<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 June 30, 1999
-------------
Commission file number 340-23520
---------
QUINTILES TRANSNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 998-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding as of July 31,
1999 was 114,758,559.
<PAGE> 2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 1999 and December 31, 1998 3
Condensed consolidated statements of
operations - Three months ended June 30,
1999 and 1998; six months ended June 30,
1999 and 1998 4
Condensed consolidated statements of
cash flows - Six months ended
June 30, 1999 and 1998 5
Notes to condensed consolidated financial
statements - June 30, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities - Not Applicable --
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 5. Other Information - Not Applicable --
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
<PAGE> 3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
----------- -----------
(unaudited) (Note 1)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 140,735 $ 156,977
Accounts receivable and unbilled services 415,578 363,163
Investments in debt securities 128,075 32,241
Prepaid expenses 43,541 26,326
Other current assets 21,957 24,112
----------- -----------
Total current assets 749,886 602,819
Property and equipment 510,391 430,408
Less accumulated depreciation (184,119) (156,763)
----------- -----------
326,272 273,645
Intangibles and other assets:
Goodwill, net 240,544 124,963
Other intangibles, net 28,116 30,655
Investments in debt securities 85,157 65,456
Investments in marketable equity securities 14,765 --
Deferred income taxes 71,192 71,401
Deposits and other assets 46,595 41,984
----------- -----------
486,369 334,459
----------- -----------
Total assets $ 1,562,527 $ 1,210,923
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 6,268 $ 921
Accounts payable and accrued expenses 190,895 161,548
Credit arrangements, current 104,988 33,818
Unearned income 135,469 153,535
Income taxes and other current liabilities 24,550 13,558
----------- -----------
Total current liabilities 462,170 363,380
Long-term liabilities:
Credit arrangements, less current portion 157,941 134,276
Long-term obligations 2,777 23,830
Deferred income taxes and other liabilities 44,061 43,305
----------- -----------
204,779 201,411
----------- -----------
Total liabilities 666,949 564,791
Shareholders' equity:
Preferred stock, none and 3,264,800 shares
issued and outstanding at June 30, 1999
and December 31, 1998, respectively -- 33
Common stock and additional paid-in capital,
114,692,192 and 105,775,628 shares issued and
outstanding at June 30, 1999 and December
31, 1998, respectively 776,695 559,496
Retained earnings 138,631 95,618
Accumulated other comprehensive income (16,024) (5,198)
Other equity (3,724) (3,817)
----------- -----------
Total shareholders' equity 895,578 646,132
----------- -----------
Total liabilities and shareholders' equity $ 1,562,527 $ 1,210,923
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
3
<PAGE> 4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net revenue $ 456,413 $ 340,435 $ 869,727 $ 655,505
Costs and expenses:
Direct 232,166 175,938 444,924 338,491
General and administrative 141,345 106,703 266,492 203,692
Depreciation and amortization 24,015 22,903 49,351 44,971
--------- --------- --------- ---------
397,526 305,544 760,767 587,154
--------- --------- --------- ---------
Income from operations 58,887 34,891 108,960 68,351
Transaction costs (3,464) (469) (25,827) (1,001)
Other income (expense) 1,245 (266) 1,645 (555)
--------- --------- --------- ---------
Total other expense, net (2,219) (735) (24,182) (1,556)
--------- --------- --------- ---------
Income before income taxes 56,668 34,156 84,778 66,795
Income taxes 21,488 13,738 40,984 25,163
--------- --------- --------- ---------
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
========= ========= ========= =========
Basic net income per share $ 0.31 $ 0.20 $ 0.39 $ 0.40
========= ========= ========= =========
Diluted net income per share $ 0.30 $ 0.18 $ 0.38 $ 0.38
========= ========= ========= =========
</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>
SIX MONTHS ENDED JUNE 30
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 43,794 $ 41,632
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 49,351 44,971
Non-recurring transaction costs 25,827 --
Provision for (benefit from) deferred income tax expense 1,417 (2,686)
Change in operating assets and liabilities (73,018) (40,649)
Other 582 560
--------- ---------
Net cash provided by operating activities 47,953 43,828
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 4,132 1,474
Acquisition of property and equipment (94,527) (47,995)
Cash acquired in stock transactions, Note 2 83,986 (6,901)
Payment of non-recurring transaction costs (22,755) --
Payment of dividends by pooled entities (761) (2,078)
Purchases of debt securities, net (32,753) (13,734)
Purchases of equity securities, net (10,640) --
Other (234) --
--------- ---------
Net cash used in investing activities (73,552) (69,234)
FINANCING ACTIVITIES
Increase in lines of credit, net 5,188 (3,657)
Principal payments on credit arrangements (4,336) (9,340)
Issuance of common stock, net 11,709 11,309
Other (29) --
--------- ---------
Net cash provided by (used in) financing activities 12,532 (1,688)
Effect of foreign currency exchange rate changes on cash (3,175) (1,048)
--------- ---------
Decrease in cash and cash equivalents (16,242) (28,142)
Cash and cash equivalents at beginning of period 156,977 93,195
--------- ---------
Cash and cash equivalents at end of period $ 140,735 $ 65,053
========= =========
</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)
June 30, 1999
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. For further information, refer to the
Consolidated Financial Statements and Notes thereto included in the Current
Report on Form 8-K, dated July 15, 1999 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements of the Company. The financial statements do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
2. Mergers and Acquisitions
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's ("HMR") Kansas City-based Drug Innovation and Approval facility for
approximately $93 million in cash, most of which 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. The
Company has evaluated the pro forma disclosure requirements for the Oak Grove
transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
On March 29, 1999, the Company acquired Pharmaceutical Marketing Services Inc.
("PMSI") and its core company, Scott-Levin, a leader in pharmaceutical market
information and research services in the U.S. The Company acquired PMSI in
exchange for approximately 4,993,787 shares of the Company's Common Stock.
6
<PAGE> 7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Outstanding PMSI options became options to acquire approximately 440,426 shares
of the Company's Common Stock. In addition, the Company agreed to pay contingent
value payments to former PMSI stockholders who deferred receipt of one-half of
the shares of the Company's Common Stock they were entitled to receive in the
transaction until June 14, 1999. The right to receive contingent value payments
terminated in accordance with the merger agreement. Accordingly, no contingent
value payments were payable to any former PMSI shareholder. The total purchase
price of the PMSI acquisition approximates $201.8 million. The Company recorded
approximately $111.5 million related to the excess cost over the fair value of
net assets acquired, which amount is being amortized over 30 years. The
acquisition of PMSI has been accounted for as a purchase. For the periods
presented, the Company has evaluated the pro forma disclosure requirements for
the PMSI transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
On March 30, 1999, the Company acquired ENVOY Corporation ("ENVOY"), a
Tennessee-based provider of healthcare electronic data interchange and data
mining services. The Company acquired ENVOY in exchange for approximately
28,465,160 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.
On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a
Scotland-based clinical research organization, in exchange for 1,143,625 shares
of the Company's Common Stock. The acquisition of Minerva has been accounted for
as a pooling of interests, and as such, all historical data have been restated
to include the historical data of Minerva.
On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a
Chicago-based leading healthcare market information company, in exchange for
1,170,291 shares of the Company's Common Stock. The acquisition of SMG has been
accounted for as a pooling of interests, and as such, all historical data have
been restated to include the historical data of SMG.
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(1) Minerva SMG Consolidated
---------- ------- ------- ------------
<S> <C> <C> <C> <C>
For the three months ended
June 30, 1999:
Net revenue $453,252 $ 655 $ 2,506 $456,413
Net income (loss) 34,154 619 407 35,180
Basic net income per share 0.30 0.31
Diluted net income per share $ 0.29 $ 0.30
</TABLE>
7
<PAGE> 8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Company ENVOY N & B Minerva SMG Consolidated
---------- --------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
June 30, 1998:
Net revenue $ 289,991 $ 42,949 $ 2,981 $ 1,248 $ 3,266 $ 340,435
Net income (loss) 20,371 612 164 (1,133) 404 20,418
Basic net income per share 0.26 0.19
Diluted net income per share $ 0.26 $ 0.18
For the six months ended
June 30, 1999:
Net revenue $ 804,158 $ 54,468 $ 2,724 $ 1,938 $ 6,439 $ 869,727
Net income (loss)(2) 44,638 (3,316) 535 290 1,647 43,794
Basic net income per share(2) 0.45 0.39
Diluted net income per share(2) $ 0.47 $ 0.38
For the six months ended
June 30, 1998:
Net revenue $ 553,865 $ 85,473 $ 5,651 $ 3,272 $ 7,244 $ 655,505
Net income (loss) 39,273 687 59 (201) 1,814 41,632
Basic net income per share 0.51 0.40
Diluted net income per share $ 0.50 $ 0.38
</TABLE>
(1) Includes transaction costs and results of operations for Minerva and SMG
since their respective dates of acquisitions.
(2) Includes transaction costs and amortization of certain acquired intangible
assets.
3. Significant Customers
One customer accounted for 13.9% and 12.1% of consolidated net revenue for the
three and six months ended June 30, 1999, respectively. 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 and six months ended June 30, 1998.
4. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
======== ======== ======== ========
Weighted average shares:
Basic weighted average shares 114,451 104,656 112,004 104,239
Effect of dilutive securities
Stock options 2,982 3,940 3,080 3,299
Preferred stock -- 3,264 -- 3,264
-------- -------- -------- --------
Diluted weighted average shares 117,433 111,860 115,084 110,802
======== ======== ======== ========
Basic net income per share $ 0.31 $ 0.20 $ 0.39 $ 0.40
Diluted net income per share $ 0.30 $ 0.18 $ 0.38 $ 0.38
</TABLE>
8
<PAGE> 9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Options to purchase approximately 2.4 million and 2.2 million shares of common
stock with exercise prices ranging between $40.688 and $56.25 per share were
outstanding during the three and six months ended June 30, 1999, respectively,
but were not included in the computation of diluted net income per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
The conversion of the Company's 4.25% Convertible Subordinated Notes into
approximately 3.5 million shares of common stock was not included in the
computation of diluted net income per share because the effect would be
antidilutive.
5. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
Other comprehensive income:
Unrealized gain on marketable securities, net of tax 3,809 113 3,577 32
Foreign currency adjustment (5,162) (2,590) (14,274) (1,643)
-------- -------- -------- --------
Comprehensive income $ 33,827 $ 17,941 $ 33,097 $ 40,021
======== ======== ======== ========
</TABLE>
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.
9
<PAGE> 10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, and also asserts
additional claims under Tennessee common law for fraud and negligent
misrepresentation. The complaint alleges, among other things, 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.
10
<PAGE> 11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
8. Segments
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development service group, the commercialization service group and the
QUINTERNET(TM) informatics service group. Management has distinguished these
segments based on the normal operations of the Company. The product development
group is primarily responsible for all phases of clinical research and outcomes
research consulting. The commercialization group is primarily responsible for
sales force deployment and strategic marketing services. The QUINTERNET(TM)
informatics group is primarily responsible for electronic data interchange and
related informatics and includes primarily ENVOY, which was acquired in the
first quarter of 1999. The Company does not include non-recurring costs ($5.1
million for the three months ended June 30, 1998, and $3.7 million and $10.1
million for the six months ended June 30, 1999 and 1998, respectively), interest
income (expense) and income tax (benefit) in segment profitability. Overhead
costs are allocated based upon management's best estimate of efforts expended in
managing the segments. There are not any significant intersegment revenues.
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net revenue:
Product development $242,981 $170,493 $468,477 $327,965
Commercialization 146,686 123,727 276,102 234,823
QUINTERNET(TM) informatics 66,746 46,215 125,148 92,717
-------- -------- -------- --------
$456,413 $340,435 $869,727 $655,505
======== ======== ======== ========
Income from operations:
Product development $ 30,426 $ 16,919 $ 58,057 $ 35,775
Commercialization 13,582 12,795 25,824 23,058
QUINTERNET(TM) informatics 14,879 10,242 28,800 19,648
-------- -------- -------- --------
$ 58,887 $ 39,956 $112,681 $ 78,481
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999 As of December 31, 1998
------------------- -----------------------
<S> <C> <C>
Total assets:
Product development $ 786,816 $ 754,129
Commercialization 249,389 267,091
QUINTERNET(TM) informatics 526,322 189,703
---------- ----------
$1,562,527 $1,210,923
========== ==========
</TABLE>
9. Subsequent Events
On July 2, 1999, the Company acquired Medcom, Inc., a New Jersey-based provider
of physician meetings and educational events to help pharmaceutical companies
raise awareness of their products among healthcare professionals, for
approximately $2.5 million in cash. In addition, the Company agreed to pay the
former Medcom, Inc. owners earnout payments based on a multiple of 1999 profits
for Medcom as defined in the Medcom purchase agreement. The acquisition of
Medcom, Inc. will be accounted for as a purchase.
11
<PAGE> 12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On July 15, 1999, the Company acquired MediTrain, a Netherlands-based multimedia
pharmaceutical sales representative training company, in exchange for 19,772
shares of the Company's Common Stock. The acquisition of MediTrain will be
accounted for as a purchase.
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,
N & B, Minerva and SMG.
Three Months Ended June 30, 1999 and 1998
Net revenue for the second quarter of 1999 was $456.4 million, an increase of
$116.0 million or 34.1% over the second quarter of 1998 net revenue of $340.4
million. Growth occurred across each of the Company's three segments. Factors
contributing to the growth included an increase of contract service offerings,
the provision of increased services rendered under existing contracts, the
initiation of services under contracts awarded subsequent to the second quarter
of 1998 and the Company's 1999 acquisitions accounted for under purchase
accounting which contributed approximately $9.9 million of net revenue for the
second quarter of 1999. Net revenue for the product development group increased
42.5% to $243.0 million for the second quarter of 1999 as compared to $170.5
million for the second quarter of 1998. Net revenue for the commercialization
group increased 18.6% to $146.7 million for the second quarter of 1999 as
compared to $123.7 million for the second quarter of 1998. Net revenue for the
QUINTERNET(TM) informatics group increased 44.4% to $66.7 million for the second
quarter of 1999 as compared to $46.2 million for the second quarter of 1998. The
net revenue for the second quarter of 1999 for the QUINTERNET(TM) informatics
group included approximately $8.4 million of net revenue contributed by a 1999
acquisition accounted for as a purchase. In addition, the QUINTERNET(TM)
informatics group continued to experience an increase in the volume of
transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related electronic data
interchange ("EDI") and transaction processing expenses and other expenses
directly related to contracts, were $232.2 million or 50.9% of net revenue for
the second quarter of 1999 versus $175.9 million or 51.7% of net revenue for the
second 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 $141.3 million or
31.0% of net revenue for the second quarter of 1999 versus $106.7 million or
31.3% of net revenue for the second quarter of 1998. The $34.6 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 $1.1 million of
incremental costs related to the Company's Year 2000 Program.
12
<PAGE> 13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Depreciation and amortization were $24.0 million or 5.3% of net revenue for the
second quarter of 1999 versus $22.9 million or 6.7% of net revenue for the
second quarter of 1998. Included is amortization of certain acquired intangible
assets of $5.1 million for the three months ended June 30, 1998. These
intangible assets were fully amortized as of March 31, 1999. Excluding these
expenses, depreciation and amortization were $17.8 million or 5.2% of net
revenue for the second quarter of 1998. Excluding the amortization of certain
acquired intangible assets, amortization expense increased $1.9 million due to
the goodwill amortization resulting from the Company's 1999 acquisitions
accounted for under purchase accounting. The remaining $4.6 million increase is
primarily due to the increase in the capitalized asset base of the Company.
Income from operations was $58.9 million or 12.9% of net revenue for the second
quarter of 1999 versus $34.9 million or 10.2% of net revenue for the second
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $40.0 million or 11.7% of net
revenue for the second quarter of 1998. Income from operations for the product
development group increased to $30.4 million or 12.5% of net revenue for the
second quarter of 1999 from $16.9 million or 9.9% of net revenue for the second
quarter of 1998. Income from operations for the commercialization group
decreased as a percentage of net revenue to $13.6 million or 9.3% of net revenue
for the second quarter of 1999 from $12.8 million or 10.3% of net revenue for
the second quarter of 1998. Excluding the amortization of certain acquired
intangible assets as discussed above, income from operations for the
QUINTERNET(TM) informatics group increased slightly to $14.9 million or 22.3% of
net revenue for the second quarter of 1999 from $10.2 million or 22.2% of net
revenue for the second quarter of 1998.
Other expense increased to $2.2 million for the second quarter of 1999 from
$735,000 for the second quarter of 1998. Excluding transaction costs, other
income was $1.2 million for the second quarter of 1999 versus other expense of
$266,000 for the second quarter of 1998. The $1.4 million change primarily
results from an increase in net interest income.
The effective tax rate for the second quarter of 1999 was 37.9% versus a 40.2%
effective tax rate for the second 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 second quarter of 1999 was 35.7% versus a 34.6% effective tax rate for the
second 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.
13
<PAGE> 14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Six Months Ended June 30, 1999 and 1998
Net revenue for the six months ended June 30, 1999 was $869.7 million, an
increase of $214.2 million or 32.7% over the six months ended June 30, 1998 net
revenue of $655.5 million. Growth occurred across each of the Company's three
segments. Factors contributing to the growth included an increase of contract
service offerings, the provision of increased services rendered under existing
contracts, the initiation of services under contracts awarded subsequent to June
30, 1998 and the Company's 1999 acquisitions accounted for under purchase
accounting which contributed approximately $10.3 million of net revenue for the
six months ended June 30, 1999. Net revenue for the product development group
increased 42.8% to $468.5 million for the six months ended June 30, 1999 as
compared to $328.0 million for the six months ended June 30, 1998. Net revenue
for the commercialization group increased 17.6% to $276.1 million for the six
months ended June 30, 1999 as compared to $234.8 million for the six months
ended June 30, 1998. Net revenue for the QUINTERNET(TM) informatics group
increased 35.0% to $125.1 million for the six months ended June 30, 1999 as
compared to $92.7 million for the six months ended June 30, 1998. The net
revenue for the six months ended June 30, 1999 for the QUINTERNET(TM)
informatics group includes approximately $8.4 million of net revenue contributed
by a 1999 acquisition accounted for as a purchase. In addition, the
QUINTERNET(TM) informatics group experienced an increase in the volume of
transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related EDI and transaction
processing expenses and other expenses directly related to contracts, were
$444.9 million or 51.2% of net revenue for the six months ended June 30, 1999
versus $338.5 million or 51.6% of net revenue for the six months ended June 30,
1998.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $266.5 million or
30.6% of net revenue for the six months ended June 30, 1999 versus $203.7
million or 31.1% of net revenue for the six months ended June 30, 1998. The
$62.8 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 $3.9 million of incremental costs related to the Company's Year
2000 Program.
Depreciation and amortization were $49.4 million or 5.7% of net revenue for the
six months ended June 30, 1999 versus $45.0 million or 6.9% of net revenue for
the six months ended June 30, 1998. Included is amortization of certain acquired
intangible assets of $3.7 million and $10.1 million for the six months ended
June 30, 1999 and 1998, respectively. These intangible assets were fully
amortized as of March 31, 1999. Excluding these expenses, depreciation and
amortization were $45.6 million or 5.2% of net revenue for the six months ended
June 30, 1999 versus $34.8 million or 5.3% of net revenue for the six months
ended June 30, 1998. Excluding the amortization of certain acquired intangible
assets, amortization expense increased approximately $1.3 million due to the
goodwill amortization resulting from the Company's 1999 acquisitions accounted
for under purchase accounting. The remaining $9.5 million increase is primarily
due to the increase in the capitalized asset base of the Company.
14
<PAGE> 15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Income from operations was $109.0 million or 12.5% of net revenue for the six
months ended June 30, 1999 versus $68.4 million or 10.4% of net revenue for the
six months ended June 30, 1998. Excluding amortization of certain acquired
intangible assets as discussed above, income from operations was $112.7 million
or 13.0% of net revenue for the six months ended June 30, 1999 versus $78.5
million or 12.0% of net revenue for the six months ended June 30, 1998. Income
from operations for the product development group increased to $58.1 million or
12.4% of net revenue for the six months ended June 30, 1999 from $35.8 million
or 10.9% of net revenue for the six months ended June 30, 1998. Income from
operations for the commercialization group decreased slightly as a percentage of
net revenue to $25.8 million or 9.4% of net revenue for the six months ended
June 30, 1999 from $23.1 million or 9.8% of net revenue for the six months ended
June 30, 1998. Excluding the amortization of certain acquired intangible assets
as discussed above, income from operations for the QUINTERNET(TM) informatics
group increased to $28.8 million or 23.0% of net revenue for the six months
ended June 30, 1999 from $19.6 million or 21.2% of net revenue for the six
months ended June 30, 1998. This increase primarily results from the
efficiencies realized due to the increase in the volume of transactions
processed.
Other expense increased to $24.2 million for the six months ended June 30, 1999
from $1.6 million for the six months ended June 30, 1998. Excluding transaction
costs, other income was $1.6 million for the six months ended June 30, 1999
versus other expense of $555,000 for the six months ended June 30, 1998. The
$2.2 million change primarily results from an increase in net interest income.
The effective tax rate for the six months ended June 30, 1999 was 48.3% versus a
37.7% effective tax rate for the six months ended June 30, 1998. Excluding the
amortization of certain acquired intangible assets as discussed above and
transaction costs which are not generally deductible for tax purposes, the
effective tax rate for the six months ended June 30, 1999 was 35.8% as compared
to a 32.3% effective tax rate for the six months ended June 30, 1998. The
effective tax rate increase resulted primarily from profits generated in
locations with higher tax rates. Since the Company conducts operations on a
global basis, its effective tax rate may vary.
Liquidity and Capital Resources
Cash inflows from operations were $48.0 million for the six months ended June
30, 1999 versus $43.8 million for the comparable period of 1998. Investing
activities, for the six months ended June 30, 1999, consisted primarily of
capital asset purchases, investment security purchases and maturities and
payment of non-recurring transaction costs. Capital asset purchases required an
outlay of cash of $94.5 million for the six months ended June 30, 1999 compared
to an outlay of $48.0 million for the same period in 1998. Capital asset
expenditures for the six months ended June 30, 1999 included approximately $35
million in connection with the acquisition of the HMR Drug Innovation and
Approval Facility. The remainder of the purchase price, approximately $58
million, is expected to be paid in the second half of 1999 when the acquisition
of the physical facility is completed.
15
<PAGE> 16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
As of June 30, 1999, total working capital was $287.7 million versus $239.4
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $280.1 million at
June 30, 1999 as compared to $209.6 million at the end of 1998. As of June 30,
1999, accounts receivable were $262.0 million versus $212.7 million at December
31, 1998. Unbilled services were $153.6 million at June 30, 1999 versus $150.4
million at December 31, 1998, offset by unearned income balances of $135.5
million and $153.5 million, respectively. The number of days revenue outstanding
in accounts receivable and unbilled services, net of unearned income, was 49
days at June 30, 1999, as compared to 43 days at December 31, 1998. This
increase is due to the decrease in unearned income.
During the first six months of 1999, the Company had a (pound sterling) 15.0
million (approximately $24.3 million) unsecured line of credit with a U.K. bank
and a (pound sterling) 5.0 million (approximately $8.1 million) unsecured line
of credit with a second U.K. bank. In accordance with their terms, both of these
facilities expired in May 1999.
In May 1999, the Company entered into a (pound sterling) 10.0 million
(approximately $15.9 million) unsecured line of credit with a U.K. bank. The
Company also entered into a (pound sterling) 1.5 million (approximately $2.4
million) general banking facility with the same U.K. bank. At June 30, 1999, the
Company had (pound sterling) 7.5 million (approximately $12.0 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 June 30, 1999, the Company had the full $150
million available under this credit facility. Based upon its current financing
plan, the Company believes the $150.0 million facility would be available to
retire long-term credit arrangements and obligations, if necessary.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents and investments in marketable securities, together
with future cash flows from operations and borrowings under its line of credit
agreements will be sufficient to meet its foreseeable cash needs in connection
with its operations. As part of its business strategy, the Company reviews many
acquisition candidates in the ordinary course of business, and in addition to
acquisitions already made, the Company is continually evaluating new acquisition
and expansion possibilities. The Company may from time to time seek to obtain
debt or equity financing in its ordinary course of business or to facilitate
possible acquisitions or expansion.
16
<PAGE> 17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 Issue
State of Readiness
The Company continues to implement its Year 2000 Program described in its
previous filings. Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 for information relating to the Company's
staffing, framework and scope of its Year 2000 Program.
Current Status
The Company has addressed and substantially completed assessment, remediation,
testing and deployment of its systems relating to its commercialization service
group. The Company has successfully remediated, replaced and migrated a
substantial majority of systems in the Company's product development service
group, and anticipates that substantial completion of these systems will occur
by the end of the third quarter of 1999. The Company has evaluated the state of
readiness of its recent acquisitions, including ENVOY, PMSI and SMG, which form
the core of the Company's QUINTERNET(TM) informatics services, and has
integrated these acquisitions into its Year 2000 Program. The Company is
substantially complete with respect to the systems formerly owned by PMSI and
SMG, and it anticipates that remediation, internal testing and deployment of
former ENVOY systems will be substantially complete by the end of the third
quarter 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.
Although the Company cannot control whether and how third parties will address
the Year 2000 issue, the Company is conducting a limited evaluation of critical
services on which it is substantially dependent. For example, the Company
believes that among its most significant third party service providers are
physician investigators who participate as independent contractors 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.
17
<PAGE> 18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 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 $12.3 million through June
30, 1999, of which approximately $7.5 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, costs relating to the Year 2000 compliance
status of acquired companies and similar uncertainties.
Contingencies
The Company is developing business continuity plans for each service area. These
plans are specifically created based on the unique characteristics of the
affected service group or business unit. The Company will continue to develop
and refine these plans through the fourth quarter of 1999.
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.
18
<PAGE> 19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 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.
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 Company's
ability to introduce new service offerings and achieve commercial success for
those offerings, 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.
19
<PAGE> 20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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.
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 May 19, 1999, the Company completed the acquisition of Minerva,
a Scotland-based clinical research organization. The Company issued
1,143,625 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 Minerva 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 June 3, 1999, the Company completed the acquisition of SMG, a
Chicago-based healthcare market information company. The Company
issued 1,170,291 shares of its Common Stock, par value $0.01 per
share, in connection with the acquisition, which shares were
received by holders of all of the outstanding share capital of SMG
in exchange for such interests. The shares were issued in reliance
on a claim of exemption pursuant to Rule 506 of Regulation D and
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.
Item 3. Defaults upon Senior Securities -- Not applicable
20
<PAGE> 21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
On June 14, 1999, the Company held its Annual Meeting of
Shareholders during which the shareholders:
(1) Elected five nominees to serve as Class II directors with
terms continuing until the Annual Meeting of Shareholders in
2002. The votes were cast as follows:
<TABLE>
<CAPTION>
Broker
For Withheld Non-Vote
---------- -------- --------
<S> <C> <C> <C>
Vaughn D. Bryson 85,851,163 195,547 --
Rachel R. Selisker 85,864,687 182,023 --
Eric J. Topol, M.D. 85,860,263 186,447 --
Jim D. Kever 85,851,764 194,946 --
William E. Ford 85,838,410 208,300 --
</TABLE>
(2) Elected one nominee to serve as Class III director with a term
continuing until the Annual Meeting of Shareholders in 2000.
The votes were cast as follows:
<TABLE>
<CAPTION>
Broker
For Withheld Non-Vote
---------- -------- --------
<S> <C> <C> <C>
Fred C. Goad, Jr. 85,739,694 307,016 --
</TABLE>
(3) Approved amendments to the Company's Equity Compensation Plan.
The votes were cast as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------- ---------- ------- --------
<S> <C> <C> <C> <C>
Approval of amendments to Company's
Equity Compensation Plan 49,152,405 36,747,307 146,998 --
</TABLE>
(4) Ratified the appointment of Arthur Andersen LLP as independent
public accountants for the Company and its subsidiaries for
the fiscal year ending December 31, 1999. The votes were cast
as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------- ---------- ------- --------
<S> <C> <C> <C> <C>
Ratification of Arthur Andersen LLP 85,976,083 34,155 36,472 --
</TABLE>
Item 5. Other Information -- Not applicable
21
<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
10.01 Amended and Restated Equity Compensation Plan
27.01 Financial Data Schedule for the
Six Months Ended June 30, 1999
99.01 Risk Factors
(b) During the three months ended June 30, 1999, the Company
filed two reports on Form 8-K.
The Company filed a Form 8-K, dated April 22, 1999, including
its press release announcing the Company's fiscal first
quarter 1999 earnings information.
The Company filed a Form 8-K, dated April 30, 1999, to
publish unaudited financial results covering 30 days of
combined operations of the Company and ENVOY following the
merger.
No other reports on Form 8-K were filed during the three
months ended June 30, 1999.
22
<PAGE> 23
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 August 13, 1999 /s/ Dennis B. Gillings
----------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date August 13, 1999 /s/ Rachel R. Selisker
----------------- -------------------------------------------
Rachel R. Selisker, Chief Financial Officer
23
<PAGE> 24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
10.01 Amended and Restated Equity Compensation Plan
27.01 Financial Data Schedule for the
Six Months Ended June 30, 1999
99.01 Risk Factors
24
<PAGE> 1
QUINTILES TRANSNATIONAL CORP.
EQUITY COMPENSATION PLAN
(As amended and restated June 14, 1999)
<PAGE> 2
QUINTILES TRANSNATIONAL CORP.
EQUITY COMPENSATION PLAN
(As amended and restated June 14, 1999)
TABLE OF CONTENTS
ARTICLE I - GENERAL PROVISIONS.................................................1
ARTICLE II - DEFINITIONS.......................................................2
ARTICLE III - ADMINISTRATION...................................................6
ARTICLE IV - INCENTIVE STOCK OPTIONS..........................................10
ARTICLE V - NONQUALIFIED STOCK OPTIONS........................................12
ARTICLE VI - STOCK APPRECIATION RIGHTS........................................13
ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS.....................15
ARTICLE VIII - RESTRICTED STOCK...............................................17
ARTICLE IX - ACCELERATION EVENTS..............................................19
ARTICLE X - AMENDMENT AND TERMINATION.........................................21
ARTICLE XI - MISCELLANEOUS PROVISIONS.........................................22
<PAGE> 3
QUINTILES TRANSNATIONAL CORP.
EQUITY COMPENSATION PLAN
ARTICLE I - GENERAL PROVISIONS
1.1 The Plan is designed for the benefit of the executives, directors and
key employees of the Corporation and its Subsidiaries; to attract and
retain for the Corporation and its subsidiaries personnel of
exceptional ability; to motivate such personnel through added
incentives to make a maximum contribution to greater profitability; to
develop and maintain a highly competent management team; and to be
competitive with other companies with respect to executive
compensation.
1.2 Awards under the Plan may be made to Participants in the form of (i)
Incentive Stock Options; (ii) Nonqualified Stock Options; (iii) Stock
Appreciation Rights; and (iv) Restricted Stock.
1.3 The Plan shall be effective February 21, 1994 (the "Effective Date"),
subject to the approval of the Plan by a vote of a majority of the
Board of Directors and by a majority of the votes cast by the holders
of the Corporation's Common Stock that may be voted at the meetings of
the Board of Directors and shareholders, respectively, scheduled for
February 21, 1994.
1
<PAGE> 4
ARTICLE II - DEFINITIONS
DEFINITIONS. Except where the context otherwise indicates, the following
definitions apply:
2.1 "Acceleration Event" means the occurrence of an event defined in
Article IX of the Plan.
2.2 "Act" means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended. (All citations to sections of the Act or rules
thereunder are to such sections or rules as they may from time to time
be amended or renumbered.)
2.3 "Agreement" means the written agreement evidencing each Award granted
to a Participant under the Plan.
2.4 "Award" means an award granted to a Participant in accordance with the
provisions of the Plan, including, but not limited to, a Stock Option,
Stock Right, Restricted Stock, or any combination of the foregoing.
2.5 "Board" means the Board of Directors of the Corporation.
2.6 "Board-Approved Change in Control" shall have the meaning set forth in
Section 9.3 of the Plan.
2.7 "Change in Control" shall have the meaning set forth in Section 9.2 of
the Plan.
2.8 "Change in Control Price" shall have the meaning set forth in Section
9.8 of the Plan.
2.9 "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.)
2.10 "Committee" means the Compensation Committee or such other committee
consisting of three (3) or more members as may be appointed by the
Board to administer this Plan pursuant to Article III. To the extent
required by Rule 16b-3 under the Act, the Committee shall consist of
individuals who are members of the Board and Non-Employee Directors.
Committee members may also be appointed for such limited purposes as
may be provided by the Board.
2.11 "Corporation" means Quintiles Transnational Corp., a North Carolina
corporation, and its successors and assigns. "Corporation" also means
Quintiles Transnational Corp. and its Subsidiaries, unless the context
clearly indicates otherwise.
2.12 "Disability" means disability as determined under procedures
established by the Committee or in any Award.
2.13 "Discount Stock Options" means the Nonqualified Stock Options that
provide for an exercise price of less than the Fair Market Value of the
Stock at the date of the Award.
2
<PAGE> 5
2.14 "Early Retirement" means retirement from active employment with the
Corporation or any Subsidiary, with the express consent of the
Committee, pursuant to the early retirement provisions established by
the Committee or in any Award.
2.15 "Effective Date" shall have the meaning set forth in Section 1.3 of the
Plan.
2.16 "Eligible Participant" means any executive, key employee or director of
the Corporation or its Subsidiaries, as shall be determined by the
Committee, as well as any other person whose participation the
Committee determines is in the best interest of the Corporation,
subject to limitations as may be provided by the Code, the Act or the
Committee.
2.17 "ERISA" means the Employee Retirement Income Security Act of 1974, as
now in effect or as hereafter amended.
2.18 "Fair Market Value" means, with respect to any given day, the closing
price of the Stock reported on the Nasdaq National Market for such day,
or if the Stock is not traded on such day, then on the next day on
which the Stock is traded, all as reported by such source as the
Committee may select. The Committee may establish an alternative method
of determining Fair Market Value.
2.19 "Incentive Stock Option" means a Stock Option granted under Article IV
of the Plan, and as defined in Section 422 of the Code.
2.20 "Limited Stock Appreciation Rights" means a Stock Right that is
exercisable only in the event of a Change in Control and/or a Potential
Change in Control, as described in Section 6.8 of this Plan, that
provides for an amount payable solely in cash, equal to the excess of
the Stock Appreciation Right Fair Market Value of a share of Stock on
the day the Stock Right is surrendered over the price at which a
Participant could exercise a related Stock Option to purchase the share
of Stock.
2.21 "Non-Employee Directors" shall have the meaning set forth under Rule
16b-3(b)(3) of the Act.
2.22 "Nonqualified Stock Option" means a Stock Option granted under Article
V of the Plan.
2.23 "Normal Retirement" means retirement from active employment with the
Corporation or any Subsidiary on or after age 65, or pursuant to such
other requirements as may be established by the Committee or in any
Award.
2.24 "Option Grant Date" means, as to any Stock Option, the latest of:
(a) the date on which the Committee grants the Stock Option by
entering into an Award Agreement with the Participant;
(b) the date the Participant receiving the Stock Option becomes an
employee of the Corporation or its Subsidiaries, to the extent
employment status is a condition of the grant or a requirement
of the Code or the Act; or
(c) such other date (later than the dates described in (i) and
(ii) above) as the Committee may designate.
2.25 "Participant" means an Eligible Participant to whom an Award of
equity-based compensation has been granted and who has entered into an
Agreement evidencing the Award.
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2.26 "Potential Change in Control" shall have the meaning set forth in
Section 9.4 of the Plan.
2.27 "Plan" means the Quintiles Transnational Corp. Equity Compensation
Plan, as amended from time to time.
2.28 "Restricted Stock" means an Award of Stock under Article VIII of the
Plan, which Stock is issued with the restriction that the holder may
not sell, transfer, pledge, or assign such Stock and with such other
restrictions as the Committee, in its sole discretion, may impose
(including, without limitation, any restriction on the right to vote
such Stock, and the right to receive any cash dividends), which
restrictions may lapse separately or in combination at such time or
times, in installments or otherwise, as the Committee may deem
appropriate.
2.29 "Restriction Period" means the period commencing on the date an Award
of Restricted Stock is granted and ending on such date as the Committee
shall determine.
2.30 "Retirement" means Normal or Early Retirement.
2.31 "Stock" means shares of Common Stock of the Corporation, as may be
adjusted pursuant to the provisions of Section 3.11.
2.32 "Stock Appreciation Right" means a Stock Right, as described in Article
VI of this Plan, that provides for an amount payable in Stock and/or
cash, as determined by the Committee, equal to the excess of the Fair
Market Value of a share of Stock on the day the Stock Right is
exercised over the price at which the Participant could exercise a
related Stock Option to purchase the share of Stock.
2.33 "Stock Appreciation Right Fair Market Value" means a value established
by the Committee for the exercise of a Stock Appreciation Right or a
Limited Stock Appreciation Right.
2.34 "Stock Option" means an Award under Article IV or V of the Plan of an
option to purchase Stock. A Stock Option may be either an Incentive
Stock Option or a Nonqualified Stock Option.
2.35 "Stock Right" means an Award under Article VI of the Plan. A Stock
Right may be either a Stock Appreciation Right or a Limited Stock
Appreciation Right.
2.36 "Subsidiary" or "Subsidiaries" means:
(a) for the purpose of an Incentive Stock Option, any corporation
(other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation if, at the time of
the granting of the Option, each of the corporations other
than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%)
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or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain; and
(b) for the purposes of all other types of equity-based
compensation provided for under the Plan, any corporation (or
partnership, joint venture, limited liability company, or
other enterprise) of which the Corporation owns or controls,
directly or indirectly, fifty percent (50%) or more of the
outstanding shares of stock normally entitled to vote for the
election of directors (or comparable equity participation and
voting power).
2.37 "Termination of Employment" means the discontinuance of employment of a
Participant with the Corporation or its Subsidiaries for any reason
other than a Transfer. The determination of whether a Participant has
discontinued employment shall be made by the Committee in its
discretion. In determining whether a Termination of Employment has
occurred, the Committee may provide that service as a consultant or
service with a business enterprise in which the Corporation has a
significant ownership interest shall be treated as employment with the
Corporation. The Committee shall have the discretion, exercisable
either at the time the Award is granted or at the time the Participant
terminates employment, to establish as a provision applicable to the
exercise of one or more Awards that during the limited period of
exercisability following Termination of Employment, the Award may be
exercised not only with respect to the number of shares of Stock for
which it is exercisable at the time of the Termination of Employment
but also with respect to one or more subsequent installments for which
the Award would have become exercisable had the Termination of
Employment not occurred.
2.38 "Transfer" means a change of employment of a Participant within the
group consisting of the Corporation and its Subsidiaries.
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ARTICLE III - ADMINISTRATION
3.1 This Plan shall be administered by the Committee. The Committee, in its
discretion, may delegate to one or more of its members, or to one or
more officers of the Corporation, all or part of the Committee's
authority and duties with respect to grants and awards to individuals
who are not subject to the reporting and other provisions of Section 16
of the Act; provided, however, that such persons must exercise any
authority so delegated to them within any guidelines established by the
Committee. The Committee may revoke or amend the terms of a delegation
at any time but such action shall not invalidate any prior actions of
the Committee's delegate or delegates that were consistent with the
terms of the Plan. Members of the Committee shall be appointed
originally, and as vacancies occur, by the Board, to serve at the
pleasure of the Board. The Board may serve as the Committee, if by the
terms of the Plan all Board members are otherwise eligible to serve on
the Committee.
3.2 The Committee shall meet at such times and places as it determines. A
majority of its members shall constitute a quorum, and the decision of
a majority of those present at any meeting at which a quorum is present
shall constitute the decision of the Committee. A memorandum signed by
all of its members shall constitute the decision of the Committee
without necessity, in such event, for holding an actual meeting.
3.3 The Committee shall have the exclusive right to interpret, construe and
administer the Plan, to select the persons who are eligible to receive
an Award, and to act in all matters pertaining to the granting of an
Award and the contents of the Agreement evidencing the Award,
including, without limitation, the determination of the number of Stock
Options, Stock Rights, and shares of Restricted Stock subject to an
Award and the form, terms, conditions and duration of each Award, and
any amendment thereof consistent with the provisions of the Plan. All
acts, determinations and decisions of the Committee made or taken
pursuant to grants of authority under the Plan or with respect to any
questions arising in connection with the administration and
interpretation of the Plan, including the severability of any and all
of the provisions thereof, shall be conclusive, final and binding upon
all Participants, Eligible Participants and their beneficiaries.
3.4 The Committee may adopt such rules, regulations and procedures of
general application for the administration of this Plan, as it deems
appropriate.
3.5 Without limiting the foregoing Sections 3.1, 3.2, 3.3 and 3.4, and
notwithstanding any other provisions of the Plan, the Committee is
authorized to take such action as it determines to be necessary or
advisable, and fair and equitable to Participants, with respect to an
Award in the event of an Acceleration Event as defined in Article IX.
Such action may include, but shall not be limited to, establishing,
amending or waiving the forms, terms, conditions and duration of an
Award and the Award Agreement, so as to provide for earlier, later,
extended or additional times for exercise or payments, differing
methods for calculating payments, alternate forms and amounts of
payment, an accelerated release of restrictions or other modifications.
The Committee may take such actions pursuant to this Section 3.5 by
adopting rules and regulations of general applicability to all
Participants or to certain categories of Participants, by including,
amending or waiving terms and conditions in an Award and the Award
Agreement, or by taking action with respect to individual Participants.
3.6 The maximum aggregate number of shares of Stock subject to Awards under
the Plan
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shall be five million eight hundred forty-one thousand three hundred
and nineteen (5,841,319) shares, plus an annual increase to be added as
of January 1 of each year, beginning January 1, 2000, equal to the
lesser of (i) five hundred thousand (500,000) shares, (ii) five percent
(5%) of any increase, other than any increase due to Awards under this
Plan or any other similar plan of the Corporation, in the number of
authorized and issued shares (on a fully diluted basis) above the
number of authorized and outstanding shares as of the preceding January
1, or (iii) a lesser number determined by the Board.
(a) If, for any reason, any shares of Stock awarded or subject to
purchase under the Plan are not delivered or purchased, or are
reacquired by the Corporation, for reasons including, but not
limited to, a forfeiture of Restricted Stock or termination,
expiration or cancellation of a Stock Option or Stock Right,
or any other termination of an Award without payment being
made in the form of Stock (whether or not Restricted Stock),
such shares of Stock shall not be charged against the
aggregate number of shares of Stock available for Award under
the Plan, and shall again be available for Award under the
Plan.
(b) To the extent a Stock Right granted in connection with a Stock
Option is exercised without payment being made in the form of
Stock (whether or not Restricted Stock), the shares of Stock
that otherwise would have been issued upon the exercise of
such related Stock Option shall not be charged against the
aggregate number of shares of Stock subject to an Award under
the Plan, and shall again be available for Award under the
Plan.
3.7 Each Award granted under the Plan shall be evidenced by a written Award
Agreement. Each Award Agreement shall be subject to and incorporate (by
reference or otherwise) the applicable terms and conditions of the
Plan, and any other terms and conditions (not inconsistent with the
Plan) required by the Committee.
3.8 The Corporation shall not be required to issue or deliver any
certificates for shares of Stock prior to:
(a) the listing of such shares on any stock exchange or the
national market system on which the Stock may then be listed;
and
(b) the completion of any registration or qualification of such
shares of Stock under any federal or state law, or any ruling
or regulation of any government body that the Corporation
shall, in its discretion, determine to be necessary or
advisable.
3.9 All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations, and
other requirements of the Securities and Exchange Commission, any stock
exchange or the national market system upon which the Stock is then
listed and any applicable federal or state laws, and the Committee may
cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for
the Corporation.
3.10 Subject to the restrictions on Restricted Stock, as provided in Article
VIII of the Plan and in the Restricted Stock Award Agreement, each
Participant who receives an Award of Restricted Stock shall have all of
the rights of a shareholder with respect to such shares of Stock,
including the right to vote the shares to the extent, if any, such
shares possess voting
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rights and receive dividends and other distributions. Except as
provided otherwise in the Plan or in an Award Agreement, no Participant
awarded a Stock Option or Stock Right shall have any right as a
shareholder with respect to any shares of Stock covered by his or her
Stock Option or Stock Right prior to the date of issuance to him or her
of a certificate or certificates for such shares of Stock.
3.11 If any reorganization, recapitalization, reclassification, stock
split-up, stock dividend, or consolidation of shares of Stock, merger
or consolidation of the Corporation or its subsidiaries or sale or
other disposition by the Corporation or its Subsidiaries of all or a
portion of its assets, any other change in the Corporation's or its
Subsidiaries' corporate structure, or any distribution to shareholders
other than a cash dividend results in the outstanding shares of Stock,
or any securities exchanged therefor or received in their place, being
exchanged for a different number or class of shares of Stock or other
securities of the Corporation, or for shares of Stock or other
securities of any other corporation; or new, different or additional
shares or other securities of the Corporation or of any other
corporation being received by the holders of outstanding shares of
Stock, then equitable adjustments shall be made by the Committee in:
(a) the limitation of the aggregate number of shares of Stock that
may be awarded as set forth in Section 3.6 of the Plan;
(b) the number and class of Stock that may be subject to an Award
and that have not been issued or transferred under an
outstanding Award;
(c) the purchase price to be paid per share of Stock under
outstanding Stock Options and the number of shares of Stock to
be transferred in settlement of outstanding Stock Rights; and
(d) the terms, conditions or restrictions of any Award and Award
Agreement, including the price payable for the acquisition of
Stock; provided, however, that all adjustments made as the
result of the foregoing in respect of each Incentive Stock
Option shall be made so that such Stock Option shall continue
to be an Incentive Stock Option, as defined in Section 422 of
the Code.
3.12 In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against reasonable expenses,
including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted thereunder, and against
all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the
Corporation) or paid by them in satisfaction of a judgment or
settlement in any such action, suit or proceeding, except as to matters
as to which the Committee member has been negligent or engaged in
misconduct in the performance of his duties; provided, that within
sixty (60) days after institution of any such action, suit or
proceeding, a Committee member shall in writing offer the Corporation
the opportunity, at its own expense, to handle and defend the same.
3.13 The Committee may require each person purchasing shares of Stock
pursuant to a Stock Option or other Award under the Plan to represent
to and agree with the Corporation in writing that he is acquiring the
shares of Stock without a view to distribution thereof. The
certificates for such shares of Stock may include any legend that the
Committee deems
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appropriate to reflect any restrictions on transfer.
3.14 The Committee shall be authorized to make adjustments in the terms and
conditions of Awards in recognition of unusual or nonrecurring events
affecting the Corporation (or any Subsidiary, if applicable) or its
financial statements or changes in applicable laws, regulations or
accounting principles. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award
Agreement in the manner and to the extent it shall deem desirable to
carry it into effect. If the Corporation (or any Subsidiary, if
applicable) shall assume outstanding employee benefit awards or the
right or obligation to make future such awards in connection with the
acquisition of another corporation or business entity, the Committee
may, in its discretion, make such adjustments in the terms of Awards
under the Plan as it shall deem appropriate.
3.15 The Committee shall have full power and authority to determine whether,
to what extent and under what circumstances, any Award shall be
canceled or suspended. In particular, but without limitation, all
outstanding Awards to any Participant shall be canceled if (a) the
Participant, without the consent of the Committee, while employed by
the Corporation or any Subsidiary or after termination of such
employment, becomes associated with, employed by, renders services to,
or owns any interest in (other than any nonsubstantial interest, as
determined by the Committee), any business that is in competition with
the Corporation or with any business in which the Corporation and/or
its Subsidiaries have a substantial interest as determined by the
Committee; or (b) is terminated for cause as determined by the
Committee.
3.16 The following limitations shall apply to grants of Options:
(a) No Eligible Participant shall be granted, in any fiscal year
of the Company, Options to purchase more than 500,000 shares
of Stock.
(b) In connection with his or her initial service, an Eligible
Participant may be granted Options to purchase up to an
additional 200,000 shares that shall not count against the
limit set forth in subsection (a) above.
(c) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as
described in Section 3.11.
(d) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with
a transaction described in Article IX of the Plan), the
cancelled Option will be counted against the limits set forth
in subsections (a) and (b) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will
be treated as a cancellation of the Option and the grant of a
new Option.
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ARTICLE IV - INCENTIVE STOCK OPTIONS
4.1 Each provision of this Article IV and of each Incentive Stock Option
granted hereunder shall be construed in accordance with the provisions
of Section 422 of the Code, and any provision hereof that cannot be so
construed shall be disregarded. Incentive Stock Options shall be
granted only to Eligible Participants, each of whom may be granted one
or more such Incentive Stock Options at such time or times determined
by the Committee following the Effective Date until February 21, 2004,
subject to the following conditions:
(a) The Incentive Stock Option price per share of Stock shall be
set in the Award Agreement, but shall not be less than one
hundred percent (100%) of the Fair Market Value of the Stock
at the time of the Option Grant Date.
(b) The Incentive Stock Option and its related Stock Right, if
any, may be exercised in full or in part from time to time
within ten (10) years from the Option Grant Date, or such
shorter period as may be specified by the Committee in the
Award; provided, that in any event, the Incentive Stock Option
and related Stock Right shall lapse and cease to be
exercisable upon, or within such period following, a
Termination of Employment as shall have been determined by the
Committee and as specified in the Incentive Stock Option Award
Agreement or its related Stock Right Award Agreement;
provided, however, that such period following a Termination of
Employment shall not exceed three (3) months unless employment
shall have terminated:
(i) as a result of death or Disability, in which event
such period shall not exceed one year after the date
of death or Disability; and
(ii) as a result of death, if death shall have occurred
following a Termination of Employment and while the
Incentive Stock Option or Stock Right was still
exercisable, in which event such period shall not
exceed one year after the date of death;
provided further, that such period following a Termination of
Employment shall in no event extend the original exercise
period of the Incentive Stock Option or any related Stock
Right.
(c) The aggregate Fair Market Value, determined as of the Option
Grant Date, of the shares of Stock with respect to which
Incentive Stock Options are first exercisable during any
calendar year by any Eligible Participant shall not exceed one
hundred thousand dollars (100,000); provided, however, to the
extent permitted under Section 422 of the Code:
(i) if a Participant's employment is terminated by reason
of death, Disability or Retirement and the portion of
any Incentive Stock Option that is otherwise
exercisable during the post-termination period
applied without regard to the one hundred thousand
dollar (100,000) limitation contained in Section 422
of the Code is greater than the portion of such
option that is immediately exercisable as an
Incentive Stock Option during such post-termination
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period under Section 422, such excess shall be
treated as a Nonqualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of an Acceleration Event, any
portion of such Award that is not exercisable as an
Incentive Stock Option by reason of the one hundred
thousand dollar ($100,000) limitation contained in
Section 422 of the Code shall be treated as a
Nonqualified Stock Option.
(d) Incentive Stock Options shall be granted only to Eligible
Participants who, at the time of the Option Grant Date, do not
own stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the
Corporation, unless the Incentive Stock Option Price per share
of Stock shall not be less than one hundred and ten percent
(110%) of the Fair Market Value of the Stock at the time of
the Option Grant Date and the Incentive Stock Options by their
terms are not exercisable after the expiration of five (5)
years from the Option Grant Date.
(e) The Committee may adopt any other terms and conditions that it
determines should be imposed for Incentive Stock Options to
qualify under Section 422 of the Code, as well as any other
terms and conditions not inconsistent with this Article IV, as
determined by the Committee.
4.2 The Committee may at any time offer to buy out for a payment in cash,
Stock, or Restricted Stock an Incentive Stock Option previously
granted, based on such terms and conditions as the Committee shall
establish and communicate to the Participant at the time that such
offer is made.
4.3 If the Incentive Stock Option Award Agreement so provides, the
Committee may require that all or part of the shares of Stock to be
issued upon the exercise of an Incentive Stock Option shall take the
form of Restricted Stock, which shall be valued on the date of
exercise, as determined by the Committee, on the basis of the Fair
Market Value of such Restricted Stock determined without regard to the
forfeiture restrictions involved.
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ARTICLE V - NONQUALIFIED STOCK OPTIONS
5.1 One or more Stock Options may be granted as Nonqualified Stock Options
to Eligible Participants to purchase shares of Stock at such time or
times determined by the Committee, following the Effective Date,
subject to the terms and conditions set forth in this Article V.
5.2 The Nonqualified Stock Option price per share of Stock shall be
established in the Award Agreement and may be less than one hundred
percent (100%) of the Fair Market Value at the time of the grant.
5.3 The times and conditions upon which a Nonqualified Stock Option and its
related Stock Right, if any, will terminate where a Participant to whom
such an option and related right has been granted under the Plan
terminates, or the Corporation terminates, his or her employment,
consultant, or service relationship with the Corporation shall be
determined by the Committee when the option and any related right are
granted; provided, however, that in no event shall an option or related
right be exercisable more than ten (10) years from the date it was
granted. Nothing in the Plan or in any option or related right granted
pursuant to the Plan shall (a) confer on any individual any right to
continue in the employ of the Corporation or to continue any consultant
or service relationship with the Corporation or (b) interfere in any
way with the Corporation's right to terminate such individual's
employment, consultant or service relationship at any time.
5.4 The Nonqualified Stock Option Award Agreement may include any other
terms and conditions not inconsistent with this Article V or Article
VII below, as determined by the Committee.
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ARTICLE VI - STOCK APPRECIATION RIGHTS
6.1 A Stock Appreciation Right may be granted to an Eligible Participant in
connection with an Incentive Stock Option or a Nonqualified Stock
Option granted under Article IV or Article V of this Plan, or may be
granted independent of any related Stock Option.
6.2 A related Stock Appreciation Right shall entitle a holder of a Stock
Option, within the period specified for the exercise of the Stock
Option, to surrender the unexercised Stock Option (or a portion
thereof) and to receive in exchange therefor a payment in cash or
shares of Stock having an aggregate value equal to the amount by which
the Fair Market Value of each share of Stock exceeds the Stock Option
price per share of Stock, times the number of shares of Stock under the
Stock Option, or portion thereof, that is surrendered.
6.3 Each related Stock Appreciation Right granted hereunder shall be
subject to the same terms and conditions as the related Stock Option,
including limitations on transferability, and shall be exercisable only
to the extent such Stock Option is exercisable and shall terminate or
lapse and cease to be exercisable when the related Stock Option
terminates or lapses. The grant of Stock Appreciation Rights related to
Incentive Stock Options must be concurrent with the grant of the
Incentive Stock Options. With respect to Nonqualified Stock Options,
the grant either may be concurrent with the grant of the Nonqualified
Stock Options or in connection with Nonqualified Stock Options
previously granted under Article V, which are unexercised and have not
terminated or lapsed.
6.4 The Committee shall have sole discretion to determine in each case
whether the payment with respect to the exercise of a Stock
Appreciation Right will be in the form of all cash, all Stock, or any
combination thereof. If payment is to be made in Stock, the number of
shares of Stock shall be determined based on the Fair Market Value of
the Stock on the date of exercise. If the Committee elects to make full
payment in Stock, no fractional shares of Stock shall be issued and
cash payments shall be made in lieu of fractional shares.
6.5 The Committee shall have sole discretion as to the timing of any
payment made in cash, Stock, or a combination thereof, upon exercise of
Stock Appreciation Rights. Payment may be made in a lump sum, in annual
installments or may be otherwise deferred; and the Committee shall have
sole discretion to determine whether any deferred payments may bear
amounts equivalent to interest or cash dividends.
6.6 Upon exercise of a Stock Appreciation Right, the number of shares of
Stock subject to exercise under any related Stock Option shall
automatically be reduced by the number of shares of Stock represented
by the Stock Option or portion thereof that is surrendered.
6.7 The Committee, in its sole discretion, may also provide that, in the
event of a Change in Control and/or a Potential Change in Control, the
amount to be paid upon the exercise of a Stock Appreciation Right or
Limited Stock Appreciation Right shall be based on the Change in
Control Price, subject to such terms and conditions as the Committee
may specify at grant.
6.8 In its sole discretion, the Committee may grant Limited Stock
Appreciation Rights under this Article VI. Limited Stock Appreciation
Rights become exercisable only in the event of a Change in Control
and/or a Potential Change in Control, subject to such terms and
conditions as the Committee, in its sole discretion, may specify at
grant. Such Limited Stock Appreciation Rights shall be settled solely
in cash. A Limited Stock Appreciation
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Right shall entitle the holder of the related Stock Option to surrender
such Stock Option, or any portion thereof, to the extent unexercised in
respect of the number of shares of Stock as to which such Limited Stock
Appreciation Right is exercised, and to receive a cash payment equal to
the difference between (a) the Stock Appreciation Right Fair Market
Value (at the date of surrender) of a share of Stock for which the
surrendered Stock Option or portion thereof is then exercisable, and
(b) the price at which a Participant could exercise a related Stock
Option to purchase the share of Stock. Such Stock Option shall, to the
extent so surrendered, thereupon cease to be exercisable.
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ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS
7.1 Each Stock Option and Stock Right shall be granted subject to such
terms and conditions, if any, not inconsistent with this Plan, as shall
be determined by the Committee, including any provisions as to
continued employment as consideration for the grant or exercise of such
Stock Option or Stock Right and any provisions that may be advisable to
comply with applicable laws, regulations or rulings of any governmental
authority.
7.2 A Stock Option or Stock Right shall not be transferable by the
Participant other than by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the
Participant only by him or by his guardian or legal representative.
7.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid
for in such amounts, at such times and upon such terms as shall be
determined by the Committee, subject to limitations set forth in the
Stock Option Award Agreement. Without limiting the foregoing, the
Committee may establish payment terms for the exercise of Stock Options
that permit the Participant to deliver shares of Stock (or other
evidence of ownership of Stock satisfactory to the Corporation) with a
Fair Market Value equal to the Stock Option price as payment.
7.4 No cash dividends shall be paid on shares of Stock subject to
unexercised Stock Options. The Committee may provide, however, that a
Participant to whom a Stock Option has been granted that is exercisable
in whole or in part at a future time for shares of Stock shall be
entitled to receive an amount per share equal in value to the cash
dividends, if any, paid per share on issued and outstanding Stock, as
of the dividend record dates occurring during the period between the
date of the grant and the time each such share of Stock is delivered
pursuant to exercise of such Stock Option or the related Stock Right.
Such amounts (herein called "dividend equivalents") may, in the
discretion of the Committee, be:
(a) paid in cash or Stock either from time to time prior to, or at
the time of the delivery of, such Stock, or upon expiration of
the Stock Option if it shall not have been fully exercised; or
(b) converted into contingently credited shares of Stock (with
respect to which dividend equivalents may accrue) in such
manner, at such value, and deliverable at such time or times,
as may be determined by the Committee.
Such Stock (whether delivered or contingently credited) shall be
charged against the limitations set forth in Section 3.6.
7.5 The Committee, in its sole discretion, may authorize payment of
interest equivalents on dividend equivalents that are payable in cash
at a future time.
7.6 In the event of death or Disability, the Committee, with the consent of
the Participant or his legal representative, may authorize payment, in
cash or in Stock, or partly in cash and partly in Stock, as the
Committee may direct, of an amount equal to the difference at the time
between the Fair Market Value of the Stock subject to a Stock Option
and the Option price in consideration of the surrender of the Stock
Option.
7.7 If a Participant is required to pay to the Corporation an amount with
respect to income and employment tax withholding obligations in
connection with exercise of a Nonqualified
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Stock Option, and/or with respect to certain dispositions of Stock
acquired upon the exercise of an Incentive Stock Option, the Committee,
in its discretion and subject to such rules as it may adopt, may permit
the Participant to satisfy the obligation, in whole or in part, by
making an irrevocable election that a portion of the total Fair Market
Value of the shares of Stock subject to the Nonqualified Stock Option
and/or with respect to certain dispositions of Stock acquired upon the
exercise of an Incentive Stock Option, be paid in the form of cash in
lieu of the issuance of Stock and that such cash payment be applied to
the satisfaction of the withholding obligations. The amount to be
withheld shall not exceed the statutory minimum federal and state
income and employment tax liability arising from the Stock Option
exercise transaction.
7.8 The Committee may permit the voluntary surrender of all or a portion of
any Stock Option granted under the Plan to be conditioned upon the
granting to the Participant of a new Stock Option for the same or a
different number of shares of Stock as the Stock Option surrendered, or
may require such voluntary surrender as a condition precedent to a
grant of a new Stock Option to such Participant. Subject to the
provisions of the Plan, such new Stock Option shall be exercisable at
the same price, during such period and on such other terms and
conditions as are specified by the Committee at the time the new Stock
Option is granted. Upon surrender, the Stock Option surrendered shall
be canceled and the shares of Stock previously subject to it shall be
available for the grant of other Stock Options.
16
<PAGE> 19
ARTICLE VIII - RESTRICTED STOCK
8.1 Restricted Stock Awards may be made to certain Participants as
incentives for the performance of future services that will contribute
materially to the successful operation of the Corporation and its
Subsidiaries. Awards of Restricted Stock may be made either alone, in
addition to or in tandem with other Awards granted under the Plan
and/or cash payments made outside of the Plan.
8.2 With respect to Awards of Restricted Stock, the Committee shall:
(a) determine the purchase price, if any, to be paid for such
Restricted Stock, which may be equal to or less than par value
and may be zero, subject to such minimum consideration as may
be required by applicable law;
(b) determine the length of the Restriction Period;
(c) determine any restrictions applicable to the Restricted Stock
such as service or performance, other than those set forth in
this Article VIII;
(d) determine if the restrictions shall lapse as to all shares of
Restricted Stock at the end of the Restriction Period or as to
a portion of the shares of Restricted Stock in installments
during the Restriction Period; and
(e) determine if dividends and other distributions on the
Restricted Stock are to be paid currently to the Participant
or withheld by the Corporation for the account of the
Participant.
8.3 Awards of Restricted Stock must be accepted within a period of sixty
(60) days (or such shorter periods as the Committee may specify at
grant) after the Award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required.
The prospective recipient of a Restricted Stock Award shall not have
any rights with respect to such Award, unless such recipient has
executed a Restricted Stock Award Agreement and has delivered a fully
executed copy thereof to the Committee, and has otherwise complied with
the applicable terms and conditions of such Award.
8.4 Except when the Committee determines otherwise, or as otherwise
provided in the Restricted Stock Award Agreement, if a Participant
terminates employment with the Corporation or its Subsidiaries for any
reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the
Participant and shall be reacquired by the Corporation.
8.5 Except as otherwise provided in this Article VIII, no shares of
Restricted Stock received by a Participant shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period.
8.6 To the extent not otherwise provided in a Restricted Stock Award
Agreement, in cases of death, Disability or Retirement or in cases of
special circumstances, the Committee, if it
17
<PAGE> 20
finds that a waiver would be appropriate, may elect to waive any or all
remaining restrictions with respect to such Participant's Restricted
Stock.
8.7 In the event of hardship or other special circumstances of a
Participant whose employment with the Corporation or any Subsidiary is
involuntarily terminated (other than for cause), the Committee may
waive in whole or in part any or all remaining restrictions with
respect to any or all of the Participant's Restricted Stock, based on
such factors and criteria as the Committee may deem appropriate.
8.8 The certificates representing shares of Restricted Stock may either:
(a) be held in custody by the Corporation until the Restriction
Period expires or until restrictions thereon otherwise lapse,
and the Participant shall deliver to the Corporation a stock
power endorsed in blank relating to the Restricted Stock;
and/or
(b) be issued to the Participant and registered in the name of the
Participant, and shall bear an appropriate restrictive legend
and shall be subject to appropriate stop-transfer orders.
8.9 Except as provided in this Article VIII, a Participant receiving a
Restricted Stock Award shall have, with respect to the shares of
Restricted Stock covered by any Award, all of the rights of a
shareholder of the Corporation, including the right to vote the shares
to the extent, if any, such shares possess voting rights, and the right
to receive any dividends; provided, however, the Committee may require
that any dividends on such shares of Restricted Stock shall be
automatically deferred and reinvested in additional Restricted Stock
subject to the same restrictions as the underlying Award, or may
require that dividends and other distributions on Restricted Stock
shall be withheld by the corporation for the account of the
Participant. The Committee shall determine whether interest shall be
paid on amounts withheld, the rate of any such interest, and the other
terms applicable to such withheld amounts.
8.10 If and when the Restriction Period expires without a prior forfeiture
of the Restricted Stock subject to such Restriction Period,
unrestricted certificates for such shares shall be delivered to the
Participant.
8.11 In order to better ensure that Award payments actually reflect the
performance of the Corporation and its Subsidiaries and the service of
the Participant, the Committee may provide, in its sole discretion, for
a tandem performance-based or other Award designed to guarantee a
minimum value, payable in cash or Stock to the recipient of a
Restricted Stock Award, subject to such performance, future service,
deferral and other terms and conditions as may be specified by the
Committee.
18
<PAGE> 21
ARTICLE IX - ACCELERATION EVENTS
9.1 For the purposes of the Plan, an Acceleration Event shall occur in the
event of a "Potential Change in Control," or "Change in Control" or a
"Board-Approved Change in Control", as those terms are defined below.
9.2 A "Change in Control" shall be deemed to have occurred if:
(a) Any "Person" as defined in Section 3(a)(9) of the Act,
including a "group" (as that term is used in Sections 3(d)(3)
and 14(d)(2) of the Act), but excluding the Corporation and
any Subsidiary and any employee benefit plan sponsored or
maintained by the Corporation and any Subsidiary (including
any trustee of such plan acting as trustee) or Dennis B.
Gillings, Ph.D.
individually, who:
(i) makes a tender or exchange offer for any shares of
the Corporation's Stock (as defined below) pursuant
to which any shares of the Corporation's Stock are
purchased (an "Offer"); or
(ii) together with its "affiliates" and "associates" (as
those terms are defined in Rule 12b-2 under the Act)
becomes the "Beneficial Owner" (within the meaning of
Rule 13d-3 under the Act) of at least twenty percent
(20%) of the Corporation's Stock (an "Acquisition");
(b) The shareholders of the Corporation approve a definitive
agreement or plan to merge or consolidate the Corporation with
or into another corporation, to sell or otherwise dispose of
all or substantially all of its assets, or to liquidate the
Corporation (individually, a "Transaction"); or
(c) When, during any period of twenty-four (24) consecutive months
during the existence of the Plan, the individuals who, at the
beginning of such period, constitute the Board (the "Incumbent
Directors") cease for any reason other than death to
constitute at least a majority thereof; provided, however,
that a director who was not a director at the beginning of
such twenty-four (24) month period shall be deemed to have
satisfied such twenty-four (24) month requirement (and be an
Incumbent Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such twenty-four (24) month period) or by prior operation
of this Section 9.2(c).
9.3 A "Board-Approved Change in Control" shall be deemed to have occurred
if the Offer, Acquisition or Transaction, as the case may be, is
approved by a two-thirds (2/3) majority of the Directors serving as
members of the Board at the time of the Potential Change in Control or
Change in Control.
9.4 A "Potential Change in Control" means the happening of any one of the
following:
(a) The approval by shareholders of an agreement by the
Corporation, the consummation of which would result in a
Change in Control of the Corporation, as defined in Section
9.2; or
(b) The acquisition of Beneficial Ownership, directly or
indirectly, by any entity, person
19
<PAGE> 22
or group (other than the Corporation or any Subsidiary or any
Corporation or Subsidiary employee benefit plan (including any
trustee of such plan acting as such trustee) or Dennis B.
Gillings, Ph.D. individually), of securities of the
Corporation representing ten percent (10%) or more of the
combined voting power of the Corporation's outstanding
securities and the adoption by the Board of a resolution to
the effect that a Potential Change in Control of the
Corporation has occurred for the purposes of this Plan.
9.5 Upon the occurrence of an Acceleration Event, subject to the approval
of the Committee if the Acceleration Event results from a
Board-Approved Change in Control, the Committee in its discretion may
declare any or all then outstanding Stock Options (and any or all
related Stock Rights outstanding for at least six (6) months) not
previously exercisable and vested as immediately exercisable and fully
vested, in whole or in part.
9.6 Upon the occurrence of an Acceleration Event, subject to the approval
of the Committee if the Acceleration Event results from a
Board-Approved Change in Control, the Committee in its discretion, may
declare the restrictions applicable to Awards of Restricted Stock to
have lapsed, in which case the Corporation shall remove all restrictive
legends and stop-transfer orders applicable to the certificates for
such shares of Stock, and deliver such certificates to the Participants
in whose names they are registered.
9.7 The value of all outstanding Stock Options, Stock Rights, and
Restricted Stock, in each case to the extent vested, shall, unless
otherwise determined by the Committee in its sole discretion at or
after grant but prior to any Change in Control, be cashed out on the
basis of the "Change in Control Price," as defined in Section 9.8 as of
the date such Change in Control or such Potential Change in Control is
determined to have occurred or such other date as the Committee may
determine prior to the Change in Control.
9.8 For purposes of Section 9.7, "Change in Control Price" means the
highest price per share of Stock paid in any transaction reported on
the Nasdaq National Market or paid or offered in any bona fide
transaction related to a Potential or actual Change in Control of the
Corporation at any time during the sixty (60) day period immediately
preceding the occurrence of the Change in Control (or, where
applicable, the occurrence of the Potential Change in Control event),
in each case as determined by the Committee except that, in the case of
Incentive Stock Options and Stock Appreciation Rights (or Limited Stock
Appreciation Rights) relating to such Incentive Stock Options, such
price shall be based only on transactions reported for the date on
which the optionee exercises such Stock Appreciation Rights (or Limited
Stock Appreciation Rights).
20
<PAGE> 23
ARTICLE X - AMENDMENT AND TERMINATION
10.1 The Board, upon recommendation of the Committee, or otherwise, at any
time and from time to time (subject to the provisions of Section 9.7),
may amend or terminate the Plan as may be necessary or desirable to
implement or discontinue this Plan or any provision thereof. To the
extent required by Rule 16b-3 under the Act, no amendment, without
approval by the Corporation's shareholders, shall:
(a) alter the group of persons eligible to participate in the
Plan;
(b) except as provided in Section 3.6, increase the maximum number
of shares of Stock or Stock Options or Stock Rights that are
available for Awards under the Plan;
(c) extend the period during which Incentive Stock Option Awards
may granted beyond February 21, 2004;
(d) limit or restrict the powers of the Committee with respect to
the administration of this Plan;
(e) change the definition of an Eligible Participant for the
purpose of an Incentive Stock Option or increase the limit or
the value of shares of Stock for which an Eligible Participant
may be granted an Incentive Stock Option;
(f) materially increase the benefits accruing to Participants
under this Plan;
(g) materially modify the requirements as to eligibility for
participation in this Plan; or
(h) change any of the provisions of this Article X.
10.2 No amendment to or discontinuance of this Plan or any provision thereof
by the Board or the shareholders of the Corporation shall, without the
written consent of the Participant, adversely affect, as shall be
determined by the Committee, any Award theretofore granted to such
Participant under this Plan; provided, however, the Committee retains
the right and power to:
(a) annul any Award if the Participant is terminated for cause as
determined by the Committee;
(b) provide for the forfeiture of shares of Stock or other gain
under an Award as determined by the Committee for competing
against the Corporation or any Subsidiary; and
(c) convert any outstanding Incentive Stock Option to a
Nonqualified Stock Option.
10.3 If an Acceleration Event has occurred, no amendment or termination
shall impair the rights of any person with respect to an outstanding
Award as provided in Article IX.
21
<PAGE> 24
ARTICLE XI - MISCELLANEOUS PROVISIONS
11.1 Nothing in the Plan or any Award granted hereunder shall confer upon
any Participant any right to continue in the employ of the Corporation
or its Subsidiaries (or to serve as a director thereof) or interfere in
any way with the right of the Corporation or its subsidiaries to
terminate his or her employment at any time. Unless specifically
provided otherwise, no Award granted under the Plan shall be deemed
salary or compensation for the purpose of computing benefits under any
employee benefit plan or other arrangement of the Corporation or its
Subsidiaries for the benefit of its employees unless the Corporation
shall determine otherwise. No Participant shall have any claim to an
Award until it is actually granted under the Plan. To the extent that
any person acquires a right to receive payments from the Corporation
under the Plan, such right shall, except as otherwise provided by the
Committee, be no greater than the right of an unsecured general
creditor of the Corporation. All payments to be made hereunder shall be
paid from the general funds of the Corporation, and no special or
separate fund shall be established and no segregation of assets shall
be made to assure payment of such amounts, except as provided in
Article VIII with respect to Restricted Stock and except as otherwise
provided by the Committee.
11.2 The Corporation may make such provisions and take such steps as it may
deem necessary or appropriate for the withholding of any taxes that the
Corporation or any Subsidiary is required by any law or regulation of
any governmental authority, whether federal, state or local, domestic
or foreign, to withhold in connection with any Stock Option or the
exercise thereof, any Stock Right or the exercise thereof, or in
connection with any Restricted Stock, including, but not limited to,
the withholding of payment of all or any portion of such Award or
another Award under this Plan until the Participant reimburses the
Corporation or its Subsidiaries for the amount the Corporation or its
Subsidiaries is required to withhold with respect to such taxes, or
canceling any portion of such Award or another Award under this Plan in
an amount sufficient to reimburse itself for the amount it is required
to so withhold, or selling any property contingently credited by the
Corporation for the purpose of paying such Award or another Award under
this Plan, in order to withhold or reimburse itself for the amount it
is required to so withhold.
11.3 The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by
any government or regulatory agency as may be required.
11.4 The terms of the Plan shall be binding upon the Corporation, its
Subsidiaries, and their successors and assigns.
11.5 Neither a Stock Option, Stock Right, nor any Restricted Stock shall be
transferable except as provided for herein or in an Award Agreement. If
any Participant makes such a transfer in violation hereof, any
obligation of the Corporation shall forthwith terminate.
22
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<PAGE> 1
RISK FACTORS
================================================================================
In addition to the other information provided or incorporated by reference in
our reports, you should consider the following factors carefully in evaluating
us and our business. Additional risks and uncertainties not presently known to
us, that we currently deem immaterial or that are similar to those faced by
other companies in our industry or business in general, such as competitive
conditions, may also impair our business operations. If any of the following
risks occur, our business, financial condition, or results of operations could
be materially adversely affected.
================================================================================
CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to
hire outside organizations such as ours to conduct large clinical research
and sales and marketing projects. This practice has grown substantially in
the 1990s, and we have benefited from this trend. 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
In March 1999 we completed the acquisitions of Pharmaceutical Marketing
Services, Inc. and ENVOY Corporation. ENVOY is the largest acquisition we
have completed to date, and PMSI is one of the largest we have ever
completed. We may not achieve the intended benefits of the mergers with
PMSI and ENVOY if we are unable to integrate these businesses with our own
successfully. The PMSI and ENVOY acquisitions have expanded our lines of
business and thus involve new risks. ENVOY is a provider of electronic data
interchange (or "EDI") and data analysis services; PMSI provides market
research audits and other studies for the pharmaceutical industry. If
either of these acquisitions fails to meet our performance expectations,
our results of operation and financial condition could be materially
adversely affected. We could encounter a number of difficulties in the
integration of these businesses, such as:
- retaining PMSI's customers among pharmaceutical companies;
- retaining ENVOY's EDI customers among pharmacies, health
insurance companies, hospitals and other healthcare providers;
- maintaining and increasing PMSI's and ENVOY's competitive
presence in the healthcare industry;
<PAGE> 2
- the ability to operate and expand the data analysis portion of
ENVOY's business;
- continuing to operate each of PMSI's and ENVOY's businesses
efficiently; or
- retaining key PMSI and ENVOY employees.
For example, if either acquired company's current customers are uncertain
about our commitment to support their existing products and services, they
could cancel or refuse to renew current contracts. In addition, the
combined company may be unsuccessful in expanding or retaining its
competitive position in the current and new sectors of the healthcare
industry in which it now operates as a result of factors such as its
inability to properly market either acquired company's services and
products. Furthermore, the successful integration of PMSI and ENVOY depends
on the contribution of certain key PMSI and ENVOY employees. The loss of
any key personnel could result in less efficient business operations for
the combined company and could seriously harm its business.
IF COMPANIES WE ACQUIRE DO NOT PERFORM AS EXPECTED OR IF WE ARE UNABLE TO MAKE
STRATEGIC ACQUISITIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED
A key element of our growth strategy depends on our ability to complete
acquisitions that complement or expand our business and successfully
integrate the acquired companies into our operations. If we are unable to
successfully execute our acquisition strategy, there could be a material
adverse effect on our business, results of operations and financial
condition. In the past, some of our acquisitions performed below our
expectations in the short term, but we experienced no impact to our
expectations for our overall results, due in part to the size of such
acquisitions and the performance of other areas of our business. In the
future, if we are unable to operate the business of an acquired company so
that its results meet our expectations, those results could have a negative
impact on our results as a whole. The risk that our results may be affected
if we are unable to successfully operate the businesses we acquire may
increase in proportion with (1) the size of the businesses we acquire, (2)
the lines of business we acquire and (3) the number of acquisitions we
complete in any given time period.
In 1998, we completed 11 acquisitions and announced agreements to acquire
PMSI and ENVOY. As of June 30, 1999, we have completed another 6
acquisitions, including PMSI and ENVOY. In addition, we are currently
reviewing many acquisition candidates and continually evaluating and
competing for new acquisition opportunities. Other risk factors we face as
a result of our aggressive acquisition strategy include the following:
- the ability to achieve anticipated synergies from combined
operations;
- integrating the operations and personnel of acquired companies,
especially those in lines of business that differ from our
current lines of business;
- the ability of acquired companies to meet anticipated revenue and
net income targets;
2
<PAGE> 3
- potential loss of the acquired companies' key employees;
- the possibility that we may be adversely affected by risk factors
present at the acquired companies, including Year 2000 risks;
- potential losses resulting from undiscovered liabilities of
acquired companies that are not covered by the indemnification we
may obtain from the sellers;
- risks of assimilating differences in foreign business practices
and overcoming language barriers (for acquisitions of foreign
companies); and
- risks experienced by companies in general that are involved in
acquisitions.
Due to these risks, we may not be able to successfully execute our
acquisition strategy.
IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND MARKET POTENTIAL NEW SERVICES, OUR
GROWTH COULD BE ADVERSELY AFFECTED
Another key element of our growth strategy is the successful development
and marketing of new services which complement or expand our existing
business. If we are unable to succeed in (1) developing new services and
(2) attracting a customer base for those newly developed services, we will
not be able to implement this element of our growth strategy, and our
future business, results of operations and financial condition could be
adversely affected.
For example, as a result of our acquisition of ENVOY, we are expanding our
pharmaceutical and healthcare information and market research services.
Providers of these services analyze healthcare information to study aspects
of current healthcare products and procedures for use in producing new
products and services or in analyzing sales and marketing of existing
products. We believe that the healthcare information ENVOY processes in its
current business could be utilized to create new data analysis services. In
addition to the other difficulties associated with the development of any
new service, our ability to develop this line of service may be limited
further by contractual provisions limiting our use of the healthcare
information or the legal rights of others that may prevent or impair our
use of the healthcare information. Due to these and other limitations, we
cannot assure you that we will be able to develop this type of service
successfully. Our inability to develop new products or services or any
delay in development may adversely affect our ability to realize some of
the synergies we anticipate from the acquisition of ENVOY and to maintain
our rate of growth in the future.
OUR RESULTS COULD BE ADVERSELY AFFECTED BY THE POTENTIAL LOSS OR DELAY OF OUR
LARGE CONTRACTS
Many of our contract research customers can terminate our contracts upon
15-90 days' notice. In the event of termination, our contracts often
provide for fees for winding down the project. 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. In addition, EDI customers
under certain circumstances may enter into contracts with other providers
which lessen the number of transactions processed by or under our
contracts.
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. Backlog does not include
anticipated net revenue from our transaction processing services since the
contracts do not quantify the volume of transactions processed. We cannot
assure you that the backlog we have reported will be indicative of our
future results. A number of factors may affect our backlog, including:
- the variable size and duration of projects (some are performed
over several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
WE FACE RISKS CONCERNING THE YEAR 2000 ISSUE
If We or Our Vendors Do Not Adequately Prepare for the Year 2000 Issue, Our
Operations Could be Disrupted
We are continuing to implement our Year 2000 Program described in our
previous filings with the Securities and Exchange Commission, and we refer
you to our Form 10-K for the fiscal year ended December 31, 1998 for
information relating to the staffing, framework and scope of our Year 2000
Program. We have addressed and substantially completed our assessment,
remediation, testing and deployment of our systems relating to our
commercialization service group. We have successfully remediated, replaced
and migrated a substantial majority of systems in our product development
service group and anticipate that substantial completion of these systems
will occur by the end of the third quarter of 1999. We have evaluated the
state of readiness of our recent acquisitions, including ENVOY, PMSI and
SMG Marketing Group, Inc., which form the core of our QUINTERNET(TM)
informatics services, and have integrated these acquisitions into our Year
2000 Program. We are substantially complete with respect to the systems
formerly owned by PMSI and SMG and anticipate that remediation, internal
testing and deployment of former ENVOY systems will be substantially
complete by the end of the third quarter of 1999. We expect to complete the
core components of our Year 2000 Program before there is a significant risk
that internal Year 2000 problems will have a material impact on our
operations.
Although we cannot control whether and how third parties will address the
Year 2000 issue, we are conducting a limited evaluation of critical
services on which we are substantially dependent. For example, we believe
that among our most significant third party service providers are physician
investigators who participate as independent contractors in clinical
studies conducted through our contract research services and external
organizations (such as pharmacies, insurance providers and medical offices)
linked to our QUINTERNET(TM) informatics services; 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.
4
<PAGE> 5
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 $12.3 million through June 30,
1999, of which approximately $7.5 million represented incremental expense.
Our estimates regarding the cost, timing and impact of addressing the Year
2000 issue are based on numerous assumptions of future events, including
the continued availability of certain resources, our ability to meet
deadlines and the cooperation of third parties. We cannot assure you our
assumptions will be correct and that these estimates will be achieved.
Actual results could differ materially from our expectations as a result of
numerous factors, including the availability and cost of personnel trained
in this area, unforeseen circumstances that would cause us to allocate our
resources elsewhere, costs relating to the Year 2000 compliance status of
acquired companies and similar uncertainties.
We are developing business continuity plans for each service area. These
plans are specifically created based on the unique characteristics of the
affected service group or business unit. We will continue to develop and
refine these plans through the fourth quarter of 1999.
Our Business Could Be Adversely Affected if Year 2000 Issues Are Not
Adequately Addressed in Other Parts of the World or by Companies With Which
We Do Business
We face both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on our business,
results of operations or financial condition. 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 telephony, will fail in some or all of the regions in which
we operate, as well as the danger that the internal systems of our foreign
suppliers, service providers and customers will fail. Our business also
requires considerable travel, and our ability to perform services under our
customer contracts could be negatively affected if air travel is disrupted
by the Year 2000 issue.
In addition, our business depends heavily on the healthcare industry,
including third party physician investigators, pharmacies, insurance
providers and medical offices. The healthcare industry, and physicians'
groups in particular, to date may not have focused on the Year 2000 issue
to the same degree as some other industries, especially outside of major
metropolitan centers. As a result, we face increased risk that our
physician investigators will be unable to provide us with the data that we
need to perform under our contracts on time, if at all. Thus, the clinical
study involved could be slowed or brought to a halt. The failure due to a
Year 2000 issue of an external organization on whose services we rely
significantly could also impact our ability to process transactions in our
informatics services. Also,
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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.
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
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regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on
the business opportunities available to us.
FAILURE TO COMPLY WITH EXISTING REGULATIONS COULD RESULT IN A LOSS OF REVENUE
Any failure on our part to comply with applicable regulations could result
in the termination of ongoing clinical research or sales and marketing
projects or the disqualification of data for submission to regulatory
authorities, either of which could have a material adverse effect on us.
For example, if we were to fail to verify that informed consent is obtained
from patient participants in connection with a particular clinical trial,
the data collected from that trial could be disqualified, and we could be
required to redo the trial under the terms of our contract at no further
cost to our customer, but at substantial cost to us.
PROPOSED REGULATIONS MAY INCREASE THE COST OF OUR BUSINESS OR LIMIT OUR SERVICE
OFFERINGS
Certain of our current services relate to the diagnosis and treatment of
disease. The confidentiality of patient-specific information and the
circumstances under which such patient-specific records may be released for
inclusion in our databases or used in other aspects of our business, are
subject to substantial government regulation. Additional legislation
governing the possession, use and dissemination of medical record
information and other personal health information has been proposed at both
the state and federal levels. This legislation may (1) require us to
implement security measures that may require substantial expenditures or
(2) limit our ability to offer some of our products and services. These and
other changes in regulation could limit our ability to offer some of our
products or have an impact on the business opportunities available to us.
INDUSTRY REGULATION MAY RESTRICT OUR ABILITY TO ANALYZE AND DISSEMINATE
PHARMACEUTICAL AND HEALTHCARE DATA
As described above, the pharmaceutical industry is subject to extensive
regulations at the federal, state and international levels, including
limitations on the prices drug companies may charge. Such regulations may
cause our pharmaceutical company clients to revise or reduce their
marketing programs. In addition, we are directly subject to certain
restrictions on the collection and use of data. Laws relating to the
collection and use of data are evolving, as are contractual rights. We
cannot assure you that contractual restrictions imposed by our customers,
legislation or regulations will not, now or in the future, directly or
indirectly restrict the analysis or dissemination of the type of
information we gather and therefore materially adversely affect our
operations.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY MAY ADVERSELY AFFECT OUR BUSINESS
Many healthcare providers and payors are consolidating to create larger
healthcare organizations. This consolidation reduces the number of
potential customers for our EDI and data analysis services, and the
increased bargaining power of these organizations could lead to reductions
in the amounts paid for such services. For example, payors and other
healthcare information companies, such as billing services and practice
management vendors, which currently utilize our EDI services, have
developed or acquired transaction processing and networking capabilities
and may cease utilizing our EDI services in the future. Industry
developments are increasing the amount of capitation-based care and
reducing the need for providers to make claims or reimbursements for
products or services. The impact of these developments in the healthcare
EDI and transaction processing industry, as well as the import for the
development of new data analysis products, is difficult to predict and
could materially adversely affect our business.
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OUR SERVICES ARE SUBJECT TO EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL
CHANGES
The markets for our services, particularly our QUINTERNET(TM) informatics
services, which include our EDI and data analysis services, are
characterized by rapidly changing technology, evolving industry standards
and frequent introduction of new and enhanced services. To succeed, we must
continue to:
- enhance our existing services;
- introduce new services on a timely and cost-effective basis to
meet evolving customer requirements;
- achieve market acceptance for new services; and
- respond to emerging industry standards and other technological
changes.
Particularly, the current industry standard EDI platform for processing
transactions could be replaced or supplemented by an internet platform to
handle these transactions. Some of our competitors in the EDI business are
beginning to implement such a platform. If others succeed in implementing
an internet platform and are able to gain market acceptance of that
platform, whether or not we develop and execute an internet platform, our
EDI business could be materially adversely affected.
EXCHANGE RATE FLUCTUATIONS MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
We derive a large portion of our net revenue from international operations;
for example, we derived approximately 44.3% of our 1998 net revenue from
outside the United States. Our financial statements are denominated in U.S.
dollars; thus, factors associated with international operations, including
changes in foreign currency exchange rates, could significantly affect our
results of operations and financial condition. Exchange rate fluctuations
between local currencies and the U.S. dollar create risk in several ways,
including:
- Foreign Currency Translation Risk. The revenue and expenses of
our foreign operations are generally denominated in local
currencies.
- Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we
incur expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation provisions
stated in our service contracts, or we may hedge our transaction risk with
foreign currency exchange contracts or options. Despite these efforts, we
may still experience fluctuations in financial results from our operations
outside the United States, and we cannot assure you that we will be able to
favorably reduce our currency transaction risk associated with our service
contracts.
On January 1, 1999, a new currency, the euro, became the legal currency for
11 of the 15 member countries of the European Economic Community. Between
January 1, 1999 and January 1, 2002, governments, companies and individuals
may conduct business in these countries in both the euro and existing
national currencies. On January 1, 2002, the euro will become the sole
currency in these countries. We are evaluating the impact conversion to the
euro will have on our business. In
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particular we are reviewing (1) whether we may have to change the prices of
our services in the different countries because they will now be dominated
in the same currency in each country and (2) whether we will have to change
the terms of any financial instruments in connection with our hedging
activities described above. Based on current information and our initial
evaluation, we do not expect the cost of any necessary corrective action to
seriously harm our business. However, we will continue to evaluate the
impact of these and other possible effects of the conversion to the euro on
our business. We cannot assure you that the costs associated with the
conversion to the euro will not in the future seriously harm our business,
results of operations or financial condition.
WE MAY BE ADVERSELY AFFECTED BY CUSTOMER CONCENTRATION
We have one customer that accounted for 10% of our revenues for the three
months ended March 31, 1999. These revenues resulted from services provided
by our product development and commercialization service groups. If this or
any future customer of similar size decreases or terminates its
relationship with us, our business, results of operations or financial
condition could be materially adversely affected.
WE RELY ON SPECIFIC DATA CENTERS FOR OUR EDI BUSINESS
Our EDI business relies on a host computer system to perform real-time EDI
transaction processing. This host computer system is contained in a single
data facility. The host computer system does not have a remote backup data
center. Although the host computer system is insured, if there is a fire or
other disaster at the data facility, our EDI business could be materially
adversely affected.
Our EDI business also relies on a data center operated by a third party to
perform many of our other healthcare EDI transaction processing services.
The facility is located in Tampa, Florida and is operated by GTE Data
Services Incorporated, with whom we have contracted for such processing
services. Our EDI business relies primarily on this facility to process
batch claims and other medical EDI transaction sets. Our contract with GTE
requires GTE to maintain continuous processing capability and a "hot site"
disaster recovery system. This contract expires in December 2003. If the
GTE facility's services are disrupted or delayed, our EDI business could be
materially adversely affected.
WE CANNOT PREDICT THE NEED FOR INDEPENDENT HEALTHCARE EDI PROCESSING
Our EDI business strategy anticipates that providers of healthcare services
and payors will increase their use of electronic processing of healthcare
transactions in the future. The development of the business of
electronically transmitting healthcare transactions is affected, and
somewhat hindered, by the complex nature and types of transactions that
must be processed. Furthermore, while the wide variety of processing forms
used by different payors has fostered the need for healthcare EDI and
transaction processing clearinghouses such as ENVOY to date, if such forms
become standardized, through consolidation of payors or otherwise, then the
need for independent third party healthcare EDI processing could become
less prevalent. We cannot assure you that the electronic processing of
healthcare transactions will increase or that our EDI business will grow.
DIRECT LINKS MAY BYPASS NEED FOR OUR EDI SERVICES
Some third party payors provide electronic data transmission systems to
healthcare providers, thereby directly linking the payor to the provider.
These direct links bypass third party processors like us. An
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increase in the use of direct links between payors and providers would
materially adversely affect our EDI business.
INCREASED COMPETITION IN THE HEALTHCARE EDI BUSINESS COULD ADVERSELY IMPACT OUR
RESULTS
Increased competition in the healthcare EDI and transaction processing
business could force us to reduce, or even eliminate, per transaction fees,
which could adversely affect our results of operations. Our EDI services
face different types of competition, any or all of which could affect our
EDI business. Some of our competitors are similarly specialized, such as
former regional partners of ENVOY that have direct provider relationships,
and others are involved in more highly developed areas of the business. In
addition, some vendors of provider information management systems include
or may include, in their offered products, their own electronic transaction
processing systems. If electronic transaction processing becomes the
standard method of processing healthcare claims and information, other
companies with significant capital resources could enter the industry.
NEW HEALTHCARE LEGISLATION OR REGULATION COULD RESTRICT OUR EDI BUSINESS
The Health Insurance Portability and Accountability Act of 1996 requires
the use of standard transactions, standard identifiers, security and other
administrative simplification provisions and instructs the Secretary of
Health and Human Services to promulgate regulations regarding these
standards. 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 our EDI
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. We are preparing to comply with the mandated standards
within three to six months after they are published. Whether we are
successful in complying with these standards may depend on whether
providers, payors and others are also successful in complying with the
standards.
In addition, broad-based health information privacy legislation which may
restrict 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 inhibit third party processors in using, transmitting or
disclosing certain treatment and clinical data, or make such activities
more expensive to undertake, and hence less profitable to the EDI business.
It is difficult to predict the impact of the legislation described above,
but such legislation could materially adversely affect our EDI business.
UNAUTHORIZED ACCESS TO DATA CENTERS COULD ADVERSELY AFFECT OUR EDI BUSINESS
Unauthorized access to our EDI data centers and misappropriation of our
proprietary information could have a material adverse effect on our EDI
business and financial results. While we believe our current security
measures and the security measures used by third parties for whom we
process or transmit healthcare information are adequate, such unauthorized
access or misappropriation could occur.
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