintiles Transnational Corp.
We have audited the accompanying consolidated balance sheets of Quintiles
Transnational Corp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 consolidated financial statements of BRI
International, Inc. and Innovex Limited, each of which was combined with the
Company in 1996 in transactions accounted for as poolings of interests. The two
businesses represent 33.0% and 49.6% of the consolidated assets and net revenues
for 1995, respectively. Those statements were audited by other auditors whose
reports have been provided to us, and our opinion, insofar as it relates to
amounts included for BRI International, Inc. and Innovex Limited for 1995, is
based on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Quintiles Transnational Corp. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 26, 1998
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenue .................................. $ 814,476 $ 554,227 $ 337,006
Costs and expenses:
Direct ..................................... 421,855 278,981 171,571
General and administrative ................. 267,463 192,184 116,948
Depreciation and amortization .............. 37,459 25,195 17,241
Non-recurring costs:
Restructuring ........................... -- 13,102 2,373
Special pension contribution ............ -- 2,329 2,329
--------- --------- ---------
726,777 511,791 310,462
--------- --------- ---------
Income from operations ....................... 87,699 42,436 26,544
Other income (expense):
Interest income ............................ 8,434 7,089 2,548
Interest expense ........................... (8,566) (9,526) (3,765)
Non-recurring transaction costs ............ -- (17,118) --
Other ...................................... (1,989) 16 34
--------- --------- ---------
(2,121) (19,539) (1,183)
--------- --------- ---------
Income before income taxes ................... 85,578 22,897 25,361
Income taxes ................................. 30,262 14,015 9,293
--------- --------- ---------
Net income ................................... 55,316 8,882 16,068
Non-equity dividend .......................... -- (1,785) (719)
--------- --------- ---------
Net income available for common shareholders . $ 55,316 $ 7,097 $ 15,349
========= ========= =========
Basic net income per share ................... $ 0.76 $ 0.11 $ 0.25
Diluted net income per share ................. $ 0.75 $ 0.10 $ 0.24
Shares used in computing net income per share:
Basic ..................................... 72,394 67,377 61,995
Diluted ................................... 73,931 70,013 63,770
</TABLE>
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................ $ 78,007 $ 68,730
Accounts receivable and unbilled services 210,444 183,288
Investments .............................. 44,372 37,623
Prepaid expenses ......................... 22,261 9,956
Other current assets ..................... 22,596 2,912
-------- --------
Total current assets ............. 377,680 302,509
Property and equipment:
Land, buildings and leasehold improvements 82,350 50,187
Equipment and software ................... 115,663 68,708
Furniture and fixtures ................... 28,733 31,275
Motor vehicles ........................... 39,105 30,353
-------- --------
265,851 180,523
Less accumulated depreciation ............ 80,479 55,289
-------- --------
185,372 125,234
Intangible and other assets:
Intangibles .............................. 71,976 68,595
Investments .............................. 69,089 25,083
Deferred income taxes .................... 68,651 --
Deposits and other assets ................ 26,130 11,156
-------- --------
235,846 104,834
-------- --------
Total assets ..................... $798,898 $532,577
======== ========
</TABLE>
See accompanying notes.
13
<PAGE> 14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit ........................................ $ 10,335 $ 9,048
Accounts payable ....................................... 35,207 36,074
Accrued expenses ....................................... 60,852 54,392
Unearned income ........................................ 85,327 78,962
Income taxes payable ................................... -- 4,978
Current portion of obligations held under capital
leases .............................................. 14,844 11,816
Current portion of long-term debt ...................... 23 1,897
Other current liabilities .............................. 6,234 6,032
--------- ---------
Total current liabilities ...................... 212,822 203,199
Long-term liabilities:
Obligations held under capital leases, less current
portion ............................................. 8,164 5,465
Long-term debt and obligation, less current portion .... 162,200 163,285
Deferred income taxes .................................. 25,548 4,747
Other liabilities ...................................... 3,059 5,336
--------- ---------
198,971 178,833
--------- ---------
Total liabilities .............................. 411,793 382,032
Commitments and contingencies
Shareholders' Equity:
Preferred Stock, none issued and outstanding ........... -- --
Common Stock and additional paid-in capital, 73,853,867,
and 68,377,220 shares issued and outstanding in 1997
and 1996, respectively .............................. 335,312 139,710
Retained earnings ...................................... 60,008 11,513
Other equity ........................................... (8,215) (678)
--------- ---------
Total shareholders' equity ..................... 387,105 150,545
--------- ---------
Total liabilities and shareholders' equity ..... $ 798,898 $ 532,577
========= =========
</TABLE>
See accompanying notes.
14
<PAGE> 15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EMPLOYEE
STOCK
OWNERSHIP
ADDITIONAL PLAN LOAN CURRENCY
COMMON PAID-IN RETAINED GUARANTEE TRANSLATION
STOCK CAPITAL EARNINGS & OTHER ADJUSTMENTS TOTAL
----- ------- -------- ------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ........ $209 $ 63,138 $ 26,294 $(1,958) $ 1,332 $ 89,015
Issuance of common stock .......... 10 56,893 -- -- -- 56,903
Principal payments on ESOP
loan ............................ -- -- -- 401 -- 401
Common stock issued for
acquisitions .................... 4 11,799 31 -- -- 11,834
Reduction of liability under
stock option plan, net of
tax ............................. -- 693 -- -- -- 693
Dividends paid by pooled
entity .......................... -- -- (9,162) -- -- (9,162)
Non-equity dividend ............... -- -- (719) -- -- (719)
Two-for-one stock split ........... 107 (107) -- -- -- --
Other equity transactions ......... -- (135) -- -- 284 149
Net income ........................ -- -- 16,068 -- -- 16,068
---- --------- -------- ------- ------- ---------
Balance, December 31, 1995 ........ 330 132,281 32,512 (1,557) 1,616 165,182
Common stock issued for
acquisitions .................... 3 516 608 -- -- 1,127
Issuance of common stock .......... 9 3,838 -- -- -- 3,847
Principal payments on ESOP
loan ............................ -- -- -- 420 -- 420
Effect due to change in fiscal
year of pooled company .......... -- -- 324 -- -- 324
Recapitalization of pooled
entity .......................... -- (202) (29,028) -- -- (29,230)
Tax benefit from the exercise
of non-qualified stock
options ......................... -- 2,920 -- -- -- 2,920
Non-equity dividend ............... -- -- (1,785) -- -- (1,785)
Other equity transactions ......... -- 15 -- 45 (1,202) (1,142)
Net income ........................ -- -- 8,882 -- -- 8,882
---- --------- -------- ------- ------- ---------
Balance, December 31, 1996 ........ 342 139,368 11,513 (1,092) 414 150,545
Issuance of common stock .......... 24 112,741 -- -- -- 112,765
Principal payments on ESOP loan ... -- -- -- 536 -- 536
Common stock issued for
acquisitions ................... 4 2 (1,414) -- -- (1,408)
Effect due to change in fiscal year
of pooled entity ................ -- -- (3,775) -- 117 (3,658)
Two-for-one stock split ........... 369 (369) -- -- -- 0
Tax effect of pooling of interests -- 62,700 -- -- -- 62,700
Tax benefit from the exercise of
non-qualified stock options .... -- 20,118 -- -- -- 20,118
Dividend paid by pooled entity ... -- -- (1,632) -- -- (1,632)
Other equity transactions ......... -- 13 -- (104) (8,086) (8,177)
Net income ........................ -- -- 55,316 -- -- 55,316
--------- -------- ------- ------- ---------
Balance, December 31, 1997 ........ $739 $ 334,573 $ 60,008 $ (660) $(7,555) $ 387,105
==== ========= ======== ======= ======= =========
</TABLE>
See accompanying notes.
15
<PAGE> 16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income .................................................................. $ 55,316 $ 8,882 $ 16,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................. 37,459 25,812 17,241
Non-recurring transaction costs ........................................... -- 17,118 --
Net loss (gain) on sale of property and equipment ......................... 672 (134) (172)
Provision for deferred income tax expense ................................. 10,002 731 1,904
Change in operating assets and liabilities:
Accounts receivable and unbilled services ............................... (28,718) (68,525) (36,201)
Prepaid expenses and other assets ....................................... (15,924) (11,389) (838)
Accounts payable and accrued expenses ................................... 10,431 23,682 17,299
Unearned income ......................................................... 738 42,460 20,013
Income taxes payable and other current liabilities ...................... 7,945 3,491 547
Change in fiscal year of pooled entity .................................... (581) (9,378) --
Other ..................................................................... 71 (27) (25)
--------- --------- --------
Net cash provided by operating activities ................................... 77,411 32,723 35,836
Investing activities:
Proceeds from disposition of property and equipment ....................... 4,254 1,434 4,311
Purchase of investments held-to-maturity .................................. -- (95,939) --
Maturities of investments held-to-maturity ................................ 35,579 43,345 --
Purchase of investments available-for-sale ................................ (137,573) (19,003) --
Proceeds from sale of investments available-for-sale ...................... 51,246 8,936 --
Purchase of other investments ............................................. (12,011) -- --
Acquisition of property and equipment ..................................... (78,693) (39,744) (25,964)
Acquisition of businesses, net of cash acquired ........................... (7,130) (35,109) (16,571)
Payment of non-recurring transaction costs ................................ (5,648) (11,440) --
Change in fiscal year of pooled entity .................................... (17) 2,606 --
Other ..................................................................... -- -- (108)
--------- --------- --------
Net cash used in investing activities ....................................... (149,993) (144,914) (38,332)
Financing activities:
Increase in lines of credit, net .......................................... 513 2,570 3,917
Proceeds from issuance of debt ............................................ -- 139,650 568
Repayment of debt ......................................................... (7,727) (56,792) (1,371)
Principal payments on capital lease obligations ........................... (16,470) (9,516) (6,621)
Issuance of common stock .................................................. 108,834 3,678 56,746
Issuance of debt for capitalization of pooled entity ...................... -- 45,197 --
Recapitalization of pooled entity ......................................... -- (29,230) --
Non-equity dividend ....................................................... -- (1,756) (677)
Dividend paid by pooled entity ............................................ (1,632) -- (9,162)
Change in fiscal year of pooled entity .................................... 58 1,399 --
Other ..................................................................... 64 (249) (6,047)
--------- --------- --------
Net cash provided by financing activities ................................... 83,640 94,951 37,353
Effect of foreign currency exchange rate changes on cash .................... (1,781) 277 (100)
--------- --------- --------
Increase (decrease) in cash and cash equivalents ............................ 9,277 (16,963) 34,757
Cash and cash equivalents at beginning of year .............................. 68,730 85,693 50,936
--------- --------- --------
Cash and cash equivalents at end of year .................................... $ 78,007 $ 68,730 $ 85,693
========= ========= ========
Supplemental Cash Flow Information:
Interest paid ............................................................. $ 8,909 $ 9,468 $ 2,660
Income taxes paid ......................................................... 16,374 12,781 9,819
Non-cash Investing and Financing Activities:
Capitalized leases ........................................................ 22,688 12,979 11,774
Equity impact of mergers and acquisitions ................................. 1,134 (23,253) 11,803
Equity impact from exercise of non-qualified stock options ................ 24,049 2,920 --
Tax effect of pooled transactions .......................................... 62,700 -- --
</TABLE>
See accompanying notes
16
<PAGE> 17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company is a leader in providing full-service contract research, sales,
marketing and healthcare policy consulting and health information management
services to the worldwide pharmaceutical, biotechnology, medical device and
healthcare industries.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Revenues, costs and expenses are recorded at average rates of exchange
during the year. Translation adjustments resulting from this process are charged
or credited to equity. Gains and losses on foreign currency transactions are
included in other income (expense).
Revenue Recognition
The Company recognizes net revenue from its contracts on a
percentage-of-completion or per diem basis as work is performed. The Company's
exposure to credit loss is equal to the outstanding accounts receivable and
unbilled services balance. Although the Company does not require collateral for
unpaid balances, credit losses have consistently been within management's
expectations. Certain contracts contain provisions for price redetermination for
cost overruns. Such redetermined amounts are included in service revenue when
realization is assured and the amounts can be reasonably determined. In the
period in which it is determined that a loss will result from the performance of
a contract, the entire amount of the estimated ultimate loss is charged against
income. One customer accounted for 11.5% of consolidated net revenue in 1996.
Unbilled Services and Unearned Income
In general, prerequisites for billings are established by contractual
provisions including predetermined payment schedules, the achievement of
contract milestones or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but clients have not been
billed. Similarly, unearned income represents prebillings for services that have
not yet been rendered.
17
<PAGE> 18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company does
not report in the accompanying balance sheets cash held for clients for
investigator payments in the amount of $9.5 million and $4.6 million at
December 31, 1997 and 1996, respectively, that pursuant to agreements with
these clients, remains the property of the clients.
The Company's investments in debt and marketable equity securities are
classified as held-to-maturity and available-for-sale. Investments classified as
held-to-maturity are recorded at amortized cost. Investments classified as
available-for-sale are measured at market value and net unrealized gains and
losses are recorded as a component of stockholders' equity until realized. In
addition, the Company has $13.1 million and $1.5 million in deposits and other
assets at December 31, 1997 and 1996, respectively, that represents investments
in equity securities for which there are not readily available market values.
Any gains or losses on sales of investments are computed by specific
identification.
Property and Equipment
Property and equipment are carried at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated useful
life or the lease term ranging from three to 50 years.
Intangible Assets
Intangibles consist principally of the excess cost over the fair value of
net assets acquired ("goodwill") and are being amortized on a straight-line
basis over periods not exceeding 40 years. Accumulated amortization totaled
$12.8 million and $10.5 million at December 31, 1997 and 1996, respectively.
The carrying values of intangible assets are reviewed if the facts and
circumstances suggest impairment. If this review indicates that carrying values
will not be recoverable, as determined based on undiscounted cash flows over the
remaining amortization period, the Company would reduce carrying values by the
estimated shortfall of discounted cash flows.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements and has restated all prior year net income per share information.
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 4.
Income Taxes
Income tax expense includes U.S. and international income taxes. Certain
items of income and expense are not reported in tax returns and financial
statements in the same year. The tax effects of these differences are reported
as deferred income taxes. Tax credits are accounted for as a reduction of tax
expense in the year in which the credits reduce taxes payable.
18
<PAGE> 19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
Research and development costs relating principally to new software
applications and computer technology are charged to expense as incurred. These
expenses totaled $2.8 million, $2.3 million and $1.9 million in 1997, 1996 and
1995, respectively.
Employee Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" APB 25 and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Foreign Currency Hedging
The Company uses foreign exchange contracts and options to hedge the risk of
changes in foreign currency exchange rates associated with contracts in which
the expenses for providing services are incurred in one currency and paid for by
the client in another currency. The Company recognizes changes in value in
income only when contracts are settled or options are exercised. There were
several foreign exchange contracts relating to service contracts open at
December 31, 1997, all of which are immaterial to the Company.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 financial statement presentation. The reclassifications
had no effect on previously reported net income available to common
shareholders, shareholders' equity or net income per share.
Recently Issued Accounting Standards
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December 15, 1997.
Statement No. 130 establishes standards for reporting and displaying of
comprehensive income and its components in financial statements. The Company
will adopt Statement No. 130 in the first quarter of 1998 and will provide the
financial statement disclosures as required. The application of the new rules
will not have an impact on the Company's financial position or results from
operations.
In June 1997, FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which is effective for fiscal
years beginning after December 15, 1997. Statement No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial statements to shareholders. Statement No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company will adopt Statement No. 131 in 1998, which may
result in additional disclosures. The application of the new rules will not have
an impact on the Company's financial position or results from operations.
19
<PAGE> 20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
2. SHAREHOLDERS' EQUITY (Continued)
The Company is authorized to issue 25 million shares of preferred stock,
$.01 per share par value. At December 31, 1997, 200 million common shares of
$.01 par value were authorized.
In October, 1997, the Board of Directors authorized a two-for-one split of
the Company's Common Stock in the form of a 100% stock dividend. A total of
36,920,627 shares of Common Stock were issued in connection with the split. The
stated par value of each share was not changed from $.01. A total of $369,000
was reclassified from additional paid in capital to Common Stock. All references
in the financial statements to number of shares, per share amounts, stock option
data and market prices of Common Stock have been restated to reflect the stock
split.
In March, 1997, the Company completed a stock offering of 11,040,000 shares
of its Common Stock. Of the shares sold, 2,830,000 shares were sold by the
Company and 8,210,000 shares by certain selling shareholders. The offering
provided the Company with approximately $84.3 million, net of expenses.
In April, 1996, in anticipation of a planned initial public offering,
Innovex was recapitalized by the purchase of the entire issued share capital of
Innovex Holdings Limited (the former holding company of the Innovex Group) from
its shareholders in exchange for a combination of newly issued Ordinary Shares,
Preferred Ordinary Shares (the "Preferred Shares"), loan notes and cash. In
exchange for its holdings in Innovex Holdings Limited, the principal shareholder
received 67,994,225 newly issued Ordinary Shares of Innovex Limited,
approximately $26.0 million of loan notes and approximately $2.4 million of
cash. In exchange for their respective holdings, certain investors received
14,285,720 newly issued Preferred Shares, and certain members of management
received 4,637,080 Ordinary Shares. Pursuant to an investment agreement, Innovex
also issued 28,533,345 additional preferred shares and created and issued 11
million 7.5% preference shares (the "Preference Shares") and approximately $10.7
million of loan stock. In connection with the Preference Shares, the Company
paid $846,000 of non-equity dividends in 1996. Prior to the recapitalization,
Innovex paid a dividend of $9.2 million to the principal shareholder and made a
special pension contribution of $2.3 million. In connection with the Innovex
merger, the Company has paid $56.8 million of Innovex obligations.
3. MERGERS AND ACQUISITIONS
On June 11, 1997, the Company acquired 100% of the stock of MAC, a leading
international strategic medical communications consultancy, for 1,131,394 shares
of the Company's Common Stock. On July 2, 1997, the Company acquired CVA, a
contract research organization that is a leader in stroke clinical trials,
through an exchange of 100% of CVA's stock for 467,936 shares of the Company's
Common Stock. On August 29, 1997, the Company acquired Clindepharm in exchange
for 477,966 shares of the Company's Common Stock. These transactions were
accounted for by the pooling of interests method.
The following is a summary of the net revenue and net income available for
common shareholders from the beginning of the year through the date of
combination for companies acquired in transactions accounted for as poolings of
interests in 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) MAC CVA CLINDEPHARM OTHERS
-------------- --- --- ----------- ------
<S> <C> <C> <C> <C>
Net revenue................... $ 5,733 $ 2,382 $ 3,437 $ 9,034
Net income available for common
shareholders................ $ 1,013 $ 332 $ 1,062 $ 1,153
</TABLE>
20
<PAGE> 21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
3. MERGERS AND ACQUISITIONS (Continued)
On November 29, 1996, the Company acquired 100% of the outstanding stock of
Innovex, an international contract pharmaceutical organization based in Marlow,
United Kingdom, for 18,428,478 shares of the Company's Common Stock and the
exchange of options to purchase 1,572,452 shares of the Company's Common Stock.
On November 22, 1996, the Company acquired BRI, a global contract research
organization, through an exchange of 100% of BRI's stock for 3,229,724 shares of
the Company's Common Stock. Related to the Innovex and BRI transactions, the
Company recognized approximately $17.1 million in non-recurring transaction
costs and approximately $10.7 million in non-recurring restructuring costs.
These transactions were accounted for by the pooling of interests method.
On May 13, 1996, the Company acquired the operating assets of Lewin-VHI,
Inc., a healthcare consulting company, for approximately $30 million in cash.
The Company recorded approximately $20 million related to the excess cost over
the fair value of net assets acquired. The acquisition was accounted for as a
purchase and accordingly, the financial statements include the results of
operations of the business from the date of acquisition.
In addition to the above mergers and acquisitions, the Company has completed
other mergers and acquisitions all of which are immaterial to the financial
statements.
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Net income available for common shareholders:
Net income ................................... $55,316 $ 8,882 $ 16,068
Non-equity dividend .......................... -- (1,785) (719)
------- -------- --------
Net income available for common shareholders -
basic and diluted net income per share .... $55,316 $ 7,097 $ 15,349
======= ======== ========
Weighted average shares:
Basic net income per share - weighted
average shares ............................. 72,394 67,377 61,995
Effect of dilutive securities:
Stock options .............................. 1,537 2,636 1,775
------- -------- --------
Diluted net income per share - adjusted
weighted-average shares
and assumed conversions .................... 73,931 70,013 63,770
======= ======== ========
Basic net income per share ................... $ 0.76 $ 0.11 $ 0.25
======= ======== ========
Diluted net income per share ................. $ 0.75 $ 0.10 $ 0.24
======= ======== ========
</TABLE>
Options to purchase 1.8 million shares of common stock with exercise prices
ranging between $35.25 and $41.375 per share were outstanding during 1997 but
were not included in the computation of diluted net income per share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
The conversion of the Company's 4.25% Convertible Subordinated Notes
("Notes") into approximately 3.5 million shares of common stock was not included
in the computation of diluted net income per share because the effect would be
antidilutive.
For additional disclosures regarding the outstanding stock options and the
Notes, see "Employee Benefit Plans" and "Credit Arrangements and Obligations."
21
<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
5. CREDIT ARRANGEMENTS AND OBLIGATIONS
On May 23, 1996, the Company completed a private placement of $143.75
million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. Net
proceeds to the Company amounted to approximately $139.7 million. The Notes are
convertible into 3,474,322 shares of Common Stock, at the option of the holder,
at a conversion price of $41.37 per share, subject to adjustment under certain
circumstances, at any time after August 21, 1996. The Notes are redeemable, at
the option of the Company, beginning May 31, 1999. Interest is payable on the
notes semi-annually on May 31 and November 30 each year.
The Company has a (pound)15.0 million (approximately $25.2 million)
line of credit which is guaranteed by the Company's United Kingdom subsidiaries.
Interest is charged at the bank's base rate (7.25% at December 31, 1997), plus
1%, with a minimum of 5.5%. The line of credit had an outstanding balance of
(pound)1.5 million (approximately $2.5 million) and (pound) 4.7 million
(approximately $6.6 million) at December 31, 1997 and 1996, respectively.
The Company has a (pound)5.0 million (approximately $8.4 million) line of
credit with a second U.K. bank. The line of credit is charged interest at the
bank's published base rate (7.25% at December 31, 1997) plus 1.5%. The line of
credit had an outstanding balance of (pound)4.7 million (approximately $7.8
million) and (pound)1.4 million (approximately $2.4 million) at December 31,
1997 and 1996, respectively.
In March, 1995, Quintiles Scotland Limited, a wholly-owned subsidiary of
the Company, acquired assets of a drug development facility in Edinburgh,
Scotland from Syntex Pharmaceuticals Limited, a member of the Roche group based
in Basel, Switzerland for a purchase commitment valued at (pound)13.0 million
(approximately $21.0 million), with payment due in December 1999. As of December
31, 1997 and 1996, the Company has committed to purchasing approximately
(pound)1.5 million (approximately $2.3 million) and (pound)600,000
(approximately $852,000 ), respectively, under foreign exchange contracts. The
Company is obligated to purchase up to an additional (pound)5.9 million through
December 28, 1999 in varying amounts as the daily dollar-to-pound exchange rate
ranges between $1.5499 and $1.6800.
Long-term debt and obligation consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
<C> <C> <C>
4.25% Convertible Subordinated Notes due 2000 .. $143,750 $143,750
Employee Stock Ownership Plan notes payable, due
1997 ...................................... -- 1,138
Other notes payable ............................ 23 1,953
Long-term obligation ........................... 20,985 21,823
-------- --------
164,758 168,664
Less: current portion ..................... 23 1,897
unamortized issuance costs ....... 2,535 3,482
-------- --------
$162,200 $163,285
======== ========
</TABLE>
Maturities of long-term debt and obligation at December 31, 1997 are as
follows (in thousands):
1998 $ 23
1999 20,985
2000 143,750
---------
$ 164,758
=========
22
<PAGE> 23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
6. INVESTMENTS
The following is a summary as of December 31, 1997 of held-to-maturity
securities and available-for-sale securities by contractual maturity where
applicable (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE
---------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Securities --
Maturing in one year or less ....... $ 5,892 $ 15 $ -- $ 5,907
Maturing between one and three years 2,814 16 -- 2,830
State and Municipal Securities --
Maturing in one year or less ....... 2,688 9 -- 2,697
Maturing between one and three years 2,329 17 -- 2,346
Other ............................... 2,312 97 -- 2,409
------- ---- ------- -------
$16,035 $154 $ -- $16,189
======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE SECURITIES: COST GAINS LOSSES VALUE
------------------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Securities --
Maturing in one year or less ......... $ 2,499 $-- $ -- $ 2,499
Maturing between one and three years . 52,061 -- (57) 52,004
Maturing between three and five years 7,000 5 -- 7,005
State and Municipal Securities --
Maturing in one year or less ........ 3,060 -- -- 3,060
Maturing between one and three years -- -- -- --
Maturing between three and five years 2,595 30 -- 2,625
Money Funds ............................. 30,301 -- (68) 30,233
------- ----- -------- -------
$97,516 $ 35 $ (125) $97,426
======= ===== ======== =======
</TABLE>
The following is a summary as of December 31, 1996 of held-to-maturity
securities and available-for-sale securities by contractual maturity where
applicable (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE
---------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Securities --
Maturing in one year or less ....... $ 5,707 $-- $ -- $ 5,707
Maturing between one and three years 9,951 -- -- 9,951
State and Municipal Securities --
Maturing in one year or less ....... 22,327 -- -- 22,327
Maturing between one and three years 5,065 -- -- 5,065
Other ................................. 8,564 $-- -- 8,564
------- ----- ------- -------
$51,614 $-- $ -- $51,614
======= ===== ======= =======
</TABLE>
23
<PAGE> 24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
6. INVESTMENTS (Continued)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE SECURITIES: COST GAINS LOSSES VALUE
------------------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Securities --
Maturing between one and three years $10,008 $59 $ -- $10,067
Money Funds ........................... 1,019 6 -- 1,025
------- --- ------- -------
$11,027 $65 -- $11,092
======= === ======= =======
</TABLE>
7. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
--------- ---------
Trade:
<S> <C> <C>
Billed ............. $ 122,898 $ 121,803
Unbilled services .. 77,613 52,772
--------- ---------
200,511 174,575
Other ................ 11,753 10,759
Allowance for doubtful
accounts .......... (1,820) (2,046)
--------- ---------
$ 210,444 $ 183,288
========= =========
</TABLE>
The Company provides professional services involved in the development,
testing, approval, sale and marketing of new drugs. Substantially all of the
Company's accounts receivable are due from companies in the pharmaceutical and
biotechnology industries located in the Americas and Europe. The percentage of
accounts receivable and unbilled services by region is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
REGION 1997 1996
----------------- ---- ----
<S> <C> <C>
Americas ........ 48% 45%
Europe and Africa 50 53
Asia-Pacific .... 2 2
--- ---
100% 100%
=== ===
</TABLE>
24
<PAGE> 25
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Compensation and payroll taxes .... $29,818 $22,621
Transaction and restructuring costs 2,751 16,047
Other ............................. 28,283 15,724
------- -------
$60,852 $54,392
======= =======
</TABLE>
9. LEASES
The Company leases certain office space and equipment under operating
leases. The leases expire at various dates through 2049 with options to cancel
certain leases at five-year increments. Some leases contain renewal options.
Annual rental expenses under these agreements were approximately $24.3 million,
$21.0 million and $10.4 million for the years ended December 31, 1997, 1996 and
1995, respectively. The Company leases certain assets, primarily vehicles, under
capital leases. Capital lease amortization is included with depreciation and
amortization expenses and accumulated depreciation in the accompanying financial
statements.
The following is a summary of future minimum payments under capitalized
leases and under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
1998 ................................ $16,600 $ 28,441
1999 ................................ 8,156 22,887
2000 ................................ 9 18,530
2001 ................................ -- 13,958
2002 ................................ -- 12,223
Thereafter .......................... -- 47,512
------- --------
Total minimum lease payments ........ 24,765 $143,551
========
Amounts representing interest ....... 1,757
-------
Present value of net minimum payments 23,008
Current portion ..................... 14,844
-------
Long-term capital lease obligations . $ 8,164
=======
</TABLE>
25
<PAGE> 26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
10. INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------- -------- ------
Current:
<S> <C> <C> <C>
Federal ................. $11,153 $ 5,185 $4,313
State ................... 2,655 1,735 856
Foreign ................. 6,452 5,839 2,345
------- -------- ------
20,260 12,759 7,514
Deferred expense (benefit):
Federal ................. 7,506 (682) 598
Foreign ................. 2,496 1,938 1,181
------- -------- ------
$30,262 $ 14,015 $9,293
======= ======== ======
</TABLE>
Tax benefits of $62.7 million from goodwill arising in connection with a
taxable pooling of interests business combination and $20.1 million from
non-qualified stock options exercised were allocated directly to contributed
capital.
The Company's consolidated effective tax rate differed from the statutory
rate as set forth below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Federal taxes at statutory rate ....................... $ 29,952 $ 7,992 $ 8,636
State and local income taxes net of federal benefit ... 1,726 1,040 653
Non-deductible transaction costs ...................... -- 4,761 --
Foreign earnings taxed at different rates ............. 418 (191) (14)
Foreign losses for which no benefit has been recognized -- -- 646
Utilization of net operating loss carryforwards ....... (636) -- (1,520)
Non-taxable income .................................... (1,521) -- --
Other ................................................. 323 413 892
-------- -------- -------
$ 30,262 $ 14,015 $ 9,293
======== ======== =======
</TABLE>
Income before income taxes from foreign operations was approximately $4
million, $24 million and $11 million for the years 1997, 1996 and 1995,
respectively. Income from foreign operations was approximately $35 million, $25
million and $14 million for the years 1997, 1996 and 1995, respectively. The
difference between income from operations and income before income taxes is due
primarily to intercompany charges which eliminate upon consolidation.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $38 million at December 31, 1997. Those earnings are considered to
be indefinitely reinvested, and accordingly, no U.S. federal and state income
taxes have been provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various countries.
26
<PAGE> 27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
10. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax (assets) liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization ................... $ 24,031 $ 16,359
Prepaid expenses ................................ 1,335 1,034
Other ........................................... 2,318 213
--------- --------
Total deferred tax liabilities .................... 27,684 17,606
Deferred tax assets:
Net operating loss carryforwards ................ (17,532) (7,028)
Accrued expenses and unearned income ............ (7,104) (5,345)
Goodwill net of amortization ..................... (101,095) (675)
Non-deductible transaction costs ................ -- (2,206)
Other ........................................... (4,783) (2,445)
--------- --------
Total deferred tax assets ......................... (130,514) (17,699)
Valuation allowance for deferred tax assets ....... 54,879 4,840
--------- --------
Net deferred tax assets ........................... (75,635) (12,859)
--------- --------
Net deferred tax (assets) liabilities ............. $ (47,951) $ 4,747
========= ========
</TABLE>
The increase in the Company's valuation allowance for deferred tax
assets to $54.9 million at December 31, 1997 from $4.8 million at December 31,
1996 is primarily due to projected foreign tax credit limitations.
The Company's deferred income tax expense results from the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Excess (deficiency) of tax over
financial reporting:
Depreciation and amortization ...... $ 14,936 $ 9,414 $ 1,681
Net operating loss carryforwards ... (6,693) (1,097) 1,025
Accrued expenses and unearned income (1,084) (4,147) 110
Benefit plans ...................... -- -- (656)
Other items, net ................... 2,843 (1,834) (381)
-------- ------- -------
$ 10,002 $ 1,256 $ 1,779
======== ======= =======
</TABLE>
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs)
for 100% of capital expenditures on certain assets under the Inland Revenue
Service guidelines. For 1997, 1996 and 1995, these allowances were $28 million,
$11 million and $6 million, respectively, which helped to generate net operating
loss carryforwards of $26 million to be used to offset taxable income in that
country. Assuming the U.K. subsidiaries continue to invest in qualified capital
expenditures at an adequate level, the portion of the deferred tax liability
relating to the U.K. subsidiaries may be deferred indefinitely. Innovex has
German net operating loss carryforwards that do not expire of $3 million to be
used to offset taxable income in that country. Quintiles Transnational has U.S.
state net operating loss carryforwards of approximately $8 million which will be
available through 2002. In addition, Innovex, Inc. has U.S. federal net
operating loss carryforwards of approximately $4 million which will expire
beginning 2005.
27
<PAGE> 28
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
11. EMPLOYEE BENEFIT PLANS
The Company has numerous employee benefit plans which cover
substantially all eligible employees in the countries in which the plans are
offered. Contributions are primarily discretionary, except in some countries
where contributions are contractually required. Plans include Approved Profit
Sharing Schemes in the U.K. and Ireland which are funded with Company stock, a
defined contribution plan funded by Company stock in Australia, Belgium and
Canada, defined contribution plans in Belgium, Holland, Sweden, and Great
Britain, a profit sharing scheme in France, and defined benefit plans in Germany
and the U.K. The defined benefit plan in Germany is an unfunded plan which is
provided for in the balance sheet. In addition, the Company sponsors a
supplemental non-qualified deferred compensation plan, covering certain
management employees.
The Company has a leveraged Employee Stock Ownership Plan ("ESOP")
which provides benefits to eligible employees. Contributions and related
compensation expenses for this plan totaled $568,000, $585,000 and $734,000 in
1997, 1996 and 1995, respectively. Interest paid by the Company on the ESOP loan
was approximately $80,000, $130,000 and $157,000 for 1997, 1996 and 1995,
respectively. Shares allocated to participants totaled 1,773,000 at December 31,
1997. Unallocated shares totaled 152,100 as of December 31, 1997 with a fair
market value of $5.8 million.
The Company has an employee savings and investment plan (401(k) Plan)
available to all eligible employees meeting certain specified criteria. The
Company matches employee deferrals at varying percentages, set at the discretion
of the Board of Directors. For the years ended December 31, 1997, 1996 and 1995,
the Company expensed $1.5 million, $539,000 and $177,000, respectively as
matching contributions.
On July 25, 1996, the Company's Board of Directors adopted the
Quintiles Transnational Corp. Employee Stock Purchase Plan (the "Purchase Plan")
which is intended to provide eligible employees an opportunity to acquire the
Company's Common Stock. Participating employees have the option to purchase
shares at 85% of the lower of the closing price per share of common stock on the
first or last day of the calendar quarter. The Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The Board of Directors has reserved 200,000
shares of common stock for issuance under the Purchase Plan. During 1997 and
1996, 81,024 shares and 9,576 shares, respectively, were purchased under the
Purchase Plan. At December 31, 1997, 109,400 shares were available for issuance
under the Purchase Plan.
The Company has stock option plans to provide incentives to eligible
employees, officers, and directors in the form of incentive stock options,
non-qualified stock options, stock appreciation rights, and restricted stock.
The Board of Directors determines the option price (not to be less than fair
market value of incentive options) at the date of grant. The majority of
options, granted under the Executive Compensation Plan, typically vest 25% per
year over four years, and expire ten years from the date of grant. Other options
including options granted and exchanged as a result of acquisitions have various
vesting schedules and expiration periods.
28
<PAGE> 29
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
11. EMPLOYEE BENEFIT PLANS (Continued)
Information with respect to these option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
------ --------------
<S> <C> <C>
Options outstanding January 1, 1995 1,762,730 $ 3.91
Granted 1,162,476 13.42
Exercised (311,740) 2.58
Canceled (39,160) 5.17
-----------
Outstanding at December 31, 1995 2,574,306 8.09
Granted 4,146,568 34.27
Exercised (1,334,836) 2.49
Canceled (416,264) 35.92
-----------
Outstanding at December 31, 1996 4,969,774 15.52
Granted 2,234,387 36.82
Exercised (1,565,827) 7.78
Canceled (269,550) 24.34
-----------
Outstanding at December 31, 1997 5,368,784 $ 26.21
===========
</TABLE>
Pro forma information regarding net income and net income per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement No. 123. The fair value for each option was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options Employee Stock Purchase Plan
---------------------- ----------------------------
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected dividend yield .... 0% 0% 0% 0% -- --
Risk-free interest rate .... 6% 6% 6% 5.1% -- --
Expected volatility ........ 40% 40% 40% 34.4% -- --
Expected life (in years from
vest) ................... 1 1 1 0.25 -- --
- ---------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
11. EMPLOYEE BENEFIT PLANS (Continued)
For options outstanding and exercisable at December 31, 1997 the
following number of options, range of exercise prices, weighted average exercise
prices and weighted average contractual lives existed:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
------- -------------- -------------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C>
646,196 $0.20 - $4.75 $ 3.31 4.6 635,696 $ 3.29
557,886 $4.88 - $9.50 7.92 6.5 342,886 6.95
762,060 $10.69 - $20.68 18.64 7.1 274,174 17.46
721,574 $22.61 - $32.69 31.19 7.1 271,794 31.34
684,062 $33.13 - $33.13 33.13 9.0 311,628 33.13
616,469 $33.88 - $36.63 35.66 8.6 8,387 35.87
239,693 $36.75 - $38.19 37.91 9.1 212,953 37.98
1,002,162 $38.25 - $38.25 38.25 10.0 0 n.a.
130,682 $38.50 - $41.13 38.88 6.3 54,712 38.52
8,000 $41.38 - $41.38 41.38 9.7 5,000 41.38
--------- ---------
5,368,784 $ 26.21 7.8 2,117,230 $18.33
========= =========
</TABLE>
The Black-Scholes valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of the
Purchase Plan and stock option plans are amortized to expense over the vesting
period. The grant date Black-Scholes weighted-average value was $13.37, $4.41
and $4.38 per share for 1997, 1996 and 1995.
The Company's pro forma information follows (in thousands except for
net income (loss) per share information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Net income available for common shareholders .... $ 55,316 $ 7,097 $ 15,349
Pro forma net income (loss) available for common
shareholders .................................. 40,280 (3,142) 14,595
Pro forma basic net income (loss) per share ..... 0.56 (0.05) 0.24
Pro forma diluted net income (loss) per share ... $ 0.54 $ (0.05) $ 0.23
</TABLE>
30
<PAGE> 31
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
12. OPERATIONS
The following table presents the Company's operations by geographical
location (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Net revenue:
Americas ................... $414,401 $240,118 $ 134,350
Europe and Africa .......... 377,382 301,398 195,669
Asia-Pacific ............... 22,693 12,711 6,987
-------- -------- ---------
$814,476 $554,227 $ 337,006
======== ======== =========
Income (loss) from operations:
Americas ................... $ 52,541 $ 17,158 $ 12,469
Europe and Africa .......... 34,905 25,262 14,515
Asia-Pacific ............... 253 16 (440)
-------- -------- ---------
$ 87,699 $ 42,436 $ 26,544
======== ======== =========
Identifiable assets:
Americas ................... $529,915 $270,770 $ 154,273
Europe and Africa .......... 252,100 252,863 184,313
Asia-Pacific ............... 16,883 8,944 5,176
-------- -------- ---------
$798,898 $532,577 $ 343,762
======== ======== =========
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $179,885 $194,180 $206,697 $233,714
Income from operations 18,931 21,111 22,494 25,163
Net income available for
common shareholders 11,479 12,863 14,207 16,767
Basic net income per share 0.16 0.18 0.19 0.23
Diluted net income per share $ 0.16 $ 0.17 $ 0.19 $0.22
Range of stock prices $26.625 - 39.000 $21.500 - 35.000 $35.032 - 43.688 $31.000 - 43.500
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $113,813 $131,328 $141,916 $167,170
Income from operations 7,979 12,900 14,659 6,898
Net income available for
common shareholders 4,798 7,551 8,562 (13,814)
Basic net income per share 0.07 0.11 0.13 (0.21)
Diluted net income per share $ 0.07 $ 0.11 $ 0.12 $ (0.21)
Range of stock prices $18.500 - 34.625 $28.250 - 41.000 $26.250 - 41.625 $29.125 - 41.625
</TABLE>
31
<PAGE> 32
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued)
13. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
The following pro forma quarterly financial information reflects results
of operations excluding non-recurring costs (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $179,885 $194,180 $206,697 $233,714
Income from operations 18,931 21,111 22,494 25,163
Net income available for
common shareholders $ 11,479 $ 12,863 $ 14,207 $ 16,767
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $113,813 $131,328 $141,916 $167,170
Income from operations 12,681 12,900 14,659 17,627
Net income available for
common shareholders $ 8,386 $ 7,551 $ 8,562 $ 10,354
</TABLE>
14. SUBSEQUENT EVENTS
On February 2, 1998, the Company acquired Pharma Networks N.V. ("Pharma"),
a leading contract sales organization in Belgium. The Company acquired Pharma in
exchange for 132,000 shares of the Company's Common Stock. The acquisition of
Pharma will be accounted for as a pooling of interests.
On February 4, 1998, the Company acquired Technology Assessment Group
("TAG"), an international health outcomes assessment firm that specializes in
patient registries and in evaluating the economic, quality-of-life and clinical
effects of drug therapies and disease management programs. The Company acquired
TAG in exchange for 460,366 shares of the Company's Common Stock. The
acquisition of TAG will be accounted for as a pooling of interests.
On February 26, 1998, the Company acquired T2A S.A. ("T2A"), a leading
French contract sales organization. The Company acquired T2A in exchange for
311,899 shares of the Company's Common Stock. The acquisition of T2A will be
accounted for as a pooling of interests.
32
<PAGE> 33
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.01 Consent of Ernst & Young LLP
23.02 Consent of Coopers & Lybrand L.L.P.
23.03 Consent of KPMG
27 Financial Data Schedule (for SEC use only)
99.01 Report of Coopers & Lybrand L.L.P.
99.02 Report of KPMG
33
<PAGE> 34
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 hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
------------------------------
Dated: March 20, 1998 Rachel R. Selisker
Chief Financial Officer and
Executive Vice
President Finance
34
<PAGE> 35
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.01 Consent of Ernst & Young LLP
23.02 Consent of Coopers & Lybrand L.L.P.
23.03 Consent of KPMG
27 Financial Data Schedule (for SEC use only)
99.01 Report of Coopers & Lybrand L.L.P.
99.02 Report of KPMG
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the Company's
Registration Statements on Form S-8 (Registration Nos. 33-91026, 333-16553,
333-03603 and 333-40493) and the Registration Statements on Form S-3
(Registration Nos. 333-19009, 333-28919, 333-38181 and 333-40497) of our report
dated January 26, 1998 with respect to the consolidated financial statements of
Quintiles Transnational Corp. included in its Current Report on Form 8-K dated
March 20, 1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 20, 1998
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the Quintiles
Transnational Corp. Registration Statements on Form S-8 (Registration Nos.
33-91026, 333-03603, 333-16553 and 333-40493) and the Registration Statements on
Form S-3 (Registration Nos. 333-19009, 333-28919, 333-38181 and 333-40497) of
our report dated May 15, 1996, on our audits of the consolidated financial
statements of BRI International, Inc. as of November 30, 1995 and 1994, and for
the years then ended, which report is included in this Current Report on Form
8-K filed with the Securities and Exchange Commission.
/s/ Coopers & Lybrand L.L.P.
McLean, Virginia
March 20, 1998
<PAGE> 1
EXHIBIT 23.03
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the Registration
Statements of Quintiles Transnational Corp. on Form S-8 (Registration Nos.
33-91026, 333-16553, 333-03603 and 333-40493) and the Registration Statements on
Form S-3 (Registration Nos. 333-19009, 333-28919, 333-38181 and 333-40497) of
our report dated July 24, 1996, with respect to the combined financial
statements of the Innovex Companies, which report is included in this Current
Report on Form 8-K filed with the Securities and Exchange Commission.
/s/ KPMG
Reading, England
20 March 1998
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<PAGE> 1
EXHIBIT 99.01
Report of Independent Accountants
To the Board of Directors
of BRI International, Inc.
We have audited the accompanying consolidated balance sheet of BRI
International, Inc., formerly Biometric Research Institute, Inc., (the Company)
as of November 30, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BRI
International, Inc. as of November 30, 1995 and 1994, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Certain stockholders' equity amounts as of November 30, 1993 have been
restated to give effect to the pooling of interests described in Note 3 and to
correct for prior period adjustments described in Note 12.
/s/ Coopers & Lybrand L.L.P.
Rockville, Maryland
May 15, 1996
<PAGE> 1
EXHIBIT 99.02
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Innovex PLC and Innovex Holdings Limited
We have audited the combined income statement and statement of cash flows for
the year ended March 31, 1996 which comprise a combination of Innovex PLC and
Innovex Holdings Limited and its subsidiaries. These combined statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined statements based on our audits.
We conducted our audits in accordance with auditing standards in the United
Kingdom and the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the aforementioned combined statements present fairly, in all
material respects, the results of the operations of the Innovex Companies and
their cash flows for the year ended March 31, 1996 in conformity with generally
accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected the results of operations for the year ended March
31, 1996, to the extent summarized in Note 27 to the combined financial
statements.
Reading, England /s/ KPMG
July 24, 1996 Chartered Accountants
Registered Auditors
