10-Q 1 g65132e10-q.txt QUINTILES TRANSNATIONAL CORP. 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. 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 3 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31 2000 1999 ------------ ------------ (unaudited) (Note 1) (In thousands) 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 =========== ===========
The accompanying notes are an integral part of these condensed consolidated statements. 3 4 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 ------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) 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 ======== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated statements. 4 5 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30 2000 1999 --------- --------- (In thousands) 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 ========= =========
The accompanying notes are an integral part of these condensed consolidated statements. 5 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 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 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 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.
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 2000 1999 2000 1999 ----- ---- ----- ---- 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 ========= ========= =========== ===========
As of September 30, 2000 As of December 31, 1999 ------------------------ ----------------------- 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 =========== ===========
9 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):
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- 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 ======== ======= ========= ========
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 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 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).
Net Revenue (Loss)/Income From Operations ------------------------------ -------------------------------------------- Growth % of Net % of Net 2000 1999 % 2000 Revenue 1999 Revenue ------- ------- ------ ------ -------- ------ -------- 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% ======= ======= ===== ======
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 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. 13 14 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. 14 15 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).
Net Revenue (Loss)/Income From Operations ------------------------------- -------------------------------------------- Growth % of Net % of Net 2000 1999 % 2000 Revenue 1999 Revenue -------- -------- ------ ------ -------- ------- -------- 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% ======== ======== ======= =======
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. 15 16 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. 16 17 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. 17 18 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. 18 19 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. 19 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 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. 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. 21 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. 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. 22 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. 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 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 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. 24 25 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 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 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