<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, 2000
-------------
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. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding as of July 31,
2000 was 115,581,425.
<PAGE> 2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 2000 and December 31, 1999 3
Condensed consolidated statements of
operations - Three months ended June 30,
2000 and 1999; six months ended June 30,
2000 and 1999 4
Condensed consolidated statements of
cash flows - Six months ended
June 30, 2000 and 1999 5
Notes to condensed consolidated financial
statements - June 30, 2000 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities - Not Applicable 25
Item 4. Submission of Matters to a Vote of Security
Holders - Not Applicable 25
Item 5. Other Information - Not Applicable 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
2
<PAGE> 3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
---------- ----------
(unaudited) (Note 1)
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 345,824 $ 191,653
Trade accounts receivable and unbilled services, net 413,527 377,278
Investments in debt securities 33,527 32,476
Prepaid expenses 37,302 37,216
Deferred income taxes 16,685 --
Other current assets and receivables 26,932 27,991
Net assets of discontinued operation -- 122,981
---------- ----------
Total current assets 873,797 789,595
Property and equipment 565,808 574,090
Less accumulated depreciation (191,885) (174,406)
---------- ----------
373,923 399,684
Intangibles and other assets:
Intangibles, net 194,642 208,946
Investments in debt securities 77,685 76,902
Investments in marketable equity securities 595,267 45,237
Deferred income taxes -- 52,975
Deposits and other assets 43,073 37,908
---------- ----------
910,667 421,968
---------- ----------
Total assets $2,158,387 $1,611,247
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 713 $ 12
Accounts payable and accrued expenses 261,741 234,795
Credit arrangements, current 12,679 169,398
Unearned income 156,941 172,557
Income taxes payable 110,394 5,561
Deferred income taxes -- 15,041
Other current liabilities 835 508
---------- ----------
Total current liabilities 543,303 597,872
Long-term liabilities:
Credit arrangements, less current portion 8,745 9,570
Long-term obligations 12,574 7,290
Deferred income taxes 53,294 --
Other liabilities 9,750 4,756
---------- ----------
84,363 21,616
---------- ----------
Total liabilities 627,666 619,488
Shareholders' equity:
Preferred stock, none issued and outstanding
at June 30, 2000 and December 31, 1999,
respectively -- --
Common stock and additional paid-in capital,
115,334,607 and 115,118,347 shares issued
and outstanding at June 30, 2000 and
December 31, 1999, respectfully 872,268 788,247
Retained earnings 611,777 204,062
Accumulated other comprehensive income 48,811 1,677
Other equity (2,135) (2,227)
---------- ----------
Total shareholders' equity 1,530,721 991,759
---------- ----------
Total liabilities and shareholders' equity $2,158,387 $1,611,247
========== ==========
</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
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net revenue $423,107 $402,276 $837,952 $761,981
Costs and expenses:
Direct 255,901 216,687 508,310 410,593
General and administrative 142,597 123,119 280,726 232,601
Depreciation and amortization 22,749 20,015 45,871 37,815
Non-recurring charges:
Restructuring -- -- 58,592 --
Disposal of business 17,325 -- 17,325 --
-------- -------- -------- --------
438,572 359,821 910,824 681,009
-------- -------- -------- --------
(Loss) income from operations (15,465) 42,455 (72,872) 80,972
Transaction costs -- (3,464) -- (25,827)
Other income, net 3,193 1,157 5,141 1,589
-------- -------- -------- --------
Total other income (expense), net 3,193 (2,307) 5,141 (24,238)
-------- -------- -------- --------
(Loss) income from continuing operations before
income taxes (12,272) 40,148 (67,731) 56,734
Income tax (benefit) expense (4,050) 15,009 (22,350) 28,231
-------- -------- -------- --------
(Loss) income from continuing operations (8,222) 25,139 (45,381) 28,503
Income from discontinued operation, net of income taxes 6,176 10,041 16,770 15,291
-------- -------- -------- --------
(Loss) income before extraordinary gain (2,046) 35,180 (28,611) 43,794
Extraordinary gain from sale of discontinued operation,
net of income taxes 436,327 -- 436,327 --
-------- -------- -------- --------
Net income $434,281 $ 35,180 $407,716 $ 43,794
======== ======== ======== ========
Basic net income per share:
(Loss) income from continuing operations $ (0.07) $ 0.22 $ (0.39) $ 0.25
Income from discontinued operation 0.05 0.09 0.15 0.14
Extraordinary gain from sale of discontinued operation 3.78 -- 3.78 --
-------- -------- -------- --------
Basic net income per share $ 3.76 $ 0.31 $ 3.53 $ 0.39
======== ======== ======== ========
Diluted net income per share:
(Loss) income from continuing operations $ (0.07) $ 0.21 $ (0.39) $ 0.25
Income from discontinued operation 0.05 0.09 0.15 0.13
Extraordinary gain from sale of discontinued operation 3.78 -- 3.78 --
-------- -------- -------- --------
Diluted net income per share $ 3.76 $ 0.30 $ 3.53 $ 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
2000 1999
--------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 407,716 $ 43,794
Income from discontinued operation, net of income taxes (16,770) (15,291)
Gain on the sale of discontinued operation, net of income taxes (436,327) --
--------- --------
(Loss) income from continuing operations (45,381) 28,503
Adjustments to reconcile (loss) income from continuing operations
to net cash (used in) provided by operating activities:
Depreciation and amortization 45,871 37,815
Transaction costs -- 25,827
Restructuring charge 50,874 --
Loss on disposal of business 17,325 --
Provision for deferred income tax expense 79 1,417
Change in operating assets and liabilities (113,540) (68,678)
Other 93 581
--------- --------
Net cash (used in) provided by operating activities (44,679) 25,465
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 3,574 4,132
Acquisition of property and equipment (43,050) (91,693)
Proceeds from disposal of discontinued operation, net of expenses 391,500 --
Acquisition of businesses, net of cash acquired (8,419) 87,666
Payment of non-recurring transaction costs -- (22,755)
Purchases of debt securities, net (3,989) (32,753)
Purchases of equity investments (3,057) (10,640)
Other 1 (234)
--------- --------
Net cash provided by (used in) investing activities 336,560 (66,277)
FINANCING ACTIVITIES
Increase in lines of credit, net 700 5,459
Principal payments on credit arrangements, net (153,074) (4,911)
Issuance of common stock, net 8,599 11,709
Repurchase of common stock (8,510) --
Dividend from discontinued operation 17,086 9,705
Other -- (790)
--------- --------
Net cash (used in) provided by financing activities (135,199) 21,172
Effect of foreign currency exchange rate changes on cash (2,511) (3,175)
--------- --------
Increase (decrease) in cash and cash equivalents 154,171 (22,815)
Cash and cash equivalents at beginning of period 191,653 128,621
--------- --------
Cash and cash equivalents at end of period $ 345,824 $105,806
========= ========
</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, 2000
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 six month period ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1999 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 1999
financial statements have been reclassified to conform with the 2000 financial
statement presentation. The reclassifications had no effect on previously
reported net income, shareholders' equity or net income per share. The financial
statements do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
2. Stock Repurchase
On February 3, 2000, the Board of Directors authorized the Company to repurchase
up to $200 million of the Company's Common Stock. During the first six months of
2000, the Company repurchased 578,000 shares of its Common Stock for an
aggregate price of approximately $9.9 million.
To enhance its stock repurchase program, the Company sold put options to an
independent third party. These put options entitle the holder to sell a total of
500,000 shares of the Company's Common Stock to the Company on January 2, 2001
at $13.7125 per share. The transaction has been recorded as a component of
shareholders' equity.
3. Significant Customers
No one customer accounted for greater than 10% of consolidated net revenue for
the three and six months ended June 30, 2000. One customer accounted for 12.6%
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.
6
<PAGE> 7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
4. Restructuring Charge
In January 2000, the Company announced the adoption of a restructuring plan. In
connection with this plan, the Company recognized a restructuring charge of
$58.6 million. The restructuring charge consists of $33.2 million related to
severance payments, $11.3 million related to asset impairment write-offs and
$14.0 million of exit costs. As a part of this plan, 770 positions worldwide
will be eliminated and as of June 30, 2000, 438 individuals have been
terminated. Although positions eliminated were across all functions, most of the
eliminated positions were in the product development service group.
As of June 30, 2000, the following amounts were recorded (in thousands):
<TABLE>
<CAPTION>
Activity six months ended
June 30, 2000
------------------------------
Accruals Write-Offs/Payments Balance at June 30, 2000
-------- ------------------- ------------------------
<S> <C> <C> <C>
Severance and related costs $33,228 $(14,799) $18,429
Asset impairment write-offs 11,315 (11,315) --
Exit costs 14,049 (4,632) 9,417
------- -------- -------
$58,592 $(30,746) $27,846
======= ======== =======
</TABLE>
The above provisions and related restructuring reserves are estimates based on
the Company's judgment at June 30, 2000. Adjustments to the restructuring
provisions may be necessary in the future based on further development of
restructuring related costs.
5. Loss on Disposal
The Company completed the sale of its general toxicology operations in Ledbury,
Herefordshire, United Kingdom. This facility contributed less than one percent
of consolidated net revenue and was included in the product development segment.
In connection with the sale, the Company recognized a $17.3 million loss on
disposal.
6. Discontinued Operation
On May 26, 2000, the Company completed the sale of its electronic data
interchange unit, ENVOY Corporation ("ENVOY"), to Healtheon/WebMD Corp.
("Healtheon/WebMD"). Prior to the sale, ENVOY transferred its informatics
subsidiary, Synergy Health Care, Inc., to the Company. The Company received $400
million in cash and 35 million shares of Healtheon/WebMD common stock in
exchange for its entire interest in ENVOY and a warrant to acquire 10 million
shares of the Company's Common Stock at $40 per share, exercisable for four
years. During the second quarter of 2000, the Company recorded an extraordinary
gain on the sale of $436.3 million, net of income taxes of $184.7 million.
7
<PAGE> 8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
ENVOY has been treated as a discontinued operation. The accompanying
consolidated financial statements reflect the operating results through the date
of closing and balance sheet items of ENVOY separately. The results of the
discontinued operation do not reflect any interest expense, management fee or
transaction costs allocated by the Company.
The following is a summary of income from operations through the date of closing
of ENVOY (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 39,634 $ 54,137 $ 99,041 $ 107,746
======== ======== ======== =========
Income before income taxes $ 10,562 $ 16,520 $ 27,121 $ 28,044
Income taxes 4,386 6,479 10,351 12,753
-------- -------- -------- ---------
Net income $ 6,176 $ 10,041 $ 16,770 $ 15,291
======== ======== ======== =========
</TABLE>
7. Net Income Per Share
The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares:
Basic weighted average shares 115,394 114,451 115,417 112,004
Effect of dilutive securities:
Stock options -- 2,982 -- 3,080
------- ------- ------- -------
Diluted weighted average shares 115,394 117,433 115,417 115,084
======= ======= ======= =======
</TABLE>
Options to purchase approximately 32.5 million shares of common stock were
outstanding during the six months ended June 30, 2000, but were not included in
the computation of diluted net income per share because the effect would be
antidilutive.
Warrants to purchase 10 million shares of common stock were outstanding as of
June 30, 2000, but were not included in the computation of diluted net income
per share because the effect would be antidilutive.
Put options that entitle the holder to sell a total of 500,000 shares of the
Company's Common Stock to the Company were outstanding during the three and six
months ended June 30, 2000 but were not included in the computation of diluted
net income per share because the effect would be antidilutive.
8
<PAGE> 9
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 providing market research
solutions and strategic analysis to support healthcare decisions. During 2000
there were reclassifications between segments due to management changes of
certain business units. These changes are reflected in both the 2000 and 1999
periods shown below. The Company does not include net revenue and expenses
relating to the Internet initiative (approximately $125,000 and $5.1 million,
respectively, for the three months ended June 30, 2000 and $570,000 and $8.3
million, respectively, for the six months ended June 30, 2000), non-recurring
costs, interest income (expense) and income tax expense (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
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
Product development $202,469 $219,004 $402,965 $421,394
Commercialization 206,257 169,018 406,613 319,028
QUINTERNET(TM) informatics 14,256 14,254 27,804 21,559
-------- -------- -------- --------
$422,982 $402,276 $837,382 $761,981
======== ======== ======== ========
Income from operations:
Product development $ (4,585) $ 27,469 $(13,830) $ 52,772
Commercialization 16,711 16,871 32,380 30,687
QUINTERNET(TM) informatics (5,272) (1,885) (7,767) (2,487)
-------- -------- -------- --------
$ 6,854 $ 42,455 $ 10,783 $ 80,972
======== ======== ======== ========
</TABLE>
As of June 30, 2000 As of December 31, 1999
------------------- -----------------------
Total assets:
Product development $ 934,556 $ 865,607
Commercialization 363,640 334,772
QUINTERNET(TM) informatics 336,192 287,887
Internet initiative 523,999 --
Net assets of discontinued
operation -- 122,981
---------- ----------
$2,158,387 $1,611,247
========== ==========
9
<PAGE> 10
9. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and six months ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $434,281 $35,180 $407,716 $ 43,794
Other comprehensive loss:
Unrealized gain on marketable
securities, net of income taxes 56,516 3,809 66,623 3,577
Foreign currency adjustment (12,042) (5,162) (19,489) (14,274)
-------- ------- -------- --------
Comprehensive income $478,755 $33,827 $454,850 $ 33,097
======== ======= ======== ========
</TABLE>
10. Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance for revenue recognition under certain circumstances. The
accounting and disclosures prescribed by SAB 101 will be effective for the
fourth quarter of fiscal year 2001. The Company is currently evaluating the
impact the application of SAB 101 will have on its financial position or results
of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, 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.
10
<PAGE> 11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
We caution you that any such forward looking statements are further qualified by
important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, our ability to efficiently distribute backlog among therapeutic
business units and match demand to resources, actual operating performance, the
actual savings and operating improvements resulting from the restructuring, the
ability to maintain large client contracts or to enter into new contracts,
changes in trends in the pharmaceutical industry, the ability to create data
products from data licensed to us and the ability to operate successfully in new
lines of business, as set forth in its filings with the Securities and Exchange
Commission. See "Risk Factors" below for additional factors that could cause
actual results to differ.
Results of Continuing Operations
Three Months Ended June 30, 2000 and 1999
Net revenue for the second quarter of 2000 was $423.1 million, an increase of
$20.8 million or 5.2% over the second quarter of 1999 net revenue of $402.3
million. 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 1999 and the Company's acquisitions accounted for under
purchase accounting completed subsequent to the second quarter of 1999 which
contributed approximately $2.2 million of net revenue for the second quarter of
2000.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$255.9 million or 60.5% of net revenue for the second quarter of 2000 versus
$216.7 million or 53.9% of net revenue for the second quarter of 1999. The
increase in direct costs as a percentage of net revenue was primarily
attributable to realization rates during the second quarter of 2000 being lower
than historical levels.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $142.6 million or
33.7% of net revenue for the second quarter of 2000 versus $123.1 million or
30.6% of net revenue for the second quarter of 1999. Also included in general
and administrative expenses for the quarter ended June 30, 1999 were $913,000 of
incremental costs related to our Year 2000 Program. Excluding these incremental
costs, general and administrative expenses increased $20.4 million primarily due
to costs associated with our Internet initiative, implementation of a global
shared service center and delays in realizing the benefits of our restructuring
program.
Depreciation and amortization were $22.7 million or 5.4% of net revenue for the
second quarter of 2000 versus $20.0 million or 5.0% of net revenue for the
second quarter of 1999. The $2.7 million increase is primarily due to the
increase in the capitalized asset base of the Company.
11
<PAGE> 12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Consistent with our shift in focus of our preclinical operations from basic
toxicology to more advanced technologies such as genomics and proteomics, we
completed the sale of our general toxicology operations in Ledbury,
Herefordshire, UK. This facility was not contributing to our profitability and
represented less than one percent of our net revenue. In connection with this
sale, we recognized a $17.3 million loss on the disposal during the second
quarter of 2000.
Loss from operations was $15.5 million or (3.7%) of net revenue for the second
quarter of 2000 versus income from operations of $42.5 million or 10.6% of net
revenue for the second quarter of 1999. Excluding the non-recurring charge of
$17.3 million for the disposal of our Ledbury operations and the $5.0 million
for the Internet initiative, income from operations was $6.9 million or 1.6% of
net revenue for the second quarter of 2000.
Other income was $3.2 million for the second quarter of 2000 versus other
expense of $2.3 million for the second quarter of 1999. Excluding transaction
costs, other income was $1.2 million for the second quarter of 1999. The $2.0
million variation was primarily due to an increase in net interest income.
The effective income tax rate for the second quarter of 2000 was 33.0% versus a
37.4% effective income tax rate for the second quarter of 1999. Excluding the
transaction costs which are not generally deductible for income tax purposes,
the effective income tax rate for the second quarter of 1999 was 34.4%. Since we
conduct operations on a global basis, our effective income tax rate may vary.
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the three months ended June 30, 2000 and 1999. We do not include
net revenue and expenses relating to the Internet initiative and non-recurring
charges in our segment analysis. (Stated in millions)
<TABLE>
<CAPTION>
Net Revenue (Loss)/Income From Operations
------------------------------------ -------------------------------------------------
Growth % of Net % of Net
2000 1999 % 2000 Revenue 1999 Revenue
------ ------ ----------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Product development $ 202.5 $ 219.0 (7.5%) $ (4.6) (2.3)% $ 27.5 12.5%
Commercialization 206.3 169.0 22.0 16.7 8.1 16.9 10.0
QUINTERNET(TM) informatics 14.3 14.3 -- (5.3) (37.0) (1.9) (13.2)
------- ------- ------- ------
$ 423.1 $ 402.3 5.2% $ 6.8 1.6% $ 42.5 10.6%
======= ======= ======= ======
</TABLE>
The product development group's financial performance was negatively impacted
during the quarter by several factors, including less than expected new
business, realization rates that were lower than historical levels and the
effects of contracts with lower profit margins than we have historically
achieved. During the second quarter of 2000, the cancellation rate for clinical
trials decreased to the level we experienced during the first half of 1999 as
opposed to the second half of 1999.
12
<PAGE> 13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The commercialization group's financial performance is the result of strong
growth in the Americas region, primarily the US, offset by a weakening in the
Europe and Africa region, primarily in the United Kingdom and continental
Europe. A portion of this growth stems from the growth in the medical
communications and strategic consulting services. The commercialization group is
integrating informatics offerings into the commercialization offerings.
The QUINTERNET(TM) informatics group's performance was impacted by the
discontinuation of products that we expect to replace with more technologically
advanced products and the costs associated with web-enabling the data products
of the QUINTERNET(TM) informatics group.
Six Months Ended June 30, 2000 and 1999
Net revenue for the six months ended June 30, 2000 was $838.0 million, an
increase of $76.0 million or 10.0% over the six months ended June 30, 1999 net
revenue of $762.0 million. 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, 1999 and the Company's acquisitions accounted for
under purchase accounting completed subsequent to January 1, 1999 which
contributed approximately $22.3 million of net revenue for the first six months
of 2000 as compared to $10.3 million of net revenue for the first six months of
1999.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$508.3 million or 60.7% of net revenue for the first six months of 2000 versus
$410.6 million or 53.9% of net revenue for the first six months of 1999. The
increase in direct costs as a percentage of net revenue was primarily
attributable to a decrease in the realization rates during the first six months
of 2000.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $280.7 million or
33.5% of net revenue for the first six months of 2000 versus $232.6 million or
30.5% of net revenue for the first six months of 1999. Also included in general
and administrative expenses for the six months ended June 30, 1999 were $3.6
million of incremental costs related to our Year 2000 Program. Excluding these
incremental costs, general and administrative expenses increased $51.7 million
primarily due to costs associated with our Internet initiative, implementation
of a global shared service center and delays in realizing the benefits of our
restructuring program.
Depreciation and amortization were $45.9 million or 5.5% of net revenue for the
first six months of 2000 versus $37.8 million or 5.0% of net revenue for the
first six months of 1999. Amortization expense increased $1.7 million due to the
goodwill amortization resulting from the Company's 1999 acquisitions accounted
for under purchase accounting. The remaining $6.3 million increase is primarily
due to the increase in the capitalized asset base of the Company.
13
<PAGE> 14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In January 2000, we announced the adoption of a restructuring plan. In
connection with this plan, we recognized a restructuring charge of $58.6 million
during the quarter ended March 31, 2000. The restructuring charge consists of
$33.2 million related to severance payments, $11.3 million related to asset
impairment write-offs and $14.0 million of exit costs. As a part of this plan,
770 positions worldwide will be eliminated. Most of the eliminated positions
were in the product development service group.
During the six months ended June 30, 2000, we recognized a $17.3 million loss on
the disposal of a business as discussed above.
Loss from operations was $72.9 million or (8.7%) of net revenue for the first
six months of 2000 versus income from operations of $81.0 million or 10.6% of
net revenue for the first six months of 1999. Excluding the non-recurring
charges of $75.9 million and the $7.7 million for the Internet initiative,
income from operations was $10.8 million or 1.3% of net revenue for the first
six months of 2000.
Other income was $5.1 million for the first six months of 2000 versus other
expense of $24.2 million for the first six months of 1999. Excluding transaction
costs, other income was $1.6 million for the first six months of 1999. The $3.6
million variation was primarily due to an increase in net interest income.
The effective income tax rate for the first six months of 2000 was 33.0% versus
a 49.8% effective income tax rate for the first six months of 1999. Excluding
the transaction costs which are not generally deductible for income tax
purposes, the effective income tax rate for the first six months of 1999 was
34.2%. Since we conduct operations on a global basis, our effective income tax
rate may vary.
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the six months ended June 30, 2000 and 1999. We do not include net
revenue and expenses relating to the Internet initiative and non-recurring
charges in our segment analysis. (Stated in millions)
<TABLE>
<CAPTION>
Net Revenue (Loss)/Income From Operations
------------------------------------ -------------------------------------------------
Growth % of Net % of Net
2000 1999 % 2000 Revenue 1999 Revenue
------ ------ ----------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Product development $ 403.0 $ 421.4 (4.4)% $ (13.8) (3.4)% $ 52.8 12.5%
Commercialization 406.6 319.0 27.5 32.4 8.0 30.7 9.6
QUINTERNET(TM) informatics 27.8 21.6 29.0 (7.8) (27.9) (2.5) (11.5)
------- ------- ------- ------
$ 837.4 $ 762.0 9.9% $ 10.8 1.3% $ 81.0 10.6%
======= ======= ======= ======
</TABLE>
14
<PAGE> 15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The product development group's financial performance was negatively impacted by
several factors, including early termination and delays in clinical trials, less
than expected new business, realization rates that were lower than historical
levels, adjustments made in existing programs, higher operating costs in our
laboratory services, and the effects of contracts with lower profit margins than
we have historically achieved. During the second quarter of 2000, the
cancellation rate for clinical trials decreased to the level we experienced
during the first half of 1999 as opposed to the second half of 1999.
The commercialization group's net revenue growth includes approximately $4.3
million from an acquisition accounted for as a purchase that was completed
subsequent to the second quarter of 1999. The financial performance of this
group is the result of strong growth in the Americas region, primarily the US,
offset by a weakening in the Europe and Africa region, primarily in the United
Kingdom and continental Europe. A portion of this stems from the growth in the
medical communications and strategic consulting services. The commercialization
group is integrating informatics offerings into the commercialization offerings.
The net revenue for the QUINTERNET(TM) informatics group includes net revenue
from an acquisition accounted for as a purchase that was completed subsequent to
January 1, 1999 of $15.3 million for the first six months of 2000 as compared to
$6.8 million for the first six months of 1999. The QUINTERNET(TM) informatics
group's performance was impacted by the discontinuation of products that we
expect to replace with more technologically advanced products and the costs
associated with web-enabling the data products of the QUINTERNET(TM) informatics
group.
Liquidity and Capital Resources
Cash outflows from operations were $44.7 million for the six months ended June
30, 2000 versus cash inflows of $25.5 million for the comparable period of 1999.
Investing activities, for the six months ended June 30, 2000, consisted
primarily of $391.5 million of net proceeds from the sale of ENVOY, offset by
capital asset purchases. Capital asset purchases required an outlay of cash of
$43.1 million for the six months ended June 30, 2000 compared to an outlay of
$91.7 million for the same period in 1999. Capital asset expenditures for the
six months ended June 30, 1999 included approximately $35 million in connection
with the acquisition of the Hoechst Marion Roussel's Drug Innovation and
Approval Facility. The remainder of the purchase price, approximately $58
million, is expected to be paid in the second half of 2000 when the acquisition
of the physical facility is completed.
15
<PAGE> 16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Total working capital, excluding net assets of discontinued operation, was
$330.5 million as of June 30, 2000, an increase of $261.8 million versus working
capital of $68.7 million as of December 31, 1999. The increase results from
receiving $391.5 million of cash from the sale of ENVOY which is partially
offset by the cash payment of $143.75 million to redeem our 4.25% Convertible
Subordinated Notes. Net receivables from customers (trade accounts receivable
and unbilled services, net of unearned income) were $256.6 million at June 30,
2000 as compared to $204.7 million at December 31, 1999. As of June 30, 2000,
trade accounts receivable were $239.3 million versus $220.3 million at December
31, 1999. Unbilled services were $174.3 million at June 30, 2000 versus $157.0
million at December 31, 1999, offset by unearned income balances of $156.9
million and $172.6 million, respectively. The number of days revenue outstanding
in trade accounts receivable and unbilled services, net of unearned income, were
49 days at June 30, 2000, as compared to 38 days at December 31, 1999.
We have a $150 million senior unsecured credit facility with a U.S. bank. In
addition, we have available to us a (pound sterling) 10.0 million (approximately
$15.2 million) unsecured line of credit and a (pound sterling) 1.5 million
(approximately $2.3 million) general banking facility with a U.K. bank. At June
30, 2000, we did not have any outstanding balances on these facilities.
Based on our current operating plan, we believe that our available cash and cash
equivalents and investments in marketable securities, together with future cash
flows from operations and borrowings under our line of credit agreements will be
sufficient to meet our foreseeable cash needs in connection with our operations.
As part of our business strategy, we review many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, we
are continually evaluating new acquisition and expansion possibilities. We may
from time to time seek to obtain debt or equity financing in our ordinary course
of business or to facilitate possible acquisitions or expansion.
16
<PAGE> 17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
RISK FACTORS
In addition to the other information provided in our reports, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice has grown substantially over the past decade,
and we have benefited from this trend. Some industry commentators believe that
the rate of growth of outsourcing will continue to trend downward. If these
industries reduce their tendency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.
Recently, we also believe we have been negatively impacted by pending mergers
and other factors in the pharmaceutical industry, which appear to have slowed
decision making by our customers and delayed certain trials. A continuation of
these trends would have an ongoing adverse effect on our business. 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.
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 that 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.
17
<PAGE> 18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
For example, we are expanding our pharmaceutical and healthcare information and
market research services. These services involve analyzing healthcare
information to study aspects of current healthcare products and procedures for
use in developing new products and services or in analyzing sales and marketing
of existing products. In addition to the other difficulties associated with the
development of any new service, our ability to develop these services 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 maintain our rate of growth in the future.
Our plan to web-enable our product development and commercialization services
may negatively impact our results in the short term.
We are currently making a substantial investment in developing an Internet
platform for our product development and commercialization services, but we do
not believe that we will see any positive impact to our revenues from this
investment over the short term. We have entered into an agreement with
Healtheon/WebMD for them to provide web-enablement services over an
eighteen-month period to help us develop this platform. If Healtheon/WebMD fails
to perform as expected under this agreement or if there are substantial delays
in developing and implementing this platform, we may have to make substantial
further investments, internally or with Healtheon/WebMD or third parties, to
achieve our objectives. Also, these expenditures are likely to impact negatively
our profitability, at least until our web-enabled products are commercialized.
Over time, we envision continuing to invest in extending and enhancing our
Internet platform in other ways to further support and improve our services. We
cannot assure you that any improvements in revenues resulting from our Internet
capabilities will be sufficient to offset our investments in the Internet
platform. Our results could be further negatively impacted if our competitors
are able to execute their services on a web-based platform before we can launch
our Internet services or if they are able to structure a platform that attracts
clients away from our services.
18
<PAGE> 19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our ability to provide informatics services depends on our agreement with
Healtheon/WebMD.
In order to provide our informatics services, we need access to healthcare data.
Prior to the sale of our ENVOY subsidiary, we obtained this data directly from
ENVOY. Following the sale of ENVOY to Healtheon/WebMD, we entered into a data
services agreement with Healtheon/WebMD to continue to provide us with the ENVOY
data, as well as other data collected by Healtheon/WebMD. If Healtheon/WebMD
fails to perform under this agreement or our access to data is otherwise
significantly limited, we would be unable to provide some or all of those
services, which would have a negative impact on our business.
The potential loss or delay of our large contracts could adversely affect our
results.
Many of our contract research customers can terminate our contracts upon 15-90
days' notice. In the event of termination, our contracts often provide for fees
for winding down the project, but these fees may not be sufficient for us to
maintain our margins, and termination may result in lower resource utilization
rates. Thus, the loss or delay of a large contract or the loss or delay of
multiple contracts could adversely affect our net revenue and profitability. We
believe that this risk has potentially greater effect as we pursue larger
outsourcing arrangements with global pharmaceutical companies, which may
encompass global clinical trials at a number of sites and cross many service
lines. Also, over the past year we have observed that customers may be more
willing to delay, cancel or reduce contracts more rapidly than in the past. If
this trend continues, it could become more difficult for us to balance our
resources with demands for our services and our financial results could be
adversely affected.
Our backlog may not be indicative of future results.
We report backlog, $2.09 billion at June 30, 2000, based on anticipated net
revenue from uncompleted projects that a customer has authorized. We cannot
assure you that the backlog we have reported will be indicative of our future
results. A number of factors may affect our backlog, including:
- the variable size and duration of projects (some are performed over
several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
Also, if customers delay projects, the projects will remain in backlog, but will
not generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues are not indicative of the
future relationship.
19
<PAGE> 20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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. Our performance
also depends on our ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings, or any key executive, or our inability to continue to
attract and retain qualified personnel could have a material adverse effect on
our business, results of operations or financial condition.
Our product development services create a risk of liability from clinical trial
participants and the parties with whom we contract.
We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive. If
we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards, trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants.
We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. Nonetheless, it is possible we could be found
liable for those types of losses.
In addition to supervising tests or performing laboratory analysis, we also own
a number of labs where Phase I clinical trials are conducted. Phase I clinical
trials involve testing a new drug on a limited number of healthy individuals,
typically 20 to 80 persons, to determine the drug's basic safety. We also could
be liable for the general risks associated with ownership of such a facility.
These risks include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or breach
of contract if one of our laboratories inaccurately reports or fails to report
lab results or if our informatics products violate rights of third parties. We
maintain insurance to cover ordinary risks but any insurance might not be
adequate, and it would not cover the risk of a customer deciding not to do
business with us as a result of poor performance.
20
<PAGE> 21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Relaxation of government regulation could decrease the need for the services we
provide.
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies through
the regulatory drug approval process. Any relaxation in regulatory approval
standards could eliminate or substantially reduce the need for our services,
and, as a result, our business, results of operations and financial condition
could be materially adversely affected. Potential regulatory changes under
consideration in the United States and elsewhere include mandatory substitution
of generic drugs for patented drugs, relaxation in the scope of regulatory
requirements or the introduction of simplified drug approval 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.
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.
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.
21
<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our services are subject to evolving industry standards and rapid technological
changes.
The markets for our services, particularly our QUINTERNET(TM) informatics
services, which include our 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.
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 45.8% of our 1999 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 and any trends associated with the transition to the
euro, 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.
We may be adversely affected by customer concentration.
Although we do not have any customers that accounted for 10% of our net revenues
for the three and six months ended June 30, 2000, we did have one customer that
accounted for 11% of our net revenues for the year ended December 31, 1999.
These revenues resulted from services provided by our product development and
commercialization service groups. If any large customer decreases or terminates
its relationship with us, our business, results of operations or financial
condition could be materially adversely affected.
22
<PAGE> 23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
New healthcare legislation or regulation could restrict our informatics
business.
The Department of Health and Human Services published proposed regulations
setting privacy standards to protect health information that is transmitted
electronically in the Federal Register on November 3, 1999. The comment period
for these proposed rules ended February 17, 2000. We understand generally that
final regulations will be issued no earlier than 60 days after the end of the
comment period, however, HHS has indicated that a significant delay is likely
which will add additional months to the expected date of the final rules. While
the proposed rules, if promulgated without modification, likely would not
restrict us from de-identifying individual health information and providing such
de-identified, aggregated data to our Synergy subsidiary for purposes of
analysis, the proposed rule may be changed in response to comments and further
modification and could be preempted by legislation. Such legislative or
regulatory changes could occur as early as this year and their impact cannot be
predicted. If legislation or a more restrictive regulation is adopted, it could
inhibit third party processors in using, transmitting or disclosing health data
(even if they have been de-identified) for purposes other than facilitating
payment or performing other clearinghouse functions which would restrict our
ability to obtain data for use in our informatics services. In addition, it
could require us to establish uniform specifications for obtaining de-identified
data, so that de-identified data obtained from different sources could be
aggregated. Third party processors, under the proposed rules, or modified rules,
also may require us to provide indemnity from claims against them arising from
our use of data, even in de-identified form. While the impact of developments in
legislation, regulations or the demands of third party processors is difficult
to predict, each could materially adversely affect our informatics business.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a result of the sale of ENVOY, the Company received 35 million shares of
Healtheon/WebMD common stock. These securities are classified as
available-for-sale and are recorded at fair value in the financial statements.
These securities are subject to equity price risk.
During the three months ended June 30, 2000, the Company's $143.75 million of
4.25% Convertible Subordinated Notes matured and was repaid.
The Company did not have any other material changes in market risk from December
31, 1999.
23
<PAGE> 24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
Beginning on September 30, 1999, several purported class action lawsuits were
filed in the United States District Court for the Middle District of North
Carolina against us and several of our executive officers and directors on
behalf of all persons who purchased or otherwise acquired shares of our common
stock between July 16, 1999, and September 15, 1999. These actions were
subsequently consolidated and plaintiffs filed an amended complaint purporting
to represent a class of purchasers of Quintiles stock or call options, and
sellers of put options, during the period between April 21, 1999, and September
15, 1999. The complaints allege violations of Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs seek unspecified damages,
plus costs and expenses, including attorneys' fees and experts' fees. We believe
that the claims are without merit and intend to defend the suit vigorously.
In February 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit in the
State Court of Fulton County, Georgia, naming as defendants Richard L. Borison,
Bruce I. Diamond, 14 pharmaceutical companies and Quintiles Laboratories
Limited, one of our subsidiaries. We have reached a settlement with the
Plaintiff under which the Plaintiff acknowledged that we had no liability with
respect to the lawsuit, and the Plaintiff has released all claims against us
under the lawsuit. The Plaintiff has filed a Stipulation of Dismissal with
Prejudice, which when entered by the Court will serve to dismiss us from the
case.
We are also a party in certain other pending litigation arising in the normal
course of our business. While the final outcome of such litigation cannot be
predicted with certainty, it is the opinion of management that the outcome of
these matters would not materially affect our consolidated financial position or
results of operations.
Item 2. Changes in Securities
During the three months ended June 30, 2000, options to purchase 38,000 shares
of Common Stock were exercised at an average exercise price of $3.8833 per share
in reliance on Rule 701 under the Securities Act of 1933. Such options were
issued by the Company prior to becoming subject to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to its
Non-qualified Employee Incentive Stock Option Plan.
On May 26, 2000, the Company issued to Healtheon/WebMD a warrant to purchase 10
million shares of the Company's Common Stock at an exercise price of $40 per
share. The warrant was issued as part of the consideration exchanged for shares
of Healtheon/WebMD common stock in connection with the Company's sale of its
ENVOY subsidiary to Healtheon/WebMD. The Company issued the warrant under the
exemptions provided by Section 3(a)(10) of the Securities Act, pursuant to a
fairness hearing conducted by the Securities Administrator of the Office of the
North Carolina Secretary of State, and Section 4(2) of the Securities Act, as a
private placement.
24
<PAGE> 25
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On June 30, 2000, the Company sold put options to an institutional investor for
consideration of $925,000. The put options entitle the holder to sell a total of
500,000 shares of the Company's Common Stock to the Company on January 2, 2001
at $13.7125 per share, if exercised. The Company sold the put options in a
private placement in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act.
Item 3. Defaults upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 19, 2000, the Company held its Annual Meeting of Shareholders
during which the shareholders:
(1) Elected three nominees to serve as Class II directors with terms
continuing until the Annual Meeting of Shareholders in 2003. The
votes were cast as follows:
Broker
For Withheld Non-Vote
---------- --------- --------
Dennis B. Gillings, Ph.D. 93,755,177 1,394,418 --
Chester W. Douglass, Ph.D. 93,909,905 1,239,690 --
Virginia V. Weldon, M.D. 93,909,353 1,240,242 --
(2) Approved the Company's 1999 Employee Stock Purchase Plan. The votes
were cast as follows:
Broker
For Against Abstain Non-Vote
---------- --------- ------- --------
Approval of the Company's
1999 Employee Stock
Purchase Plan 87,961,631 6,665,145 522,819 --
(3) Ratified the appointment of Arthur Andersen LLP as independent
public accountants for the Company and its subsidiaries for the
fiscal year ending December 31, 2000. The votes were cast as
follows:
Broker
For Against Abstain Non-Vote
---------- ------- ------- --------
Ratification of Arthur
Andersen LLP 94,798,500 132,531 218,564 --
Item 5. Other Information -- Not applicable
25
<PAGE> 26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
10.01 Data Rights Agreement, dated as of May 26,
2000, by and between Healtheon/WebMD
Corporation and the Company [Note: Certain
confidential portions of this exhibit have been
omitted, as indicated in the exhibit with an
asterisk (*) and filed separately with the
Securities and Exchange Commission.]
27.01 Financial Data Schedule for the Six Months
Ended June 30, 2000 (for SEC use only)
(b) During the three months ended June 30, 2000, the Company filed three
reports on Form 8-K.
The Company filed a Form 8-K, dated April 20, 2000, including its press release
announcing the Company's earnings information for the period ended March 31,
2000.
The Company filed a Form 8-K, dated May 4, 2000, including its press release
announcing the amendment of its Rights Agreement between the Company and First
Union National Bank.
The Company filed a Form 8-K, dated May 26, 2000, including its press release
announcing the completion of the sale of its electronic data interchange unit,
ENVOY Corporation, to Healtheon/WebMD Corp., and attaching the agreement as an
exhibit.
No other reports on Form 8-K were filed during the three months ended June 30,
2000.
26
<PAGE> 27
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 14, 2000 /s/ Dennis B. Gillings
-------------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date August 14, 2000 /s/ James L. Bierman
-------------------- -------------------------------------------
James L. Bierman, Chief Financial Officer
27
<PAGE> 28
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
10.01 Data Rights Agreement, dated as of May 26,
2000, by and between Healtheon/WebMD
Corporation and the Company [Note: Certain
confidential portions of this exhibit have been
omitted, as indicated in the exhibit with an
asterisk (*) and filed separately with the
Securities and Exchange Commission.]
27.01 Financial Data Schedule for the Six
Months Ended June 30, 2000 (for SEC
use only)
