<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 340-23520
---------------------
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NORTH CAROLINA 56-1714315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4709 CREEKSTONE DR., SUITE 200
DURHAM, NC 27703-8411
(Address of principal executive offices, including zip code)
(919) 998-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, $.01 par value, outstanding as of October
31, 1999 was 114,951,844.
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<PAGE> 2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -- September 30, 1999
and December 31, 1998 3
Condensed consolidated statements of operations -- Three
months ended September 30, 1999 and 1998; nine months ended
September 30, 1999 and 1998 4
Condensed consolidated statements of cash flows -- Nine
months ended September 30, 1999 and 1998 5
Notes to condensed consolidated financial statements --
September 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 24
Part II Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities - Not Applicable 25
Item 4. Submission of Matters to a Vote of Security Holders -- Not
Applicable 25
Item 5. Other Information -- Not Applicable 25
Item 6. Exhibits and Reports on Form 8-K 25
26
Signatures
27
Exhibit Index
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
(UNAUDITED) (NOTE 1)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 185,687 $ 156,977
Accounts receivable and unbilled services................. 442,569 363,163
Investments in debt securities............................ 34,958 32,241
Prepaid expenses.......................................... 41,482 26,326
Other current assets...................................... 23,299 24,112
---------- ----------
Total current assets.............................. 727,995 602,819
Property and equipment...................................... 552,199 430,408
Less accumulated depreciation............................... (204,892) (156,763)
---------- ----------
347,307 273,645
Intangibles and other assets:
Goodwill, net............................................. 243,566 124,963
Other intangibles, net.................................... 26,922 30,655
Investments in debt securities............................ 76,079 65,456
Investments in marketable equity securities............... 23,279 --
Deferred income taxes..................................... 71,291 71,401
Deposits and other assets................................. 46,773 41,984
---------- ----------
487,910 334,459
---------- ----------
Total assets...................................... $1,563,212 $1,210,923
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................... $ 3,496 $ 921
Accounts payable and accrued expenses..................... 201,034 161,548
Credit arrangements, current.............................. 178,190 33,818
Unearned income........................................... 154,100 153,535
Income taxes and other current liabilities................ 28,192 13,558
---------- ----------
Total current liabilities......................... 565,012 363,380
Long-term liabilities:
Credit arrangements, less current portion................. 9,682 155,180
Long-term obligations..................................... 2,874 2,926
Deferred income taxes and other liabilities............... 45,155 43,305
---------- ----------
57,711 201,411
---------- ----------
Total liabilities................................. 622,723 564,791
Shareholders' equity:
Preferred stock, 0 and 3,264,800 shares issued and
outstanding at September 30, 1999 and December 31,
1998, respectively..................................... -- 33
Common stock and additional paid-in capital, 114,951,099
and 105,775,628 shares issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively........................................... 782,143 559,496
Retained earnings......................................... 169,706 95,618
Accumulated other comprehensive income.................... (7,684) (5,198)
Other equity.............................................. (3,676) (3,817)
---------- ----------
Total shareholders' equity........................ 940,489 646,132
---------- ----------
Total liabilities and shareholders' equity........ $1,563,212 $1,210,923
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
3
<PAGE> 4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- --------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue............................ $457,827 $362,035 $1,327,554 $1,017,540
Costs and expenses:
Direct............................... 239,448 186,432 684,372 524,923
General and administrative........... 147,867 112,822 414,359 316,514
Depreciation and amortization........ 25,726 23,426 75,077 68,397
-------- -------- ---------- ----------
413,041 322,680 1,173,808 909,834
-------- -------- ---------- ----------
Income from operations................. 44,786 39,355 153,746 107,706
Transaction costs...................... (281) (1,145) (26,108) (2,146)
Other income (expense)................. 806 (168) 2,451 (723)
-------- -------- ---------- ----------
Total other income (expense),
net........................ 525 (1,313) (23,657) (2,869)
-------- -------- ---------- ----------
Income before income taxes............. 45,311 38,042 130,089 104,837
Income taxes........................... 14,132 16,057 55,116 41,220
-------- -------- ---------- ----------
Net income............................. $ 31,179 $ 21,985 $ 74,973 $ 63,617
======== ======== ========== ==========
Basic net income per share............. $ 0.27 $ 0.21 $ 0.66 $ 0.61
======== ======== ========== ==========
Diluted net income per share........... $ 0.27 $ 0.20 $ 0.65 $ 0.57
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
4
<PAGE> 5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------
1999 1998
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 74,973 $ 63,617
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 75,077 68,397
Non-recurring transaction costs........................... 26,108 --
Provision for (benefit from) deferred income tax
expense................................................ 2,899 (2,587)
Change in operating assets and liabilities................ (66,580) (26,864)
Other..................................................... 361 247
--------- --------
Net cash provided by operating activities................... 112,838 102,810
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment......... 4,367 4,499
Acquisition of property and equipment....................... (129,550) (77,084)
Cash acquired in stock transactions......................... 81,980 (6,903)
Payment of non-recurring transaction costs.................. (24,733) --
Payment of dividends by pooled entities..................... (761) (2,583)
(Purchases) maturities of debt securities, net.............. (10,419) 9,722
Purchases of equity securities, net......................... (12,424) --
Other....................................................... (2) --
--------- --------
Net cash used in investing activities....................... (91,542) (72,349)
FINANCING ACTIVITIES
Increase (decrease) in lines of credit, net................. 3,334 (9,015)
Principal payments on credit arrangements................... (10,092) (14,735)
Issuance of common stock, net............................... 16,331 14,331
Other....................................................... (29) --
--------- --------
Net cash provided by (used in) financing activities......... 9,544 (9,419)
Effect of foreign currency exchange rate changes on cash.... (2,130) 742
--------- --------
Increase in cash and cash equivalents....................... 28,710 21,784
Cash and cash equivalents at beginning of period............ 156,977 93,195
--------- --------
Cash and cash equivalents at end of period.................. $ 185,687 $114,979
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
5
<PAGE> 6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the Consolidated Financial Statements and Notes thereto included in the Current
Report on Form 8-K, dated July 15, 1999 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements of the Company. The financial statements do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
2. MERGERS AND ACQUISITIONS
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's ("HMR") Kansas City-based Drug Innovation and Approval facility for
approximately $93 million in cash, most of which (approximately $58 million) is
expected to be paid in the fourth quarter of 1999 when the acquisition of the
physical facility is completed. As a part of this transaction, the Company was
awarded a $436 million contract for continued support and completion of ongoing
HMR development projects over a five-year period. In addition, HMR will offer
the Company the opportunity to provide all U.S. outsourcing services up to an
additional $144 million over the same period.
On February 17, 1999, the Company acquired Oak Grove Technologies, Inc. ("Oak
Grove"), a leader in providing current Good Manufacturing Practice compliance
services to the pharmaceutical, biotechnology and medical device industries. The
Company acquired Oak Grove in exchange for 87,948 shares of the Company's Common
Stock. The acquisition of Oak Grove has been accounted for as a purchase. The
Company has evaluated the pro forma disclosure requirements for the Oak Grove
transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
On March 29, 1999, the Company acquired Pharmaceutical Marketing Services Inc.
("PMSI") and its core company, Scott-Levin, a leader in pharmaceutical market
information and research services in the U.S. The Company acquired PMSI in
exchange for approximately 4,993,732 shares of the Company's Common Stock.
Outstanding PMSI options became options to acquire approximately 440,426 shares
of the Company's Common Stock. In addition, the Company agreed to pay contingent
value payments to former PMSI stockholders who deferred receipt of one-half of
the shares of the Company's Common Stock they were entitled to receive in the
transaction until June 14, 1999. The right to receive contingent value payments
terminated in accordance with the merger agreement. Accordingly, no contingent
value payments were payable to any former PMSI shareholder. The total purchase
price of the PMSI acquisition approximates $201.8 million. The Company recorded
approximately $111.5 million related to the excess cost over the fair value of
net assets acquired, which amount is being amortized over 30 years. The
acquisition of PMSI has been accounted for as a purchase. For the periods
presented, the Company has evaluated the pro forma disclosure requirements for
the PMSI transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
6
<PAGE> 7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On March 30, 1999, the Company acquired ENVOY Corporation ("ENVOY"), a
Tennessee-based provider of healthcare electronic data interchange and data
mining services. The Company acquired ENVOY in exchange for approximately
28,465,083 shares of the Company's Common Stock. Outstanding ENVOY options
became options to acquire approximately 3,914,583 shares of the Company's Common
Stock. The acquisition of ENVOY has been accounted for as a pooling of
interests, and as such, all historical financial data have been restated to
include the historical financial data of ENVOY.
On March 31, 1999, the Company acquired Medlab Pty Ltd and the assets of the
Niehaus & Botha ("N & B") partnership, a South African based clinical
laboratory, in exchange for 271,146 shares of the Company's Common Stock. The
acquisition of N & B has been accounted for as a pooling of interests, and as
such, all historical financial data have been restated to include the historical
financial data of N & B.
On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a
Scotland-based clinical research organization, in exchange for 1,143,625 shares
of the Company's Common Stock. The acquisition of Minerva has been accounted for
as a pooling of interests, and as such, all historical data have been restated
to include the historical data of Minerva.
On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a
Chicago-based leading healthcare market information company, in exchange for
1,170,291 shares of the Company's Common Stock. The acquisition of SMG has been
accounted for as a pooling of interests, and as such, all historical data have
been restated to include the historical data of SMG.
On July 2, 1999, the Company acquired Medcom, Inc., a New Jersey-based provider
of physician meetings and educational events to help pharmaceutical companies
raise awareness of their products among healthcare professionals, for
approximately $2.5 million in cash. In addition, the Company agreed to pay the
former Medcom, Inc. owners earnout payments based on a multiple of 1999 profits
for Medcom as defined in the Medcom purchase agreement. The acquisition of
Medcom, Inc. has been accounted for as a purchase. The Company has evaluated the
pro forma disclosure requirements for the Medcom, Inc. transaction and has
determined that this transaction is immaterial and therefore, no pro forma
disclosures are required.
On July 15, 1999, the Company acquired MediTrain, a Netherlands-based multimedia
pharmaceutical sales representative training company, in exchange for 19,772
shares of the Company's Common Stock. The acquisition of MediTrain has been
accounted for as a purchase. The Company has evaluated the pro forma disclosure
requirements for the MediTrain transaction and has determined that this
transaction is immaterial and therefore, no pro forma disclosures are required.
On August 27, 1999, the Company acquired Medicines Control Consultants Pty Ltd.
("MCC"), a South African-based pharmaceutical regulatory consulting group, for
approximately $1 million in cash. The acquisition of MCC has been accounted for
as a purchase. The Company has evaluated the pro forma disclosure requirements
for the MCC transaction and has determined that this transaction is immaterial
and therefore, no pro forma disclosures are required.
7
<PAGE> 8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Reconciliation of results of operations previously reported by the separate
entities prior to the mergers and as restated for the combined company follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
COMPANY ENVOY N & B MINERVA SMG CONSOLIDATED
---------- -------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
September 30, 1998:
Net revenue........................ $ 308,064 $ 47,290 $2,631 $ 1,157 $ 2,893 $ 362,035
Net income (loss).................. 21,449 2,271 24 (1,787) 28 21,985
Basic net income per share......... 0.28 0.21
Diluted net income per share....... $ 0.27 $ 0.20
For the nine months ended September
30, 1999:
Net revenue........................ $1,261,985 $ 54,468 $2,724 $ 1,938 $ 6,439 $1,327,554
Net income (loss) (1).............. 75,817 (3,316) 535 290 1,647 74,973
Basic net income per share(1)...... 0.74 0.66
Diluted net income per share(1).... $ 0.73 $ 0.65
For the nine months ended September
30, 1998:
Net revenue........................ $ 861,929 $132,763 $8,282 $ 4,429 $10,137 $1,017,540
Net income (loss).................. 60,722 2,958 83 (1,988) 1,842 63,617
Basic net income per share......... 0.78 0.61
Diluted net income per share....... $ 0.77 $ 0.57
</TABLE>
- ---------------
(1) Includes transaction costs and amortization of certain acquired intangible
assets.
3. SIGNIFICANT CUSTOMERS
One customer accounted for 10.2% of consolidated net revenue for the nine months
ended September 30, 1999. These revenues were earned by the Company's product
development and commercialization segments. No customer accounted for greater
than 10% of consolidated net revenue for the three months ended September 30,
1999 and 1998 and the nine months ended September 30, 1998.
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $31,179 $21,985 $74,973 $63,617
======= ======= ======= =======
Weighted average shares:
Basic weighted average shares..................... 114,907 105,071 112,994 104,510
Effect of dilutive securities
Stock options.................................. 1,857 2,782 2,312 2,889
Preferred stock................................ -- 3,264 -- 3,264
------- ------- ------- -------
Diluted weighted average shares................... 116,764 111,117 115,306 110,663
======= ======= ======= =======
Basic net income per share.......................... $ 0.27 $ 0.21 $ 0.66 $ 0.61
Diluted net income per share........................ $ 0.27 $ 0.20 $ 0.65 $ 0.57
</TABLE>
Options to purchase approximately 7.0 million and 3.0 million shares of common
stock with exercise prices ranging between $33.94 and $56.25 per share were
outstanding during the three and nine months ended
8
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
September 30, 1999, respectively, 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 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.
5. COMPREHENSIVE INCOME
The following table represents the Company's comprehensive income for the three
and nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $31,179 $21,985 $74,973 $63,617
Other comprehensive income:
Unrealized gain on marketable securities, net of
tax............................................ 641 165 4,218 197
Foreign currency adjustment....................... 7,572 5,867 (6,702) 4,224
------- ------- ------- -------
Comprehensive income................................ $39,392 $28,017 $72,489 $68,038
======= ======= ======= =======
</TABLE>
6. CREDIT ARRANGEMENTS
As a result of the acquisition of PMSI, the Company had a forward sale
arrangement with CIBC Oppenheimer ("CIBC") pursuant to which the Company
transferred all of the IMS Health common stock in exchange for cash and a note
payable of $73.0 million. All of the Company's 1.2 million shares of IMS Health
common stock were held by CIBC as collateral against the Company's obligation to
deliver these shares in August 1999. In accordance with the terms of the
agreement, the forward sale and related note payable were settled in August
1999.
7. COMMITMENTS AND CONTINGENCIES
On September 30, 1999 a class action lawsuit was filed in the United States
District Court for the Middle District of North Carolina against the Company and
two of its executive officers and directors on behalf of all persons who
purchased or otherwise acquired shares of the Company's common stock between
July 16, 1999 and September 15, 1999. The complaint alleges violations of
federal securities laws, including violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. In particular, among other
claims, the complaint alleges that defendants made certain statements about the
Company's anticipated growth that were misleading because they failed to
disclose that the pharmaceutical industry allegedly had reversed its trend of
outsourcing clinical trials and that the Company had been notified that clinical
trials for a class of cardiovascular drugs would be discontinued. The complaint
seeks unspecified damages, plus costs and expenses, including attorneys' fees
and experts' fees.
Since then, three additional class action complaints have been filed against the
Company in the same court. These three new actions assert essentially the same
claims and seek the same relief as the original complaint. One of the new
complaints, filed October 26, 1999, seeks to expand the class to include a
purported sub-class of persons who purchased Company call options, or sold
Company put options, during the class period. The Company anticipates that all
of the existing lawsuits, and any additional suits that may be filed, ultimately
will be consolidated into a single action. The Company continues to believe that
all of the claims are without merit and intends vigorously to defend the
lawsuits.
In February 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit naming as
defendants Richard L. Borison, Bruce I. Diamond, 14 pharmaceutical companies and
Quintiles Laboratories Limited, a subsidiary of
9
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
the Company. The complaint alleges that certain drug trials conducted by Drs.
Borison and Diamond in which Plaintiff alleges he participated between 1988 and
1996 were not properly conducted or supervised, that Plaintiff had violent
adverse reactions to many of the drugs and that his schizophrenia was aggravated
by the drug trials. Consequently, Plaintiff alleges that he was subject to
severe mortification, injured feelings, shame, public humiliations,
victimization, emotional turmoil and distress. The complaint alleges claims for
battery, fraudulent inducement to participate in the drug experiments, medical
malpractice, negligence in conducting the experiments, and intentional
infliction of emotional distress. Plaintiff seeks to recover his actual damages
in unspecified amounts, medical expenses, litigation costs, and punitive
damages. Nowhere in the complaint are found any specific allegations against
Quintiles Laboratories Limited nor any specific factual connection between the
Company and the Plaintiff's claims. The Company believes the claims alleged
against it are vague and meritless, and the recovery sought is baseless. The
Company intends to vigorously defend itself against these claims.
Three class action complaints were filed in 1998, and later consolidated into a
single action against ENVOY and certain of its executive officers. The complaint
asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, and also asserted
additional claims under Tennessee common law for fraud and negligent
misrepresentation. On September 15, 1999, the Federal Court for the Middle
District of Tennessee granted ENVOY's motion to dismiss each of the complaints.
The Court dismissed the claims without prejudice.
10
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
8. SEGMENTS
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development service group, the commercialization service group and the
QUINTERNET(TM) informatics service group. Management has distinguished these
segments based on the normal operations of the Company. The product development
group is primarily responsible for all phases of clinical research and outcomes
research consulting. The commercialization group is primarily responsible for
sales force deployment and strategic marketing services. The QUINTERNET(TM)
informatics group is primarily responsible for electronic data interchange and
related informatics and includes primarily ENVOY, which was acquired in the
first quarter of 1999. The Company does not include non-recurring costs ($5.1
million for the three months ended September 30, 1998, and $3.7 million and
$15.2 million for the nine months ended September 30, 1999 and 1998,
respectively), interest income (expense) and income tax (benefit) in segment
profitability. Overhead costs are allocated based upon management's best
estimate of efforts expended in managing the segments. There are not any
significant intersegment revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue:
Product development........................ $228,523 $185,417 $ 697,000 $ 513,382
Commercialization.......................... 161,828 126,435 437,930 361,258
QUINTERNET(TM) informatics................. 67,476 50,183 192,624 142,900
-------- -------- ---------- ----------
$457,827 $362,035 $1,327,554 $1,017,540
======== ======== ========== ==========
Income from operations:
Product development........................ $ 14,323 $ 20,724 $ 72,380 $ 56,499
Commercialization.......................... 15,403 10,854 41,227 33,912
QUINTERNET(TM) informatics................. 15,060 12,842 43,860 32,490
-------- -------- ---------- ----------
$ 44,786 $ 44,420 $ 157,467 $ 122,901
======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 AS OF DECEMBER 31, 1998
------------------------ -----------------------
<S> <C> <C>
Total assets:
Product development........................ $ 847,080 $ 754,129
Commercialization.......................... 271,730 267,091
QUINTERNET(TM) informatics................. 444,402 189,703
---------- ----------
$1,563,212 $1,210,923
========== ==========
</TABLE>
11
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations and "Risk Factors",
contains various "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934,
which statements represent the Company's judgement 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, our ability to efficiently distribute backlog
among therapeutic business units and match demand to resources, actual operating
performance, the ability to maintain large contracts or enter into new
contracts, the ability of the Company to integrate acquired businesses with the
Company's historical operations, the costs and impact of the year 2000 issue,
the actual costs of the combining of the acquired businesses, the ability to
operate successfully in the lines of business resulting from the ENVOY and PMSI
transactions, the Company's ability to introduce new service offerings and
achieve commercial success for those offerings and the level of demand for
services. See "Risk Factors" for additional factors that could cause the
Company's actual results to differ.
RESULTS OF OPERATIONS
The Company's consolidated financial data have been restated to include ENVOY,
N & B, Minerva and SMG.
Three Months Ended September 30, 1999 and 1998
Net revenue for the third quarter of 1999 was $457.8 million, an increase of
$95.8 million or 26.5% over the third quarter of 1998 net revenue of $362.0
million. Growth occurred across each of the Company's three segments. Factors
contributing to the growth included an increase of contract service offerings,
the provision of increased services rendered under existing contracts, the
initiation of services under contracts awarded subsequent to the third quarter
of 1998 and the Company's 1999 acquisitions accounted for under purchase
accounting which contributed approximately $11.0 million of net revenue for the
third quarter of 1999. Net revenue for the product development group increased
23.2% to $228.5 million for the third quarter of 1999 as compared to $185.4
million for the third quarter of 1998. This growth was slower than anticipated
as a result of several factors, including early termination and delays of
clinical trials and utilization rates that were lower than historical levels.
Net revenue for the commercialization group increased 28.0% to $161.8 million
for the third quarter of 1999 as compared to $126.4 million for the third
quarter of 1998. The net revenue for the third quarter of 1999 for the
commercialization group included approximately $2.2 million of net revenue
contributed by a 1999 acquisition accounted for as a purchase. Net revenue for
the QUINTERNET(TM) informatics group increased 34.5% to $67.5 million for the
third quarter of 1999 as compared to $50.2 million for the third quarter of
1998. The net revenue for the third quarter of 1999 for the QUINTERNET(TM)
informatics group included approximately $7.7 million of net revenue contributed
by a 1999 acquisition accounted for as a purchase. In addition, the
QUINTERNET(TM) informatics group continued to experience an increase in the
volume of transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related electronic data
interchange ("EDI") and transaction processing expenses and other expenses
directly related to contracts, were $239.4 million or 52.3% of net revenue for
the third quarter of 1999 versus $186.4 million or 51.5% of net revenue for the
third quarter of 1998. The increase in direct costs as a percentage of net
revenue was primarily attributable to a decrease in the utilization rates
achieved during the third quarter, as discussed above.
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General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $147.9 million or
32.3% of net revenue for the third quarter of 1999 versus $112.8 million or
31.2% of net revenue for the third quarter of 1998. Also included in general and
administrative expenses were incremental costs related to the Company's Year
2000 Program of $2.9 million for the third quarter of 1999 versus $1.2 million
for the third quarter of 1998. The remaining $33.3 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 $25.7 million or 5.6% of net revenue for the
third quarter of 1999 versus $23.4 million or 6.5% of net revenue for the third
quarter of 1998. Included is amortization of certain acquired intangible assets
of $5.1 million for the three months ended September 30, 1998. These intangible
assets were fully amortized as of March 31, 1999. Excluding these expenses,
depreciation and amortization were $18.4 million or 5.1% of net revenue for the
third quarter of 1998. Excluding the amortization of certain acquired intangible
assets, amortization expense increased $1.8 million due to the goodwill
amortization resulting from the Company's 1999 acquisitions accounted for under
purchase accounting. The remaining $5.5 million increase is primarily due to the
increase in the capitalized asset base of the Company.
Income from operations was $44.8 million or 9.8% of net revenue for the third
quarter of 1999 versus $39.4 million or 10.9% of net revenue for the third
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $44.4 million or 12.3% of net
revenue for the third quarter of 1998. Income from operations for the product
development group decreased to $14.3 million or 6.3% of net revenue for the
third quarter of 1999 from $20.7 million or 11.2% of net revenue for the third
quarter of 1998. This decrease results from the early termination and delays of
clinical programs and lower utilization rates as discussed above and an increase
of approximately $1.6 million in incremental costs incurred related to the
Company's Year 2000 Program. Income from operations for the commercialization
group increased to $15.4 million or 9.5% of net revenue for the third quarter of
1999 from $10.9 million or 8.6% of net revenue for the third quarter of 1998.
Excluding the amortization of certain acquired intangible assets as discussed
above, income from operations for the QUINTERNET(TM) informatics group increased
to $15.1 million or 22.3% of net revenue for the third quarter of 1999 from
$12.8 million or 25.6% of net revenue for the third quarter of 1998.
Other income was $525,000 for the third quarter of 1999 versus other expense of
$1.3 million for the third quarter of 1998. Excluding transaction costs, other
income was $806,000 for the third quarter of 1999 versus other expense of
$168,000 for the third quarter of 1998. The $974,000 fluctuation was due to an
increase in net interest income of $1.4 million which was partially offset by a
$400,000 increase in other expense.
The effective tax rate for the third quarter of 1999 was 31.2% versus a 42.2%
effective tax rate for the third quarter of 1998. Excluding the amortization of
certain acquired intangible assets as discussed above and transaction costs
which are not generally deductible for tax purposes, the effective tax rate for
the third quarter of 1999 was 31.0% versus a 36.3% effective tax rate for the
third quarter of 1998. The effective tax rate decrease resulted primarily from
profits generated in locations with lower tax rates. Since the Company conducts
operations on a global basis, its effective tax rate may vary.
Nine Months Ended September 30, 1999 and 1998
Net revenue for the nine months ended September 30, 1999 was $1.3 billion, an
increase of $310.0 million or 30.5% over the nine months ended September 30,
1998 net revenue of $1.0 billion. Growth occurred across each of the Company's
three segments. Factors contributing to the growth included an increase of
contract service offerings, the provision of increased services rendered under
existing contracts, the initiation of services under contracts awarded
subsequent to September 30, 1998 and the Company's 1999 acquisitions accounted
for under purchase accounting which contributed approximately $21.3 million of
net revenue for the nine months ended September 30, 1999. Net revenue for the
product development group increased 35.8% to $697.0 million for the nine months
ended September 30, 1999 as compared to $513.4 million for the nine months ended
September 30, 1998. Net revenue for the commercialization group increased 21.2%
to $437.9 million
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
for the nine months ended September 30, 1999 as compared to $361.3 million for
the nine months ended September 30, 1998. The net revenue for the nine months
ended September 30, 1999 for the commercialization group included approximately
$2.2 million of net revenue contributed by a 1999 acquisition accounted for as a
purchase. Net revenue for the QUINTERNET(TM) informatics group increased 34.8%
to $192.6 million for the nine months ended September 30, 1999 as compared to
$142.9 million for the nine months ended September 30, 1998. The net revenue for
the nine months ended September 30, 1999 for the QUINTERNET(TM) informatics
group includes approximately $16.1 million of net revenue contributed by a 1999
acquisition accounted for as a purchase. In addition, the QUINTERNET(TM)
informatics group experienced an increase in the volume of transactions
processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related EDI and transaction
processing expenses and other expenses directly related to contracts, were
$684.4 million or 51.6% of net revenue for the nine months ended September 30,
1999 versus $524.9 million or 51.6% of net revenue for the nine months ended
September 30, 1998.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $414.4 million or
31.2% of net revenue for the nine months ended September 30, 1999 versus $316.5
million or 31.1% of net revenue for the nine months ended September 30, 1998.
Also included in general and administrative expenses were incremental costs
related to the Company's Year 2000 Program of $6.8 million for the nine months
ended September 30, 1999 versus $1.2 million for the nine months ended September
30, 1998. The remaining $92.2 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 $75.1 million or 5.7% of net revenue for the
nine months ended September 30, 1999 versus $68.4 million or 6.7% of net revenue
for the nine months ended September 30, 1998. Included is amortization of
certain acquired intangible assets of $3.7 million and $15.2 million for the
nine months ended September 30, 1999 and 1998, respectively. These intangible
assets were fully amortized as of March 31, 1999. Excluding these expenses,
depreciation and amortization were $71.4 million or 5.4% of net revenue for the
nine months ended September 30, 1999 versus $53.2 million or 5.2% of net revenue
for the nine months ended September 30, 1998. Excluding the amortization of
certain acquired intangible assets, amortization expense increased approximately
$3.1 million due to the goodwill amortization resulting from the Company's 1999
acquisitions accounted for under purchase accounting. The remaining $15.0
million increase is primarily due to the increase in the capitalized asset base
of the Company.
Income from operations was $153.7 million or 11.6% of net revenue for the nine
months ended September 30, 1999 versus $107.7 million or 10.6% of net revenue
for the nine months ended September 30, 1998. Excluding amortization of certain
acquired intangible assets as discussed above, income from operations was $157.5
million or 11.9% of net revenue for the nine months ended September 30, 1999
versus $122.9 million or 12.1% of net revenue for the nine months ended
September 30, 1998. Income from operations for the product development group
increased to $72.4 million or 10.4% of net revenue for the nine months ended
September 30, 1999 from $56.5 million or 11.0% of net revenue for the nine
months ended September 30, 1998. Income from operations for the
commercialization group increased to $41.2 million or 9.4% of net revenue for
the nine months ended September 30, 1999 from $33.9 million or 9.4% of net
revenue for the nine months ended September 30, 1998. Excluding the amortization
of certain acquired intangible assets as discussed above, income from operations
for the QUINTERNET(TM) informatics group increased to $43.9 million or 22.8% of
net revenue for the nine months ended September 30, 1999 from $32.5 million or
22.7% of net revenue for the nine months ended September 30, 1998. This increase
primarily results from the efficiencies realized due to the increase in the
volume of transactions processed.
Other expense increased to $23.7 million for the nine months ended September 30,
1999 from $2.9 million for the nine months ended September 30, 1998. Excluding
transaction costs, other income was $2.5 million for the nine months ended
September 30, 1999 versus other expense of $723,000 for the nine months ended
September 30, 1998. The $3.2 million change primarily results from an increase
in net interest income.
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The effective tax rate for the nine months ended September 30, 1999 was 42.4%
versus a 39.3% effective tax rate for the nine months ended September 30, 1998.
Excluding the amortization of certain acquired intangible assets as discussed
above and transaction costs which are not generally deductible for tax purposes,
the effective tax rate for the nine months ended September 30, 1999 was 34.5% as
compared to a 33.7% effective tax rate for the nine months ended September 30,
1998. The effective tax rate increase resulted primarily from profits generated
in locations with higher tax rates. Since the Company conducts operations on a
global basis, its effective tax rate may vary.
Results of operations for the nine months ended September 30, 1999 were impacted
in the third quarter of 1999 by the same factors discussed under three months
results of operations for the product development group.
LIQUIDITY AND CAPITAL RESOURCES
Cash inflows from operations were $112.8 million for the nine months ended
September 30, 1999 versus $102.8 million for the comparable period of 1998.
Investing activities, for the nine months ended September 30, 1999, consisted
primarily of capital asset purchases, investment security purchases and
maturities and payment of non-recurring transaction costs. Capital asset
purchases required an outlay of cash of $129.6 million for the nine months ended
September 30, 1999 compared to an outlay of $77.1 million for the same period in
1998. Capital asset expenditures for the nine months ended September 30, 1999
included approximately $35 million in connection with the acquisition of the HMR
Drug Innovation and Approval Facility. The remainder of the purchase price,
approximately $58 million, is expected to be paid in the fourth quarter of 1999
when the acquisition of the physical facility is completed.
As of September 30, 1999, total working capital was $163.0 million versus $239.4
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $288.5 million at
September 30, 1999 as compared to $209.6 million at the end of 1998. As of
September 30, 1999, accounts receivable were $280.3 million versus $212.7
million at December 31, 1998. Unbilled services were $162.3 million at September
30, 1999 versus $150.4 million at December 31, 1998, offset by unearned income
balances of $154.1 million and $153.5 million, respectively. The number of days
revenue outstanding in accounts receivable and unbilled services, net of
unearned income, was 50 days at September 30, 1999, as compared to 43 days at
December 31, 1998.
During the first five months of 1999, the Company had a L15.0 million
(approximately $24.3 million) unsecured line of credit with a U.K. bank and a
L5.0 million (approximately $8.1 million) unsecured line of credit with a second
U.K. bank. In accordance with their terms, both of these facilities expired in
May 1999.
In May 1999, the Company entered into a L10.0 million (approximately $16.4
million) unsecured line of credit with a U.K. bank. The Company also entered
into a L1.5 million (approximately $2.5 million) general banking facility with
the same U.K. bank. At September 30, 1999, the Company had L9.4 million
(approximately $15.4 million) available under these arrangements.
The Company has a $150 million senior unsecured credit facility ("$150.0 million
facility") with a U.S. bank. At September 30, 1999, the Company had the full
$150 million available under this credit facility. Based upon its current
financing plan, the Company believes the $150.0 million facility would be
available to retire long-term credit arrangements and obligations, if necessary.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents and investments in marketable securities, 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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
RISK FACTORS
In addition to the other information provided or incorporated by reference in
our reports, you should consider the following factors carefully in evaluating
us and our business. Additional risks and uncertainties not presently known to
us, that we currently deem immaterial or that are similar to those faced by
other companies in our industry or business in general, such as competitive
conditions, may also impair our business operations. If any of the following
risks occur, our business, financial condition, or results of operations could
be materially adversely affected.
Changes in Outsourcing Trends in the Pharmaceutical and Biotechnology Industries
Could Adversely Affect Our Operating Results and Growth Rate
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations such as ours to conduct large clinical research and sales
and marketing projects. This practice has grown substantially in the 1990s, and
we have benefited from this trend. Some industry commentators believe that the
rate of growth of outsourcing has slowed. If these industries reduced their
tendency to outsource those projects, our operations, financial condition and
growth rate could be materially and adversely affected. In addition, numerous
governments have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers and
pharmaceutical companies. If future regulatory cost containment efforts limit
the profits which can be derived on new drugs, our customers may reduce their
research and development spending which could reduce the business they outsource
to us. We cannot predict the likelihood of any of these events or the effects
they would have on our business, results of operations or financial condition.
We May Not Be Able to Successfully Integrate PMSI and ENVOY Into Our Business
In March 1999 we completed the acquisitions of Pharmaceutical Marketing
Services, Inc. and ENVOY Corporation. ENVOY is the largest acquisition we have
completed to date, and PMSI is one of the largest we have ever completed. We may
not achieve the intended benefits of the mergers with PMSI and ENVOY if we are
unable to integrate these businesses with our own successfully. The PMSI and
ENVOY acquisitions have expanded our lines of business and thus involve new
risks. ENVOY is a provider of electronic data interchange (or "EDI") and data
analysis services; PMSI provides market research audits and other studies for
the pharmaceutical industry. If either of these acquisitions fails to meet our
performance expectations, our results of operation and financial condition could
be materially adversely affected. We could encounter a number of difficulties in
the integration of these businesses, such as:
- retaining PMSI's customers among pharmaceutical companies;
- retaining ENVOY's EDI customers among pharmacies, health insurance
companies, hospitals and other healthcare providers;
- maintaining and increasing PMSI's and ENVOY's competitive presence in the
healthcare industry;
- the ability to operate and expand the data analysis portion of ENVOY's
business;
- continuing to operate each of PMSI's and ENVOY's businesses efficiently;
or
- retaining key PMSI and ENVOY employees.
For example, if either acquired company's current customers are uncertain about
our commitment to support their existing products and services, they could
cancel or refuse to renew current contracts. In addition, the combined company
may be unsuccessful in expanding or retaining its competitive position in the
current and
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
new sectors of the healthcare industry in which it now operates as a result of
factors such as its inability to properly market either acquired company's
services and products. Furthermore, the successful integration of PMSI and ENVOY
depends on the contribution of certain key PMSI and ENVOY employees. The loss of
any key personnel could result in less efficient business operations for the
combined company and could seriously harm its business.
If Companies We Acquire Do Not Perform as Expected or if We Are Unable to Make
Strategic Acquisitions, Our Business Could Be Adversely Affected
A key element of our growth strategy depends on our ability to complete
acquisitions that complement or expand our business and successfully integrate
the acquired companies into our operations. If we are unable to successfully
execute our acquisition strategy, there could be a material adverse effect on
our business, results of operations and financial condition. In the past, some
of our acquisitions performed below our expectations in the short term, but we
experienced no impact to our expectations for our overall results, due in part
to the size of such acquisitions and the performance of other areas of our
business. In the future, if we are unable to operate the business of an acquired
company so that its results meet our expectations, those results could have a
negative impact on our results as a whole. The risk that our results may be
affected if we are unable to successfully operate the businesses we acquire may
increase in proportion with (1) the size of the businesses we acquire, (2) the
lines of business we acquire and (3) the number of acquisitions we complete in
any given time period.
In 1998, we completed 11 acquisitions and announced agreements to acquire PMSI
and ENVOY. As of September 30, 1999, we have completed another nine
acquisitions, including PMSI and ENVOY. In addition, we are currently reviewing
many acquisition candidates and continually evaluating and competing for new
acquisition opportunities. Other risk factors we face as a result of our
aggressive acquisition strategy include the following:
- the ability to achieve anticipated synergies from combined operations;
- integrating the operations and personnel of acquired companies,
especially those in lines of business that differ from our current lines
of business;
- the ability of acquired companies to meet anticipated revenue and net
income targets;
- potential loss of the acquired companies' key employees;
- the possibility that we may be adversely affected by risk factors present
at the acquired companies, including Year 2000 risks;
- potential losses resulting from undiscovered liabilities of acquired
companies that are not covered by the indemnification we may obtain from
the sellers;
- risks of assimilating differences in foreign business practices and
overcoming language barriers (for acquisitions of foreign companies); and
- risks experienced by companies in general that are involved in
acquisitions.
Due to these risks, we may not be able to successfully execute our acquisition
strategy.
If We Are Unable to Successfully Develop and Market Potential New Services, Our
Growth Could Be Adversely Affected
Another key element of our growth strategy is the successful development and
marketing of new services which complement or expand our existing business. If
we are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected.
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For example, as a result of our acquisition of ENVOY, we are expanding our
pharmaceutical and healthcare information and market research services.
Providers of these services analyze healthcare information to study aspects of
current healthcare products and procedures for use in producing new products and
services or in analyzing sales and marketing of existing products. We believe
that the healthcare information ENVOY processes in its current business could be
utilized to create new data analysis services. In addition to the other
difficulties associated with the development of any new service, our ability to
develop this line of service may be limited further by contractual provisions
limiting our use of the healthcare information or the legal rights of others
that may prevent or impair our use of the healthcare information. Due to these
and other limitations, we cannot assure you that we will be able to develop this
type of service successfully. Our inability to develop new products or services
or any delay in development may adversely affect our ability to realize some of
the synergies we anticipate from the acquisition of ENVOY and to maintain our
rate of growth in the future.
Our Results Could Be Adversely Affected by the Potential Loss or Delay of Our
Large Contracts
Many of our contract research customers can terminate our contracts upon 15-90
days' notice. In the event of termination, our contracts often provide for fees
for winding down the project, but these fees may not be sufficient for us to
maintain our margins and termination may result in lower resource utilization
rates. Still, the loss or delay of a large contract or the loss or delay of
multiple contracts could adversely affect our net revenue and profitability. We
believe that this risk has potentially greater effect as we pursue larger
outsourcing arrangements with global pharmaceutical companies, which may
encompass global clinical trials at a number of sites and cross many service
lines. Also, our EDI customers under certain circumstances may enter into
contracts with other providers which lessen the number of transactions processed
by or under our contracts.
Our Backlog May Not Be Indicative of Future Results
We report backlog based on anticipated net revenue from uncompleted projects
that a customer has authorized. Backlog does not include anticipated net revenue
from our transaction processing services since the contracts do not quantify the
volume of transactions processed. We cannot assure you that the backlog we have
reported will be indicative of our future results. A number of factors may
affect our backlog, including:
- the variable size and duration of projects (some are performed over
several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
We Face Risks Concerning the Year 2000 Issue
If We or Our Vendors Do Not Adequately Prepare for the Year 2000 Issue,
Our Operations Could be Disrupted
We continue to implement our Year 2000 Program described in our previous filings
with the Securities and Exchange Commission, and we refer you to our Form 10-K
for the fiscal year ended December 31, 1998 for information relating to the
staffing, framework and scope of our Year 2000 Program. We have addressed and
substantially completed our assessment, remediation, testing and deployment of
our systems for all service groups. A very small number of remaining systems are
currently undergoing remediation, testing and deployment and are anticipated to
be complete by the end of 1999. Furthermore, ENVOY, one of our recent
acquisitions, will continue testing with customers through the end of 1999. We
expect to complete the core components of our Year 2000 Program before there is
a significant risk that internal Year 2000 problems will have a material impact
on our operations.
Although we cannot control whether and how third parties will address the Year
2000 issue, we are conducting a limited evaluation of services on which we are
substantially dependent. For example, we believe that among our most significant
third party service providers are physician investigators who participate as
independent
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contractors in clinical studies conducted through our contract research services
and external organizations (such as pharmacies, insurance providers and medical
offices) linked to our QUINTERNET(TM) informatics services. We do not plan to
assess how our customers, such as pharmaceutical and large biotechnology
companies, are dealing with the Year 2000 issue.
If Our Costs of Addressing the Year 2000 Issue Exceed Our Estimates,
Our Net Income Could Be Adversely Affected
We estimate that the aggregate costs of our Year 2000 Program, including recent
acquisitions, will be approximately $20.7 million, including costs already
incurred. A significant portion of these costs, approximately $8.1 million, are
not likely to be incremental costs, but rather will represent the redeployment
of existing resources. This reallocation of resources is not expected to have a
significant impact on our day-to-day operations. We incurred total Year 2000
Program costs of $16.8 million through September 30, 1999, of which
approximately $10.4 million represented incremental expense. Our estimates
regarding the cost, timing and impact of addressing the Year 2000 issue are
based on numerous assumptions of future events, including the continued
availability of certain resources, our ability to meet deadlines and the
cooperation of third parties. We cannot assure you our assumptions will be
correct and that these estimates will be achieved. Actual results could differ
materially from our expectations as a result of numerous factors, including the
availability and cost of personnel trained in this area, unforeseen
circumstances that would cause us to allocate our resources elsewhere, costs
relating to the Year 2000 compliance status of acquired companies and similar
uncertainties.
We are developing and finalizing business continuity plans for each service
area. These plans are specifically created based on the unique characteristics
of the affected service group or business unit and each plan will vary based on
the internal and third party risks identified and prioritized for the applicable
service group or business unit. Each plan may also identify incident response
teams to allocate appropriate resources where required and to initiate and
implement decisions in the event of a Year 2000 related failure. We will
continue to develop and refine these plans through the fourth quarter of 1999.
Our Business Could Be Adversely Affected if Year 2000 Issues Are Not
Adequately Addressed in Other Parts of the World or by Companies With Which We
Do Business
We face both internal and external risks from the Year 2000 issue. If realized,
these risks could have a material adverse effect on our business, results of
operations or financial condition. The decentralized nature of our business may
compound these risks if we are unable to coordinate efforts across our global
operations. We believe that our Year 2000 Program will successfully address
these risks, however, we cannot assure you that this program will effectively
address all Year 2000 issues. Notwithstanding our Year 2000 Program, we also
face external risks that may be beyond our control. Our international operations
and our relationships with foreign third parties create additional risks for us,
as many countries outside the United States have been less attuned to the Year
2000 issue. These risks include the possibility that infrastructural systems,
such as electricity, water, natural gas or telephony, will fail in some or all
of the regions in which we operate, as well as the danger that the internal
systems of our foreign suppliers, service providers and customers will fail. Our
business also requires considerable travel, and our ability to perform services
under our customer contracts could be negatively affected if air travel is
disrupted by the Year 2000 issue.
In addition, our business depends heavily on the healthcare industry, including
third party physician investigators, pharmacies, insurance providers and medical
offices. The healthcare industry, and physicians' groups in particular, to date
may not have focused on the Year 2000 issue to the same degree as some other
industries, especially outside of major metropolitan centers. As a result, we
face increased risk that our physician investigators will be unable to provide
us with the data that we need to perform under our contracts on time, if at all.
Thus, the clinical study involved could be slowed or brought to a halt. The
failure due to a Year 2000 issue of an external organization on whose services
we rely significantly could also impact our ability to process transactions in
our informatics services. Also, the failure of our customers to address the Year
2000 issue could negatively impact their ability to utilize our services. While
we intend to develop
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contingency plans to address certain of these risks, we cannot assure you that
any developed plans will sufficiently insulate us from the effects of these
risks. Any disruptions resulting from the realization of these risks would
affect our ability to perform our services. If we are unable to receive or
process information, or if third parties are unable to provide information or
services to us, we may not be able to meet milestones or obligations under our
customer contracts, which could have a material adverse effect on our business,
results of operations and financial condition.
If We Lose the Services of Dennis Gillings or Other Key Personnel,
Our Business Could Be Adversely Affected
Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman of the Board of Directors and Chief Executive Officer. We maintain key
man life insurance on Dr. Gillings in the amount of $3 million. Our performance
also depends on our ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings, or any key executive, or our inability to continue to
attract and retain qualified personnel could have a material adverse effect on
our business, results of operations or financial condition.
Our Product Development Services Create a Risk of Liability From Clinical Trial
Participants and the Parties With Whom We Contract
We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive. If
we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants.
We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. Nonetheless, it is possible we could be found
liable for those types of losses.
In addition to supervising tests or performing laboratory analysis, we also own
a number of labs where Phase I clinical trials are conducted. Phase I clinical
trials involve testing a new drug on a limited number of healthy individuals,
typically 20 to 80 persons, to determine the drug's basic safety. We also could
be liable for the general risks associated with ownership of such a facility.
These risks include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
We maintain insurance to cover these risks but the insurance might not be
adequate and it would not cover the risk of a drug company deciding not to do
business with us as a result of poor performance.
Relaxation of Government Regulation Could Decrease the Need For the Services We
Provide
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies through
the regulatory drug approval process. Any relaxation in regulatory approval
standards could eliminate or substantially reduce the need for our services,
and, as a result, our business, results of
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
operations and financial condition could be materially adversely affected.
Potential regulatory changes under consideration in the United States and
elsewhere include mandatory substitution of generic drugs for patented drugs,
relaxation in the scope of regulatory requirements or the introduction of
simplified drug approval procedures. These and other changes in regulation could
have an impact on the business opportunities available to us.
Failure to Comply With Existing Regulations Could Result in a Loss of Revenue
Any failure on our part to comply with applicable regulations could result in
the termination of ongoing clinical research or sales and marketing projects or
the disqualification of data for submission to regulatory authorities, either of
which could have a material adverse effect on us. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at substantial
cost to us.
Proposed Regulations May Increase the Cost of Our Business or Limit Our Service
Offerings
Certain of our current services relate to the diagnosis and treatment of
disease. The confidentiality of patient-specific information and the
circumstances under which such patient-specific records may be released for
inclusion in our databases or used in other aspects of our business, are subject
to substantial government regulation. Additional legislation governing the
possession, use and dissemination of medical record information and other
personal health information has been proposed at both the state and federal
levels. This legislation may (1) require us to implement security measures that
may require substantial expenditures or (2) limit our ability to offer some of
our products and services. These and other changes in regulation could limit our
ability to offer some of our products or have an impact on the business
opportunities available to us.
Industry Regulation May Restrict Our Ability to Analyze and Disseminate
Pharmaceutical and Healthcare Data
As described above, the pharmaceutical industry is subject to extensive
regulations at the federal, state and international levels, including
limitations on the prices drug companies may charge. Such regulations may cause
our pharmaceutical company clients to revise or reduce their marketing programs.
In addition, we are directly subject to certain restrictions on the collection
and use of data. Laws relating to the collection and use of data are evolving,
as are contractual rights. We cannot assure you that contractual restrictions
imposed by our customers, legislation or regulations will not, now or in the
future, directly or indirectly restrict the analysis or dissemination of the
type of information we gather and therefore materially adversely affect our
operations.
Consolidation in the Healthcare Industry May Adversely Affect Our Business
Many healthcare providers and payors are consolidating to create larger
healthcare organizations. This consolidation reduces the number of potential
customers for our EDI and data analysis services, and the increased bargaining
power of these organizations could lead to reductions in the amounts paid for
such services. For example, payors and other healthcare information companies,
such as billing services and practice management vendors, which currently
utilize our EDI services, have developed or acquired transaction processing and
networking capabilities and may cease utilizing our EDI services in the future.
Industry developments are increasing the amount of capitation-based care and
reducing the need for providers to make claims or reimbursements for products or
services. The impact of these developments in the healthcare EDI and transaction
processing industry, as well as the import for the development of new data
analysis products, is difficult to predict and could materially adversely affect
our business.
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<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our Services Are Subject to Evolving Industry Standards and Rapid Technological
Changes
The markets for our services, particularly our QUINTERNET(TM) informatics
services, which include our EDI and data analysis services, are characterized by
rapidly changing technology, evolving industry standards and frequent
introduction of new and enhanced services. To succeed, we must continue to:
- enhance our existing services;
- introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
- achieve market acceptance for new services; and
- respond to emerging industry standards and other technological changes.
Particularly, the current industry standard EDI platform for processing
transactions could be replaced or supplemented by an internet platform to handle
these transactions. Some of our competitors in the EDI business are beginning to
implement such a platform. If others succeed in implementing an internet
platform and are able to gain market acceptance of that platform, whether or not
we develop and execute an internet platform, our EDI business could be
materially adversely affected.
Exchange Rate Fluctuations May Affect Our Results of Operations and Financial
Condition
We derive a large portion of our net revenue from international operations; for
example, we derived approximately 44.3% of our 1998 net revenue from outside the
United States. Our financial statements are denominated in U.S. dollars; thus,
factors associated with international operations, including changes in foreign
currency exchange rates, could significantly affect our results of operations
and financial condition. Exchange rate fluctuations between local currencies and
the U.S. dollar create risk in several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
- Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably reduce
our currency transaction risk associated with our service contracts.
On January 1, 1999, a new currency, the euro, became the legal currency for 11
of the 15 member countries of the European Economic Community. Between January
1, 1999 and January 1, 2002, governments, companies and individuals may conduct
business in these countries in both the euro and existing national currencies.
On January 1, 2002, the euro will become the sole currency in these countries.
We are evaluating the impact that conversion to the euro will have on our
business. In particular we are reviewing (1) whether we may have to change the
prices of our services in the different countries because they will now be
dominated in the same currency in each country and (2) whether we will have to
change the terms of any financial instruments in connection with our hedging
activities described above. Based on current information and our initial
evaluation, we do not expect the cost of any necessary corrective action to
seriously harm our business. However, we will continue to evaluate the impact of
these and other possible effects of the conversion to the euro on our business.
We cannot assure you that the costs associated with the conversion to the euro
will not in the future seriously harm our business, results of operations or
financial condition.
We May Be Adversely Affected By Customer Concentration
We have one customer that accounted for 10.2% of our revenues for the nine
months ended September 30, 1999. These revenues resulted from services provided
by our product development and commercialization
22
<PAGE> 23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
service groups. If this or any future customer of similar size decreases or
terminates its relationship with us, our business, results of operations or
financial condition could be materially adversely affected.
We Rely on Specific Data Centers for Our EDI Business
Our EDI business relies on a host computer system to perform real-time EDI
transaction processing. This host computer system is contained in a single data
facility. The host computer system does not have a remote backup data center.
Although the host computer system is insured, if there is a fire or other
disaster at the data facility, our EDI business could be materially adversely
affected.
Our EDI business also relies on a data center operated by a third party to
perform many of our other healthcare EDI transaction processing services. The
facility is located in Tampa, Florida and is operated by GTE Data Services
Incorporated, with whom we have contracted for such processing services. Our EDI
business relies primarily on this facility to process batch claims and other
medical EDI transaction sets. Our contract with GTE requires GTE to maintain
continuous processing capability and a "hot site" disaster recovery system. This
contract expires in December 2003. If the GTE facility's services are disrupted
or delayed, our EDI business could be materially adversely affected.
We Cannot Predict the Need for Independent Healthcare EDI Processing
Our EDI business strategy anticipates that providers of healthcare services and
payors will increase their use of electronic processing of healthcare
transactions in the future. The development of the business of electronically
transmitting healthcare transactions is affected, and somewhat hindered, by the
complex nature and types of transactions that must be processed. Furthermore,
while the wide variety of processing forms used by different payors has fostered
the need for healthcare EDI and transaction processing clearinghouses such as
ENVOY to date, if such forms become standardized, through consolidation of
payors or otherwise, then the need for independent third party healthcare EDI
processing could become less prevalent. We cannot assure you that the electronic
processing of healthcare transactions will increase or that our EDI business
will grow.
Direct Links May Bypass Need for Our EDI Services
Some third party payors provide electronic data transmission systems to
healthcare providers, thereby directly linking the payor to the provider. These
direct links bypass third party processors like us. An increase in the use of
direct links between payors and providers would materially adversely affect our
EDI business.
Increased Competition in the Healthcare EDI Business Could Adversely Impact Our
Results
Increased competition in the healthcare EDI and transaction processing business
could force us to reduce, or even eliminate, per transaction fees, which could
adversely affect our results of operations. Our EDI services face different
types of competition, any or all of which could affect our EDI business. Some of
our competitors are similarly specialized, such as former regional partners of
ENVOY that have direct provider relationships, and others are involved in more
highly developed areas of the business. In addition, some vendors of provider
information management systems include or may include, in their offered
products, their own electronic transaction processing systems. If electronic
transaction processing becomes the standard method of processing healthcare
claims and information, other companies with significant capital resources could
enter the industry.
New Healthcare Legislation or Regulation Could Restrict Our EDI Business
The Health Insurance Portability and Accountability Act of 1996 requires the use
of standard transactions, standard identifiers, security and other
administrative simplification provisions and instructs the Secretary of Health
and Human Services to promulgate regulations regarding these standards. HIPAA
also specifically names clearinghouses as the compliance facilitators for
providers and payors, and permits clearinghouses to convert non-standard
transactions to standard transactions on behalf of their clients. We are
preparing to
23
<PAGE> 24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
comply with the mandated standards within the time frames set forth in final
rules, which have not yet been issued. Whether we are successful in complying
with these standards may depend on whether providers, payors and others are also
successful in complying with the standards.
HIPAA also requires the Secretary of Health and Human Services to develop
recommendations regarding the privacy of individually identifiable health
information. On September 11, 1997, the Secretary presented her recommendations,
which, among other things, advise that patient information should not be
disclosed to third parties except when authorized by the patient or as
specifically permitted by law or regulation. HIPAA further established an August
1999 deadline for Congress to enact privacy legislation after which, if Congress
failed to act, the Department of Health and Human Services was directed to issue
regulations setting privacy standards to protect health information that is
transmitted electronically. HHS published a proposed rule in the Federal
Register on November 3, 1999. HHS will accept public comments regarding the rule
for 60 days from the date of publication. While the proposed rule, if
promulgated without modification, likely would not restrict ENVOY from
de-identifying individual health information and providing such de-identified,
aggregated data to our Synergy subsidiary for purposes of analysis, the proposed
rule is subject to comment and further modification and could be preempted by
legislation. Such legislative or regulatory changes could occur as early as the
year 2000, and their impact cannot be predicted. If legislation or a more
restrictive regulation is adopted, it could inhibit third party processors in
using, transmitting or disclosing health data (even if they have been
de-identified) for purposes other than facilitating payment or performing other
clearinghouse functions, or it could make such activities more expensive to
undertake, and hence less profitable to the EDI business. Third party
processors, under the proposed rules, or modified rules, also may require us to
provide indemnity from claims against them arising from our use of data, even in
de-identified form. While the impact of developments in legislation, regulations
or the demands of third party processors is difficult to predict, each could
materially adversely affect our EDI business.
Unauthorized Access To Data Centers Could Adversely Affect Our EDI Business
Unauthorized access to our EDI data centers and misappropriation of our
proprietary information could have a material adverse effect on our EDI business
and financial results. While we believe our current security measures and the
security measures used by third parties for whom we process or transmit
healthcare information are adequate, such unauthorized access or
misappropriation could occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a result of the acquisition of PMSI, the Company had a forward sale agreement
with CIBC pursuant to which the Company transferred all of the IMS Health common
stock, approximately 1.2 million shares, in exchange for cash and a note payable
of $73.0 million. As a result of this forward sale agreement, the Company
mitigated its risk of a decrease in the market value of the IMS Health common
stock by agreeing to a pre-determined value with CIBC. In accordance with the
terms of the agreement, the forward sale and related note payable were settled
in August 1999.
The Company did not have any other material changes in market risk from December
31, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In its Form 8-K filed with the Securities and Exchange Commission dated October
4, 1999, the Company disclosed that a class action lawsuit had been filed
against it in the United States District Court for the Middle District of North
Carolina, alleging violations of federal securities laws, including violations
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Since the date of its last filing, three additional class action
complaints have been filed against the Company in the same court. These three
new actions assert essentially the same claims and seek the same relief as the
original complaint. One of the new
24
<PAGE> 25
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
complaints, filed October 26, 1999, seeks to expand the class to include a
purported sub-class of persons who purchased Company call options, or sold
Company put options, during the class period. The Company anticipates that all
of the existing lawsuits, and any additional suits that may be filed, ultimately
will be consolidated into a single action. The Company continues to believe that
all of the claims are without merit and intends to vigorously defend the
lawsuits.
The Company previously reported certain legal proceedings in its Form 10-K for
the fiscal year ended December 31, 1998. There were no material developments in
such matters since that report and subsequent periodic reports except as
discussed below.
On September 15, 1999, the Federal Court for the Middle District of Tennessee
granted ENVOY's motion to dismiss three class action complaints against ENVOY
and certain of its officers alleging violation of the Securities Exchange Act of
1934 and related State laws. The Court dismissed the claims without prejudice.
ITEM 2. CHANGES IN SECURITIES
On July 15, 1999, the Company completed the acquisition of MediTrain, a
Netherlands-based multimedia pharmaceutical sales representative training
company. The Company issued 19,772 shares of its Common Stock, par value $0.01
per share, in connection with the acquisition, which shares were received by the
holders of all of the outstanding share capital of MediTrain in exchange for
such interests. The shares were issued in reliance on a claim of exemption
pursuant to section 4(2) of the Securities Act of 1933, as amended, based on
representations made by the recipients in the share acquisition agreement.
During the three months ended September 30, 1999, options to purchase 6,000
shares of Common Stock were exercised at an average exercise price of $4.3175
per share in reliance on Rule 701 under the Securities Act of 1933. Such options
were issued by the Company prior to becoming subject to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant
to its Non-qualified Employee Incentive Stock Option Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NOT APPLICABLE
ITEM 5. OTHER INFORMATION -- NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.01 Amended and Restated Articles of Incorporation, as amended
27.01 Financial Data Schedule for the Nine Months Ended September
30, 1999
</TABLE>
(b) During the three months ended September 30, 1999, the Company filed four
reports on Form 8-K.
The Company filed a Form 8-K, dated July 15, 1999, to report restated
consolidated financial statements and other materials in connection with certain
acquisitions accounted for as poolings of interests which were consummated
between January 1, 1998 and June 30, 1999.
The Company filed a Form 8-K, dated July 19, 1999, to report restated
consolidated financial statements and other materials in connection with certain
acquisitions accounted for as poolings of interests which were consummated
between January 1, 1998 and March 31, 1999.
The Company filed a Form 8-K, dated July 21, 1999, including its press release
announcing the Company's fiscal second quarter 1999 earnings information.
The Company filed a Form 8-K, dated September 16, 1999, including its press
release announcing that the Company has lowered its earnings targets.
No other reports on Form 8-K were filed during the three months ended September
30, 1999.
25
<PAGE> 26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
Registrant
Date November 15, 1999 /s/ DENNIS B. GILLINGS
--------------------------------------
Dennis B. Gillings, Chief Executive
Officer
Date November 15, 1999 /s/ RACHEL R. SELISKER
--------------------------------------
Rachel R. Selisker, Chief Financial
Officer
26
<PAGE> 27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.01 Amended and Restated Articles of Incorporation, as amended
27.01 Financial Data Schedule for the Nine Months Ended September
30, 1999
</TABLE>
27
<PAGE> 1
EXHIBIT 3.01
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
QUINTILES TRANSNATIONAL, CORP.
ARTICLE I
The name of the Corporation is QUINTILES TRANSNATIONAL, CORP.
ARTICLE II
The period of duration of the Corporation is perpetual.
ARTICLE III
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under Chapter 55
of the General Statutes of North Carolina.
ARTICLE IV
Section 4.1. Total Number of Shares of Stock. The total number of shares
of capital stock of all classes that the Corporation shall have the authority to
issue is 75,000,000 shares. The authorized capital stock is divided into
25,000,000 shares of preferred stock, having $.01 par value (the "Preferred
Stock"), and 50,000,000 shares of common stock, having $.01 par value (the
"Common Stock").
Section 4.2. Preferred Stock. (a) The shares of Preferred Stock of the
Corporation may be issued from time to time in one or more classes or series,
the shares of each class or series to have such voting powers, full or limited,
or no voting powers, and such designations, preferences and rights (or
qualifications, limitations or restrictions thereof) as are stated in the
<PAGE> 2
resolution or resolutions providing for the issue of such class or series
adopted by the Board of Directors as provided in Section 4.2(b).
(b) Authority is granted to the Board of Directors of the Corporation,
subject to the provisions of this Article IV and to the limitations prescribed
by the North Carolina Business Corporation Act, to authorize the issuance of one
or more classes, or series within a class, of Preferred Stock and with respect
to each such class or series to fix by resolution or resolutions the voting
powers, full or limited, if any, of the shares of such class or series and the
designations, preferences and rights (or qualifications, limitations or
restrictions thereof).
Section 4.3. Common Stock. The shares of Common Stock of the
Corporation shall be one and the same class. Subject to the rights of the
Preferred Stock provided for by resolution or resolutions of the Board of
Directors pursuant to this Article IV or by the North Carolina Business
Corporation Act, the holders of shares of Common Stock shall have one vote per
share on all matters on which holders of shares of Common Stock are entitled to
vote. The holders of shares of Common Stock shall receive the net assets of the
Corporation upon dissolution.
ARTICLE V
The shareholders of the Corporation shall have no right to cumulate their
votes for the election of directors.
2
<PAGE> 3
ARTICLE VI
The shareholders of the Corporation shall have no preemptive right to
acquire additional shares of the Corporation.
ARTICLE VII
The address of the current registered office of the Corporation in the
State of North Carolina is 1007 Slater Road, Morrisville, Wake County, North
Carolina, and the name of its current registered agent at such address is Dennis
B. Gillings, Ph.D.
ARTICLE VIII
Section 8.1. Number of Directors. The number of directors constituting
the Board of Directors shall be not less than nine (9) nor more than fifteen
(15), as specified in the Corporation's Bylaws. The number of directors
constituting the Board of Directors following the effectiveness of these Amended
and Restated Articles of Incorporation shall be nine (9), divided into three
classes as described in Section 8.2.
Section 8.2. Classified Board of Directors. The Board of Directors
shall be divided into three (3) classes, Class I, Class II, and Class III, which
shall be as nearly equal in number as possible. The term of office of each
Director in Class I shall expire at the first annual meeting of shareholders of
the Corporation following the effectiveness of these Amended and Restated
Articles of Incorporation. The term of office of each Director in Class II
shall expire at the second annual meeting of shareholders of the Corporation
following the effectiveness of
3
<PAGE> 4
these Amended and Restated Articles of Incorporation. The term of office of
each Director in Class III shall expire at the third annual meeting of
shareholders of the Corporation following the effectiveness of these Amended
and Restated Articles of Incorporation. Each Director shall serve until the
election and qualification of a successor or until such Director's earlier
resignation, death, or removal from office. Upon the expiration of the term of
office for each class of Directors, the Directors of such class shall be
elected for a term of three (3) years, to serve until the election and the
qualification of their successors or until their earlier resignation, death, or
removal from office.
Section 8.3. Directors. The names and classes of those persons who
are to serve as the Directors of the Corporation following the effectiveness of
these Amended and Restated Articles of Incorporation are set forth below. The
address for each such director is 1007 Slater Road, Morrisville, North
Carolina 27560.
CLASS I
S. Epes Robinson
Vacancy to be filled by Board of Directors
Vacancy to be filled by Board of Directors
CLASS II
David H. Smith, M.D.
Paul A. Stark, Ph.D.
John G. Fryer, Ph.D.
CLASS III
Richard H. Thompson
Chester W. Douglass, Ph.D.
Dennis B. Gillings, Ph.D.
4
<PAGE> 5
Section 8.4. Removal of Directors. Any Director, or the entire Board
of Directors, may be removed from office at any time, with or without cause,
but only by the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66-2/3%) of the voting power of all of the shares of capital
stock of the Corporation then entitled to vote generally in the election of
Directors. If a Director was elected by the holders of the class or series of
capital stock, or of a group of such classes or series, only members of that
voting group may participate in the vote to remove him.
Section 8.5. Vacancies. Any vacancy occurring in the Board of
Directors, including, without limitation, a vacancy resulting from an increase
in the number of Directors or from the failure by the shareholders to elect
the full authorized number of Directors, shall be filled only by the Board of
Directors or, if the Directors remaining in office constitute fewer than quorum
of the Board, by the affirmative vote of a majority of the remaining Directors
or by the sole remaining Director. If the vacant office was held by a Director
elected by holders of one class or series of capital stock, or of a group of
such classes or series, only the remaining Director or Directors elected by
that voting group are entitled to fill the vacancy.
Section 8.6. Factors to be Considered by the Directors. In connection
with the exercise of its or his judgement in determining what is in the best
interests of the Corporation and its shareholders, the Board of Directors of
the Corporation, any
5
<PAGE> 6
committee of the Board of Directors, or any individual director may, but shall
not be required to, in addition to considering the long-term and short-term
interests of the shareholders, consider any of the following factors and any
other factors and any other factors which it or he deems relevant: (i) the
social and economic effects of the matter to be considered on the Corporation
and its subsidiaries, its and their employees, clients, and creditors, and the
communities in which the Corporation and its subsidiaries operate or are
located; and (ii) when evaluating a business combination or a proposal by
another Person or Persons to make a business combination or a tender or
exchange offer or any other proposal relating to a potential change of control
of the Corporation (x) the business and financial condition and earnings
prospects of the acquiring Person or Persons, including, but not limited to,
debt service and other existing financial obligations, financial obligations to
be incurred in connection with the acquisition, and other likely financial
obligations of the acquiring Person or Persons, and the possible effect of such
conditions upon the Corporation and its subsidiaries and the communities in
which the Corporation and its subsidiaries operate or are located, (y) the
competence, experience, and integrity of the acquiring Person or Persons and
its or their management, and (z) the prospects for successful conclusion of the
business combination, offer or proposal. The provisions of this Section shall
be deemed solely to grant discretionary authority to the directors and shall
not be deemed to provide to any constituency the right to be considered. As
used in
6
<PAGE> 7
this Section, the term "Person" means any individual, partnership, firm,
corporation, limited liability company, association, trust, unincorporated
organization or other entity; when two or more Persons act as a partnership,
limited partnership, syndicate, or other group acting in concert for the purpose
of acquiring, holding, voting or disposing of securities of the Corporation,
such partnership, limited partnership, syndicate or group shall also be deemed a
"Person" for purposes of this Section.
ARTICLE IX
Section 9.1. Approval of Business Combinations. With regard to any
Business Combination (as defined in Section 9.5(b)) between the Corporation and
any other corporation, person, or other entity, excluding its Subsidiaries (as
defined in Section 9.5(g)) except as provided in section 9.5(b), such Business
Combination must be approved only as follows unless otherwise more restrictively
required by applicable North Carolina law:
(a) The Business Combination must be approved by resolution adopted by
affirmative vote of a majority of a quorum of the Board of Directors;
(b) In addition to the Board approval specified in section 9.1(a), the
Business Combination must receive one of the following levels of shareholder
approval:
(1) To the extent a shareholder's vote is required by law, at a
special or annual meeting of shareholders by an affirmative vote of the
shareholders holding at least a majority of the shares of capital stock of the
Corporation issued and
7
<PAGE> 8
outstanding and entitled to vote thereon if such Business Combination has
received the prior approval by resolution adopted by an affirmative vote of at
least sixty-six and two-thirds percent (66 2/3%) of the full Board of Directors
before such Business Combination is submitted for approval to the shareholders;
or
(2) At a special or annual meeting of shareholders by an
affirmative vote of the shareholders holding at least sixty-six and two-thirds
percent (66-2/3%) of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote thereon if such Business Combination has
received the prior approval by resolution adopted by an affirmative vote of a
majority of a quorum (but less than sixty-six and two-thirds percent (66-2/3%))
of the Board of Directors; and
(c) If the Business Combination is to be approved pursuant to Section
9.1(b)(2), the Business Combination as approved must grant to shareholders not
voting to approve the Business Combination the rights set forth in Section 9.2.
Section 9.2. Fair Price. When any Business Combination above is
approved pursuant Section 9.1(b)(2), any shareholder not voting to approve the
Business Combination may elect to sell his shares for cash to the Corporation at
their "Fair Price" (as defined in Section 9.5(f)), upon so notifying the
Corporation in writing within twenty (20) days after receiving written
notification of his rights hereunder and that the Business Combination was
approved by the Corporation's shareholders. The Corporation shall have ten (10)
days after receipt of the
8
<PAGE> 9
shareholder's tender of shares to make payment in cash. Tender of shares may be
made simultaneously with, or after, the shareholder's written notification that
he is electing to be paid the Fair Price of his shares. The Business
Combination shall not be consummated until all shareholders electing to sell
their shares for cash to the Corporation at their Fair Price pursuant to this
Article IX have been paid in full by the Corporation.
Section 9.3 Certain Restrictions on Business Combinations.
Notwithstanding any other provision of this Article IX, prior to the
consummation of any Business Combination between the Corporation and a Control
Person (as defined in Section 9.5(c)):
(a) such Control Person shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance tax credits provided by the
Corporation; and
(b) there shall have been no increase or reduction in the annual rate of
dividends paid on the Corporation's common stock after the Control Person became
such (except as necessary to reflect any subdivision of the common stock),
unless such increase or reduction has been approved by a majority of
Disinterested Directors (as defined in Section 9.5(e)).
Section 9.4. Amendments to Articles of Incorporation. Amendments to
these Articles of Incorporation shall be adopted only upon receiving the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of all the shares of capital stock of the Corporation issued and
outstanding and
9
<PAGE> 10
entitled to vote thereon; provided, however, that if such amendment shall have
received prior approval by resolution adopted by an affirmative vote of a
majority of Disinterested Directors, then the affirmative vote of the holders of
at least a majority of all the shares of capital stock of the Corporation issued
and outstanding and entitled to vote, or such greater percentage approval as
required by North Carolina law, shall be sufficient to amend these Articles of
Incorporation.
Section 9.5. Definitions. As used in this Article IX, the following
terms shall have the following meanings:
(a) "Affiliate," as used in defining "Control Person," shall mean a
corporation, person, group, or other entity that directly or indirectly
controls, is controlled by, or is under common control with the Control Person.
(b) "Business Combination" shall mean (i) any merger or consolidation of
the Corporation into any other corporation, person, group or other entity where
the Corporation is not the surviving or resulting entity; (ii) any merger or
consolidation of the Corporation with or into any Control Person or with any
corporation, person, group or other entity where the merger or consolidation is
proposed by or on behalf of a Control Person; (iii) any sale, lease, exchange,
transfer, hypothecation or other disposition of all or substantially all of the
assets of the Corporation: (iv) any sale, lease, exchange, transfer,
hypothecation or other disposition of a Substantial Part (as defined in Section
9.5(h)) of the assets of the Corporation to a
10
<PAGE> 11
Control Person, whether in a single transaction or in related transactions; (v)
the issuance of any securities of the Corporation to a Control Person; (vi) the
acquisition by the Corporation of any securities of a Control Person unless
such acquisition commences prior to the person becoming a Control Person or is
an attempt to prevent the Control Person from obtaining greater control of the
Corporation; (vii) the acquisition by the Corporation of all or substantially
all of the assets of any Control Person or any corporation, person, group or
other entity where the acquisition is proposed by or on behalf of a Control
Person; (viii) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation which is proposed by or on behalf of a Control
Person; (ix) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation which has the effect, directly
or indirectly, of increasing the proportionate share of the outstanding shares
of any class of equity or convertible securities of the Corporation which is
beneficially owned or controlled by a Control Person; (x) any of the
transactions described in this definition of Business Combination which are
between the Corporation and any of its Subsidiaries and which are proposed by
or on behalf of any Control Person; or (xi) any agreement, plan, contract or
other arrangement providing for any of the transactions described in this
definition of Business Combination.
(c) "Control Person" shall mean and include any corporation, person,
group or other entity which, together with its Affiliates
11
<PAGE> 12
prior to a Business Combination beneficially owns (as the term is defined by
federal securities law) ten percent (10%) or more of the shares of any class of
equity or convertible securities of the Corporation, and any Affiliate of any
such corporation, person, group or other entity; provided, however, any
corporation, person, group or other entity which, together with its Affiliates,
prior to January 1, 1994 beneficially owned (as the term is defined by federal
securities law) ten percent (10%) or more of the shares of any class of equity
or convertible securities of the Corporation, and any Affiliate of any such
corporation, person, group or other entity shall not be considered to be a
Control Person for the purposes hereof.
(d) "Corporation shall mean Quintiles Transnational, Corp. and its
Subsidiaries, or any one of them, and their successors.
(e) "Disinterested Director" shall mean any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a nominee of, a
Control Person and was a member of the Board of Directors prior to the time a
Control Person became such, and any successor of a Disinterested Director who is
unaffiliated with, and not a nominee of, a Control Person and who is recommended
to succeed a Disinterested Director by a majority of Disinterested Directors
then on the Board of Directors.
(f) "Fair Price" shall mean the highest of the following: (i) the
highest price per share paid for the Corporation's shares during the four years
immediately preceding the Section 9.1(b)(2) vote of shareholders by any
shareholder who, at the time of the
12
<PAGE> 13
Section 9.1 (b)(2) shareholder vote, beneficially owned five percent (5%) or
more of the Corporation's common stock and who, in whole or in part, votes
in favor of the Business Combination; (ii) the cash value of the highest price
per share previously offered pursuant to a tender offer to the shareholders of
the Corporation within the four years immediately preceding the Section
9.1(b)(2) shareholder vote; and (iii) the highest price per share (including
brokerage commissions, soliciting dealers' fees and dealer-management
compensation) paid by a Control Person in acquiring any of its holdings of the
Corporation's common stock.
(g) "Subsidiaries" shall mean any entity in which the Corporation
owns, directly or indirectly, a majority of the voting interests.
(h) "Substantial Part" shall mean more than ten percent (10%) of the
total assets of the Corporation, as of the end of the Corporation's most
recent fiscal year prior to the time the determination is being made.
ARTICLE X
The Board of Directors shall have the power to adopt, amend, alter,
change, and repeal the Bylaws of the Corporation. In addition to any
requirements of the Bylaws and the North Carolina Business Corporation Act as
in effect from time to time (and notwithstanding the fact that a lesser
percentage may be specified by the Bylaws or the North Carolina Business
Corporation Act), the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all the shares
13
<PAGE> 14
of capital stock of the Corporation then entitled to vote generally in the
election of directors, voting together as a single class, shall be required
for the shareholders of the Corporation to adopt, amend, alter, change, or
repeal the Bylaws of the Corporation.
ARTICLE XI
Except to the extent that the North Carolina General Statutes prohibit
such limitation or elimination of liability of directors for breaches of duty,
no director of the Corporation shall have any personal liability arising out of
an action whether by or in the right of the Corporation or otherwise for
monetary damages for breach of any duty as a director. No amendment to or
repeal of this article shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
The provisions of this article shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability that has not
been eliminated by the provisions of this article.
ARTICLE XII
Section 12.1. Opt-Out of North Carolina Shareholder Protection Act.
The provisions of the North Carolina Shareholder Protection Act, as amended
from time to time, shall not be applicable to the Corporation.
Section 13.2. Opt-Out of North Carolina Control Share Acquisition Act.
The provisions of the North Carolina Control
14
<PAGE> 15
Share Acquisition Act, as amended from time to time, shall not be applicable to
the Corporation.
15
<PAGE> 16
ARTICLES OF AMENDMENT
OF
QUINTILES TRANSNATIONAL, CORP.
The undersigned corporation hereby submits these Articles of Amendment
for the purpose of amending its Amended and Restated Articles of Incorporation:
1. The name of the corporation is Quintiles Transnational, Corp.
2. The Amended and Restated Articles of Incorporation of the
corporation are hereby amended as follows:
Article I is hereby amended so that the name of the corporation
is QUINTILES TRANSNATIONAL CORP.
3. The foregoing amendment was adopted on November 3, 1994 by the
corporation's board of directors without shareholder action,
which was not required because N.C. Gen. Stat. Section 55-10-02
permits a corporation's board of directors to make minor changes
to the corporation's name.
This is the 7th day of March, 1995.
QUINTILES TRANSNATIONAL, CORP.
By: /s/ Santo J. Costa
----------------------------
Santo J. Costa
President
<PAGE> 17
State of North Carolina
Department of the Secretary of State
ARTICLES OF AMENDMENT
OF THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
QUINTILES TRANSNATIONAL CORP.
Pursuant to Section 55-10-06 of the General Statutes of North Carolina,
the undersigned corporation hereby submits the following Articles of Amendment
for the purpose of amending its Amended and Restated Articles of Incorporation.
I. The name of the corporation is Quintiles Transnational Corp.
II. The text of the amendment adopted is as follows:
"Article IV, Section 4.1 of the Amended and Restated Articles
of Incorporation of Quintiles Transnational Corp. should be amended
and restated to read in full as follows:
Section 4.1. Total Number of Shares of Stock. The total
number of shares of capital stock of all classes that the
Corporation shall have the authority to issue is 225,000,000
shares. The authorized capital stock is divided into
25,000,000 shares of preferred stock, having $.01 par value
(the "Preferred Stock"), and 200,000,000 shares of common
stock, having $.01 par value (the "Common Stock")."
III. The foregoing amendment was adopted on the 24th day of October,
1996, by the board of directors of the corporation, and approved by the
shareholders of the corporation at a special meeting held on November 26, 1996,
as required by Section 55-10-03 of the General Statutes of North Carolina.
IV. These articles shall be effective upon filing.
IN WITNESS WHEREOF, the corporation has caused this instrument to be
duly executed as of the 9th day of December, 1996.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Gregory D. Porter
-----------------------------
Gregory D. Porter
Vice President, General Counsel
<PAGE> 18
State of North Carolina
Department of the Secretary of State
ARTICLES OF AMENDMENT
OF THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
QUINTILES TRANSNATIONAL CORP.
Pursuant to Section 55-10-06 of the General Statutes of North Carolina,
the undersigned corporation hereby submits the following Articles of Amendment
for the purpose of amending its Amended and Restated Articles of Incorporation.
I. The name of the corporation is Quintiles Transnational Corp.
II. The text of the amendment adopted is as follows:
"RESOLVED, that Article IV, Section 4.1 of the Amended and
Restated Articles of Incorporation of Quintiles Transnational Corp.
should be amended to read in full as follows:
Section 4.1. Total Number of Shares of Stock. The total
number of shares of capital stock of all classes that the
Corporation shall have the authority to issue is 525,000,000
shares. The authorized capital stock is divided into
25,000,000 shares of preferred stock, having $.01 par value
(the "Preferred Stock"), and 500,000,000 shares of common
stock, having $.01 par value (the "Common Stock")."
III. The foregoing amendment was adopted on February 4, 1999, by the
board of directors of the corporation, and approved by the shareholders of the
corporation at a special meeting held on March 30, 1999, as required by Section
55-10-03 of the General Statutes of North Carolina.
IV. These articles shall be effective upon filing.
IN WITNESS WHEREOF, the corporation has caused this instrument to be
duly executed as of the 20th day of April, 1999.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Gregory D. Porter
--------------------------------
Gregory D. Porter
Executive Vice President, Chief
Administrative and Legal Officer
<PAGE> 19
State of North Carolina
Department of the Secretary of State
ARTICLES OF AMENDMENT
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
QUINTILES TRANSNATIONAL CORP.
Pursuant to Section 55-10-06 and Section 55-6-02 of the General Statutes of
North Carolina, the undersigned corporation hereby submits the following
Articles of Amendment for the purpose of amending its Amended and Restated
Articles of Incorporation to fix the preferences, limitations, and relative
rights of a series of its shares:
I. The name of the corporation is Quintiles Transnational Corp.
II. The text of the amendment adopted is as follows:
The Amended and Restated Articles of Incorporation of the corporation
are hereby amended as follows:
Article IV of the Amended and Restated Articles of Incorporation is
amended by inserting the following new Section 4.4 at the end of the existing
provisions of Article IV:
Section 4.4. Series A Preferred Stock. A series of Preferred Stock of
the Corporation is hereby created and the designation and amount thereof and the
preferences, relative rights, and powers of the shares of such series, and the
qualifications, limitations or restrictions thereof, are fixed, determined and
set forth as follows:
Section 4.4.1. Designation and Amount. The shares of such series shall
be designated as "Series A Preferred Stock," $.01 par value per share, and the
number of shares constituting such series shall be one million (1,000,000). Such
number of shares may be increased or decreased by action of the Board of
Directors; provided that no decrease shall reduce the number of shares of Series
A Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock.
Section 4.4.2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock and of
any other junior stock, shall be entitled to receive, when, as and
<PAGE> 20
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March, June,
September and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $10 or (b) subject to the provision for adjustment
hereinafter set forth, one thousand (1,000) times the aggregate per share amount
of all cash dividends, and one thousand (1,000) times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
In the event the Corporation shall declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event,
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
<PAGE> 21
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than sixty (60) days prior to the
date fixed for the payment thereof.
Section 4.4.3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to one thousand (1,000) votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than a
payment of dividend in shares of Common Stock into a greater or lesser number of
shares of Common Stock), then in each such case the number of votes per share to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any articles of
amendment to articles of incorporation of the Corporation, or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4.4.4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section
4.4.2 are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
<PAGE> 22
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in accordance with
a purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4.4.4, purchase or otherwise acquire such shares at such time and
in such manner.
Section 4.4.5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock, subject to the conditions and restrictions on issuance set
forth herein, in articles of amendment of articles of incorporation of the
Corporation, or as otherwise required by law.
Section 4.4.6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $100 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the holders
of shares of Series A Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to one thousand (1,000) times the aggregate amount to be distributed per
share to holders of shares of Common Stock or (ii) to the holders of shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock and all such parity
stock in proportion to the total amounts to which the holders of all such shares
are entitled upon such liquidation, dissolution or winding up. In the event the
<PAGE> 23
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under clause (i) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 4.4.7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination, share exchange or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any such
case each share of Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to one thousand (1,000) times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event, and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 4.4.8. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 4.4.9. Rank. The Series A Preferred Stock shall rank junior to
all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 4.4.10. Amendment. The Amended and Restated Articles of
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the preferences, rights or powers of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds (2/3) or more of the outstanding
shares of Series A Preferred Stock, voting separately as a single class.
Section 4.4.11. Fractional Shares. Series A Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise
<PAGE> 24
voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Participating Preferred
Stock.
III. The foregoing amendment was duly adopted and approved on the
4th day of November 1999, by the board of directors without shareholder action,
which was not required because the amendment only fixes the preferences,
limitations and relative rights of a series of the corporation's preferred stock
pursuant to authority granted to the directors by the corporation's Amended and
Restated Articles of Incorporation and Section 55-6-02 of the General Statutes
of North Carolina.
IV. These articles shall be effective upon filing.
IN WITNESS WHEREOF, the corporation has caused this instrument to be duly
executed as of the 5th day of November, 1999.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
----------------------------------
Name: Rachel R. Selisker
Title: Chief Executive Officer and
Executive V.P. Finance
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 185,687
<SECURITIES> 34,958
<RECEIVABLES> 442,569
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<PP&E> 552,199
<DEPRECIATION> 204,892
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<BONDS> 12,556
0
0
<COMMON> 1,148
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<TOTAL-LIABILITY-AND-EQUITY> 1,563,212
<SALES> 0
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<CGS> 0
<TOTAL-COSTS> 1,173,808
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