-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E4HyWSaA/7cwiO7wZLs20NHE4awQOz3PWN0xUSDeA4269D0oDpc/skSd1wFGlmqv Ra/Qk8HMdZIV8EQISclPpw== 0000950144-99-008962.txt : 19990720 0000950144-99-008962.hdr.sgml : 19990720 ACCESSION NUMBER: 0000950144-99-008962 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990719 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990719 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUINTILES TRANSNATIONAL CORP CENTRAL INDEX KEY: 0000919623 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561714315 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-23520 FILM NUMBER: 99666795 BUSINESS ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: RIVERBIRCH BLDG STE 200 CITY: DURHAM STATE: NC ZIP: 27703-8411 BUSINESS PHONE: 9199982000 MAIL ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: STE 300 CITY: DURHAM STATE: NC ZIP: 27703-8411 8-K 1 QUINTILES TRANSNATIONAL CORP 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): July 19, 1999 QUINTILES TRANSNATIONAL CORP. (Exact name of registrant as specified in its charter) North Carolina 340-23520 56-1714315 (State or other (Commission File No.) I.R.S. Employer jurisdiction Identification Number of incorporation) 4709 Creekstone Drive, Riverbirch Building, Suite 200, Durham, North Carolina 27703-8411 (Address of principal executive offices) (919) 998-2000 (Registrant's telephone number, including area code) N/A (Former name or former address, if changed since last report) 2 Item 5. Other Events. In connection with its March 30, 1999 acquisition of ENVOY Corporation and its subsidiaries, March 31, 1999 acquisition of Medlab (Pty) Limited and the assets of the Niehaus & Botha partnership, which acquisitions were accounted for as poolings of interests, Quintiles Transnational Corp. (the "Company") has restated its historical consolidated financial statements and data for the years ended December 31, 1998, 1997 and 1996 and other materials described below. The filing of this Current Report dated July 19, 1999 to restate the Company's historical consolidated financial statements along with its supplemental consolidated financial statements filed on the Current Report on Form 8-K dated July 15, 1999 will comply with the age-of-financial statement rules. Item Description Page ---------------- ---- (1) Selected Consolidated Financial Data 1 (2) Annual Financial Data of the Company a. Management's Discussion and Analysis of Financial Condition and 2 Results of Operations b. Consolidated Financial Statements of the Company i. Report of Independent Public Accountants 12 ii. Report of Independent Auditors 13 iii. Consolidated Statements of Operations for each of the 14 three years in the period ended December 31, 1998 iv. Consolidated Balance Sheets as of December 31, 1998 and 1997 15 v. Consolidated Statements of Shareholders' Equity for each 17 of the three years in the period ended December 31, 1998 vi. Consolidated Statements of Cash Flows for each of the three 18 years in the period ended December 31, 1998 vii. Notes to Consolidated Financial Statements 20 i 3 Information set forth in this report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, which statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," or "continue," or the negative thereof or other variations thereof or comparable terminology. The Company cautions that any such forward looking statements are further qualified by important factors that could cause the Company's actual operating results to differ materially from those in the forward looking statements, including without limitation, the Company's dependence on certain industries and clients, management of its growth, risks associated with acquisitions, risks relating to contract sales services, competition within the industry, the loss or delay of large contracts, dependence on personnel and government regulation and other considerations described in connection with specific forward looking statements, as well as other risk factors described in the Company's filings with the Securities and Exchange Commission. ii 4 SELECTED CONSOLIDATED FINANCIAL DATA The selected Consolidated Statement of Operations Data set forth below for each of the years in the three-year period ending December 31, 1998 and the Consolidated Balance Sheet Data set forth below as of December 31, 1998 and 1997 are derived from the audited consolidated financial statements of the Company and notes thereto, as restated for certain pooling transactions, included in this Current Report on Form 8-K dated July 19, 1999. The selected Consolidated Statement of Operations Data set forth below for the years ended December 1995 and 1994, and the Consolidated Balance Sheet Data set forth below as of December 31, 1996, 1995 and 1994 are derived from the consolidated financial statements of the Company as subsequently restated for certain pooling transactions. The data provided as of March 31, 1999 and 1998 and for the three months ended March 31, 1999 and 1998 are derived from unaudited consolidated financial statements included in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999, but in the opinion of management, contain all adjustments, consisting only of normal recurring accruals, which are necessary for a fair statement of results of such periods. The consolidated financial statements of the Company have been restated to reflect material acquisitions by the Company in transactions accounted for as poolings of interests consummated as of March 31, 1999. However, the consolidated financial statements have not been restated to reflect certain other acquisitions accounted for as pooling of interests which were consummated subsequent to March 31, 1999 and where the Company determined that the consolidated financial data would not have been materially different if the pooled companies had been included. For such immaterial pooling of interests transactions, which include three transactions in 1998, one transaction in 1997 and two transactions in 1996, the Company's financial statements for the year of each transaction have been restated to include the pooled companies from January 1 of that year, but the financial statements for years prior to the year of each transaction have not been restated because the effect of such restatement would be immaterial. The selected consolidated financial data presented below should be read in conjunction with the Company's audited consolidated financial statements and notes thereto, as restated herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Year Ended December 31, Three Months Ended March 31, -------------------------------------------------------------- ---------------------------- 1998 1997 1996 (1,3) 1995 (1) 1994 1999 1998 ---------- ---------- --------- -------- -------- ---------- ---------- (In thousands, except per share data) Net revenue $1,383,714 $1,007,334 $ 705,354 $411,984 $263,988 $ 408,098 $ 309,068 Income from operations 149,851 86,637 30,054 25,888 18,167 49,010 30,971 Income before income taxes 145,705 84,032 3,945 24,351 17,198 27,073 30,149 Net income (loss) available for common shareholders 88,031 46,551 (29,686) 12,567 11,310 7,703 18,872 Basic net income (loss) per share 0.86 0.48 (0.33) 0.15 0.15 0.07 0.19 Diluted net income (loss) per share $ 0.81 $ 0.44 $ (0.33) $ 0.15 $ 0.15 $ 0.07 $ 0.17 Weighted average shares outstanding (2): Basic 102,486 97,595 89,380 81,152 75,256 107,027 101,499 Diluted 108,564 104,828 89,380 83,512 76,280 109,729 108,219
As of December 31, As of March 31, -------------------------------------------------------------- ------------------------ 1998 1997 1996 (1) 1995 (1) 1994 (1) 1999 1998 ---------- ---------- --------- -------- -------- ---------- ---------- (In thousands, except employees) Cash and cash equivalents $ 155,469 $ 89,673 $ 111,798 $ 85,176 $ 56,433 $ 197,307 $ 61,550 Working capital 238,890 183,002 148,825 84,447 56,714 279,128 192,489 Total assets 1,201,679 989,184 716,609 390,185 271,587 1,536,340 1,067,734 Long-term debt including current portion 191,468 186,902 196,654 64,790 23,653 273,388 214,498 Shareholders' equity $ 643,654 $ 513,394 $ 274,778 $181,623 $107,677 $ 849,558 $ 541,151 Employees 16,523 12,567 8,887 5,428 3,800 17,648 13,365
1 Prior to the Company's November 29, 1996 share exchange with Innovex Limited ("Innovex"), Innovex had a fiscal year end of March 31 and the Company had (and continues to have) a fiscal year end of December 31. As a result, the pooled data presented above for 1994 and 1995 include Innovex's March 31 fiscal year data in combination with the Company's December 31 fiscal year data. In connection with the share exchange, Innovex changed its fiscal year end to December 31. Accordingly, the pooled data presented above for 1996 include both Innovex's and the Company's data on a December 31 year end basis. Because of the difference between Innovex's fiscal year end in 1995 compared with 1996, Innovex's quarter ended March 31,1996 data are included in the Company's pooled data for both 1995 and 1996. 2 Restated to reflect the two-for-one stock splits of the Company's Common Stock effected as a 100% stock dividend in November 1995 and December 1997. 3 Excluding amortization of certain acquired intangible assets of $16.4 million and non-recurring costs, the 1996 basic and diluted net income per share (unaudited) were $0.26 and $0.23, respectively. 1 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Quintiles Transnational Corp. ("Quintiles" or "the Company") is a market leader in providing a full range of integrated product development and commercialization solutions to the global pharmaceutical, biotechnology and medical device industries. The Company is also a leader in providing electronic data interchange ("EDI") and healthcare informatics services to the healthcare market and provides healthcare policy consulting to governments and other organizations worldwide. Based on industry analyst reports, the Company is the largest company in the pharmaceutical outsourcing services industry as ranked by 1998 net revenue; the net revenue of the second largest company was over $650 million less than the Company's 1998 net revenue. During 1998, the Company completed a number of strategic acquisitions. Specifically: On February 2, 1998, the Company acquired Pharma Networks N.V. ("Pharma"), a leading contract sales organization in Belgium. The Company acquired Pharma in exchange for 132,000 shares of the Company's Common Stock. The acquisition of Pharma was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include the historical financial data of Pharma. On February 4, 1998, the Company acquired Technology Assessment Group ("TAG"), a California-based international health outcomes assessment firm that specializes in patient registries and in evaluating the economic, quality-of-life and clinical effects of drug therapies and disease management programs. The Company acquired TAG in exchange for 460,366 shares of the Company's Common Stock. The acquisition of TAG was accounted for as a purchase. On February 26, 1998, the Company acquired T2A S.A. ("T2A"), a leading French contract sales organization. The Company acquired T2A in exchange for 311,899 shares of the Company's Common Stock. The acquisition of T2A was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include T2A. On February 27, 1998, the Company acquired More Biomedical Contract Research Organization Ltd. ("More Biomedical"), a contract research organization based in Taiwan. The Company acquired More Biomedical in exchange for 16,600 shares of the Company's Common Stock. The acquisition was accounted for as a pooling of interests. On February 27, 1998, ENVOY Corporation ("ENVOY") which was acquired by the Company in March 1999, acquired XpiData, Inc., Professional Office Services, Inc. and Automated Revenue Management, Inc. (collectively "ExpressBill Companies") pursuant to separate agreements and plans of merger for an aggregate of approximately 3.5 million shares of ENVOY common stock (approximately 4.1 million shares of the Company's Common Stock). ExpressBill Companies transactions were accounted for as poolings of interest and as such, the historical financial data includes the results of the ExpressBill Companies. On May 31, 1998, the Company acquired Crossbox Limited t/a Cardiac Alert ("Cardiac Alert"), a U.K.-based company which provides a centralized electrocardiogram monitoring service for international clinical trials. The Company acquired Cardiac Alert in exchange for 70,743 shares of the Company's Common Stock. The acquisition of Cardiac Alert was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include Cardiac Alert. On May 31, 1998, the Company acquired ClinData International Pty Limited ("ClinData"), a leading biostatistics and data management company in South Africa. The Company acquired ClinData in exchange for 123,879 shares of the Company's Common Stock. The acquisition of ClinData was accounted for as a pooling of interests. On August 24, 1998, the Company acquired The Royce Consultancy, Limited ("Royce"), a leading pharmaceutical sales representative recruitment and contract sales organization in the U.K. The Company acquired Royce in exchange for 664,194 shares of the Company's Common Stock. The acquisition of Royce was accounted for as a pooling of interests and as such, all historical financial data have been restated to include Royce. On September 9, 1998, the Company acquired Data Analysis Systems, Inc. ("DAS"), a New Jersey-based leader in sales force planning and territory organization systems for the pharmaceutical industry. The Company acquired DAS in exchange for 358,897 shares of the Company's Common Stock. The acquisition of DAS was accounted for as a pooling of interests and as such, all historical financial data have been restated to include DAS. 2 6 On October 8, 1998, the Company acquired Simirex Inc. and Simirex International Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for the U.S. pharmaceutical industry. The Company acquired Simirex in exchange for 383,273 shares of the Company's Common Stock. The acquisition of Simirex was accounted for as a pooling of interests. On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a Paris-based French contract sales and marketing company. The Company acquired Serval in exchange for 77,876 shares of the Company's Common Stock. The acquisition of Serval was accounted for as a purchase. On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a New York-based provider of integrated product marketing and communication services for pharmaceutical companies in the U.S. market. The Company acquired QED in exchange for 523,520 shares of the Company's Common Stock. The acquisition of QED was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include QED. The Company has made several more strategic acquisitions in the first half of 1999 which include the following pooling of interests transactions: On March 30, 1999, the Company acquired ENVOY, a Tennessee-based provider of healthcare electronic data interchange and data mining services. The Company acquired ENVOY in exchange for approximately 28,465,160 shares of the Company's Common Stock. Outstanding ENVOY options became options to acquire approximately 3,914,583 shares of the Company's Common Stock. The acquisition of ENVOY was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include ENVOY. On March 31, 1999, the Company acquired MedLab Pty Ltd. and the assets of the Niehaus & Botha (collectively "N&B"), a South African-based clinical laboratory. The Company acquired N&B in exchange for 271,146 shares of the Company's Common Stock. The acquisition of N&B was accounted for as a pooling of interests, and as such, all historical financial data have been restated to include N&B. On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a Scotland-based clinical research organization. The Company acquired Minerva in exchange for 1,143,625 shares of the Company's Common Stock. The acquisition of Minerva was accounted for as a pooling of interests. However, the historical financial data included herein have not been restated to include Minerva. The supplemental consolidated financial statements contained within the Current Report on 8-K dated July 15, 1999 reflect, on a supplemental basis, the impact of pooling this transaction. On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a Chicago-based healthcare market information company. The Company acquired SMG in exchange for 1,170,291 shares of the Company's Common Stock. The acquisition of SMG was accounted for as a pooling of interests. However, the historical financial data included herein have not been restated to include SMG. The supplemental consolidated financial statements contained within the Current Report on 8-K dated July 15, 1999 reflect, on a supplemental basis, the impact of pooling this transaction. The Company's 1998 financial statements have been restated to include More Biomedical, ClinData, and Simirex from January 1, 1998, but the financial statements for 1997 and prior years have not been restated because the effect of such restatement would be immaterial. Contract Revenue The Company considers net revenue, which excludes reimbursed costs, its primary measure of revenue growth. Substantially all net revenue for the product development and commercialization service groups is earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. Most of the net revenue for the QUINTERNET(TM) informatics service group is earned from providing EDI and transaction processing services to the healthcare market which are generally paid for by the healthcare providers or third party payors. Many of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. The Company is also party to fee-for-service and unit-of-service contracts. The Company recognizes net revenue based upon (1) labor costs expended as a percentage of total labor costs expected to be expended (percentage of completion) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed for fee-for-service contracts or (3) completion of units of service or transactions processed for unit-of-service contracts. 3 7 The Company's contracts generally provide for price negotiation upon scope of work changes. The Company recognizes revenue related to these scope changes when the underlying services are performed and realization of revenue is assured. Most contracts are terminable upon 15 - 90 days' notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Each contract specifies billing and payment procedures. Generally, the procedures require a portion of the contract fee to be paid at the time the project is initiated with subsequent contract billings and payments due periodically over the length of the project's term in accordance with contractual provisions. Revenue recognized in excess of billings is classified as unbilled services, while billings in excess of revenue are classified as unearned income. The Company reports backlog based on anticipated net revenue from uncompleted projects which have been authorized by the customer through a written contract or otherwise. Backlog does not include anticipated net revenue from the Company's transaction processing services since the contracts do not quantify the volume of transactions to be processed. Using this method of reporting backlog, at December 31, 1998, 1997 and 1996 the backlog was approximately $1.9 billion, $1.1 billion and $736 million, respectively. The Company believes that backlog may not be a consistent indicator of future results because backlog can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, loss or significant delay of contracts, or a change in the scope of a project during the course of a study. Results of Operations Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 Net revenue for the year ended December 31, 1998 was $1.4 billion, an increase of $376.4 million or 37.4% over fiscal 1997 net revenue of $1.0 billion. Growth occurred across each of the Company's geographic regions and each of its major service groups. Factors contributing to the growth included an increase of contract service offerings, the provision of increased services rendered under existing contracts, an increase in the volume of transactions processed and the initiation of services under contracts awarded subsequent to January 1, 1998. Net revenue for the product development group increased 36.8% to $702.8 million for the year ended December 31, 1998 as compared to $513.7 million for the year ended December 31, 1997. Net revenue for the commercialization group increased 39.4% to $496.2 million for the year ended December 31, 1998 as compared to $356.1 million for the year ended December 31, 1997. Net revenue for the QUINTERNET(TM) informatics group increased 34.3% to $184.8 million for the year ended December 31, 1998 as compared to $137.6 million for the year ended December 31, 1997 primarily as a result of the increase in the volume of transactions processed. Direct costs, which include compensation and related fringe benefits for billable employees, cost of communications and related EDI and transaction processing expenses and other expenses directly related to contracts, were $716.5 million or 51.8% of 1998 net revenue versus $526.1 million or 52.2% of 1997 net revenue. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $425.5 million or 30.8% of 1998 net revenue versus $315.4 million or 31.3% of 1997 net revenue. The $110.1 million increase in general and administrative expenses was primarily due to an increase in personnel, facilities and locations and outside services resulting from the Company's growth. Depreciation and amortization expense was $91.9 million or 6.6% of 1998 net revenue versus $72.7 million or 7.2% of 1997 net revenue. Included is amortization of certain acquired intangible assets of $20.3 million and $20.4 million in 1998 and 1997, respectively. Excluding these expenses, depreciation and amortization expense was $71.6 million or 5.2% of 1998 net revenue versus $52.2 million or 5.2% of 1997 net revenue. The $19.4 million increase is primarily due to the increase in the capitalized asset base of the Company. In 1998, the Company recognized approximately $2.8 million of depreciation expense associated with the first full year of operation for the facility in Bathgate, Scotland and related assets. 4 8 Income from operations was $149.9 million or 10.8% of 1998 net revenue versus $86.6 million or 8.6% of 1997 net revenue. Excluding the amortization of certain acquired intangible assets as discussed above and the $6.6 million of 1997 non-recurring costs relating to ENVOY's write-offs of acquired in-process technology discussed below, income from operations was $170.1 million or 12.3% of 1998 net revenue versus $113.7 million or 11.3% of 1997 net revenue. Income from operations for the product development group increased to $79.3 million or 11.3% of 1998 net revenue from $51.6 million or 10.0% of 1997 net revenue. Income from operations for the commercialization group increased to $47.3 million or 9.5% of 1998 net revenue from $37.7 million or 10.6% of 1997 net revenue. Excluding the amortization of certain acquired intangible assets of $20.3 million and $20.4 million in 1998 and 1997, respectively and the 1997 non-recurring costs of $6.6 million, the income from operations for the QUINTERNET(TM) informatics group increased to $43.5 million or 23.5% of 1998 net revenue from $24.4 million or 17.8% of 1997 net revenue. This increase primarily results from the efficiencies realized due to the increase in the volume of transactions processed. Other expense, which consists primarily of transaction costs and interest, increased to $4.1 million in 1998 from $2.6 million in 1997. Transaction costs included in other expense were $3.5 million in 1998 versus $2.2 million in 1997. The effective tax rate for 1998 was 39.6% versus a 44.6% rate in 1997. Excluding amortization of certain acquired intangible assets as discussed above, the effective tax rate for 1998 would have been 34.8% versus a 36.0% rate for 1997. The effective tax rate reduction resulted from the reversal of prior year valuation allowances relating to certain net operating loss carryforwards that the Company now believes are more likely than not to be utilized and profits generated in countries with favorable tax rates. Since the Company conducts operations on a global basis, its effective tax rate may vary. See "--Taxes." Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 Net revenue for the year ended December 31, 1997 was $1.0 billion, an increase of $302.0 million or 42.8% over fiscal 1996 net revenue of $705.4 million. Growth occurred across each of the Company's geographic regions and each of its major service groups. Factors contributing to the growth included an increase of contract service offerings, the provision of increased services rendered under existing contracts, an increase in the volume of transactions processed and the initiation of services under contracts awarded subsequent to January 1, 1997. Net revenue for the product development group increased 23.6% to $513.7 million for the year ended December 31, 1997 as compared to $415.6 million for the year ended December 31, 1996. Net revenue for the commercialization group increased 78.7% to $356.1 million for the year ended December 31, 1997 as compared to $199.2 million for the year ended December 31, 1996. The commercialization group experienced particularly strong growth in the Americas region. Net revenue for the QUINTERNET(TM) informatics group increased 51.9% to $137.6 million for the year ended December 31, 1997 as compared to $90.6 million for the year ended December 31, 1996 primarily due to an increase in the volume of transactions processed. Direct costs, which include compensation and related fringe benefits for billable employees, cost of communications and related EDI and transaction processing expenses and other expenses directly related to contracts, were $526.1 million or 52.2% of 1997 net revenue versus $362.4 million or 51.4% of 1996 net revenue. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $315.4 million or 31.3% of 1997 net revenue versus $237.2 million or 33.6% of 1996 net revenue. The $78.1 million increase in general and administrative expenses was primarily due to an increase in personnel, facilities and locations and outside services resulting from the Company's growth. Depreciation and amortization expense was $72.7 million or 7.2% of 1997 net revenue versus $51.5 million or 7.3% of 1996 net revenue. Included is amortization of certain acquired intangible assets of $20.4 million and $16.4 million in 1997 and 1996, respectively. Excluding these expenses, depreciation and amortization expense was $52.2 million or 5.2% of 1997 net revenue versus $35.1 million or 5.0% of 1996 net revenue. ENVOY recorded write-offs of acquired in-process technology of $6.6 million and $8.7 million in 1997 and 1996, respectively. These write-offs related to acquisitions completed by ENVOY in 1997 and 1996. These amounts represent an allocation of the purchase price of these acquisitions to research and development projects that had not reached technological feasibility and for which there was no alternative future use. 5 9 Income from operations was $86.6 million or 8.6% of 1997 net revenue versus $30.1 million or 4.3% of 1996 net revenue. Excluding non-recurring costs of $24.1 million incurred in 1996, the 1996 income from operations was $54.2 million or 7.7% of net revenue. Excluding the amortization of certain acquired intangible assets as discussed above and the non-recurring costs, income from operations was $113.7 million or 11.3% of 1997 net revenue versus $70.6 million or 10.0% of 1996 net revenue. Excluding 1996 non-recurring costs, the income from operations for the product development group increased to $51.6 million or 10.0% of 1997 net revenue from $41.4 million or 10.0% of 1996 net revenue. Excluding non-recurring costs in 1996, income from operations for the commercialization group increased to $37.7 million or 10.6% of 1997 net revenue from $18.2 million or 9.1% of 1996 net revenue. Excluding the amortization of certain acquired intangible assets of $20.4 million and $16.4 million in 1997 and 1996, respectively and the non-recurring costs in 1997 and 1996, the income from operations for the QUINTERNET(TM) informatics group increased to $24.4 million or 17.8% of 1997 net revenue from $11.0 million or 12.2% of 1996 net revenue. This increase primarily results from the efficiencies realized due to the increase in the volume of transactions processed. Other expense decreased to $2.6 million in 1997 from $26.1 million in 1996. Excluding acquisition costs and non-recurring transaction costs, other expense was $371,000 in 1997 and $4.3 million in 1996. The $4.0 million change was primarily due to decreases in net interest expense. The effective tax rate for 1997 was 44.6% versus a 429.0% rate in 1996. Excluding amortization of certain acquired intangible assets as discussed above and non-recurring transaction and restructuring costs which were not deductible for tax purposes, the effective tax rate for 1997 would have been 36.0% versus a 35.3% rate for 1996. Since the Company conducts operations on a global basis, its effective tax rate may vary. See "--Taxes." Liquidity and Capital Resources Cash flows generated from operations were $169.2 million in 1998 versus $102.1 million and $50.9 million in 1997 and 1996, respectively. Cash flows used in investing activities in 1998 were $98.5 million, versus $206.1 million and $244.7 million in 1997 and 1996, respectively. Of these investing activities, capital asset purchases required $102.0 million in 1998 versus $88.5 million and $46.6 million in 1997 and 1996, respectively. Capital asset expenditures in 1997 and 1996 included (pound)15.8 million (approximately $26.5 million) and (pound)2.7 million (approximately $5.0 million), respectively, related to the Company's purchase of land and construction of a facility in Bathgate, Scotland. The remaining capital expenditures were predominantly incurred in connection with the expansion of existing operations, the enhancement of information technology capabilities and the opening of new offices. Total working capital increased $55.9 million to $238.9 million at December 31, 1998 from $183.0 million at December 31, 1997. Including long-term investments of $65.5 million and $69.1 million at December 31, 1998 and 1997, respectively, in total working capital, the increase was $52.3 million. Total accounts receivable and unbilled services increased 38.3% to $358.3 million at December 31, 1998 from $259.2 million at December 31, 1997, as a result of the growth in net revenue. Accounts receivable and unbilled services, net of unearned income, increased 25.7% to $207.9 million at December 31, 1998 from $165.4 million at December 31, 1997. The number of days revenue outstanding in accounts receivable and unbilled services, net of unearned income, were 44 and 46 days at December 31, 1998 and December 31, 1997, respectively. During 1998, the Company acquired a clinical trial production and warehouse facility in Livingston, Scotland for a purchase commitment valued at (pound)1.75 million (approximately $2.9 million), with payment due in May, 2001. During 1995, the Company acquired a drug development facility in Edinburgh, Scotland. Related to this acquisition, the Company entered into a purchase commitment valued at (pound)12.5 million (approximately $20.9 million) with payment due in December 1999. The Company has hedged a portion of this commitment by purchasing forward contracts. The Company's forward contracts mature on December 29, 1999, and as of December 31, 1998, the Company had committed to purchasing approximately (pound)2.4 million (approximately $3.5 million) under such contracts. The Company is obligated to purchase up to an additional (pound)2.9 million through December 28, 1999 in varying amounts as the daily dollar-to-pound exchange rate ranges between $1.5499 and $1.6800. In connection with its March 1999 acquisition of PMSI, the Company agreed to pay contingent value payments to former PMSI stockholders who deferred receipt of one-half of the shares of the Company's Common Stock they were entitled to receive in the transaction until June 14, 1999. The right to receive contingent value payments terminated in accordance with the merger agreement. Accordingly, no contingent value payments were payable to any former PMSI shareholder. 6 10 The Company has available to it a (pound)15.0 million (approximately $25.1 million) unsecured line of credit with a U.K. bank and a (pound)5.0 million (approximately $8.4 million) unsecured line of credit with a second U.K. bank. At December 31, 1998, the Company had (pound)19.8 million (approximately $33.1 million) available under these credit agreements. In accordance with their terms, both of these facilities expired in May 1999. During 1998, the Company entered into a $150 million senior unsecured credit facility ("$150 million facility") with a U.S. bank. At December 31, 1998, the Company had $150 million available under this facility. Based upon its current financing plan, the Company believes the $150 million facility would be available to retire long-term credit arrangements and obligations, if necessary. In May 1999, the Company entered into a (pound)10.0 million (approximately $16.7 million) unsecured line of credit with a U.K. bank. The Company also entered into a (pound)1.5 million (approximately $2.5 million) general bank facility with the same U.K. bank. All foreign currency denominated amounts due, subsequent to December 31, 1998, have been translated using the Thursday, December 24, 1998 foreign exchange rates as published in the December 28, 1998 edition of the Wall Street Journal. Based on its current operating plan, the Company believes that its available cash and cash equivalents, together with future cash flows from operations and borrowings under its line of credit agreements will be sufficient to meet its foreseeable cash needs in connection with its operations. As part of its business strategy, the Company reviews many acquisition candidates in the ordinary course of business, and in addition to acquisitions already made, the Company is continually evaluating new acquisition and expansion possibilities. The Company may from time to time seek to obtain debt or equity financing in its ordinary course of business or to facilitate possible acquisitions or expansion. Taxes Since the Company conducts operations on a global basis, the Company's effective tax rate has depended and will continue to depend on the amount of profits in locations with varying tax rates. The Company's results of operations will be impacted by changes in the tax rates of the various jurisdictions and by changes in any applicable tax treaties. In particular, as the portion of the Company's non-U.S. business varies, the Company's effective tax rate may vary significantly from period to period. The Company's effective tax rate may also depend upon the extent to which the Company is allowed (and is able to use under applicable limitations) U. S. foreign tax credits in respect of taxes paid on its foreign operations. Inflation The Company believes the effects of inflation generally do not have a material adverse impact on its operations or financial condition. Impact of Year 2000 Issue State of Readiness The Company has established a Year 2000 Program to address the Year 2000 issue, which results from computer processors and software failing to process date values correctly, potentially causing system failures or data corruption. The Year 2000 issue could cause disruptions of the Company's operations, including, among other things, a temporary inability to process information such as real-time transaction processing for pharmacies and other healthcare providers and payors; receive information, services or products from third parties; interface with customers in the performance of contracts; or operate or communicate in some or all of the regions in which it operates. The Company's computing infrastructure is based on industry standard systems. The scope of the Company's Year 2000 Program includes unique software systems and tools in each of its service groups, especially its product development service group, embedded systems in its laboratory and manufacturing operations, mainframe systems in its QUINTERNET(TM) informatics service group, facilities such as elevators and fire alarms in over 133 offices (which also involve embedded technology) and numerous supplier and other business relationships. The Company has identified critical systems within each service group and is devoting its resources to address these items first. 7 11 The Company's Year 2000 Program is directed by the Year 2000 Executive Steering Team, which is comprised of the Company's Chief Information Officer and representatives from regional business units, together with legal, quality assurance and information technology personnel. The Company has established a Year 2000 Program Management Office, staffed by consultants and internal staff, which develops procedures and instructions at a centralized level and oversees performance of the projects that make up the program. Project teams organized by service group and geographic region are responsible for implementation of the individual projects. The framework for the Company's Year 2000 Program prescribes broad inventory, assessment and planning phases which generally guide its projects. Each project generally includes launch, analysis, remediation, testing and deployment phases. The Company is in the process of assessing those systems, facilities and business relationships which it believes may be vulnerable to the Year 2000 issue and which it believes could impact its operations. Although the Company cannot control whether and how third parties will address the Year 2000 issue, its assessment also will include a limited evaluation of certain services on which it is substantially dependent, and the Company plans to develop contingency plans for possible deficiencies in those services. For example, the Company believes that among its most significant third party service providers are physician investigators who participate in clinical studies conducted through its contract research services and external organizations (such as pharmacies, insurance providers and medical offices) linked to the QUINTERNET(TM) informatics services; consequently, the Company is developing a specialized process to assess and address Year 2000 issues arising from these relationships. The Company does not plan to assess how its customers, such as pharmaceutical and large biotechnology companies, are dealing with the Year 2000 issue. As the Company completes the assessment of its systems, it is developing plans to renovate, replace or retire them, as appropriate, if they are affected by the Year 2000 issue. Such plans generally include testing of new or renovated systems upon completion of the remedial actions. The Company will utilize both internal and external resources to implement these plans. The Company has addressed and substantially completed assessment, remediation, testing and deployment of its systems relating to its healthcare consulting services and its commercialization services. The Company's product development services utilize numerous systems, which it must address individually on disparate schedules, depending on the magnitude and complexity of the particular system. The Company has successfully remediated, replaced and migrated a substantial majority of these systems, and anticipates that substantial completion of these systems will occur by the end of the third quarter of 1999. The Company has evaluated the state of readiness of its recent acquisitions, including ENVOY, PMSI and SMG, which form the core of the Company's QUINTERNET(TM) informatics services, and has integrated these acquisitions into its Year 2000 Program. The Company's QUINTERNET(TM) informatics services utilize real-time and batch systems linked to external organizations and PC based audit and syndicated data systems. Significant progress has been made in remediating and testing these systems. The Company is substantially complete with respect to the systems formerly owned by PMSI, and it anticipates that remediation and testing of former ENVOY and SMG systems will be substantially complete by the end of the third quarter of 1999. Testing with external organizations which work with our QUINTERNET(TM) informatics service group will occur throughout the second half of 1999. The Company expects to complete the core components of its Year 2000 Program before there is a significant risk that internal Year 2000 problems will have a material impact on its operations. Costs The Company estimates that the aggregate costs of its Year 2000 Program, including recent acquisitions, will be approximately $20.7 million, including costs already incurred. A significant portion of these costs, approximately $8.1 million, are not likely to be incremental costs, but rather will represent the redeployment of existing resources. This reallocation of resources is not expected to have a significant impact on the Company's day-to-day operations. The Company incurred total Year 2000 Program costs of $8.6 million through March 31, 1999, of which approximately $6.4 million represented incremental expense. The Company's estimates regarding the cost, timing and impact of addressing the Year 2000 issue are based on numerous assumptions of future events, including the continued availability of certain resources, its ability to meet deadlines and the cooperation of third parties. The Company cannot provide assurance that its assumptions will be correct and that these estimates will be achieved. Actual results could differ materially from the Company's expectations as a result of numerous factors, including the availability and cost of personnel trained in this area, unforeseen circumstances that would cause the Company to allocate its resources elsewhere and similar uncertainties. 8 12 Year 2000 Risks The Company faces both internal and external risks from the Year 2000 issue. If realized, these risks could have a material adverse effect on the Company's business, results of operations or financial condition. The Company's primary internal risk is that its systems will not be Year 2000 compliant on time. The magnitude of this risk depends on the Company's ability to achieve compliance of both internally and externally developed systems or to migrate to alternate systems in a timely fashion. The decentralized nature of the Company's business may compound this risk if it is unable to coordinate efforts across its global operations on a timely basis. The Company believes that its Year 2000 Program will successfully address these risks, however, the Company cannot provide assurance that this program will be completed in a timely manner. Notwithstanding its Year 2000 Program, the Company also faces external risks that may be beyond its control. The Company's international operations and its relationships with foreign third parties create additional risks for the Company, as many countries outside the United States have been less attuned to the Year 2000 issue. These risks include the possibility that infrastructural systems, such as electricity, water, natural gas or telephony, will fail in some or all of the regions in which the Company operates, as well as the danger that the internal systems of its foreign suppliers, service providers and customers will fail. The Company's business also requires considerable travel, and its ability to perform services under its customer contracts could be negatively affected if air travel is disrupted by the Year 2000 issue. In addition, the Company's business depends heavily on the healthcare industry, including third party physician investigators, pharmacies, insurance providers and medical offices. The healthcare industry, and physicians' groups in particular, to date may not have focused on the Year 2000 issue to the same degree as some other industries, especially outside of major metropolitan centers. As a result, the Company faces increased risk that its physician investigators will be unable to provide it with the data that the Company needs to perform under its contracts on time, if at all. Thus, the clinical study involved could be slowed or brought to a halt. The failure due to a Year 2000 issue of an external organization on whose services Quintiles relies significantly could also adversely impact the Company's ability to process transactions in its informatics services. Also, the failure of its customers to address the Year 2000 issue could negatively impact their ability to utilize the Company's services. While it intends to develop contingency plans to address certain of these risks, the Company cannot assure you that any developed plans will sufficiently insulate it from the effects of these risks. Any disruptions resulting from the realization of these risks would affect the Company's ability to perform its services. If the Company is unable to receive or process information, or if third parties are unable to provide information or services to it, the Company may not be able to meet milestones or obligations under its customer contracts, which could have a material adverse effect on its business and financial results. Contingencies The Company is in the process of developing business continuity plans for each service area. These plans will primarily be developed during the second half of 1999. Conversion to the Euro Currency On January 1, 1999, a new currency, the euro, became the legal currency for 11 of the 15 member countries of the European Economic Community. Between January 1, 1999 and January 1, 2002, governments, companies and individuals may conduct business in the member countries in both the euro and existing national currencies. On January 1, 2002, the euro will become the sole currency in the member countries. The Company conducts business in the member countries. The Company is reviewing the issues involved with the introduction of the euro. The more important issues the Company is reviewing include: (1) whether the Company may have to change the prices of its services in the different countries and (2) whether the Company will have to change the terms of any financial instruments in connection with its hedging activities. Based on current information and its initial evaluation, the Company believes that the use of the euro will not have a significant impact on the Company's business or operations. Accordingly, the Company does not expect the conversion to the euro to have a material effect on the Company's financial condition or results of operations. 9 13 Recent Events On January 1, 1999, the Company acquired substantial assets of Hoechst Marion Roussel's ("HMR") Kansas City-based Drug Innovation and Approval facility for approximately $93 million in cash, most of which is expected to be paid in the second half of 1999 when the acquisition of the physical facility is completed. As part of this transaction, the Company was awarded a $436 million contract for continued support and completion of ongoing HMR development projects over a five-year period. In addition, HMR will offer the Company the opportunity to provide all United States ("U.S.") outsourcing services up to an additional $144 million over the same period. On February 17, 1999, the Company acquired Oak Grove Technologies, Inc. ("Oak Grove"), a leader in providing current Good Manufacturing Practice compliance services to the pharmaceutical, biotechnology and medical device industries. The Company acquired Oak Grove in exchange for 87,948 shares of the Company's Common Stock. The acquisition of Oak Grove was accounted for as a purchase. On March 29, 1999, the Company acquired PMSI and its core company, Scott-Levin, a leader in pharmaceutical market information and research services located in the U.S. The Company acquired PMSI in exchange for approximately 4,993,787 shares of the Company's Common Stock. Outstanding PMSI options became options to acquire approximately 440,426 shares of the Company's Common Stock. In addition, the Company agreed to pay contingent value payments to former PMSI stockholders who deferred receipt of one-half of the shares of the Company's Common Stock they were entitled to receive in the transaction until June 14, 1999. The right to receive contingent value payments terminated in accordance with the merger agreement. Accordingly, no contingent value payments were payable to any former PMSI shareholder. The acquisition of PMSI was accounted for as a purchase. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). Statement No. 133 requires that upon adoption, all derivative instruments be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in other comprehensive income pending recognition in earnings. The Company will adopt Statement No. 133 when required to do so on January 1, 2001. Because of its limited use of derivatives, the Company does not expect the application of Statement No. 133 to have a significant impact on its financial position or results of operations. Market Risk Market risk is the potential loss arising from adverse changes in the market rates and prices, such as foreign currency rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange rates, interest rates and equity price changes and the Company regularly evaluates its exposure to such changes. The Company's overall risk management strategy seeks to balance the magnitude of the exposure and the cost and availability of appropriate financial instruments. From time to time, the Company has utilized forward exchange contracts to manage its foreign currency exchange rate risk. The Company does not hold or issue derivative instruments for trading purposes. The following analyses present the sensitivity of the Company's financial instruments to hypothetical changes in interest and foreign currency exchange rates that are reasonably possible over a one-year period. Foreign Currency Exchange Rates Approximately 44.5%, 44.9% and 50.9% of the Company's net revenue for the years ended December 31, 1998, 1997, and 1996, respectively, were derived from the Company's operations outside the United States. The Company does not have significant operations in countries in which the economy is considered to be highly-inflationary. The Company's financial statements are denominated in U.S. dollars, and accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of such subsidiaries' financial results into U.S. dollars for purposes of reporting the Company's consolidated financial results. Accumulated currency translation adjustments recorded as a separate component (reduction) of shareholders' equity were ($4.6) million at December 31, 1998 as compared to ($7.5) million at December 31, 1997. 10 14 The Company may be subject to foreign currency transaction risk when the Company's service contracts are denominated in a currency other than the currency in which the Company earns fees or incurs expenses related to such contracts. At December 31, 1998, the Company's most significant foreign currency exchange rate exposures were in the British pound, German mark and French franc. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in its contracts with customers, or the Company may hedge its transaction risk with foreign currency exchange contracts or options. The Company recognizes changes in value in income only when foreign currency exchange contracts or options are settled or exercised, respectively. There were several foreign exchange contracts relating to service contracts open at December 31, 1998, all of which are immaterial to the Company. As of December 31, 1998, the Company has a long-term obligation denominated in a foreign currency (approximately (pound)1.8 million) and a short-term obligation denominated in a foreign currency (approximately (pound)12.5 million). Assuming a hypothetical change of 10% in year-end exchange rates (a weakening of the U.S. dollar), the fair value of these instruments would increase by approximately $2.4 million. Interest Rates At December 31, 1998, the Company had outstanding $143.75 million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. The fair value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The carrying value of the Notes at December 31, 1998 approximates the fair value. A 10% increase in prevailing interest rates at December 31, 1998 would not result in a material decrease in the fair value of the Notes due to the short maturity. Currently, the Company does not hold any derivative instruments to manage interest rate risk. At December 31, 1998, the Company's investment portfolio consists primarily of U.S. Government Securities and money funds. The portfolio is primarily classified as available-for-sale and therefore these investments are recorded at fair value in the financial statements. These securities are exposed to market price risk which also takes into account interest rate risk. As of December 31, 1998, the fair value of the investment portfolio was $97.7 million, based on quoted market prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted market price is approximately $9.8 million. 11 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: We have audited the accompanying consolidated balance sheet of Quintiles Transnational Corp. (a North Carolina corporation) and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the consolidated financial statements of ENVOY Corporation, a company acquired during March 1999 in a transaction accounted for as a pooling of interests, as discussed in Note 3. Such statements are included in the consolidated financial statements of Quintiles Transnational Corp. and reflect total assets and total net revenues of 15 percent and 13 percent, respectively, of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for ENVOY Corporation, is based solely upon the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Quintiles Transnational Corp. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Raleigh, North Carolina, March 31, 1999 (except with respect to the acquisitions discussed in Note 15, as to which the date is June 3, 1999) 12 16 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Quintiles Transnational Corp. We have audited the accompanying consolidated balance sheet of Quintiles Transnational Corp. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quintiles Transnational Corp. and subsidiaries at December 31, 1997, and the consolidated results of their operations and their cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Raleigh, North Carolina January 26, 1998, except for Note 3, as to which the date is March 31, 1999 13 17 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 ----------- ----------- --------- Net revenue ......................................... $ 1,383,714 $ 1,007,334 $ 705,354 Costs and expenses: Direct .......................................... 716,451 526,057 362,424 General and administrative ...................... 425,507 315,386 237,239 Depreciation and amortization ................... 91,905 72,654 51,506 Non-recurring costs: Write-off of acquired in-process technology .. -- 6,600 8,700 Restructuring ................................ -- -- 13,102 Special pension contribution ................. -- -- 2,329 ----------- ----------- --------- 1,233,863 920,697 675,300 ----------- ----------- --------- Income from operations .............................. 149,851 86,637 30,054 Other income (expense): Interest income ................................... 11,418 8,835 8,654 Interest expense .................................. (12,097) (9,407) (12,997) Non-recurring transaction costs ................... -- -- (17,118) Other ............................................. (3,467) (2,033) (4,648) ----------- ----------- --------- (4,146) (2,605) (26,109) ----------- ----------- --------- Income before income taxes .......................... 145,705 84,032 3,945 Income taxes ........................................ 57,674 37,481 16,925 ----------- ----------- --------- Net income (loss) ................................... 88,031 46,551 (12,980) Non-equity dividend ................................. -- -- (16,706) ----------- ----------- --------- Net income (loss) available for common shareholders.. $ 88,031 $ 46,551 $ (29,686) =========== =========== ========= Basic net income (loss) per share ................... $ 0.86 $ 0.48 (0.33) Diluted net income (loss) per share ................. $ 0.81 $ 0.44 (0.33) Shares used in computing net income (loss) per share: Basic ............................................ 102,486 97,595 89,380 Diluted .......................................... 108,564 104,828 89,380
The accompanying notes are an integral part of these consolidated statements. 14 18 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
DECEMBER 31, ----------------------------- 1998 1997 ----------- --------- Assets Current assets: Cash and cash equivalents ................ $ 155,469 $ 89,673 Accounts receivable and unbilled services 358,319 259,158 Investments .............................. 32,241 44,372 Prepaid expenses ......................... 26,000 22,287 Other current assets ..................... 24,112 30,818 ----------- --------- Total current assets ............. 596,141 446,308 Property and equipment: Land, buildings and leasehold improvements 96,518 86,149 Equipment and software ................... 239,898 153,145 Furniture and fixtures ................... 42,081 31,756 Motor vehicles ........................... 46,455 39,899 ----------- --------- 424,952 310,949 Less accumulated depreciation ............ (153,870) (103,161) ----------- --------- 271,082 207,788 Intangibles and other assets: Intangibles .............................. 155,618 166,780 Investments .............................. 65,453 69,089 Deferred income taxes .................... 71,401 68,651 Deposits and other assets ................ 41,984 30,568 ----------- --------- 334,456 335,088 ----------- --------- Total assets ..................... $ 1,201,679 $ 989,184 =========== =========
The accompanying notes are an integral part of these consolidated statements. 15 19 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except for share data)
DECEMBER 31, ----------------------------- 1998 1997 ----------- --------- Liabilities and Shareholders' Equity Current liabilities: Lines of credit .................................................. $ 921 $ 11,550 Accounts payable ................................................. 63,163 44,533 Accrued expenses ................................................. 96,496 76,934 Unearned income .................................................. 150,393 93,796 Income taxes payable ............................................. 9,103 2,239 Current portion of obligations held under capital leases ........................................................ 12,692 15,282 Current portion of long-term debt and obligation ................. 20,978 624 Other current liabilities ........................................ 3,505 18,348 ----------- --------- Total current liabilities ................................ 357,251 263,306 Long-term liabilities: Obligations held under capital leases, less current portion ....................................................... 12,646 8,796 Long-term debt and obligation, less current portion .............. 145,152 162,200 Deferred income taxes ............................................ 30,578 28,067 Other liabilities ................................................ 12,398 13,421 ----------- --------- 200,774 212,484 ----------- --------- Total liabilities ........................................ 558,025 475,790 Commitments and contingencies Shareholders' Equity: Preferred stock, 3,264,800 and 4,349,451 shares issued and outstanding at December 31, 1998 and 1997, respectively ....... 33 43 Common Stock and additional paid-in capital, 103,461,712 and 99,578,181 shares issued and outstanding at December 31, 1998 and 1997, respectively ........................................ 559,443 513,156 Retained earnings ................................................ 93,263 8,310 Accumulated other comprehensive income ........................... (5,192) (7,513) Other equity ..................................................... (3,893) (602) ----------- --------- Total shareholders' equity ............................... 643,654 513,394 ----------- --------- Total liabilities and shareholders' equity ............... $ 1,201,679 $ 989,184 =========== =========
The accompanying notes are an integral part of these consolidated statements. 16 20 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Accumulated Employee Stock Other Com- Additional Ownership Plan Comprehensive Retained prehensive Preferred Common Paid-In Loan Guarantee Income Earnings Income Stock Stock Capital & Other Total --------- --------- --------- --------- ------ --------- --------- --------- Balance, December 31, 1995, as previously reported............. $ -- $ 32,618 $ 1,700 $ -- $ 342 $ 132,778 $ (1,495) $ 165,943 Adjustments for poolings of interest -- (2,859) -- -- 180 18,359 -- 15,680 --------- --------- --------- --------- ------ --------- --------- --------- Balance, December 31, 1995 .......... -- 29,759 1,700 -- 522 151,137 (1,495) 181,623 Issuance of common stock ............ -- -- -- -- 56 87,271 -- 87,327 Principal payments on ESOP loan ..... -- -- -- -- -- -- 420 420 Stock issued for acquisitions ....... -- 608 -- 43 9 47,297 -- 47,957 Issuance of common stock for other than cash ...................... -- -- -- -- 1 135 -- 136 Conversion of debt by pooled entity . -- -- -- -- 2 1,784 -- 1,786 Effect due to change in fiscal year of pooled entity ............... -- 324 -- -- -- -- -- 324 Recapitalization of pooled entity ... -- (29,028) -- -- -- (202) -- (29,230) Tax benefit from the exercise of non-qualified stock options .... -- -- -- -- -- 2,920 -- 2,920 Dividends paid by pooled entity ..... -- (1,797) -- -- -- -- -- (1,797) Non-equity dividend ................. -- (16,706) -- -- -- 14,921 -- (1,785) Other equity transactions ........... -- (679) -- -- -- 25 (62) (716) Comprehensive income: Net loss .......................... (12,980) (12,980) -- -- -- -- -- (12,980) Unrealized gain on marketable, securities, net of tax ........ 45 -- 45 -- -- -- -- 45 Foreign currency adjustments ...... (1,252) -- (1,252) -- -- -- -- (1,252) --------- Comprehensive loss .................. (14,187) ========= --------- --------- --------- ------ --------- --------- --------- Balance, December 31, 1996 .......... (30,499) 493 43 590 305,288 (1,137) 274,778 Issuance of common stock ............ -- -- -- -- 27 114,657 -- 114,684 Principal payments on ESOP loan ..... -- -- -- -- -- -- 536 536 Stock issued for acquisitions ....... -- (445) -- -- -- 244 -- (201) Issuance of common stock for other than cash ...................... -- -- -- -- 1 19 -- 20 Conversion of debt by pooled entity . -- -- -- -- 9 8,205 -- 8,214 Effect due to change in fiscal year of pooled entity ............... -- (3,775) 117 -- -- -- -- (3,658) Tax effect of pooling of interests .. -- -- -- -- -- 62,700 -- 62,700 Tax benefit from the exercise of non-qualified stock options .... -- -- -- -- -- 21,367 -- 21,367 Dividend paid by pooled entity ...... -- (3,522) -- -- -- (72) -- (3,594) Two-for-one stock split ............. -- -- -- -- 369 (369) -- -- Other equity transactions ........... -- -- -- -- -- 121 (1) 120 Comprehensive income: Net income ....................... 46,551 46,551 -- -- -- -- -- 46,551 Unrealized loss on marketable securities, net of tax ....... (104) -- (104) -- -- -- -- (104) Foreign currency adjustments ..... (8,019) -- (8,019) -- -- -- -- (8,019) --------- Comprehensive income ................ 38,428 ========= --------- --------- --------- ------ --------- --------- --------- Balance, December 31, 1997 .......... 8,310 (7,513) 43 996 512,160 (602) 513,394 Issuance of common stock ............ -- -- -- -- 17 24,263 -- 24,280 Principal payments on ESOP loan ..... -- -- -- -- -- -- 215 215 Loan to ESOP ........................ -- -- -- -- -- -- (3,429) (3,429) Stock issued for acquisitions ....... -- (272) -- -- 11 4,474 -- 4,213 Tax benefit from the exercise of non-qualified stock options .... -- -- -- -- -- 15,603 -- 15,603 Conversion of preferred stock by pooled entity .................. -- -- -- (10) 10 -- -- -- Dividend paid by pooled entity ...... -- (1,306) -- -- -- -- -- (1,306) Other equity transactions ........... -- (1,500) -- -- -- 1,909 (77) 332 Comprehensive income: Net income ....................... 88,031 88,031 -- -- -- -- -- 88,031 Unrealized loss on marketable securities, net of tax ......... (572) -- (572) -- -- -- -- (572) Foreign currency adjustments .... 2,893 -- 2,893 -- -- -- -- 2,893 --------- Comprehensive income ................ $ 90,352 ========= --------- --------- --------- ------ --------- --------- --------- Balance, December 31, 1998 .......... $ 93,263 $ (5,192) $ 33 $1,034 $ 558,409 $ (3,893) $ 643,654 ========= ========= ========= ====== ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 17 21 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------- --------- --------- Operating activities: Net income (loss) .................................... $ 88,031 $ 46,551 $ (12,980) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ...................... 91,905 72,654 52,133 Non-recurring transaction costs .................... -- -- 17,118 Net loss (gain) on sale of property and equipment .. 534 665 21 Write-off of certain intangible assets by pooled entity ........................................ -- 6,600 10,281 Provision for (benefit from) deferred income taxes . (1,846) 9,736 1,257 Change in operating assets and liabilities: Accounts receivable and unbilled services ........ (89,904) (41,078) (81,474) Prepaid expenses and other assets ................ (6,975) (14,858) (9,711) Accounts payable and accrued expenses ............ 38,956 12,378 31,351 Unearned income .................................. 50,955 1,231 48,321 Income taxes payable and other current liabilities (2,537) 8,739 4,023 Change in fiscal year of pooled entity ............. -- (581) (9,378) Other .............................................. 80 60 (42) --------- --------- --------- Net cash provided by operating activities ............ 169,199 102,097 50,920 Investing activities: Proceeds from disposition of property and equipment 6,297 4,642 2,284 Purchase of investments held-to-maturity ........... -- -- (95,939) Maturities of investments held-to-maturity ......... 10,593 35,579 43,345 Purchase of investments available-for-sale ......... (125,413) (137,597) (19,020) Proceeds from sale of investments available-for-sale 130,422 51,278 8,960 Purchase of other investments ...................... -- (12,011) -- Acquisition of property and equipment .............. (102,003) (88,473) (46,615) Acquisition of businesses, net of cash acquired .... (15,010) (51,813) (128,852) Payment of non-recurring transaction costs ......... -- (5,648) (11,440) Change in fiscal year of pooled entity ............. -- (17) 2,606 Loan to ESOP, net .................................. (3,429) -- -- Other .............................................. -- (1,998) -- --------- --------- --------- Net cash used in investing activities ................ $ (98,543) $(206,058) $(244,671)
18 22 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (in thousands)
Financing activities: Increase (decrease) in lines of credit, net .............. $ (9,912) $ 194 $ 2,907 Proceeds from issuance of debt ........................... -- 566 184,608 Repayment of debt ........................................ (23) (7,727) (101,999) Principal payments on capital lease obligations .......... (19,025) (17,082) (9,627) Issuance of common stock ................................. 24,280 110,758 132,257 Issuance of debt for capitalization of pooled entity ..... -- -- 45,197 Recapitalization of pooled entity ........................ -- -- (29,230) Payment of deferred financing costs ..................... -- -- (1,200) Non-equity dividend ...................................... -- -- (1,756) Dividend paid by pooled entity ........................... (1,629) (3,008) (2,189) Change in fiscal year of pooled entity ................... -- 58 1,399 Other .................................................... 832 (54) (295) --------- --------- --------- Net cash provided by (used in) financing activities ........ (5,477) 83,705 220,072 Effect of foreign currency exchange rate changes on cash ... 617 (1,869) 301 --------- --------- --------- Increase (decrease) in cash and cash equivalents ........... 65,796 (22,125) 26,622 Cash and cash equivalents at beginning of year ............. 89,673 111,798 85,176 --------- --------- --------- Cash and cash equivalents at end of year ................... $ 155,469 $ 89,673 $ 111,798 ========= ========= ========= Supplemental Cash Flow Information Interest paid ............................................ $ 11,677 $ 9,130 $ 11,781 Income taxes paid ........................................ 28,067 22,768 13,129 Non-cash Investing and Financing Activities Capitalized leases ....................................... 19,531 23,027 13,210 Equity impact of mergers and acquisitions ................ 5,046 1,134 (24,903) Equity impact from exercise of non-qualified stock options 5,498 24,049 2,920 Tax effect of pooled transactions ........................ -- 62,700 -- Conversion of debt to equity ............................. $ -- $ 8,214 $ 1,786
The accompanying notes are an integral part of these consolidated statements. 19 23 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company The Company is a leader in providing a full range of integrated product development and commercialization solutions to the global pharmaceutical, biotechnology and medical device industries. The Company is also a leader in providing electronic data interchange and healthcare informatics services to the healthcare market and provides healthcare policy consulting to governments and other organizations worldwide. Principles of Consolidation The accompanying supplemental consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currencies Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are recorded at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to equity. Gains and losses on foreign currency transactions are included in other income (expense). Revenue Recognition Many of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. The Company is also party to fee-for-service and unit-of-service contracts. The Company recognizes net revenue based upon (1) labor costs expended as a percentage of total labor costs expected to be expended (percentage of completion) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed under fee-for-service contracts or (3) completion of units of service or transactions processed for unit-of-service contracts. The Company's contracts provide for price renegotiation upon scope of work changes. The Company recognizes revenue related to these scope changes when the underlying services are performed and realization is assured. Most contracts are terminable upon 15 - 90 days' notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Concentration of Credit Risk Substantially all net revenue is earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company's customers. The Company does not require collateral or other securities to support customer receivables. Credit losses have been immaterial and consistently within management's expectations. No one customer accounted for greater than 10% of consolidated net revenue. Unbilled Services and Unearned Income In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, submission of appropriate billing detail or the achievement of contract milestones, depending on the type of contract. Unbilled services arise when services have been rendered but customers have not been billed. Similarly, unearned income represents prebillings for services that have not yet been rendered. 20 24 Cash Equivalents and Investments The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company does not report in the accompanying balance sheets cash held for customers for investigator payments in the amount of $7.3 million and $9.5 million at December 31, 1998 and 1997, respectively, that pursuant to agreements with these customers, remains the property of the customers. The Company's investments in debt and marketable equity securities are classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are recorded at amortized cost. Investments classified as available-for-sale are measured at market value and net unrealized gains and losses are recorded as a component of shareholders' equity until realized. In addition, the Company has recorded $19.2 million and $13.1 million in deposits and other assets at December 31, 1998 and 1997, respectively, that represents investments in equity securities of and advances to companies for which there are not readily available market values; such investments are accounted for using the cost method. Any gains or losses on sales of investments are computed by specific identification. Property and Equipment Property and equipment are carried at historical cost and are depreciated using the straight-line method over the shorter of the asset's estimated useful life or the lease term as follows: Buildings and leasehold improvements 3 - 50 years Equipment and software 3 - 10 years Furniture and fixtures 5 - 10 years Motor vehicles 3 - 5 years Intangible Assets Intangibles consist principally of the excess cost over the fair value of net assets acquired ("goodwill"). Goodwill and other intangible assets are being amortized on a straight-line basis over periods from two to 40 years. Accumulated amortization totaled $90.0 million and $61.6 million at December 31, 1998 and 1997, respectively. The carrying values of intangible assets are reviewed if the facts and circumstances suggest impairment. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining amortization period, the Company would reduce carrying values by the estimated shortfall of discounted cash flows. Net Income Per Share In February 1997, the FASB issued Statement No. 128, "Earnings per Share" which established new standards for computing and presenting net income per share information. As required, the Company adopted the provisions of Statement No. 128 in its 1997 financial statements and has restated all prior year net income per share information. Basic net income per share was determined by dividing net income available for common shareholders by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the potential dilution that could occur assuming conversion or exercise of all convertible securities and issued and unexercised stock options. A reconciliation of the net income available for common shareholders and number of shares used in computing basic and diluted net income per share is in Note 4. Income Taxes Income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred income taxes. Tax credits are accounted for as a reduction of tax expense in the year in which the credits reduce taxes payable. Research and Development Costs Research and development costs relating principally to new software applications and computer technology are charged to expense as incurred. These expenses totaled $6.2 million, $5.0 million and $4.1 million in 1998, 1997 and 1996, respectively. 21 25 Employee Stock Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Foreign Currency Hedging The Company uses foreign exchange contracts and options to hedge the risk of changes in foreign currency exchange rates associated with contracts in which the expenses for providing services are incurred in one currency and paid for by the customer in another currency. The Company recognizes changes in value in income only when contracts are settled or options are exercised. There were several foreign exchange contracts relating to service contracts open at December 31, 1998, all of which are immaterial to the Company. Recently Adopted Accounting Standards As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. Statement No. 130 requires foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale securities to be included in other comprehensive income. Prior to the adoption of Statement No. 130, the Company reported such adjustments and unrealized gains or losses separately in shareholders' equity. Amounts in prior year financial statements have been reclassified to conform to Statement No. 130. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company adopted the provisions of SOP No. 98-1 in fiscal 1998. The adoption of SOP No. 98-1 did not have a material impact on the Company's consolidated financial statements. Recently Issued Accounting Standard In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 requires that upon adoption, all derivative instruments be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in other comprehensive income pending recognition in earnings. The Company will adopt Statement No. 133 when required to do so on January 1, 2001. Because of its limited use of derivatives, the Company does not expect the application of Statement No. 133 to have a significant impact on its financial position or results of operations. 2. SHAREHOLDERS' EQUITY The Company is authorized to issue 25 million shares of preferred stock, $.01 per share par value. At December 31, 1998, 200 million common shares of $.01 par value were authorized. In October 1997, the Board of Directors authorized a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend. A total of 36,920,627 shares of Common Stock were issued in connection with the split. The stated par value of each share was not changed from $.01. A total of $369,000 was reclassified from additional paid-in capital to Common Stock. All references in the financial statements to number of shares, per share amounts, stock option data and market prices of Common Stock have been restated to reflect the stock split. In March 1997, the Company completed a stock offering of 11,040,000 shares of its Common Stock. Of the shares sold, 2,830,000 shares were sold by the Company and 8,210,000 shares by certain selling shareholders. The offering provided the Company with approximately $84.3 million, net of expenses. 22 26 3. MERGERS AND ACQUISITIONS On May 31, 1998, the Company acquired Cardiac Alert in exchange for 70,743 shares of the Company's Common Stock. On October 12, 1998, the Company acquired QED in exchange for 523,520 shares of the Company's Common Stock. On March 30, 1999, the Company acquired ENVOY in exchange for approximately 28,465,160 shares of the Company's Common Stock. Outstanding ENVOY options became options to acquire approximately 3,914,583 shares of the Company's Common Stock. On March 31, 1999, the Company acquired N&B in exchange for 271,146 shares of the Company's Common Stock. These transactions were accounted for by the pooling of interests method. Thus the accompanying consolidated financial statements have been restated to include historical financial data for each such acquisition. On February 27, 1998, ENVOY acquired the Express Bill Companies pursuant to separate agreements and plans of merger for an aggregate of 3.5 million shares of ENVOY common stock (approximately 4.1 million shares of the Company's Common Stock). These transactions were accounted for as poolings of interests and as such, the historical financial data for ENVOY includes the results of the Express Bill Companies. The following are reconciliations of net revenue and net income (loss) available for common shareholders previously reported by the Company for the years ended December 31, 1998, 1997 and 1996, with the combined amounts currently presented in the financial statements for those years:
YEAR ENDED DECEMBER 31, 1998 ---------------------------- (in thousands) Consolidated As Previously As Reported ENVOY N&B Restated ------------- ---------- ---------- ------------- Net revenue $1,188,012 $ 184,773 $ 10,929 $1,383,714 Net income (loss) available for common shareholders $ 83,679 $ 4,245 $ 107 $ 88,031
YEAR ENDED DECEMBER 31, 1997 ---------------------------- (in thousands) As Consolidated, Previously Cardiac As Reported Alert QED ENVOY N&B Restated ---------- ------- ------ --------- -------- ---------- Net revenue $852,900 $1,435 $5,096 $ 137,605 $ 10,298 $1,007,334 Net income (loss) $ 55,683 $ 140 $ 452 $ (9,197) $ (527) $ 46,551 available for common shareholders
YEAR ENDED DECEMBER 31, 1996 ---------------------------- (in thousands) As Consolidated, Previously Cardiac As Reported Alert QED ENVOY N&B Restated ---------- ------- ------ --------- -------- ---------- Net revenue $601,126 $ 341 $3,602 $ 90,572 $ 9,713 $ 705,354 Net income (loss) $ 7,879 $(245) $ 401 $(37,217) $ (504) $ (29,686) available for common shareholders
23 27 On February 2, 1998, the Company acquired Pharma in exchange for 132,000 shares of the Company's Common Stock. On February 26, 1998, the Company acquired T2A in exchange for 311,899 shares of the Company's Common Stock. On August 24, 1998, the Company acquired Royce in exchange for 664,194 shares of the Company's Common Stock. On September 9, 1998, the Company acquired DAS in exchange for 358,897 shares of the Company's Common Stock. These transactions were accounted for by the pooling of interests method and were previously included in the Company's historical consolidated financial statements. On May 6, 1998, ENVOY acquired all of the issued and outstanding capital stock of Synergy Health Care, Inc. for approximately $10.2 million in cash. ENVOY recorded approximately $6.9 million related to the excess cost over the fair value of net assets acquired. This acquisition was accounted for as a purchase and accordingly, the financial statements include the results of the business from the date of acquisition. On October 1, 1998, ENVOY acquired substantially all of the assets of Control-O-Fax Corporation and its wholly-owned subsidiary Control-O-Fax Systems, Inc. for approximately $8.3 million in cash. ENVOY recorded approximately $3.1 million related to the excess cost over the fair value of the net assets acquired. This acquisition was accounted for as a purchase. On June 2, 1997, the Company acquired Butler Communications, Inc. in exchange for 428,610 shares of the Company's Common Stock. On June 11, 1997, the Company acquired 100% of the stock of Medical Action Communications Limited for 1,131,394 shares of the Company's Common Stock. On July 2, 1997, the Company acquired CerebroVascular Advances, Inc. ("CVA") through an exchange of 100% of CVA's stock for 467,936 shares of the Company's Common Stock. On August 29, 1997, the Company acquired Intelligent Imaging, Inc. ("Intelligent Imaging") in exchange for 171,880 shares of the Company's Common Stock. On August 29, 1997, the Company acquired Clindepharm International (Pty) Limited in exchange for 477,966 shares of the Company's Common Stock. These transactions were accounted for by the pooling of interests method and were previously included in the Company's historical financial statements. On August 7, 1997, ENVOY acquired all of the issued and outstanding capital stock of Healthcare Data Interchange Corporation ("HDIC"), the EDI subsidiary of Aetna U.S. Healthcare Inc., for approximately $36.4 million in cash. ENVOY recorded approximately $38.9 million related to the excess cost over the fair value of net assets acquired. As part of the HDIC acquisition, ENVOY also recorded a one-time write-off of acquired in-process technology of approximately $6.0 million. The acquisition was accounted for as a purchase and accordingly, the financial statements include the results of operations of the business from the date of acquisition. On March 6, 1996, ENVOY's shareholders approved the acquisition of National Electronic Information Corporation ("NEIC"). As part of the $88.4 million purchase price, ENVOY issued approximately 4.1 million shares of ENVOY stock (approximately 4.7 million shares of the Company's Stock). ENVOY recorded approximately $59.6 million related to the excess cost over the fair value of net assets acquired. The NEIC acquisition was financed through equity and debt financing. ENVOY issued approximately 3.7 million shares of ENVOY Preferred Stock (approximately 4.3 million shares of the Company's Preferred Stock) and 333,333 shares of ENVOY common stock (approximately 388,600 shares of the Company's Common Stock). In addition, ENVOY entered into a credit agreement, whereby ENVOY obtained $50 million in bank financing. In connection with the NEIC acquisition, ENVOY recorded a one-time write-off of acquired in-process technology of approximately $8.0 million. The acquisition was accounted for as a purchase and accordingly, the financial statements include the results of operations of the business from the date of acquisition. On May 13, 1996, the Company acquired the operating assets of Lewin-VHI, Inc., a healthcare consulting company, for approximately $30 million in cash. The Company recorded approximately $20 million related to the excess cost over the fair value of net assets acquired. The acquisition was accounted for as a purchase and accordingly, the financial statements include the results of operations of the business from the date of acquisition. On November 29, 1996, the Company acquired 100% of the outstanding stock of Innovex Limited ("Innovex"), an international contract pharmaceutical organization based in Marlow, U.K., for 18,428,478 shares of the Company's Common Stock and the exchange of options to purchase 1,572,452 shares of the Company's Common Stock. On November 22, 1996, the Company acquired BRI International, Inc. ("BRI"), a global contract research organization, through an exchange of 100% of BRI's stock for 3,229,724 shares of the Company's Common Stock. Related to the Innovex and BRI transactions, the Company recognized approximately $17.1 million in non-recurring transaction costs and approximately $10.7 million in non-recurring restructuring costs. These transactions were accounted for by the pooling of interests method and were previously included in the Company's historical financial statements. In addition to the above mergers and acquisitions, the Company has completed other mergers and acquisitions all of which are immaterial to the financial statements. For such immaterial pooling of interests transactions, the Company's financial statements for the year of the transaction have been restated to include the pooled companies from January 1 of that year, but the financial statements for years prior to the year of the transaction have not been restated because the effect of such restatement would be immaterial. For the Company's 1998 purchase transactions, the Company has not presented pro forma disclosures because the results of operations for these transactions are not material to the Company. 24 28 4. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Net income (loss) available for common shareholders: Net income (loss) $ 88,031 $ 46,551 $(12,980) Non-equity dividend -- -- (16,706) -------- -------- -------- Net income (loss) available for common shareholders $ 88,031 $ 46,551 $(29,686) ======== ======== ======== Weighted average shares: Basic weighted average shares 102,486 97,595 89,380 Effect of dilutive securities: Stock options 2,813 2,884 -- Preferred Stock 3,265 4,349 -- -------- -------- -------- Diluted adjusted weighted average shares and assumed conversions 108,564 104,828 89,380 ======== ======== ======== Basic net income (loss) per share $ 0.86 $ 0.48 $ (0.33) ======== ======== ======== Diluted net income (loss) per share $ 0.81 $ 0.44 $ (0.33) ======== ======== ========
Options to purchase 1.5 million shares of common stock with exercise prices ranging between $46.75 and $56.25 per share were outstanding during 1998 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The conversion of the Company's 4.25% Convertible Subordinated Notes ("Notes") into approximately 3.5 million shares of common stock was not included in the computation of diluted net income per share because the effect would be antidilutive. For additional disclosures regarding the outstanding stock options and the Notes, see "Employee Benefit Plans" and "Credit Arrangements and Obligations." 5. CREDIT ARRANGEMENTS AND OBLIGATIONS On May 31, 1998, the Company acquired a clinical trial supply production and warehouse facility in Livingston, Scotland for a purchase commitment valued at (pound)1.75 million (approximately $2.9 million), with payment due in May, 2001. On May 23, 1996, the Company completed a private placement of $143.75 million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. Net proceeds to the Company amounted to approximately $139.7 million. The Notes are convertible into 3,474,322 shares of Common Stock, at the option of the holder, at a conversion price of $41.37 per share, subject to adjustment under certain circumstances, at any time after August 21, 1996. The Notes are redeemable, at the option of the Company, beginning May 31, 1999. Interest is payable on the notes semi-annually on May 31 and November 30 each year. The Company has a $150 million senior unsecured credit facility with a U.S. bank. At the option of the Company, interest is charged at either the bank's prime rate (7.75% at December 31, 1998) or LIBOR rate (5.06563% at December 31, 1998) plus an applicable rate (.2% at December 31, 1998). No balance was outstanding as of December 31, 1998. At December 31, 1998, the Company had a (pound)15.0 million (approximately $25.1 million) line of credit which was guaranteed by certain of the Company's U.K. subsidiaries. Interest is charged at the bank's base rate (7.25% at December 31, 1998), plus 1%, with a minimum of 5.5%. The line of credit had an outstanding balance of (pound)0 and (pound)1.5 million (approximately $2.5 million) at December 31, 1998 and 1997, respectively. At December 31, 1998, the Company had a (pound)5.0 million (approximately $8.4 million) unsecured line of credit with a second U.K. bank. The line of credit was charged interest at the bank's published base rate (6.25% at December 31, 1998) plus 1.5%. The line of credit had an outstanding balance of (pound).2 million (approximately $.4 million) and (pound)4.7 million (approximately $7.8 million) at December 31, 1998 and 1997, respectively. In accordance with their terms, both of these facilities expired in May 1999. In conjunction with the ENVOY transaction, ENVOY's $50.0 million revolving credit facility with a U.S. bank was terminated. ENVOY did not have any amounts outstanding on this facility at December 31, 1998 and 1997. 25 29 In March 1995, Quintiles Scotland Limited, a wholly-owned subsidiary of the Company, acquired assets of a drug development facility in Edinburgh, Scotland from Syntex Pharmaceuticals Limited, a member of the Roche group based in Basel, Switzerland for a purchase commitment valued at (pound)12.5 million (approximately $20.9 million), with payment due in December 1999. In connection with this commitment, the Company has committed to purchasing at December 31, 1998 approximately (pound)2.4 million (approximately $3.5 million) under foreign exchange contracts. The Company is obligated to purchase up to an additional (pound)2.9 million through December 28, 1999 in varying amounts as the daily dollar-to-pound exchange rate ranges between $1.5499 and $1.6800. Long-term debt and obligation consist of the following (in thousands):
DECEMBER 31, ------------------------ 1998 1997 -------- -------- 4.25% Convertible Subordinated Notes due 2000 $143,747 $143,750 Other notes payable ......................... 222 624 Long-term obligations ....................... 23,830 20,985 -------- -------- 167,799 165,359 Less: current portion .................. 20,978 624 unamortized issuance costs ....... 1,669 2,535 -------- -------- $145,152 $162,200 ======== ========
Maturities of long-term debt and obligation at December 31, 1998 are as follows (in thousands): 1999 $ 20,978 2000 143,824 2001 2,989 2002 8 -------- $167,799 ======== The fair value of the Company's long-term debt approximates carrying value. 26 30 6. INVESTMENTS The following is a summary as of December 31, 1998 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE ---------------------------- ------ ------- ------ ------ U.S. Government Securities -- Maturing in one year or less $2,990 $ 15 $ -- $3,005 Other 2,330 217 -- 2,547 ------ ------- ------ ------ $5,320 $ 232 $ -- $5,552 ====== ======= ====== ======
GROSS GROSS AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET SECURITIES: COST GAINS LOSSES VALUE ------------------ --------- ---------- ---------- -------- U.S. Government Securities -- Maturing between one and three years $ 6,506 $ 2 $ (9) $ 6,499 Maturing between three and five years 43,584 9 (298) 43,295 Maturing between five and seven years 13,000 13 (39) 12,974 State and Municipal Securities -- Maturing in one year or less 2,000 -- -- 2,000 Maturing between one and three years 1,568 27 -- 1,595 Equity Securities 556 -- (63) 493 Money Funds 25,512 -- (594) 24,918 Other 605 -- (5) 600 -------- -------- -------- -------- $ 93,331 $ 51 $ (1,008) $ 92,374 ======== ======== ======== ========
The following is a summary as of December 31, 1997 of held-to-maturity and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET SECURITIES: COST GAINS LOSSES VALUE ---------------- --------- ---------- ---------- ------ U.S. Government Securities -- Maturing in one year or less $ 5,892 $ 15 $ -- $ 5,907 Maturing between one and three years 2,814 16 -- 2,830 State and Municipal Securities -- Maturing in one year or less 2,688 9 -- 2,697 Maturing between one and three years 2,329 17 -- 2,346 Other 2,312 97 -- 2,409 ------- ------- ------- ------- $16,035 $ 154 $ -- $16,189 ======= ======= ======= =======
GROSS GROSS AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET SECURITIES: COST GAINS LOSSES VALUE ------------------ --------- ---------- ---------- -------- U.S. Government Securities -- Maturing in one year or less $ 2,499 $ -- $ -- $ 2,499 Maturing between one and three years 52,061 -- (57) 52,004 Maturing between three and five years 7,000 5 -- 7,005 State and Municipal Securities -- Maturing in one year or less 3,060 -- -- 3,060 Maturing between three and five years 2,595 30 -- 2,625 Money Funds 30,301 -- (68) 30,233 -------- -------- -------- -------- $ 97,516 $ 35 $ (125) $ 97,426 ======== ======== ======== ========
27 31 The gross realized gains and losses on sales of available-for-sale securities were $81,000 and $210,000, respectively, in 1998. The net adjustment to unrealized holding gains (losses) on available-for-sale securities included as a separate component of shareholders' equity was ($572,000), ($104,000) and $45,000 in 1998, 1997 and 1996, respectively. 7. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES Accounts receivable and unbilled services consist of the following (in thousands):
DECEMBER 31, --------------------------- 1998 1997 --------- --------- Trade: Billed $ 202,248 $ 157,481 Unbilled services 148,310 95,421 --------- --------- 350,558 252,902 Other 14,133 11,847 Allowance for doubtful accounts (6,372) (5,591) --------- --------- $ 358,319 $ 259,158 ========= =========
Substantially all of the Company's accounts receivable and unbilled services are due from companies in the pharmaceutical, biotechnology, medical device, and healthcare industries and are a result of contract research, sales, marketing, healthcare consulting, health information management and EDI services provided by the Company on a global basis. The percentage of accounts receivable and unbilled services by region is as follows:
DECEMBER 31, ---------------- REGION 1998 1997 ------ ---- ---- Americas: United States 58% 54% Other 1 1 --- --- Americas 59 55 Europe and Africa: United Kingdom 27 31 Other 12 13 --- --- Europe and Africa 39 44 Asia - Pacific 2 1 --- --- 100% 100% === ===
8. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
DECEMBER 31, ---------------------- 1998 1997 ------- ------- Compensation and payroll taxes .... $50,195 $33,296 Transaction and restructuring costs 943 2,751 Other ............................. 45,358 40,887 ------- ------- $96,496 $76,934 ======= =======
28 32 9. LEASES The Company leases certain office space and equipment under operating leases. The leases expire at various dates through 2049 with options to cancel certain leases at five-year increments. Some leases contain renewal options. Annual rental expenses under these agreements were approximately $40.2 million, $27.9 million and $24.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The Company leases certain assets, primarily vehicles, under capital leases. Capital lease amortization is included with depreciation and amortization expenses and accumulated depreciation in the accompanying financial statements. The following is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1998 (in thousands):
CAPITAL OPERATING LEASES LEASES -------- -------- 1999 $ 13,994 $ 42,924 2000 12,907 35,903 2001 284 26,969 2002 174 21,912 2003 6 16,815 Thereafter 1 58,604 -------- -------- Total minimum lease payments 27,366 $203,127 ======== Amounts representing interest 2,028 -------- Present value of net minimum payments 25,338 Current portion 12,692 -------- Long-term capital lease obligations $ 12,646 ========
10. INCOME TAXES The components of income tax expense are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- ------- -------- Current: Federal $ 41,761 $16,158 $ 5,500 State 7,473 5,084 2,851 Foreign 12,005 6,775 6,686 -------- ------- -------- 61,239 28,017 15,037 Deferred expense (benefit): Federal (1,186) 6,968 (50) Foreign (2,379) 2,496 1,938 -------- ------- -------- (3,565) 9,464 1,888 -------- ------- -------- $ 57,674 $37,481 $ 16,925 ======== ======= ========
The Company has allocated directly to additional paid-in capital approximately $15.6 million in 1998, $21.4 million in 1997 and $2.9 million in 1996 related to the tax benefit from non-qualified stock options exercised. 29 33 The differences between the Company's consolidated tax expense and the expense computed at the 35% U.S. statutory tax rate were as follows (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Federal taxes at statutory rate $ 51,999 $ 30,085 $ 2,200 State and local income taxes, net of federal benefit 4,849 2,375 1,304 Non-deductible transaction costs 315 -- 7,740 Non-deductible goodwill amortization 7,242 7,055 5,447 Foreign earnings taxed at different rates (1,808) 714 518 Utilization of net operation loss carryforwards (2,194) (398) 163 Non-taxable income (590) (1,521) -- Other (2,139) (829) (447) -------- -------- -------- $ 57,674 $ 37,481 $ 16,925 ======== ======== ========
Income before income taxes from foreign operations was approximately $29.3 million, $4.0 million and $24.3 million for the years 1998, 1997 and 1996, respectively. Income from foreign operations was approximately $64.7 million, $35.2 million and $25.5 million for the years 1998, 1997 and 1996, respectively. The difference between income from operations and income before income taxes is due primarily to intercompany charges which eliminate in consolidation. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $77.9 million at December 31, 1998. Those earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries. The tax effects of temporary differences that give rise to significant portions of deferred tax (assets) liabilities are presented below (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 --------- --------- Deferred tax liabilities: Depreciation and amortization $ 31,255 $ 29,896 Prepaid expenses 3,389 1,335 Other 4,336 3,283 --------- --------- Total deferred tax liabilities 38,980 34,514 Deferred tax assets: Net operating loss carryforwards (24,817) (17,930) Accrued expenses and unearned income (15,437) (8,787) Goodwill net of amortization (96,460) (103,527) Other (7,135) (7,353) --------- --------- Total deferred tax assets (143,849) (137,597) Valuation allowance for deferred tax assets 53,600 55,904 --------- --------- Net deferred tax assets (90,249) (81,693) --------- --------- Net deferred tax (assets) liabilities $ (51,269) $ (47,179) ========= =========
The decrease in the Company's valuation allowance for deferred tax assets to $53.6 million at December 31, 1998 from $55.9 million at December 31, 1997 is primarily due to the reduction of prior year valuation allowances relating to net operating loss carryforwards that the Company now believes are more likely than not to be utilized. In connection with the Innovex acquisition, the Company established an initial deferred tax asset of $108 million to reflect the tax benefits arising from the deductibility of goodwill recorded for tax purposes. The Innovex business combination was accounted for as a pooling of interests for financial reporting purposes, and no goodwill was recorded. In addition, the Company recorded a $45.3 million valuation allowance related to this taxable goodwill to reflect uncertainties that might affect the realization of this deferred tax asset. These uncertainties include the projection of future taxable and foreign source income, the interplay of U.S. tax statutes and the Company's ability to minimize foreign tax credit limitations. Based on its analysis, the Company believes it is more likely than not that a portion of the deferred tax asset related to this taxable goodwill will not be recognized. The resulting net asset of $62.7 million was recorded as an increase to additional paid-in capital. 30 34 The Company's deferred income tax expense (benefit) results from the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 -------- -------- ------- Excess (deficiency) of tax over financial reporting: Depreciation and amortization $ 10,208 $ 13,883 $ 9,753 Net operating loss carryforwards (6,816) (6,057) (1,907) Valuation allowance reduction (2,194) (636) -- Accrued expenses and unearned income (6,611) (874) (4,368) Other items, net 1,848 3,148 (1,590) -------- -------- ------- $ (3,565) $ 9,464 $ 1,888 ======== ======== =======
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for 100% of capital expenditures on certain assets under the Inland Revenue Service guidelines. For 1998, 1997 and 1996, these allowances were $23 million, $28 million and $11 million, respectively, which helped to generate net operating loss carryforwards of $7 million to be used to offset taxable income in that country. Assuming the U.K. subsidiaries continue to invest in qualified capital expenditures at an adequate level, the portion of the deferred tax liability relating to the U.K. subsidiaries may be deferred indefinitely. The Company recognizes a deferred tax benefit for foreign generated operating losses at the time of the loss, as the Company believes it is more likely than not that the benefit will be realized. The Company has net operating loss carryforwards of approximately $55 million in various entities within the United Kingdom which have no expiration date and has over $10 million of net operating loss carryforwards from various foreign jurisdictions which have different expiration periods. In addition, the Company has approximately $18.6 million of U.S. state operating loss carryforwards which expire through 2012 and has approximately $3 million of U.S. federal operating loss carryforwards which begin to expire in 2005. 11. EMPLOYEE BENEFIT PLANS The Company has numerous employee benefit plans that cover substantially all eligible employees in the countries in which the plans are offered. Contributions are primarily discretionary, except in some countries where contributions are contractually required. Plans include Approved Profit Sharing Schemes in the U.K. and Ireland that are funded with Company stock, a defined contribution plan funded by Company stock in Australia, Belgium and Canada, defined contribution plans in Belgium, Holland, Sweden, and Great Britain, a profit sharing scheme in France, and defined benefit plans in Germany and the U.K. The defined benefit plan in Germany is an unfunded plan, which is provided for in the balance sheet. In addition, the Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees. The Company sponsors a leveraged Employee Stock Ownership Plan (the "ESOP") for all eligible employees. In 1992, the Company loaned the ESOP approximately $2.0 million to purchase 413,222 shares of Company common stock. As of December 31, 1997, the loan was repaid. In connection with its acquisition of BRI, the Company merged the existing BRI ESOP, also a leveraged plan, into the Company's ESOP effective September 1, 1997. During 1998, the ESOP borrowed approximately $4.0 million from the Company to purchase 100,000 shares of Company Common Stock. The ESOP's trustee holds such shares in suspense and releases them for allocation to participants as the loan is repaid. The Company's contributions to the ESOP are used to repay the loan principal and interest. Compensation expense for the Company's contributions to the ESOP totaled $1,743,000, $568,000, and $585,000 in 1998, 1997, and 1996, respectively. As of December 31, 1998 and 1997, 1,520,950 and 1,773,000 shares, respectively, were allocated to participants. Shares unallocated and held in suspense as of December 31, 1998, totaled 172,740 and had a fair value of $9.2 million. The Company has an employee savings and investment plan (401(k) Plan) available to all eligible employees meeting certain specified criteria. The Company matches employee deferrals at varying percentages, set at the discretion of the Board of Directors. For the years ended December 31, 1998, 1997 and 1996, the Company expensed $3.4 million, $2.1 million, and $1.1 million., respectively, as matching contributions. The Company has an Employee Stock Purchase Plan (the "Purchase Plan"), which is intended to provide eligible employees an opportunity to acquire the Company's Common Stock. Participating employees have the option to purchase shares at 85% of the lower of the closing price per share of common stock on the first or last day of the calendar quarter. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. During 1998, 1997 and 1996, 141,727 shares, 84,522 shares and 9,576 shares, respectively, were purchased under the Purchase Plan. At December 31, 1998, 285,163 shares were available for issuance under the Purchase Plan. 31 35 The Company has stock option plans to provide incentives to eligible employees, officers and directors in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock. The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Options, particularly those assumed or exchanged as a result of acquisitions, have various vesting schedules and expiration periods. The majority of options granted under the Executive Compensation Plan typically vest 25% per year over four years expiring ten years from the date of grant. Stock option activity during the periods indicated is as follows:
Weighted-Average Number Exercise Price ---------- ---------------- Outstanding at December 31, 1995 6,113,116 $ 6.79 Granted 4,875,318 32.29 Exercised (1,524,894) 2.51 Canceled (728,752) 23.83 ---------- Outstanding at December 31, 1996 8,734,788 12.62 Granted 3,206,831 31.69 Exercised (2,075,369) 6.76 Canceled (530,734) 20.77 ---------- Outstanding at December 31, 1997 9,335,516 20.02 Granted 3,148,054 43.26 Exercised (1,535,542) 12.38 Canceled (728,087) 25.40 ---------- Outstanding at December 31, 1998 10,219,941 $ 27.99
Pro forma information regarding net income and net income per share is required by Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement No. 123. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $16.07, $12.64 and $5.83 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Employee Stock Options Employee Stock Purchase Plan ---------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Expected dividend yield 0% 0% 0% 0% 0% -- Risk-free interest rate 4.8% 5.9% 6.0% 4.9% 5.1% -- Expected volatility 42.0% 41.0% 40.0% 40.0% 34.4% -- Expected life (in years from vest) 1.35 1.20 1.10 0.25 0.25 --
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are transferable. All available option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 32 36 11. EMPLOYEE BENEFIT PLANS -- Continued The Company's pro forma information follows (in thousands, except for net income per share information):
Year Ended December 31, --------------------------------- 1998 1997 1996 -------- -------- -------- Pro forma net income (loss) available for common shareholders $ 69,714 $ 34,458 $(38,143) Pro forma basic net income (loss) per share 0.68 0.35 (0.43) Pro forma diluted net income (loss) per share $ 0.64 $ 0.33 $ (0.43)
Selected information regarding stock options as of December 31, 1998 follows:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------- ------------------------------------ Number of Exercise Price Weighted-Average Weighted-Average Number of Weighted-Average Options Range Exercise Price Remaining Life Options Exercise Price --------- --------------- ---------------- ---------------- --------- ---------------- 2,371,966 $ 0.20 - $ 8.58 $ 6.66 5.6 585,256 $ 4.77 2,118,068 $ 8.75 - $26.37 19.00 7.3 308,640 16.56 2,130,132 $26.59 - $36.25 33.00 7.8 715,467 32.36 1,988,200 $36.32 - $43.06 38.19 8.6 1,005,622 38.23 1,611,575 $43.13 - $56.25 51.68 9.7 14,888 47.39 --------- --------- 10,219,941 $28.03 7.7 2,629,873 $ 26.69 ========== =========
12. OPERATIONS BY GEOGRAPHIC LOCATION The table below presents the Company's operations by geographical location. The Company attributes revenues to geographical locations based upon (1) customer service activities, (2) operational management, (3) business development activities and (4) customer contract coordination. The Company's operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals. (in thousands)
1998 1997 1996 ---------- ---------- -------- Net revenue: Americas: United States $ 767,440 $ 555,025 $346,678 Other 15,078 7,325 2,908 ---------- ---------- -------- Americas 782,518 562,350 349,586 Europe and Africa: United Kingdom 340,345 252,043 200,999 Other 232,047 170,248 142,058 ---------- ---------- -------- Europe and Africa 572,392 422,291 343,057 Asia-Pacific: 28,804 22,693 12,711 ---------- ---------- -------- $1,383,714 $1,007,334 $705,354 ========== ========== ======== Long-lived assets: Americas: United States $ 95,067 $ 72,385 $ 51,035 Other 1,544 1,130 460 ---------- ---------- -------- Americas 96,611 73,515 51,495 Europe and Africa: United Kingdom 148,384 116,529 79,374 Other 20,713 15,330 11,353 ---------- ---------- -------- Europe and Africa 169,097 131,859 90,727 Asia-Pacific: 5,374 2,414 1,947 ---------- ---------- -------- $ 271,082 $ 207,788 $144,169 ========== ========== ========
33 37 13. SEGMENTS The following table presents the Company's operations by reportable segment. The Company is managed through three reportable segments, namely, the product development service group, the commercialization service group and the QUINTERNET(TM) informatics service group. Management has distinguished these segments based on the normal operations of the Company. The product development group is primarily responsible for all phases of clinical research and outcomes research consulting. The commercialization group is primarily responsible for sales force deployment and strategic marketing services. The QUINTERNET(TM) informatics group is primarily responsible for electronic data interchange and related informatics and includes primarily ENVOY. The Company does not include non-recurring costs ($20.3 million, $27.0 million and $40.5 million in 1998, 1997 and 1996, respectively), 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. (in thousands)
1998 1997 1996 ---------- ---------- -------- Net revenue: Product development $ 702,763 $ 513,665 $415,561 Commercialization 496,178 356,064 199,221 QUINTERNET(TM) informatics 184,773 137,605 90,572 ---------- ---------- -------- $1,383,714 $1,007,334 $705,354 ========== ========== ======== Income from operations: Product development $ 79,306 $ 51,551 $ 41,352 Commercialization 47,298 37,685 18,208 QUINTERNET(TM) informatics 43,506 24,441 11,032 ---------- ---------- -------- $ 170,110 $ 113,677 $ 70,592 ========== ========== ======== Total assets: Product development $ 751,069 $ 609,040 $410,135 Commercialization 267,091 213,519 150,106 QUINTERNET(TM) informatics 183,519 166,625 156,368 ---------- ---------- -------- $1,201,679 $ 989,184 $716,609 ========== ========== ======== Expenditures to acquire long-lived assets: Product development $ 77,468 $ 68,219 $ 31,782 Commercialization 18,349 11,510 9,477 QUINTERNET(TM) informatics 6,186 8,744 5,356 ---------- ---------- -------- $ 102,003 $ 88,473 $ 46,615 ========== ========== ======== Depreciation and amortization expense: Product development $ 33,069 $ 20,359 $ 14,841 Commercialization 22,681 17,864 11,168 QUINTERNET(TM) informatics 36,155 34,431 25,497 ---------- ---------- -------- $ 91,905 $ 72,654 $ 51,506 ========== ========== ========
34 38 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly results of operations (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Net revenue $309,068 $335,759 $357,985 $380,902 Income from operations 30,971 35,526 40,390 42,964 Net income available for common shareholders 18,872 21,012 23,744 24,403 Basic net income per share 0.19 0.21 0.23 0.24 Diluted net income per share $ 0.17 $ 0.19 $ 0.22 $ 0.22 Range of stock prices $34.000-52.428 $42.250-53.500 $33.375-52.000 $41.000-56.875 YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Net revenue $224,015 $239,352 $255,307 $288,660 Income from operations 18,560 22,204 18,215 27,658 Net income available for common shareholders 9,299 12,048 9,671 15,533 Basic net income per share 0.10 0.12 0.10 0.16 Diluted net income per share $ 0.09 $ 0.12 $ 0.09 $ 0.15 Range of stock prices $26.625-39.000 $21.500-35.000 $35.032-43.688 $31.000-43.500
15. SUBSEQUENT EVENTS On January 1, 1999, the Company acquired substantial assets of HMR's Kansas City-based Drug Innovation and Approval facility for approximately $93 million in cash, most of which is expected to be paid in the second half of 1999 when the acquisition of the physical facility is completed. As a part of this transaction, the Company was awarded a $436 million contract for continued support and completion of ongoing HMR development projects over a five-year period. In addition, HMR will offer the Company the opportunity to provide all U.S. outsourcing services up to an additional $144 million over the same period. On February 12, 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit naming as defendants Richard L. Borison, Bruce I. Diamond, 14 pharmaceutical companies and Quintiles Laboratories Limited, a subsidiary of the Company. The complaint alleges that certain drug trials conducted by Drs. Borison and Diamond in which plaintiff alleges he participated between 1988 and 1996 were not properly conducted or supervised, that Plaintiff had violent adverse reactions to many of the drugs and that his schizophrenia was aggravated by the drug trials. Consequently, Plaintiff alleges that he was subject to severe mortification, injured feelings, shame, public humiliation, victimization, emotional turmoil and distress. The compliant alleges claims for battery, fraudulent inducement to participate in the drug experiments, medical malpractice, negligence in conducting the experiments, and intentional infliction of emotional distress. Plaintiff seeks to recover his actual damages in unspecified amounts, medical expenses, litigation costs, and punitive damages. Nowhere in the complaint are found any specific allegations against Quintiles Laboratories Limited nor any specific factual connection between the Company and the Plaintiff's claims. The Company believes the claims alleged against it are vague and meritless, and the recovery sought is baseless. The Company intends to vigorously defend against these claims. On February 17, 1999, the Company acquired Oak Grove, a leader in providing current Good Manufacturing Practice compliance services to the pharmaceutical, biotechnology and medical device industries. The Company acquired Oak Grove in exchange for 87,948 shares of the Company's Common Stock. The acquisition of Oak Grove is expected to be accounted for as a purchase. 35 39 On March 29, 1999, the Company acquired PMSI and its core company, Scott-Levin, a leader in pharmaceutical market information and research services in the U.S. The Company acquired PMSI in exchange for approximately 4,993,787 shares of the Company's Common Stock. Outstanding PMSI options became options to acquire approximately 440,426 shares of the Company's Common Stock. In addition, the Company agreed to pay contingent value payments to former PMSI stockholders who deferred receipt of one-half of the shares of the Company's Common Stock they were entitled to receive in the transaction until June 14, 1999. The right to receive contingent value payments terminated in accordance with the merger agreement. Accordingly, no contingent value payments were payable to any former PMSI shareholder. The acquisition of PMSI will be accounted for as a purchase. Three class action complaints were filed in 1998, and later consolidated into a single action, against ENVOY and certain of its executive officers. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and also asserts additional claims under Tennessee common law for fraud and negligent misrepresentation. The complaint alleges, among other things, that ENVOY failed to disclose that its financial statements were not prepared in accordance with generally accepted accounting principles due to the improper write-off of certain acquired in-process technology, resulting in ENVOY's stock trading at allegedly artificially inflated prices. The plaintiffs in this action seek unspecified compensatory damages, attorney's fees and other relief. ENVOY believes that these claims are without merit and intends to defend the allegations vigorously. Neither the likelihood of an unfavorable outcome nor the amount of the ultimate liability, if any, with respect to these claims can be determined at this time. On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a Scotland-based clinical research organization. The Company acquired Minerva in exchange for 1,143,625 shares of the Company's Common Stock. The acquisition of Minerva was accounted for as a pooling of interests. However, the consolidated financial statements have not been restated to include Minerva. On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a Chicago-based healthcare market information company. The Company acquired SMG in exchange for 1,170,291 shares of the Company's Common Stock. The acquisition of SMG was accounted for as a pooling of interests. However, the consolidated financial statements have not been restated to include SMG. 36 40 Item 7. Financial Statements and Exhibits (c) Exhibits Exhibit Number Description of Exhibit - -------------- ---------------------- 23.01 Consent of Arthur Andersen LLP 23.02 Consent of Ernst & Young LLP 23.03 Consent of Ernst & Young LLP 27.01 Restated Financial Data Schedule (SEC Use Only) 27.02 Restated Financial Data Schedule (SEC Use Only) 27.03 Restated Financial Data Schedule (SEC Use Only) 27.04 Restated Financial Data Schedule (SEC Use Only) 27.05 Restated Financial Data Schedule (SEC Use Only) 27.06 Restated Financial Data Schedule (SEC Use Only) 27.07 Restated Financial Data Schedule (SEC Use Only) 27.08 Restated Financial Data Schedule (SEC Use Only) 99.01 Report of Ernst & Young LLP 41 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 hereunto duly authorized. QUINTILES TRANSNATIONAL CORP. By: /s/ Rachel R. Selisker Dated: July 19, 1999 Rachel R. Selisker Chief Financial Officer and Executive Vice President Finance 42 EXHIBIT INDEX Exhibit Number Description of Exhibit - -------------- ---------------------- 23.01 Consent of Arthur Andersen LLP 23.02 Consent of Ernst & Young LLP 23.03 Consent of Ernst & Young LLP 27.01 Restated Financial Data Schedule (SEC Use Only) 27.02 Restated Financial Data Schedule (SEC Use Only) 27.03 Restated Financial Data Schedule (SEC Use Only) 27.04 Restated Financial Data Schedule (SEC Use Only) 27.05 Restated Financial Data Schedule (SEC Use Only) 27.06 Restated Financial Data Schedule (SEC Use Only) 27.07 Restated Financial Data Schedule (SEC Use Only) 27.08 Restated Financial Data Schedule (SEC Use Only) 99.01 Report of Ernst & Young LLP EX-23.01 2 CONSENT ARTHUR ANDERSEN 1 Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: As independent public accountants, we hereby consent to the incorporation of our report included in this Current Report on Form 8-K, into the Company's previously filed Registration Statement Nos. 33-91026 on Form S-8, 333-03603 on Form S-8, 333-16553 on Form S-8, 333-40493 on Form S-8, 333-60797 on Form S-8, 333-19009 on Form S-3, 333-28919 on Form S-3, 333-38181 on Form S-3, 333-40497 on Form S-3, 333-48403 on Form S-3, 333-65743 on Form S-3, 333-75183 on Form S-8 and 333-83051 on Form S-3 filed July 16, 1999. /s/ ARTHUR ANDERSEN LLP Raleigh, North Carolina July 15, 1999 EX-23.02 3 CONSENT ERNST & YOUNG 1 Exhibit 23.02 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference into the Company's Registration Statements on Form S-8 (Registration Nos. 33-91026, 333-16553, 333-03603, 333-40493, 333-75183 and 333-60797) and the Registration Statements on Form S-3 (Registration Nos. 333-19009, 333-28919, 333-38181, 333-40497, 333-65743, 333-48403 and 333-83051) of our report dated January 26, 1998, except for Note 3, as to which the date is March 31, 1999 with respect to the consolidated financial statements of Quintiles Transnational Corp. included in its Current Report on Form 8-K to be dated July 19, 1999 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Raleigh, North Carolina July 15, 1999 EX-23.03 4 CONSENT ERNST & YOUNG 1 Exhibit 23.03 Consent of Ernst & Young LLP Independent Auditors We consent to the incorporation by reference in the Registration Statements (Nos. 33-91026, 333-03603, 333-16553, 333-40493, 333-60797, 333-19009, 333-28919, 333-38181, 333-40497, 333-48403, 333-65743, 333-75183 and 333-83051) of Quintiles Transnational Corp. of our report dated January 29, 1999, with respect to the financial statements of ENVOY Corporation included in this Current Report on Form 8-K to be filed with the Securities and Exchange Commission on or about July 19, 1999. /s/ Ernst & Young LLP Nashville, Tennessee July 15, 1999 EX-27.01 5 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 111,798 37,623 222,084 0 0 395,374 215,848 71,679 716,609 246,549 181,276 0 43 590 274,145 716,609 0 705,354 0 675,300 13,112 0 12,997 3,945 16,925 (12,980) 0 0 0 (29,686) (0.33) (0.33)
EX-27.02 6 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 89,673 44,372 264,749 5,591 0 446,308 310,949 103,161 989,184 263,306 170,996 0 43 996 512,355 989,184 0 1,007,334 0 920,697 (6,802) 0 9,407 84,032 37,481 46,551 0 0 0 46,551 0.48 0.44
EX-27.03 7 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 155,469 32,241 364,691 6,372 0 596,141 424,952 153,870 1,201,679 357,251 157,798 0 33 1,034 642,587 1,201,679 0 1,383,714 0 1,233,863 (7,951) 0 12,097 145,705 57,674 88,031 0 0 0 88,031 0.86 0.81
EX-27.04 8 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 149,767 32,666 238,018 0 0 420,092 239,637 83,220 867,284 252,457 185,413 0 43 600 421,689 867,284 0 224,015 0 205,455 (2,212) 0 2,904 17,868 8,569 9,299 0 0 0 9,299 .10 .09
EX-27.05 9 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 116,313 29,297 253,459 0 0 430,184 267,385 91,800 890,242 259,251 181,900 0 43 586 441,179 890,244 0 463,367 0 422,603 (3,532) 0 4,352 39,944 18,597 21,347 0 0 0 21,347 .22 .21
EX-27.06 10 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 86,783 36,223 261,026 0 0 422,371 281,253 94,149 917,042 262,803 183,652 0 43 596 630,370 917,042 0 718,674 0 659,695 (5,911) 0 (7,904) 57,093 26,075 31,018 0 0 0 31,018 .32 .30
EX-27.037 11 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 63,790 52,379 355,537 0 0 515,461 339,472 102,263 1,089,610 312,154 180,324 0 33 1,012 562,597 1,089,610 0 644,827 0 578,330 (4,574) 0 6,173 64,899 25,015 39,884 0 0 0 39,884 0.39 0.36
EX-27.08 12 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 113,014 44,867 348,210 0 0 550,217 375,879 114,688 1,131,472 319,470 179,001 0 33 1,014 595,361 1,131,472 0 1,002,812 0 896,242 (9,678) 0 12,468 104,098 40,470 63,628 0 0 0 63,628 0.62 0.59
EX-99.01 13 REPORT ERNST & YOUNG 1 Exhibit 99.01 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders ENVOY Corporation We have audited the consolidated balance sheet of ENVOY Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1998 not presented separately herein. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ENVOY Corporation and subsidiaries at December 31, 1998, and the consolidated results of their operations and their cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Nashville, Tennessee January 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----