##### 



Securities and Exchange Commission Washington, D.C. 20549
 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended
    
    September 30, 2004
 Commission file number
    
    000-23520
 QUINTILES TRANSNATIONAL CORP. 
  North Carolina
    
    56-1714315(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)4709 Creekstone Dr., Suite 200Durham, NC
    
    27703-8411(Address of principal executive offices)
    
    (Zip Code)
 (919) 998-2000 
  N/A 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). o Yes x No The number of shares of Common Stock, $.01 par value, outstanding as of
September 30, 2004 was 125,000,000.




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##### 



Index PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statements (unaudited)Condensed consolidated balance sheets -September 30, 2004 and December 31, 2003
    
    
    3Condensed consolidated statements ofoperations  Three and nine months ended September 30,2004 (successor); September 26, 2003 throughSeptember 30, 2003 (successor); July 1, 2003 throughSeptember 25, 2003 (predecessor); January 1, 2003through September 25, 2003 (predecessor)
    
    
    4Condensed consolidated statements ofcash flows  Nine months ended September 30,2004 (successor); September 26, 2003 throughSeptember 30, 2003 (successor); January 1, 2003 throughSeptember 25, 2003 (predecessor)
    
    
    5Notes to condensed consolidated financialstatements  September 30, 2004
    
    
    6Item 2.
    
    Management's Discussion and Analysis ofFinancial Condition and Results of Operations
    
    
    38Item 3.
    
    Quantitative and Qualitative Disclosure AboutMarket Risk
    
    
    72Item 4.
    
    Controls and Procedures
    
    
    72Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    73Item 2.
    
    Unregistered Sales of Equity Securities andUse of Proceeds    Not Applicable
    
    
    74Item 3.
    
    Defaults Upon Senior Securities  NotApplicable
    
    
    74Item 4.
    
    Submission of Matters to a Vote of SecurityHolders  Not Applicable
    
    
    74Item 5.
    
    Other Information  Not Applicable
    
    
    74Item 6.
    
    Exhibits
    
    
    75Signatures
    
    
    
    
    76Exhibit Index
    
    
    
    
    77
  2




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##### 



Part I. Financial Information 
 Item 1. Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Balance Sheets
  September 30
    
    December 312004
    
    2003Successor
    
    Successor(unaudited)
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    548,684
    
    
    $
    373,622Trade accounts receivable and unbilled services, net
    
    
    288,292
    
    
    
    237,142Investments in debt securities
    
    
    629
    
    
    
    611Prepaid expenses
    
    
    20,296
    
    
    
    20,096Other current assets and receivables
    
    
    45,806
    
    
    
    52,723Assets of discontinued operation
    
    
    
    
    
    
    88,549Total current assets
    
    
    903,707
    
    
    
    772,743Property and equipment
    
    
    327,835
    
    
    
    300,902Less accumulated depreciation
    
    
    (52,376
    )
    
    
    (15,072
    )275,459
    
    
    
    285,830Intangibles and other assets:Investments in debt securities
    
    
    11,079
    
    
    
    10,426Investments in marketable equity securities
    
    
    27,203
    
    
    
    58,294Investments in non-marketable equity securities and loans
    
    
    56,416
    
    
    
    48,556Investments in unconsolidated affiliates
    
    
    120,520
    
    
    
    121,176Commercial rights and royalties
    
    
    115,924
    
    
    
    12,528Accounts receivable  unbilled
    
    
    44,865
    
    
    
    40,107Advances to customer
    
    
    
    
    
    
    70,000Goodwill
    
    
    168,544
    
    
    
    181,327Other identifiable intangibles, net
    
    
    285,212
    
    
    
    335,251Deferred income taxes
    
    
    4,142
    
    
    
    4,093Deposits and other assets
    
    
    46,861
    
    
    
    52,380880,766
    
    
    
    934,138Total assets
    
    $
    2,059,932
    
    
    $
    1,992,711Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    352,578
    
    
    $
    312,700Credit arrangements
    
    
    19,034
    
    
    
    20,669Unearned income
    
    
    187,738
    
    
    
    191,255Income taxes payable
    
    
    32,403
    
    
    
    24,911Other current liabilities
    
    
    2,366
    
    
    
    3,169Liabilities of discontinued operation
    
    
    
    
    
    
    7,081Total current liabilities
    
    
    594,119
    
    
    
    559,785Long-term liabilities:Credit arrangements, less current portion
    
    
    772,709
    
    
    
    773,587Deferred income taxes
    
    
    98,999
    
    
    
    99,622Minority interest
    
    
    35,425
    
    
    
    1,380Other liabilities
    
    
    20,125
    
    
    
    23,239927,258
    
    
    
    897,828Total liabilities
    
    
    1,521,377
    
    
    
    1,457,613Shareholders equity:Common stock and additional paid-in capital,
125,000,000 shares issued and outstanding at
September 30, 2004 and December 31, 2003
    
    
    521,891
    
    
    
    521,725Retained earnings (accumulated deficit)
    
    
    1,198
    
    
    
    (7,427
    )Accumulated other comprehensive income
    
    
    15,466
    
    
    
    20,800Total shareholders equity
    
    
    538,555
    
    
    
    535,098Total liabilities and shareholders equity
    
    $
    2,059,932
    
    
    $
    1,992,711
 The accompanying notes are an integral part of these condensed
consolidated financial statements. 3




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Statements of Operations
   Three months
    
    September 26,

    


    July 1,
    
    Nine months

    
    September 26,

    

    January 1,ended
    
    2003 through

    

    2003 through
    
    ended
    
    2003 through

    

    2003 throughSeptember 30,
    
    September 30,

    

    September 25,
    
    September 30,
    
    September 30,

    

    September 25,2004
    
    2003

    
    2003
    
    2004
    
    2003

    

    2003Successor
    
    Successor

    
    Predecessor
    
    Successor
    
    Successor

    

    PredecessorNet revenues
    
    $
    440,071
    
    
    $
    19,247
    

    

    $
    384,295
    
    
    $
    1,289,031
    
    
    $
    19,247
    

    

    $
    1,196,247Add: reimbursed service costs
    
    
    95,441
    
    
    
    3,465
    

    

    
    77,545
    
    
    
    260,206
    
    
    
    3,465
    

    

    
    268,683Gross revenues
    
    
    535,512
    
    
    
    22,712
    

    

    
    461,840
    
    
    
    1,549,237
    
    
    
    22,712
    

    

    
    1,464,930Costs, expenses and other:Costs of revenues
    
    
    391,784
    
    
    
    14,708
    

    

    
    299,874
    
    
    
    1,120,448
    
    
    
    14,708
    

    

    
    969,474General and administrative
    
    
    159,815
    
    
    
    5,971
    

    

    
    129,082
    
    
    
    474,503
    
    
    
    5,971
    

    

    
    397,318Interest expense (income), net
    
    
    14,838
    
    
    
    1,033
    

    

    
    (2,246
    )
    
    
    44,033
    
    
    
    1,033
    

    

    
    (10,374
    )Other expense (income), net
    
    
    2,543
    
    
    
    (308
    )

    

    
    34
    
    
    
    551
    
    
    
    (308
    )

    

    
    (5,391
    )Transaction and restructuring
    
    
    
    
    
    
    
    

    

    
    50,261
    
    
    
    
    
    
    
    
    

    

    
    54,148Gain on sale of portion of an
investment in a subsidiary
    
    
    
    
    
    
    
    

    

    
    
    
    
    
    (24,688
    )
    
    
    
    

    

    
    Non-operating gain on change
of interest transaction
    
    
    
    
    
    
    
    

    

    
    
    
    
    
    (10,030
    )
    
    
    
    

    

    
    568,980
    
    
    
    21,404
    

    

    
    477,005
    
    
    
    1,604,817
    
    
    
    21,404
    

    

    
    1,405,175(Loss) income before income
taxes
    
    
    (33,468
    )
    
    
    1,308
    

    

    
    (15,165
    )
    
    
    (55,580
    )
    
    
    1,308
    

    

    
    59,755Income tax (benefit) expense
    
    
    (15,715
    )
    
    
    471
    

    

    
    204
    
    
    
    (2,307
    )
    
    
    471
    

    

    
    27,224(Loss) income before
minority interests and equity
in (losses) earnings of
unconsolidated
affiliates
    
    
    (17,753
    )
    
    
    837
    

    

    
    (15,369
    )
    
    
    (53,273
    )
    
    
    837
    

    

    
    32,531Minority interests and equity
in (losses) earnings of
unconsolidated affiliates
    
    
    (1,068
    )
    
    
    22
    

    

    
    (12
    )
    
    
    (1,524
    )
    
    
    22
    

    

    
    4(Loss) income from
continuing operations
    
    
    (18,821
    )
    
    
    859
    

    

    
    (15,381
    )
    
    
    (54,797
    )
    
    
    859
    

    

    
    32,535(Loss) income from
discontinued operation
    
    
    (521
    )
    
    
    (40
    )

    

    
    (2,211
    )
    
    
    9,620
    
    
    
    (40
    )

    

    
    4,626Gain from sale of
discontinued operation, net
of income taxes
    
    
    53,802
    
    
    
    
    

    

    
    
    
    
    
    53,802
    
    
    
    
    

    

    
    Net income (loss)
    
    $
    34,460
    
    
    $
    819
    

    

    $
    (17,592
    )
    
    $
    8,625
    
    
    $
    819
    

    

    $
    37,161
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 4




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows
   Nine months
    
    September 26,

    

    January 1,ended
    
    2003 through

    
    2003 throughSeptember 30,
    
    September 30,

    

    September 25,2004
    
    2003

    

    2003Successor
    
    Successor

    

    PredecessorOperating activitiesNet income
    
    $
    8,625
    
    
    $
    819
    

    

    $
    37,161(Income) loss from discontinued operation
    
    
    (9,620
    )
    
    
    40
    

    

    
    (4,626
    )Gain from the sale of discontinued operation, net of income taxes
    
    
    (53,802
    )
    
    
    
    

    

    
    (Loss) income from continuing operations
    
    
    (54,797
    )
    
    
    859
    

    

    
    32,535Adjustments to reconcile (loss) income from continuing operations to
net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    100,415
    
    
    
    1,604
    

    

    
    61,478Amortization of debt issuance costs
    
    
    2,643
    
    
    
    
    

    

    
    Amortization of commercial rights and royalties assets
    
    
    8,301
    
    
    
    
    
    
    

    
    Transaction costs
    
    
    
    
    
    
    
    

    

    
    44,057Restructuring charge (payments) accrual, net
    
    
    (6,915
    )
    
    
    
    

    

    
    283Loss (gain) from sales and impairments of investments, net
    
    
    6,303
    
    
    
    (213
    )

    

    
    (27,363
    )Loss on disposals of property and equipment, net
    
    
    4,108
    
    
    
    
    

    

    
    445Gain from sale of certain assets
    
    
    (5,835
    )
    
    
    
    

    

    
    Gain from sale of a portion of an investment in a subsidiary
    
    
    (24,688
    )
    
    
    
    

    

    
    Non-operating gain on change of interest transaction
    
    
    (10,030
    )
    
    
    
    

    

    
    Provision for deferred income tax expense
    
    
    11,216
    
    
    
    
    

    

    
    12,592Change in accounts receivable, unbilled services and unearned income
    
    
    (59,006
    )
    
    
    
    

    

    
    25,559Change in other operating assets and liabilities
    
    
    (9,087
    )
    
    
    (2,250
    )

    

    
    16,898Other
    
    
    (1,140
    )
    
    
    
    

    

    
    (1,347
    )Net cash (used in) provided by operating activities
    
    
    (38,512
    )
    
    
    
    

    

    
    165,137Investing activitiesAcquisition of property and equipment
    
    
    (37,953
    )
    
    
    
    

    

    
    (39,143
    )Repurchase of common stock in Transaction
    
    
    
    
    
    
    (1,617,567
    )

    

    
    Payment of transaction costs in Transaction
    
    
    (17,393
    )
    
    
    (16,073
    )

    

    
    (2,896
    )Acquisition of businesses, net of cash acquired
    
    
    (2,189
    )
    
    
    
    

    

    
    Acquisition of intangible assets
    
    
    
    
    
    
    
    

    

    
    (5,118
    )Acquisition of commercial rights and royalties
    
    
    (13,000
    )
    
    
    
    

    

    
    (17,710
    )Proceeds from disposal of discontinued operation, net of expenses
    
    
    177,936
    
    
    
    
    

    

    
    Proceeds from sale of certain assets
    
    
    9,218
    
    
    
    
    

    

    
    Proceeds from sale of minority interest in subsidiary, net of expenses
    
    
    35,963
    
    
    
    
    

    

    
    Proceeds from disposition of property and equipment
    
    
    5,384
    
    
    
    
    

    

    
    6,219(Purchases of) proceeds from debt securities, net
    
    
    (612
    )
    
    
    
    

    

    
    25,267Purchases of equity securities and other investments
    
    
    (12,045
    )
    
    
    
    

    

    
    (10,830
    )Proceeds from sale of equity securities and other investments
    
    
    30,210
    
    
    
    
    

    

    
    61,926Other
    
    
    250
    
    
    
    
    

    

    
    Net cash provided by (used in) investing activities
    
    
    175,769
    
    
    
    (1,633,640
    )

    

    
    17,715Financing activitiesPrincipal payments on credit arrangements, net
    
    
    (14,305
    )
    
    
    (912
    )

    

    
    (13,248
    )Proceeds from issuance of debt, net of expenses, in Transaction
    
    
    
    
    
    
    734,864
    

    

    
    Capital contribution in Transaction
    
    
    
    
    
    
    390,549
    

    

    
    Dividend from discontinued operation
    
    
    10,874
    
    
    
    
    

    

    
    3,138Proceeds from change in interest transaction
    
    
    41,773
    
    
    
    
    

    

    
    Issuance of common stock, net (predecessor)
    
    
    
    
    
    
    
    

    

    
    7,042Net cash provided by (used in) financing activities
    
    
    38,342
    
    
    
    1,124,501
    

    

    
    (3,068
    )Effect of foreign currency exchange rate changes on cash
    
    
    (537
    )
    
    
    
    

    

    
    17,922Increase (decrease) in cash and cash equivalents
    
    
    175,062
    
    
    
    (509,139
    )

    

    
    197,706Cash and cash equivalents at beginning of period
    
    
    373,622
    
    
    
    841,961
    

    

    
    644,255Cash and cash equivalents at end of period
    
    $
    548,684
    
    
    $
    332,822
    

    

    $
    841,961
 The accompanying notes are an integral part of these condensed
consolidated financial statements. 5




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##### 



Quintiles Transnational Corp. and Subsidiaries 
   September 30, 2004 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2003 of Quintiles Transnational Corp. (the
Company). The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 2003
financial statements have been reclassified to conform with the 2004 financial
statement presentation. In August 2004, the Company completed the sale of certain assets related to its
Bioglan Pharmaceuticals business (Bioglan) as further described in Note 10.
Accordingly, the operating results and balance sheet items of Bioglan have been
reflected separately in the accompanying financial statements as a discontinued
operation. On September 25, 2003, the Company completed its merger transaction with Pharma
Services Holding, Inc. (Pharma Services) pursuant to which Pharma Services
Acquisition Corp. (Acquisition Corp.) was merged with and into the Company,
with the Company continuing as the surviving corporation and an indirect wholly
owned subsidiary of Pharma Services (the Transaction or Pharma Services
Transaction). As a result of the Transaction, the Companys results of
operations, financial position and cash flows prior to the date of the
Transaction are presented as the Predecessor. The financial effects of the
Transaction and the Companys results of operations, financial position and
cash flows as the surviving corporation following the Transaction are presented
as the Successor. To clarify and emphasize that the Successor Company has
been presented on an entirely new basis of accounting, the Company has
separated Predecessor and Successor operations with a vertical black line,
where appropriate. 6




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##### 



Quintiles Transnational Corp. and Subsidiaries 2. Employee Stock Compensation Pharma Services granted options to purchase 492,500 shares of its common stock
to certain of the Companys employees during the nine months ended September
30, 2004, 280,000 of which were granted during the quarter ended September 30,
2004. As of September 30, 2004, there were options to acquire 3,805,000 shares
of Pharma Services common stock outstanding. In addition, Pharma Services issued restricted common stock to certain of the
Companys employees, other than executive officers, for full recourse notes
with a fixed interest rate. As of September 30, 2004, there are approximately
4.2 million shares of such restricted stock outstanding. The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, during the
third quarter of 2004 utilizing the modified prospective approach as described
in SFAS No. 148. Under the modified prospective approach, the Company has
restated its 2004 financial statements to reflect the effect of the adoption of
SFAS No. 123 as of January 1, 2004. The stock compensation expense recognized
as a result of the adoption was $43,000 for each of the first and second
quarters of 2004, such that the net loss as restated for the
adoption of SFAS No. 123 is $15,707 and $10,128 for the first and
second quarters of 2004, respectively. The results for prior years have not been restated. Information regarding net (loss) income is required by SFAS No. 123, as amended
by SFAS No. 148, and has been determined as if the Company had accounted for
the stock options granted and the restricted stock issued for recourse notes by
its parent company, Pharma Services, to the Companys employees under the fair
value method of SFAS No. 123 for the periods not restated (i.e., periods prior
to January 1, 2004). There were no outstanding stock options or restricted stock for the period from
September 26, 2003 through September 30, 2003. The following table illustrates the effect on net (loss) income if the Company
had adopted SFAS No. 123 as amended by SFAS No. 148 the first day of the
periods presented (in thousands): Three months
    
    September 26,

    

    July 1, 2003
    
    Nine months
    
    September 26,

    

    January 1,ended
    
    2003 through

    

    through
    
    ended
    
    2003 through

    

    2003 throughSeptember 30,
    
    September 30,

    

    September 25,
    
    September 30,
    
    September 30,

    

    September 25,2004
    
    2003

    

    2003
    
    2004
    
    2003

    

    2003Successor
    
    Successor

    

    Predecessor
    
    Successor
    
    Successor

    

    PredecessorNet (loss) income, as reported
    
    $
    34,460
    
    
    $
    819
    

    

    $
    (17,592
    )
    
    $
    8,625
    
    
    $
    819
    

    

    $
    37,161Add: stock based compensation
expense included in net
income (loss) as reported,
net of income tax
    
    
    80
    
    
    
    
    

    

    
    7,262
    
    
    
    166
    
    
    
    
    

    

    
    7,262Less: total
stock-compensation employee
compensation expense
determined under SFAS No.
123, net of related income
taxes
    
    
    (80
    )
    
    
    
    

    

    
    (10,955
    )
    
    
    (166
    )
    
    
    
    

    

    
    (18,435
    )Pro forma net income (loss)
    
    $
    34,460
    
    
    $
    819
    

    

    $
    (21,285
    )
    
    $
    8,625
    
    
    $
    819
    

    

    $
    25,988
 7




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##### 



Quintiles Transnational Corp. and Subsidiaries 3. Commercial Rights and Royalties Commercial rights and royalties related assets are classified either as
commercial rights and royalties, accounts receivable  unbilled, or advances to
customers in the non-current asset section of the accompanying balance sheets.
As of September 30, 2004, the amounts paid to Eli Lilly and Company (LLY)
under the CymbaltaTM contract have been classified as a commercial rights and
royalties asset as a result of CymbaltaTM receiving the United States Food and
Drug Administration (FDA) approval during the third quarter of 2004. Below
is a summary of the commercial rights and royalties related assets (in
thousands): September 30,
    
    December 31,2004
    
    2003Successor
    
    SuccessorCommercial rights and royalties
    
    $
    115,924
    
    
    $
    12,528Accounts receivable-unbilled
    
    
    44,865
    
    
    
    40,107Advances to customer
    
    
    
    
    
    
    70,000Total
    
    $
    160,789
    
    
    $
    122,635
 Below is a brief description of these agreements: In May 1999, the Company entered into an agreement with CV Therapeutics, Inc.
(CVTX) to commercialize Ranexa for angina in the United States and Canada.
In July 2003, CVTX and the Company entered into a new agreement that superseded
the prior agreement. Under the terms of the July 2003 agreement, all rights to
RanexaTM reverted back to CVTX, and CVTX will owe no royalty payments to the
Company. Under the July 2003 agreement, the Company received a warrant to
purchase 200,000 shares of CVTX common stock at $32.93 per share during the
five-year term commencing July 9, 2003. CVTX also is obligated to purchase
from the Company, within six months of the approval of RanexaTM, services of at
least $10.0 million in aggregate value or to pay the Company a lump sum amount
equal to 10% of any shortfall from $10.0 million in purchased services. In December 1999, the Company obtained the distribution rights to market four
pharmaceutical products in the Philippines from a large pharmaceutical customer
in exchange for providing certain commercialization services amounting to
approximately $5.1 million during the two-year period ended December 31, 2001.
As of September 30, 2004, the Company has capitalized 251.8 million Philippine
pesos (approximately $4.5 million) related to the cost of acquiring these
commercial rights and is amortizing these costs over five years. Under the
terms of the agreement, the customer has the option to reacquire the rights to
the four products from the Company after seven years for a price to be
determined at the exercise date. 8




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##### 



Quintiles Transnational Corp. and Subsidiaries In June 2001, the Company entered into an agreement with Pilot Therapeutics,
Inc. (PLTT) to commercialize a natural therapy for asthma, AIROZIN, in the
United States and Canada. Under the terms of the agreement, the Company will
provide commercialization services for AIROZIN and a milestone-based $6.0
million line of credit which is convertible into PLTTs common stock, of which
$4.0 million has been funded by the Company. Further, based on achieving
certain milestones, the Company committed to funding 50% of sales and marketing
activities for AIROZIN over five years with a $6.0 million limit per year.
Following product launch, the agreement provides for the Company to receive
royalties based on the net sales of AIROZIN. The royalty percentage will vary
to allow the Company to achieve a minimum rate of return. The Form 10-QSB
filed by PLTT on September 5, 2003 indicated that PLTT will need significant
additional financing to continue operations beyond September 15, 2003, and PLTT
has not made any additional filings with the Securities and Exchange Commission
since that time. As such, the Company recorded an impairment of $4.0 million
during 2003 on the loan receivable from PLTT and reduced its five-year
contingent commitment for the sales force and marketing activities to zero at
December 31, 2003. In 2004, PLTT ceased active operations and is pursuing a
recapitalization strategy. During September 2004, the Company signed a
non-binding letter of intent with PLTTs banker to convert the Companys debt
to equity in PLTT as part of PLTT's recapitalization plan. In December 2001, the Company entered into an agreement with Discovery
Laboratories, Inc. (DSCO) to commercialize, in the United States, DSCOs
humanized lung surfactant, Surfaxin®, which is currently in Phase III studies.
Under the terms of the agreement, the Company acquired 791,905 shares of DSCOs
common stock and a warrant to purchase 357,143 shares of DSCOs common stock at
$3.48 per share for a total of $3.0 million, and agreed to make available to
DSCO a line of credit up to $10.0 million for pre-launch commercialization
services as certain milestones are achieved by DSCO. As of September 30, 2004,
the Company has made $8.5 million available under the line of credit, of which
$5.7 million has been funded. In addition, the Company has received warrants
to purchase approximately 320,000 shares of DSCO common stock as milestones
were achieved and will receive warrants to purchase approximately 38,000 shares
of DSCO common stock at an exercise price of $3.03 per share for each million
dollars made available by the Company in excess of $8.5 million. The Company
has also agreed to pay the sales and marketing activities of this product up to
$10.0 million per year for seven years. In return, the Company will receive
commissions based on net sales of Surfaxin® for meconium aspiration syndrome,
infant respiratory distress syndrome and all off-label uses for 10 years.
The subscription agreements under which the Company acquired its shares of DSCO
common stock included participation rights to acquire additional shares of
DSCO. The Company exercised its participation rights in two such transactions
with DSCO. During November 2002, the Company purchased an additional 266,246
shares of DSCO common stock along with a detachable warrant to purchase 119,811
shares of DSCO common stock for $517,000. Using the cashless exercise feature,
the Company exercised the November 2002 warrant and received 83,357 shares of
DSCO common stock. During July 2003, the Company purchased an additional
218,059 shares of DSCO common stock along with a detachable warrant to purchase
43,612 shares of DSCO common stock for $1.2 million. In February 2004, the
Company used the cashless feature to exercise warrants to purchase 357,143
shares of common stock and received 249,726 shares of DSCO common stock. In
April 2004, the Company used the cashless feature to purchase 213,334 shares of
common stock and received 160,318 shares of DSCO common stock. In July 2004,
the Company used the cashless feature to purchase 106,666 shares of common
stock and received 68,084 shares of DSCO common stock. During November 2004,
the Company and DSCO agreed to restructure its commercialization
arrangements to allow
DSCO to assume the entire commercialization program for Surfaxin®. As part of
this new arrangement, the Company will not pay for the sales and marketing 9




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##### 



Quintiles Transnational Corp. and Subsidiaries activities of Surfaxin®, nor will the Company receive commissions on the net
sales of Surfaxin®. Further, the Company has extended the $8.5 million line of
credit through December 31, 2006. In return for these modifications, the
Company will receive a warrant to purchase 850,000 shares of DSCO common stock
at an exercise price of $7.19 per share and will also continue to have a
preferred provider relationship with DSCO. In January 2002, the Company entered into an agreement with Kos
Pharmaceuticals, Inc. (KOSP) to commercialize, in the United States, KOSPs
treatments for cholesterol disorders, Advicor® and Niaspan®. Advicor® was
launched in January 2002 and Niaspan® is also on the market. Under the terms
of the agreement, the Company provided, at its own expense, a dedicated sales
force of 150 cardiovascular-trained representatives who, in combination with
KOSPs sales force of 300 representatives, commercialized Advicor® and Niaspan®
for the first two years after launch (January 2002 to December 2003). In
return, the Company received a warrant to purchase 150,000 shares of KOSPs
common stock at $32.79 per share, exercisable in installments over two years.
Further, the Company will receive commissions based on net sales of the product
from 2002 through 2006. The commission payments are subject to minimum and
maximum amounts, as amended September 30, 2003, of $50.0 million and $65.0
million, respectively, over the life of the agreement. Through September 30,
2004, the Company has received payments totaling approximately $19.4 million.
The proceeds are reported in the statement of cash flows as an operating
activity  change in operating assets and liabilities. During the second quarter of 2002, the Company finalized the arrangements under
its previously announced letter of intent with a large pharmaceutical customer
to market pharmaceutical products in Belgium, Germany and Italy. Either party
may cancel the contract at six-month intervals in the event that sales are not
above certain levels specified. In the first quarter of 2003 and the third
quarter of 2003, the agreements in Germany and Belgium, respectively, were
terminated. For the remaining portion of the contract in Italy, the Company
will provide, at its own expense, sales and marketing resources over the
five-year life of the agreement. As of September 30, 2004, the Company
estimates the cost of its minimum obligation over the remaining contract life
for the remaining territory of Italy to be approximately $12 million, in return
for which the customer will pay the Company royalties on product sales in
excess of certain baselines. The total royalty is comprised of a minimal
royalty on the baseline sales targets for these products plus a share of
incremental net sales above these baselines. In July 2002, the Company entered into an agreement with LLY to support LLY in
its commercialization efforts for Cymbalta in the United States. LLY has
submitted a New Drug Application, or NDA, for Cymbalta, which was approved in
the third quarter of 2004 by the FDA for the treatment of depression. Under
the terms of the agreement, the Company will provide, at its expense, more than
500 sales representatives to supplement the extensive LLY sales force in the
promotion of Cymbalta for the five years following product launch. The
Companys sales force will promote Cymbalta in its primary, or P1, position
within sales calls. During the first three years LLY will pay for the
remainder of the capacity of this sales force, referred to as the P2 and P3
positions, on a fee-for-service basis. The Company will make marketing and
milestone payments to LLY totaling $110.0 million of which $70.0 million was
paid in 2002 and the remaining $40.0 million is due throughout the four
quarters following FDA approval, which occurred on August 10, 2004.
Accordingly, the Company paid a further $10 million to LLY in the third quarter
of 2004, bringing its cumulative payments to $80 million. In addition, the
Company will pay LLY an additional $5 million for the approval of CymbaltaTM
for diabetic peripheral neuropathic pain. The revenues related to this
indication will be included in the basis for the royalties paid to the Company. 10




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##### 



Quintiles Transnational Corp. and Subsidiaries The $80 million in payments made and the $35 million in payments the Company is
liable for have been capitalized and will be amortized in proportion to the
estimated revenues as a reduction of revenue over the five-year service period.
The sales force costs are being expensed as incurred. The payments are
reported in the statement of cash flows as an investing activity  acquisition
of commercial rights and royalties. Prior to FDA approval, the $70 million
payment was classified as an advance to customer on the balance sheet.
Following the FDA approval, this amount and subsequent payments are classified
as a commercial rights and royalties asset. In return for the P1 position for
Cymbalta and the marketing and milestone payments, LLY will pay to the Company
8.25% of U.S. Cymbalta sales for depression and other neuroscience indications
over the five-year service period followed by a 3% royalty over the subsequent
three years. During the quarter ended September 30, 2004, the Company recorded
revenue of $2.9 million for the P2 and P3 positions. The Company has not
recorded any revenue related to the royalty on CymbaltaTM as the amount is not
fixed and determinable until the Company receives documentation from LLY for
the CymbaltaTM net sales during the quarter ended September 30, 2004. In
addition to the Companys obligations, LLY is obligated to spend at specified
levels. In July 2002, the Company entered into an agreement with Columbia Laboratories,
Inc. (CBRX) to commercialize, in the United States, the following womens
health products: Prochieve 8%, Prochieve 4%, Advantage-S® and RepHresh.
Under the terms of the agreement, the Company purchased 1,121,610 shares of
CBRX common stock for $5.5 million. The Company also paid to CBRX four
quarterly payments of $1.125 million totaling $4.5 million. The payments are
reported in the statement of cash flows as an investing activity  acquisition
of commercial rights and royalties. In return, the Company will receive
royalties of 5% on the sales of the four CBRX womens healthcare products in
the United States for a five-year period beginning in the first quarter of
2003. The royalties are subject to minimum and maximum amounts of $8.0 million
and $12.0 million, respectively, over the life of the agreement. Through
September 30, 2004, the Company has received payments totaling approximately
$589,000. The proceeds are reported in the statement of cash flows as an
operating activity  change in operating assets and liabilities. In addition,
the Company will provide to CBRX, at CBRXs expense on a fee-for-service basis,
a sales force to commercialize the products. In January 2004, the Company and
CBRX agreed to restructure the fee-for-service agreement to allow for an
accelerated transfer of the sales force management responsibility to CBRX. The
purchase of the CBRX common stock included participation rights to acquire
additional shares of CBRX. During July 2003, the Company exercised its
participation rights and purchased an additional 56,749 shares of CBRX for
$664,000. The Company has continued to monitor the revenue performance of the
womens health products, described above, as well as the ability of CBRX to
meet its minimum royalty obligations to the Company under this agreement and
under its March 2003 agreement to market CBRXs StriantTM product. The Company
recognized an impairment on its commercial rights and royalties asset relating
to the StriantTM product in the third quarter of 2004, as described below. 11




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##### 



Quintiles Transnational Corp. and Subsidiaries In December 2002, the Company entered into an agreement with a large
pharmaceutical customer to market two products in Belgium. Under the terms of
an asset purchase agreement, the Company will have the rights to one product in
Belgium in exchange for payments of 5.5 million euros (approximately $6.8
million). The customer will continue to manufacture the product through 2005.
Under the terms of a distribution agreement, the Company will have the rights
to market the other product in Belgium for a period of six years in exchange
for payments of 6.9 million euros (approximately $8.5 million) of which 2.2
million euros (approximately $2.7 million) are in the form of services to be
completed by December 31, 2008, based on the Companys standard pricing. The
Company has paid 7.5 million euros (approximately $9.2 million) as of September
30, 2004. The payments are reported in the statement of cash flows as an
investing activity  acquisition of intangible assets. The Company has also
provided all of the services to the customer under the 2.2 million euros
service component. The Companys service obligation is recorded as a cost of
the distribution rights and is being amortized over the six-year distribution
agreement. The customer will continue to manufacture the product for the six
years of the distribution agreement. In March 2003, the Company entered into an agreement with CBRX to commercialize
CBRXs StriantTM testosterone buccal bioadhesive product in the United States.
StriantTM was approved in June 2003 by the FDA for the treatment of
hypogonadism. Under the terms of the agreement, the Company has paid five
quarterly payments of $3.0 million each totaling $15.0 million. The payments
are reported in the statement of cash flows as an investing activity 
acquisition of commercial rights and royalties. In return, the Company will
receive a 9% royalty on the net sales of StriantTM in the United States up to
agreed levels of annual sales revenues, and a 4.5% royalty of net sales above
those levels. The royalty term is seven years. Royalty payments are subject
to minimum and maximum amounts of $30.0 million and $55.0 million,
respectively, over the life of the agreement. Through September 30, 2004, the
Company has received payments totaling approximately $319,000. The proceeds
are reported in the statement of cash flows as an operating activity  change
in operating assets and liabilities. In addition, the Company will provide to
CBRX, at CBRXs expense on a fee-for-service basis, a sales force to
commercialize the products for a two-and-a-half year term. In January 2004,
the Company and CBRX agreed to restructure the fee-for-service agreement to
allow for an accelerated transfer of the sales force management responsibility
to CBRX. The Company has continued to monitor the revenue growth of
CBRXs StriantTM product and CBRXs womens health
products, which are subject to
separate agreements with the Company. The Company has continued to
monitor the ability of CBRX to meet its
minimum obligations under these agreements. Based upon the financial
prospects
of CBRX and the Companys assessment of various potential outcomes it might
realize under its agreements with CBRX, during the third quarter of
2004, the Company recognized an impairment of
$7.8 million in its commercial rights and
royalties asset relating to the StriantTM product. In February 2004, the Company entered into an agreement with a large
pharmaceutical customer to provide services in connection with the customers
development and U.S. launch of a Phase III product, or the new product, which
is related to one of the customers currently marketed pharmaceutical products,
or the existing product. The existing product has historically achieved
multi-hundred million dollars in sales annually. Under the agreement, the
Company will provide, at its expense, up to $90.0 million of development and
commercialization services for the new and existing products. The customer has
agreed that at least $67.5 million of those services will be performed by the
Company, at agreed upon rates. The customer, though, may direct the Company to
use third parties to perform up to $22.5 million of the $90.0 million of
services. The agreement contains quarterly limits on the Companys service
obligations with a 12




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##### 



Quintiles Transnational Corp. and Subsidiaries maximum of $10.0 million of
services in any quarter. Without revising the overall limits of the
agreement, the agreement  was amended to allow increased spending for
the second, third and fourth quarters of 2004. The revised quarterly limits are $11 million for the second
quarter of 2004 and $13 million for each of the third and fourth quarters of
2004. The Companys service obligations are anticipated to occur through the
end of 2006, but may run longer depending on the customers actual use of
services and when, and if, FDA approval of the new product occurs. Until the
FDA approves the new product, the Company is obligated to provide no more than
$57.5 million in services. In return for performing the obligations, the
Company will receive (1) beginning in the first quarter of 2005, a low,
single-digit royalty on U.S. net sales of the existing product and (2)
beginning on the U.S. launch of the new product, a declining tiered royalty
(beginning in the low teens) on U.S. net sales of the new product. The
Companys royalty period under the agreement lasts for approximately nine
years; however, the agreement limits the amount of royalties the Company
receives each year and also caps the aggregate amount of royalties the Company
can receive under the agreement at $180.0 million. The Company will also
receive a $20.0 million payment from the customer upon the U.S. launch of the
new product. If the new product is not approved by the FDA or a significant
delay occurs in its approval process, the Company may terminate its remaining
service obligations and continue to receive the royalty on the existing product
subject to a return ceiling of no less than 8%. The agreement also provides
for royalty term extensions, in the event of certain other specified
unfavorable circumstances such as product shortages or recalls. The customer
may terminate the agreement at any time subject to the customers payment to
the Company of the then-present value of its remaining expected royalties. The
Company has provided and expensed $14.4 million of services under this
agreement through September 30, 2004. In September 2004, the Company entered into an agreement with Solvay
Pharmaceuticals B.V. (Solvay) to provide clinical development services
valued at $25 million for ten Solvay clinical Phase II projects, thereby
sharing the costs and uncertainties of the outcomes for these projects. The
agreement specifies project and annual spending limits. Spending beneath these
limits may be carried over to one of the other ten projects or another year,
but may not exceed the overall $25 million limit. The Company will expense the
costs related to these projects as the expenses are incurred. In return, the
Company will receive a milestone payment from Solvay for each of the compounds
reaching positive clinical proof-of-principle and moving into further
development. The agreement terminates upon the final determination of the
successful or unsuccessful completion of the ten projects. The Company has firm commitments under the arrangements described above to
provide funding of approximately $735.0 million in exchange for various
commercial rights. As of September 30, 2004, the Company has funded
approximately $208.6 million. Further, the Company has additional future
funding commitments that are contingent upon satisfaction of certain milestones
by the third party such as receiving FDA approval, obtaining funding from
additional third parties, agreeing to a marketing plan and other similar
milestones. Due to the uncertainty of the amounts and timing, these contingent
commitments are not included in the firm commitment amounts. If all of these
contingencies were satisfied over approximately the same time period, the
Company estimates these commitments to be a minimum of approximately $15-20
million per year for a period of five to six years, subject to certain
limitations and varying time periods. 13




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##### 



Quintiles Transnational Corp. and Subsidiaries Below is a summary of the remaining firm commitments with pre-determined
payment schedules under such arrangements (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    TotalService commitments
    
    $
    29,954
    
    
    $
    119,884
    
    
    $
    93,706
    
    
    $
    90,742
    
    
    $
    87,147
    
    
    $
    66,579
    
    
    $
    488,012Milestone payments
    
    
    15,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000Licensing and
distribution rights
    
    
    1,238
    
    
    
    2,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,376$
    46,192
    
    
    $
    142,022
    
    
    $
    93,706
    
    
    $
    90,742
    
    
    $
    87,147
    
    
    $
    66,579
    
    
    $
    526,388
 4. Investments  Marketable Equity Securities The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment. The equity investments may be subject to certain trading
restrictions including lock-up agreements. The Companys portfolio in such
transactions as of September 30, 2004 is as follows (in thousands except share
data): Company
    
    Trading Symbol
    
    Number of Shares
    
    Cost Basis
    
    Fair Market ValueCommon Stock:The Medicines Company
    
    MDCO
    
    
    348,900
    
    
    $
    9,054
    
    
    $
    8,422Discovery Laboratories, Inc.
    
    DSCO
    
    
    1,567,741
    
    
    
    12,371
    
    
    
    10,504Columbia Laboratories, Inc.
    
    CBRX
    
    
    1,178,359
    
    
    
    4,077
    
    
    
    3,594Other
    
    
    
    
    
    
    
    
    
    
    4,324
    
    
    
    4,683Total Marketable Equity Securities
    
    
    
    
    
    
    
    
    
    $
    29,826
    
    
    $
    27,203
 In accordance with its policy to continually review declines in fair value of
the marketable equity securities for declines that may be other-than-temporary,
the Company recognized losses due to the impairment of marketable equity
securities of $10.2 million and $282,000 during the nine months ended September
30, 2004 and the period from January 1, 2003 through September 25, 2003,
respectively. The Company did not recognize any such losses during the three
months ended September 30, 2004. 5. Investments  Non-marketable Equity Securities and Loans The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment in non-marketable securities or loans. These financial arrangements
are comprised of direct and indirect investments. The indirect investments are
made through eight venture capital funds in which the Company is an investor.
The Companys portfolio in such transactions as of September 30, 2004 is as
follows (in thousands): Remaining FundingCompany
    
    Cost Basis
    
    CommitmentVenture capital funds
    
    $
    34,670
    
    
    $
    13,152Equity investments (seven companies)
    
    
    16,062
    
    
    
    Convertible loans (three companies)
    
    
    644
    
    
    
    112Loans (two companies)
    
    
    5,040
    
    
    
    3,022Total non-marketable equity securities and loans
    
    $
    56,416
    
    
    $
    16,286
 14




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##### 



Quintiles Transnational Corp. and Subsidiaries Below is a table representing managements best estimate as of September 30,
2004 of the amount and timing of the above remaining funding commitments (in
thousands): 2004
    
    2005
    
    TotalVenture capital funds
    
    $
    4,090
    
    
    $
    9,062
    
    
    $
    13,152Convertible loans
    
    
    70
    
    
    
    42
    
    
    
    112Loans
    
    
    1,000
    
    
    
    2,022
    
    
    
    3,022Total remaining funding commitments
    
    $
    5,160
    
    
    $
    11,126
    
    
    $
    16,286
 The amount and timing of such funding events are subject to a number of
different variables and may differ materially from managements estimates. The Company also has future loan commitments that are contingent upon
satisfaction of certain milestones by the third party such as receiving FDA
approval, obtaining funding from additional third parties, agreement of a
marketing plan and other similar milestones. Due to the uncertainty of the
amounts and timing, these commitments are not included in the commitment
amounts described above. The Company reviews the carrying value of each individual investment at each
balance sheet date to determine whether or not an other-than-temporary decline
in fair value has occurred. The Company employs alternative valuation
techniques including: (1) the review of financial statements including
assessments of liquidity, (2) the review of valuations available to the Company
prepared by independent third parties used in raising capital, (3) the review
of publicly available information including press releases and (4) direct
communications with the investees management, as appropriate. If the review
indicates that such a decline in fair value has occurred, the Company adjusts
the carrying value to the estimated fair value of the investment and recognizes
a loss for the amount of the adjustment. The Company recognized $7.8 million,
$205,000 and $10.3 million of losses due to such impairments during the period
from July 1, 2003 through September 25, 2003, during the nine months ended
September 30, 2004 and during the period from January 1, 2003 through September
30, 2003, respectively, relating to non-marketable equity securities and loans
mainly due to declining financial condition of investees that were deemed by
management to be other-than-temporary. There were no such losses due to
impairments during the three months ended September 30, 2004. 6. Derivatives As of September 30, 2004, the Company had the following derivative positions in
securities of other issuers: (1) conversion option positions that are embedded
in financing arrangements, (2) freestanding warrants to purchase shares of
common stock and (3) put and call instruments to hedge the cash flow from the
sale of certain marketable securities. 15




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##### 



Quintiles Transnational Corp. and Subsidiaries As of September 30,
2004, the Company had funded three convertible loans with a
carrying value of approximately $644,000. Loans that are convertible into an
equity interest have an embedded option contract because the value of the
equity interest is based on the market price of another entitys common stock
and thus is not clearly and closely related to the value of the
interest-bearing note. The Company has not accounted for these embedded
conversion features as mark-to-market derivatives because the terms of
conversion do not allow for cash settlement and the Company believes that the
equity interest delivered upon conversion would not be readily convertible to
cash since these entities are privately held or have limited liquidity and
trading of their equity interest. As of September 30, 2004, the Company has several freestanding warrants to
purchase common stock of various customers and other third parties. These
freestanding warrants primarily were acquired as part of the financial
arrangements with such customers and third parties. No quoted price is
available for the Companys freestanding warrants to purchase shares of common
stock. The Company uses various valuation techniques including the present
value of estimated expected future cash flows, option-pricing models and
fundamental analysis. Factors affecting the valuation include the current
price of the underlying asset, exercise price, time to expiration of the
warrant, estimated price volatility of the underlying asset over the life of
the warrant and restrictions on the transferability or ability to exercise the
warrant. At September 30, 2004, the Company held warrants from various
contracts valued at $3.8 million which are included in the accompanying balance
sheet as deposits and other assets. The Company recognized investment losses
of $2.2 million and $17,000 during the three and nine months ended September
30, 2004, respectively. The Company recognized investment revenues of $2.5
million and $14.9 million during the period from July 1, 2003 through September
25, 2003 and the period from January 1, 2003 through September 25, 2003,
respectively, related to changes in the fair values of the warrants. In 2003, the Company had entered into three zero-cost-collar transactions to
hedge certain future cash flows occurring in 2004. As these transactions were
entered into to hedge the risk of the potential volatility in the cash flows
resulting from sales of the underlying security during the first three quarters
of 2004, these transactions are accounted for as a cash flow hedge. As such,
the effective portion of the gain or loss on the derivative instrument is
recorded as unrealized holding gains (losses) on marketable equity securities
included as a separate component of shareholders equity. This hedge is deemed
to be perfectly effective under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as defined. As of September 30, 2004,
these contracts have expired unexercised. Upon expiration of the hedging
instruments, all amounts recorded as unrealized holding gains (losses) on
marketable equity securities included as a separate component of shareholders
equity were reclassified into income. As each of these zero-cost-collar
transactions expired unexercised, the zero-cost-collar contract had no value;
therefore, there were no amounts reclassified into income. The underlying
equity security was sold generating approximately $22.2 million in cash and a
gain of approximately $2.0 million for the nine months ended September 30,
2004. 16




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##### 



Quintiles Transnational Corp. and Subsidiaries 7. Goodwill and Identifiable Intangible Assets The Company has approximately $285.2 million of identifiable intangible assets,
of which approximately $109.7 million is deemed to be indefinite-lived and,
accordingly, is not being amortized. Amortization expense associated with
definite-lived identifiable intangible assets were as follows: Three months
    
    September 26,

    

    July 1,
    
    Nine months
    
    September 26,

    

    January 1,ended
    
    2003 through

    

    2003 through
    
    ended
    
    2003 through

    

    2003 throughSeptember 30,
    
    September 30,

    

    September 25,
    
    September 30,
    
    September 30,

    

    September 25,2004
    
    2003

    

    2003
    
    2004
    
    2003

    

    2003Successor
    
    Successor

    

    Predecessor
    
    Successor
    
    Successor

    

    PredecessorAmortization expense
    
    $19.4 million
    
    $
    943,000
    

    

    $7.0 million
    
    $57.9 million
    
    $
    943,000
    

    

    $23.6 million
 Estimated amortization expense for existing identifiable intangible assets is
targeted to be approximately, $71.8 million, $56.2 million, $25.8 million,
$15.1 million and $10.8 million for each of the years in the five-year period
ended December 31, 2008, respectively. Estimated amortization expense can be
affected by various factors including future acquisitions or divestitures of
product and/ or licensing and distribution rights. The following is a summary of identifiable intangible assets as of September
30, 2004 (in thousands): AccumulatedGross Amount
    
    Amortization
    
    Net AmountIdentifiable intangible assets:Commercial rights and royalties,
licenses and customer relationships
    
    $
    126,380
    
    
    $
    38,085
    
    
    $
    88,295Trademarks, trade names and other
    
    
    164,720
    
    
    
    17,714
    
    
    
    147,006Software and related assets
    
    
    72,938
    
    
    
    23,027
    
    
    
    49,911Total identifiable intangible assets
    
    $
    364,038
    
    
    $
    78,826
    
    
    $
    285,212
 The following is a summary of goodwill by segment for the nine months ended
September 30, 2004 (in thousands): Product
    
    Commercial
    
    PharmaBioDevelopment
    
    Services
    
    Development
    
    ConsolidatedBalance as of December 31, 2003
    
    $
    116,931
    
    
    $
    61,750
    
    
    $
    2,646
    
    
    $
    181,327Less: goodwill allocated to certain assets disposed of
    
    
    (519
    )
    
    
    
    
    
    
    
    
    
    
    (519
    )goodwill allocated to sale of a portion of an
investment in a subsidiary
    
    
    (2,345
    )
    
    
    (4,424
    )
    
    
    
    
    
    
    (6,769
    )goodwill allocated to non-operating change in
interest transaction
    
    
    (988
    )
    
    
    (1,865
    )
    
    
    
    
    
    
    (2,853
    )goodwill allocated to the sale of
discontinued operation
    
    
    
    
    
    
    
    
    
    
    (1,233
    )
    
    
    (1,233
    )Add: Earn out on acquisition
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Privatization transaction price adjustment
    
    
    (1,070
    )
    
    
    (283
    )
    
    
    
    
    
    
    (1,353
    )Impact of foreign currency fluctuations
    
    
    (122
    )
    
    
    2
    
    
    
    
    
    
    
    (120
    )Balance as of September 30, 2004
    
    $
    111,887
    
    
    $
    55,244
    
    
    $
    1,413
    
    
    $
    168,544
 In connection with the Pharma Services Transaction, the Company prepared an
allocation of the purchase price to the assets acquired and liabilities assumed
based upon their respective fair values. During the third quarter of 2004, the
Company evaluated the pre-acquisition contingencies. As part of this review,
the Company adjusted accruals relating to its restructuring plans, acquisition
costs relating to the Pharma 17




---



##### 



Quintiles Transnational Corp. and Subsidiaries Services Transaction, as well as related income tax effects. The adjustments
resulted in a net decrease of approximately $1.4 million in goodwill. 8. Investment Revenues The following table is a summary of investment revenues (in thousands): Three months
    
    September 26,

    

    July 1,
    
    Nine months
    
    September 26,

    

    January 1,ended
    
    2003 through

    

    2003 through
    
    ended
    
    2003 through

    

    2003 throughSeptember 30,
    
    September 30,

    

    September 25,
    
    September 30,
    
    September 30,

    

    September 25,2004
    
    2003

    

    2003
    
    2004
    
    2003

    

    2003Successor
    
    Successor

    

    Predecessor
    
    Successor
    
    Successor

    

    PredecessorMarketable equity and
derivative securities:Gross realized gains
    
    $
    
    
    
    $
    213
    

    

    $
    6,715
    
    
    $
    7,389
    
    
    $
    213
    

    

    $
    38,724Gross realized losses
    
    
    (2,509
    )
    
    
    
    

    

    
    
    
    
    
    (3,331
    )
    
    
    
    

    

    
    Impairment losses
    
    
    
    
    
    
    
    

    

    
    
    
    
    
    (10,157
    )
    
    
    
    

    

    
    (282
    )Non-marketable equity
securities and loans:Gross realized gains
    
    
    
    
    
    
    
    

    

    
    
    
    
    
    
    
    
    
    
    

    

    
    Gross realized losses
    
    
    
    
    
    
    
    

    

    
    
    
    
    
    
    
    
    
    
    

    

    
    Impairment losses
    
    
    
    
    
    
    
    

    

    
    (7,801
    )
    
    
    (205
    )
    
    
    
    

    

    
    (10,269
    )Total investment revenues
    
    $
    (2,509
    )
    
    $
    213
    

    

    $
    (1,086
    )
    
    $
    (6,304
    )
    
    $
    213
    

    

    $
    28,173
 9. Gain on Portion of Sale in an Investment in a Subsidiary and Change in
Interest Transactions In June 2004, Mitsui & Co., Ltd. (Mitsui) acquired a 20% voting interest in
one of the Companys subsidiaries, Quintiles Transnational Japan K.K. (QJPN)
through two transactions. Mitsui acquired 3,556 shares of QJPNs ordinary
shares from the Company for approximately 4.0 billion yen (approximately $37.0
million). As part of its sale of 3,556 ordinary shares, the Company may
receive up to an additional 2.0 billion yen (approximately $18.5 million) based
on QJPNs future financial performance. Due to the uncertainty associated with
the contingent consideration, the Company has not included this amount in its
gain on the sale of a portion of an investment in a subsidiary. During the
second quarter of 2004, the Company recorded a gain on the sale of a minority
interest in a subsidiary of $24.7 million related to this transaction. In addition, QJPN issued 1,778 shares of its Class A preference shares and
1,778 ordinary shares to Mitsui for approximately 4.7 billion yen
(approximately $42.9 million). The issuance by QJPN of the additional ordinary
shares further reduced the ownership interest by the Company in QJPN. As the
proceeds from the issuance of preference shares are not considered realized
until the preference shares are converted into ordinary shares, the Company did
not include such proceeds in its non-operating gain on the change in interest
transaction. The Company recorded a non-operating gain on the change in
interest transaction of approximately $10.0 million. 18




---



##### 



Quintiles Transnational Corp. and Subsidiaries As the preference shares are substantially the same as the ordinary shares
since the holders participate equally in dividends, voting rights and
liquidation of residual assets, the Company included the preference shares in
determining the minority ownership interest in QJPN. Therefore, the percentage
used by the Company in calculating the minority interest will be 20%. 10. Discontinued Operation In August 2004, the Company completed its previously announced sale of certain
assets related to its Bioglan business to Bradley Pharmaceuticals, Inc. for
approximately $188.3 million in cash including approximately $5.3 million of
direct costs for transferred inventory. Further, based on certain purchase
price adjustment provisions in the asset purchase agreement, the Company paid
Bradley approximately $1.9 million in October 2004. The assets disposed of
were part of the PharmaBio Development groups strategic investment portfolio,
which is routinely analyzed to evaluate the return potential of the assets
within the portfolio. The components of the gain on sale of discontinued operation are as follows (in
thousands): Cash received
    
    $
    188,329Purchase price adjustments
    
    
    (1,937
    )Disposal costs
    
    
    (16,534
    )Net assets
    
    
    (78,602
    )Goodwill allocated to discontinued operation
    
    
    (1,233
    )Gain on disposal of discontinued operation
    
    
    90,023Income taxes
    
    
    (36,221
    )Gain on sale of discontinued operation
    
    $
    53,802
 The Bioglan business consisted primarily of a number of dermatology products,
including Solaraze® and ADOXA®, that the Company acquired in 2001 and 2002.
In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc. for
a total consideration of approximately $27.9 million. The assets included
distribution rights to market ADOXA® in the United States for nine years along
with other products and product rights that Bioglan Pharma, Inc. had previously
marketed, as well as approximately $1.6 million in cash. Until the Company
entered into a plan to dispose of the Bioglan assets in May 2004, the Company
amortized the intangible assets in proportion to the estimated revenues over
the lives of these product rights. As a result of the discontinued operation,
these assets were reclassified as assets held for sale in the Companys
balance sheet as of December 31, 2003. Under certain of the contracts
acquired, the Company had commitments to pay royalties based on a percentage of
net sales of the acquired product rights. 19




---



##### 



Quintiles Transnational Corp. and Subsidiaries In December 2001, the Company acquired the license to market SkyePharmas
Solaraze® skin treatment in the United States, Canada and Mexico for 14 years
from Bioglan Pharma Plc for a total consideration of $26.7 million. Until the
Company entered into a plan to dispose of the Bioglan assets in May 2004, the
Company amortized the rights in proportion to the revenues earned over the
14-year life of the license. Until the completion of the sale of Bioglan, the
Company had a commitment to pay royalties to SkyePharma based on a percentage
of net sales of Solaraze®. The results of the Bioglan business have been reported separately as a
discontinued operation in the condensed consolidated statements of operations.
The results of the discontinued operation do not reflect any corporate costs or
management fees allocated by the Company. The following is a summary of the operations of the Bioglan business included
in discontinued operation (in thousands): Three months
    
    September 26,

    

    July 1,
    
    Nine months
    
    September 26,

    

    January 1,ended
    
    2003 through

    

    2003 through
    
    ended
    
    2003 through

    

    2003 throughSeptember 30,
    
    September 30,

    

    September 25,
    
    September 30,
    
    September 30,

    

    September 25,2004
    
    2003

    

    2003
    
    2004
    
    2003

    

    2003Successor
    
    Successor

    

    Predecessor
    
    Successor
    
    Successor

    

    PredecessorGross revenues
    
    $
    2,957
    
    
    $
    280
    

    

    $
    5,342
    
    
    $
    38,558
    
    
    $
    280
    

    

    $
    33,892(Loss) income
before income taxes
    
    
    (622
    )
    
    
    (63
    )

    

    
    (2,430
    )
    
    
    11,100
    
    
    
    (63
    )

    

    
    5,585Income taxes
    
    
    (101
    )
    
    
    (23
    )

    

    
    (219
    )
    
    
    1,480
    
    
    
    (23
    )

    

    
    959Net (loss) income
    
    $
    (521
    )
    
    $
    (40
    )

    

    $
    (2,211
    )
    
    $
    9,620
    
    
    $
    (40
    )

    

    $
    4,626
 The assets and liabilities of the Bioglan operations are reported separately in
the accompanying condensed consolidated balance sheets as assets and
liabilities of discontinued operation. The following is a summary of the
assets and liabilities of discontinued operation (in thousands): As of December 31, 2003Current assets
    
    $
    9,012Property and equipment, net
    
    
    536Intangible assets
    
    
    78,995Other assets
    
    
    6Assets of discontinued operation
    
    $
    88,549Current liabilities
    
    $
    7,040Long-term liabilities
    
    
    41Liabilities of discontinued operation
    
    $
    7,081
 In May 2000, the Company completed its sale of its electronic data interchange
unit, ENVOY Corporation (ENVOY). The Company recorded an extraordinary gain
on the sale of ENVOY in the amount of $436.3 million, net of income taxes of
$184.7 million. In 2001, the Company adjusted its estimate of its tax basis in
ENVOY resulting in a $142.0 million reduction in income taxes on the sale of
ENVOY which resulted in an increase in the extraordinary gain in the same
amount. 20




---



##### 



Quintiles Transnational Corp. and Subsidiaries In January 2004, the Company received a communication from the Internal Revenue
Service proposing an increase in its income taxes owed for 2000 by
approximately $153.1 million. After further discussions, the Internal Revenue
Service revised and reissued its prior communication, reducing the proposed
assessment to $84.6 million. The proposed increase relates to the Internal
Revenue Service challenging the Companys method for determining the basis it
applied to the sale of ENVOY. The Company is contesting the proposed increase
and is presently in the appeals process with the Internal Revenue Service. 11. Restructuring As part of the Companys evaluation of the contingencies in the Pharma Services
Transaction, the Company reviewed the restructuring accruals. This review
resulted in a decrease of $1.6 million and $11,000 of severance payments for
the plans in 2003 and 2000, respectively, and a decrease of $34,000, $105,000,
$72,000 and $2,000 of exit related costs for the plans in 2003, 2002, 2001 and
2000, respectively. The accrual adjustments have been recorded as a decrease
in goodwill recorded in the Pharma Services Transaction as part of the purchase
price adjustment. In connection with the Pharma Services Transaction, the Company adopted a
restructuring plan. As part of this plan, approximately 211 positions are to
be eliminated mostly in Europe and the United States. The number of positions
to be eliminated was reduced to approximately 130 as a result of (1) an
increase in voluntary terminations and (2) affected individuals transferring
into other positions within the Company. As of September 30, 2004, 87
positions were eliminated. Delays in certain of the Companys systems
implementation in Europe have caused the terminations to extend beyond one
year. During the period from July 1, 2003 through September 25, 2003 in connection
with the Pharma Services Transaction, the Company reviewed its estimates of
restructuring plans adopted during 2002, 2001 and 2000. This review resulted
in a decrease of $1.0 million and $310,000 in severance payments for plans
adopted in 2002 and 2001, respectively. In addition, there was an increase of
$6.4 million and $421,000 in exit costs for abandoned leased facilities for
plans adopted in 2001 and 2000, respectively. During the second quarter of 2002, the Company revised its estimates of the
restructuring plan adopted during 2001 (2001 Plan) which resulted in a
reduction of $9.1 million in accruals for the 2001 Plan. The reduction
included approximately $5.7 million in severance payments and $3.4 million of
exit costs. Also during the second quarter of 2002, the Company recognized $9.1 million of
restructuring charges as a result of the continued implementation of the
strategic plan announced during 2001. This restructuring charge included
revisions to the 2001 and 2000 restructuring plans of approximately $2.5
million and $1.9 million, respectively, due to a revision in the estimates for
the exit costs relating to certain abandoned leased facilities. In addition,
the adopted follow-on restructuring plan (2002 Plan) consisted of $4.3
million related to severance payments, $310,000 related to exit costs and
$112,000 of asset write-offs. As part of the 2002 Plan, approximately 99
positions were to be eliminated mostly in the Europe and Africa region. As of
September 30, 2004, 89 individuals have been terminated pursuant to the 2002
Plan. 21




---



##### 



Quintiles Transnational Corp. and Subsidiaries During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating primarily to severance costs from the
reorganization of the Companys Internet initiative and the commercial services
group in the United States. All of the 40 positions to be eliminated as part
of this restructuring were terminated as of June 30, 2001. During the third quarter of 2001, the Company recognized a $50.9 million
restructuring charge. In addition, the Company recognized a restructuring
charge of approximately $1.1 million as a revision of an estimate to a 2000
restructuring plan. The restructuring charge consisted of $31.1 million
related to severance payments, $8.2 million related to asset impairment
write-offs and $12.7 million of exit costs. As part of this restructuring,
approximately 1,000 positions worldwide were to be eliminated and as of
December 31, 2003, all individuals who were to be terminated under this plan
had been terminated. In certain circumstances, international regulations and
restrictions have caused the terminations to extend beyond one year. Positions
were eliminated in each of the Companys segments. In January 2000, the Company announced the adoption of a restructuring plan
(January 2000 Plan). In connection with this plan, the Company recognized a
restructuring charge of $58.6 million. The restructuring charge consisted of
$33.2 million related to severance payments, $11.3 million related to asset
impairment write-offs and $14.0 million of exit costs. As part of the January
2000 Plan, approximately 770 positions worldwide were eliminated as of December
31, 2001. Although positions eliminated were across all functions, most of the
eliminated positions were in the product development group. In the fourth quarter of 2000, the Company revised its estimates of the January
2000 Plan. This revision resulted in a reduction of the January 2000 Plan of
$6.9 million. This reduction included $6.3 million in severance payments and
$632,000 in exit costs. Also, during the fourth quarter of 2000, management conducted a detailed review
of the resource levels within each business group. Based on this review, the
Company adopted a follow-on restructuring plan resulting in a restructuring
charge of $7.1 million. The restructuring charge consisted of $5.8 million
related to severance payments and $1.3 million related to exit costs. As part
of a 2000 Follow-On Plan, approximately 220 positions were to be eliminated
mostly in the commercial services group. As of December 31, 2003, all
individuals who were to be terminated under this plan had been terminated. In
certain circumstances, international regulations and restrictions have caused
the terminations to extend beyond one year. As of September 30, 2004, the following amounts were recorded for the
restructuring plans discussed above (in thousands): 2003 Plans
    
    2002 Plans
    
    2001 Plans
    
    2000 PlansBalance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as ofDecember 31,
    
    Write-offs/
    
    Accrual
    
    Write-offs/
    
    Accrual
    
    Write-offs/
    
    Accrual
    
    Write-offs/
    
    Accrual
    
    September 30,2003
    
    Payments
    
    Revision
    
    Payments
    
    Revision
    
    Payments
    
    Revision
    
    Payments
    
    Revision
    
    2004Severance and
related costs
    
    $
    7,567
    
    
    $
    (3,873
    )
    
    $
    (1,572
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    (11
    )
    
    $
    2,106Exit costs
    
    
    8,176
    
    
    
    (132
    )
    
    
    (34
    )
    
    
    (6
    )
    
    
    (105
    )
    
    
    (2,704
    )
    
    
    (72
    )
    
    
    (196
    )
    
    
    (2
    )
    
    
    4,925$
    15,743
    
    
    $
    (4,005
    )
    
    $
    (1,606
    )
    
    $
    (6
    )
    
    $
    (105
    )
    
    $
    (2,704
    )
    
    $
    (72
    )
    
    $
    (201
    )
    
    $
    (13
    )
    
    $
    7,031
 22




---



##### 



Quintiles Transnational Corp. and Subsidiaries On November 10, 2004, the
Companys Board of Directors approved the first phase of a new
initiative to review aspects of the Companys current operating
structure and future strategic directions regarding certain corporate
initiatives, including utilization of shared services and strategic
sourcing initiatives. This review occurs in the context of
substantial growth in the Companys backlog, primarily in its
clinical business, and expected strategic headcount additions,
following the 1000+ additions in the past nine months. In conjunction
with this review, the Company will incur costs to restructure or exit
certain business activities. The Company expects that these costs
will be incurred in both its product development and commercial
services segments. The Company expects to incur during the fourth
quarter of 2004 a restructuring charge totaling $7.7 million.
The estimated cash expenditures total approximately $7.6 million
and include termination benefits of approximately $7.4 million
to eliminate approximately 230 positions globally, and exit costs of
approximately $0.2 million. The estimated non-cash charges
total approximately $0.1 million and consist primarily of asset
impairments. The Company anticipates that additional costs will be
incurred in later quarters, as subsequent phases of our review are
completed. The Company will provide supplemental information when
those costs are defined. The Company has targeted completion of the
cash expenditures relating to this first phase for the first half of
2005. 12. Comprehensive Income The following table represents the Companys comprehensive (loss) income (in
thousands): Three months
    
    September 26,
    
    

    July 1,
    
    Nine months
    
    September 26,
    
    

    January 1,ended
    
    2003 through
    
    

    2003 through
    
    ended
    
    2003 through
    
    

    2003 throughSeptember 30,
    
    September 30,
    
    

    September 25,
    
    September 30,
    
    September 30,
    
    

    September 25,2004
    
    2003
    
    

    2003
    
    2004
    
    2003
    
    

    2003Successor
    
    Successor
    
    

    Predecessor
    
    Successor
    
    Successor
    
    

    PredecessorNet income (loss)
    
    $
    34,460
    
    
    $
    819
    
    
    

    $
    (17,592
    )
    
    $
    8,625
    
    
    $
    819
    
    
    

    $
    37,161Other comprehensive income
(loss):Unrealized (losses) gains
on marketable securities
arising during the period,
net of income taxes
    
    
    (4,584
    )
    
    
    
    
    
    

    
    6,428
    
    
    
    (4,427
    )
    
    
    
    
    
    

    
    19,637Reclassification
adjustment for (gains)
losses, net of income
taxes, included in net
(loss) income
    
    
    (60
    )
    
    
    
    
    
    

    
    (1,516
    )
    
    
    1,972
    
    
    
    
    
    
    

    
    (11,103
    )Minimum pension liability,
net of income taxes
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    

    
    (3,098
    )Foreign currency adjustment
    
    
    (1,075
    )
    
    
    
    
    
    

    
    3,881
    
    
    
    (2,879
    )
    
    
    
    
    
    

    
    25,178Comprehensive income (loss)
    
    $
    28,741
    
    
    $
    819
    
    
    

    $
    (8,799
    )
    
    $
    3,291
    
    
    $
    819
    
    
    

    $
    67,775
 23




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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 group, the commercial services group, and the PharmaBio Development
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 commercial services group is primarily responsible for sales
force deployment and strategic marketing services. The PharmaBio Development
group is primarily responsible for facilitating non-traditional customer
alliances and its results consist primarily of product revenues, royalties and
commissions and investment revenues relating to the financial arrangements with
customers and other third parties. In August 2004, the Company completed its
previously announced sale of certain assets related to its Bioglan business.
The results of operations for the Bioglan business have been separately
reported as a discontinued operation and are no longer included in the
PharmaBio Development group. All historical periods presented herein have been
restated to reflect the Bioglan business as a discontinued operation. The
Company does not include general and administrative expenses, depreciation and
amortization except amortization of commercial rights, interest (income)
expense, other (income) expense and income tax expense (benefit) in determining
segment profitability. Contribution is defined as gross revenues less costs of
revenues, excluding depreciation and amortization expense as indicated below.
When the Company enters into strategic agreements whereby its commercial
services or product development groups provide services to customers, service
revenues are presented based upon market rates and are eliminated in
consolidation. Intersegment revenues have been eliminated (in thousands): Three months ended September 30, 2004  Successor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    282,497
    
    
    $
    152,423
    
    
    $
    
    
    
    $
    
    
    
    $
    434,920Intersegment
    
    
    
    
    
    
    26,703
    
    
    
    
    
    
    
    (26,703
    )
    
    
    Total net services
    
    
    282,497
    
    
    
    179,126
    
    
    
    
    
    
    
    (26,703
    )
    
    
    434,920Reimbursed service costs
    
    
    82,313
    
    
    
    15,732
    
    
    
    
    
    
    
    (2,604
    )
    
    
    95,441Gross service revenues
    
    
    364,810
    
    
    
    194,858
    
    
    
    
    
    
    
    (29,307
    )
    
    
    530,361Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    7,660
    
    
    
    
    
    
    
    7,660Investment
    
    
    
    
    
    
    
    
    
    
    (2,509
    )
    
    
    
    
    
    
    (2,509
    )Total revenues
    
    $
    364,810
    
    
    $
    194,858
    
    
    $
    5,151
    
    
    $
    (29,307
    )
    
    $
    535,512Contribution
    
    $
    139,322
    
    
    $
    71,917
    
    
    $
    (35,099
    )
    
    $
    
    
    
    $
    176,140
 24




---



##### 



Quintiles Transnational Corp. and Subsidiaries September 26, 2003 through September 30, 2003  Successor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    11,884
    
    
    $
    6,048
    
    
    $
    
    
    
    $
    
    
    
    $
    17,932Intersegment
    
    
    
    
    
    
    518
    
    
    
    
    
    
    
    (518
    )
    
    
    Total net services
    
    
    11,884
    
    
    
    6,566
    
    
    
    
    
    
    
    (518
    )
    
    
    17,932Reimbursed service costs
    
    
    2,857
    
    
    
    608
    
    
    
    
    
    
    
    
    
    
    
    3,465Gross service revenues
    
    
    14,741
    
    
    
    7,174
    
    
    
    
    
    
    
    (518
    )
    
    
    21,397Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    1,102
    
    
    
    
    
    
    
    1,102Investment
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    213Total revenues
    
    $
    14,741
    
    
    $
    7,174
    
    
    $
    1,315
    
    
    $
    (518
    )
    
    $
    22,712Contribution
    
    $
    6,601
    
    
    $
    2,823
    
    
    $
    148
    
    
    $
    
    
    
    $
    9,572
 July 1, 2003 through September 25, 2003  Predecessor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    233,319
    
    
    $
    115,694
    
    
    $
    
    
    
    $
    
    
    
    $
    349,013Intersegment
    
    
    
    
    
    
    10,789
    
    
    
    
    
    
    
    (10,789
    )
    
    
    Total net services
    
    
    233,319
    
    
    
    126,483
    
    
    
    
    
    
    
    (10,789
    )
    
    
    349,013Reimbursed service costs
    
    
    63,912
    
    
    
    13,633
    
    
    
    
    
    
    
    
    
    
    
    77,545Gross service revenues
    
    
    297,231
    
    
    
    140,116
    
    
    
    
    
    
    
    (10,789
    )
    
    
    426,558Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    36,368
    
    
    
    
    
    
    
    36,368Investment
    
    
    
    
    
    
    
    
    
    
    (1,086
    )
    
    
    
    
    
    
    (1,086
    )Total revenues
    
    $
    297,231
    
    
    $
    140,116
    
    
    $
    35,282
    
    
    $
    (10,789
    )
    
    $
    461,840Contribution
    
    $
    120,731
    
    
    $
    46,521
    
    
    $
    13,329
    
    
    $
    
    
    
    $
    180,581
 Nine months ended September 30, 2004  Successor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    813,544
    
    
    $
    443,390
    
    
    $
    
    
    
    $
    
    
    
    $
    1,256,934Intersegment
    
    
    
    
    
    
    41,582
    
    
    
    
    
    
    
    (41,582
    )
    
    
    Total net services
    
    
    813,544
    
    
    
    484,972
    
    
    
    
    
    
    
    (41,582
    )
    
    
    1,256,934Reimbursed service costs
    
    
    218,037
    
    
    
    45,148
    
    
    
    
    
    
    
    (2,979
    )
    
    
    260,206Gross service revenues
    
    
    1,031,581
    
    
    
    530,120
    
    
    
    
    
    
    
    (44,561
    )
    
    
    1,517,140Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    38,401
    
    
    
    
    
    
    
    38,401Investment
    
    
    
    
    
    
    
    
    
    
    (6,304
    )
    
    
    
    
    
    
    (6,304
    )Total revenues
    
    $
    1,031,581
    
    
    $
    530,120
    
    
    $
    32,097
    
    
    $
    (44,561
    )
    
    $
    1,549,237Contribution
    
    $
    395,737
    
    
    $
    187,782
    
    
    $
    (57,255
    )
    
    $
    
    
    
    $
    526,264
 25




---



##### 



Quintiles Transnational Corp. and Subsidiaries January 1, 2003 through September 25, 2003  Predecessor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    ConsolidatedService revenues:External
    
    $
    734,729
    
    
    $
    362,273
    
    
    $
    
    
    
    $
    
    
    
    $
    1,097,002Intersegment
    
    
    
    
    
    
    29,777
    
    
    
    
    
    
    
    (29,777
    )
    
    
    Total net services
    
    
    734,729
    
    
    
    392,050
    
    
    
    
    
    
    
    (29,777
    )
    
    
    1,097,002Reimbursed service costs
    
    
    225,695
    
    
    
    42,988
    
    
    
    
    
    
    
    
    
    
    
    268,683Gross service revenues
    
    
    960,424
    
    
    
    435,038
    
    
    
    
    
    
    
    (29,777
    )
    
    
    1,365,685Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    71,072
    
    
    
    
    
    
    
    71,072Investment
    
    
    
    
    
    
    
    
    
    
    28,173
    
    
    
    
    
    
    
    28,173Total revenues
    
    $
    960,424
    
    
    $
    435,038
    
    
    $
    99,245
    
    
    $
    (29,777
    )
    
    $
    1,464,930Contribution
    
    $
    375,125
    
    
    $
    142,144
    
    
    $
    37,455
    
    
    $
    
    
    
    $
    554,724
 Three months
    
    September 26,
    
    

    July 1,
    
    Nine months
    
    September 26,
    
    

    January 1,ended
    
    2003 through
    
    

    2003 through
    
    ended
    
    2003 through
    
    

    2003 throughSeptember 30,
    
    September 30,
    
    

    September 25,
    
    September 30,
    
    September 30,
    
    

    September 25,2004
    
    2003
    
    

    2003
    
    2004
    
    2003
    
    

    2003Successor
    
    Successor
    
    

    Predecessor
    
    Successor
    
    Successor
    
    

    PredecessorDepreciation and
amortization
expense:Product development
    
    $
    21,367
    
    
    $
    1,078
    
    
    

    $
    13,768
    
    
    $
    64,139
    
    
    $
    1,078
    
    
    

    $
    43,142Commercial services
    
    
    7,857
    
    
    
    385
    
    
    

    
    4,654
    
    
    
    23,864
    
    
    
    385
    
    
    

    
    15,520PharmaBio
Development
(included in
contribution)
    
    
    1,121
    
    
    
    36
    
    
    

    
    679
    
    
    
    2,940
    
    
    
    36
    
    
    

    
    2,210Corporate
    
    
    3,188
    
    
    
    105
    
    
    

    
    194
    
    
    
    9,472
    
    
    
    105
    
    
    

    
    607Total depreciation
and amortization
expense
    
    $
    33,533
    
    
    $
    1,604
    
    
    

    $
    19,295
    
    
    $
    100,415
    
    
    $
    1,604
    
    
    

    $
    61,479
  As of
    
    As ofSeptember 30, 2004
    
    December 31, 2003Assets:Product development
    
    $
    1,078,882
    
    
    $
    1,008,099Commercial services
    
    
    341,413
    
    
    
    266,021PharmaBio Development
    
    
    267,827
    
    
    
    267,572Corporate
    
    
    371,810
    
    
    
    362,470Assets of discontinued operation
    
    
    
    
    
    
    88,549Total assets
    
    $
    2,059,932
    
    
    $
    1,992,711
 14. Guarantor Financial Information In connection with the issuance of the 10% Senior Subordinated Notes due 2013,
the Company and all of its wholly owned domestic subsidiaries (Guarantors)
have fully and unconditionally guaranteed, on a joint and several basis, the
Companys obligations under the related indenture (the Guarantees). Each
Guarantee is subordinated in right of payment to the Guarantors existing and
future senior debt, including obligations under the senior secured credit
facility. 26




---



##### 



Quintiles Transnational Corp. and Subsidiaries The accompanying Guarantor condensed financial information is presented on the
equity method of accounting for all periods presented. Under this method,
investments in subsidiaries are recorded at cost and adjusted for the Companys
share in the subsidiaries cumulative results of operations, capital
contributions and distributions and other changes in equity. Elimination
entries relate primarily to the elimination of investments in subsidiaries and
associated intercompany balances and transactions. The following are condensed consolidating statements of operations of the
Company for the three and nine months ended September 30, 2004 and the periods
from September 26, 2003 through September 30, 2003, July 1, 2003 through
September 25, 2003 and January 1, 2003 through September 25, 2003 (in
thousands): Three months ended September 30, 2004 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalNet revenues
    
    $
    
    
    
    $
    148,589
    
    
    $
    291,658
    
    
    $
    (176
    )
    
    $
    440,071Add reimbursed service costs
    
    
    
    
    
    
    46,860
    
    
    
    48,581
    
    
    
    
    
    
    
    95,441Gross revenues
    
    
    
    
    
    
    195,449
    
    
    
    340,239
    
    
    
    (176
    )
    
    
    535,512Costs, expenses and other:Costs of revenues
    
    
    5,718
    
    
    
    167,330
    
    
    
    218,736
    
    
    
    
    
    
    
    391,784General and administrative
    
    
    13,958
    
    
    
    48,356
    
    
    
    97,677
    
    
    
    (176
    )
    
    
    159,815Interest (income) expense, net
    
    
    15,842
    
    
    
    (6,670
    )
    
    
    5,666
    
    
    
    
    
    
    
    14,838Other (income) expense, net
    
    
    (18,294
    )
    
    
    16,890
    
    
    
    3,947
    
    
    
    
    
    
    
    2,54317,224
    
    
    
    225,906
    
    
    
    326,026
    
    
    
    (176
    )
    
    
    568,980(Loss) income before income taxes
    
    
    (17,224
    )
    
    
    (30,457
    )
    
    
    14,213
    
    
    
    
    
    
    
    (33,468
    )Income tax (benefit) expense
    
    
    9,061
    
    
    
    (30,688
    )
    
    
    5,912
    
    
    
    
    
    
    
    (15,715
    )(Loss) income before minority interests
and equity in (losses) earnings of
unconsolidated affiliates
    
    
    (26,285
    )
    
    
    231
    
    
    
    8,301
    
    
    
    
    
    
    
    (17,753
    )Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    (441
    )
    
    
    (114
    )
    
    
    (513
    )
    
    
    (1,068
    )Subsidiary income
    
    
    59,976
    
    
    
    (5,059
    )
    
    
    (94
    )
    
    
    (54,823
    )
    
    
    (Loss) income from continuing operations
    
    
    33,691
    
    
    
    (5,269
    )
    
    
    8,093
    
    
    
    (55,336
    )
    
    
    (18,821
    )(Loss) income from discontinued operation
    
    
    
    
    
    
    136
    
    
    
    (657
    )
    
    
    
    
    
    
    (521
    )Gain from sale of discontinued
operation, net of income taxes
    
    
    769
    
    
    
    15,292
    
    
    
    37,741
    
    
    
    
    
    
    
    53,802Net (loss) income
    
    $
    34,460
    
    
    $
    10,159
    
    
    $
    45,177
    
    
    $
    (55,336
    )
    
    $
    34,460
 27




---



##### 



Quintiles Transnational Corp. and Subsidiaries September 26, 2003 through September 30, 2003 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalNet revenues
    
    $
    (6
    )
    
    $
    7,884
    
    
    $
    11,369
    
    
    $
    
    
    
    $
    19,247Add reimbursed service costs
    
    
    
    
    
    
    1,591
    
    
    
    1,874
    
    
    
    
    
    
    
    3,465Gross revenues
    
    
    (6
    )
    
    
    9,475
    
    
    
    13,243
    
    
    
    
    
    
    
    22,712Costs, expenses and other:Costs of revenues
    
    
    195
    
    
    
    5,963
    
    
    
    8,550
    
    
    
    
    
    
    
    14,708General and administrative
    
    
    349
    
    
    
    1,963
    
    
    
    3,659
    
    
    
    
    
    
    
    5,971Interest (income) expense, net
    
    
    1,062
    
    
    
    (307
    )
    
    
    278
    
    
    
    
    
    
    
    1,033Other (income) expense, net
    
    
    (1,243
    )
    
    
    1,163
    
    
    
    (228
    )
    
    
    
    
    
    
    (308
    )Transaction and
restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    363
    
    
    
    8,782
    
    
    
    12,259
    
    
    
    
    
    
    
    21,404(Loss) income before income taxes
    
    
    (369
    )
    
    
    693
    
    
    
    984
    
    
    
    
    
    
    
    1,308Income tax (benefit) expense
    
    
    (133
    )
    
    
    250
    
    
    
    354
    
    
    
    
    
    
    
    471(Loss) income before minority interests
and equity in (losses) earnings of
unconsolidated affiliates
    
    
    (236
    )
    
    
    443
    
    
    
    630
    
    
    
    
    
    
    
    837Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    23
    
    
    
    (1
    )
    
    
    
    
    
    
    22Subsidiary income
    
    
    1,055
    
    
    
    16
    
    
    
    67
    
    
    
    (1,138
    )
    
    
    Income (loss) from continuing operations
    
    
    819
    
    
    
    482
    
    
    
    696
    
    
    
    (1,138
    )
    
    
    859Loss from discontinued operation
    
    
    
    
    
    
    (11
    )
    
    
    (29
    )
    
    
    
    
    
    
    (40
    )Net (loss) income
    
    $
    819
    
    
    $
    471
    
    
    $
    667
    
    
    $
    (1,138
    )
    
    $
    819
 28




---



##### 



Quintiles Transnational Corp. and Subsidiaries July 1, 2003 through September 25, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalNet revenues
    
    $
    (1,789
    )
    
    $
    154,324
    
    
    $
    231,760
    
    
    $
    
    
    
    $
    384,295Add reimbursed service costs
    
    
    
    
    
    
    37,464
    
    
    
    40,081
    
    
    
    
    
    
    
    77,545Gross revenues
    
    
    (1,789
    )
    
    
    191,788
    
    
    
    271,841
    
    
    
    
    
    
    
    461,840Costs, expenses and other:Costs of revenues
    
    
    2,030
    
    
    
    123,536
    
    
    
    174,308
    
    
    
    
    
    
    
    299,874General and administrative
    
    
    10,306
    
    
    
    42,376
    
    
    
    76,400
    
    
    
    
    
    
    
    129,082Interest (income) expense, net
    
    
    (855
    )
    
    
    (6,703
    )
    
    
    5,312
    
    
    
    
    
    
    
    (2,246
    )Other (income) expense, net
    
    
    (6,622
    )
    
    
    5,496
    
    
    
    1,160
    
    
    
    
    
    
    
    34Transaction and
 restructuring
    
    
    44,650
    
    
    
    (563
    )
    
    
    6,174
    
    
    
    
    
    
    
    50,26149,509
    
    
    
    164,142
    
    
    
    263,354
    
    
    
    
    
    
    
    477,005(Loss) income before income taxes
    
    
    (51,298
    )
    
    
    27,646
    
    
    
    8,487
    
    
    
    
    
    
    
    (15,165
    )Income tax (benefit) expense
    
    
    (10,690
    )
    
    
    8,717
    
    
    
    2,177
    
    
    
    
    
    
    
    204(Loss) income before minority interests
and equity in (losses) earnings of
unconsolidated affiliates
    
    
    (40,608
    )
    
    
    18,929
    
    
    
    6,310
    
    
    
    
    
    
    
    (15,369
    )Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    (16
    )
    
    
    4
    
    
    
    
    
    
    
    (12
    )Subsidiary income
    
    
    23,016
    
    
    
    (4,299
    )
    
    
    (440
    )
    
    
    (18,277
    )
    
    
    Income (loss) from continuing operations
    
    
    (17,592
    )
    
    
    14,614
    
    
    
    5,874
    
    
    
    (18,277
    )
    
    
    (15,381
    )Income from discontinued operation
    
    
    
    
    
    
    767
    
    
    
    (2,978
    )
    
    
    
    
    
    
    (2,211
    )Net (loss) income
    
    $
    (17,592
    )
    
    $
    15,381
    
    
    $
    2,896
    
    
    $
    (18,277
    )
    
    $
    (17,592
    )
 29




---



##### 



Nine months ended September 30, 2004 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalNet revenues
    
    $
    (15
    )
    
    $
    440,937
    
    
    $
    848,898
    
    
    $
    (789
    )
    
    $
    1,289,031Add reimbursed service costs
    
    
    
    
    
    
    124,697
    
    
    
    135,509
    
    
    
    
    
    
    
    260,206Gross revenues
    
    
    (15
    )
    
    
    565,634
    
    
    
    984,407
    
    
    
    (789
    )
    
    
    1,549,237Costs, expenses and other:Costs of revenues
    
    
    16,327
    
    
    
    459,634
    
    
    
    644,487
    
    
    
    
    
    
    
    1,120,448General and administrative
    
    
    50,425
    
    
    
    137,683
    
    
    
    287,184
    
    
    
    (789
    )
    
    
    474,503Interest (income) expense, net
    
    
    46,908
    
    
    
    (20,025
    )
    
    
    17,150
    
    
    
    
    
    
    
    44,033Other (income) expense, net
    
    
    (53,326
    )
    
    
    42,573
    
    
    
    11,304
    
    
    
    
    
    
    
    551Gain on sale of a portion of an
investment in a subsidiary
    
    
    (24,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,688
    )Non-operating gain on change of
interest transaction
    
    
    (10,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )25,616
    
    
    
    619,865
    
    
    
    960,125
    
    
    
    (789
    )
    
    
    1,604,817(Loss) income before income taxes
    
    
    (25,631
    )
    
    
    (54,231
    )
    
    
    24,282
    
    
    
    
    
    
    
    (55,580
    )Income tax (benefit) expense
    
    
    23,845
    
    
    
    (41,664
    )
    
    
    15,512
    
    
    
    
    
    
    
    (2,307
    )(Loss) income before minority interests
and equity in (losses) earnings of
unconsolidated affiliates
    
    
    (49,476
    )
    
    
    (12,567
    )
    
    
    8,770
    
    
    
    
    
    
    
    (53,273
    )Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    (464
    )
    
    
    (547
    )
    
    
    (513
    )
    
    
    (1,524
    )Subsidiary income
    
    
    57,332
    
    
    
    (16,472
    )
    
    
    1,564
    
    
    
    (42,424
    )
    
    
    Income (loss) from continuing operations
    
    
    7,856
    
    
    
    (29,503
    )
    
    
    9,787
    
    
    
    (42,937
    )
    
    
    (54,797
    )Income from discontinued operation
    
    
    
    
    
    
    1,081
    
    
    
    8,539
    
    
    
    
    
    
    
    9,620Gain from sale of discontinued
operation, net of income taxes
    
    
    769
    
    
    
    15,292
    
    
    
    37,741
    
    
    
    
    
    
    
    53,802Net (loss) income
    
    $
    8,625
    
    
    $
    (13,130
    )
    
    $
    56,067
    
    
    $
    (42,937
    )
    
    $
    8,625
 30




---



##### 



Quintiles Transnational Corp. and Subsidiaries
January 1, 2003 through September 25, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalNet revenues
    
    $
    (3,233
    )
    
    $
    495,684
    
    
    $
    703,796
    
    
    $
    
    
    
    $
    1,196,247Add reimbursed service costs
    
    
    
    
    
    
    136,663
    
    
    
    132,020
    
    
    
    
    
    
    
    268,683Gross revenues
    
    
    (3,233
    )
    
    
    632,347
    
    
    
    835,816
    
    
    
    
    
    
    
    1,464,930Costs, expenses and other:Costs of revenues
    
    
    6,519
    
    
    
    422,104
    
    
    
    540,851
    
    
    
    
    
    
    
    969,474General and administrative
    
    
    32,747
    
    
    
    129,308
    
    
    
    235,263
    
    
    
    
    
    
    
    397,318Interest (income) expense, net
    
    
    (3,111
    )
    
    
    (22,021
    )
    
    
    14,758
    
    
    
    
    
    
    
    (10,374
    )Other (income) expense, net
    
    
    (33,379
    )
    
    
    16,624
    
    
    
    11,364
    
    
    
    
    
    
    
    (5,391
    )Transaction and
 restructuring
    
    
    48,537
    
    
    
    (563
    )
    
    
    6,174
    
    
    
    
    
    
    
    54,14851,313
    
    
    
    545,452
    
    
    
    808,410
    
    
    
    
    
    
    
    1,405,175(Loss) income before income taxes
    
    
    (54,546
    )
    
    
    86,895
    
    
    
    27,406
    
    
    
    
    
    
    
    59,755Income tax (benefit) expense
    
    
    (11,497
    )
    
    
    25,344
    
    
    
    13,377
    
    
    
    
    
    
    
    27,224(Loss) income before minority
interests and equity in (losses)
earnings of unconsolidated
affiliates
    
    
    (43,049
    )
    
    
    61,551
    
    
    
    14,029
    
    
    
    
    
    
    
    32,531Minority interests and equity in
(losses) earnings of
unconsolidated affiliates
    
    
    
    
    
    
    (24
    )
    
    
    28
    
    
    
    
    
    
    
    4Subsidiary income
    
    
    80,210
    
    
    
    (16,554
    )
    
    
    (1,440
    )
    
    
    (62,216
    )
    
    
    Income (loss) from continuing
operations
    
    
    37,161
    
    
    
    44,973
    
    
    
    12,617
    
    
    
    (62,216
    )
    
    
    32,535Income from discontinued operation
    
    
    
    
    
    
    778
    
    
    
    3,848
    
    
    
    
    
    
    
    4,626Net (loss) income
    
    $
    37,161
    
    
    $
    45,751
    
    
    $
    16,465
    
    
    $
    (62,216
    )
    
    $
    37,161
 The following are condensed
consolidating balance sheets of the Company as of September 30, 2004
and December 31, 2003 (in thousands): 31




---



##### 



Quintiles Transnational Corp. and Subsidiaries As of September 30, 2004 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    48,140
    
    
    $
    172,334
    
    
    $
    328,210
    
    
    $
    
    
    
    $
    548,684Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    128,312
    
    
    
    159,980
    
    
    
    
    
    
    
    288,292Other current assets
    
    
    (4,191
    )
    
    
    23,432
    
    
    
    47,490
    
    
    
    
    
    
    
    66,731Total current assets
    
    
    43,949
    
    
    
    324,078
    
    
    
    535,680
    
    
    
    
    
    
    
    903,707Property and equipment, net
    
    
    1,596
    
    
    
    113,532
    
    
    
    160,331
    
    
    
    
    
    
    
    275,459Intangibles and other assets:Investments
    
    
    21,359
    
    
    
    353,424
    
    
    
    1,224
    
    
    
    
    
    
    
    376,007Goodwill and other identifiable
intangibles, net
    
    
    3,650
    
    
    
    230,828
    
    
    
    219,278
    
    
    
    
    
    
    
    453,756Deposits and other assets
    
    
    24,872
    
    
    
    9,016
    
    
    
    17,115
    
    
    
    
    
    
    
    51,003Investments in subsidiaries
    
    
    1,710,217
    
    
    
    (214,921
    )
    
    
    75,545
    
    
    
    (1,570,841
    )
    
    
    Total intangibles and other assets
    
    
    1,760,098
    
    
    
    378,347
    
    
    
    313,162
    
    
    
    (1,570,841
    )
    
    
    880,766Total assets
    
    $
    1,805,643
    
    
    $
    815,957
    
    
    $
    1,009,173
    
    
    $
    (1,570,841
    )
    
    $
    2,059,932Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    55,892
    
    
    $
    102,611
    
    
    $
    194,075
    
    
    $
    
    
    
    $
    352,578Credit arrangements
    
    
    3,100
    
    
    
    646
    
    
    
    15,288
    
    
    
    
    
    
    
    19,034Unearned income
    
    
    
    
    
    
    67,508
    
    
    
    120,230
    
    
    
    
    
    
    
    187,738Other current liabilities
    
    
    55,031
    
    
    
    6,538
    
    
    
    (26,800
    )
    
    
    
    
    
    
    34,769Total current liabilities
    
    
    114,023
    
    
    
    177,303
    
    
    
    302,793
    
    
    
    
    
    
    
    594,119Long-term liabilities:Credit arrangements, less current
portion
    
    
    753,800
    
    
    
    3,243
    
    
    
    15,666
    
    
    
    
    
    
    
    772,709Minority interest
    
    
    
    
    
    
    
    
    
    
    25,793
    
    
    
    9,632
    
    
    
    35,425Other liabilities
    
    
    101,600
    
    
    
    (18,917
    )
    
    
    36,441
    
    
    
    
    
    
    
    119,124Net intercompany payables
    
    
    297,665
    
    
    
    (797,745
    )
    
    
    500,080
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,153,065
    
    
    
    (813,419
    )
    
    
    577,980
    
    
    
    9,632
    
    
    
    927,258Total liabilities
    
    
    1,267,088
    
    
    
    (636,116
    )
    
    
    880,773
    
    
    
    9,632
    
    
    
    1,521,377Total shareholders equity
    
    
    538,555
    
    
    
    1,452,073
    
    
    
    128,400
    
    
    
    (1,580,473
    )
    
    
    538,555Total liabilities and shareholders equity
    
    $
    1,805,643
    
    
    $
    815,957
    
    
    $
    1,009,173
    
    
    $
    (1,570,841
    )
    
    $
    2,059,932
 32




---



##### 



Quintiles Transnational Corp. and Subsidiaries
As of December 31, 2003 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    (7,138
    )
    
    $
    188,430
    
    
    $
    192,330
    
    
    $
    
    
    
    $
    373,622Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    84,148
    
    
    
    152,994
    
    
    
    
    
    
    
    237,142Other current assets
    
    
    5,885
    
    
    
    23,093
    
    
    
    44,452
    
    
    
    
    
    
    
    73,430Assets of discontinued operation
    
    
    
    
    
    
    1,501
    
    
    
    87,048
    
    
    
    
    
    
    
    88,549Total current assets
    
    
    (1,253
    )
    
    
    297,172
    
    
    
    476,824
    
    
    
    
    
    
    
    772,743Property and equipment, net
    
    
    1,863
    
    
    
    125,301
    
    
    
    158,666
    
    
    
    
    
    
    
    285,830Intangibles and other assets:Investments
    
    
    20,147
    
    
    
    339,797
    
    
    
    1,143
    
    
    
    
    
    
    
    361,087Goodwill and other identifiable
intangibles, net
    
    
    13,429
    
    
    
    255,209
    
    
    
    247,940
    
    
    
    
    
    
    
    516,578Deposits and other assets
    
    
    27,156
    
    
    
    12,158
    
    
    
    17,159
    
    
    
    
    
    
    
    56,473Investments in subsidiaries
    
    
    1,738,852
    
    
    
    (201,283
    )
    
    
    77,107
    
    
    
    (1,614,676
    )
    
    
    Total intangibles and other assets
    
    
    1,799,584
    
    
    
    405,881
    
    
    
    343,349
    
    
    
    (1,614,676
    )
    
    
    934,138Total assets
    
    $
    1,800,194
    
    
    $
    828,354
    
    
    $
    978,839
    
    
    $
    (1,614,676
    )
    
    $
    1,992,711Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    58,482
    
    
    $
    63,162
    
    
    $
    191,055
    
    
    
    
    
    
    $
    312,699Credit arrangements
    
    
    3,100
    
    
    
    736
    
    
    
    16,834
    
    
    
    
    
    
    
    20,670Unearned income
    
    
    
    
    
    
    76,126
    
    
    
    115,129
    
    
    
    
    
    
    
    191,255Other current liabilities
    
    
    58,047
    
    
    
    3,669
    
    
    
    (33,636
    )
    
    
    
    
    
    
    28,080Liabilities of discontinued operation
    
    
    
    
    
    
    5,696
    
    
    
    1,385
    
    
    
    
    
    
    
    7,081Total current liabilities
    
    
    119,629
    
    
    
    149,389
    
    
    
    290,767
    
    
    
    
    
    
    
    559,785Long-term liabilities:Credit arrangements, less current
portion
    
    
    756,125
    
    
    
    3,593
    
    
    
    13,869
    
    
    
    
    
    
    
    773,587Minority interest
    
    
    
    
    
    
    
    
    
    
    1,380
    
    
    
    
    
    
    
    1,380Other liabilities
    
    
    98,924
    
    
    
    (8,375
    )
    
    
    32,312
    
    
    
    
    
    
    
    122,861Net intercompany payables
    
    
    290,418
    
    
    
    (774,401
    )
    
    
    483,983
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,145,467
    
    
    
    (779,183
    )
    
    
    531,544
    
    
    
    
    
    
    
    897,828Total liabilities
    
    
    1,265,096
    
    
    
    (629,794
    )
    
    
    822,311
    
    
    
    
    
    
    
    1,457,613Total shareholders equity
    
    
    535,098
    
    
    
    1,458,148
    
    
    
    156,528
    
    
    
    (1,614,676
    )
    
    
    535,098Total liabilities and shareholders equity
    
    $
    1,800,194
    
    
    $
    828,354
    
    
    $
    978,839
    
    
    $
    (1,614,676
    )
    
    $
    1,992,711
 33




---



##### 



Quintiles Transnational Corp. and Subsidiaries The following are condensed consolidating statements of cash flows of the
Company for the nine months ended September 30, 2004 and the periods from
September 26, 2003 through September 30, 2003 and January 1, 2003 through
September 25, 2003(in thousands): Nine months ended September 30, 2004 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalOperating activitiesNet income
    
    $
    8,625
    
    
    $
    (13,130
    )
    
    $
    56,067
    
    
    $
    (42,937
    )
    
    $
    8,625(Income) loss from discontinued operation
    
    
    
    
    
    
    (1,081
    )
    
    
    (8,539
    )
    
    
    
    
    
    
    (9,620
    )Gain from the sale of discontinued operation, net of income
taxes
    
    
    (769
    )
    
    
    (15,292
    )
    
    
    (37,741
    )
    
    
    
    
    
    
    (53,802
    )(Loss) income from continuing operations
    
    
    7,856
    
    
    
    (29,503
    )
    
    
    9,787
    
    
    
    (42,937
    )
    
    
    (54,797
    )Adjustments to reconcile (loss) income from continuing
operations to net cash (used in) provided by operating
activities:Depreciation and amortization
    
    
    9,076
    
    
    
    46,249
    
    
    
    45,090
    
    
    
    
    
    
    
    100,415Amortization of debt issuance costs
    
    
    2,470
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    2,643Amortization of commercial rights and royalties assets
    
    
    
    
    
    
    8,301
    
    
    
    
    
    
    
    
    
    
    
    8,301Restructuring charge (payments) accrual, net
    
    
    (10
    )
    
    
    (2,137
    )
    
    
    (4,768
    )
    
    
    
    
    
    
    (6,915
    )Loss (gain) from sales and impairments of investments, net
    
    
    1,877
    
    
    
    4,061
    
    
    
    365
    
    
    
    
    
    
    
    6,303Loss (gain) on disposals of property and equipment, net
    
    
    15
    
    
    
    4,101
    
    
    
    (8
    )
    
    
    
    
    
    
    4,108Gain from sale of certain assets
    
    
    (4,659
    )
    
    
    
    
    
    
    (1,176
    )
    
    
    
    
    
    
    (5,835
    )Gain from sale of a portion of an investment in a subsidiary
    
    
    (24,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,688
    )Non-operating gain on change of interest transaction
    
    
    (10,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )Provision for deferred income tax expense
    
    
    5,324
    
    
    
    (1,095
    )
    
    
    6,987
    
    
    
    
    
    
    
    11,216Change in accounts receivable, unbilled services and
unearned income
    
    
    876
    
    
    
    (53,024
    )
    
    
    (6,858
    )
    
    
    
    
    
    
    (59,006
    )Change in other operating assets and liabilities
    
    
    27,595
    
    
    
    (26,455
    )
    
    
    (10,740
    )
    
    
    513
    
    
    
    (9,087
    )Investment in subsidiaries and intercompany
    
    
    16,227
    
    
    
    12,629
    
    
    
    (71,280
    )
    
    
    42,424
    
    
    
    Other
    
    
    (100
    )
    
    
    (968
    )
    
    
    (72
    )
    
    
    
    
    
    
    (1,140
    )Net cash (used in) provided by operating activities
    
    
    31,829
    
    
    
    (37,668
    )
    
    
    (32,673
    )
    
    
    
    
    
    
    (38,512
    )Investing activitiesAcquisition of property and equipment
    
    
    (193
    )
    
    
    (15,344
    )
    
    
    (22,416
    )
    
    
    
    
    
    
    (37,953
    )Payment of transaction costs in Transaction
    
    
    (17,393
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,393
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (2,189
    )
    
    
    
    
    
    
    (2,189
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (13,000
    )
    
    
    
    
    
    
    
    
    
    
    (13,000
    )Proceeds from disposal of discontinued operation, net of
expenses
    
    
    (3,393
    )
    
    
    31,534
    
    
    
    149,795
    
    
    
    
    
    
    
    177,936Proceeds from sale of certain assets
    
    
    
    
    
    
    
    
    
    
    9,218
    
    
    
    
    
    
    
    9,218Proceeds from sale of minority interest in subsidiary, net of
expenses
    
    
    35,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,963Proceeds from disposition of property and equipment
    
    
    1,193
    
    
    
    28
    
    
    
    4,163
    
    
    
    
    
    
    
    5,384Proceeds from (purchases of) debt securities, net
    
    
    (874
    )
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    (612
    )Purchases of equity securities and other investments
    
    
    (332
    )
    
    
    (11,712
    )
    
    
    (1
    )
    
    
    
    
    
    
    (12,045
    )Proceeds from sale of equity securities and other investments
    
    
    53
    
    
    
    30,157
    
    
    
    
    
    
    
    
    
    
    
    30,210Other
    
    
    100
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    250Net cash provided by investing activities
    
    
    15,124
    
    
    
    21,925
    
    
    
    138,720
    
    
    
    
    
    
    
    175,769Financing activitiesPrincipal payments on credit arrangements, net
    
    
    (2,549
    )
    
    
    (360
    )
    
    
    (11,396
    )
    
    
    
    
    
    
    (14,305
    )Dividend from discontinued operation
    
    
    10,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,874Proceeds from change in interest transaction
    
    
    
    
    
    
    
    
    
    
    41,773
    
    
    
    
    
    
    
    41,773Net cash provided by (used in) financing activities
    
    
    8,325
    
    
    
    (360
    )
    
    
    30,377
    
    
    
    
    
    
    
    38,342Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    7
    
    
    
    (544
    )
    
    
    
    
    
    
    (537
    )Increase in cash and cash equivalents
    
    
    55,278
    
    
    
    (16,096
    )
    
    
    135,880
    
    
    
    
    
    
    
    175,062Cash and cash equivalents at beginning of period
    
    
    (7,138
    )
    
    
    188,430
    
    
    
    192,330
    
    
    
    
    
    
    
    373,622Cash and cash equivalents at end of period
    
    $
    48,140
    
    
    $
    172,334
    
    
    $
    328,210
    
    
    $
    
    
    
    $
    548,684
 34




---



##### 



Quintiles Transnational Corp. and Subsidiaries September 26, 2003 through September 30, 2003 (successor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    819
    
    
    $
    471
    
    
    $
    667
    
    
    $
    (1,138
    )
    
    $
    819Income from discontinued operation
    
    
    
    
    
    
    11
    
    
    
    29
    
    
    
    
    
    
    
    40(Loss) income from continuing operation
    
    
    819
    
    
    
    482
    
    
    
    696
    
    
    
    (1,138
    )
    
    
    859Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    102
    
    
    
    802
    
    
    
    700
    
    
    
    
    
    
    
    1,604Restructuring charge (payments) accrual, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss (gain) from sales and impairments of investments,
net
    
    
    
    
    
    
    (213
    )
    
    
    
    
    
    
    
    
    
    
    (213
    )Provision for (benefit from) deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in accounts receivable, unbilled services and
unearned income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in other operating assets and liabilities
    
    
    (921
    )
    
    
    (1,071
    )
    
    
    (258
    )
    
    
    1,138
    
    
    
    (2,250
    )Investment in subsidiaries and intercompany
    
    
    
    
    
    
    
    
    
    
    (1,138
    )
    
    
    1,138
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by operating activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investing activities:Repurchase of common stock in Transaction
    
    
    (1,617,567
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,617,567
    )Payment of transaction costs in Transaction
    
    
    (16,073
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,073
    )Net cash (used in) provided by investing activities
    
    
    (1,633,640
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,633,640
    )Financing activities:Principal payments on credit arrangements, net
    
    
    
    
    
    
    
    
    
    
    (912
    )
    
    
    
    
    
    
    (912
    )Proceeds from issuance of debt, net of expenses, in
Transaction
    
    
    734,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734,864Capital contribution
    
    
    390,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390,549Net cash provided by (used in) financing activities
    
    
    1,125,413
    
    
    
    
    
    
    
    (912
    )
    
    
    
    
    
    
    1,124,501Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Decrease) increase in cash and cash equivalents
    
    
    (508,227
    )
    
    
    
    
    
    
    (912
    )
    
    
    
    
    
    
    (509,139
    )Cash and cash equivalents at beginning of period
    
    
    509,439
    
    
    
    190,505
    
    
    
    142,017
    
    
    
    
    
    
    
    841,961Cash and cash equivalents at end of period
    
    $
    1,212
    
    
    $
    190,505
    
    
    $
    141,105
    
    
    $
    
    
    
    $
    332,822
 35




---



##### 



Quintiles Transnational Corp. and Subsidiaries
January 1, 2003 through September 25, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    37,161
    
    
    $
    45,751
    
    
    $
    16,465
    
    
    $
    (62,216
    )
    
    $
    37,161Income from discontinued operation
    
    
    
    
    
    
    (778
    )
    
    
    (3,848
    )
    
    
    
    
    
    
    (4,626
    )(Loss) income from continuing operation
    
    
    37,161
    
    
    
    44,973
    
    
    
    12,617
    
    
    
    (62,216
    )
    
    
    32,535Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    1,034
    
    
    
    27,503
    
    
    
    32,941
    
    
    
    
    
    
    
    61,478Transaction costs
    
    
    44,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,057Restructuring charge (payments) accrual, net
    
    
    (634
    )
    
    
    (2,050
    )
    
    
    2,967
    
    
    
    
    
    
    
    283Loss (gain) from sales and impairments of investments,
net
    
    
    2,661
    
    
    
    (30,024
    )
    
    
    
    
    
    
    
    
    
    
    (27,363
    )(Gain) loss on disposals of property and equipment, net
    
    
    
    
    
    
    (32
    )
    
    
    477
    
    
    
    
    
    
    
    445Provision for (benefit from) deferred income tax expense
    
    
    11,696
    
    
    
    (1,414
    )
    
    
    2,310
    
    
    
    
    
    
    
    12,592Change in accounts receivable, unbilled services and
unearned income
    
    
    2,253
    
    
    
    (1,201
    )
    
    
    24,507
    
    
    
    
    
    
    
    25,559Change in other operating assets and liabilities
    
    
    (39,617
    )
    
    
    51,084
    
    
    
    5,431
    
    
    
    
    
    
    
    16,898Investment in subsidiaries and intercompany
    
    
    452,266
    
    
    
    (334,278
    )
    
    
    (180,204
    )
    
    
    62,216
    
    
    
    Other
    
    
    (478
    )
    
    
    (1,079
    )
    
    
    210
    
    
    
    
    
    
    
    (1,347
    )Net cash (used in) provided by operating activities
    
    
    510,399
    
    
    
    (246,518
    )
    
    
    (98,744
    )
    
    
    
    
    
    
    165,137Investing activities:Acquisition of property and equipment
    
    
    (277
    )
    
    
    (18,375
    )
    
    
    (20,491
    )
    
    
    
    
    
    
    (39,143
    )Payment of transaction costs in Transaction
    
    
    (2,896
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,896
    )Acquisition of intangible assets
    
    
    
    
    
    
    (500
    )
    
    
    (4,618
    )
    
    
    
    
    
    
    (5,118
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (17,710
    )
    
    
    
    
    
    
    
    
    
    
    (17,710
    )Proceeds from disposition of property and equipment
    
    
    
    
    
    
    1,330
    
    
    
    4,889
    
    
    
    
    
    
    
    6,219Proceeds from (purchases of) debt securities, net
    
    
    (1,353
    )
    
    
    26,620
    
    
    
    
    
    
    
    
    
    
    
    25,267Purchases of equity securities and other investments
    
    
    (6,320
    )
    
    
    (4,471
    )
    
    
    (39
    )
    
    
    
    
    
    
    (10,830
    )Proceeds from sale of equity securities and other
investments
    
    
    1,391
    
    
    
    60,533
    
    
    
    2
    
    
    
    
    
    
    
    61,926Net cash (used in) provided by investing activities
    
    
    (9,455
    )
    
    
    47,427
    
    
    
    (20,257
    )
    
    
    
    
    
    
    17,715Financing activities:Principal payments on credit arrangements
    
    
    
    
    
    
    (595
    )
    
    
    (12,653
    )
    
    
    
    
    
    
    (13,248
    )Dividend from discontinued operation
    
    
    1,233
    
    
    
    
    
    
    
    1,905
    
    
    
    
    
    
    
    3,138Issuance of common stock, net (predecessor)
    
    
    7,042
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,042Net cash provided by (used in) financing activities
    
    
    8,275
    
    
    
    (595
    )
    
    
    (10,748
    )
    
    
    
    
    
    
    (3,068
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    142
    
    
    
    17,780
    
    
    
    
    
    
    
    17,922(Decrease) increase in cash and cash equivalents
    
    
    509,219
    
    
    
    (199,544
    )
    
    
    (111,969
    )
    
    
    
    
    
    
    197,706Cash and cash equivalents at beginning of period
    
    
    220
    
    
    
    390,049
    
    
    
    253,986
    
    
    
    
    
    
    
    644,255Cash and cash equivalents at end of period
    
    $
    509,439
    
    
    $
    190,505
    
    
    $
    142,017
    
    
    $
    
    
    
    $
    841,961
 36




---



##### 



Quintiles Transnational Corp. and Subsidiaries 15. Commitments and Contingencies On January 22, 2002, Federal Insurance Company (Federal) and Chubb Custom
Insurance Company (Chubb) filed suit against the Company, Quintiles Pacific,
Inc. and Quintiles Laboratories Limited, two of the Companys subsidiaries, in
the United States District Court for the Northern District of Georgia. In the
suit, Chubb, the Companys primary commercial general liability carrier for
coverage years 2000-2001 and 2001-2002, and Federal, the Companys excess
liability carrier for coverage years 2000-2001 and 2001-2002, seek to rescind
the policies issued to the Company based on an alleged misrepresentation by the
Company on the policy application. Alternatively, Chubb and Federal seek a
declaratory judgment that there is no coverage under the policies for some or
all of the claims asserted against the Company and its subsidiaries in a class
action lawsuit that was settled earlier this year involving an Alzheimers
study and, if one or more of such claims is determined to be covered, Chubb and
Federal request an allocation of the defense costs between the claims they
contend are covered and non-covered claims. The Company has filed an answer
with counterclaims against Federal and Chubb in response to their complaint.
Additionally, the Company has amended its pleadings to add AON Risk Services
(AON) as a counterclaim defendant, as an alternative to the Companys
position that Federal and Chubb are liable under the policies. In order to
preserve its rights, on March 27, 2003, the Company also filed a separate
action against AON in the United States District Court for the Middle District
of North Carolina. The parties have agreed to a settlement in principle, which
does not result in the Company making any payments. On June 13, 2003, ENVOY and Federal filed suit against the Company, in the
United States District Court for the Middle District of Tennessee. One or both
plaintiffs in this case have alleged claims for breach of contract, contractual
subrogation, equitable subrogation, and equitable contribution. The plaintiffs
reached settlement in principle, in the amount of $11.0 million, of the case
pending in the same court captioned In Re Envoy Corporation Securities
Litigation, Case No. 3-98-0760 (the Envoy Securities Litigation). The
plaintiffs claim that the Company is responsible for payment of the settlement
amount and associated fees and costs in the Envoy Securities Litigation based
on merger and settlement agreements between WebMD, ENVOY and the Company. The
Company has filed a motion to dismiss the suit, and the plaintiffs have filed
motions for summary judgment. These motions are pending before the court. All
parties have agreed to a stay of discovery. The Company believes that the
allegations made by ENVOY and Federal are without merit and intends to defend
the case vigorously. On June 28, 2004, ML Laboratories PLC (ML) filed a request to the
International Chamber of Commerce seeking arbitration in connection with a
contract dispute with Novex Pharma Limited (Novex), a subsidiary of the
Company. This claim relates to a contract entered into by Novex with ML for
the marketing and sales promotion of MLs medical device product known as
Adept, a solution used for the treatment and prevention of adhesions in
abdominal surgery. MLs claim alleges breach of contract by Novex by failing
to provide an adequate UK sales force, failing to implement marketing efforts
in European countries as required by the contract, and repudiatory breach of
the contract. The claim by ML is for damages of £55.1 million (approximately
$100.5 million). Novex intends to file a counter-claim asserting breach of
contract. The parties have reached agreement to stay the arbitration process
pending future discussions. The Company believes that the allegations made by
ML are without merit and intends to defend the case vigorously. 37




---



##### 



Quintiles Transnational Corp. and Subsidiaries The Company also is party to other legal proceedings incidental to its
business. While the Companys management currently believes that the ultimate
outcome of these proceedings, individually and in the aggregate, will not have
a material adverse effect on the Companys consolidated financial statements,
litigation is subject to inherent uncertainties. Were an unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the results
of operations for the period in which the ruling occurs. 16. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, which
requires the assets, liabilities and results of operations of variable interest
entities (VIE) to be consolidated into the financial statements of the
company that has controlling financial interest. FIN 46 also provides the
framework for determining whether a VIE should be consolidated based on voting
interest or significant financial support provided to the VIE. The Company
adopted these provisions, as required, with respect to VIEs created after
January 31, 2003. The Company has determined that it is a non-public entity as
defined by accounting guidance in FIN 46. The effective date for applying the
provisions of FIN 46 for interests held by non-public entities in VIEs or
potential VIEs created before February 1, 2003 is January 1, 2005. The Company
is currently evaluating the impact of FIN 46 on these interests held prior to
February 1, 2003. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Cautionary Statement for Forward Looking Information Information set forth in this Form 10-Q, including Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Forward looking statements
represent our judgment concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology such as may, will,
expect, anticipate, estimate, believe, continue, or target or the
negative thereof or other variations thereof or comparable terminology. We caution you that any such forward looking statements are further qualified
by important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, the risk that our substantial debt could adversely affect our
financial condition, the limitations on the operation of our business imposed
by the covenants contained in our senior subordinated notes and senior secured
credit facility, the risk that the market for our products and services will
not grow as we expect, the risk that our PharmaBio Development transactions
will not generate revenues, profits or return on investment at the rate or
levels we expect or that royalty revenues under our PharmaBio Development
arrangements may not be adequate to offset our upfront and on-going expenses in
providing sales and marketing services or in making milestone and marketing
payments, our ability to efficiently distribute backlog among project
management groups and match demand to resources, our actual operating
performance, variation in the actual savings and operating improvements
resulting from previous restructurings, our ability to maintain large customer
contracts or to enter into 38




---



##### 



Quintiles Transnational Corp. and Subsidiaries new contracts, delays in obtaining or failure to receive required regulatory
approvals of our customers products or projects, changes in trends in the
pharmaceutical industry, our ability to operate successfully in a new line of
business, the risk that Verispan, our joint venture with McKesson Corporation,
or McKesson, relating to the informatics business, will not be successful,
changes in existing, and the adoption of new, regulations affecting the
pharmaceutical industry and liability risks associated with our business which
could result in losses or indemnity to others not covered by insurance. See
Risk Factors below for additional factors that could cause actual results to
differ. Results of Operations As a result of the going-private merger transaction in September 2003, the
Condensed Consolidated Financial Statements present our results of operations,
financial position and cash flows prior to the date of the merger transaction
as the Predecessor. The financial effects of the going-private merger
transaction and our results of operations, financial position and cash flows
following the closing of the transaction are presented as the Successor. In
accordance with generally accepted accounting principles in the United States,
or GAAP, our predecessor results have not been aggregated with our successor
results and, accordingly, our Condensed Consolidated Financial Statements do
not show results of operations or cash flows for the three or nine months ended
September 30, 2003. However, in order to facilitate an understanding of our
results of operations for the three and nine months ended September 30, 2004 in
comparison with the three and nine months ended September 30, 2003, in this
section our predecessor results and our successor results are presented and
discussed on a combined basis. The combined results of operations are non-GAAP
financial measures and should not be used in isolation or substitution of the
Predecessor and Successor results. 39




---



##### 



Quintiles Transnational Corp. and Subsidiaries Below is a reconciliation of the combined results for the three and nine months
ended September 30, 2003: September 26,
    
    July 1,
    
    Three months
    
    September 26,
    
    January 1,
    
    Nine months2003 through
    
    2003 through
    
    ended
    
    2003 through
    
    2003 through
    
    endedSeptember 30,
    
    September 25,
    
    September 30,
    
    September 30,
    
    September 25,
    
    September 30,2003
    
    2003
    
    2003
    
    2003
    
    2003
    
    2003Successor
    
    Predecessor
    
    Combined
    
    Successor
    
    Predecessor
    
    CombinedNet revenue
    
    $
    19,247
    
    
    $
    384,295
    
    
    $
    403,542
    
    
    $
    19,247
    
    
    $
    1,196,247
    
    
    $
    1,215,494Add reimbursed service costs
    
    
    3,465
    
    
    
    77,545
    
    
    
    81,010
    
    
    
    3,465
    
    
    
    268,683
    
    
    
    272,148Gross revenues
    
    
    22,712
    
    
    
    461,840
    
    
    
    484,552
    
    
    
    22,712
    
    
    
    1,464,930
    
    
    
    1,487,642Costs, expenses and other:Costs of revenues
    
    
    14,708
    
    
    
    299,874
    
    
    
    314,582
    
    
    
    14,708
    
    
    
    969,474
    
    
    
    984,182General and administrative
    
    
    5,971
    
    
    
    129,082
    
    
    
    135,053
    
    
    
    5,971
    
    
    
    397,318
    
    
    
    403,289Interest (income) expense, net
    
    
    1,033
    
    
    
    (2,246
    )
    
    
    (1,213
    )
    
    
    1,033
    
    
    
    (10,374
    )
    
    
    (9,341
    )Other (income) expense, net
    
    
    (308
    )
    
    
    34
    
    
    
    (274
    )
    
    
    (308
    )
    
    
    (5,391
    )
    
    
    (5,699
    )Transaction and restructuring
    
    
    
    
    
    
    50,261
    
    
    
    50,261
    
    
    
    
    
    
    
    54,148
    
    
    
    54,14821,404
    
    
    
    477,005
    
    
    
    498,409
    
    
    
    21,404
    
    
    
    1,405,175
    
    
    
    1,426,579Income (loss) before income taxes
    
    
    1,308
    
    
    
    (15,165
    )
    
    
    (13,857
    )
    
    
    1,308
    
    
    
    59,755
    
    
    
    61,063Income tax expense (benefit)
    
    
    471
    
    
    
    204
    
    
    
    675
    
    
    
    471
    
    
    
    27,224
    
    
    
    27,695Income (loss) before minority
interests and equity in (losses)
earnings of unconsolidated
affiliates
    
    
    837
    
    
    
    (15,369
    )
    
    
    (14,532
    )
    
    
    837
    
    
    
    32,531
    
    
    
    33,368Minority interests and equity in
(losses) earnings of
unconsolidated affiliates
    
    
    22
    
    
    
    (12
    )
    
    
    10
    
    
    
    22
    
    
    
    4
    
    
    
    26Income (loss) from continuing
operations
    
    
    859
    
    
    
    (15,381
    )
    
    
    (14,522
    )
    
    
    859
    
    
    
    32,535
    
    
    
    33,394(Loss) income from discontinued
operation
    
    
    (40
    )
    
    
    (2,211
    )
    
    
    (2,251
    )
    
    
    (40
    )
    
    
    4,626
    
    
    
    4,586Net income (loss)
    
    $
    819
    
    
    $
    (17,592
    )
    
    $
    (16,773
    )
    
    $
    819
    
    
    $
    37,161
    
    
    $
    37,980
 40




---



##### 



Quintiles Transnational Corp. and Subsidiaries Below is a reconciliation of the results by segment on a combined basis for the
three and nine months ended September 30, 2003: September 26,
    
    July 1,
    
    Three months
    
    September 26,
    
    January 1,
    
    Nine months2003 through
    
    2003 through
    
    ended
    
    2003 through
    
    2003 through
    
    endedSeptember 30,
    
    September 25,
    
    September 30,
    
    September 30,
    
    September 25,
    
    September 30,2003
    
    2003
    
    2003
    
    2003
    
    2003
    
    2003Successor
    
    Predecessor
    
    Combined
    
    Successor
    
    Predecessor
    
    CombinedNet revenues:Product development
    
    $
    11,884
    
    
    $
    233,319
    
    
    $
    245,203
    
    
    $
    11,884
    
    
    $
    734,729
    
    
    $
    746,613Commercial services
    
    
    6,566
    
    
    
    126,483
    
    
    
    133,049
    
    
    
    6,566
    
    
    
    392,050
    
    
    
    398,616PharmaBio Development
    
    
    1,315
    
    
    
    35,282
    
    
    
    36,597
    
    
    
    1,315
    
    
    
    99,245
    
    
    
    100,560Eliminations
    
    
    (518
    )
    
    
    (10,789
    )
    
    
    (11,307
    )
    
    
    (518
    )
    
    
    (29,777
    )
    
    
    (30,295
    )$
    19,247
    
    
    $
    384,295
    
    
    $
    403,542
    
    
    $
    19,247
    
    
    $
    1,196,247
    
    
    $
    1,215,494Contribution:Product development
    
    $
    6,601
    
    
    $
    120,731
    
    
    $
    127,332
    
    
    $
    6,601
    
    
    $
    375,125
    
    
    $
    381,726Commercial services
    
    
    2,823
    
    
    
    46,521
    
    
    
    49,344
    
    
    
    2,823
    
    
    
    142,144
    
    
    
    144,967PharmaBio Development
    
    
    148
    
    
    
    13,329
    
    
    
    13,477
    
    
    
    148
    
    
    
    37,455
    
    
    
    37,603$
    9,572
    
    
    $
    180,581
    
    
    $
    190,153
    
    
    $
    9,572
    
    
    $
    554,724
    
    
    $
    564,296
 Below is a reconciliation of certain items of the combined statement of cash
flows for the nine months ended September 30, 2003: September 26,
    
    July 1,
    
    Nine months2003 through
    
    2003 through
    
    endedSeptember 30,
    
    September 25,
    
    September 30,2003
    
    2003
    
    2003Successor
    
    Predecessor
    
    CombinedNet cash provided by operations
    
    $
    
    
    
    $
    165,137
    
    
    $
    165,137Investing activities:Acquisition of property and equipment
    
    
    
    
    
    
    (39,143
    )
    
    
    (39,143
    )Repurchase of common stock in going-private merger
    
    
    (1,617,567
    )
    
    
    
    
    
    
    (1,617,567
    )Payment of transaction costs in going-private merger
    
    
    (16,073
    )
    
    
    (2,896
    )
    
    
    (18,969
    )Acquisition of intangible assets
    
    
    
    
    
    
    (5,118
    )
    
    
    (5,118
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (17,710
    )
    
    
    (17,710
    )Proceeds from disposition of property and equipment
    
    
    
    
    
    
    6,219
    
    
    
    6,219Proceeds from (purchases of) debt securities, net
    
    
    
    
    
    
    25,267
    
    
    
    25,267Purchases of equity securities and other investments
    
    
    
    
    
    
    (10,830
    )
    
    
    (10,830
    )Proceeds from sale of equity securities and other investments
    
    
    
    
    
    
    61,926
    
    
    
    61,926Net cash
(used in) provided by investing activities
    
    
    (1,633,640
    )
    
    
    17,715
    
    
    
    (1,615,925
    )Financing activities:Proceeds from issuance of debt, net of expenses, in Transaction
    
    
    734,864
    
    
    
    
    
    
    
    734,864Principal payments on credit arrangements, net
    
    
    (912
    )
    
    
    (13,248
    )
    
    
    (14,160
    )Dividend from discontinued operation
    
    
    
    
    
    
    3,138
    
    
    
    3,138Capital contribution
    
    
    390,549
    
    
    
    
    
    
    
    390,549Issuance of common stock (predecessor)
    
    
    
    
    
    
    7,042
    
    
    
    7,042Net cash provided by (used in) financing activities
    
    
    1,124,501
    
    
    
    (3,068
    )
    
    
    1,121,433
 In August 2004, we completed our sale of certain assets related to our Bioglan
Pharmaceuticals business, or Bioglan, to Bradley Pharmaceuticals, Inc., or
Bradley, for approximately $188.3 million including approximately $5.3 million
of direct costs for transferred inventory. We recognized a gain from the sale
of Bioglan during the third quarter of 2004 of $53.8 million, net of income
taxes of $36.2 million. The results of operations, assets and liabilities of
the Bioglan business have been reported separately as a 41




---



##### 



Quintiles Transnational Corp. and Subsidiaries discontinued operation. All historical periods presented herein have been
restated to reflect the Bioglan business as a discontinued operation. Three Months Ended September 30, 2004 and 2003 Gross Revenues.Gross revenues for the third quarter of 2004 were $535.5
million versus $484.6 million for the third quarter of 2003. Gross revenues
include service revenues, revenues from commercial rights and royalties and
revenues from investments. Net revenues exclude reimbursed service costs.
Reimbursed service costs may fluctuate due, in part, to the payment provisions
of the respective service contract. Below is a summary of revenues (in
thousands): Three months ended September 302004
    
    2003Service revenues
    
    $
    530,361
    
    
    $
    447,955Less: reimbursed service costs
    
    
    95,441
    
    
    
    81,010Net service revenues
    
    
    434,920
    
    
    
    366,945Commercial rights and royalties
    
    
    7,660
    
    
    
    37,470Investments
    
    
    (2,509
    )
    
    
    (873
    )Total net revenues
    
    $
    440,071
    
    
    $
    403,542Reimbursed service costs
    
    
    95,441
    
    
    
    81,010Gross revenues
    
    $
    535,512
    
    
    $
    484,552
  
    
    Service Revenues.Service revenues were $530.4 million for the
third quarter of 2004 compared to $448.0 million for the third
quarter of 2003. Service revenues less reimbursed service costs, or
net service revenues, for the third quarter of 2004 were $434.9
million, an increase of $68.0 million or 18.5% over net service
revenues of $366.9 million for the third quarter of 2003. Net
service revenues for the third quarter of 2004 were positively
impacted by approximately $23.6 million due to the effect of the
weakening of the U.S. dollar relative to the euro, the British pound,
the South African rand and the Japanese yen. Net service revenues
increased in the Asia Pacific region $11.5 million or 19.0% to $71.9
million for the third quarter of 2004 from the third quarter of 2003
including a positive impact of approximately $4.5 million due to the
effect of foreign currency fluctuations. Net service revenues
increased $37.3 million or 23.2% to $198.5 million for the third
quarter of 2004 from the third quarter of 2003 in the Europe and
Africa region including a positive impact of approximately $19.3
million due to the effect of foreign currency fluctuations. We
experienced growth from our clinical development services, or CDS,
and an improvement in the business conditions for our commercial
services group in Europe, primarily Germany and the United Kingdom.
Net service revenues increased $19.2 million or 13.2% to $164.6
million for the third quarter of 2004 from the third quarter of 2003
in the Americas region, primarily from CDS. 42




---



##### 



Quintiles Transnational Corp. and Subsidiaries  
    
    Commercial Rights and Royalties Revenues.Commercial rights and
royalties revenues, which include product revenues, royalties and
commissions, for the third quarter of 2004 were $7.7 million, a
decrease of $29.8 million as compared to the third quarter 2003
commercial rights and royalties revenues of $37.5 million. Commercial
rights and royalties revenues were positively impacted by
approximately $869,000 due to the effect of foreign currency
fluctuations related to the weakening of the U.S. dollar relative to
the euro. Commercial rights and royalties revenues were reduced by
approximately $10.3 million for the third quarter of 2004 for payments
we made to our customers versus $1.6 million for the third quarter of
2003. These payments are considered incentives and are amortized
against revenues over the service period of the contract. The
decrease in commercial rights and royalties revenues is due to (1) our
contracts with Columbia Labs, Inc., or CBRX, which decreased revenue
by approximately $5.9 million in the third quarter of 2004, compared
to a $4.8 million contribution to revenues in the third quarter of
2003, due to an impairment of the payments made to CBRX of
approximately $7.8 million representing a decline in fair value of the
related commercial rights and royalties asset which we deemed to be
other-than-temporary; (2) the conclusion of our service contract in
December 2003 with Kos Pharmaceuticals, Inc., or KOSP, which
contributed approximately $6.3 million of revenue in the third quarter
of 2003; (3) a slight decrease in the revenues under our contracts in
Europe with two large pharmaceutical customers to $8.1 million in the
third quarter of 2004 as compared to $8.6 million in the third quarter
of 2003 and (4) a decline in the revenues from miscellaneous contracts
and activities to $334,000 during the third quarter of 2004 from $1.2
million during the third quarter of 2003. In addition, the third
quarter of 2003 included $15.9 million of revenues related to our
contract and subsequent termination agreement with Scios, Inc., or
SCIO. These decreases were partially offset by increases resulting
from (1) our contract for CymbaltaTM which contributed $2.4 million of
revenues in the third quarter of 2004 and (2) our September 2003
acquisition of a controlling interest in Pharmaplan which contributed
$2.8 million of revenues during the third quarter of 2004 versus
$552,000 during the third quarter of 2003. Commercial rights and
royalties revenues for the third quarter of 2004 were attributable to
the following: (1) approximately 105.2% to our contracts with two
large pharmaceutical customers in Europe, (2) approximately 31.3% to
our CymbaltaTM contract, (3) approximately 36.7% to the acquisition of
Pharmaplan during September 2003, (4) approximately 4.4% related to
miscellaneous contracts and activities and (5) approximately (77.7%)
related to our contracts with CBRX.
    
    Investment Revenues.Investment revenues related to our
PharmaBio Development groups financing arrangements, which include
gains and losses from the sale of equity securities and impairments
from other-than-temporary declines in the fair values of our direct
and indirect investments, for the third quarter of 2004 were a loss
of $2.5 million versus a loss of $873,000 for the third quarter of
2003. Investment revenues for the third quarter of 2004 included
$2.5 million of net losses on marketable securities versus $6.9
million of net gains on marketable securities for the third quarter
of 2003. In addition, during the third quarter of 2003, we
recognized $7.8 million of impairment losses on investments whose
decline in fair value was considered to be other-than-temporary. 43




---



##### 



Quintiles Transnational Corp. and Subsidiaries Costs of Revenues.Costs of revenues were $391.8 million for the third quarter
of 2004 versus $314.6 million for the third quarter of 2003. Below is a
summary of the costs of revenues (in thousands): Three months ended September 30,2004
    
    2003Reimbursed service costs
    
    $
    95,441
    
    
    $
    81,010Service costs
    
    
    223,681
    
    
    
    190,268Commercial rights and royalties costs
    
    
    40,250
    
    
    
    23,120Depreciation and amortization
    
    
    32,412
    
    
    
    20,184$
    391,784
    
    
    $
    314,582
  
    
    Reimbursed Service Costs.Reimbursed service costs were $95.4
million and $81.0 million for the third quarter of 2004 and 2003,
respectively.
    
    Service Costs.Service costs, which include compensation and
benefits for billable employees, and certain other expenses directly
related to service contracts, were $223.7 million or 51.4% of net
service revenues versus $190.3 million or 51.9% of net service
revenues for the third quarter of 2004 and 2003, respectively.
Compensation and related expenses increased approximately $41.1
million primarily as a result of salary and wage increases including
an increase in our number of billable employees. Other expenses
directly related to our service contracts decreased approximately
$7.7 million. Service costs were negatively impacted by
approximately $12.2 million from the effect of foreign currency
fluctuations.
    
    Commercial Rights and Royalties Costs.Commercial rights and
royalties costs, which include compensation and related benefits for
employees, amortization of commercial rights, infrastructure costs of
the PharmaBio Development group and other expenses directly related
to commercial rights and royalties, were $40.3 million for the third
quarter of 2004 versus $23.1 million for the third quarter of 2003.
These costs include services and products provided by third parties,
as well as services provided by our other service groups, totaling
approximately $29.3 million and $11.3 million for the third quarter
of 2004 and 2003, respectively. We incurred approximately $17.4
million and $2.1 million of costs related to our CymbaltaTM contract
for the third quarter of 2004 and 2003, respectively. In addition,
the third quarter of 2004 and 2003 includes approximately $9.7
million and $539,000, respectively, of costs related to our February
2004 contract with a large pharmaceutical company and our Pharmaplan
operations in which we acquired a controlling interest in September
2003. The third quarter of 2003 includes approximately $4.1 million
of costs related to our service contract with KOSP which was
terminated in December 2003.
    
    Depreciation and Amortization.Depreciation and amortization,
which include depreciation of our property and equipment and
amortization of our definite-lived intangible assets except
commercial rights, increased to $32.4 million for the third quarter
of 2004 versus $20.2 million for the third quarter of 2003.
Amortization expense increased approximately $11.7 million as a
result of the increase in intangible assets which are being amortized
over their finite lives. We have approximately $109.7 million of
intangible assets which have an indefinite life and therefore are not
being amortized. Depreciation expense remained relatively constant
increasing approximately $498,000. 44




---



##### 



Quintiles Transnational Corp. and Subsidiaries General and administrative expenses.General and administrative expenses,
which include compensation and benefits for administrative employees,
non-billable travel, professional services, and expenses for advertising,
information technology and facilities, were $159.8 million or 36.3% of total
net revenues for the third quarter of 2004 versus $135.1 million or 33.5% of
total net revenues for the third quarter of 2003. Travel expenses increased
approximately $8.6 million for the third quarter of 2004 when compared to the
third quarter of 2003, primarily as a result of increased activities associated
with our global operations. These travel expenses include reimbursements made
to our Executive Chairman and Chief Executive Officer for business related
travel services he provides for himself and other employees with the use of his
own plane. Professional services increased approximately $1.7 million during
this same time period, including approximately $938,000 of management fees to
our parent companys investor group. In addition, compensation and related
expenses were negatively impacted by approximately $7.3 million as a result of
salary and wage increases including an increase in the number of administrative
employees. General and administrative expenses were negatively impacted by
approximately $8.5 million from the effect of foreign currency fluctuations. Net interest expense, which represents interest income received from bank
balances and investments in debt securities, and the accretion of discounts
provided pursuant to commercial rights and royalties assets relating to certain
PharmaBio Development contracts, net of interest expense incurred on lines of
credit, notes and capital leases, was $14.8 million for the third quarter of
2004 versus net interest income of $1.2 million for the third quarter of 2003.
Interest income decreased approximately $339,000 to $2.6 million for the third
quarter of 2004 as a result of the decline in investable cash. Interest
expense increased approximately $15.7 million to $17.4 million for the third
quarter of 2004 as a result of the interest on the debt we incurred to fund the
Pharma Services Transaction. Other expense was $2.5 million for the third quarter of 2004 versus other
income of $274,000 for the third quarter of 2003. Net losses on the disposal
of assets were approximately $3.1 million for the third quarter of 2004
compared to approximately $142,000 in the third quarter of 2003. We recognized $50.3 million of transaction expenses and restructuring charges
for the third quarter of 2003 which consisted of approximately $44.8 million of
transaction related expenses including expenses of the special committee of our
Board of Directors and its financial and legal advisors and a $5.5 million
restructuring charge. During the third quarter of 2003 in connection with the
Pharma Services Transaction, we reviewed our estimates of the restructuring
plans we adopted in prior years. This review resulted in a net increase of
approximately $5.5 million in our accruals, including an increase of $6.8
million in exit costs for abandoned leased facilities and a decrease of
approximately $1.3 million for severance payments. The decrease in severance
payments is a result of the number of actual voluntary employee terminations
exceeding our estimates. Loss before income taxes was $33.5 million for the third quarter of 2004 versus
a loss of $13.9 million for the third quarter of 2003. The effective income tax rate was 47.0% for the third quarter of 2004 versus
(4.9%) for the third quarter of 2003. Our estimated annual effective income
tax rate for the third quarter of 2004 increased mainly due to the cumulative
effect of an increase in the expected annual effective income tax rate from
3.8% to approximately 20.4%. This change was driven primarily by a reduction
in profitability in the United 45




---



##### 



Quintiles Transnational Corp. and Subsidiaries States due to the increased interest expense associated with the privatization
transaction. Our estimated annual effective income tax rate was negatively
impacted by the repatriation of cash in connection with the going-private
merger transaction for which no foreign tax credits were available and the
transaction related expenses some of which were not deductible for income tax
purposes. Since we conduct operations on a global basis, shifts in income
between taxing jurisdictions may cause our effective income tax rate to vary
from period to period. During the third quarter of 2004 and 2003, we recognized losses of $1.1 million
and earnings of $10,000, respectively, from minority interests and equity in
unconsolidated affiliates which represents a minority interest in consolidated
affiliates, primarily our Japanese subsidiary, net of our pro rata share of the
net loss of unconsolidated affiliates, primarily Verispan. Loss from continuing operations was $18.8 million in the third quarter of 2004
versus $14.5 million in the third quarter of 2003. Loss from our discontinued operation, Bioglan, which was sold August 10, 2004,
was $521,000 in the third quarter of 2004 versus $2.3 million in the third
quarter of 2003. Gross revenues of the discontinued operation were
approximately $3.0 million and $5.6 million for the third quarter of 2004 and
2003, respectively. During August 2004, we completed the sale of our Bioglan operations for
approximately $188.3 million in cash including approximately $5.3 million of
direct costs for transferred inventory. Based on certain purchase price
adjustment provisions in the asset purchase agreement, we paid Bradley
approximately $1.9 million in October 2004. As a result of the completion of
the transaction, we recognized a gain from the sale of Bioglan during the
third quarter of 2004 of $53.8 million, net of income taxes of $36.2 million. Net income was $34.5 million for the third quarter of 2004 versus net loss of
$16.8 million for the third quarter of 2003. Analysis by Segment: The following table summarizes the operating activities for our reportable
segments for the third quarter of 2004 and 2003, respectively. In August 2004,
we completed our sale of certain assets related to our
Bioglan business. The results of operations for the Bioglan business have been
separately reported as a discontinued operation and are no longer included in
the PharmaBio Development group. All historical periods presented herein have
been restated to reflect Bioglan as a discontinued operation. We do not
include reimbursed service costs, general and administrative expenses,
depreciation and amortization expense except the amortization of commercial
rights, interest (income) expense, other (income) expense and income tax
expense (benefit) in our segment analysis. Intersegment revenues have been
eliminated and the profit on intersegment revenues is reported within the
service group providing the services (dollars in millions). 46




---



##### 



Quintiles Transnational Corp. and Subsidiaries Total Net Revenues
    
    Contribution% of Net
    
    
    
    
    
    % of Net2004
    
    2003
    
    Growth %
    
    2004
    
    Revenues
    
    2003
    
    RevenuesProduct development
    
    $
    282.5
    
    
    $
    245.2
    
    
    
    15.2
    %
    
    $
    139.3
    
    
    
    49.3
    %
    
    $
    127.3
    
    
    
    51.9
    %Commercial services
    
    
    179.1
    
    
    
    133.0
    
    
    
    34.6
    
    
    
    71.9
    
    
    
    40.1
    
    
    
    49.3
    
    
    
    37.1PharmaBio Development
    
    
    5.2
    
    
    
    36.6
    
    
    
    (85.9
    )
    
    
    (35.1
    )
    
    
    (681.4
    )
    
    
    13.5
    
    
    
    36.8Eliminations
    
    
    (26.7
    )
    
    
    (11.3
    )
    
    
    (136.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    440.1
    
    
    $
    403.5
    
    
    
    9.1
    %
    
    $
    176.1
    
    
    
    40.0
    %
    
    $
    190.2
    
    
    
    47.1
    %
 Product Development Group.Net service revenues for the product development
group were $282.5 million for the third quarter of 2004 compared to $245.2
million for the third quarter of 2003. The increase in revenues is primarily
from clinical development services, or CDS. Net service revenues for the third
quarter of 2004 were positively impacted by approximately $14.2 million due to
the effect of foreign currency fluctuations. Net service revenues increased in
the Asia Pacific region $1.6 million or 5.3% to $31.7 million as a result of a
positive impact of approximately $1.9 million due to the effect of foreign
currency fluctuations. The net service revenues in the Europe and Africa
region increased $18.4 million or 17.1% to $126.0 million primarily as a result
of an increase in CDS revenues and a positive impact of approximately $12.3
million due to the effect of foreign currency fluctuations. Net service
revenues increased $17.3 million or 16.1% to $124.9 million in the Americas
region primarily due to an increase in CDS revenues. Contribution for the product development group was $139.3 million for the third
quarter of 2004 compared to $127.3 million for the third quarter of 2003. As a
percentage of net service revenues, contribution margin was 49.3% for the third
quarter of 2004 compared to 51.9% for the third quarter of 2003. The
contribution margin was negatively impacted by costs directly related to our
service contracts increasing as a percentage of net revenues. Commercial Services Group.Net service revenues for the commercial services
group were $179.1 million for the third quarter of 2004 compared to $133.0
million for the third quarter of 2003. Net service revenues for the third
quarter of 2004 were positively impacted by approximately $9.7 million due to
the effect of foreign currency fluctuations. We experienced strong growth in
net revenues in the Asia Pacific region with net service revenues increasing
$9.9 million or 32.7% to $40.2 million including a positive impact of
approximately $2.7 million due to the effect of foreign currency fluctuations.
Net service revenues increased approximately $18.6 million or 33.3% to $74.2
million in the Europe and Africa region, including a positive impact of
approximately $7.2 million due to the effect of foreign currency fluctuations.
We experienced an improvement in the business conditions in Europe, primarily
Germany and the United Kingdom. Net service revenues increased $17.6 million
or 37.4% to $64.7 million in the Americas region as a result of an increase in
the services provided under our PharmaBio Development contracts during the
year, primarily relating to the CymbaltaTM contract. Contribution for the commercial services group was $71.9 million for the third
quarter of 2004 compared to $49.3 million for the third quarter of 2003. As a
percentage of net service revenues, contribution margin was 40.1% for the third
quarter of 2004 compared to 37.1% for the third quarter of 2003. Utilization
of our syndicated sales forces in the United Kingdom improved which contributed
to the increase in contribution as the costs for the syndicated sales forces
are relatively constant and do not fluctuate directly in proportion to the
revenues. In addition, we also experienced improvements in the 47




---



##### 



Quintiles Transnational Corp. and Subsidiaries contribution margins of our operations in Germany and France. PharmaBio Development Group.Net revenues for the PharmaBio Development group
decreased approximately $31.4 million during the third quarter of 2004 as
compared to the third quarter of 2003 due to a $29.8 million decrease in
commercial rights and royalties revenues and a decrease of approximately $1.6
million in investment revenues. Investment revenues include net losses of
approximately $2.5 million for the third quarter of 2004 versus net losses of
$873,000 for the third quarter of 2003 including approximately $7.8 million of
impairment losses. Commercial rights and royalties costs increased by
approximately $17.1 million during the same period, as a result of several
factors including (1) increased service costs relating to services provided by
our commercial services group and (2) increased costs associated with our
contract for CymbaltaTM and our February 2004 contract with a large
pharmaceutical company. The contribution for the PharmaBio Development group decreased by $48.6 million
in the third quarter of 2004 compared to the third quarter of 2003. The
contribution related to commercial rights and royalties agreements (net of
related costs) in the third quarter of 2004 decreased the overall contribution
of this group by approximately $46.9 million when compared to the third quarter
of 2003. The decrease in the contribution provided by the commercial rights
and royalties agreements is a result of a decrease of approximately $29.8
million in revenue and an increase in related costs of approximately $17.1
million including approximately $7.1 million of costs associated with one of
our contracts for which no revenues have been recognized. The contribution
from investment revenues decreased by approximately $1.6 million for the third
quarter of 2004 to ($2.5) million versus ($873,000) for the third quarter of
2003 as a direct result of the decrease in the investment revenues. Nine Months Ended September 30, 2004 and 2003 Gross Revenues.Gross revenues for the first nine months of 2004 were $1.55
billion versus $1.49 billion for the first nine months of 2003. Below is a
summary of revenues (in thousands): Nine months ended September 302004
    
    2003Service revenues
    
    $
    1,517,140
    
    
    $
    1,387,082Less: reimbursed service costs
    
    
    260,206
    
    
    
    272,148Net service revenues
    
    
    1,256,934
    
    
    
    1,114,934Commercial rights and royalties
    
    
    38,401
    
    
    
    72,174Investments
    
    
    (6,304
    )
    
    
    28,386Total net revenues
    
    $
    1,289,031
    
    
    $
    1,215,494Reimbursed service costs
    
    
    260,206
    
    
    
    272,148Gross revenues
    
    $
    1,549,237
    
    
    $
    1,487,642
  
    
    Service Revenues.Service revenues were $1.52 billion for the
first nine months of 2004 compared to $1.39 billion for the first nine
months of 2003. Net service revenues for the first nine months of
2004 were $1.26 billion, an increase of $142.0 million or 12.7% over
net service revenues of $1.11 billion for the first nine months of
2003. Net service revenues for the first nine months of 2004 were
positively impacted by approximately $78.3 million due to the effect
of the weakening of the U.S. dollar relative to the euro, the British
pound, the South African rand and the Japanese yen. Net service
revenues increased in the Asia Pacific region $36.9 million or 21.8%
to $206.2 million for the first nine months of 2004 from the first
nine 48




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##### 



Quintiles Transnational Corp. and Subsidiaries  months of 2003 as a result of strong growth in our commercial services.
Net revenues in the Asia Pacific region were positively impacted by
approximately $16.3 million due to the effect of foreign currency
fluctuations. Net service revenues increased $91.3 million or 18.8% to
$576.2 million for the first nine months of 2004 from the first nine
months of 2003 in the Europe and Africa region including a positive
impact of approximately $60.9 million due to the effect of foreign
currency fluctuations. We experienced an improvement in the business
conditions for our commercial services group in Europe, primarily
Germany and the United Kingdom. Net service revenues increased $13.8
million or 3.0% to $474.5 million for the first nine months of 2004
from the first nine months of 2003 in the Americas region primarily
from CDS.
    
    Commercial Rights and Royalties Revenues.Commercial rights and
royalties revenues for the first nine months of 2004 were $38.4
million, a decrease of $33.8 million over the first nine months of
2003 commercial rights and royalties revenues of $72.2 million.
Commercial rights and royalties revenues were positively impacted by
approximately $3.5 million due to the effect of foreign currency
fluctuations related to the weakening of the U.S. dollar relative to
the euro. Commercial rights and royalties revenues were reduced by
approximately $14.6 million for the first nine months of 2004 for
payments we made to our customers versus $2.2 million for the first
nine months of 2003. These payments are considered incentives and are
amortized against revenues over the service period of the contract.
The decrease in commercial rights and royalties revenues is due to (1)
our contracts with CBRX which decreased revenue by $1.2 million in the
first nine months of 2004, compared to a $8.2 million contribution to
revenues in the first nine months of 2003, due to an impairment of the
payments made to CBRX of approximately $10.7 million representing a
decline in fair value of the related commercial rights and royalties
asset which we deemed to be other-than-temporary; and (2) the
conclusion of our service contract in December 2003 with KOSP which
contributed approximately $17.6 million of revenue in the first nine
months of 2003. In addition, the first nine months of 2003 included
$15.9 million of revenues related to our contract and subsequent
termination agreement with SCIO. These decreases were partially
offset by increases resulting from (1) our contract for CymbaltaTM
which contributed $2.4 million of revenues in the first nine months of
2004; (2) our September 2003 acquisition of a controlling interest in
Pharmaplan which contributed $8.4 million of revenues during the first
nine months of 2004 versus $551,000 during the first nine months of
2003; and (3) our miscellaneous contracts and activities which
contributed $2.5 million of revenues in the first nine months of 2004
versus $370,000 during the first nine months of 2003. Commercial
rights and royalties revenues for the first nine months of 2004 were
attributable to the following: (1) approximately 74.0% to our
contracts with two large pharmaceutical customers in Europe, (2)
approximately 6.3% to our CymbaltaTM contract, (3) approximately 21.9%
to the acquisition of Pharmaplan during September 2003, (4)
approximately 1.0% related to miscellaneous contracts and activities
and (5) approximately (3.1%) related to our contracts with CBRX.
    
    Investment Revenues.Investment revenues related to our
PharmaBio Development groups financing arrangements for the first
nine months of 2004 were a loss of $6.3 million versus a gain of
$28.4 million for the first nine months of 2003. Investment revenues
for the first nine months of 2004 included $4.1 million of net gains
on marketable securities versus $38.9 million for the first nine
months of 2003. Gains on marketable securities for the first nine 49




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##### 



Quintiles Transnational Corp. and Subsidiaries  months of 2003 included a $12.1 million gain on the warrant to acquire
700,000 shares of SCIO. In addition, during the first nine months of
2004 and 2003, we recognized $10.4 million and $10.6 million,
respectively, of impairment losses on investments whose decline in fair
value was considered to be other-than-temporary. Costs of Revenues.Costs of revenues were $1.12 billion for the first nine
months of 2004 versus $984.2 million for the first nine months of 2003. Below
is a summary of the costs of revenues (in thousands): Nine months ended September 30,2004
    
    2003Reimbursed service costs
    
    $
    260,206
    
    
    $
    272,148Service costs
    
    
    673,415
    
    
    
    588,240Commercial rights and royalties costs
    
    
    89,352
    
    
    
    62,957Depreciation and amortization
    
    
    97,475
    
    
    
    60,837$
    1,120,448
    
    
    $
    984,182
  
    
    Reimbursed Service Costs.Reimbursed service costs were $260.2
million and $272.1 million for the first nine months of 2004 and
2003, respectively.
    
    Service Costs.Service costs were $673.4 million or 53.6% of
net service revenues versus $588.2 million or 52.8% of net service
revenues for the first nine months of 2004 and 2003, respectively.
Compensation and related expenses increased approximately $78.8
million primarily as a result of salary and wage increases, including
an increase in the number of billable employees. Other expenses
directly related to our service contracts increased approximately
$6.4 million. Service costs were negatively impacted by
approximately $40.9 million from the effect of foreign currency
fluctuations.
    
    Commercial Rights and Royalties Costs.Commercial rights and
royalties costs were $89.4 million for the first nine months of 2004
versus $63.0 million for the first nine months of 2003. These costs
include services and products provided by third parties, as well as
services provided by our other service groups, totaling approximately
$44.6 million and $30.3 million for the first nine months of 2004 and
2003, respectively. We also incurred approximately $24.1 million and
$4.9 million of costs related to our CymbaltaTM contract for the
first nine months of 2004 and 2003, respectively. In addition, the
first nine months of 2004 and 2003 includes approximately $21.8
million and $648,000, respectively, of costs related to our February
2004 contract with a large pharmaceutical company and our Pharmaplan
operations in which we acquired a controlling interest in September
2003. The first nine months of 2003 includes approximately $12.4
million of costs related to our service contract with KOSP which was
terminated in December 2003.
    
    Depreciation and Amortization.Depreciation and amortization
increased to $97.5 million for the first nine months of 2004 versus
$60.8 million for the first nine months of 2003. Amortization
expense increased approximately $35.4 million as a result of the
increase in intangible assets which are being amortized over their
finite lives. We have approximately $109.7 million of intangible
assets which have an indefinite life and therefore are not being
amortized. Depreciation expense increased approximately $1.2
million. 50




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##### 



Quintiles Transnational Corp. and Subsidiaries General and administrative expenses.General and administrative expenses were
$474.5 million or 36.8% of total net revenues for the first nine months of 2004
versus $403.3 million or 33.2% of total net revenues for the first nine months
of 2003. Travel expenses increased approximately $20.1 million for the first
nine months of 2004 when compared to the first nine months of 2003, primarily
as a result of increased activities associated with our global operations.
These travel expenses include reimbursements made to our Executive Chairman and
Chief Executive Officer for business related travel services he provides for
himself and other employees with the use of his own plane. Professional
services increased approximately $10.5 million during this same time period,
including approximately $2.8 million of management fees to our parent companys
investor group. In addition, compensation and related expenses were negatively
impacted by approximately $25.2 million as a result of salary and wage
increases including an increase in the number of administrative employees.
General and administrative expenses were negatively impacted by approximately
$28.2 million from the effect of foreign currency fluctuations. Net interest expense was $44.0 million for the first nine months of 2004 versus
net interest income of $9.3 million for the first nine months of 2003.
Interest income decreased approximately $5.1 million to $7.2 million for the
first nine months of 2004 as a result of the decline in investable cash.
Interest expense increased approximately $48.3 million to $51.2 million as a
result of the interest on the debt we incurred to fund the Pharma Services
Transaction. Other expense was $551,000 for the first nine months of 2004 versus other
income of $5.7 million for the first nine months of 2003. The first nine
months of 2004 included approximately $1.3 million of net gains on the sale and
disposal of assets. During the first nine months of 2004, we recognized
approximately $2.2 million of foreign currency translation losses versus
foreign currency translation gains of approximately $4.2 million for the first
nine months of 2003. During the second quarter of 2004, we sold 3,556 ordinary shares, or
approximately 11.1% of our ownership interest, in our Japanese subsidiary,
QJPN, to Mitsui for approximately 4.0 billion yen (approximately $37.0 million)
of gross proceeds. We incurred approximately $1.1 million of costs related to
the sale. As a result, we recognized a gain on the sale of a portion of an
investment in a subsidiary of approximately $24.7 million. In addition, our Japanese subsidiary issued 1,778 ordinary shares and 1,778
preference shares directly to Mitsui for an aggregate amount of approximately
4.7 billion yen (approximately $42.9 million) of gross proceeds. We incurred
approximately $463,000 of costs related to the issuance of the ordinary shares
and approximately $652,000 of costs related to the issuance of the preference
shares. The issuance of the new ordinary shares further reduced our ownership
interest in our subsidiary by an additional 4.7%. As a result, we recognized a
non-operating gain of approximately $10.0 million for the change in interest
transaction. We did not recognize any gain or loss associated with the new
issuance of preference shares which decreased our voting interest in this
subsidiary by an additional 4.2% to 80% and accounted for approximately 2.8
billion yen (approximately $25.1 million) of gross proceeds. 51




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##### 



Quintiles Transnational Corp. and Subsidiaries We recognized $54.1 million of transaction expenses and restructuring charges
during the nine months ended September 30, 2003 which consisted of $48.7
million of transaction related expenses including expenses of the special
committee of our Board of Directors and its financial and legal advisors and a
$5.5 million restructuring charge. During the third quarter of 2003 in
connection with the Pharma Services Transaction, we reviewed our estimates of
the restructuring plans we adopted in prior years. This review resulted in a
net increase of approximately $5.5 million in our accruals, including an
increase of $6.8 million in exit costs for abandoned leased facilities and a
decrease of approximately $1.3 million for severance payments. The decrease in
severance payments is a result of the number of actual voluntary employee
terminations exceeding our estimates. Loss before income taxes was $55.6 million for the first nine months of 2004
versus income before income taxes of $61.1 million or 5.0% of total net
revenues for the first nine months of 2003. The effective income tax rate was 4.2% for the first nine months of 2004 versus
45.4% for the first nine months of 2003. Our effective income tax rate was
negatively impacted by income taxes provided on approximately $22.5 million of
earnings of our foreign subsidiaries. The earnings of our foreign subsidiaries
will be subject to taxation in the United States for income tax purposes when
repatriated. However, for financial reporting purposes, income taxes are
provided on the earnings of our foreign subsidiaries as though they have
currently been repatriated. Our effective income tax rate for the first nine
months of 2004 was negatively impacted due to the gains on the Mitsui
transactions. The tax effects of the gains on these transactions are
recognized as a period adjustment not a change in the annual effective income
tax rate. Our estimated annual effective income tax rate increased to
approximately 20.4% during the third quarter of 2004 versus an estimated 3.8%
at the second quarter of 2004. Since we conduct operations on a global basis,
shifts in income between taxing jurisdictions may cause our effective income
tax rate to vary from period to period. During the first nine months of 2004 we recognized $1.5 million of losses from
minority interests and equity in unconsolidated affiliates which represents a
minority interest in consolidated subsidiaries, primarily our Japanese
subsidiary, net of our pro rata share of the net loss of unconsolidated
affiliates, primarily Verispan. During the first nine months of 2003 we
recognized $26,000 of earnings from equity in unconsolidated affiliates and
other. Loss from continuing operations was $54.8 million for the first nine months of
2004 versus income from continuing operations of $33.4 million for the first
nine months of 2003. Income from our discontinued operation, Bioglan, which we sold on August 10,
2004, was $9.6 million for the first nine months of 2004 versus $4.6 million
for the first nine months of 2003. Gross revenues of the discontinued
operation were approximately $38.6 million and $34.2 million for the first nine
months of 2004 and 2003, respectively. During August 2004, we completed the sale of our Bioglan operations for
approximately $188.3 million in cash including approximately $5.3 million of
direct costs for transferred inventory. Based on certain purchase price
adjustment provisions in the asset purchase agreement, we paid Bradley
approximately $1.9 million in October 2004. As a result of the completion of
the transaction, we recognized a gain from the sale of Bioglan during the third
quarter of 2004 of $53.8 million, net of income taxes of $36.2 million. 52




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##### 



Quintiles Transnational Corp. and Subsidiaries Net income was $8.6 million for the first nine months of 2004 versus $38.0
million for the first nine months of 2003. Analysis by Segment: The following table summarizes the operating activities for our reportable
segments for the first nine months of 2004 and 2003, respectively. In August
2004, we completed our sale of certain assets related to
our Bioglan business. The results of operations for the Bioglan business have
been separately reported as a discontinued operation and are no longer included
in the PharmaBio Development group. All historical periods presented herein
have been restated to reflect the Bioglan business as a discontinued operation.
We do not include reimbursed service costs, general and administrative
expenses, depreciation and amortization expense except the amortization of
commercial rights, interest (income) expense, other (income) expense and income
tax expense (benefit) in our segment analysis. Intersegment revenues have been
eliminated and the profit on intersegment revenues is reported within the
service group providing the services (dollars in millions). Total Net Revenues
    
    Contribution% of Net
    
    
    
    
    
    % of Net2004
    
    2003
    
    Growth %
    
    2004
    
    Revenues
    
    2003
    
    RevenuesProduct development
    
    $
    813.5
    
    
    $
    746.6
    
    
    
    9.0
    %
    
    $
    395.7
    
    
    
    48.6
    %
    
    $
    381.7
    
    
    
    51.1
    %Commercial services
    
    
    485.0
    
    
    
    398.6
    
    
    
    21.7
    
    
    
    187.8
    
    
    
    38.7
    
    
    
    145.0
    
    
    
    36.4PharmaBio Development
    
    
    32.1
    
    
    
    100.6
    
    
    
    (68.1
    )
    
    
    (57.3
    )
    
    
    (178.4
    )
    
    
    37.6
    
    
    
    37.4Eliminations
    
    
    (41.6
    )
    
    
    (30.3
    )
    
    
    (37.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,289.0
    
    
    $
    1,215.5
    
    
    
    6.1
    %
    
    $
    526.3
    
    
    
    40.8
    %
    
    $
    564.3
    
    
    
    46.4
    %
 Product Development Group.Net service revenues for the product development
group were $813.5 million for the first nine months of 2004 compared to $746.6
million for the first nine months of 2003. Net service revenues for the first
nine months of 2004 were positively impacted by approximately $48.0 million due
to the effect of foreign currency fluctuations. Net service revenues increased
in the Asia Pacific region $5.3 million or 5.9% to $93.5 million as a result of
a positive impact of approximately $7.3 million due to the effect of foreign
currency fluctuations. Net service revenues increased $46.2 million or 14.3%
to $369.3 million in the Europe and Africa region primarily as a result of the
positive impact of approximately $39.2 million due to the effect of foreign
currency fluctuations. Net service revenues increased $15.5 million or 4.6% to
$350.7 million in the Americas region, primarily due to the growth in CDS
revenues and a positive impact of approximately $1.5 million due primarily to
the effect of the strengthening U.S. dollar relative to the Canadian dollar. Contribution for the product development group was $395.7 million for the first
nine months of 2004 compared to $381.7 million for the first nine months of
2003. As a percentage of net service revenues, contribution margin was 48.6%
for the first nine months of 2004 compared to 51.1% for the first nine months
of 2003. The contribution margin was negatively impacted by the timing of
project start up costs in the CDS business, the incremental costs in our EDLS
business due to a realignment of resources and an increase in compensation and
related expenses. Commercial Services Group.Net service revenues for the commercial services
group were $485.0 million for the first nine months of 2004 compared to $398.6
million for the first nine months of 2003. Net service revenues for the first
nine months of 2004 were positively impacted by approximately $31.4 53




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##### 



Quintiles Transnational Corp. and Subsidiaries million due to the effect of foreign currency fluctuations. We experienced
strong growth in net revenues in the Asia Pacific region with net service
revenues increasing $31.6 million or 39.1% to $112.7 million including a
positive impact of approximately $9.3 million due to the effect of foreign
currency fluctuations. Net service revenues increased approximately $43.9
million or 25.9% to $213.0 million in the Europe and Africa region, including a
positive impact of approximately $22.3 million due to the effect of foreign
currency fluctuations. The increase is primarily the result of improved
business conditions in the United Kingdom, Germany and Italy. Net service
revenues increased $10.8 million or 7.3% to $159.3 million in the Americas
region primarily as a result of an increase in the services provided under our
PharmaBio Development contracts, primarily with respect to the CymbaltaTM
contract. Contribution for the commercial services group was $187.8 million for the first
nine months of 2004 compared to $145.0 million for the first nine months of
2003. As a percentage of net service revenues, contribution margin was 38.7%
for the first nine months of 2004 compared to 36.4% for the first nine months
of 2003. We experienced an improvement in the difficult market conditions for
our syndicated sales forces in the United Kingdom which contributed to the
increase in contribution as the costs for the syndicated sales forces are
relatively constant and do not fluctuate in proportion to the revenues. PharmaBio Development Group.Net revenues for the PharmaBio Development group
decreased approximately $68.5 million during the first nine months of 2004 as
compared to the first nine months of 2003 due to a $34.7 million decrease in
investment revenues and a decrease of approximately $33.8 million in commercial
rights and royalties revenues. Commercial rights and royalties costs increased
by approximately $26.4 million during the same period as a result of several
factors including (1) increased service costs relating to services provided by
our commercial services group and (2) increased costs associated with our
contract for CymbaltaTM and our February 2004 contract with a large
pharmaceutical company. These increases were partially offset by a decrease of
approximately $12.4 million in costs related to our service contract with KOSP
which was terminated in December 2003. The contribution for the PharmaBio Development group decreased by $94.9 million
in the first nine months of 2004 compared to the first nine months of 2003.
The commercial rights and royalties revenues (net of related costs) in the
first nine months of 2004 decreased the contribution of this group by
approximately $60.2 million when compared to the first nine months of 2003 due
to the decrease in revenues coupled with the increase in related costs. The
contribution from the commercial rights and royalties revenues was negatively
impacted by costs of approximately $14.6 million for the first nine months of
2004 related to one of our contracts for which no revenues were recognized.
The contribution from investment revenues decreased by approximately $34.7
million for the first nine months of 2004 to ($6.3) million versus $28.4
million for the first nine months of 2003 as a direct result of the decrease in
the investment revenues. Liquidity and Capital Resources Cash and cash equivalents were $548.7 million at September 30, 2004 as compared
to $373.6 million at December 31, 2003. Cash used in operations was $38.5 million for the nine months ended September
30, 2004 versus cash provided by operations of $165.1 million for the nine
months ended September 30, 2003. 54




---



##### 



Quintiles Transnational Corp. and Subsidiaries Cash provided by investing activities was $175.8 million for the nine months
ended September 30, 2004 versus cash used in investing activities of $1.62
billion for the nine months ended September 30, 2003. Investing activities
included the proceeds from the disposal of our discontinued operation, certain
assets and a minority interest in one of our subsidiaries and the purchases and
sales of equity securities and other investments, capital asset purchases, and
the acquisition of commercial rights. For the nine months ended September 30,
2003, investing activities consisted primarily of the payments relating to our
going private transaction including the repurchase of our common stock and the
payment of transaction costs. During August 2004, we completed the sale of our Bioglan operations for
approximately $188.3 million in cash including approximately $5.3 million of
direct costs for transferred inventory. Based on certain purchase price
adjustment provisions in the asset purchase agreement, we paid Bradley
approximately $1.9 million in October 2004. Our proceeds, net of expenses,
were approximately $177.9 million for the first nine months of 2004. The net
proceeds will change as expenses relating to the sale of Bioglan are paid. During the first nine months of 2004, we sold 3,556 ordinary shares or
approximately 11.1% of our ownership in our Japanese subsidiary, QJPN, to
Mitsui. We received net proceeds from this sale of approximately $36.0 million
net of related costs, which is included as a source of cash in the cash
provided by investing activities. We also received approximately $41.8 million
of net proceeds from the issuance of ordinary and preference shares by our
Japanese subsidiary, which is included as a source of cash in the cash provided
by financing activities, for total net proceeds received from Mitsui of
approximately $77.7 million. Capital asset purchases required an outlay of cash of $38.0 million for the
nine months ended September 30, 2004 compared to an outlay of $39.1 million for
the same period in 2003. Cash used for the acquisition of commercial rights and royalties related assets
was $13.0 million for the nine months ended September 30, 2004 as compared to
an outlay of $22.8 million for the comparable period in 2003. The nine months
ended September 30, 2004 reflected payments of $10.0 million pursuant to our
contract with Eli Lilly and Company for CymbaltaTM and $3.0 million pursuant to
a contract with CBRX. Purchases of equity securities and other investments required an outlay of cash
of $12.0 million for the nine months ended September 30, 2004 compared to an
outlay of $10.8 million for the same period in 2003. Proceeds from the sale of
equity securities and other investments were $30.2 million during the nine
months ended September 30, 2004 as compared to $61.9 million for the same
period in 2003. The proceeds received during the nine months ended September
30, 2004 included approximately $27.6 million from the sale of a portion of our
equity investments in The Medicines Company and Discovery Laboratories, Inc. 55




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##### 



Quintiles Transnational Corp. and Subsidiaries The following table is a summary of our net service receivables outstanding
(dollars in thousands): September 30, 2004
    
    December 31, 2003Trade service accounts receivable, net
    
    $
    144,793
    
    
    $
    122,496Unbilled services
    
    
    135,238
    
    
    
    102,802Unearned income
    
    
    (189,977
    )
    
    
    (190,918
    )Net service receivables outstanding
    
    $
    90,054
    
    
    $
    34,380Number of days of service revenues
outstanding
    
    
    15
    
    
    
    7
 Investments in debt securities were $11.7 million at September 30, 2004 as
compared to $11.0 million at December 31, 2003. Our investments in debt
securities consist primarily of state and municipal securities. Investments in marketable equity securities decreased $31.1 million to $27.2
million at September 30, 2004 as compared to $58.3 million at December 31, 2003
primarily as a result of sales of equity securities. Investments in non-marketable equity securities and loans at September 30, 2004
were $56.4 million, as compared to $48.6 million at December 31, 2003. Investments in unconsolidated affiliates, primarily Verispan, were $120.5
million at September 30, 2004 as compared to $121.2 million at December 31,
2003. Cash provided by financing activities was $38.3 million for the first nine
months of 2004 versus $1.12 billion for the first nine months of 2003.
Financing activities included approximately $14.3 million and $14.2 million of
principal payments on credit arrangements for the first nine months of 2004 and
2003, respectively. On September 25, 2003, we completed the going-private
merger transaction with a total purchase price of approximately $1.82 billion.
We used approximately $508.1 million of cash to fund this transaction and
received $390.5 million in cash for capital contributions. In addition, we
entered into a secured credit facility which consists of a $310.0 million
principal senior term loan and a $75.0 million revolving loan facility. We
also issued $450.0 million principal amount of 10% Senior Subordinated Notes
due 2013. As of September 30, 2004, we did not have any outstanding balance on
the revolving loan facility. Our various long-term debt agreements contain usual and customary negative
covenants that, among other things, place limitations on our ability to (1)
incur additional indebtedness, including capital leases and liens; (2) pay
dividends and repurchase our capital stock; (3) enter into mergers,
consolidations, acquisitions, asset dispositions and sale-leaseback
transactions; (4) make capital expenditures; and (5) issue capital stock of our
subsidiaries. The agreements also contain financial covenants requiring us to
maintain minimum interest coverage ratios and maximum consolidated leverage and
senior leverage ratios as defined therein. 56




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##### 



Quintiles Transnational Corp. and Subsidiaries Below is a summary of our future payment commitments by year under contractual
obligations as of September 30, 2004 (dollar in thousands): October 1toDecember 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalLong-term debt
    
    $
    1,520
    
    
    $
    5,283
    
    
    $
    4,977
    
    
    $
    4,162
    
    
    $
    3,890
    
    
    $
    3,935
    
    
    $
    740,946
    
    
    $
    764,713Obligations held under capital
leases
    
    
    4,044
    
    
    
    12,785
    
    
    
    9,274
    
    
    
    1,157
    
    
    
    644
    
    
    
    379
    
    
    
    214
    
    
    
    28,497Operating leases
    
    
    17,825
    
    
    
    59,112
    
    
    
    43,018
    
    
    
    29,171
    
    
    
    19,758
    
    
    
    12,480
    
    
    
    58,575
    
    
    
    239,939Service Agreement
    
    
    4,974
    
    
    
    23,627
    
    
    
    20,520
    
    
    
    19,227
    
    
    
    14,420
    
    
    
    
    
    
    
    
    
    
    
    82,768PharmaBio funding commitments in
various commercial rights and
royalties:Service commitments
    
    
    29,954
    
    
    
    119,884
    
    
    
    93,706
    
    
    
    90,742
    
    
    
    87,147
    
    
    
    66,579
    
    
    
    
    
    
    
    488,012Milestone payments
    
    
    15,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000Licensing and distribution rights
    
    
    1,238
    
    
    
    2,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,376PharmaBio funding commitments to
purchase non-marketable equity
securities and loans:Venture capital funds
    
    
    4,090
    
    
    
    9,062
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,152Convertible loans
    
    
    70
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Loans
    
    
    1,000
    
    
    
    2,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,022Total
    
    $
    79,715
    
    
    $
    253,955
    
    
    $
    171,495
    
    
    $
    144,459
    
    
    $
    125,859
    
    
    $
    83,373
    
    
    $
    799,735
    
    
    $
    1,658,591
 We also have additional future PharmaBio funding commitments that are
contingent upon satisfaction of certain milestones by the third party such as
receiving FDA approval, obtaining funding from additional third parties,
agreement of a marketing plan and other similar milestones. Due to the
uncertainty of the amounts and timing of these commitments, they are not
included in the commitment amounts above. If all of these contingencies were
satisfied over approximately the same time period, then we estimate these
commitments to be a minimum of approximately $15-20 million per year for a
period of five to six years, subject to certain limitations and varying time
periods. Sales force commitments, which comprise a significant amount of such
future commitments, are not classified as investments in either our new senior
secured facility or the indenture governing the notes and, therefore, these
future commitments do not have the same restrictions. Shareholders equity at September 30, 2004 was $538.6 million versus $535.1
million at December 31, 2003. 57




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Quintiles Transnational Corp. and Subsidiaries Based on our current operating plan, we believe that our available cash and
cash equivalents, together with future cash flows from operations and
borrowings available under the revolving portion of our senior credit facility
and line of credit agreements will be sufficient to meet our foreseeable cash
needs in connection with our operations and debt repayment obligations. As
part of our business strategy, we review many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, we
are continually evaluating new acquisition and expansion possibilities. In
addition, as part of our business strategy going forward, we intend to review
and consider opportunities to acquire additional, or dispose of our existing
assets or product rights, as appropriate. We may from time to time seek to
obtain debt or equity financing in our ordinary course of business or to
facilitate possible acquisitions or expansion. Any such acquisitions or equity
or debt financings may be limited by the terms and restrictions contained in
the credit agreement governing our senior secured facility, our indenture or
the indenture governing the senior discount notes issued by Pharma Services
Intermediate Holding Corp., or Intermediate Holding. Subsequent Event On November 10, 2004, our
board of directors approved the first phase of a new initiative to
review aspects of our current operating structure and future
strategic directions regarding certain corporate initiatives,
including utilization of shared services and strategic sourcing
initiatives. This review occurs in the context of substantial growth
in our backlog, primarily in our clinical business, and expected strategic headcount additions, following
the 1000+ additions in the past nine months. In conjunction with this review, we will incur
costs to restructure or exit certain business activities. We expect
that these costs will be incurred in both  our product development
and commercial services segments. We expect to incur during the
fourth quarter of 2004 a restructuring charge totaling $7.7 million.
The estimated cash expenditures total approximately $7.6 million
and include one-time termination benefits of approximately $7.4
million to eliminate approximately 230 positions globally, and exit costs of
approximately $0.2 million. The estimated non-cash charges total
approximately $0.1 million and consist primarily of asset
impairments. We anticipate that additional costs will be incurred in
later quarters, as subsequent phases of our review are completed. We
will provide supplemental information when those costs are defined.
We have targeted completion of the cash expenditures relating to this
first phase for the first half of 2005. 58




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Quintiles Transnational Corp. and Subsidiaries RISK FACTORS In addition to the other information provided in this report, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also
impair our business operations. If any of the following risks occur, our
business, financial condition, or results of operations could be materially
adversely affected. Our substantial debt could adversely affect our financial condition and prevent
us from fulfilling our obligations under our senior subordinated notes. As of September 30, 2004, we had outstanding debt of approximately $791.7
million. Of the total debt, approximately $341.7 million is secured, and an
additional $75.0 million in loans available under our senior credit facility
also are secured by substantially all of our assets, if drawn upon. Our substantial indebtedness could adversely affect our financial condition and
thus make it more difficult for us to satisfy our obligations with respect to
the senior subordinated notes as well as our obligations under our senior
secured credit facility. Our substantial indebtedness could also:  
    
    increase our vulnerability to adverse general economic and industry conditions;
    
    require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby
reducing the availability of our cash flows to fund working capital, investments, capital expenditures, research and
development efforts and other general corporate purposes;
    
    limit our ability to make required payments under our existing contractual commitments;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
    
    place us at a competitive disadvantage compared to our competitors that have less debt;
    
    increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates; and
    
    limit our ability to borrow additional funds on terms that are satisfactory to us or at all. 59




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Quintiles Transnational Corp. and Subsidiaries The indenture governing the senior subordinated notes and the senior secured
credit facility contain covenants that limit our flexibility and prevent us
from taking certain actions. The indenture governing the notes and the credit agreement governing the senior
secured credit facility include a number of significant restrictive covenants.
These covenants could adversely affect us by limiting our ability to plan for
or react to market conditions, meet our capital needs and execute our business
strategy. These covenants, among other things, limit our ability and the
ability of our restricted subsidiaries to:  
    
    incur additional debt;
    
    pay dividends on, redeem or repurchase capital stock;
    
    issue capital stock of restricted subsidiaries;
    
    make certain investments;
    
    enter into certain types of transactions with affiliates;
    
    engage in unrelated businesses;
    
    create liens; and
    
    sell certain assets or merge with or into other companies. These covenants may significantly limit our operating and financial flexibility
and limit our ability to respond to changes in our business or competitive
activities. In addition, the senior secured credit facility includes other and
more restrictive covenants and prohibits us from prepaying our other debt,
including the notes, while borrowings under our senior secured credit facility
are outstanding. The senior secured credit facility also requires us to
maintain certain financial ratios and meet other financial tests. These
covenants are broadly drafted and we must apply our judgment on a daily basis
to whether our actions comply; however, our lenders may interpret these
covenants differently and could claim that our actions are in violation of the
covenants. Our failure to comply with these covenants could result in an event
of default, which, if not cured or waived, could result in our being required
to repay these borrowings before their scheduled due date. If we were unable
to make this repayment or otherwise refinance these borrowings, the lenders
under the senior secured credit facility could elect to declare all amounts
borrowed under the senior secured credit facility, together with accrued
interest, to be due and payable, which, in some instances, would be an event of
default under the indenture governing the notes. In addition, these lenders
could foreclose on our assets. If we were unable to refinance these borrowings
on favorable terms, our results of operations and financial condition could be
adversely impacted by increased costs and less favorable terms, including
interest rates and covenants. Any future refinancing of the senior secured
credit facility is likely to contain similar restrictive covenants and
financial tests. 60




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Quintiles Transnational Corp. and Subsidiaries We are subject to additional risks and restrictions as a result of Intermediate
Holdings issuance of discount notes. On March 18, 2004, Intermediate Holding issued an aggregate principal amount at
maturity of $219.0 million in senior discount notes due April 1, 2014, or the
discount notes. The discount notes accrete at the rate of 11.5% per annum,
compounded semi-annually on April 1 and October 1 of each year to, but not
including April 1, 2009. From and after April 1, 2009, cash interest on the
discount notes will accrue at the rate of 11.5% per annum, and will be payable
semiannually in arrears on April 1 and October 1 of each year, commencing on
October 1, 2009, until maturity. Intermediate Holding is a holding company
that currently conducts all of its operations through us and our subsidiaries
and affiliates. As a result, all of Intermediate Holdings operating profit
and cash flows are generated by us and our subsidiaries and affiliates. The
discount notes, however, are the exclusive obligation of Intermediate Holding,
and we are not obligated to make funds available for payment on the discount
notes. Intermediate Holdings ability to make payments on the discount notes
is nevertheless dependent on our earnings and cash flows and our ability to
make distributions in the form of dividends or other advances and transfers to
Intermediate Holding. To the extent we have funds available and to the extent
permitted by our senior credit facility and the indenture governing our notes,
we may make funds available to Intermediate Holding to permit payment of its
obligations under the discount notes. In addition, the indenture governing the
discount notes prohibits Intermediate Holding from permitting us to take
certain actions substantially similar to those we would be prohibited from
taking under the covenants contained in our indenture. Despite our level of indebtedness, we and our parent companies are able to
incur substantially more debt and undertake additional obligations. Incurring
such debt or undertaking such obligations could further exacerbate the risks to
our financial condition. Although the indenture governing our notes and the credit agreement governing
our senior secured credit facility each contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions and the indebtedness incurred in compliance with
these restrictions could be substantial. To the extent new debt is added to
our current debt levels, our substantial leverage risks would increase. In
addition, to the extent new debt is incurred by Pharma Services or Intermediate
Holding, such as the discount notes, we may be required to generate sufficient
cash flow to satisfy such obligations. While the indenture and the credit agreement also contain restrictions on our
ability to make investments, these restrictions are subject to a number of
qualifications and exceptions and the investments we may make in compliance
with these restrictions could be substantial. The restrictions do not prevent
us from incurring certain expenses in connection with our PharmaBio Development
group transactions, including expenses we may incur to provide sales forces for
the products of our PharmaBio Development customers at our cost under the terms
of our agreements with those customers. 61




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Quintiles Transnational Corp. and Subsidiaries Mitsuis ownership interest in our Japanese subsidiary could give rise to
Mitsuis right to acquire our entire interest in QJPN or to require us to buy
out Mitsuis interest. As part of the terms of Mitsuis investment in QJPN, Mitsui acquired certain
rights that could potentially allow Mitsui to acquire the remainder of our
interest in QJPN. Upon the occurrence of certain actions by us or Pharma
Services, including liquidation, dissolution, bankruptcy or similar events,
Mitsui will have the option to (1) sell to us all or part of its interest in
QJPN at a premium or (2) purchase from us all or part of our interest in QJPN
at a discount. In addition, if there is a change in control of us or Pharma
Services or a breach of certain provisions of our investment agreement with
Mitsui, Mitsui could sell to us its entire interest in QJPN. As a result, if
such rights are triggered, we could lose control of our QJPN subsidiary or be
required to spend significant funds to acquire Mitsuis interest in QJPN,
either of which could have a material adverse effect on our business, results
of operations and financial condition. Changes in aggregate spending, research and development budgets and outsourcing
trends in the pharmaceutical and biotechnology industries could adversely
affect our operating results and growth rate. Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice grew substantially during the 1990s and we
benefited from this trend. Some industry commentators believe that the rate of
growth of outsourcing will tend to decrease. If these industries reduce their
outsourcing of clinical research and sales and marketing projects, our
operations and financial condition could be materially and adversely affected.
We also believe we have been negatively impacted recently by mergers and other
factors in the pharmaceutical industry, which appear to have slowed decision
making by our customers and delayed certain trials. We believe our
commercialization services have been particularly affected by recent reductions
in new product launches and increases in the number of drugs losing patent
protection. A continuation of these trends would have an ongoing adverse
effect on our business. In addition, U.S. federal and state legislatures and
numerous foreign governments have considered various types of healthcare
reforms and have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers
and pharmaceutical companies. If future regulatory cost containment efforts
limit the profitability of new drugs, our customers may reduce their research
and development spending, which could reduce the business they outsource to us.
We cannot predict the likelihood of any of these events or the effects they
would have on our business, results of operations or financial condition. 62




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Quintiles Transnational Corp. and Subsidiaries If we are unable to successfully develop and market potential new services, our
growth could be adversely affected. A key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If
we are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected. Our plan to strengthen the technology platform for our product development and
commercialization services may negatively impact our results in the short term. We are currently undertaking significant programs to optimize business
processes in our product development and commercialization services. We have
entered into agreements with certain vendors for them to provide systems
development and integration services to help us develop the information
technology, or IT, platform for these programs. If such vendors fail to
perform as required or if there are substantial delays in developing and
implementing this platform, we may have to make substantial further
investments, internally or with third parties, to achieve our objectives.
Additionally, our progress may be limited by existing or claimed patents by
parties who seek to enjoin us from adopting or limiting preferred technology or
seek license payments from us. Meeting our objectives is dependent on a number
of factors which may not take place as we anticipate, including obtaining
adequate technology enabled services, creating IT-enabled services which our
customers will find desirable and implementing our business model with respect
to these services. Also, these expenditures are likely to negatively impact
our profitability, at least until our IT-enabled processes and services are
operationalized. Over time, we envision continuing to invest in extending and
enhancing our IT platform in other ways to further support and improve our
services. We cannot assure you that any improvements in operating income
resulting from our new capabilities will be sufficient to offset our
investments in them. Our results could be further negatively impacted if our
competitors are able to execute similar programs before we can launch our
optimized services or if they are able to structure a platform that attracts
customers away from our services. We may not be able to derive the benefits we hope to achieve from Verispan, our
joint venture with McKesson. In May 2002, we completed the formation of a joint venture, Verispan, with
McKesson designed to leverage the operational strengths of the healthcare
information business of each party. As part of the formation of Verispan, we
contributed our former informatics business. As a result, Verispan remains
subject to the risks to which our informatics business was exposed. If
Verispan is not successful or if it experiences any of the difficulties
described below, there could be an adverse effect on our results of operations
and financial condition, as Verispan is a pass-through entity and, as such, its
results are reflected in our financial statements to the extent of our interest
in Verispan. We may not achieve the intended benefits of Verispan if it is not
able to secure additional data in exchange for equity. Verispan also could
encounter other difficulties, including:  
    
    its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to
support its informatics products; 63




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##### 



Quintiles Transnational Corp. and Subsidiaries  
    
    its ability to process and use the volume of data received from a variety of data providers;
    
    its ability to attract customers, besides us and McKesson, to purchase its products and services;
    
    the risk of changes in healthcare information privacy laws and regulations that could create a risk of liability, increase
the cost of Verispans business or limit its service offerings;
    
    the risk that industry regulation may restrict Verispans ability to analyze and disseminate pharmaceutical and healthcare
data; and
    
    the risk that it will not be able to effectively and cost-efficiently replace services previously provided to the
contributed businesses by the former parent corporations. Although we have a license to use Verispans commercially available data
products and we may pay Verispan to create customized data products for us, if
Verispan is unable to provide us with the quality and character of data
products that we need to support those services, we would need to seek other
strategic alternatives to achieve our goals. In contributing our former informatics business to Verispan, we assigned
certain contracts to Verispan. Verispan has agreed to indemnify us against any
liabilities we may incur in connection with these contracts after contributing
them to Verispan, but we still may be held liable under the contracts to the
extent Verispan is unable to satisfy its obligations, either under the
contracts or to us. The potential loss or delay of our large contracts could adversely affect our
results. Many of our customers can terminate our contracts upon 15-90 days notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. In
addition, we may not realize the full benefits of our backlog of contractually
committed services if our customers cancel, delay or reduce their commitments
under their contracts with us. Thus, the loss or delay of a large contract or
the loss or delay of multiple contracts could adversely affect our net revenue
and profitability. We believe that this risk of loss or delay of multiple
contracts potentially has greater effect as we pursue larger outsourcing
arrangements with global pharmaceutical companies. Also, over the past two
years we have observed that customers may be more willing to delay, cancel or
reduce contracts more rapidly than in the past. If this trend continues, it
could become more difficult for us to balance our resources with demands for
our services and our financial results could be adversely affected. 64




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##### 



Quintiles Transnational Corp. and Subsidiaries Underperformance of our commercial rights strategies could have a negative
impact on our financial performance. As part of our PharmaBio Development groups business strategy, we enter into
transactions with customers in which we take on some of the risk of the
potential success or failure of the customers product. These transactions may
include making a strategic investment in a customer, providing financing to a
customer, or acquiring an interest in the revenues from a customers product.
For example, we may build or provide a sales organization for a biotechnology
customer to commercialize a new product in exchange for a share in the revenues
of the product. We anticipate that in the early periods of many of these
relationships, our expenses will exceed revenues from these arrangements,
particularly where we are providing a sales force for the product at our own
cost. Aggregate royalty or other payments made to us under these arrangements
may not be adequate to offset our total expenditure in providing a sales force
or in making milestone or marketing payments to our customers. We carefully
analyze and select the customers and products with which we are willing to
structure our risk-based deals. Products underlying our commercial rights
strategies may not complete clinical trials, receive approval from the FDA or
achieve the level of market acceptance or consumer demand that we expect, in
which case we might not be able to earn a profit or recoup our investment with
regard to a particular transaction. In addition, the timing of regulatory
approval and product launch and the achievement of other milestones are
generally beyond our control and can affect our actual return from these
investments. The potential negative effect to us could increase depending on
the nature and timing of these transactions and the length of time before it
becomes apparent that the product will not achieve commercial success. Our
financial results would be adversely affected if our customers or their
products do not achieve the level of success that we anticipate and/or our
return or payment from the product investment or financing is less than our
costs with respect to these transactions. Our rights to market and sell certain pharmaceutical products expose us to
product risks typically associated with pharmaceutical companies. From time to time, we may acquire or hold rights to market and sell certain
pharmaceutical products. Ownership of these product rights subjects us to a
number of risks typical to the pharmaceutical industry. For example, we could
face product liability claims in the event users of products subject to our
rights experience negative reactions or adverse side effects or in the event
such products cause injury, are found to be unsuitable for their intended
purpose or are otherwise defective. While we believe we currently have
adequate insurance in place to protect against these risks, we may nevertheless
be unable to satisfy any claims for which we may be held liable as a result of
the use or misuse of products which we manufacture or sell, and any such
product liability claim could adversely affect our business, operating results
or financial condition. In addition, like pharmaceutical companies, our
commercial success in this area will depend in part on our obtaining, securing
and defending our intellectual property rights covering our pharmaceutical
product rights. These risks may be augmented by certain risks if we outsource
the manufacturing and/or distribution of these products, such as our inability
to directly monitor quality control in the manufacturing and distribution
processes. 65




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##### 



Quintiles Transnational Corp. and Subsidiaries Our plans to market and sell pharmaceutical products also subject us to risks
associated with entering into a new line of business in which we have limited
experience. If we are unable to operate this new line of business as we
expect, the financial results from this new line of business could have a
negative impact on our results of operations as a whole. The risk that our
results may be affected if we are unable to successfully operate our
pharmaceutical operations may increase in proportion with (1) the number of
products or product rights we license or acquire in the future, (2) the
applicable stage of the drug approval process of the products and (3) the
levels of outsourcing involved in the development, manufacture and
commercialization of such products. If we lose the services of Dennis Gillings or other key personnel, our business
could be adversely affected. Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Executive Chairman and Chief Executive Officer. Our performance also depends
on our ability to identify, attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings or any key executive, or our inability to continue to
attract and retain qualified personnel, or replace any departed personnel in a
timely fashion could have a material adverse effect on our business, results of
operations or financial condition. Our product development services could result in potential liability to us. We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include monitoring clinical
trials, data and laboratory analysis, electronic data capture, patient
recruitment and other related services. The process of bringing a new drug to
market is time-consuming and expensive. If we do not perform our services to
contractual or regulatory standards, the clinical trial process could be
adversely affected. Additionally, if clinical trial services such as
laboratory analysis or electronic data capture and related services do not
conform to contractual or regulatory standards, trial participants or trial
results could be affected. These events would create a risk of liability to us
from the drug companies with whom we contract or the study participants.
Similar risks apply to our product development services relating to medical
devices. 66




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##### 



Quintiles Transnational Corp. and Subsidiaries We also contract with physicians to serve as investigators in conducting
clinical trials. Such studies create risk of liability for personal injury to
or death of clinical trial participants, particularly to clinical trial
participants with life-threatening illnesses, resulting from adverse reactions
to the drugs administered during testing. It is possible third parties could
claim that we should be held liable for losses arising from any professional
malpractice of the investigators with whom we contract or in the event of
personal injury to or death of persons participating in clinical trials. We do
not believe we are legally accountable for the medical care rendered by third
party investigators, and we would vigorously defend any such claims. However,
such claims may still be brought against us, and it is possible we could be
found liable for these types of losses. For example, we were among the
defendants named in a class action by participants in an Alzheimers study
which sought to hold us liable for alleged injury to the participants
participating in the trial, allegedly caused as a result of that participation.
The parties have subsequently agreed to settle the matter, and the case was
dismissed. In addition to supervising tests or performing laboratory analysis, we also own
a number of facilities where Phase I clinical trials are conducted. Phase I
clinical trials involve testing an investigational new drug on a limited number
of healthy individuals, typically 20 to 80 persons, to determine the drugs
basic safety. We also could be liable for the general risks associated with
ownership of such a facility. These risks include, but are not limited to,
adverse events resulting from the administration of drugs to clinical trial
participants or the professional malpractice of Phase I medical care providers. We also package, label and distribute clinical trial supplies. We could be
held liable for any problems that result from the trial drugs we package, label
and distribute, including any quality control problems in our clinical trial
supplies facilities. For example, accounting for controlled substances is
subject to regulation by the United States Drug Enforcement Administration, or
the DEA, and some of our facilities have been audited by the DEA. In one case,
the DEA indicated that it found that we miscounted certain drugs, which was
resolved to DEAs satisfaction by our providing a corrected accounting of these
drugs to the DEA. We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or
breach of contract if one of our laboratories inaccurately reports or fails to
report lab results. Although we maintain insurance to cover ordinary risks,
insurance would not cover the risk of a customer deciding not to do business
with us as a result of poor performance, which could adversely affect our
results of operations and financial condition. Our commercialization services could result in potential liability to us. When we market and sell pharmaceutical products under contract for a
pharmaceutical company, we could suffer liability for harm allegedly caused by
those products, either as a result of a lawsuit against the pharmaceutical
company to which we are joined, a lawsuit naming us, or an action launched by a
regulatory body. While we are indemnified by the pharmaceutical company for
the action of the products we market and sell on its behalf, and while we carry
insurance to cover harm caused by our negligence in performing services, it is
possible that we could nonetheless incur financial losses, regulatory penalty
or both. 67




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##### 



Quintiles Transnational Corp. and Subsidiaries Our insurance may not cover all of our indemnification obligations and other
liabilities associated with our operations. We maintain insurance designed to cover ordinary risks associated with our
operations and our ordinary indemnification obligations. This insurance might
not be adequate coverage or may be contested by our carriers. For example, our
insurance carrier, to whom we paid premiums to cover risks associated with our
product development services, filed suit against us seeking to rescind the
insurance policies or to have coverage denied for some or all of the claims
arising from class action litigation involving an Alzheimers study, which suit
has been subsequently settled. The availability and level of coverage provided
by our insurance could have a material impact on our profitability if we suffer
uninsured losses or are required to indemnify third parties for uninsured
losses. As part of the formation of Verispan, Verispan assumed our obligation under our
settlement agreement with WebMD Corporation, or WebMD, to indemnify WebMD for
losses arising out of or in connection with (1) the canceled Data Rights
Agreement with WebMD, (2) our data business, which was contributed to the joint
venture, (3) the collection, accumulation, storage or use of data by ENVOY
Corporation, or ENVOY, for the purpose of transmitting or delivering data to
us, (4) any actual transmission or delivery by ENVOY of data to us or (5)
violations of law or contract attributable to any of the events described in
(1)  (4) above. These indemnity obligations are limited to 50.0% for the
first $20.0 million in aggregate losses, subject to exceptions for certain
indemnity obligations that were not transferred to Verispan. Although Verispan
has assumed our indemnity obligations to WebMD relating to our former data
business, Verispan may have insufficient resources to satisfy these obligations
or may otherwise default with respect thereto. In addition, WebMD may seek
indemnity from us, and we would have to proceed against Verispan. In addition, we remain subject to other indemnity obligations to WebMD,
including for losses arising out of the settlement agreement itself or out of
the sale of ENVOY to WebMD. In particular, we could be liable for losses which
may arise in connection with a class action lawsuit filed against ENVOY prior
to our purchase and subsequent sale of it to WebMD, which lawsuit was recently
settled. ENVOY and its insurance carrier, Federal, filed a lawsuit against us
in June 2003 alleging that we should be responsible for payment of the
settlement amount of $11.0 million and related fees and costs in connection
with the class action lawsuit settlement. Our indemnity obligation with regard
to losses arising from the sale of ENVOY to WebMD including ENVOYs class
action lawsuit is not subject to the limitation on the first $20.0 million of
aggregate losses described above. In connection with the sale of certain assets relating to our Bioglan business,
including rights to certain dermatology products, to Bradley, we agreed to
indemnify Bradley for losses caused by the manufacture, packaging, labeling,
promotion, distribution, transportation, storage or sale of those products by
or on our behalf prior to the transaction closing or patients use of products
sold by or on our behalf prior to the transaction closing. For example, we
could face product liability claims in the event users of these products, who
bought them during the time we owned the product rights, experienced negative
reactions or adverse side effects or in the event such products cause injury or
are found to be unsuitable for their intended purposes or are otherwise
defective. We are subject to similar risks with respect to any pharmaceutical
product rights we may own at any time. While we believe we currently have
adequate insurance in place to protect against these risks, we may nevertheless
be unable to satisfy any claims for which we may be held liable as a result of
the use or misuse of products we sold and any such product liability claims
could adversely affect our operating results or financial condition. 68




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Quintiles Transnational Corp. and Subsidiaries We may be exposed to additional income tax liabilities. In January 2004, we received a written communication from the Internal Revenue
Service asserting that the income tax basis of the stock of our ENVOY
subsidiary (which we sold in 2000 in a taxable transaction) may have been
overstated and proposing an increase in our income taxes owed for 2000 by
approximately $153.1 million. After further discussions, the Internal Revenue
Service revised and reissued its prior communication, reducing the proposed
assessment to $84.6 million. If our income tax basis is reduced, we will be
required to pay additional income taxes, plus interest and possible penalties,
on the amount of such reduction. If the reduction in our income tax basis is
large enough, the resulting income tax effect could have a material adverse
impact on our liquidity and financial condition. We are contesting the
Internal Revenue Services challenge and are presently in the appeals process
with the Internal Revenue Service. Changes in government regulation could decrease the need for the services we
provide. Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for our
services, and, as a result, our business, results of operations and financial
condition could be materially adversely affected. Potential regulatory changes
under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on the
business opportunities available to us. Failure to comply with existing regulations could result in a loss of revenue. We are subject to a wide range of government regulations and review by a number
of regulatory agencies including, in the United States, the Department of
Justice, FDA, DEA, Department of Transportation and similar regulatory agencies
throughout the world. Any failure on our part to comply with applicable
regulations could materially impact our ability to perform our services. For
example, non-compliance could result in the termination of ongoing clinical
research or sales and marketing projects or the disqualification of data for
submission to regulatory authorities, either of which could have a material
adverse effect on us. If we were to fail to verify that informed consent is
obtained from patient participants in connection with a particular clinical
trial, the data collected from that trial could be compromised, and we could be
required to redo the trial under the terms of our contract at no further cost
to our customer, but at substantial cost to us. Moreover, from time to time,
including the present, one or more of our customers are investigated by
regulatory authorities or enforcement agencies with respect to regulatory
compliance of their clinical trials, programs or products. In these
situations, we often have provided services to our customers with respect to
the trials, programs or products being investigated, and we are called upon to
respond to requests for information by the authorities and agencies. There is
a risk that either our customers or regulatory authorities could claim that we
performed our services improperly or that we are responsible for trial or
program compliance. If our customers or regulatory authorities make such
claims against us and prove them, we could be subject to substantial damages,
fines or 69




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Quintiles Transnational Corp. and Subsidiaries penalties. In addition, negative publicity regarding regulatory compliance of
our customers trials, programs or products could have an adverse effect on our
business and reputation. Our services are subject to evolving industry standards and rapid technological
changes. The markets for our services are characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. To succeed, we must continue to:  
    
    enhance our existing services;
    
    introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
    
    integrate new services with existing services;
    
    achieve market acceptance for new services; and
    
    respond to emerging industry standards and other technological changes. Exchange rate fluctuations may affect our results of operations and financial
condition. We derive a large portion of our net revenue from international operations. Our
financial statements are denominated in U.S. dollars; thus, factors associated
with international operations, including changes in foreign currency exchange
rates, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:  
    
    Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
    
    Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts. We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at September 30, 2004. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably
reduce our currency transaction risk associated with our service contracts. 70




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Quintiles Transnational Corp. and Subsidiaries We face other risks in connection with our international operations. We have significant operations in foreign countries. As a result, we are
subject to certain risks inherent in conducting business internationally,
including the following:  
    
    foreign countries could change regulations or impose currency restrictions
and other restraints;
    
    political changes and economic crises may lead to changes in the
business environment in which we operate; and
    
    international conflict, including terrorist acts, could significantly
impact our financial condition and results of operations. New and proposed laws and regulations regarding confidentiality of patients
information could result in increased risks of liability or increased cost to
us, or could limit our service offerings. The confidentiality and release of patient-specific information are subject to
governmental regulation. Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human
Services has issued regulations mandating heightened privacy and
confidentiality protections for patients identifiable health information
(protected health information). We do not meet the definition of a covered
entity under HIPAA; however, we are indirectly affected by HIPAA because many
investigators with whom we are involved with in clinical trials are HIPAA
covered entities. Also, the European Union, or EU, and its member states, as
well as other countries, continue to issue new rules. National and U.S. state
governments are contemplating or have proposed or adopted additional
legislation governing the possession, use and dissemination of medical record
information and other personal health information. In particular, proposals
being considered by state governments may contain privacy and security
protections that are more burdensome than the federal regulations. In order to
comply with these regulations, we may need to implement new privacy and
security measures, which may require us to make substantial expenditures or
cause us to limit the products and services we offer. In addition, if we
violate applicable laws, regulations or duties relating to the use, privacy or
security of health information, we could be subject to civil or criminal
penalty and be forced to alter our business practices. We may be adversely affected by customer concentration. Although we did not have any one customer that accounted for 10% of net service
revenues for the three and nine months ended September 30, 2004, if any large
customer decreases or terminates its relationship with us, our business,
results of operations or financial condition could be materially adversely
affected. 71




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Quintiles Transnational Corp. and Subsidiaries If we are unable to submit electronic records to the FDA according to FDA
regulations, our ability to perform services for our customers which meet
applicable regulatory requirements could be adversely affected. If we were unable to produce electronic records, which meet the requirements of
FDA regulations, our customers may be adversely affected when they submit the
data concerned to the FDA in support of an application for approval of a
product, which could harm our business. The FDA published 21 CFR Part 11
Electronic Records; Electronic Signatures; Final Rule, or Part 11, in 1997.
Part 11 became effective in August 1997 and defines the regulatory requirements
that must be met for FDA acceptance of electronic records and/or electronic
signatures in place of the paper equivalents. Further, in August 2003, the FDA
issued a Guidance for Industry: Part 11, Electronic Records; Electronic
Signatures  Scope and Application, and, in September 2004, the agency issued
a revised version of the Guidance for Industry: Computerized Systems Used in
Clinical Trials, Revision 1. These guidance documents set forth the FDAs
current thinking on this topic. Further, on June 9, 2004, the FDA accepted
comments from the public in order to re-evaluate or possibly amend or rescind
Part 11. Currently, however, the regulation requires that those utilizing such
electronic records and/or signatures employ procedures and controls designed to
ensure the authenticity, integrity and, as appropriate, confidentiality of
electronic records and, Part 11 requires those utilizing electronic signatures
to ensure that a person appending an electronic signature cannot readily
repudiate the signed record. Pharmaceutical, medical device and biotechnology
companies are increasing their utilization of electronic records and electronic
signatures and are requiring their service providers and partners to do
likewise. Our ability to provide services to our customers depends in part on
our compliance with the FDAs requirements regarding Part 11. We are making
steady and documented progress in bringing our critical computer applications
into compliance according to written enhancement plans that have been reviewed
and approved by third party authorities. Lower-priority systems are, likewise,
being reviewed and revalidated. If we are unable to complete these compliance
objectives, our ability to provide services to our customers which meet FDA
requirements may be adversely affected. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk We did not have any material changes in market risk from December 31, 2003. 
 Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this Form 10-Q. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Form 10-Q, our
disclosure controls and procedures provide reasonable assurances that the
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the
time period required by the United States Securities and Exchange Commissions
rules and forms. From time to time, we make changes to our internal control
over financial reporting that are intended to enhance the effectiveness of our
internal controls and which do not have a material effect on our overall
internal controls. We will continue to evaluate the effectiveness of our
disclosure controls and procedures and internal control over financial
reporting on an ongoing basis and will take action as appropriate. There 72




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Quintiles Transnational Corp. and Subsidiaries have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the period covered by this Form 10-Q that we believe materially affected, or
will be reasonably likely to materially affect, our company-wide internal
control over financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings On January 22, 2002, Federal Insurance Company, or Federal, and Chubb Custom
Insurance Company, or Chubb, filed suit against us, Quintiles Pacific, Inc. and
Quintiles Laboratories Limited, two of our subsidiaries, in the United States
District Court for the Northern District of Georgia. In the suit, Chubb, our
primary commercial general liability carrier for coverage years 2000-2001 and
2001-2002, and Federal, our excess liability carrier for coverage years
2000-2001 and 2001-2002, seek to rescind the policies issued to us based on an
alleged misrepresentation by us on our policy application. Alternatively,
Chubb and Federal seek a declaratory judgment that there is no coverage under
the policies for some or all of the claims asserted against us and our
subsidiaries in a class action lawsuit that was settled earlier this year
involving an Alzheimers study and, if one or more of such claims is determined
to be covered, Chubb and Federal request an allocation of the defense costs
between the claims they contend are covered and non-covered claims. We have
filed an answer with counterclaims against Federal and Chubb in response to
their complaint. Additionally, we have amended our pleadings to add AON Risk
Services, or AON, as a counterclaim defendant, as an alternative to our
position that Federal and Chubb are liable under the policies. In order to
preserve our rights, on March 27, 2003, we also filed a separate action against
AON in the United States District Court for the Middle District of North
Carolina. The parties have agreed to a settlement in principle, which does not
result in us making any payments. On June 13, 2003, ENVOY and Federal filed suit against us, in the United States
District Court for the Middle District of Tennessee. One or both plaintiffs in
this case have alleged claims for breach of contract, contractual subrogation,
equitable subrogation, and equitable contribution. The plaintiffs reached
settlement in principle, in the amount of $11.0 million, of the case pending in
the same court captioned In Re Envoy Corporation Securities Litigation, Case
No. 3-98-0760, or the Envoy Securities Litigation. The plaintiffs claim that we
are responsible for payment of the settlement amount and associated fees and
costs in the Envoy Securities Litigation based on merger and settlement
agreements between WebMD, ENVOY and us. We have filed a motion to dismiss the
suit, and the plaintiffs have filed motions for summary judgment. These
motions are pending before the court. All parties have agreed to a stay of
discovery. We believe that the allegations made by ENVOY and Federal are
without merit and intend to defend the case vigorously. 73




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Quintiles Transnational Corp. and Subsidiaries On June 28, 2004, ML Laboratories PLC (ML) filed a request to the
International Chamber of Commerce seeking arbitration in connection with a
contract dispute with Novex Pharma Limited, or Novex, one of our subsidiaries.
This claim relates to a contract entered into by Novex with ML for the
marketing and sales promotion of MLs medical device product known as Adept, a
solution used for the treatment and prevention of adhesions in abdominal
surgery. MLs claim alleges breach of contract by Novex by failing to provide
an adequate UK sales force, failing to implement marketing efforts in European
countries as required by the contract, and repudiatory breach of the contract.
The claim by ML is for damages of £55.1 million (approximately $100.5 million).
Novex intends to file a counter-claim asserting breach of contract. The
parties have reached agreement to stay the arbitration process pending future
discussions. We believe that the allegations made by ML are without merit and
intend to defend the case vigorously. We are also party to other legal proceedings incidental to our business. While
we currently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our consolidated financial statements, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations for the
period in which the ruling occurs. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  Not
Applicable 
 Item 3. Defaults upon Senior Securities  Not applicable 
 Item 4. Submission of Matters to a Vote of Security Holders  Not Applicable 
 Item 5. Other Information  Not applicable 74




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Quintiles Transnational Corp. and Subsidiaries 
 Item 6. Exhibits Exhibit No.
    
    Exhibit10.1
    
    Asset Purchase Agreement, dated June 8, 2004, by and among
Quintiles Transnational Corp., Quintiles Bermuda Ltd., Quintiles
Ireland Limited, Bioglan Pharmaceuticals Company and Bradley
Pharmaceuticals, Inc., as amended August 10, 2004. (1)10.2
    
    Form of Stock Option Agreement
under the Pharma Services Holding, Inc. Stock Incentive Plan10.3
    
    Form of Restricted Stock Purchase
Agreement under the Pharma Services Holding, Inc. Stock Incentive Plan10.4
    
    Summary of Material Terms of
PharmaBio Development Bonus Plan31.1
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
   (1)
    
    Exhibit to our Current Report on Form 8-K dated August 10,
2004, as filed with the Securities and Exchange Commission on August
20, 2004 and incorporated herein by reference. 75




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Quintiles Transnational Corp. and Subsidiaries 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Quintiles Transnational Corp. 
  Date
    
    November 12, 2004
    
    
    
    /s/ Dennis B. GillingsDennis B. Gillings, Executive Chairman
and Chief Executive OfficerDate
    
    November 12, 2004
    
    
    
    /s/ John D. RatliffJohn D. Ratliff, Executive Vice President
and Chief Financial Officer
 76




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Quintiles Transnational Corp. and Subsidiaries 
 EXHIBIT INDEX Exhibit
    
    Description10.1
    
    Asset Purchase Agreement, dated June 8, 2004, by and among Quintiles
Transnational Corp., Quintiles Bermuda Ltd., Quintiles Ireland Limited,
Bioglan Pharmaceuticals Company and Bradley Pharmaceuticals, Inc., as
amended August 10, 2004. (1)10.2
    
    Form of Stock Option Agreement
under the Pharma Services Holding, Inc. Stock Incentive Plan10.3
    
    Form of Restricted Stock Purchase
Agreement under the Pharma Services Holding, Inc. Stock Incentive Plan10.4
    
    Summary of Material Terms of
PharmaBio Development Bonus Plan31.1
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
   (1)
    
    Exhibit to our Current Report on Form 8-K dated August 10, 2004, as filed
with the Securities and Exchange Commission on August 20, 2004 and
incorporated herein by reference. 77