<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 September 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. [X] Yes [ ] No
The number of shares of Common Stock, $.01 par value, outstanding as of
October 31, 2000 was 115,284,494.
<PAGE> 2
Quintiles Transnational Corp. and Subsidiaries
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
September 30, 2000 and December 31, 1999 3
Condensed consolidated statements of
operations - Three months ended
September 30, 2000 and 1999; nine months
ended September 30, 2000 and 1999 4
Condensed consolidated statements of cash
flows - Nine months ended September 30, 2000
and 1999 5
Notes to condensed consolidated financial
statements - September 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 25
Item 3. Defaults upon Senior Securities - Not Applicable 25
Item 4. Submission of Matters to a Vote of Security
Holders - Not Applicable 25
Item 5. Other Information - Not Applicable 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
2
<PAGE> 3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ ------------
(unaudited) (Note 1)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 299,908 $ 191,653
Trade accounts receivable and unbilled services, net 422,008 377,278
Investments in debt securities 35,052 32,476
Prepaid expenses 32,950 37,216
Deferred income taxes 11,999 --
Other current assets and receivables 30,656 27,991
Net assets of discontinued operation -- 122,981
----------- -----------
Total current assets 832,573 789,595
Property and equipment 576,870 574,090
Less accumulated depreciation (201,850) (174,406)
----------- -----------
375,020 399,684
Intangibles and other assets:
Intangibles, net 195,388 208,946
Investments in debt securities 75,128 76,902
Investments in marketable equity securities 675,889 45,237
Deferred income taxes -- 52,975
Deposits and other assets 39,893 37,908
----------- -----------
986,298 421,968
----------- -----------
Total assets $ 2,193,891 $ 1,611,247
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 10,363 $ 12
Accounts payable and accrued expenses 263,611 234,795
Credit arrangements, current 11,967 169,398
Unearned income 158,554 172,557
Income taxes payable 77,497 5,561
Deferred income taxes -- 15,041
Other current liabilities 3,092 508
----------- -----------
Total current liabilities 525,084 597,872
Long-term liabilities:
Credit arrangements, less current portion 20,910 16,860
Deferred income taxes 66,366 --
Other liabilities 8,639 4,756
----------- -----------
95,515 21,616
----------- -----------
Total liabilities 620,999 619,488
Shareholders' equity:
Preferred stock, none issued and outstanding
at September 30, 2000 and December 31, 1999,
respectively -- --
Common stock and additional paid-in capital,
115,424,992 and 115,118,347 shares issued
and outstanding at September 30, 2000 and
December 31, 1999, respectively 872,194 788,247
Retained earnings 616,341 204,062
Accumulated other comprehensive income 86,442 1,677
Other equity (2,085) (2,227)
----------- -----------
Total shareholders' equity 1,572,892 991,759
----------- -----------
Total liabilities and shareholders' equity $ 2,193,891 $ 1,611,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE> 4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net revenue $412,344 $ 402,497 $ 1,250,296 $ 1,164,478
Costs and expenses:
Direct 247,577 219,988 755,887 630,581
General and administrative 141,042 132,701 421,768 365,302
Depreciation and amortization 22,934 21,811 68,805 59,626
Non-recurring charges:
Restructuring -- -- 58,592 --
Disposal of business -- -- 17,325 --
-------- ----------- ----------- -----------
411,553 374,500 1,322,377 1,055,509
-------- ----------- ----------- -----------
Income (loss) from operations 791 27,997 (72,081) 108,969
Transaction costs -- (281) -- (26,108)
Other income, net 6,022 766 11,163 2,355
-------- ----------- ----------- -----------
Total other income (expense), net 6,022 485 11,163 (23,753)
-------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes 6,813 28,482 (60,918) 85,216
Income tax expense (benefit) 2,248 7,982 (20,102) 36,213
-------- ----------- ----------- -----------
Income (loss) from continuing operations 4,565 20,500 (40,816) 49,003
Income from discontinued operation, net of income taxes -- 10,679 16,770 25,970
-------- ----------- ----------- -----------
Income (loss) before extraordinary gain 4,565 31,179 (24,046) 74,973
Extraordinary gain from sale of discontinued operation,
net of income taxes -- -- 436,327 --
-------- ----------- ----------- -----------
Net income $ 4,565 $ 31,179 $ 412,281 $ 74,973
======== =========== =========== ===========
Basic net income per share:
Income (loss) from continuing operations $ 0.04 $ 0.18 $ (0.35) $ 0.43
Income from discontinued operation 0.00 0.09 0.14 0.23
Extraordinary gain from sale of discontinued operation 0.00 0.00 3.77 0.00
-------- ----------- ----------- -----------
Basic net income per share $ 0.04 $ 0.27 $ 3.56 $ 0.66
======== =========== =========== ===========
Diluted net income per share:
Income (loss) from continuing operations $ 0.04 $ 0.18 $ (0.35) $ 0.42
Income from discontinued operation 0.00 0.09 0.14 0.23
Extraordinary gain from sale of discontinued operation 0.00 0.00 3.77 0.00
-------- ----------- ----------- -----------
Diluted net income per share $ 0.04 $ 0.27 $ 3.56 $ 0.65
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE> 5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 412,281 $ 74,973
Income from discontinued operation, net of income taxes (16,770) (25,970)
Gain on the sale of discontinued operation, net of income taxes (436,327) --
--------- ---------
(Loss) income from continuing operations (40,816) 49,003
Adjustments to reconcile (loss) income from continuing operations
to net cash (used in) provided by operating activities:
Depreciation and amortization 68,805 59,626
Transaction costs -- 26,108
Restructuring charge 50,874 --
Loss on disposal of business 17,325 --
(Benefit) provision for deferred income tax expense (8,437) 2,899
Change in operating assets and liabilities (146,299) (70,997)
Other (184) 363
--------- ---------
Net cash (used in) provided by operating activities (58,732) 67,002
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 6,379 4,367
Acquisition of property and equipment (73,323) (122,483)
Proceeds from disposal of discontinued operation, net of expenses 391,500 --
Acquisition of businesses, net of cash acquired (15,169) 85,380
Payment of non-recurring transaction costs -- (24,733)
Purchases of debt securities, net (2,160) (10,419)
Purchases of equity investments (6,092) (12,424)
Other (3) (763)
--------- ---------
Net cash provided by (used in) investing activities 301,132 (81,075)
FINANCING ACTIVITIES
Increase in lines of credit, net 10,351 3,334
Principal payments on credit arrangements, net (156,402) (10,382)
Issuance of common stock, net 14,394 16,331
Repurchase of common stock (13,455) --
Dividend from discontinued operation 17,086 52,581
Other 1 938
--------- ---------
Net cash (used in) provided by financing activities (128,025) 62,802
Effect of foreign currency exchange rate changes on cash (6,120) (2,130)
--------- ---------
Increase in cash and cash equivalents 108,255 46,599
Cash and cash equivalents at beginning of period 191,653 128,621
--------- ---------
Cash and cash equivalents at end of period $ 299,908 $ 175,220
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE> 6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
September 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 nine month period ended September
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.
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 nine months
of 2000, the Company entered into agreements to repurchase 988,000 shares of its
Common Stock for an aggregate price of approximately $16.6 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
One customer accounted for 10.5%, 11.3% and 11.8% of consolidated net revenue
for the three months ended September 30, 2000 and the three and nine months
ended September 30, 1999, respectively. No one customer accounted for 10% of
consolidated net revenue for the nine months ended September 30, 2000. These
revenues were primarily 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, approximately 770 positions
worldwide will be eliminated and as of September 30, 2000, 583 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 September 30, 2000, the following amounts were recorded (in thousands):
Activity nine months ended
September 30, 2000
------------------------------
Balance at
Accruals Write-Offs/Payments September 30, 2000
-------- ------------------- ------------------
Severance and related costs $ 33,228 $ (18,806) $ 14,422
Asset impairment write-offs 11,315 (11,315 --
Exit costs 14,049 (7,726) 6,323
-------- --------- ---------
$ 58,592 $ (37,847) $ 20,745
======== ========= =========
The above provisions and related restructuring reserves are estimates based on
the Company's judgment at September 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. which
subsequently changed its name to WebMD Corporation ("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
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 nine months ended September 30, 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):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Net revenue N/A $55,330 $99,041 $163,076
======= ======= ========
Income before income taxes N/A $16,829 27,121 $ 44,873
Income taxes N/A 6,150 10,351 18,903
------- ------- --------
Net income N/A $10,679 $16,770 $ 25,970
======= ======= ========
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):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Weighted average shares:
Basic weighted average shares 115,702 114,907 115,711 112,994
Effect of dilutive securities:
Stock options 2,437 1,857 -- 2,312
------- ------- ------- -------
Diluted weighted average shares 118,139 116,764 115,711 115,306
======= ======= ======= =======
Options to purchase approximately 13.3 million shares of common stock were
outstanding during the three months ended September 30, 2000, but were not
included in the computation of diluted net income per share because the effect
would be antidilutive.
The effect of options outstanding for the nine months ended September 30, 2000
is not included in the computation of diluted net income per share because their
effect on loss from continuing operations would have been antidilutive.
Warrants to purchase 10 million shares of common stock were outstanding during
the three and nine months ended September 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
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 nine
months ended September 30, 2000 but were not included in the computation of
diluted net income per share because the effect would be antidilutive.
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 $228,000 and $9.1 million,
respectively, for the three months ended September 30, 2000 and $798,000 and
$17.4 million, respectively, for the nine months ended September 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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
----- ---- ----- ----
<S> <C> <C> <C> <C>
Net revenue:
Product development $ 201,610 $ 203,788 $ 604,575 $ 625,182
Commercialization 196,167 184,678 602,780 503,706
QUINTERNET(TM) informatics 14,339 14,031 42,143 35,590
--------- --------- ----------- -----------
$ 412,116 $ 402,497 $ 1,249,498 $ 1,164,478
========= ========= =========== ===========
Income from operations:
Product development $ 2,220 $ 11,745 $ (11,610) $ 64,517
Commercialization 11,433 18,012 43,813 48,699
QUINTERNET(TM) informatics (4,017) (1,760) (11,784) (4,247)
--------- --------- ----------- -----------
$ 9,636 $ 27,997 $ 20,419 $ 108,969
========= ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------ -----------------------
<S> <C> <C>
Total assets:
Product development $ 945,557 $ 865,607
Commercialization 367,844 334,772
QUINTERNET(TM) informatics 343,376 287,887
Internet initiative 537,114 --
Net assets of discontinued
operation -- 122,981
----------- -----------
$ 2,193,891 $ 1,611,247
=========== ===========
</TABLE>
9
<PAGE> 10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
9. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and nine months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,565 $31,179 $ 412,281 $ 74,973
Other comprehensive income (loss):
Unrealized gain on marketable securities,
net of income taxes 49,617 641 116,240 4,218
Foreign currency adjustment (11,984) 7,572 (31,473) (6,702)
-------- ------- --------- --------
Comprehensive income $ 42,198 $39,392 $ 497,048 $ 72,489
======== ======= ========= ========
</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 first
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 our judgement concerning the future and are subject to risks and
uncertainties that could cause our 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 our 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 September 30, 2000 and 1999
----------------------------------------------
Net revenue for the third quarter of 2000 was $412.3 million, an increase of
$9.8 million or 2.4% over the third quarter of 1999 net revenue of $402.5
million. Factors contributing to the growth included an increase of contract
service offerings, the provision of increased services rendered under existing
contracts and the initiation of services under contracts awarded subsequent to
the third quarter of 1999. We experienced growth in the Americas and Asia
Pacific regions. The decrease that we experienced in the Europe and Africa
region was primarily due to the effect of foreign currency fluctuations related
to the strengthening of the US dollar relative to the euro and other European
currencies.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$247.6 million or 60.0% of net revenue for the third quarter of 2000 versus
$220.0 million or 54.7% of net revenue for the third quarter of 1999. The
increase in direct costs as a percentage of net revenue was primarily
attributable to realization rates during the third 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 $141.0 million or
34.2% of net revenue for the third quarter of 2000 versus $132.7 million or
33.0% of net revenue for the third quarter of 1999. Also included in general and
administrative expenses for the quarter ended September 30, 1999 were $2.8 of
incremental costs related to our Year 2000 Program. Excluding these incremental
costs, general and administrative expenses increased $11.2 million primarily due
to costs associated with our Internet initiative and implementation of a global
shared service center.
Depreciation and amortization were $22.9 million or 5.6% of net revenue for the
third quarter of 2000 versus $21.8 million or 5.4% of net revenue for the third
quarter of 1999. The $1.1 million increase is primarily due to the increase in
our capitalized asset base.
11
<PAGE> 12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Income from operations was $.791 million or .2% of net revenue for the third
quarter of 2000 versus $28.0 million or 7.0% of net revenue for the third
quarter of 1999. Excluding the $8.8 million for the Internet initiative, income
from operations was $9.6 million or 2.3% of net revenue for the third quarter of
2000.
Other income was $6.0 million for the third quarter of 2000 versus $.485 million
for the third quarter of 1999. Excluding transaction costs, other income was
$.766 million for the third quarter of 1999. The $5.3 million variation was
primarily due to an increase in net interest income as a result of an increase
in investable funds and a decrease in debt.
The effective income tax rate for the third quarter of 2000 was 33.0% versus a
28.0% effective income tax rate for the third quarter of 1999. Excluding the
transaction costs which are not generally deductible for income tax purposes,
the effective income tax rate for the third quarter of 1999 was 27.8%. 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 September 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, (dollars 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 $ 201.6 $ 203.8 (1.1%) $ 2.2 1.1% $ 11.7 5.8%
Commercialization 196.2 184.7 6.2% 11.4 5.8 18.0 9.8
QUINTERNET(TM) informatics 14.3 14.0 2.2% (4.0) (28.0) (1.8) (12.5)
------- ------- ----- ------
$ 412.1 $ 402.5 2.4% $ 9.6 2.3% $ 28.0 7.0%
======= ======= ===== ======
</TABLE>
The product development group's financial performance was negatively impacted
during the quarter by several factors, including less than expected new business
and the effects of contracts with lower profit margins than we have historically
achieved. We began to realize some of the benefits from our restructuring during
the third quarter of 2000.
12
<PAGE> 13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The commercialization group's financial performance was negatively impacted
during the quarter by several factors, including less than expected new business
and the effect of large contracts being converted in-house by our customers
instead of being renewed. We believe these factors will continue to negatively
impact us over the next few quarters.
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.
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
Net revenue for the nine months ended September 30, 2000 was $1.3 billion, an
increase of $85.8 million or 7.4% over the nine months ended September 30, 1999
net revenue of $1.2 billion. Factors contributing to the growth included an
increase of contract service offerings, the provision of increased services
rendered under existing contracts, the initiation of services under contracts
awarded subsequent to September 30, 1999 and our acquisitions accounted for
under purchase accounting completed subsequent to January 1, 1999. These
acquisitions contributed approximately $34.0 million of net revenue for the
first nine months of 2000 as compared to $21.3 million of net revenue for the
first nine months of 1999. We experienced growth in the Americas and Asia
Pacific regions. The decrease that we experienced in the Europe and Africa
region was primarily due to the effect of foreign currency fluctuations related
to the strengthening of the US dollar relative to the euro and other European
currencies.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$755.9 million or 60.5% of net revenue for the first nine months of 2000 versus
$630.6 million or 54.2% of net revenue for the first nine months of 1999. The
increase in direct costs as a percentage of net revenue was primarily
attributable to realization rates during the first nine months 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 $421.8 million or
33.7% of net revenue for the first nine months of 2000 versus $365.3 million or
31.4% of net revenue for the first nine months of 1999.
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,
approximately 770 positions worldwide will be eliminated, of which 583 were
eliminated in the first nine months of 2000. Most of the eliminated positions
were in the product development service group.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Also included in general and administrative expenses for the nine months ended
September 30, 1999 were $6.4 million of incremental costs related to our Year
2000 Program. Excluding these incremental costs, general and administrative
expenses increased $62.9 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 $68.8 million or 5.5% of net revenue for the
first nine months of 2000 versus $59.6 million or 5.1% of net revenue for the
first nine months of 1999. Amortization expense increased $1.6 million due to
the goodwill amortization resulting from our 1999 acquisitions accounted for
under purchase accounting. The remaining $7.5 million increase is primarily due
to the increase in our capitalized asset base.
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.
Loss from operations was $72.1 million or (5.8%) of net revenue for the first
nine months of 2000 versus income from operations of $109.0 million or 9.4% of
net revenue for the first nine months of 1999. Excluding the non-recurring
charges of $75.9 million and the $16.6 million for the Internet initiative,
income from operations was $20.4 million or 1.6% of net revenue for the first
nine months of 2000.
Other income was $11.2 million for the first nine months of 2000 versus other
expense of $23.8 million for the first nine months of 1999. Excluding
transaction costs, other income was $2.4 million for the first nine months of
1999. The $8.8 million variation was primarily due to an increase in net
interest income as a result of an increase in investable funds and a decrease in
debt.
The effective income tax rate for the first nine months of 2000 was 33.0% versus
a 42.5% effective income tax rate for the first nine months of 1999. Excluding
the transaction costs which are not generally deductible for income tax
purposes, the effective income tax rate for the first nine months of 1999 was
32.5%. Since we conduct operations on a global basis, our effective income tax
rate may vary.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the nine months ended September 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, (dollars 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 $ 604.6 $ 625.2 (3.3%) $ (11.6) (1.9%) $ 64.5 10.3%
Commercialization 602.8 503.7 19.7 43.8 7.3 48.7 9.7
QUINTERNET(TM) informatics 42.1 35.6 18.4 (11.8) (28.0) (4.3) (11.9)
-------- -------- ------- -------
$1,249.5 $1,164.5 7.3% $ 20.4 1.6% $ 109.0 9.4%
======== ======== ======= =======
</TABLE>
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, utilization 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 first nine months 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 net revenue for the commercialization group includes net revenue from an
acquisition accounted for as a purchase that was completed subsequent to the
second quarter of 1999 of $7.7 million for the first nine months of 2000 as
compared to $2.2 million for the first nine months of 1999. The financial
performance of the commercialization group is the result of growth in the
Americas region during the first six months offset by a weakening in the Europe
and Africa region, primarily in the United Kingdom and continental Europe. A
portion of the performance of this group stems from the growth in the medical
communications and strategic consulting services. During the third quarter of
2000, the Americas region was negatively impacted by less than expected new
business and the effect of large contracts being taken in-house by our customers
instead of being renewed. We believe these factors will continue to negatively
impact us over the next few quarters.
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 $21.8 million for the first nine months of 2000 as compared
to $16.1 million for the first nine 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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash outflows from operations were $58.7 million for the nine months ended
September 30, 2000 versus cash inflows of $67.0 million for the comparable
period of 1999. Investing activities, for the nine months ended September 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 $73.3 million for the nine months ended September 30, 2000
compared to an outlay of $122.5 million for the same period in 1999. Capital
asset expenditures for the nine months ended September 30, 1999 included
approximately $35 million in connection with the acquisition of the Aventis
S.A.'s (formerly Hoechst Marion Roussel) Drug Innovation and Approval Facility.
We believe that we will either pay the remainder of the purchase price,
approximately $58 million, or enter into a long-term lease for the facility in
late 2000 or 2001.
Total working capital, excluding net assets of discontinued operation, was
$307.5 million as of September 30, 2000, an increase of $238.7 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 $263.5 million at September
30, 2000 as compared to $204.7 million at December 31, 1999. As of September 30,
2000, trade accounts receivable were $239.1 million versus $220.3 million at
December 31, 1999. Unbilled services were $182.9 million at September 30, 2000
versus $157.0 million at December 31, 1999, offset by unearned income balances
of $158.6 million and $172.6 million, respectively. The number of days revenue
outstanding in trade accounts receivable and unbilled services, net of unearned
income, were 52 days at September 30, 2000, as compared to 38 days at December
31, 1999.
Investments in debt securities were $110.2 million at September 30, 2000 as
compared to $109.4 million at December 31, 1999. Our investments in debt
securities consist primarily of U.S. Government Securities and money funds.
Investments in strategic marketable equity securities at September 30, 2000 were
$675.9 million, which includes $207.9 million of net unrealized gains, as
compared to $45.2 million, which includes $29.7 million of net unrealized gains,
at December 31, 1999. The increase in value primarily results from the 35
million shares of WebMD common stock we acquired in connection with the sale of
ENVOY.
We have a $150 million senior unsecured credit facility with a U.S. bank. In
addition, we have available to us a (pound)10.0 million (approximately $14.7
million) unsecured line of credit and a (pound)1.5 million (approximately $2.2
million) general banking facility with a U.K. bank. At September 30, 2000, we
had (pound)6.6 million (approximately $9.8 million) outstanding on the unsecured
line of credit.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In February 2000, the Board of Directors authorized us to repurchase up to $200
million of our common stock. During the first nine months of 2000, we entered
into agreements to repurchase 988,000 shares for an aggregate price of $16.6
million. To enhance our repurchase program, we sold put options to an
independent third party. The put options entitle the holder to sell a total of
500,000 shares of our common stock to us on January 2, 2001 at $13.7125 per
share. Shareholders' equity at September 30, 2000 was $1.57 billion versus
$991.8 million at December 31, 1999.
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.
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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.
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 WebMD for
them to provide web-enablement services to help us develop this platform. If
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 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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our ability to provide informatics services depends on our agreement with 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 WebMD, we entered into a data services
agreement with WebMD to continue to provide us with the ENVOY data, as well as
other data collected by WebMD. If 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 eighteen months 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.
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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
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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. Proposed
federal regulations governing patient-specific health information may (1)
require us to implement new security measures that may require substantial
expenditures or (2) limit our ability to offer some of our products and
services. These regulations may also increase costs by creating new privacy
requirements for our informatics business and mandating additional privacy
procedures for our clinical research business. Additionally, states may adopt
health information legislation or regulations that contain privacy and security
provisions that are more burdensome than the proposed federal regulations. 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.
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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. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at September 30, 2000. 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.
We had one customer that accounted for 10.5% of our net revenues for the three
months ended September 30, 2000. These revenues primarily 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.
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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. The Department is expected to
issue the final rules before January 2001. 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 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 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 request 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
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 were repaid.
The Company did not have any other material changes in market risk from December
31, 1999.
23
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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 amended complaint alleges 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. We and the named officers and directors have filed a motion to
dismiss the amended complaint. Briefing on that motion has not been completed,
and the motion remains pending.
In February 1999, Kenneth Hodges 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.
The plaintiff has released all claims against us under the lawsuit and has filed
a Stipulation of Dismissal with Prejudice which has been entered by the Court.
On August 17, 2000, Joseph Lewis filed a civil lawsuit in the State Court of
Fulton County, State of Georgia naming as defendants Richard L. Borison, Bruce
I. Diamond, Janssen Pharmaceutica, Inc., Zeneca, Inc., Novartis Pharmaceuticals
Corporation and Quintiles Laboratories Limited, one of our subsidiaries. The
plaintiff alleges that he suffered from schizophrenia and that he was given
experimental drugs for this condition in connection with numerous clinical drug
trials conducted by defendants Borison and Diamond between January 1988 and June
1996. The plaintiff alleges that the defendants and their agents conspired to
conduct these drug trials on him, and that they improperly supervised, monitored
and regulated the trials, causing him to have violent adverse reactions to the
drugs involved in the trials. Consequently, the 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, intentional infliction of
emotional distress and unjust enrichment. The plaintiff seeks to recover his
actual damages in unspecified amounts, medical expenses, litigation costs and
punitive damages.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Nowhere in the complaint are found any specific allegations against Quintiles
Laboratories Limited nor any specific factual connection between Quintiles
Laboratories Limited and the plaintiff's claims. Quintiles Laboratories Limited
has requested that the plaintiff voluntarily dismiss his claims against it on
these grounds and believes that the plaintiff is considering this request. If
the case is not dismissed voluntarily, Quintiles Laboratories Limited
anticipates that it will file a motion to dismiss with the Court. We believe the
claims alleged against Quintiles Laboratories Limited are vague and meritless
and the recovery sought is baseless. We intend to vigorously defend against
these claims.
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 September 30, 2000, options to purchase 6,000
shares of Common Stock were exercised at an average exercise price of $4.3175
per share in reliance on Rule 701 under the Securities Act of 1933. Such options
were issued by the Company prior to becoming subject to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant
to its Non-qualified Employee Incentive Stock Option Plan.
Item 3. Defaults upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information -- Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
27.01 Financial Data Schedule for the Nine Months Ended
September 30, 2000 (for SEC use only)
(b) During the three months ended September 30, 2000, the Company filed one
report on Form 8-K.
The Company filed a Form 8-K, dated July 19, 2000, including its press release
announcing the Company's earnings information for the period ended June 30,
2000.
No other reports on Form 8-K were filed during the three months ended
September 30, 2000.
25
<PAGE> 26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
-----------------------------
Registrant
Date November 14, 2000 /s/ Dennis B. Gillings
------------------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date November 14, 2000 /s/ James L. Bierman
------------------------- -------------------------------------------
James L. Bierman, Chief Financial Officer
26
<PAGE> 27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
27.01 Financial Data Schedule for the Nine Months
Ended September 30, 2000 (for SEC use only)
27
