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United States
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 March 31, 2005 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. þ 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 þ No The number of shares of Common Stock, $.01 par value, outstanding as of March 31, 2005 was
125,000,000.   *
    
    The registrant has filed all reports required by Section 15(d) of the Exchange Act in the
past 12 months, but the registrant is a voluntary filer and is not subject to the requirements
of Section 15(d).




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Index
    
    PagePart I. Financial InformationItem 1. Financial Statements (unaudited)Condensed consolidated balance sheets -
March 31, 2005 and December 31, 2004
    
    
    3Condensed consolidated statements of operations  Three months ended March 31,
2005 and 2004
    
    
    4Condensed consolidated statements of cash flows  Three months ended March 31,
2005 and 2004
    
    
    5Notes to condensed consolidated financial statements  March 31, 2005
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    34Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    60Item 4. Controls and Procedures
    
    
    60Part II. Other InformationItem 1. Legal Proceedings
    
    
    61Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds  Not Applicable
    
    
    63Item 3. Defaults Upon Senior Securities  Not Applicable
    
    
    63Item 4. Submission of Matters to a Vote of Security Holders -
Not Applicable
    
    
    63Item 5. Other Information  Not Applicable
    
    
    63Item 6. Exhibits
    
    
    63Signatures
    
    
    64Exhibit Index
    
    
    65
  2




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Part I. Financial Information 
 Item 1. Financial Statements
 Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Balance Sheets
 March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)
    
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    338,524
    
    
    $
    535,680Trade accounts receivable and unbilled services, net
    
    
    336,382
    
    
    
    300,407Investments in debt securities
    
    
    569
    
    
    
    569Prepaid expenses
    
    
    21,996
    
    
    
    20,424Other current assets and receivables
    
    
    61,577
    
    
    
    58,254Total current assets
    
    
    759,048
    
    
    
    915,334Property and equipment
    
    
    357,279
    
    
    
    359,073Less accumulated depreciation
    
    
    (78,305
    )
    
    
    (67,928
    )278,974
    
    
    
    291,145Intangibles and other assets:Investments in debt securities
    
    
    11,548
    
    
    
    11,552Investments in marketable equity securities
    
    
    23,337
    
    
    
    24,425Investments in non-marketable equity securities and loans
    
    
    52,935
    
    
    
    56,441Investments in unconsolidated affiliates
    
    
    120,633
    
    
    
    120,984Commercial rights and royalties
    
    
    134,868
    
    
    
    138,543Accounts receivable  unbilled
    
    
    49,279
    
    
    
    46,669Goodwill
    
    
    115,542
    
    
    
    116,013Other identifiable intangibles, net
    
    
    261,466
    
    
    
    274,457Deferred income taxes
    
    
    9,478
    
    
    
    2,877Deposits and other assets
    
    
    45,808
    
    
    
    49,522824,894
    
    
    
    841,483Total assets
    
    $
    1,862,916
    
    
    $
    2,047,962Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    354,892
    
    
    $
    347,667Credit arrangements
    
    
    19,780
    
    
    
    20,319Unearned income
    
    
    204,756
    
    
    
    199,450Other current liabilities and income taxes
    
    
    24,438
    
    
    
    32,347Total current liabilities
    
    
    603,866
    
    
    
    599,783Long-term liabilities:Credit arrangements, less current portion
    
    
    619,655
    
    
    
    774,562Deferred income taxes
    
    
    11,321
    
    
    
    45,833Minority interest
    
    
    37,846
    
    
    
    38,550Other liabilities
    
    
    20,457
    
    
    
    21,143689,279
    
    
    
    880,088Total liabilities
    
    
    1,293,145
    
    
    
    1,479,871Shareholders equity:Common stock and additional paid-in capital,
125,000,000 shares issued and outstanding at
March 31, 2005 and December 31, 2004
    
    
    522,107
    
    
    
    521,979Retained earnings (accumulated deficit)
    
    
    12,960
    
    
    
    (6,384
    )Accumulated other comprehensive income
    
    
    34,704
    
    
    
    52,496Total shareholders equity
    
    
    569,771
    
    
    
    568,091Total liabilities and shareholders equity
    
    $
    1,862,916
    
    
    $
    2,047,962
 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
    
    
    Three monthsended
    
    
    endedMarch 31, 2005
    
    
    March 31, 2004Net revenues
    
    $
    492,356
    
    
    $
    423,194Add: reimbursed service costs
    
    
    110,685
    
    
    
    82,459Gross revenues
    
    
    603,041
    
    
    
    505,653Costs, expenses and other:Costs of revenues
    
    
    436,633
    
    
    
    356,602Selling, general and administrative
    
    
    154,478
    
    
    
    155,661Interest expense (income), net
    
    
    17,439
    
    
    
    14,619Other expense (income), net
    
    
    124
    
    
    
    (3,191
    )Restructuring and impairments
    
    
    9,437
    
    
    
    Transaction expense, net
    
    
    (2,666
    )
    
    
    615,445
    
    
    
    523,691Loss before income taxes
    
    
    (12,404
    )
    
    
    (18,038
    )Income tax benefit (includes $31,521 of income tax
benefit related to American Jobs Creation Act of 2004
for the three months ended March 31, 2005)
    
    
    (33,020
    )
    
    
    (725
    )Income (loss) before minority interests and equity in
(losses) earnings of unconsolidated affiliates
    
    
    20,616
    
    
    
    (17,313
    )Equity in (losses) earnings of unconsolidated affiliates
    
    
    (199
    )
    
    
    (68
    )Minority interests
    
    
    (1,073
    )
    
    
    (187
    )Income (loss) from continuing operations
    
    
    19,344
    
    
    
    (17,568
    )Income from discontinued operation
    
    
    
    
    
    
    1,861Net income (loss)
    
    $
    19,344
    
    
    $
    (15,707
    )
 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
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31, 2005
    
    
    March 31, 2004Operating activitiesNet income (loss)
    
    $
    19,344
    
    
    $
    (15,707
    )Income from discontinued operation
    
    
    
    
    
    
    (1,861
    )Income (loss) from continuing operations
    
    
    19,344
    
    
    
    (17,568
    )Adjustments to reconcile income (loss) from continuing operations to
net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    29,426
    
    
    
    33,711Amortization of debt issuance costs
    
    
    4,137
    
    
    
    828Amortization of commercial rights and royalties assets
    
    
    4,619
    
    
    
    2,826Restructuring charge accrual
    
    
    9,437
    
    
    
    Restructuring charge payments
    
    
    (7,893
    )
    
    
    (1,468
    )Loss (gain) from sales and impairments of investments, net
    
    
    1,958
    
    
    
    (4,220
    )Loss on disposals of property and equipment, net
    
    
    211
    
    
    
    371Gain from sale of certain assets
    
    
    
    
    
    
    (5,323
    )(Benefit from) provision for deferred income tax expense
    
    
    (38,396
    )
    
    
    825Change in accounts receivable, unbilled services and unearned income
    
    
    (36,718
    )
    
    
    (42,678
    )Change in other operating assets and liabilities
    
    
    14,800
    
    
    
    (11,309
    )Other
    
    
    327
    
    
    
    44Net cash provided by (used in) operating activities
    
    
    1,252
    
    
    
    (43,961
    )Investing activitiesAcquisition of property and equipment
    
    
    (12,708
    )
    
    
    (11,315
    )Payment of transaction costs in Transaction
    
    
    (1,520
    )
    
    
    (4,869
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (252
    )Acquisition of commercial rights and royalties
    
    
    (10,944
    )
    
    
    (3,000
    )Proceeds from sale of certain assets
    
    
    
    
    
    
    9,277Proceeds from disposition of property and equipment
    
    
    2,119
    
    
    
    2,092(Purchases of) proceeds from debt securities, net
    
    
    (306
    )
    
    
    (424
    )Purchases of equity securities and other investments
    
    
    (4,595
    )
    
    
    (3,803
    )Proceeds from sale of equity securities and other investments
    
    
    360
    
    
    
    14,846Other
    
    
    (239
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (27,833
    )
    
    
    2,552Financing activitiesDebt issuance costs paid
    
    
    (2,304
    )
    
    
    Principal payments on credit arrangements
    
    
    (154,984
    )
    
    
    (5,422
    )Intercompany with parent companies
    
    
    (488
    )
    
    
    691Dividend from discontinued operation
    
    
    
    
    
    
    1,267Net cash used in financing activities
    
    
    (157,776
    )
    
    
    (3,464
    )Effect of foreign currency exchange rate changes on cash
    
    
    (12,799
    )
    
    
    (1,880
    )Decrease in cash and cash equivalents
    
    
    (197,156
    )
    
    
    (46,753
    )Cash and cash equivalents at beginning of period
    
    
    535,680
    
    
    
    373,622Cash and cash equivalents at end of period
    
    $
    338,524
    
    
    $
    326,869
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 5




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Quintiles Transnational Corp. and Subsidiaries 
 
 March 31, 2005 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, 2005. 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, 2004 of
Quintiles Transnational Corp. (the Company). In August 2004, the Company completed the sale of certain assets related to its Bioglan
Pharmaceuticals business (Bioglan). Accordingly, the operating results of Bioglan for the three
months ended March 31, 2004 have been reflected separately in the accompanying financial statements
as a discontinued operation. 2. Employee Stock Compensation Pharma Services Holding, Inc. (Pharma Services) granted options to purchase 212,500 shares of its
common stock to certain of the Companys employees during the three months ended March 31, 2005.
As of March 31, 2005, there were options to acquire 3,940,500 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 March 31,
2005, 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, effective January 1, 2004; therefore, the Company accounts
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.
The Company recognized approximately $65,000 and $43,000 of compensation expense for the three
months ended March 31, 2005 and 2004, respectively, in accordance with SFAS No. 123. 6




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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 or accounts receivable  unbilled in the non-current asset section of the accompanying
balance sheets. Below is a summary of the commercial rights and royalties related assets (in
thousands): March 31,
    
    
    December 31,2005
    
    
    2004Commercial rights and royalties
    
    $
    134,868
    
    
    $
    138,543Accounts receivable-unbilled
    
    
    49,279
    
    
    
    46,669Total
    
    $
    184,147
    
    
    $
    185,212
 Below is a brief description of these agreements: In May 1999, the Company entered into an agreement with CV Therapeutics, Inc. (CV Therapeutics)
to commercialize Ranexa for angina in the United States and Canada. In July 2003, CV Therapeutics
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 CV Therapeutics, and
CV Therapeutics will owe no royalty payments to the Company. Under the July 2003 agreement, the
Company received a warrant to purchase 200,000 shares of CV
Therapeutics common stock at $32.93 per
share during the five-year term commencing July 9, 2003. CV Therapeutics 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. The Company had previously capitalized 251.8 million Philippine pesos
(approximately $4.6 million) related to the cost of acquiring these commercial rights and has
amortized 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. 7




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Quintiles Transnational Corp. and Subsidiaries In June 2001, the Company entered into an agreement with Pilot Therapeutics, Inc. (Pilot) to
commercialize a natural therapy for asthma, AIROZIN, in the United States and Canada. The
agreement calls for the Company to provide commercialization services for AIROZIN and a
milestone-based $6.0 million line of credit which is convertible into Pilot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 Pilot on
September 5, 2003 indicated that Pilot will need significant additional financing to continue
operations beyond September 15, 2003, and Pilot 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 Pilot and reduced its five-year contingent
commitment for the sales force and marketing activities to zero at December 31, 2003. In 2004,
Pilot ceased active operations and is pursuing a recapitalization strategy. During September 2004,
the Company signed a non-binding letter of intent with Pilots banker to convert the Companys debt
to equity in Pilot as part of Pilots recapitalization plan. Discussions have continued on this
matter, but the Company has reached no binding agreement to participate in such a recapitalization
plan. In December 2001, the Company entered into an agreement with Discovery Laboratories, Inc.
(Discovery) to commercialize, in the United States, Discovery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 Discoverys common stock and a warrant to purchase 357,143 shares of
Discoverys common stock at $3.48 per share for a total of $3.0 million, and agreed to make
available to Discovery a line of credit up to $10.0 million for pre-launch commercialization
services as certain milestones are achieved by Discovery. As of March 31, 2005, the Company has
made $8.5 million available under the line of credit, of which $8.5 million has been funded. In
addition, the Company has received warrants to purchase approximately
320,000 shares of Discoverys
common stock as milestones were achieved. The Company agreed to pay the sales and marketing
activities of this product up to $10.0 million per year for seven years. In return, Discovery
agreed to pay the Company 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 Discoverys common stock
included participation rights to acquire additional shares of Discovery. The Company exercised its
participation rights in two such transactions with Discovery during November 2002 and July 2003
whereby the Company purchased a total of 484,305 shares of
Discoverys common stock along with
detachable warrants to purchase 163,423 shares of Discoverys common stock. Additionally, at various
times during 2003 and 2004, the Company has used the cashless exercise feature of the warrant
contracts to purchase 796,954 shares of common stock and received
561,485 shares of Discoverys
common stock. During November 2004, the Company and Discovery agreed to restructure the
commercialization arrangements to allow Discovery to assume the entire commercialization program
for Surfaxin®. As part of this new arrangement, the Company (i) will not pay for the sales and
marketing activities of Surfaxin®, nor will the Company receive commissions on the net sales of
Surfaxin®, (ii) has extended the $8.5 million line of credit through December 31, 2006, and (iii)
received a warrant to purchase 850,000 shares of Discoverys common stock at an exercise price of
$7.19 per share which resulted in the Company recognizing revenues of $1.2 million related to the
settlement of the commercialization arrangements. The Company also continues to have a preferred
provider relationship with Discovery. During January 8




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Quintiles Transnational Corp. and Subsidiaries 2005, Discoverys contract manufacturer received a letter from the United States Food and Drug
Administration (FDA) notifying it of certain deficiencies in its manufacturing process.
Discoverys management, in a press release, indicated that these deficiencies are likely to be
resolved by July 2005 and resolution of the issues will cause the anticipated commercial launch of
Surfaxin®, if approved, to be delayed until the fourth quarter of 2005 or the first quarter of
2006. In addition, during February 2005, Discovery received an Approvable Letter from the FDA for
Surfaxin® for the prevention of Respiratory Distress Syndrome in premature infants. The Company
believes that the delay in the expected launch date will not impact Discoverys ability to repay
the line of credit outstanding at March 31, 2005. In January 2002, the Company entered into an agreement with Kos Pharmaceuticals, Inc. (Kos) to
commercialize, in the United States, Kos 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 Kos 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
Kos common stock at $32.79 per share, exercisable in installments over the first two years of the
agreement. 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 March 31, 2005, the Company has received payments totaling approximately $28.6
million. The proceeds are reported in the statement of cash flows as an operating activity -
change in operating assets and liabilities. In March 2005, the Company sold its warrant to acquire
Kos common stock for $2.5 million which resulted in investment revenues of $930,000. 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 March 31, 2005, 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 Eli Lilly and Company (Lilly) to support
Lilly in its commercialization efforts for CymbaltaÔ in the United States. The FDA approved
Lillys New Drug Application, or NDA, for CymbaltaÔ in the third quarter of 2004 for the
treatment of depression. Under the terms of the agreement, the Company is providing, at its
expense, more than 500 sales representatives to supplement the extensive Lilly sales force in the
promotion of CymbaltaÔ for the five years following product launch. The Companys sales
force will promote CymbaltaÔ in its primary, or P1, position within sales calls. During the
first three years Lilly 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 Lilly totaling $110.0 million of which $70.0 9




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Quintiles Transnational Corp. and Subsidiaries million was paid in 2002, $20 million was paid in 2004, $10 million was paid in the first quarter
of 2005 and the remaining $10.0 million is due during the second quarter of 2005. In addition, the
Company paid Lilly during 2004 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. The $105.0 million in payments made and the
$10 million in payments for which the Company is liable have been capitalized and will be amortized
in proportion to the estimated revenues as a reduction of revenue over the five-year service
period, which commenced in August 2004. 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 CymbaltaÔ and the marketing and milestone payments, Lilly will pay to the
Company 8.25% of United States CymbaltaÔ sales for depression and other neuroscience
indications over the five-year service period followed by a 3% royalty over the subsequent three
years. The Company recognized revenues, net of related amortization, related to the royalty, and
P2 and P3 positions on CymbaltaTM, of $9.8 million for the quarter ended March 31, 2005. In July 2002, the Company entered into an agreement with Columbia Laboratories, Inc. (Columbia)
to commercialize, in the United States, the following womens health products: ProchieveÔ 8%,
ProchieveÔ 4%, Advantage-Sâ and RepHreshÔ. Under the terms of the agreement, the
Company purchased 1,121,610 shares of Columbias common stock for $5.5 million. The Company also
paid to Columbia four quarterly payments of $1.125 million totaling $4.5 million. The payments
were 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
Columbia 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 March 31, 2005, the
Company has received payments totaling approximately $2.8 million. 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 Columbia, at Columbias expense on a fee-for-service
basis, a sales force to commercialize the products. The same sales force also commercializes
Columbias StriantTM product under the Companys March 2003 agreement. In January 2004,
the Company and Columbia agreed to restructure the fee-for-service agreement to allow for an
accelerated transfer of the sales force management responsibility to Columbia. The purchase of the
Columbia common stock included participation rights to acquire additional shares of Columbia.
During July 2003, the Company exercised its participation rights and purchased an additional 56,749
shares of Columbia for $664,000. In March 2003, the Company entered into an agreement with Columbia to commercialize Columbia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 were reported in the statements 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 March 31, 2005, 10




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Quintiles Transnational Corp. and Subsidiaries the Company has received payments totaling approximately $581,000. The proceeds are reported in
the statements of cash flows as an operating activity  change in operating assets and liabilities.
In addition, the Company will provide to Columbia, at Columbias expense on a fee-for-service
basis, a sales force to commercialize the products for a two-and-a-half year term. The same sales
force also commercializes the womens health products of Columbia under the Companys July 2002
agreement. In January 2004, the Company and Columbia agreed to restructure the fee-for-service
agreement to allow for an accelerated transfer of the sales force management responsibility to
Columbia. The Company has continued to monitor the revenue growth of Columbias
StriantTM product and Columbias womens health products, which are subject to separate
agreements with the Company, and the ability of Columbia to meet its minimum obligations under
these agreements. Based upon the financial prospects of Columbia and the Companys assessment of
various potential outcomes it might realize under its agreements with Columbia, the Company
recognized an impairment of $7.8 million in its commercial rights and royalties asset relating to
the StriantTM product during the third quarter of 2004. In February 2005, Columbia
announced a plan to reduce its sales force from 68 sales representatives to 28. The Companys
sales force was impacted by this reduction. The Company believes that the remaining carrying value
associated with the accounts receivable and commercial rights assets related to the Columbia
products continues to be recoverable. 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 has
the rights to one product in Belgium in exchange for payments of 5.5 million euros (approximately
$7.1 million). The customer will continue to manufacture the product through 2005. Under the
terms of a distribution agreement, the Company has 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 $8.9
million) of which 2.2 million euros (approximately $2.8 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 a
total of 10.2 million euros (approximately $13.2 million) as of March 31, 2005. The payments were
reported in the statements 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 February 2004, the Company entered into an agreement with a large pharmaceutical customer to
provide services in connection with the customers development and United States 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 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 maximum of $10.0 million of services
in any quarter. 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 11




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##### 



Quintiles Transnational Corp. and Subsidiaries performing the obligations, the Company will receive (1) beginning in the first quarter of 2005, a
low, single-digit royalty on United States net sales of the existing product and (2) beginning on
the United States launch of the new product, a declining tiered royalty (beginning in the low
teens) on United States 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 United States 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 $26.3 million of services under this agreement through March
31, 2005. The Company has recorded revenues related to the royalty of $1.6 million for the quarter
ended March 31, 2005. 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. Through March 31, 2005, the Company has provided services of $3.3 million in value of
the $25.0 million committed. The costs related to the $3.3 million have been expensed as 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. In December 2004, the Company entered into an agreement with Cell Therapeutics, Inc. (Cell
Therapeutics) involving Cell Therapeutics cancer therapy, TRISENOX® (arsenic trioxide). Under
the agreement, the Company paid Cell Therapeutics $25.0 million in cash and will make available
$5.0 million in services from the Company. The $25.0 million payment has been capitalized and
reported in the statements of cash flows as an investing activity  acquisition of commercial
rights and royalties. The $25.0 million commercial rights and royalties asset will be amortized in
proportion to the estimated revenues as a reduction of revenues over the service period. The
Companys service obligations will be expensed as incurred and are anticipated to occur during
2005, but may run longer depending on Cell Therapeutics actual use of services. In return, Cell
Therapeutics will pay the Company royalties based on a percentage of net sales of TRISENOX® in the
United States and certain European countries over a five-year period beginning January 1, 2006.
The agreement also provides the Company with a security interest in Cell Therapeutics TRISENOX®
assets related to Cell Therapeutics royalty payment obligations. The royalties are subject to
minimum and maximum amounts of $53.0 million and $69.0 million, respectively, over the life of the
agreement. Under certain termination events, including product divestiture by Cell Therapeutics,
the minimum amounts due from Cell Therapeutics may be adjusted to ensure the Company maintains a
certain internal rate of return. As of March 31, 2005, the Company has paid the $25.0 million cash
element, and has provided $460,000 of services under the $5.0 million 12




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##### 



Quintiles Transnational Corp. and Subsidiaries services element. The Company has recognized revenues from this agreement, net of related amortization, of $899,000
during the quarter ended March 31, 2005. In December 2004, the Company entered into a co-promotion agreement with Yamanouchi Pharma Limited
(Yamanouchi) to support Yamanouchi in its commercialization efforts for Vesicare in the United
Kingdom. Vesicare, or solifenacin, is currently approved for the treatment of overactive bladder.
Under the terms of the agreement, the Company will provide, at its expense a £500,000
(approximately $944,000), marketing contribution and a sales force to supplement Yamanouchis sales
force for three years. The Companys sales force will promote Vesicare in its primary, or P1,
position within sales calls. Yamanouchi and the Company are required to make a minimum number of
sales calls each year. In the event the minimum number of sales calls is not achieved, the
agreement specifies certain penalties are to be paid. The £500,000 payment has been capitalized
and will be amortized in proportion to the estimated revenues as a reduction of revenue over the
three-year service period, which commenced in January 2005. The payment is reported in the
statements of cash flows as an investing activity  acquisition of commercial rights and royalties.
The sales force costs are being expensed as incurred. In return for the P1 position for
Vesicare, Yamanouchi will pay the Company a royalty based on the net sales of Vesicare over six
years. The Company has recorded revenues, net of amortization, related to the royalty of $61,000
for the quarter ended March 31, 2005. The Company has firm commitments under the arrangements described above to provide funding of
approximately $782.0 million in exchange for various commercial rights. As of March 31, 2005, the
Company has funded approximately $315.8 million of those
commitments. 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 $4-16 million per year for a period
over the next three years, subject to certain limitations and varying time periods. Below is a summary of the remaining firm commitments with pre-determined payment schedules under
such arrangements (in thousands): April 1, 2005throughDecember 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    TotalService commitments
    
    $
    96,469
    
    
    $
    104,967
    
    
    $
    98,423
    
    
    $
    88,942
    
    
    $
    67,448
    
    
    $
    456,249Milestone payments
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000$
    106,469
    
    
    $
    104,967
    
    
    $
    98,423
    
    
    $
    88,942
    
    
    $
    67,448
    
    
    $
    466,249
 13




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##### 



Quintiles Transnational Corp. and Subsidiaries 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 March 31, 2005 is as follows (in thousands): Fair MarketCost Basis
    
    
    ValueTotal Marketable Equity Securities
    
    $
    26,414
    
    
    $
    23,337
 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 $873,000 during the three months ended March
31, 2005. There were no such impairments recognized during the three months ended March 31, 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 March 31, 2005 is as follows (in
thousands): Remaining FundingCompany
    
    Cost Basis
    
    
    CommitmentVenture capital funds
    
    $
    34,467
    
    
    $
    11,489Equity investments (eight companies)
    
    
    10,247
    
    
    
    1,023Convertible loans (two companies)
    
    
    
    
    
    
    19Loans (two companies)
    
    
    8,221
    
    
    
    Total non-marketable equity securities and loans
    
    $
    52,935
    
    
    $
    12,531
 Below is a table representing managements best estimate as of March 31, 2005 of the amount
and timing of the above remaining funding commitments (in thousands): 2005
    
    
    2006
    
    
    TotalVenture capital funds
    
    $
    7,275
    
    
    $
    4,214
    
    
    $
    11,489Equity Investments
    
    
    1,023
    
    
    
    
    
    
    
    1,023Convertible loans
    
    
    19
    
    
    
    
    
    
    
    19Total remaining funding commitments
    
    $
    8,317
    
    
    $
    4,214
    
    
    $
    12,531
 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 14




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##### 



Quintiles Transnational Corp. and Subsidiaries estimated fair value of the investment and recognizes a loss for the amount of the adjustment. The
Company recognized $1.7 million and $154,000 of losses due to such impairments during the three
months ended March 31, 2005 and 2004, 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. 6. Derivatives As of March 31, 2005, the Company had the following derivative positions: (1) conversion option
positions that are embedded in financing arrangements, (2) freestanding warrants to purchase shares
of common stock and (3) forward exchange contracts to hedge forecasted foreign currency cash flows
related to service contracts. The Company does not use derivative financial instruments for
speculative or trading purposes. As of March 31, 2005, the Company had funded three convertible loans which have been fully
reserved. 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 March 31, 2005, 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 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, expected time to exercise 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. The Company recognized investment losses
of $308,000 during the three months ended March 31, 2005 and investment gains of $2.3 million
during the three months ended March 31, 2004 related to changes in the fair values of the warrants.
Additionally, the Company sold one of the derivative instruments during the quarter ended March
31, 2005, resulting in total proceeds of $2.5 million and a realized gain of $930,000. As of March 31, 2005, the Company has 19 open foreign exchange forward contracts to hedge certain
forecasted foreign currency cash flow transactions occurring in 2005 and 2006. As these
transactions were entered into to hedge the risk of the potential volatility in the cash flows
resulting from fluctuations in currency exchange rates during 2005 and January 2006, these
transactions are accounted for as a cash flow hedge. As such, the effective portion of the gain or
loss on the derivative instruments is recorded as unrealized holding gains (losses) on derivatives
included in the accumulated other comprehensive income component of shareholders equity. This
hedge is deemed to be perfectly effective under SFAS No. 133, as defined. As of March 31, 2005,
the Company recorded gross unrealized losses of approximately $239,000. Upon expiration of the
hedge instruments, the Company expects $215,000 and $24,000 recorded as unrealized holding losses
on the derivative instruments included in the accumulated other 15




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##### 



Quintiles Transnational Corp. and Subsidiaries comprehensive income component of shareholders equity to be reclassified into income during the
last nine months of 2005 and January 2006, respectively. The unrealized gains and losses are shown
as an other current asset and other current liability, respectively, on the accompanying balance
sheets. 7. Goodwill and Identifiable Intangible Assets The Company has approximately $261.5 million of identifiable intangible assets, of which
approximately $109.7 million related to the Companys trademarks and trade names is deemed to be
indefinite-lived and, accordingly, is not being amortized. Amortization expense associated with
definite-lived identifiable intangible assets was $15.7 million and $19.4 million for the three
months ended March 31, 2005 and 2004, respectively. The following is a summary of identifiable intangible assets as of March 31, 2005 (in thousands): AccumulatedGross Amount
    
    
    Amortization
    
    
    Net AmountIdentifiable intangible assets:Commercial rights and royalties,
licenses and customer
relationships
    
    $
    124,797
    
    
    $
    54,515
    
    
    $
    70,282Trademarks, trade names and other
    
    
    169,366
    
    
    
    21,382
    
    
    
    147,984Software and related assets
    
    
    75,722
    
    
    
    32,522
    
    
    
    43,200Total identifiable intangible assets
    
    $
    369,885
    
    
    $
    108,419
    
    
    $
    261,466
 The following is a summary of goodwill by segment for the three months ended March 31, 2005
(in thousands): Product
    
    
    Commercial
    
    
    PharmaBioDevelopment
    
    
    Services
    
    
    Development
    
    
    ConsolidatedBalance as of December 31, 2004
    
    $
    70,943
    
    
    $
    43,657
    
    
    $
    1,413
    
    
    $
    116,013Impact of foreign currency fluctuations
    
    
    (446
    )
    
    
    (25
    )
    
    
    
    
    
    
    (471
    )Balance as of March 31, 2005
    
    $
    70,497
    
    
    $
    43,632
    
    
    $
    1,413
    
    
    $
    115,542
 8. Investment Revenues The following table is a summary of investment revenues (in thousands): Three months ended
    
    
    Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004Marketable equity and derivative securities:Gross realized gains
    
    $
    1,194
    
    
    $
    4,856Gross realized losses
    
    
    (588
    )
    
    
    (482
    )Impairment losses
    
    
    (873
    )
    
    
    Non-marketable equity securities and loans:Impairment losses
    
    
    (1,691
    )
    
    
    (154
    )Total investment revenues
    
    $
    (1,958
    )
    
    $
    4,220
 16




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##### 



Quintiles Transnational Corp. and Subsidiaries 9. Credit Arrangements In March 2005, the Company amended the agreement governing its senior secured credit facility. The
amendment (1) decreased the interest rate under the Term B Loan facility by 2.50%; (2) lessened the
Interest Expense Coverage Ratio and Total Leverage Ratio requirements for selected future periods;
(3) adjusted the Senior Leverage Ratio from 2.0 to 1.75 through December 31, 2005, which could
further limit the Companys ability to incur additional Senior Indebtedness during 2005; (4)
increased the Companys capacity for additional Asset Sales by $150.0 million; (5) increased the
Companys capacity to make certain investments outside the United States by $100.0 million; (6)
increased the Companys capacity to make Permitted PharmaBio Investments by $100.0 million; (7)
permitted the Company to include certain restructuring charges in the calculation of its
Consolidated EBITDA; (8) permitted the Company to offset its Consolidated Indebtedness by an
additional $50.0 million of available cash; and (9) made other clarifying or correcting changes.
On March 31, 2005, the Company paid down $150.0 million of the approximately $306.1 million
outstanding under the Term Loan B facility and paid approximately $2.3 million to the
administrative agent and lenders in connection with the amendment. The present value of the
expected future cash flows under the amended agreement was not
substantially different from the value of the
expected cash flows under the original agreement. Accordingly, the amendment was accounted for as
a modification, and not an extinguishment. As a result, the $2.3 million in expenses have been
capitalized as debt issuance costs and recorded in the accompanying balance sheet as a deposit and
other asset. In connection with the $150.0 million payment of principal, the Company expensed
approximately $3.2 million of unamortized debt issuance costs, associated with the pro-rata portion
of the original indebtedness that was repaid in connection with the amendment, in the accompanying
statements of operations as interest expense. Capitalized terms included in this paragraph have
the meanings defined in the agreement governing the Companys senior secured credit facility. The following is a summary of the credit facilities available to the Company at March 31, 2005: Facility
    
    Interest Rates$75.0 million
    
    Either at LIBOR (3.09% at March 31, 2005)
plus 2.50% or ABR (5.75% at March 31, 2005)
plus 1.5%£1.5 million (approximately
$2.8 million) general
banking facility with a
United Kingdom bank used
for the issuance of
guarantees
    
    1% per annum for each guarantee issued
 The Company did not have any outstanding balances on these facilities at March 31, 2005. Long-term debt consists of the following (in thousands): As of
    
    
    As ofMarch 31, 2005
    
    
    December 31, 200410% Senior Subordinated Notes due 2013
    
    $
    450,000
    
    
    $
    450,000Senior Term Loan B (Either at LIBOR (3.09% at March 31, 2005) plus 1.75%
or ABR (5.75% at March 31, 2005) plus 0.75%
    
    
    155,350
    
    
    
    306,125Missouri tax incentive bonds due October 2009 (6.7% annual interest rate)
    
    
    3,256
    
    
    
    3,256Other notes payable
    
    
    3,489
    
    
    
    4,160612,095
    
    
    
    763,541Capital leases
    
    
    27,340
    
    
    
    31,340Total credit arrangements
    
    $
    639,435
    
    
    $
    794,881
 17




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##### 



Quintiles Transnational Corp. and Subsidiaries Maturities of long-term debt excluding capital leases at March 31, 2005 are as follows (in
thousands): April 1, 2005 through December 31, 2005
    
    $
    4,1232006
    
    
    5,0182007
    
    
    4,1872008
    
    
    3,9102009
    
    
    144,5842010
    
    
    126Thereafter
    
    
    450,147$
    612,095
 The estimated fair value of the long-term debt was $664.6 million and $822.1 million at March
31, 2005 and December 31, 2004, respectively. 10. Commitments In May 2005, the Company provided notice that it will terminate its service agreement with a third
party vendor to provide information technology infrastructure services at certain sites in the
United States and Europe. The termination will be effective in November 2005, and the Company
expects to pay termination penalties, primarily during the fourth quarter of 2005. 11. Restructuring and Impairments In March 2005, the Companys Board of Directors approved the third phase of a new initiative to
review aspects of the Companys current operating and future strategic directions regarding
corporate initiatives, including utilization of shared services and strategic sourcing
alternatives. The Company expects that certain costs will be incurred in both its Product
Development and Commercial Services Groups to implement this phase, including restructuring and
exit costs. The Company expects to incur over the last three quarters of 2005 and the first
quarter of 2006 aggregate restructuring charges of approximately $15.5 million. The estimated cash
expenditures total approximately $15.5 million and include termination benefits of approximately
$15.0 million to eliminate approximately 384 positions globally, and exit costs of approximately
$500,000. Currently, the Company does not anticipate incurring non-cash charges as no impairment
of long-lived assets has been indicated at this time. The Company has targeted substantial
completion of the cash expenditures relating to the third phase for the end of 2005. In January 2005, the Companys Board of Directors approved the second phase of this review. In
connection with this phase, the Company recognized $8.4 million of restructuring charges during the
first quarter of 2005 including $5.3 million for termination benefits, $2.8 million of exit costs
and asset write-offs of $366,000. The Company expects to incur over the last three quarters of
2005 and the first quarter of 2006 additional aggregate restructuring charges of approximately
$12.4 million. The estimated cash expenditures total approximately $12.4 million and include
termination benefits of $5.4 million and exit costs of $7.0 million. Currently, the Company does
not anticipate incurring additional non-cash charges as no impairment of long-lived assets has been
indicated at this time. Positions in the Companys Product Development and Commercial Services
Groups have been eliminated. As of March 31, 2005, 141 individuals have been notified with 116
positions eliminated. 18




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##### 



Quintiles Transnational Corp. and Subsidiaries In November 2004, the Companys Board of Directors approved the first phase of this review. In
conjunction with this review, the Company recognized $1.0 million and $6.6 million of restructuring
charges in the first quarter of 2005 and the year ended December 31, 2004, respectively, for
termination benefits related to the elimination of 230 positions globally. The Company expects to
incur during the remainder of 2005 additional aggregate restructuring charges of approximately
$900,000 for termination benefits. Although positions were eliminated in the Commercial Services
Group, most of the eliminated positions were in the Product Development Group. As of March 31,
2005, 206 individuals had been notified with 197 positions eliminated. 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 total decrease of $1.8
million which was recorded during 2004. This decrease consisted 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 were 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 were 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 March 31, 2005, 107 individuals had been terminated.
Delays in certain of the Companys systems implementation in Europe have caused the terminations to
extend beyond one year. During the period from January 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. The decrease in severance payments was
a result of the number of actual voluntary employee terminations exceeding the Companys estimates.
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. The increase was due to several
factors including, depending on the facility: (1) an increase in managements previously estimated
time required to sublet, (2) a decrease in the expected price per square foot to sublet or (3) an
increase in the estimated cost to otherwise terminate the Companys obligation under those leases
brought about by prolonged stagnant conditions in local real estate markets. 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. The reductions are primarily the result of a higher than expected number of
voluntary terminations and the reversal of restructuring accruals due to the Companys contribution
of its informatics segment to the Verispan joint venture. 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 19




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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 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 this plan, approximately 99 positions were to be eliminated mostly in the
Europe and Africa region. All of the individuals who were to be terminated under this plan were
terminated as of December 31, 2004. 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 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 positions that were to be terminated under this
plan had been eliminated. In certain circumstances, international regulations and restrictions
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 this 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. The severance reduction resulted
primarily from a higher than expected number of voluntary terminations, reduced outplacement costs
and related fringe benefits. 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 this 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 caused
the terminations to extend beyond one year. 20




---



##### 



Quintiles Transnational Corp. and Subsidiaries As of March 31, 2005, the following amounts were recorded for the restructuring plans discussed
above (in thousands): 2003
    
    
    20012005 Plans
    
    
    2004 Plans
    
    
    Plans
    
    
    PlansBalance at
    
    
    Write-
    
    
    
    
    
    
    Foreign
    
    
    Write-
    
    
    
    
    
    
    Foreign
    
    
    Write-
    
    
    Write-
    
    
    Balance atDecember
    
    
    offs/
    
    
    
    
    
    
    Currency
    
    
    offs/
    
    
    
    
    
    
    Currency
    
    
    offs/
    
    
    offs/
    
    
    March 31,31, 2004
    
    
    Payments
    
    
    Accrual
    
    
    Translation
    
    
    Payments
    
    
    Accrual
    
    
    Translation
    
    
    Payments
    
    
    Payments
    
    
    2005Severance and
related costs
    
    $
    6,051
    
    
    $
    (2,288
    )
    
    $
    5,253
    
    
    $
    (20
    )
    
    $
    (4,942
    )
    
    $
    696
    
    
    $
    (86
    )
    
    $
    (305
    )
    
    $
    
    
    
    $
    4,359Exit costs
    
    
    4,595
    
    
    
    (85
    )
    
    
    2,784
    
    
    
    (40
    )
    
    
    (21
    )
    
    
    271
    
    
    
    (17
    )
    
    
    
    
    
    
    (257
    )
    
    
    7,229Asset write-offs
    
    
    
    
    
    
    (366
    )
    
    
    366
    
    
    
    
    
    
    
    (68
    )
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,646
    
    
    $
    (2,739
    )
    
    $
    8,403
    
    
    $
    (60
    )
    
    $
    (5,031
    )
    
    $
    1,034
    
    
    $
    (103
    )
    
    $
    (305
    )
    
    $
    (257
    )
    
    $
    11,589
 12. Income Taxes The Company recognized an overall income tax benefit of $33.0 million and $725,000 for the first
quarter of 2005 and 2004, respectively. In the first quarter of 2005, the Companys chief
executive officer approved a domestic reinvestment plan to repatriate
$117.5 million, which has since been ratified by the Companys Board of Directors, in
extraordinary dividends as defined in the American Jobs Creation Act of 2004 (Jobs Act) from
certain countries. The Company has determined that of the $117.5 million to be repatriated, $98.8
million is attributable to pre-2005 earnings and $18.7 million relates to 2005 estimated earnings.
The Companys overall income tax benefit in the quarter ended March 31, 2005 was positively
impacted by a $31.5 million income tax benefit recognized related to the $98.8 million of pre-2005
earnings and profits. The $31.5 million income tax benefit resulted from the lower income tax
applicable to the repatriation of pre-2005 foreign earnings because those earnings are not
considered to be indefinitely reinvested outside the United States and therefore in addition to the
local income tax, deferred income tax liabilities for United States income tax have historically
been provided for such earnings at 38.5%. The income tax rate available under the Jobs Act is
approximately 5.25% and the $31.5 million income tax benefit represents the reduction of the
deferred income tax liabilities on the pre-2005 earnings to 5.25%. The Company has calculated its first quarter income tax benefit pursuant to FASB Interpretation
No.18, Accounting for Income Taxes in Interim Periods (An Interpretation of APB No. 28), using
actual year to date income (loss) as it more accurately represents the interim income tax position
due to the difficulty in determining a reliable estimate of the annual effective income tax rate
because the fact that a small change in estimated income for the year could have a large
impact on the annual effective income tax rate. Consistent with 2004, the income tax rate for 2005
reflects incremental United States income tax provided on the Companys foreign earnings because
those earnings are not considered to be indefinitely reinvested outside the United States. The
5.25% income tax rate is only available for the qualified dividends being repatriated from the
identified countries from which the Company decided to repatriate the funds. Excluding the $31.5
million income tax benefit, the Companys year to date effective income tax rate is 12% which
includes incremental United States income tax expense of approximately $388,000 on year to date
2005 foreign earnings from the countries from which the Company decided to repatriate the foreign
earnings of approximately $6 million taxed at 5.25% rather than 38.5%. During the remainder of
2005, the remaining $12.7 million of estimated 2005 foreign earnings being repatriated will also be taxed for
United States income tax purposes at 5.25% as opposed to 38.5%, similar to the $6 million for the
first quarter of 2005. 21




---



##### 



Quintiles Transnational Corp. and Subsidiaries For all other foreign earnings, incremental United States income tax will continue to be provided
at a rate of 38.5%, and not at the lower United States income tax rate of approximately 5.25%
available pursuant to the Jobs Act, because the Company has not currently adopted another dividend
reinvestment plan for those earnings. The Company cannot reasonably estimate the range of income
tax effects of a potential future repatriation of foreign earnings. The Company is continuing its
assessment of the Jobs Act, and any future decisions could impact its income tax rate. Since the
Company conducts operations on a global basis, shifts in income between taxing jurisdictions may
also cause its effective income tax rate to vary from period to period. 13. Comprehensive Income The following table represents the Companys comprehensive income (loss) (in thousands): Three months
    
    
    Three monthsended March
    
    
    ended March31, 2005
    
    
    31, 2004Net income (loss)
    
    $
    19,344
    
    
    $
    (15,707
    )Other comprehensive income (loss):Unrealized (losses) gains on marketable securities arising
during the period, net of income taxes of ($2.3) million and
$1.3 million for the three months ended March 31, 2005 and
2004, respectively
    
    
    (4,260
    )
    
    
    2,383Unrealized losses on derivative instruments, net of income
taxes of ($71,000) and ($145,000) for the three months ended
March 31, 2005 and 2004, respectively
    
    
    (196
    )
    
    
    (269
    )Reclassification adjustment for gains, net of income taxes
of ($9,000) and ($772,000) for the three months ended March
31, 2005 and 2004, respectively, included in net income
(loss)
    
    
    (16
    )
    
    
    (1,433
    )Foreign currency adjustment
    
    
    (13,814
    )
    
    
    (2,218
    )Other comprehensive loss (income) to non-controlling interest
    
    
    495
    
    
    
    (7
    )Comprehensive income (loss)
    
    $
    1,553
    
    
    $
    (17,251
    )
 22




---



##### 



Quintiles Transnational Corp. and Subsidiaries 14. 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. The three months ended March 31, 2004 reflect the Bioglan business as a
discontinued operation. Contribution is defined as gross revenues less costs of revenues, excluding depreciation and
amortization expense as indicated below. The Company does not include selling, 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.
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 March 31, 2005 Product
    
    
    Commercial
    
    
    PharmaBioDevelopment
    
    
    Services
    
    
    Development
    
    
    Eliminations
    
    
    ConsolidatedService revenues:External
    
    $
    308,861
    
    
    $
    159,209
    
    
    $
    
    
    
    $
    
    
    
    $
    468,070Intersegment
    
    
    1,417
    
    
    
    24,894
    
    
    
    
    
    
    
    (26,311
    )
    
    
    Total net services
    
    
    310,278
    
    
    
    184,103
    
    
    
    
    
    
    
    (26,311
    )
    
    
    468,070Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    26,244
    
    
    
    
    
    
    
    26,244Investment
    
    
    
    
    
    
    
    
    
    
    (1,958
    )
    
    
    
    
    
    
    (1,958
    )Total net revenues
    
    
    310,278
    
    
    
    184,103
    
    
    
    24,286
    
    
    
    (26,311
    )
    
    
    492,356Reimbursed service costs
    
    
    96,555
    
    
    
    14,458
    
    
    
    
    
    
    
    (328
    )
    
    
    110,685Gross revenues
    
    $
    406,833
    
    
    $
    198,561
    
    
    $
    24,286
    
    
    $
    (26,639
    )
    
    $
    603,041Contribution
    
    $
    149,646
    
    
    $
    67,600
    
    
    $
    (22,089
    )
    
    $
    
    
    
    $
    195,157
 23




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended March 31, 2004 Product
    
    
    Commercial
    
    
    PharmaBioDevelopment
    
    
    Services
    
    
    Development
    
    
    Eliminations
    
    
    ConsolidatedService revenues:External
    
    $
    262,684
    
    
    $
    140,704
    
    
    $
    
    
    
    $
    
    
    
    $
    403,388Intersegment
    
    
    
    
    
    
    6,283
    
    
    
    
    
    
    
    (6,283
    )
    
    
    Total net services
    
    
    262,684
    
    
    
    146,987
    
    
    
    
    
    
    
    (6,283
    )
    
    
    403,388Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    15,586
    
    
    
    
    
    
    
    15,586Investment
    
    
    
    
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    4,220Total net revenues
    
    
    262,684
    
    
    
    146,987
    
    
    
    19,806
    
    
    
    (6,283
    )
    
    
    423,194Reimbursed service costs
    
    
    67,861
    
    
    
    14,927
    
    
    
    
    
    
    
    (329
    )
    
    
    82,459Gross revenues
    
    $
    330,545
    
    
    $
    161,914
    
    
    $
    19,806
    
    
    $
    (6,612
    )
    
    $
    505,653Contribution
    
    $
    128,062
    
    
    $
    54,555
    
    
    $
    (659
    )
    
    $
    
    
    
    $
    181,958
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31, 2005
    
    
    March 31, 2004Depreciation and
amortization expense:Product Development
    
    $
    20,071
    
    
    $
    21,590Commercial Services
    
    
    7,533
    
    
    
    8,184PharmaBio
Development
(included in
contribution)
    
    
    677
    
    
    
    804Corporate
    
    
    1,145
    
    
    
    3,133Total depreciation and
amortization expense
    
    $
    29,426
    
    
    $
    33,711
 24




---



##### 



Quintiles Transnational Corp. and Subsidiaries 15. 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. 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
months ended March 31, 2005 and 2004 (in thousands): Three months ended March 31, 2005 QuintilesTransnational
    
    
    Subsidiary
    
    
    SubsidiaryCorp.
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    TotalNet revenues
    
    $
    
    
    
    $
    170,467
    
    
    $
    322,161
    
    
    $
    (272
    )
    
    $
    492,356Add reimbursed service costs
    
    
    
    
    
    
    49,726
    
    
    
    60,959
    
    
    
    
    
    
    
    110,685Gross revenues
    
    
    
    
    
    
    220,193
    
    
    
    383,120
    
    
    
    (272
    )
    
    
    603,041Costs, expenses and other:Costs of revenues
    
    
    3,195
    
    
    
    179,700
    
    
    
    253,738
    
    
    
    
    
    
    
    436,633Selling, general and administrative
    
    
    15,124
    
    
    
    41,113
    
    
    
    98,513
    
    
    
    (272
    )
    
    
    154,478Interest (income) expense, net
    
    
    19,724
    
    
    
    (7,955
    )
    
    
    5,670
    
    
    
    
    
    
    
    17,439Other (income) expense, net
    
    
    (13,250
    )
    
    
    10,950
    
    
    
    2,424
    
    
    
    
    
    
    
    124Restructuring, impairments and
transaction
    
    
    (2,572
    )
    
    
    2,478
    
    
    
    6,865
    
    
    
    
    
    
    
    6,77122,221
    
    
    
    226,286
    
    
    
    367,210
    
    
    
    (272
    )
    
    
    615,445(Loss) income before income taxes
    
    
    (22,221
    )
    
    
    (6,093
    )
    
    
    15,910
    
    
    
    
    
    
    
    (12,404
    )Income tax (benefit) expense
    
    
    (35,509
    )
    
    
    (5,729
    )
    
    
    8,218
    
    
    
    
    
    
    
    (33,020
    )(Loss) income before minority
interests and equity in (losses)
earnings of unconsolidated affiliates
    
    
    13,288
    
    
    
    (364
    )
    
    
    7,692
    
    
    
    
    
    
    
    20,616Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    (199
    )
    
    
    (201
    )
    
    
    (872
    )
    
    
    (1,272
    )Subsidiary income
    
    
    6,056
    
    
    
    (5,959
    )
    
    
    (390
    )
    
    
    293
    
    
    
    Net income (loss)
    
    $
    19,344
    
    
    $
    (6,522
    )
    
    $
    7,101
    
    
    $
    (579
    )
    
    $
    19,344
 25




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended March 31, 2004 QuintilesTransnational
    
    
    Subsidiary
    
    
    SubsidiaryCorp.
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    TotalNet revenues
    
    $
    (52
    )
    
    $
    145,852
    
    
    $
    277,394
    
    
    $
    
    
    
    $
    423,194Add reimbursed service costs
    
    
    
    
    
    
    39,965
    
    
    
    42,494
    
    
    
    
    
    
    
    82,459Gross revenues
    
    
    (52
    )
    
    
    185,817
    
    
    
    319,888
    
    
    
    
    
    
    
    505,653Costs, expenses and other:Costs of revenues
    
    
    5,870
    
    
    
    139,756
    
    
    
    210,976
    
    
    
    
    
    
    
    356,602Selling, general and administrative
    
    
    19,096
    
    
    
    40,901
    
    
    
    95,664
    
    
    
    
    
    
    
    155,661Interest (income) expense, net
    
    
    15,589
    
    
    
    (6,787
    )
    
    
    5,817
    
    
    
    
    
    
    
    14,619Other (income) expense, net
    
    
    (19,464
    )
    
    
    12,053
    
    
    
    4,220
    
    
    
    
    
    
    
    (3,191
    )21,091
    
    
    
    185,923
    
    
    
    316,677
    
    
    
    
    
    
    
    523,691(Loss) income before income taxes
    
    
    (21,143
    )
    
    
    (106
    )
    
    
    3,211
    
    
    
    
    
    
    
    (18,038
    )Income tax (benefit) expense
    
    
    (2,746
    )
    
    
    (3,363
    )
    
    
    5,384
    
    
    
    
    
    
    
    (725
    )(Loss) income before minority interests
and equity in (losses) earnings of
unconsolidated affiliates
    
    
    (18,397
    )
    
    
    3,257
    
    
    
    (2,173
    )
    
    
    
    
    
    
    (17,313
    )Minority interests and equity in
(losses) earnings of unconsolidated
affiliates
    
    
    
    
    
    
    (68
    )
    
    
    (187
    )
    
    
    
    
    
    
    (255
    )Subsidiary income
    
    
    2,690
    
    
    
    (9,425
    )
    
    
    797
    
    
    
    5,938
    
    
    
    Income (loss) from continuing operations
    
    
    (15,707
    )
    
    
    (6,236
    )
    
    
    (1,563
    )
    
    
    5,938
    
    
    
    (17,568
    )Loss from discontinued operation
    
    
    
    
    
    
    419
    
    
    
    1,442
    
    
    
    
    
    
    
    1,861Net (loss) income
    
    $
    (15,707
    )
    
    $
    (5,817
    )
    
    $
    (121
    )
    
    $
    5,938
    
    
    $
    (15,707
    )
 The following are condensed consolidating balance sheets of the Company as of March 31, 2005
and December 31, 2004 (in thousands): 26




---



##### 



Quintiles Transnational Corp. and Subsidiaries As of March 31, 2005 Quintiles
    
    
    
    
    
    
    SubsidiaryTransnational
    
    
    Subsidiary
    
    
    Non-Corp.
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    28,186
    
    
    $
    60,850
    
    
    $
    249,488
    
    
    $
    
    
    
    $
    338,524Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    146,042
    
    
    
    190,340
    
    
    
    
    
    
    
    336,382Other current assets
    
    
    6,740
    
    
    
    20,945
    
    
    
    56,457
    
    
    
    
    
    
    
    84,142Total current assets
    
    
    34,926
    
    
    
    227,837
    
    
    
    496,285
    
    
    
    
    
    
    
    759,048Property and equipment, net
    
    
    1,517
    
    
    
    114,709
    
    
    
    162,748
    
    
    
    
    
    
    
    278,974Intangibles and other assets:Investments
    
    
    23,170
    
    
    
    367,294
    
    
    
    2,136
    
    
    
    
    
    
    
    392,600Goodwill and other identifiable
intangibles, net
    
    
    2,110
    
    
    
    168,966
    
    
    
    205,932
    
    
    
    
    
    
    
    377,008Deposits and other assets
    
    
    22,382
    
    
    
    15,207
    
    
    
    17,697
    
    
    
    
    
    
    
    55,286Investments in subsidiaries
    
    
    1,526,763
    
    
    
    (241,021
    )
    
    
    75,488
    
    
    
    (1,361,230
    )
    
    
    Total intangibles and other assets
    
    
    1,574,425
    
    
    
    310,446
    
    
    
    301,253
    
    
    
    (1,361,230
    )
    
    
    824,894Total assets
    
    $
    1,610,868
    
    
    $
    652,992
    
    
    $
    960,286
    
    
    $
    (1,361,230
    )
    
    $
    1,862,916Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    39,412
    
    
    $
    85,663
    
    
    $
    229,817
    
    
    $
    
    
    
    $
    354,892Credit arrangements
    
    
    3,100
    
    
    
    666
    
    
    
    16,014
    
    
    
    
    
    
    
    19,780Unearned income
    
    
    
    
    
    
    70,143
    
    
    
    134,613
    
    
    
    
    
    
    
    204,756Other current liabilities
    
    
    35,783
    
    
    
    (235
    )
    
    
    (11,110
    )
    
    
    
    
    
    
    24,438Total current liabilities
    
    
    78,295
    
    
    
    156,237
    
    
    
    369,334
    
    
    
    
    
    
    
    603,866Long-term liabilities:Credit arrangements, less current
portion
    
    
    602,250
    
    
    
    2,905
    
    
    
    14,500
    
    
    
    
    
    
    
    619,655Minority interest
    
    
    
    
    
    
    
    
    
    
    26,624
    
    
    
    11,222
    
    
    
    37,846Other liabilities
    
    
    23,817
    
    
    
    (20,508
    )
    
    
    28,469
    
    
    
    
    
    
    
    31,778Net intercompany payables
    
    
    336,735
    
    
    
    (864,114
    )
    
    
    527,379
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    962,802
    
    
    
    (881,717
    )
    
    
    596,972
    
    
    
    11,222
    
    
    
    689,279Total liabilities
    
    
    1,041,097
    
    
    
    (725,480
    )
    
    
    966,306
    
    
    
    11,222
    
    
    
    1,293,145Total shareholders equity
    
    
    569,771
    
    
    
    1,378,472
    
    
    
    (6,020
    )
    
    
    (1,372,452
    )
    
    
    569,771Total liabilities and shareholders equity
    
    $
    1,610,868
    
    
    $
    652,992
    
    
    $
    960,286
    
    
    $
    (1,361,230
    )
    
    $
    1,862,916
 27




---



##### 



Quintiles Transnational Corp. and Subsidiaries As of December 31, 2004 Quintiles
    
    
    
    
    
    
    SubsidiaryTransnational
    
    
    Subsidiary
    
    
    Non-Corp.
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    17,581
    
    
    $
    155,142
    
    
    $
    362,957
    
    
    $
    
    
    
    $
    535,680Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    122,567
    
    
    
    177,840
    
    
    
    
    
    
    
    300,407Other current assets
    
    
    10,688
    
    
    
    19,160
    
    
    
    49,399
    
    
    
    
    
    
    
    79,247Total current assets
    
    
    28,269
    
    
    
    296,869
    
    
    
    590,196
    
    
    
    
    
    
    
    915,334Property and equipment, net
    
    
    1,680
    
    
    
    115,776
    
    
    
    173,689
    
    
    
    
    
    
    
    291,145Intangibles and other assets:Investments
    
    
    22,219
    
    
    
    375,121
    
    
    
    1,274
    
    
    
    
    
    
    
    398,614Goodwill and other identifiable
intangibles, net
    
    
    2,980
    
    
    
    174,383
    
    
    
    213,107
    
    
    
    
    
    
    
    390,470Deposits and other assets
    
    
    24,200
    
    
    
    11,022
    
    
    
    17,177
    
    
    
    
    
    
    
    52,399Investments in subsidiaries
    
    
    1,654,469
    
    
    
    (247,132
    )
    
    
    75,217
    
    
    
    (1,482,554
    )
    
    
    Total intangibles and other assets
    
    
    1,703,868
    
    
    
    313,394
    
    
    
    306,775
    
    
    
    (1,482,554
    )
    
    
    841,483Total assets
    
    $
    1,733,817
    
    
    $
    726,039
    
    
    $
    1,070,660
    
    
    $
    (1,482,554
    )
    
    $
    2,047,962Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    32,834
    
    
    $
    96,508
    
    
    $
    218,325
    
    
    
    
    
    
    $
    347,667Credit arrangements
    
    
    3,100
    
    
    
    669
    
    
    
    16,550
    
    
    
    
    
    
    
    20,319Unearned income
    
    
    
    
    
    
    73,036
    
    
    
    126,414
    
    
    
    
    
    
    
    199,450Other current liabilities
    
    
    32,768
    
    
    
    6,243
    
    
    
    (6,664
    )
    
    
    
    
    
    
    32,347Total current liabilities
    
    
    68,702
    
    
    
    176,456
    
    
    
    354,625
    
    
    
    
    
    
    
    599,783Long-term liabilities:Credit arrangements, less current
portion
    
    
    753,024
    
    
    
    2,932
    
    
    
    18,606
    
    
    
    
    
    
    
    774,562Minority interest
    
    
    
    
    
    
    
    
    
    
    27,705
    
    
    
    10,845
    
    
    
    38,550Other liabilities
    
    
    61,535
    
    
    
    (23,706
    )
    
    
    29,147
    
    
    
    
    
    
    
    66,976Net intercompany payables
    
    
    282,465
    
    
    
    (818,801
    )
    
    
    536,336
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,097,024
    
    
    
    (839,575
    )
    
    
    611,794
    
    
    
    10,845
    
    
    
    880,088Total liabilities
    
    
    1,165,726
    
    
    
    (663,119
    )
    
    
    966,419
    
    
    
    10,845
    
    
    
    1,479,871Total shareholders equity
    
    
    568,091
    
    
    
    1,389,158
    
    
    
    104,241
    
    
    
    (1,493,399
    )
    
    
    568,091Total liabilities and shareholders equity
    
    $
    1,733,817
    
    
    $
    726,039
    
    
    $
    1,070,660
    
    
    $
    (1,482,554
    )
    
    $
    2,047,962
 28




---



##### 



Quintiles Transnational Corp. and Subsidiaries The following are condensed consolidating statements of cash flows of the Company for the
three months ended March 31, 2005 and 2004 (in thousands): Three months ended March 31, 2005 Quintiles
    
    
    
    
    
    
    SubsidiaryTransnational
    
    
    Subsidiary
    
    
    Non-Corp.
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    TotalOperating activitiesNet income
    
    $
    19,344
    
    
    $
    (6,522
    )
    
    $
    7,101
    
    
    $
    (579
    )
    
    $
    19,344Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    1,096
    
    
    
    12,518
    
    
    
    15,812
    
    
    
    
    
    
    
    29,426Amortization of debt issuance costs
    
    
    4,098
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    4,137Amortization of commercial rights and royalties assets
    
    
    
    
    
    
    4,619
    
    
    
    
    
    
    
    
    
    
    
    4,619Restructuring charge (payments) accrual, net
    
    
    (78
    )
    
    
    (308
    )
    
    
    1,930
    
    
    
    
    
    
    
    1,544Loss (gain) from sales and impairments of investments, net
    
    
    
    
    
    
    1,958
    
    
    
    
    
    
    
    
    
    
    
    1,958Loss (gain) on disposals of property and equipment, net
    
    
    
    
    
    
    (12
    )
    
    
    223
    
    
    
    
    
    
    
    211(Benefit from) provision for deferred income tax expense
    
    
    (38,746
    )
    
    
    890
    
    
    
    (540
    )
    
    
    
    
    
    
    (38,396
    )Change in accounts receivable, unbilled services and
unearned income
    
    
    2,250
    
    
    
    (26,404
    )
    
    
    (12,564
    )
    
    
    
    
    
    
    (36,718
    )Change in other operating assets and liabilities
    
    
    13,373
    
    
    
    (9,768
    )
    
    
    10,323
    
    
    
    872
    
    
    
    14,800Investment in subsidiaries and intercompany
    
    
    165,260
    
    
    
    (51,912
    )
    
    
    (113,055
    )
    
    
    (293
    )
    
    
    Other
    
    
    128
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    327Net cash (used in) provided by operating activities
    
    
    166,725
    
    
    
    (74,703
    )
    
    
    (90,770
    )
    
    
    
    
    
    
    1,252Investing activitiesAcquisition of property and equipment
    
    
    (98
    )
    
    
    (6,542
    )
    
    
    (5,968
    )
    
    
    
    
    
    
    (12,708
    )Payment of transaction costs in Transaction
    
    
    (1,520
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,520
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (10,944
    )
    
    
    
    
    
    
    
    
    
    
    (10,944
    )Proceeds from disposition of property and equipment
    
    
    50
    
    
    
    640
    
    
    
    1,429
    
    
    
    
    
    
    
    2,119Proceeds from (purchases of) debt securities, net
    
    
    (306
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (306
    )Purchases of equity securities and other investments
    
    
    (700
    )
    
    
    (2,943
    )
    
    
    (952
    )
    
    
    
    
    
    
    (4,595
    )Proceeds from sale of equity securities and other investments
    
    
    21
    
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    360Other
    
    
    
    
    
    
    
    
    
    
    (239
    )
    
    
    
    
    
    
    (239
    )Net cash
used in investing activities
    
    
    (2,553
    )
    
    
    (19,550
    )
    
    
    (5,730
    )
    
    
    
    
    
    
    (27,833
    )Financing activitiesDebt issuance costs paid
    
    
    (2,304
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,304
    )Principal payments on credit arrangements, net
    
    
    (150,775
    )
    
    
    (30
    )
    
    
    (4,179
    )
    
    
    
    
    
    
    (154,984
    )Intercompany with parent companies
    
    
    (488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )Net cash used in financing activities
    
    
    (153,567
    )
    
    
    (30
    )
    
    
    (4,179
    )
    
    
    
    
    
    
    (157,776
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    (9
    )
    
    
    (12,790
    )
    
    
    
    
    
    
    (12,799
    )Increase (decrease) in cash and cash equivalents
    
    
    10,605
    
    
    
    (94,292
    )
    
    
    (113,469
    )
    
    
    
    
    
    
    (197,156
    )Cash and cash equivalents at beginning of period
    
    
    17,581
    
    
    
    155,142
    
    
    
    362,957
    
    
    
    
    
    
    
    535,680Cash and cash equivalents at end of period
    
    $
    28,186
    
    
    $
    60,850
    
    
    $
    249,488
    
    
    $
    
    
    
    $
    338,524
 29




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended March 31, 2004 Quintiles
    
    
    
    
    
    
    SubsidiaryTransnational
    
    
    Subsidiary
    
    
    Non-Corp.
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    TotalOperating activities:Net (loss) income
    
    $
    (15,707
    )
    
    $
    (5,817
    )
    
    $
    (121
    )
    
    $
    5,938
    
    
    $
    (15,707
    )Income from discontinued operation
    
    
    
    
    
    
    (419
    )
    
    
    (1,442
    )
    
    
    
    
    
    
    (1,861
    )(Loss) income from continuing operation
    
    
    (15,707
    )
    
    
    (6,236
    )
    
    
    (1,563
    )
    
    
    5,938
    
    
    
    (17,568
    )Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    3,157
    
    
    
    15,594
    
    
    
    14,960
    
    
    
    
    
    
    
    33,711Amortization of debt issuance costs
    
    
    803
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    828Restructuring charge (payments) accrual, net
    
    
    (7
    )
    
    
    (1,117
    )
    
    
    (344
    )
    
    
    
    
    
    
    (1,468
    )(Gain) loss from sales and impairments of investments, net
    
    
    2,848
    
    
    
    (7,434
    )
    
    
    366
    
    
    
    
    
    
    
    (4,220
    )Loss on disposals of property and equipment, net
    
    
    
    
    
    
    221
    
    
    
    150
    
    
    
    
    
    
    
    371Provision for (benefit from) deferred income tax expense
    
    
    1,096
    
    
    
    (1,096
    )
    
    
    825
    
    
    
    
    
    
    
    825Gain from sale of certain assets
    
    
    (4,660
    )
    
    
    
    
    
    
    (663
    )
    
    
    
    
    
    
    (5,323
    )Change in accounts receivable, unbilled services and
unearned income
    
    
    809
    
    
    
    (37,903
    )
    
    
    (5,584
    )
    
    
    
    
    
    
    (42,678
    )Change in other operating assets and liabilities
    
    
    4,667
    
    
    
    (2,876
    )
    
    
    (10,274
    )
    
    
    
    
    
    
    (8,483
    )Investment in subsidiaries and intercompany
    
    
    52,883
    
    
    
    (65,035
    )
    
    
    18,090
    
    
    
    (5,938
    )
    
    
    Other
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Net cash (used in) provided by operating activities
    
    
    45,933
    
    
    
    (105,857
    )
    
    
    15,963
    
    
    
    
    
    
    
    (43,961
    )Investing activities:Acquisition of property and equipment
    
    
    (92
    )
    
    
    (4,686
    )
    
    
    (6,537
    )
    
    
    
    
    
    
    (11,315
    )Payment of transaction costs in Transaction
    
    
    (4,869
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,869
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    
    
    
    
    (252
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Proceeds from sale of certain assets
    
    
    
    
    
    
    
    
    
    
    9,277
    
    
    
    
    
    
    
    9,277Proceeds from disposition of property and equipment
    
    
    
    
    
    
    1,108
    
    
    
    984
    
    
    
    
    
    
    
    2,092(Purchases of) proceeds from debt securities, net
    
    
    (424
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (424
    )Purchases of equity securities and other investments
    
    
    (1,465
    )
    
    
    (2,337
    )
    
    
    (1
    )
    
    
    
    
    
    
    (3,803
    )Proceeds from sale of equity securities and other investments
    
    
    
    
    
    
    14,846
    
    
    
    
    
    
    
    
    
    
    
    14,846Net cash (used in) provided by investing activities
    
    
    (6,850
    )
    
    
    5,931
    
    
    
    3,471
    
    
    
    
    
    
    
    2,552Financing activities:Principal payments on credit arrangements, net
    
    
    (872
    )
    
    
    (134
    )
    
    
    (4,416
    )
    
    
    
    
    
    
    (5,422
    )Intercompany with parent companies
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    691Dividend from discontinued operation
    
    
    1,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,267Net cash provided by (used in) financing activities
    
    
    1,086
    
    
    
    (134
    )
    
    
    (4,416
    )
    
    
    
    
    
    
    (4,155
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    17
    
    
    
    (1,897
    )
    
    
    
    
    
    
    (1,880
    )(Decrease) increase in cash and cash equivalents
    
    
    40,169
    
    
    
    (100,043
    )
    
    
    13,121
    
    
    
    
    
    
    
    (46,753
    )Cash and cash equivalents at beginning of period
    
    
    (7,138
    )
    
    
    188,430
    
    
    
    192,330
    
    
    
    
    
    
    
    373,622Cash and cash equivalents at end of period
    
    $
    33,031
    
    
    $
    88,387
    
    
    $
    205,451
    
    
    $
    
    
    
    $
    326,869
 30




---



##### 



Quintiles Transnational Corp. and Subsidiaries 16. 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, sought to rescind the policies issued to the
Company based on an alleged misrepresentation by the Company on the policy application.
Alternatively, Chubb and Federal sought 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 during 2004 involving an Alzheimers study and, if one or more of
such claims is determined to be covered, Chubb and Federal requested an allocation of the defense
costs between the claims they contended were covered and non-covered claims. The Company filed an
answer with counterclaims against Federal and Chubb in response to their complaint. Additionally,
the Company amended its pleadings to add AON Risk Services (AON) as a counterclaim defendant, as
an alternative to its 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 Company signed a
settlement agreement with Federal and Chubb, which did not result in the Company making any
payments. The case between the Company and Federal and Chubb was dismissed on December 30, 2004.
The Company and AON also have agreed to a settlement in principle, which does not result in the
Company making any payments. On June 13, 2003, ENVOY Corporation (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 Corporation (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 United Kingdom 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
$103.3 million).On December 17, 2004, Novex filed an answer and counter-claim asserting breach of contract. On April
13, 31




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##### 



Quintiles Transnational Corp. and Subsidiaries 2005, the parties agreed to a
settlement in principle resulting in the Company making a payment to
ML, which has been fully reserved for as of March 31, 2005. On May 26, 2000, the Company completed the sale of its electronic data interchange unit, ENVOY, to
Healtheon/WebMD Corp., which subsequently changed its name to WebMD. Prior to the sale, ENVOY
transferred its informatics subsidiary, Synergy Health Care, Inc., to the Company. The Company
received $400 million in cash and 35 million shares of WebMD common stock in exchange for its
entire interest in ENVOY and a warrant to acquire 10 million shares of the Companys common stock
at $40 per share, exercisable for four years. The Company recorded an extraordinary gain on the
sale of $436.3 million, net of estimated taxes of $184.7 million. Because the original acquisition
of ENVOY qualified as a tax-free reorganization, the Companys tax basis in the acquisition was
allowed to be determined by substituting the tax basis of the previous shareholders of ENVOY.
However, when the Company sold ENVOY to WebMD during 2000, the tax basis of the previous
shareholders was not available to the Company since ENVOY had been a publicly traded corporation at
the time of the original acquisition. Therefore, the Company had to estimate its tax basis in
ENVOY by reviewing financial statements, income tax returns and other public documents which were
available to the Company at that time. In September 2001, the Company received the results of a
tax basis study completed by its external income tax advisors, which was prepared so that the
Company could prepare and file its 2000 United States Corporate income tax return. Using the tax
basis determined in that study, income taxes from the sale totaled approximately $42.7 million, or
approximately $142.0 million less than the estimate previously used to determine the extraordinary
gain on the sale. This resulted in an increase of $142.0 million in the extraordinary gain on the
sale of ENVOY. 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. 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. 32




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##### 



Quintiles Transnational Corp. and Subsidiaries 17. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) 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. In December 2003, the FASB published a revision
to FIN 46 (FIN 46R) to clarify some of the provisions of the interpretation and to defer the
effective dates of implementation for certain entities. The Company adopted these provisions of
FIN 46R, as required, on January 1, 2005. The Company evaluated its PharmaBio Development
investments and relationships, joint ventures, as well as certain interests and/or transactions
that it maintains with entities owned by various related parties in accordance with the provisions
in FIN 46R and related FASB staff positions. The Company determined that it was not appropriate to
consolidate these entities into the Companys financial statements. Therefore, the adoption of FIN
46R did not have a material effect on the Companys financial position or results of operations. In December 2004, FASB issued SFAS No. 123(R), Share-Based Payment, which requires that the cost
resulting from all share-based payments be recognized in the financial statements. In addition,
SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based
payment arrangements and requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees. The Company accounts for its
share-based payment transactions with employees in accordance with the provisions of SFAS No. 123.
The Company is evaluating the impact of adoption of SFAS No. 123(R) on January 1, 2006, would have
on its financial condition or results of operations. In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB
Opinion No. 29, which eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 indicates that a
nonmonetary exchange has commercial substance if the future cash flows are expected to change
significantly as a result of the exchange. SFAS No. 153 becomes effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect
the adoption of SFAS No. 153 to have a material impact on its financial condition or results of
operations due to its limited use of nonmonetary exchanges. 33




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 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, or the Securities Act, 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 ongoing 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 our
restructurings, our ability to maintain large customer contracts or to enter into 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, L.L.C., or 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 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 of the Bioglan business have been
reported separately as a discontinued operation. 34




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Quintiles Transnational Corp. and Subsidiaries Three Months Ended March 31, 2005 and 2004 Gross Revenues.Gross revenues for the first quarter of 2005 were $603.0 million versus $505.7
million for the first quarter of 2004. 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 March 312005
    
    
    2004Service revenues  external
    
    $
    578,755
    
    
    $
    485,847Less: reimbursed service costs
    
    
    110,685
    
    
    
    82,459Net service revenues  external
    
    
    468,070
    
    
    
    403,388Net service revenues  intersegment
    
    
    26,311
    
    
    
    6,283Net service revenues  combined
    
    
    494,381
    
    
    
    409,671Commercial rights and royalties
    
    
    26,244
    
    
    
    15,586Investments
    
    
    (1,958
    )
    
    
    4,220Eliminations: service revenues  intersegment
    
    
    (26,311
    )
    
    
    (6,283
    )Total net revenues
    
    $
    492,356
    
    
    $
    423,194Reimbursed service costs
    
    
    110,685
    
    
    
    82,459Gross revenues
    
    $
    603,041
    
    
    $
    505,653
  
    Service Revenues  External.Service revenues  external were $578.8 million
for the first quarter of 2005 compared to $485.8 million for the first quarter of 2004.
Service revenues  external less reimbursed service costs, or net service revenues -
external, for the first quarter of 2005 were $468.1 million, an increase of $64.7
million or 16.0% over net service revenues  external of $403.4 million for the first
quarter of 2004. Net service revenues  external for the first quarter of 2005 were
positively impacted by approximately $12.3 million due to the effect of the weakening
of the United States dollar relative to the euro, the British pound, the South African
rand and the Japanese yen. Net service revenues  external increased in the Asia
Pacific region $11.0 million or 14.3% to $88.4 million for the first quarter of 2005
from the first quarter of 2004 including a positive impact of approximately $3.5
million due to the effect of foreign currency fluctuations. Our Commercial Services
Group experienced strong growth in the Asia Pacific region. Net service revenues -
external increased $31.8 million or 17.8% to $209.8 million for the first quarter of
2005 from the first quarter of 2004 in the Europe and Africa region including a
positive impact of approximately $8.6 million due to the effect of foreign currency
fluctuations. We experienced growth from our clinical development services, or CDS,
and our early development and laboratory services, or EDLS, along with an improvement
in the business conditions for our Commercial Services Group in Europe. Net service
revenues  external increased $21.9 million or 14.8% to $169.9 million for the first
quarter of 2005 from the first quarter of 2004 in the Americas region, primarily from
our Product Development Group including growth from both our CDS and EDLS businesses. 35




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##### 



Quintiles Transnational Corp. and Subsidiaries  
    Net Service Revenues  Intersegment.Net service revenues  intersegment represents
the revenues from services provided by our service segments, primarily commercial
services, to our PharmaBio Development Group under risk-based arrangements in which we
provide services to customers in exchange for royalties. Net service revenues -
intersegment increased to $26.3 million for the first quarter of 2005 versus $6.3
million for the first quarter of 2004 as a result of the incremental services provided
under our Cymbalta contact and our February 2004 contract with a large
pharmaceutical customer.
    Net Service Revenues  Combined.Net service revenues  combined for the first
quarter of 2005 were $494.4 million versus $409.7 million for the first quarter of 2004
for reasons stated above.
    Commercial Rights and Royalties Revenues.Commercial rights and royalties revenues,
which include product revenues, royalties and commissions, for the first quarter of 2005
were $26.2 million, an increase of $10.7 million as compared to the first quarter 2004
commercial rights and royalties revenues of $15.6 million. Commercial rights and
royalties revenues were positively impacted by approximately $802,000 due to the effect
of foreign currency fluctuations related to the weakening of the United States dollar
relative to the euro. Commercial rights and royalties revenues were reduced by
approximately $4.6 million for the first quarter of 2005 for payments we made to our
customers versus $2.8 million for the first quarter of 2004. These payments are
considered incentives and are amortized against revenues over the service period of the
contract. The increase in commercial rights and royalties revenues is due to (1) our
contract for CymbaltaTM which contributed $9.8 million of revenues in the
first quarter of 2005; (2) our February 2004 contract with a large pharmaceutical
customer which contributed $1.6 million of revenues in the first quarter of 2005; (3) a
slight increase in the revenues under our contracts in Europe with two large
pharmaceutical customers to $10.4 million in the first quarter of 2005 as compared to
$10.0 million in the first quarter of 2004; (4) our contract with Cell Therapeutics,
Inc., or Cell Therapeutics, which contributed $899,000 in the first quarter of 2005; and
(5) an increase of approximately $592,000 in the revenues from miscellaneous contracts
and activities. These increases were partially offset by a decrease in revenues from
our contracts with Columbia Labs, Inc., or Columbia, to $512,000 in the first quarter of
2005 as compared to $3.2 million in the first quarter of 2004. Commercial rights and
royalties revenues for the first quarter of 2005 were attributable to the following: (1)
approximately 39.6% to our contracts with two large pharmaceutical customers in Europe,
(2) approximately 37.3% to our CymbaltaTM contract, (3) approximately 11.4%
related to miscellaneous contracts and activities, (4) approximately 6.2% to our
February 2004 with a large pharmaceutical customer, (5) approximately 3.4% related to
our contract with Cell Therapeutics and (6) approximately 2.0% to our contract with
Columbia.
    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 first quarter of 2005 were a loss of $2.0
million versus revenues of $4.2 million for the first quarter of 2004. Investment
revenues for the first quarter of 2005 included $605,000 of net gains on marketable
securities versus $4.4 million for the first quarter of 2004. 36




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Quintiles Transnational Corp. and Subsidiaries In addition, during the first quarter of 2005 and 2004, we recognized $2.6 million and
$154,000, 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 $436.6 million for the first quarter of 2005 versus
$356.6 million for the first quarter of 2004. Below is a summary of the costs of revenues (in
thousands): Three months ended March 31,2005
    
    
    2004Reimbursed service costs
    
    $
    110,685
    
    
    $
    82,459Service costs
    
    
    277,135
    
    
    
    227,054Commercial rights and royalties costs
    
    
    46,375
    
    
    
    20,465Depreciation and amortization
    
    
    28,749
    
    
    
    32,907Eliminations  intersegment costs
    
    
    (26,311
    )
    
    
    (6,283
    )$
    436,633
    
    
    $
    356,602
  
    Reimbursed Service Costs.Reimbursed service costs were $110.7 million and
$82.5 million for the first quarter of 2005 and 2004, respectively.
    Service Costs.Service costs, which include compensation and benefits for billable
employees, and certain other expenses directly related to service contracts, were
$277.1 million or 56.1% of net service revenues  combined versus $227.1 million or
55.4% of net service revenues  combined for the first quarter of 2005 and 2004,
respectively. Compensation and related expenses increased approximately $34.2 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
increased approximately $15.9 million. Service costs were negatively impacted by
approximately $6.4 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 $46.4 million for the first
quarter of 2005 versus $20.5 million for the first quarter of 2004. The increase in
commercial rights and royalties costs is primarily due to (1) an increase in costs
related to our Cymbalta contract of approximately $16.1 million to $18.1 million in
the first quarter of 2005 and (2) an increase in costs related to our February 2004
contract with a large pharmaceutical company of approximately $4.2 million to $5.0
million in the first quarter of 2005.
    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, decreased to $28.7 million for the first
quarter of 2005 versus $32.9 million for the first quarter of 2004. Amortization
expense decreased approximately $2.3 million as a result of a decrease 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 decreased approximately $1.8 million. 37




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Quintiles Transnational Corp. and Subsidiaries  
    Eliminations  Intersegment Costs.Eliminations represent the services provided by
our service segments, primarily commercial services, to our PharmaBio Development Group
under risk-based arrangements in which we provide services to customers in exchange for
royalties. Eliminations increased to $26.3 million for the first quarter of 2005
versus $6.3 million for the first quarter of 2004 primarily as a result of the
incremental services provided under our Cymbalta contract and our February 2004
contract with a large pharmaceutical customer. Selling, general and administrative expenses.Selling, 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 $154.5 million
or 31.4% of total net revenues for the first quarter of 2005 versus $155.7 million or 36.8% of
total net revenues for the first quarter of 2004. We believe this decrease as a percentage of net
revenues shows that we are beginning to realize some of the benefits from our 2004 and 2005
restructurings. Selling, general and administrative expenses were negatively impacted by
approximately $3.8 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 $17.4 million for the first quarter of
2005 versus $14.6 million for the first quarter of 2004. Interest income increased approximately
$1.3 million to $3.6 million for the first quarter of 2005 primarily as a result of an increase in
the average balance of investable cash. Interest expense increased approximately $4.1 million to
$21.0 million for the first quarter of 2005. Included in interest expense for the first quarter of
2005 is approximately $3.2 million of prior debt issuance costs expensed as a result of the $150.0
million principal payment on our Senior Term B Loan made on March 31, 2005. Other income was $124,000 for the first quarter of 2005 versus $3.2 million for the first quarter
of 2004. Included in the first quarter of 2005 and 2004 was approximately $107,000 and $2.0
million, respectively, in foreign currency losses. The first quarter of 2004 included
approximately $5.1 million of net gains on the sale of assets, primarily certain assets of our
reference laboratory in South Africa. During the first quarter of 2005, our Board of Directors approved the second and third phases of
our review of our current operating and future strategic direction.
In connection with phases one
and two of this review, we recognized $9.4 million of restructuring charges during the first
quarter of 2005. The restructuring charges included $5.9 million for termination benefits to
eliminate approximately 169 positions globally, $3.1 million of exit costs and $366,000 of non-cash
charges for asset write-offs. We anticipate incurring additional restructuring charges for the
first three phases of our review totaling approximately $28.8 million during the remainder of 2005
and the first quarter of 2006. The additional charges are expected to consist of cash expenditures
of $21.3 million for termination benefits to eliminate approximately 439 positions globally and
$7.5 million of exit costs. Although we currently do not believe an impairment of our long-lived
assets has been indicated, we may enter into strategic alternatives which may cause us to recognize
a loss on certain assets. 38




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Quintiles Transnational Corp. and Subsidiaries During the first quarter of 2005, we recognized a $2.7 million reduction in transaction expenses as a
result of a change in the estimated change in control costs associated with our September 2003
transaction with Pharma Services Holding, Inc. Loss before income taxes was $12.4 million for the first quarter of 2005 versus $18.0 million for
the first quarter of 2004. We recognized an overall
income tax benefit of $33.0 million and $725,000 for the first quarter of
2005 and 2004, respectively. In the first quarter of 2005, our chief executive officer approved a domestic reinvestment plan to
repatriate $117.5 million, which has since been ratified by our Board of Directors, in
extraordinary dividends as defined in the American Jobs Creation Act of 2004, or the Jobs Act,
from certain countries. We have determined that of the $117.5 million to be repatriated, $98.8
million is attributable to pre-2005 earnings and $18.7 million relates to 2005 estimated earnings.
Our overall income tax benefit in the quarter ended March 31, 2005 was positively impacted by a
$31.5 million income tax benefit recognized related to the $98.8 million of pre-2005 earnings and
profits. The $31.5 million income tax benefit resulted from the lower income tax applicable to the
repatriation of pre-2005 foreign earnings because those earnings are not considered to be
indefinitely reinvested outside the United States and therefore in addition to the local income
tax, deferred income tax liabilities for United States income tax have historically been provided
for such earnings at 38.5%. The income tax rate available under the Jobs Act is approximately
5.25% and the $31.5 million income tax benefit represents the reduction of the deferred income tax
liabilities on the pre-2005 earnings to 5.25%. We have calculated our first quarter income tax benefit pursuant to FASB Interpretation No.18,
Accounting for Income Taxes in Interim Periods (An Interpretation of APB No. 28), using actual
year to date income (loss) as it more accurately represents the interim income tax position due to
the difficulty in determining a reliable estimate of the annual effective income tax rate because
the fact that a small change in estimated income for the year could have a large impact on the
annual effective income tax rate. Consistent with 2004, the income tax rate for 2005 reflects
incremental United States income tax provided on our foreign earnings because those earnings are
not considered to be indefinitely reinvested outside the United States. The 5.25% income tax rate
is only available for the qualified dividends being repatriated from the identified countries from
which we decided to repatriate the funds. Excluding the $31.5 million income tax benefit, our year
to date effective income tax rate is 12% which includes incremental United States income tax
expense of approximately $388,000 on year to date 2005 foreign earnings from the countries from
which we decided to repatriate the foreign earnings of approximately $6 million taxed at 5.25%
rather than 38.5%. During the remainder of 2005, the remaining $12.7 million of estimated 2005
foreign earnings being repatriated will also be taxed for United States income tax purposes at
5.25% as opposed to 38.5%, similar to the $6 million for the first quarter of 2005. 39




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For all other foreign earnings, incremental United States income tax will continue to be provided
at a rate of 38.5%, and not at the lower United States income tax rate of approximately 5.25%
available pursuant to the Jobs Act, because we have not currently adopted another dividend
reinvestment plan for those earnings. We cannot reasonably estimate the range of income tax
effects of a potential future repatriation of foreign earnings. We are continuing our assessment
of the Jobs Act, and any future decisions could impact our income tax rate. Since we conduct
operations on a global basis, shifts in income between taxing jurisdictions may also cause its
effective income tax rate to vary from period to period. During the first quarter of 2005 and 2004, we recognized losses of $199,000 and $68,000
respectively, of (losses) earnings from equity in unconsolidated affiliates, which represents our
pro rata share of the net (loss) earnings of unconsolidated affiliates, primarily Verispan. During the first quarter of 2005 and 2004, our earnings were reduced by $1.1 million and $187,000,
respectively, for minority interests in certain of our consolidated subsidiaries. The increase in
the reductions is a result of the transactions during the second quarter of 2004 with Mitsui & Co.,
Ltd., or Mitsui, in which our interest in our Japanese subsidiary decreased to 80%. Income from continuing operations was $19.3 million in the first quarter of 2005 versus a loss from
continuing operations of $17.6 million in the first quarter of 2004. Income from our discontinued operation, Bioglan, which was sold in August 2004, was $1.9 million in
the first quarter of 2004. Net income was $19.3 million for the first quarter of 2005 versus net loss of $15.7 million for the
first quarter of 2004. 40




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Quintiles Transnational Corp. and Subsidiaries Analysis by Segment: The following table summarizes the operating activities for our reportable segments for the first
quarter of 2005 and 2004, 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 reflect Bioglan as a discontinued
operation. Contribution is defined as gross revenues less costs of revenues, excluding depreciation and amortization expense, except the
amortization of commercial rights. We do not include reimbursed service costs, selling, 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 Net2005
    
    
    2004
    
    
    Growth %
    
    
    2005
    
    
    Revenues
    
    
    2004
    
    
    RevenuesProduct Development
    
    $
    310.3
    
    
    $
    262.7
    
    
    
    18.1
    %
    
    $
    149.6
    
    
    
    48.2
    %
    
    $
    128.1
    
    
    
    48.8
    %Commercial Services
    
    
    184.1
    
    
    
    147.0
    
    
    
    25.3
    
    
    
    67.6
    
    
    
    36.7
    
    
    
    54.6
    
    
    
    37.1PharmaBio Development
    
    
    24.3
    
    
    
    19.8
    
    
    
    22.6
    
    
    
    (22.1
    )
    
    
    (91.0
    )
    
    
    (.7
    )
    
    
    (3.3
    )Eliminations
    
    
    (26.3
    )
    
    
    (6.3
    )
    
    
    (318.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    492.4
    
    
    $
    423.2
    
    
    
    16.3
    %
    
    $
    195.2
    
    
    
    39.6
    %
    
    $
    182.0
    
    
    
    43.0
    %
 Product Development Group.Net service revenues for the Product Development Group were $310.3
million for the first quarter of 2005 compared to $262.7 million for the first quarter of 2004. We
experienced an increase in revenues from both our CDS and EDLS businesses. Net service revenues
for the first quarter of 2005 were positively impacted by approximately $8.2 million due to the
effect of foreign currency fluctuations. Net service revenues increased in the Asia Pacific region
$2.2 million or 5.5% to $42.9 million primarily as a result of a positive impact of approximately
$2.0 million due to the effect of foreign currency fluctuations. The net service revenues in the
Europe and Africa region increased $22.3 million or 19.6% to $135.6 million primarily as a result
of an increase in CDS and EDLS revenues and a positive impact of approximately $6.0 million due to
the effect of foreign currency fluctuations. Net service revenues increased $23.1 million or 21.2%
to $131.8 million in the Americas region which experienced an increase in both CDS and EDLS
revenues. Contribution for the Product Development Group was $149.6 million for the first quarter of 2005
compared to $128.1 million for the first quarter of 2004. As a percentage of net service revenues,
contribution margin was 48.2% for the first quarter of 2005 compared to 48.8% for the first quarter
of 2004. The contribution margin was negatively impacted by the timing of project start ups in the
CDS business. Commercial Services Group.Net service revenues for the Commercial Services Group were $184.1
million for the first quarter of 2005 compared to $147.0 million for the first quarter of 2004.
Net service revenues for the first quarter of 2005 were positively impacted by approximately $4.4
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 $8.8 million or 24.0% to
$45.5 million including a positive impact of approximately $1.5 million due to the effect of
foreign currency fluctuations. Net service 41




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##### 



Quintiles Transnational Corp. and Subsidiaries revenues increased approximately $12.4 million or 18.6%
to $79.1 million in the Europe and Africa region, including a positive impact of approximately $2.9
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 $15.9 million or 36.4% to $59.5
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 and our February 2004 contract with a large pharmaceutical customer. Contribution for the Commercial Services Group was $67.6 million for the first quarter of 2005
compared to $54.6 million for the first quarter of 2004. As a percentage of net service revenues,
contribution margin was 36.7% for the first quarter of 2005 compared to 37.1% for the first quarter
of 2004. PharmaBio Development Group.Net revenues for the PharmaBio Development Group increased
approximately $4.5 million during the first quarter of 2005 as compared to the first quarter of
2004 due to a $10.7 million increase in commercial rights and royalties revenues which was
partially offset by a decrease of approximately $6.2 million in investment revenues. Commercial
rights and royalties costs increased by approximately $25.9 million during the same period
primarily as a result of increased costs associated with our contract for CymbaltaTM and
our February 2004 contract with a large pharmaceutical customer, as well as an increase in
miscellaneous costs. The contribution for the PharmaBio Development Group decreased by $21.4 million in the first
quarter of 2005 compared to the first quarter of 2004. The contribution related to commercial
rights and royalties agreements (net of related costs) in the first quarter of 2005 decreased the
overall contribution of this group by approximately $15.3 million when compared to the first
quarter of 2004. The decrease in the contribution provided by the commercial rights and royalties
agreements is a result of an increase in related costs of approximately $25.9 million partially
offset by a $10.7 million increase in revenues, primarily due to our Cymbalta contract. The
contribution from investment revenues decreased by approximately $6.2 million for the first quarter
of 2005 to a loss of $2.0 million versus income of $4.2 million for the first quarter of 2004 as a
direct result of the decrease in the investment revenues. EBITDA.Due to the significant increase in non-cash expenses resulting from the Pharma Services
Transaction in September 2003, as well as the resulting significant change in our debt and income
tax structures, we believe that earnings before net interest expense, income tax benefit and
depreciation and amortization, or EBITDA, provides investors with an additional important
perspective of the underlying performance of our business. Our consolidated EBITDA was $33.2
million and $31.9 million for the three months ended March 31, 2005 and 2004, respectively, as
shown in the below table. The following table reconciles our net income to EBITDA (dollars in
millions). 42




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##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended
    
    
    Three months endedMarch 31, 2005
    
    
    March 31, 2004Consolidated:Net revenues
    
    $
    492.4
    
    
    $
    423.2Reimbursed service costs
    
    
    110.7
    
    
    
    82.5Gross revenues
    
    
    603.0
    
    
    
    505.7Costs of revenues
    
    
    (436.6
    )
    
    
    (356.6
    )Selling, general and administrative expenses
    
    
    (154.5
    )
    
    
    (155.7
    )Other (expense) income, net
    
    
    (0.1
    )
    
    
    3.2Restructuring and impairments
    
    
    (9.4
    )
    
    
    Transaction expenses, net
    
    
    2.7
    
    
    
    Depreciation and amortization
    
    
    29.4
    
    
    
    33.7Equity in (losses) earnings of unconsolidated affiliates
    
    
    (0.2
    )
    
    
    (0.1
    )Minority interests
    
    
    (1.1
    )
    
    
    (0.2
    )Income from discontinued operation
    
    
    
    
    
    
    1.9EBITDA
    
    $
    33.2
    
    
    $
    31.9Depreciation and amortization
    
    
    (29.4
    )
    
    
    (33.7
    )Interest expense, net
    
    
    (17.4
    )
    
    
    (14.6
    )Income tax benefit
    
    
    33.0
    
    
    
    0.7Net income (loss)
    
    $
    19.3
    
    
    $
    (15.7
    )
 The primary difference between contribution and EBITDA is selling, general and administrative
expenses which have not been fully allocated to each of our segments historically. Contribution
continues to be the primary measure we use to assess segment profitability. As the costs of
revenues for our PharmaBio Development Group already include its infrastructure costs, the
contribution for this group essentially equates to its EBITDA of
($21.4) million which is comprised of its ($22.1) million
of contribution adding back $677,000 of depreciation and amortization. The
contribution for our PharmaBio Development Group
decreased approximately $21.4 million to ($22.1 million) for the first quarter of 2005 as compared
to $659,000 for the first quarter of 2004. Our selling, general and administrative expenses are
attributable to our service segments, namely the Product Development and Commercial Services
Groups. EBITDA is a non-GAAP financial measure and should not be used in isolation from, or as a substitute
for, net income (loss) prepared in accordance with GAAP or as a measure of profitability.
Additionally, our computation of EBITDA may not be comparable to other similarly titled measures
computed by other companies, because all companies do not calculate EBITDA in the same fashion.
Our computation of EBITDA may also differ in some respects from the calculations of EBITDA
contained in the credit agreement governing our senior secured credit facility and the indenture
governing our senior subordinated notes. EBITDA does not include interest expense, depreciation and amortization and income taxes. Because
we have borrowed money in order to finance our operations, we use capital assets in our business
and the payment of income taxes is a necessary element of our operations, any measure that excludes
these items has material limitations. 43




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##### 



Quintiles Transnational Corp. and Subsidiaries Liquidity and Capital Resources Cash and cash equivalents were $338.5 million at March 31, 2005 as compared to $535.7 million at
December 31, 2004. Cash provided by operations was $1.3 million for the three months ended March 31, 2005 versus cash
used in operations of $44.0 million for the three months ended March 31, 2004. Cash used in investing activities was $27.8 million for the three months ended March 31, 2005
versus cash provided by investing activities of $2.6 million for the three months ended March 31,
2004. Investing activities primarily included the purchases and sales of equity securities and
other investments, capital asset purchases, and the acquisition of commercial rights. Investing
activities included the proceeds from the sale of certain assets of $9.3 million during the three
months ended March 31, 2004. Capital asset purchases required an outlay of cash of $12.7 million for the three months ended
March 31, 2005 compared to an outlay of $11.3 million for the same period in 2004. Cash used for the acquisition of commercial rights and royalties related assets was $10.9 million
for the three months ended March 31, 2005 as compared to an outlay of $3.0 million for the
comparable period in 2004. The three months ended March 31, 2005 reflected payments of $10.0
million pursuant to our contract with Eli Lilly and Company for CymbaltaTM and $944,000
pursuant to a contract with Yamanouchi Pharma Limited. Purchases of equity securities and other investments required an outlay of cash of $4.6 million for
the three months ended March 31, 2005 compared to an outlay of $3.8 million for the same period in
2004. Proceeds from the sale of equity securities and other investments were $360,000 during the
three months ended March 31, 2005 as compared to $14.8 million for the same period in 2004. The following table is a summary of our net service receivables outstanding (dollars in thousands): March 31, 2005
    
    
    December 31, 2004Trade service accounts receivable, net
    
    $
    156,134
    
    
    $
    151,981Unbilled services
    
    
    168,134
    
    
    
    138,347Unearned income
    
    
    (207,136
    )
    
    
    (202,148
    )Net service receivables outstanding
    
    $
    117,132
    
    
    $
    88,180Number of days of service revenues
outstanding
    
    
    18
    
    
    
    14
 Investments in debt securities were $12.1 million at March 31, 2005 and December 31, 2004.
Our investments in debt securities consist primarily of state and municipal securities. Investments in marketable equity securities decreased $1.1 million to $23.3 million at March 31,
2005 as compared to $24.4 million at December 31, 2004 primarily as a result of sales of equity
securities. 44




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##### 



Quintiles Transnational Corp. and Subsidiaries Investments in non-marketable equity securities and loans at March 31, 2005 were $52.9 million, as
compared to $56.4 million at December 31, 2004. Investments in unconsolidated affiliates, primarily Verispan, were $120.6 million at March 31, 2005
as compared to $121.0 million at December 31, 2004. Cash used in financing activities was $157.8 million for the first three months of 2005 versus $3.5
million for the first three months of 2004. In March 2005, we amended the agreement governing our senior secured credit facility. The
amendment (1) decreased the interest rate under the Term B Loan facility by 2.50%; (2) lessened the
Interest Expense Coverage Ratio and Total Leverage Ratio requirements for selected future periods;
(3) adjusted the Senior Leverage Ratio from 2.0 to 1.75 through December 31, 2005, which could
further limit our ability to incur additional Senior Indebtedness during 2005; (4) increased our
capacity for additional Asset Sales by $150.0 million; (5) increased our capacity to make certain
investments outside the United States by $100.0 million; (6) increased our capacity to make
Permitted PharmaBio Investments by $100.0 million; (7) permitted us to include certain
restructuring charges in the calculation of our Consolidated EBITDA; (8) permitted us to offset our
Consolidated Indebtedness by an additional $50.0 million of available cash; and (9) made other
clarifying or correcting changes. On March 31, 2005, we paid down $150.0 million of the
approximately $306.1 million outstanding under Term Loan B facility and paid approximately $2.3
million to the administrative agent and lenders in connection with the amendment. Capitalized
terms included in this paragraph have the meanings defined in the agreement governing our senior
secured credit 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. As of March 31, 2005, we were
in compliance with these covenants. 45




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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
March 31, 2005 (dollar in thousands): April 1, 2005throughDecember 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalLong-term debt
    
    $
    55,019
    
    
    $
    57,584
    
    
    $
    56,540
    
    
    $
    56,061
    
    
    $
    194,823
    
    
    $
    45,000
    
    
    $
    577,660
    
    
    $
    1,042,687Obligations held under
capital leases
    
    
    11,734
    
    
    
    14,158
    
    
    
    1,525
    
    
    
    695
    
    
    
    416
    
    
    
    191
    
    
    
    42
    
    
    
    28,761Operating leases
    
    
    48,619
    
    
    
    50,120
    
    
    
    33,170
    
    
    
    20,103
    
    
    
    11,289
    
    
    
    5,402
    
    
    
    37,001
    
    
    
    205,704Service Agreement
    
    
    19,903
    
    
    
    22,582
    
    
    
    20,877
    
    
    
    15,658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,020Management fee agreement
    
    
    2,813
    
    
    
    3,750
    
    
    
    3,750
    
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,063PharmaBio funding
commitments in various
commercial rights and
royalties:Service commitments
    
    
    96,469
    
    
    
    104,967
    
    
    
    98,423
    
    
    
    88,942
    
    
    
    67,448
    
    
    
    
    
    
    
    
    
    
    
    456,249Milestone payments
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000PharmaBio funding
commitments to purchase
non-marketable equity
securities and loans:Venture capital funds
    
    
    7,275
    
    
    
    4,214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,489Equity investments
    
    
    1,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,023Convertible loans
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Total
    
    $
    252,874
    
    
    $
    257,375
    
    
    $
    214,285
    
    
    $
    185,209
    
    
    $
    273,976
    
    
    $
    50,593
    
    
    $
    614,703
    
    
    $
    1,849,015
 We also have additional future PharmaBio funding commitments that are contingent upon
satisfaction of certain milestones by the third party such as receiving approval from the United
States Food and Drug Administration, or FDA, 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 $4-16 million per year over the next three years,
subject to certain limitations and varying time periods. In May 2005, we provided notice that we will terminate our service agreement with a third party
vendor to provide information technology infrastructure services at certain sites in the United
States and Europe. The termination will be effective in November 2005, and we will expect to pay
termination penalties, primarily in the fourth quarter of 2005. Our annual commitment under this
service agreement was approximately $16.0 million per year and is included in the table above as a
service agreement at March 31, 2005. Shareholders equity at March 31, 2005 was $569.8 million versus $568.1 million at December 31,
2004. 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 will be sufficient to meet our foreseeable cash needs in
connection with our operations and debt repayment obligations. We regularly evaluate our debt
arrangements, as well as market conditions, and we actively explore opportunities to modify our
existing debt arrangements or pursue additional debt financing arrangements that could result in
the issuance of new debt securities by us or our affiliates in the near future or at a later time.
We may use our existing cash, cash generated from operations or dispositions of assets or business
and/or proceeds from any new financing arrangements to pay off or 46




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##### 



Quintiles Transnational Corp. and Subsidiaries reduce some of our outstanding obligations or to pay dividends to our parent which could be used to
repurchase equity securities or for other purposes. As part of our ongoing business strategy, we
also are continually evaluating new acquisition and expansion possibilities, as well as potential
dispositions of assets or businesses, as appropriate, including dispositions that may cause us to
recognize a loss on certain assets. Should we elect to pursue acquisition or expansion
opportunities, we may seek to obtain debt or equity financing to facilitate those activities. Our
ability to enter into any of these contemplated or potential transactions and our use of cash or
proceeds is limited to varying degrees by the terms and restrictions contained in the credit
agreement governing our senior secured credit facility, our indenture and the indenture governing
the senior discount notes issued by Pharma Services Intermediate Holding Corp., or Intermediate
Holding. We cannot assure you that we will be able to complete any such alternative financing
arrangements or other transactions or that the terms of any financing transactions would be more
favorable to us than our existing obligations. 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 March 31, 2005, we had outstanding debt of approximately $639.4 million. Of the total debt,
approximately $189.4 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; 47




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Quintiles Transnational Corp. and Subsidiaries   
    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. 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 senior subordinated 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 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 48




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##### 



Quintiles Transnational Corp. and Subsidiaries 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. We are subject to additional risks and restrictions as a result of Intermediate Holdings issuance
of discount notes. Intermediate Holding has outstanding senior discount notes with an aggregate principal amount at
maturity of $219.0 million 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 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 increase. To the extent new debt is added to our
current debt levels, our 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 arrangements, 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. 49




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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 our Japanese subsidiary or to require us to buy out Mitsuis interest. As part of the terms of its investment in our Japanese subsidiary Quintiles Transnational Japan
K.K., or 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 QJPN 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 has
continued into the 2000s and we have 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 may be negatively impacted
by mergers and other factors in the pharmaceutical industry, which appear to slow decision making
by our customers and delay certain trials. We believe our commercialization services may be
affected by reductions in new product launches and increases in the number of drugs losing patent
protection. In addition, United States federal and state legislatures and numerous foreign
governments are considering various types of healthcare reforms and may undertake 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. 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. 50




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##### 



Quintiles Transnational Corp. and Subsidiaries Operation of our information systems and evolution of the technology platform for our services pose
risks to our business. Due to the global nature of our business and our reliance on information systems to provide our
services, we intend to increase our use of Web-enabled and other integrated information systems in
delivering our services. We are and will be exposed to the risks inherent in the development,
integration and ongoing operation of our evolving information systems. These risks include:  
    invasion, disruption, impairment or failure of data centers, telecommunications
facilities, or other key infrastructure platforms,
    failure or malfunction of or attacks on critical application systems or the hardware
they run on, or
    excessive costs, excessive delays or other deficiencies in systems development and
deployment. In addition, 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 to provide systems development and integration services to develop or provide for
us under license 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, our customer delivery may be impaired and 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 using
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. In addition, we recently
terminated our contract with a third party vendor to provide IT services at certain sites in the
United States and Europe so that we could take over those services internally. We expect that we
will need to incur additional expenditures initially as we ramp up our internal capabilities to
effect the transition. Also, our IT-related expenditures are likely to negatively impact our
profitability, at least until our IT-enabled processes and services become operational. We cannot
assure you that any improvements in profitability resulting from our new capabilities will be
sufficient to offset our investments. Our results could be affected negatively if our competitors
are able to execute similar programs before we can launch ours 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. Verispan could encounter certain other difficulties, including: 51




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Quintiles Transnational Corp. and Subsidiaries  
    its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to
support its informatics products;  
    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; and  
    the risk that industry regulation may restrict Verispans ability to analyze and disseminate pharmaceutical and
healthcare data. 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. Investments in our customers business or products and our related 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 arrangements with
customers in which we take on some of the risk of the potential success or failure of the
customers business or products. These arrangements 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 an equity share in the business and a
percentage of 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 52




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Quintiles Transnational Corp. and Subsidiaries 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 arrangement. 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. As a result, we could
lose the value of our investments in our customers business or products. The potential negative
effect to our financial performance could depend on the nature and timing of these arrangements and
the length of time before it becomes apparent that the business or product will not achieve
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 cost with respect to these arrangements. An additional
negative effect of investments in our customers business or products could be that we are not
awarded projects by other customers who believe we are in competition with them because of the
investments. 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. These product rights subject 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 additional 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. Our plans to market and sell pharmaceutical products also subject us to risks associated with
participating in a business in which we have limited experience. If we are unable to operate this
business as we expect, the financial results from this 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 pharmaceutical product 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. 53




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Quintiles Transnational Corp. and Subsidiaries If we lose the services of key personnel, our business could be adversely affected. Our success substantially depends on the performance, contributions and expertise of our senior
management team. 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 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 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. 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 has been
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 54




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Quintiles Transnational Corp. and Subsidiaries 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. 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, Europe and
Japan, highly regulate the drug development and approval process. A large part of our business
involves helping pharmaceutical and biotechnology companies through the regulatory drug approval
process. Any alteration of or relaxation in regulatory approval standards could eliminate or
reduce the need for our services, and, as a result, our business could be materially adversely
affected. Actions by government regulators or customers to limit the scope of prescription or withdraw
approved products from the market could result in a loss of revenue. Governments have the authority, after approving a product, to limit its scope of prescription or
withdraw it from the market based on safety concerns. Similarly, customers may act to voluntarily
limit the scope of prescription of products or withdraw them from the market. If we are providing
services to customers for products that are limited or withdrawn, we could suffer a loss of revenue
with negative impact to our financial results. 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 have an adverse impact on 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 55




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Quintiles Transnational Corp. and Subsidiaries participants in connection with a particular clinical trial, the data collected from that trial
could be compromised, and we could be required to repeat 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, 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 have often 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 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 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
pharmaceutical companies with whom we contract or the study participants. Similar risks apply to
our product development services relating to medical devices. Included in the services we provide are technology systems which are proprietary or licensed to us,
such as our Interactive Voice Response System, or IVRS, which, among other things, enables
randomization of participants in a given clinical trial to different treatment arms and regulates
the supply of investigational medicinal product, all by means of a touch tone telephone system.
Malfunction of these systems could impair our customer delivery or harm our business. For example,
if IVRS malfunctions and, as a result, clinical trial participants are incorrectly randomized or
supplied with an incorrect medicinal product during the course of the clinical trial, then any such
event would create a risk of liability to us from the pharmaceutical companies with whom we
contract or participants in the clinical trial concerned. 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. 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 56




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Quintiles Transnational Corp. and Subsidiaries 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, resulting in, for example, clinical
trial supplies being incorrectly labeled, packaged, counted or distributed with potential
consequences such as participants in the clinical trial receiving the incorrect medication or the
incorrect dose of the medication concerned. These eventualities and others potentially arising
from such errors could expose us to liability with both the pharmaceutical companies with whom we
contract and to clinical trial participants. In addition, our clinical trial supplies facilities
in the United States are subject to regulation, and potential inspection by both the FDA and the
United States Drug Enforcement Administration, or 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 risks
of this kind, it is possible we could incur financial losses, 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. 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 United States 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 United States 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. 57




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Quintiles Transnational Corp. and Subsidiaries 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. At March
31, 2005, we had 19 open foreign exchange forward contracts relating to service contracts totaling
approximately $10.0 million. Despite these efforts, we may still experience fluctuations in
financial results from our operations outside the United States, and we cannot assure you that we
will be able to favorably reduce our currency transaction risk associated with our service
contracts. We face other risks in connection with our international operations. We have significant operations in foreign countries which may require complex arrangements to
deliver services on global contracts for our customers. Additionally, we have moved significant
operations from the United States and Europe to locations remote from our most developed business
centers. As a result, we are subject to heightened risks inherent in conducting business
internationally, including the following:  
    foreign countries could enact legislation or impose regulations or other restrictions
which have an adverse effect on our ability to conduct business in that country;
    the regulatory or judicial authorities of foreign countries may not enforce legal rights
and recognize business procedures in a manner to which we are accustomed or would
reasonably expect;
    political changes and economic crises may lead to changes in the business environment in
which we operate; and
    natural disasters or international conflict, including terrorist acts, could interrupt
our services, endangering our personnel, causing project delays or loss of study material
or results, with a significant negative impact on 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 certain types of individually identifiable health information,
or 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 United States
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 58




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Quintiles Transnational Corp. and Subsidiaries 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 or therapeutic concentration. Although we did not have any one customer that accounted for 10% of net revenues for the three
months ended March 31, 2005, if any large customer decreases or terminates its relationship with
us, our business, results of operations or financial condition could be materially adversely
affected. For the quarter ended March 31, 2005, we had one customer who represented almost 10% of
net revenues. Additionally, conducting multiple clinical trials for different sponsors in a single therapeutic
class involving drugs with the same or similar chemical action may adversely affect our business if
some or all of the trials are canceled because of new scientific information or regulatory
judgments that affect the drugs as a class. Similarly, marketing and selling products for
different sponsors with similar drug action subjects us to risk if new scientific information or
regulatory judgment prejudices the products as a class leading to compelled or voluntary
prescription limitations or withdrawal of some or all of the products from the market. 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 draft
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 July 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. 59




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Quintiles Transnational Corp. and Subsidiaries Compliance with changing regulation of corporate governance and public disclosure may result in
additional risks and expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating uncertainty for
companies such as ours. These laws, regulations and standards are subject to varying
interpretations in many cases, and as a result, their application in practice may evolve over time
as new guidance is provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. We are committed to maintaining high standards of corporate
governance and public disclosure. As a result, our efforts to comply with evolving laws,
regulations and standards have resulted in, and are likely to continue to result in, increased
selling, general and administrative expenses and a diversion of management time and attention. In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related regulations regarding our required assessment of our internal controls over financial
reporting and our external auditors audit of that assessment has required the commitment of
significant financial and managerial resources. We expect these efforts to require the continued
commitment of significant resources. Further, our Board members, chief executive officer, chief
financial officer and other executive officers could face an increased risk of personal liability
in connection with the performance of their duties. As a result, we may have difficulty attracting
and retaining qualified Board members and executive officers, which could harm our business. In
addition, it may become more difficult and more expensive for us to obtain director and officer
liability insurance. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk We did not have any material changes in market risk from December 31, 2004. 
 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 are effective in that they 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. As previously
discussed in our Annual Report on Form 10-K, we conducted additional training for select accounting
personnel with respect to the accounting for restructuring and depreciation expenses and
capitalized interest during the first quarter of 2005. 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 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. 60




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Quintiles Transnational Corp. and Subsidiaries 
 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,
sought to rescind the policies issued to us based on an alleged misrepresentation by us on our
policy application. Alternatively, Chubb and Federal sought 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 during 2004 involving an Alzheimers study and, if one
or more of such claims was determined to be covered, Chubb and Federal requested an allocation of
the defense costs between the claims they contended were covered and non-covered claims. We filed
an answer with counterclaims against Federal and Chubb in response to their complaint.
Additionally, we 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. We signed a settlement
agreement with Federal and Chubb, which did not result in us making any payments. The case against
us by Federal and Chubb was dismissed on December 30, 2004. We have also agreed to a settlement in
principle with AON, 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. 61




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Quintiles Transnational Corp. and Subsidiaries On June 28, 2004, ML Laboratories PLC, or 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 United Kingdom 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 $103.3
million). On December 17, 2004, Novex filed an answer and counter-claim asserting breach of
contract. On April 13, 2005, we agreed to a settlement in
principle with ML resulting in us
making a payment to ML, which has been fully reserved for as of March 31, 2005. On May 26, 2000, we completed the sale of our electronic data interchange unit, ENVOY, to
Healtheon/WebMD Corp., which subsequently changed its name to WebMD. Prior to the sale, ENVOY
transferred its informatics subsidiary, Synergy Health Care, Inc., to us. We received $400 million
in cash and 35 million shares of WebMD common stock in exchange for our entire interest in ENVOY
and a warrant to acquire 10 million shares of our common stock at $40 per share, exercisable for
four years. We recorded an extraordinary gain on the sale of $436.3 million, net of estimated
taxes of $184.7 million. Because the original acquisition of ENVOY qualified as a tax-free
reorganization, our tax basis in the acquisition was allowed to be determined by substituting the
tax basis of the previous shareholders of ENVOY. However, when we sold ENVOY to WebMD during 2000,
the tax basis of the previous shareholders was not available to us since ENVOY had been a publicly
traded corporation at the time of the original acquisition. Therefore, we had to estimate our tax
basis in ENVOY by reviewing financial statements, income tax returns and other public documents
which were available to us at that time. In September 2001, we received the results of a tax basis
study completed by our external income tax advisors, which was prepared so that we could prepare
and file our 2000 United States Corporate income tax return. Using the tax basis determined in
that study, income taxes from the sale totaled approximately $42.7 million, or approximately $142.0
million less than the estimate previously used to determine the extraordinary gain on the sale.
This resulted in an increase of $142.0 million in the extraordinary gain on the sale of ENVOY. In
January 2004, we received a communication from the Internal Revenue Service 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. The proposed increase relates to the Internal Revenue Service
challenging our method for determining the basis we applied to the sale of ENVOY. We are
contesting the proposed increase and are presently in the appeals process with the Internal Revenue
Service. 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. 62




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Quintiles Transnational Corp. and Subsidiaries 
 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 
 Item 6. Exhibits Exhibit No.
    
    Description10.01
    
    Amendment No. 2, dated March 31, 2005, to Credit Agreement, dated September
25, 2003, among Quintiles Transnational Corp., the Lenders referred to therein and
Citicorp North America, Inc., as Administrative Agent (incorporated herein by reference
to Exhibit 10.01 to our Current Report on Form 8-K dated March 31, 2005, as filed with
the Securities and Exchange Commission on April 1, 2005).31.01
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002.31.02
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002.
 63




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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.Registrant
 Date May 13, 2005
    
    /s/ Dennis B. GillingsDennis B. Gillings, Executive Chairmanand Chief Executive OfficerDate May 13, 2005
    
    /s/ John D. RatliffJohn D. Ratliff, Executive Vice Presidentand Chief Financial Officer
 64




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Quintiles Transnational Corp. and Subsidiaries 
 EXHIBIT INDEX Exhibit No.
    

Description10.01
    
    Amendment No. 2, dated March 31, 2005, to Credit Agreement, dated September 25, 2003, among
Quintiles Transnational Corp., the Lenders referred to therein and Citicorp North America,
Inc., as Administrative Agent (incorporated herein by reference to Exhibit 10.01 to our
Current Report on Form 8-K dated March 31, 2005, as filed with the Securities and Exchange
Commission on April 1, 2005).31.01
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.31.02
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
 65