<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1999
--------------
Commission file number 340-23520
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QUINTILES TRANSNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 998-2000
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(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
April 30, 1999 was 112,102,642.
<PAGE> 2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
March 31, 1999 and December 31, 1998 3
Condensed consolidated statements of
income - Three months ended March 31, 1999
and 1998 4
Condensed consolidated statements of
cash flows - Three months ended
March 31, 1999 and 1998 5
Notes to condensed consolidated financial
statements - March 31, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities - Not Applicable --
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information - Not Applicable --
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibit Index 22
</TABLE>
2
<PAGE> 3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(unaudited) (Note 1)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 197,307 $ 155,469
Accounts receivable and unbilled services 390,541 358,319
Investments 114,973 32,241
Prepaid expenses 38,465 26,000
Other current assets 22,138 24,113
----------- -----------
Total current assets 763,424 596,142
Property and equipment 469,145 424,952
Less accumulated depreciation 162,956 153,870
----------- -----------
306,189 271,082
Intangibles and other assets:
Intangibles 274,331 155,618
Investments 79,267 65,456
Deferred income taxes 71,090 71,401
Deposits and other assets 42,039 41,981
----------- -----------
466,727 334,456
----------- -----------
Total assets $ 1,536,340 $ 1,201,680
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 4,359 $ 921
Accounts payable and accrued expenses 200,168 172,280
Credit arrangements, current 106,020 33,670
Unearned income 152,290 144,932
Income taxes and other current liabilities 21,459 5,448
----------- -----------
Total current liabilities 484,296 357,251
Long-term liabilities:
Credit arrangements, less current portion 164,528 145,945
Long-term obligations 2,840 23,830
Deferred income taxes and other liabilities 35,118 31,000
----------- -----------
202,486 200,775
----------- -----------
Total liabilities 686,782 558,026
Shareholders' equity:
Common stock and additional paid-in capital,
111,942,601 and 106,726,390 shares issued and
outstanding at March 31, 1999 and December 31,
1998, respectively 767,257 559,450
Retained earnings 100,706 93,348
Accumulated other comprehensive income (14,637) (5,329)
Other equity (3,768) (3,815)
----------- -----------
Total shareholders' equity 849,558 643,654
----------- -----------
Total liabilities and shareholders' equity $ 1,536,340 $ 1,201,680
=========== ===========
</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 INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Net revenue $ 408,098 $ 309,068
Costs and expenses:
Direct 210,466 160,851
General and administrative 123,493 95,367
Depreciation and amortization 25,129 21,879
--------- ---------
359,088 278,097
--------- ---------
Income from operations 49,010 30,971
Transaction costs (22,363) (532)
Other income (expense) 426 (290)
--------- ---------
Total other expense, net (21,937) (822)
--------- ---------
Income before income taxes 27,073 30,149
Income taxes 19,370 11,277
--------- ---------
Net income $ 7,703 $ 18,872
========= =========
Basic net income per share $ 0.07 $ 0.19
========= =========
Diluted net income per share $ 0.07 $ 0.17
========= =========
</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>
THREE MONTHS ENDED MARCH 31
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,703 $ 18,872
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 25,129 21,879
Non-recurring transaction costs 22,463 -
Provision for deferred income tax expense 2,526 6,521
Change in operating assets and liabilities (32,976) (47,715)
Other 415 333
--------- --------
Net cash provided by (used in) operating activities 25,260 (110)
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 1,024 795
Acquisition of property and equipment (57,229) (19,646)
Cash acquired in stock transactions, Note 2 87,386 1,582
Payment of non-recurring transaction costs (2,878) -
Payment of dividend - (385)
Purchases of marketable securities, net (12,753) (22,695)
--------- --------
Net cash provided by (used in) investing activities 15,550 (40,349)
FINANCING ACTIVITIES
Increase in lines of credit, net 3,305 10,926
Principal payments on credit arrangements (3,427) (4,325)
Issuance of common stock, net 3,416 6,422
--------- --------
Net cash provided by financing activities 3,294 13,023
Effect of foreign currency exchange rate changes on cash (2,266) (399)
--------- --------
Increase (decrease) in cash and cash equivalents 41,838 (27,835)
Cash and cash equivalents at beginning of period 155,469 89,384
--------- --------
Cash and cash equivalents at end of period $ 197,307 $ 61,549
========= ========
</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)
March 31, 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 month period ended March 31,
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 Annual Report on Form
10-K for the year ended December 31, 1998 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, as restated for the ENVOY
Corporation ("ENVOY") and Niehaus and Botha, pooling of interests transactions
(see Note 2) consummated in the first quarter of 1999. 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 is expected to be paid in the
second half 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.
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 4,993,787 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
6
<PAGE> 7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
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. For each deferred share of the Company's Common Stock, the contingent
value payment, if any, will be calculated based on the difference between
$38.71875 and the average closing price of the Company's Common Stock for 10
days selected at random out of the 20 trading days ending on June 11, 1999. The
Company will account for the contingent value payments when settled. 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 required. The acquisition of PMSI has been accounted for as
a purchase.
On March 30, 1999, the Company acquired ENVOY, a Tennessee-based provider of
healthcare electronic data interchange and data mining services. The Company
acquired ENVOY in exchange for approximately 28,465,160 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.
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 CONSOLIDATED
------- ----- ----- ------------
<S> <C> <C> <C> <C>
For the three months ended
March 31, 1999:
Net revenue $ 350,906 $ 54,468 $ 2,724 $408,098
Net income (loss) 10,484 (3,316) 535 7,703
Basic net income per share 0.13 0.07
Diluted net income per share $ 0.13 $ 0.07
For the three months ended
March 31, 1998:
Net revenue $ 263,874 $ 42,524 $ 2,670 $309,068
Net income (loss) 18,902 75 (105) 18,872
Basic net income per share 0.25 0.19
Diluted net income per share $ 0.24 $ 0.17
</TABLE>
3. Significant Customers
One customer accounted for 10.2% of consolidated net revenue for the three
months ended March 31, 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 March 31, 1998.
7
<PAGE> 8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) - Continued
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
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income $ 7,703 $ 18,872
======== ========
Weighted average shares:
Basic weighted average shares 107,027 101,499
Effect of dilutive securities - Stock options 2,702 6,720
-------- --------
Diluted weighted average shares 109,729 108,219
======== ========
Basic net income per share $ 0.07 $ 0.19
Diluted net income per share $ 0.07 $ 0.17
</TABLE>
Options to purchase approximately 2.0 million shares of common stock with
exercise prices ranging between $45.125 and $56.25 per share were outstanding
during the three months ended March 31, 1999 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
months ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- --------
<S> <C> <C>
Net income $ 7,703 $ 18,872
Other comprehensive income:
Unrealized loss on marketable
securities, net of tax (232) (81)
Foreign currency adjustment (9,076) 1,014
------- --------
Comprehensive (loss) income $(1,605) $ 19,805
======= ========
</TABLE>
8
<PAGE> 9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) - Continued
6. Credit Arrangements
As a result of the acquisition of PMSI, the Company has 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 are being held by CIBC as collateral against the Company's
obligation to deliver these shares in August 1999.
7. Commitments and Contingencies
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 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
alleges, among other things, that from February 12, 1997 to August 18, 1998 the
defendants issued materially false and misleading statements about ENVOY, its
business, operations and financial position and failed to disclose material
facts necessary to make defendants' statements not false and misleading in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder, and also asserts additional
claims under Tennessee common law for fraud and negligent misrepresentation. The
complaint alleges that ENVOY failed to disclose that its financial statements
were not prepared in accordance with generally accepted accounting principles
due to the improper write-off of certain acquired in-process technology,
resulting in ENVOY's stock trading at allegedly artificially inflated prices.
The Plaintiffs in this action seek unspecified compensatory damages, attorney's
fees and other relief. The Company believes that these claims are without merit
and intends to defend the allegations vigorously. Neither the likelihood of an
unfavorable outcome nor the amount of the ultimate liability, if any, with
respect to these claims can be determined at this time.
9
<PAGE> 10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
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 ENVOY, which was acquired in the first quarter
of 1999. The Company does not include non- recurring costs ($3.7 million and
$5.1 million for the three months ended March 31, 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 March 31,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Net revenue:
Product development $224,213 $155,448
Commercialization 129,416 111,096
QUINTERNET(TM) informatics 54,469 42,524
-------- --------
$408,098 $309,068
======== ========
Income from operations:
Product development $ 27,817 $ 17,813
Commercialization 12,242 10,263
QUINTERNET(TM) informatics 12,672 7,960
-------- --------
$ 52,731 $ 36,036
======== ========
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Total assets:
Product development $ 698,588 $ 751,071
Commercialization 242,150 267,091
QUINTERNET(TM) informatics 595,602 183,518
---------- ----------
$1,536,340 $1,201,680
========== ==========
</TABLE>
10
<PAGE> 11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company's consolidated financial data have been restated to include ENVOY
and N & B.
Three Months Ended March 31, 1999 and 1998
Net revenue for the first quarter of 1999 was $408.1 million, an increase of
$99.0 million or 32.0% over the first quarter of 1998 net revenue of $309.1
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 and the
initiation of services under contracts awarded subsequent to the first quarter
of 1998. Net revenue for the product development group increased 44.2% to $224.2
million for the first quarter of 1999 as compared to $155.4 million for the
first quarter of 1998. Net revenue for the commercialization group increased
16.5% to $129.4 million for the first quarter of 1999 as compared to $111.1
million for the first quarter of 1998. The product development and
commercialization groups experienced particularly strong growth in the Asia
Pacific region. Net revenue for the QUINTERNET(TM) informatics group increased
28.1% to $54.5 million for the first quarter of 1999 as compared to $42.5
million for the first quarter of 1998. Along with this increase, 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 and other expenses directly related to contracts, were $210.5
million or 51.6% of net revenue for the first quarter of 1999 versus $160.9
million or 52.0% of net revenue for the first quarter of 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 $123.5 million or
30.3% of net revenue for the first quarter of 1999 versus $95.4 million or 30.9%
of net revenue for the first quarter of 1998. The $28.1 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. Also included in the increase is approximately $2.8 million of
incremental costs related to the Company's Year 2000 Program.
Depreciation and amortization were $25.1 million or 6.2% of net revenue for the
first quarter of 1999 versus $21.9 million or 7.1% of net revenue for the first
quarter of 1998. Included is amortization of certain acquired intangible assets
of $3.7 million and $5.1 million for the three months ended March 31, 1999 and
1998, respectively. These intangible assets have been fully amortized as of
March 31, 1999. Excluding these expenses, depreciation and amortization were
$21.4 million or 5.2% of net revenue for the first quarter of 1999 versus $16.8
million or 5.4% of net revenue for the first quarter of 1998. The $4.6 million
increase is primarily due to the increase in the capitalized asset base of the
Company.
Income from operations was $49.0 million or 12.0% of net revenue for the first
quarter of 1999 versus $31.0 million or 10.0% of net revenue for the first
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $52.7 million or 12.9% net revenue
for the first quarter of 1999 versus $36.0 million or 11.7% of net revenue for
the first quarter of 1998. Income from
11
<PAGE> 12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
operations for the product development group increased to $27.8 million or 12.4%
of net revenue for the first quarter of 1999 from $17.8 million or 11.5% of net
revenue for the first quarter of 1998. Income from operations for the
commercialization group increased slightly as a percentage of net revenue to
$12.2 million or 9.5% of net revenue for the first quarter of 1999 from $10.3
million or 9.2% of net revenue for the first 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 $12.7
million or 23.3% of net revenue for the first quarter of 1999 from $8.0 million
or 18.7% of net revenue for the first quarter of 1998. This increase primarily
results from the efficiencies realized due to the increase in the volume of
transactions processed.
The effective tax rate for the first quarter of 1999 was 71.5% versus a 37.4%
effective tax rate for the first 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 first quarter of 1999 was 36.4% as compared to a 31.5% effective tax rate
for the first quarter of 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.
Liquidity and Capital Resources
Cash inflows from operations were $25.3 million for the three months ended March
31, 1999 versus cash outflows of $110,000 for the comparable period of 1998.
Investing activities, for the three months ended March 31, 1999, consisted
primarily of capital asset purchases and investment security purchases and
maturities. Capital asset purchases required an outlay of cash of $57.2 million
for the three months ended March 31, 1999 compared to an outlay of $19.6 million
for the same period in 1998. Capital asset expenditures for the three months
ended March 31, 1999 included approximately $35 million for the HMR Drug
Innovation and Approval Facility acquisition. The remainder of the purchase
price, approximately $58 million, is expected to be paid in the second half of
1999 when the acquisition of the physical facility is completed.
As of March 31, 1999, total working capital was $279.1 million versus $238.9
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $238.3 million at
March 31, 1999 as compared to $213.4 million at the end of 1998. As of March 31,
1999, accounts receivable were $234.8 million versus $230.5 million at December
31, 1998. Unbilled services were $155.7 million at March 31, 1999 versus $127.8
million at December 31, 1998, offset by unearned income balances of $152.3
million and $144.9 million, respectively. The number of days revenue outstanding
in accounts receivable and unbilled services, net of unearned income, was 44
days at March 31, 1999, as compared to 45 days at December 31, 1998.
In connection with its March 1999 acquisition of PMSI, 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. For each deferred share of the
Company's Common Stock, the contingent value payment, if any, will be calculated
based on the
12
<PAGE> 13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources -- Continued
difference between $38.71875 and the average closing price of the Company's
Common Stock for 10 days selected at random out of the 20 trading days ending on
June 11, 1999. The Company plans to make the contingent value payments, if any,
from cash from operations or borrowings under existing lines of credit.
The Company has a pound 15.0 million (approximately $24.3 million) unsecured
line of credit with a U.K. bank and a pound 5.0 million (approximately $8.1
million) unsecured line of credit with a second U.K. bank. At March 31, 1999,
the Company had pound 17.3 million (approximately $28.0 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 March 31, 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.
Impact of Year 2000 Issue
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of the Company's operations, including,
among other things, a temporary inability to process information such as
real-time transaction processing for pharmacies and other healthcare providers
and payors; receive information, services or products from third parties;
interface with customers in the performance of contracts; or operate or
communicate in some or all of the regions in which it operates. The Company's
computing infrastructure is based on industry standard systems. The scope of the
Company's Year 2000 Program includes unique software systems and tools in each
of its service groups, especially its product development service group,
embedded systems in its laboratory and manufacturing operations, mainframe
systems in its QUINTERNET(TM) informatics service group, facilities such as
elevators and fire alarms in over 133 offices (which also involve embedded
technology) and numerous supplier and other business relationships. The Company
has identified critical systems within each service group and is devoting its
resources to address these items first.
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established
13
<PAGE> 14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
State of Readiness -- Continued
a Year 2000 Program Management Office, staffed by consultants and internal
staff, which develops procedures and instructions at a centralized level and
oversees performance of the projects that make up the program. Project teams
organized by service group and geographic region are responsible for
implementation of the individual projects.
The framework for the Company's Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
The Company is in the process of assessing those systems, facilities and
business relationships which it believes may be vulnerable to the Year 2000
issue and which it believes could impact its operations. Although the Company
cannot control whether and how third parties will address the Year 2000 issue,
its assessment also will include a limited evaluation of certain services on
which it is substantially dependent, and the Company plans to develop
contingency plans for possible deficiencies in those services. For example, the
Company believes that among its most significant third party service providers
are physician investigators who participate in clinical studies conducted
through its contract research services and external organizations (such as
pharmacies, insurance providers and medical offices) linked to the
QUINTERNET(TM) informatics services; consequently, the Company is developing a
specialized process to assess and address Year 2000 issues arising from these
relationships. The Company does not plan to assess how its customers, such as
pharmaceutical and large biotechnology companies, are dealing with the Year 2000
issue.
As the Company completes the assessment of its systems, it is developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. The Company will utilize both
internal and external resources to implement these plans. The Company addressed
most systems relating to its healthcare consulting services in 1998, with
completion expected in the first half of 1999. The Company also addressed most
of its commercialization systems in 1998, and expects to have substantially
completed this program during mid-1999. The Company's product development
services utilize numerous systems, which it must address individually on
disparate schedules, depending on the magnitude and complexity of the particular
system. The Company anticipates that remediation or replacement of these systems
will be substantially complete by mid-1999, with migration occurring primarily
in the second half of 1999. The Company has evaluated the state of readiness of
its recent acquisitions, including ENVOY and PMSI which form the core of the
Company's informatics services, and has integrated these acquisitions into its
Year 2000 Program. The Company's informatics services utilize real-time and
batch systems linked to external organizations, and PC based audit and
syndicated data systems. The Company anticipates that the remediation and
testing of these systems will be substantially complete by mid-1999, and that
testing with external organizations will occur primarily in the second half of
1999. The Company expects to complete the core components of its Year 2000
Program before there is a significant risk that internal Year 2000 problems will
have a material impact on its operations.
Costs
The Company estimates that the aggregate costs of its 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
14
<PAGE> 15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Costs -- Continued
of existing resources. This reallocation of resources is not expected to have a
significant impact on the Company's day-to-day operations. The Company incurred
total Year 2000 Program costs of $8.6 million through March 31, 1999, of which
approximately $6.4 million represented incremental expense. The Company's
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, its ability to meet deadlines and
the cooperation of third parties. The Company cannot provide assurance that its
assumptions will be correct and that these estimates will be achieved. Actual
results could differ materially from the Company's expectations as a result of
numerous factors, including the availability and cost of personnel trained in
this area, unforeseen circumstances that would cause the Company to allocate its
resources elsewhere and similar uncertainties.
Year 2000 Risks
The Company faces both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on the Company's ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion.
The decentralized nature of the Company's business may compound this risk if it
is unable to coordinate efforts across its global operations on a timely basis.
The Company believes that its Year 2000 Program will successfully address these
risks, however, the Company cannot provide assurance that this program will be
completed in a timely manner. Notwithstanding its Year 2000 Program, the Company
also faces external risks that may be beyond its control. The Company's
international operations and its relationships with foreign third parties create
additional risks for the Company, 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 the Company
operates, as well as the danger that the internal systems of its foreign
suppliers, service providers and customers will fail. The Company's business
also requires considerable travel, and its ability to perform services under its
customer contracts could be negatively affected if air travel is disrupted by
the Year 2000 issue.
In addition, the Company's 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, the Company faces increased risk that its physician
investigators will be unable to provide it with the data that the Company needs
to perform under its 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 Quintiles relies
significantly could also adversely impact the Company's ability to process
transactions in its informatics services. Also, the failure of its customers to
address the Year 2000 issue could negatively impact their ability to utilize the
Company's services. While it intends to develop contingency plans to address
certain of these risks, the Company cannot assure you that any developed plans
will sufficiently insulate it from the effects of these risks. Any disruptions
resulting from the realization of these risks would affect the Company's ability
to perform its services. If the Company is
15
<PAGE> 16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Year 2000 Risks -- Continued
unable to receive or process information, or if third parties are unable to
provide information or services to it, the Company may not be able to meet
milestones or obligations under its customer contracts, which could have a
material adverse effect on its business and financial results.
Contingencies
The Company is in the process of developing business continuity plans for each
service area. These plans will primarily be developed during the second half of
1999.
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, 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, 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,
actual operating performance, the ability to operate successfully in the lines
of business resulting from the ENVOY and PMSI transactions, the ability to
maintain large client contracts or to enter into new contracts and the level of
demand for services. See Exhibit 99.01 for additional factors that could cause
the Company's actual results to differ.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a result of the acquisition of PMSI, the Company has 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 has
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.
The Company did not have any other material changes in market risk from December
31, 1998.
16
<PAGE> 17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
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.
Item 2. Changes in Securities
On February 17, 1999, the Company completed the acquisition of Oak
Grove, a leading provider of current Good Manufacturing Practice
compliance services to the pharmaceutical, biotechnology and
medical device industries. The Company issued 87,948 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 Oak Grove 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.
On March 31, 1999, the Company completed the acquisition of Medlab
Pty Ltd. ("Medlab") and the assets of the Niehaus & Botha
partnership ("N&B"), which together comprise a South African-based
clinical laboratory. In connection with the acquisition, the
Company issued an aggregate of 271,146 shares of its Common Stock,
par value $0.01 per share, to the owners of all of the share
capital of Medlab and the N&B partnership interests in exchange for
all of the outstanding share capital of Medlab and the N&B assets,
respectively. 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
agreement relating to the purchase of such shares and assets.
During the three months ended March 31, 1999, options to purchase
25,150 shares of Common Stock were exercised at an average exercise
price of $3.7166 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
17
<PAGE> 18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information -- Continued
Item 4. Submission of Matters to a Vote of Security Holders
On March 30, 1999, the Company held a special meeting of
shareholders during which the shareholders:
(1) Approved a proposal to issue shares of the Company's Common
Stock to the shareholders of ENVOY in exchange for their
shares of ENVOY common stock and ENVOY Series B convertible
preferred stock pursuant to the Amended and Restated Agreement
and Plan of Merger, dated as of December 15, 1998, by and
among the Company, QELS Corp. and ENVOY.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Approval of proposal to issue
shares of the Company's Common Stock 52,166,689 461,731 177,431 9,381,251
</TABLE>
(2) Approved an amendment to the Company's amended and Restated
Articles of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 200,000,000 to
500,000,000.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Approval of an amendment to the
Company's Amended and Restated
Articles of Incorporation 48,609,617 13,503,134 74,351 -
</TABLE>
Item 5. Other Information -- Not applicable
18
<PAGE> 19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C>
PART II. Other Information -- Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
3.01 Amended and Restated Articles of Incorporation, as amended
4.01 Amended and Restated Articles of Incorporation, as amended (included
as Exhibit 3.01 hereto)
27.01 Financial Data Schedule for the
Three Months Ended March 31, 1999 (for SEC use only)
27.02 Restated Financial Data Schedule for the
Three Months Ended March 31, 1998 (for SEC use only)
99.01 Risk Factors
</TABLE>
(b) During the three months ended March 31, 1999, the Company
filed five reports on Form 8-K.
The Company filed a Form 8-K, dated January 27, 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, 1996 and September 30, 1998. This report also
included a copy of the Company's press release announcing its
financial results for the fiscal year ended December 31,
1998.
The Company filed a Form 8-K, also dated January 27, 1999, as
amended by Form 8-K/A on February 17, 1999, to report
historical financial statements of each of ENVOY Corporation
("ENVOY") and Pharmaceutical Marketing Services Inc. ("PMSI")
and pro forma financial information in accordance with Rule
3-05 and Article 11 of Regulation S-X in connection with the
Company's pending acquisitions of those entities.
The Company filed a Form 8-K, dated February 17, 1999,
including certain historical financial information for each
of ENVOY and PMSI for the purpose of updating its disclosure
provided in the Company's January 27, 1999 Form 8-K, as
amended on February 17, 1999, pursuant to Rule 3-05 of
Regulation S-X.
The Company filed a Form 8-K, dated March 3, 1999, attaching
as an exhibit a copy of the Agreement for the Provision of
Research Services and Purchase of Business Assets between
Hoechst Marion Roussel, Inc. and Quintiles, Inc. relating to
the Company's previously announced acquisition of substantial
assets of Hoechst Marion Roussel's Kansas City-based
19
<PAGE> 20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information -- Continued
Drug Innovation and Approval facility and the opening of a
Kansas City contract research facility. The March 3, 1999
Form 8-K also included the Company's restated Selected
Consolidated Financial Data table and described certain
information regarding a recently filed lawsuit which names a
subsidiary of the Company as a defendant.
The Company filed a Form 8-K, dated March 29, 1999, to report
the Company's acquisition of both PMSI and ENVOY.
No other reports on Form 8-K were filed during the three
months ended March 31, 1999.
20
<PAGE> 21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
------------------------------------
Registrant
Date May 14, 1999 /s/ Dennis B. Gillings
---------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date May 14, 1999 /s/ Rachel R. Selisker
---------------- -------------------------------------------
Rachel R. Selisker, Chief Financial Officer
21
<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.01 Amended and Restated Articles of Incorporation, as amended
4.01 Amended and Restated Articles of Incorporation, as amended (included
as Exhibit 3.01 hereto)
27.01 Financial Data Schedule for the
Three Months Ended March 31, 1999 (for SEC use only)
27.02 Restated Financial Data Schedule for the
Three Months Ended March 31, 1998 (for SEC use only)
99.01 Risk Factors
</TABLE>
22
<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
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<PAGE> 1
EXHIBIT 99.01
RISK FACTORS
CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
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 like us 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. If this trend were to change and companies in
these industries reduced their tendency to outsource those projects, our
operations and financial condition 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
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.
We could encounter a number of difficulties as a result of the mergers, such as:
- retaining PMSI's and ENVOY's customers;
- maintaining and increasing PMSI's and ENVOY's competitive
presence in the healthcare industry;
- continuing to operate 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 healthcare industry 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
<PAGE> 2
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 our 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. As of March 31, 1999, we have
completed another four acquisitions, including PMSI and ENVOY. The PMSI and
ENVOY acquisitions have expanded our lines of business and thus involve new
risks. ENVOY is the largest acquisition we have completed to date, and PMSI is
one of the largest we have ever completed. If either of these acquisitions fails
to meet our performance expectations, our results of operation and financial
condition could be materially adversely affected. 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;
-2-
<PAGE> 3
- the ability to expand the data analyses portion of ENVOY's
business;
- 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.
For example, as a result of our acquisition of ENVOY, we are
considering expanding our pharmaceutical and healthcare information and market
research services. Providers of these services manipulate healthcare information
to analyze aspects of current healthcare products and procedures for use in
producing new products and services or in analyzing sales and marketing of
existing products. These types of services are also known as data mining. We
believe that the healthcare information ENVOY processes in its current business
could be utilized to create new data mining 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 the development of them may adversely affect our ability to
realize some of the synergies we anticipate from the acquisition of ENVOY.
OUR RESULTS COULD BE ADVERSELY AFFECTED BY THE POTENTIAL LOSS OR DELAY OF OUR
LARGE CONTRACTS
Most of our 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. Still, the loss or delay of a large contract or the
loss or delay of multiple contracts could adversely affect our future net
revenue and profitability.
-3-
<PAGE> 4
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. 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 have established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of our operations, including, among
other things, a temporary inability to process information such as real-time
transaction processing for pharmacies and other healthcare providers and payors;
receive information, services or products from third parties; interface with
customers in the performance of contracts; or operate or communicate in some or
all of the regions in which we do business. Our computing infrastructure is
based on industry standard systems. The scope of our Year 2000 Program includes
unique software systems and tools in each of our service groups, especially our
product development group, embedded systems in our laboratory and manufacturing
operations, mainframe systems in our QUINTERNET(TM) informatics service group,
facilities such as elevators and fire alarms in over 70 offices (which also
involve embedded technology) and numerous supplier and other business
relationships. We have identified critical systems within each service group and
are devoting our resources to address these items first.
Our Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of our Chief Information Officer and representatives
from regional business units, together with legal, quality assurance and
information technology personnel. We have established a Year 2000 Program
Management Office, staffed by consultants and internal staff, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for our Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
We are in the process of assessing those systems, facilities and business
relationships which we believe may be vulnerable to the Year 2000 issue and
which we believe could impact our operations. Although we cannot control
-4-
<PAGE> 5
whether and how third parties will address the Year 2000 issue, our assessment
also will include a limited evaluation of certain services on which we are
substantially dependent, and we plan to develop contingency plans for possible
deficiencies in those services. For example, we believe that among our most
significant third party service providers are physician investigators who
participate in clinical studies conducted through our contract research
services and external organizations (such as pharmacies, insurance providers and
medical offices) linked to the QUINTERNET(TM) informatics services;
consequently, we are developing a specialized process to assess and address Year
2000 issues arising from these relationships. We do not plan to assess how our
customers, such as pharmaceutical and large biotechnology companies, are dealing
with the Year 2000 issue.
As we complete the assessment of our systems, we are developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. We will utilize both internal
and external resources to implement these plans. We addressed most systems
relating to our healthcare consulting services in 1998, with completion expected
in the first half of 1999. We also addressed most of our commercialization
systems in 1998, and expect to have substantially completed this program during
mid-1999. Our product development services utilize numerous systems, which we
must address individually on disparate schedules, depending on the magnitude and
complexity of the particular system. We anticipate that remediation or
replacement of these systems will be substantially complete by mid-1999, with
migration occurring primarily in the second half of 1999. We have evaluated the
state of readiness of our recent acquisitions, including ENVOY and PMSI, which
form the core of our informatics services, and have integrated these
acquisitions into our Year 2000 Program. Our informatics services utilize
real-time and batch systems linked to external organizations, and PC-based audit
and syndicated data systems. We anticipate that the remediation and testing of
these systems will be substantially complete by mid-1999, and that testing with
external organizations will occur primarily in the second half 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.
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 $8.6 million through March 31, 1999, of which
approximately $6.4 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 that our assumptions will be
correct and that
-5-
<PAGE> 6
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 and similar uncertainties.
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. Our primary internal risk is that
our systems will not be Year 2000 compliant on time. The magnitude of this risk
depends on our ability to achieve compliance of both internally and externally
developed systems or to migrate to alternate systems in a timely fashion. The
decentralized nature of our business may compound this risk if we are unable to
coordinate efforts across our global operations on a timely basis. We believe
that our Year 2000 Program will successfully address these risks; however, we
cannot assure you that this program will be completed in a timely manner.
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 telephone, 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 Quintiles relies significantly could also
adversely impact the Company's ability to process transactions in its
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 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.
We are in the process of developing business continuity plans for each
service area. These plans will primarily be developed in the second half of
1999.
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<PAGE> 7
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
We contract with physicians to serve as investigators in conducting
clinical trials to test new drugs on human volunteers. 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 such tests, 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.
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 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
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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 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.
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 51.0% 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
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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 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
denominated 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.
INDUSTRY REGULATION MAY RESTRICT OUR ABILITY TO DISSEMINATE
PHARMACEUTICAL DATA
As described above, the pharmaceutical industry is subject to extensive
regulations, 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. While we do not believe that any
such current legislation will have a material adverse effect on our operations,
we cannot assure you that future legislation or regulations will not directly or
indirectly restrict the dissemination of the type of information we gather and
therefore materially adversely affect our operations.
ENVOY MAY BE ADVERSELY AFFECTED BY CUSTOMER CONCENTRATION
ENVOY has one customer, Aetna U.S. Healthcare, Inc. ("AUSHC"), that
accounted for 17% of its 1998 revenues and 12% of its 1997 revenues. ENVOY and
AUSHC entered into a ten-year services agreement that requires AUSHC to use
ENVOY as its single source clearinghouse and EDI network for all of AUSHC's
electronic healthcare transactions. The fees under the AUSHC services agreement
have been negotiated for the first three years. The AUSHC services agreement
also requires ENVOY to maintain minimum transaction volumes and services levels
and to perform marketing services that are designed to encourage AUSHC providers
to use ENVOY's services. If either ENVOY or AUSHC fail to comply with a material
term of the services agreement, the other party can terminate the services
agreement upon 180 days' notice. ENVOY believes that it is currently complying
with all material terms of the AUSHC services agreement.
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ENVOY receives medical EDI transactions from practice management system
vendors and other claims clearinghouses. These vendors and claims clearinghouses
collect transactions from healthcare providers and send ENVOY these transactions
to complete the processing of the transactions with the payors. ENVOY receives
revenue from the payors for processing these transactions and, in turn, pays
rebates to exclusive and preferred vendors based on the volume of transactions
delivered to ENVOY. If consolidation in the healthcare industry results in fewer
vendors and clearinghouses that gather medical EDI transactions from healthcare
providers, then ENVOY's medical EDI business will be more dependent on a smaller
number of vendors and clearinghouses.
To illustrate the foregoing risk, ENVOY currently processes batch
transactions for Medic Computer Systems, a practice management system vendor.
ENVOY and Medic have an exclusive relationship for processing these transactions
through June 1999. ENVOY's revenues for such processing represented 3.5% of
ENVOY's revenues for the year ended December 31, 1998. Medic recently announced
that it has entered into a processing and development agreement with one of
ENVOY's competitors. Subsequently, both ENVOY and Medic have alleged that the
other party has breached the parties' current agreement, and a lawsuit is
pending to resolve the parties' allegations. If ENVOY is not able to resolve the
parties' allegations and maintain a relationship with Medic, or other companies
like Medic, its business may be adversely affected.
As another illustration, before NEIC was acquired by ENVOY, it
generated most of our revenues from five insurance companies who were
shareholders of NEIC. These insurance companies have continued to use NEIC's
services following ENVOY's acquisition of NEIC, but they are not required to
continue to use NEIC's services in the future. If one or more of the insurance
companies decreases or ceases its use of NEIC's services, then ENVOY's business
could be adversely affected.
ENVOY RELIES ON SPECIFIC DATA CENTERS
ENVOY relies on its 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, ENVOY's business could be materially adversely
affected.
ENVOY also relies on a data center operated by a third party to perform
many of its other healthcare EDI transaction processing services. The facility
is located in Tampa, Florida and is operated by GTE Data Services Incorporated,
with whom ENVOY has contracted for such processing services. ENVOY relies
primarily on this facility to process its batch claims and other medical EDI
transaction sets. ENVOY's 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, ENVOY's business could be materially adversely affected.
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ENVOY CANNOT PREDICT THE NEED FOR INDEPENDENT HEALTHCARE EDI PROCESSING
ENVOY's 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 ENVOY's business will grow.
ENVOY FACES A VARIETY OF COMPETITORS
ENVOY faces different types of competition in the healthcare EDI and
transaction processing business. Some of its 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. Competition from
any or all of these sources could force ENVOY to reduce, or even eliminate, per
transaction fees, which could adversely affect its business.
DIRECT LINKS MAY BYPASS NEED FOR ENVOY'S SERVICES
Some third party payors provide electronic data transmission systems to
healthcare providers, thereby directly linking the payor to the provider. Such
direct links bypass third party processors such as ENVOY. An increase in the use
of direct links between payors and providers would materially adversely affect
ENVOY's business.
ENVOY FACES AN UNCERTAIN REGULATORY ENVIRONMENT
The operations of companies in the healthcare industry are affected by
changes in political, economic and regulatory influences. Federal and state
legislatures periodically consider legislation that would change the federal and
state healthcare programs. Such legislation may include increased government
involvement in healthcare, lower reimbursement rates, or other changes. The
uncertainty surrounding these proposed or actual changes could cause companies
in the healthcare industry to curtail or defer investments in ENVOY's services
and products.
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CONSOLIDATION IN THE HEALTHCARE INDUSTRY MAY ADVERSELY AFFECT ENVOY'S BUSINESS
Many healthcare providers and payors are consolidating to create larger
healthcare organizations. This consolidation reduces the number of potential
customers for ENVOY's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for ENVOY's services.
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. Payors and other healthcare information companies, such as billing
services and practice management vendors, which currently utilize ENVOY's
services, have developed or acquired transaction processing and networking
capabilities and may cease utilizing ENVOY's services in the future. The impact
of these developments in the healthcare EDI and transaction processing industry
is difficult to predict and could materially adversely affect ENVOY's business.
NEW HEALTHCARE LEGISLATION COULD RESTRICT ENVOY'S 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.
The Act 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 except when authorized by the patient. This Act further establishes an
August 1999 deadline for Congress to enact privacy legislation. If Congress does
not meet this deadline, the Secretary is directed to issue regulations setting
privacy standards to protect health information that is transmitted
electronically. Such changes could occur as early as the year 2000, and their
impact cannot be predicted. Such legislation or regulations could materially
affect ENVOY's business. This Act 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. ENVOY is preparing to comply with the mandated standards within three
to six months after they are published. Whether ENVOY is successful in complying
with these standards may depend on whether providers, payors and others are also
successful in complying with the standards.
In addition, broad-based health information privacy legislation
restricting third party processors from using, transmitting or disclosing
certain patient data without specific patient consent has recently been
introduced in the United States Congress. If this legislation is adopted, it
could prevent third party processors from using, transmitting or disclosing
certain treatment and clinical data. It is difficult to predict the impact of
the legislation described above, but such legislation could materially adversely
affect ENVOY's business.
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ENVOY FACES EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES
The market for ENVOY's business is characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced products and services. To succeed, ENVOY must continue to:
- enhance its existing products and services;
- introduce new products and services on a timely and
cost-effective basis to meet evolving customer requirements;
- achieve market acceptance for new products and services; and
- respond to emerging industry standards and other technological
changes.
PROTECTING ENVOY'S TECHNOLOGY IS IMPORTANT TO ITS SUCCESS
ENVOY believes that its technology is important to its success and
competitive position. Accordingly, ENVOY has devoted substantial resources to
the establishment and protection of the intellectual property rights associated
with its technology. These actions, however, may be inadequate to prevent a
third party from imitating or using ENVOY's technology or asserting certain
rights in ENVOY's technology and intellectual property rights. Additionally,
ENVOY's competitors may independently develop technologies that are
substantially equivalent or superior to ENVOY's technology. Although ENVOY is
currently not aware of any pending or threatened infringement claims, a third
party also may claim that ENVOY's products and services are infringing on its
intellectual property rights. Such claims could require ENVOY to enter into
license arrangements in order to use such products and services. ENVOY may not
be able to obtain such licenses.
Furthermore, litigation may be necessary to enforce or defend ENVOY's
intellectual property rights or defend against any infringement claims. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on ENVOY's business and financial results.
ENVOY INCREASINGLY DEPENDS ON MEDICAL EDI AND PATIENT STATEMENT TRANSACTION
REVENUES
ENVOY's medical EDI and patient statement transaction revenues
constituted approximately 75% of ENVOY's total revenues in 1998. Although
pharmacy EDI transactions currently represent a majority of ENVOY's total
transactions, pharmacy EDI revenue constituted less than 15% of ENVOY's total
revenues in 1998 as a result of lower per transaction prices on pharmacy
transactions. In 1998, the number of transactions processed in ENVOY's pharmacy
EDI business grew at approximately half the rate experienced in ENVOY's other
businesses. Because of the significant penetration and lower per transaction
prices already existing in the
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more mature pharmacy EDI sector, ENVOY believes that the percentage of total
revenue contributed by its pharmacy EDI business as presently conducted will
continue to decrease. Accordingly, ENVOY will have an increasing dependence on
medical EDI and patient statement transaction revenues. Any decline in growth
rates associated with these businesses could have a material adverse effect on
ENVOY's business and financial results.
ENVOY FACES RISKS CONCERNING UNAUTHORIZED ACCESS TO DATA CENTERS
Unauthorized access to ENVOY's data centers and misappropriation of
ENVOY's proprietary information could have a material adverse effect on ENVOY's
business and financial results. While ENVOY believes its current security
measures and the security measures used by third parties for whom ENVOY
processes or transmits healthcare information are adequate, such unauthorized
access or misappropriation could occur.
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