##### 



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




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##### 



Index PagePart I. Financial InformationItem 1. Financial Statements (unaudited)Condensed consolidated balance sheets - March 31, 2004 and December 31, 2003
    
    
    3Condensed consolidated statements of operations  Three months ended March 31,
2004 (successor) and 2003 (predecessor)
    
    
    4Condensed consolidated statements of cash flows  Three months ended March 31,
2004 (successor) and 2003 (predecessor)
    
    
    5Notes to condensed consolidated financial statements  March 31, 2004
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    47Part II. Other InformationItem 1. Legal Proceedings
    
    
    48Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities   Not Applicable
    
    
    49Item 3. Defaults upon Senior Securities  Not Applicable
    
    
    49Item 4.
Submission of Matters to a Vote of Security Holders 
Not Applicable
    
    
    49Item 5. Other Information  Not Applicable
    
    
    49Item 6. Exhibits and Reports on Form 8-K
    
    
    49Signatures
    
    
    51Exhibit Index
    
    
    52
  2




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Balance Sheets
  March 31
    
    December 312004
    
    2003Successor
    
    Successor(unaudited)
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    327,392
    
    
    $
    375,163Trade accounts receivable and unbilled services, net
    
    
    277,818
    
    
    
    239,994Investments in debt securities
    
    
    611
    
    
    
    611Prepaid expenses
    
    
    20,443
    
    
    
    20,663Other current assets and receivables
    
    
    58,879
    
    
    
    56,775Total current assets
    
    
    685,143
    
    
    
    693,206Property and equipment
    
    
    309,385
    
    
    
    301,501Less accumulated depreciation
    
    
    (28,066
    )
    
    
    (15,134
    )281,319
    
    
    
    286,367Intangibles and other assets:Investments in debt securities
    
    
    10,896
    
    
    
    10,426Investments in marketable equity securities
    
    
    51,990
    
    
    
    58,294Investments in non-marketable equity securities and loans
    
    
    49,718
    
    
    
    48,556Investments in unconsolidated affiliates
    
    
    121,051
    
    
    
    121,176Commercial rights and royalties
    
    
    9,702
    
    
    
    12,528Accounts
receivable  unbilled
    
    
    45,742
    
    
    
    40,107Advances to customer
    
    
    70,000
    
    
    
    70,000Goodwill
    
    
    180,628
    
    
    
    181,327Other identifiable intangibles, net
    
    
    393,874
    
    
    
    414,246Deferred income taxes
    
    
    4,223
    
    
    
    4,093Deposits and other assets
    
    
    52,098
    
    
    
    52,385989,922
    
    
    
    1,013,138Total assets
    
    $
    1,956,384
    
    
    $
    1,992,711Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    319,393
    
    
    $
    317,759Credit arrangements
    
    
    20,291
    
    
    
    20,686Unearned income
    
    
    186,822
    
    
    
    191,255Income taxes payable
    
    
    13,674
    
    
    
    26,875Other current liabilities
    
    
    3,540
    
    
    
    3,169Total current liabilities
    
    
    543,720
    
    
    
    559,744Long-term liabilities:Credit arrangements, less current portion
    
    
    771,957
    
    
    
    773,628Deferred income taxes
    
    
    97,374
    
    
    
    99,622Other liabilities
    
    
    25,443
    
    
    
    24,619894,774
    
    
    
    897,869Total liabilities
    
    
    1,438,494
    
    
    
    1,457,613Shareholders equity:Common stock and additional paid-in capital,
125,000,000 shares issued and outstanding at
March 31, 2004 and December 31, 2003
    
    
    521,725
    
    
    
    521,725Accumulated deficit
    
    
    (23,091
    )
    
    
    (7,427
    )Accumulated other comprehensive income
    
    
    19,256
    
    
    
    20,800Total shareholders equity
    
    
    517,890
    
    
    
    535,098Total liabilities and shareholders equity
    
    $
    1,956,384
    
    
    $
    1,992,711
 The accompanying notes are an integral part of these condensed consolidated statements. 3




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##### 



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

    Three monthsended
    

    endedMarch 31,
    

    March 31,2004
    

    2003Successor
    

    PredecessorGross revenues
    
    $
    519,302
    
    

    $
    511,607Costs, expenses and other:Costs of revenues
    
    
    367,979
    
    

    
    341,751General and administrative
    
    
    155,618
    
    

    
    131,004Interest (income) expense, net
    
    
    14,619
    
    

    
    (3,768
    )Other (income) expense, net
    
    
    (3,191
    )
    

    
    2,843Transaction and restructuring
    
    
    
    
    

    
    1,656535,025
    
    

    
    473,486(Loss) income before income taxes
    
    
    (15,723
    )
    

    
    38,121Income tax (benefit) expense
    
    
    (314
    )
    

    
    12,961(Loss) income before equity in earnings of unconsolidated affiliates and other
    
    
    (15,409
    )
    

    
    25,160Equity in losses of unconsolidated affiliates and other
    
    
    (255
    )
    

    
    (4
    )Net (loss) income
    
    $
    (15,664
    )
    

    $
    25,156Net (loss) income per share:Basic
    
    $
    (0.13
    )
    

    $
    0.21Diluted
    
    $
    (0.13
    )
    

    $
    0.21Shares used in computing net (loss) income per share:Basic
    
    
    125,000
    
    

    
    118,100Diluted
    
    
    125,000
    
    

    
    118,564
 The accompanying notes are an integral part of these condensed consolidated statements. 4




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows
   Three months ended
    

    Three months endedMarch 31,
    

    March 31,2004
    

    2003Successor
    

    PredecessorOperating activitiesNet (loss) income
    
    $
    (15,664
    )
    

    $
    25,156Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    35,246
    
    

    
    22,643Amortization of debt issuance costs
    
    
    828
    
    

    
    Restructuring charge (payments) accrual, net
    
    
    (1,468
    )
    

    
    (1,752
    )(Gain) loss from sales and impairments of investments, net
    
    
    (4,220
    )
    

    
    (17,952
    )Gain from sale of certain assets
    
    
    (5,323
    )
    

    
    Provision for (benefit from) deferred income tax expense
    
    
    825
    
    

    
    (2,088
    )Change in accounts receivable, unbilled services and
unearned income
    
    
    (44,701
    )
    

    
    22,733Change in other operating assets and liabilities
    
    
    (8,194
    )
    

    
    9,433Other
    
    
    (320
    )
    

    
    (195
    )Net cash (used in) provided by operating activities
    
    
    (42,991
    )
    

    
    57,978Investing activitiesAcquisition of property and equipment
    
    
    (11,330
    )
    

    
    (9,362
    )Payment of transaction costs in Transaction
    
    
    (4,869
    )
    

    
    Acquisition of businesses, net of cash acquired
    
    
    (252
    )
    

    
    Acquisition of intangible assets
    
    
    
    
    

    
    (4,519
    )Acquisition of commercial rights and royalties
    
    
    (3,000
    )
    

    
    (7,355
    )Proceeds from sale of certain assets
    
    
    9,277
    
    

    
    Proceeds from disposition of property and equipment
    
    
    2,092
    
    

    
    2,265Proceeds from (purchases of) debt securities, net
    
    
    (424
    )
    

    
    (527
    )Purchases of equity securities and other investments
    
    
    (3,803
    )
    

    
    (393
    )Proceeds from sale of equity securities and other investments
    
    
    14,847
    
    

    
    22,703Net cash provided by investing activities
    
    
    2,538
    
    

    
    2,812Financing activitiesPrincipal payments on credit arrangements, net
    
    
    (5,426
    )
    

    
    (4,770
    )Issuance of common stock, net (predecessor)
    
    
    
    
    

    
    2,328Net cash used in financing activities
    
    
    (5,426
    )
    

    
    (2,442
    )Effect of foreign currency exchange rate changes on cash
    
    
    (1,892
    )
    

    
    1,492(Decrease) increase in cash and cash equivalents
    
    
    (47,771
    )
    

    
    59,840Cash and cash equivalents at beginning of period
    
    
    375,163
    
    

    
    644,284Cash and cash equivalents at end of period
    
    $
    327,392
    
    

    $
    704,124
 The accompanying notes are an integral part of these condensed consolidated statements. 5




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##### 



Quintiles Transnational Corp. and Subsidiaries 
   March 31, 2004 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2003 of Quintiles Transnational Corp. (the
Company). The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 2003
financial statements have been reclassified or modified to conform with the 2004
financial statement presentation. On September 25, 2003, the Company completed its merger transaction with Pharma
Services Holding, Inc. (Pharma Services) pursuant to which Pharma Services
Acquisition Corp. (Acquisition Corp.) was merged with and into the Company,
with the Company continuing as the surviving corporation and an indirect wholly
owned subsidiary of Pharma Services (the Transaction or Pharma Services
Transaction). As a result of the Transaction, the Companys results of
operations, financial position and cash flows prior to the date of the
Transaction are presented as the Predecessor. The financial effects of the
Transaction and the Companys results of operations, financial position and
cash flows as the surviving corporation following the Transaction are presented
as the Successor. To clarify and emphasize that the Successor Company has
been presented on an entirely new basis of accounting, the Company has
separated Predecessor and Successor operations with a vertical black line,
where appropriate. 2. Employee Stock Compensation Pharma Services issued options to purchase 212,500 shares of its common stock
to certain of the Companys employees during the quarter ended March 31, 2004.
As of March 31, 2004, there were 6




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##### 



Quintiles Transnational Corp. and Subsidiaries options to acquire 3,562,500 shares of Pharma Services common stock
outstanding. There were no outstanding stock options to acquire the Companys
Common Stock as of March 31, 2004. Pro forma information regarding net (loss) income and net (loss) income per
share is required by SFAS No. 123, as amended by SFAS No. 148, and has been
determined as if the Company had accounted for the stock options granted by its
parent company, Pharma Services, to the Companys employees under the fair
value method of SFAS No. 123. The per share weighted-average fair value of
stock options granted during the three months ended March 31, 2004 was $0.0020
per share on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions: Three months endedMarch 31, 2004Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    2.53
    %Expected volatility
    
    
    65.0
    %Expected life (in years from end of
vesting term)
    
    
    1.70
 7




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##### 



Quintiles Transnational Corp. and Subsidiaries The Companys pro forma information follows (in thousands, except for net
(loss) income per share information): Three months ended
    

    Three months endedMarch 31, 2004
    

    March 31, 2003Successor
    

    PredecessorNet (loss) income, as reported
    
    $
    (15,664
    )
    

    $
    25,156Add: stock based compensation
expense included in net (loss)
income as reported, net of income
tax
    
    
    
    
    

    
    Less: pro forma adjustment for
stock-based compensation, net of
income tax
    
    
    
    
    

    
    (3,819
    )Pro forma net (loss) income
    
    $
    (15,664
    )
    

    $
    21,337Basic net (loss) income per share:As reported
    
    $
    (0.13
    )
    

    $
    0.21Pro forma
    
    
    (0.13
    )
    

    
    0.18Effect of pro forma adjustment
    
    $
    0.00
    
    

    $
    (0.03
    )Diluted net (loss) income per share:As reported
    
    $
    (0.13
    )
    

    $
    0.21Pro forma
    
    
    (0.13
    )
    

    
    0.18Effect of pro forma adjustment
    
    $
    0.00
    
    

    $
    (0.03
    )
 3. Commercial Rights and Royalties Commercial rights and royalties related assets are classified either as a
commercial rights and royalties, accounts receivable  unbilled or advances to
customers 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 31,2004
    
    2003Successor
    
    SuccessorCommercial rights and royalties
    
    $
    9,702
    
    
    $
    12,528Accounts receivable-unbilled
    
    
    45,742
    
    
    
    40,107Advances to customer
    
    
    70,000
    
    
    
    70,000Total
    
    $
    125,444
    
    
    $
    122,635
 8




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Quintiles Transnational Corp. and Subsidiaries Below is a brief description of these agreements: In May 1999, the Company entered into an agreement with CV Therapeutics, Inc.
(CVTX) to commercialize Ranexa for angina in the United States and
Canada. In July 2003, CVTX and the Company entered into a new agreement that
superceded the prior agreement. Under the terms of the July 2003 agreement,
all rights to Ranexa reverted back to CVTX, and CVTX will owe no royalty
payments to the Company. Under the July 2003 agreement, the Company received a
warrant to purchase 200,000 shares of CVTX common stock at $32.93 per share
during the five-year term commencing July 9, 2003. CVTX also is obligated to
purchase from the Company, within six months of the approval of Ranexa,
services of at least $10.0 million in aggregate value or to pay the Company a
lump sum amount equal to 10% of any shortfall from $10.0 million in purchased
services. In December 1999, the Company obtained the distribution rights to market four
pharmaceutical products in the Philippines from a large pharmaceutical customer
in exchange for providing certain commercialization services amounting to
approximately $5.1 million during the two-year period ended December 31, 2001.
As of March 31, 2004, the Company has capitalized 251.8 million Philippine
pesos (approximately $4.3 million) related to the cost of acquiring these
commercial rights, and is amortizing these costs over five years. Under the
terms of the agreement, the customer has the option to reacquire the rights to
the four products from the Company after seven years for a price to be
determined at the exercise date. In June 2001, the Company entered into an agreement with Pilot Therapeutics,
Inc. (PLTT) to commercialize a natural therapy for asthma, AIROZIN, in
the United States and Canada. Under the terms of the agreement, the Company
will provide commercialization services for AIROZIN and a milestone-based
$6.0 million line of credit which is convertible into PLTTs common stock, of
which $4.0 million was funded by the Company as of December 31, 2003. Further,
based on achieving certain milestones, the Company has 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 Company will receive
royalties based on the net sales of AIROZIN. The royalty percentage will
vary to allow the Company to achieve a minimum rate of return. The Form 10-QSB
filed by PLTT on September 5, 2003 indicated that PLTT will need significant
additional financing to continue operations beyond September 15, 2003 and PLTT
has not made any additional filings with the Securities and Exchange Commission
since that time. As such, the Company recorded an impairment of $4.0 million
on the loan receivable from PLTT and reduced its five-year contingent
commitment for the sales force and marketing activities to zero at December 31,
2003. In December 2001, the Company entered into an agreement with Discovery
Laboratories, Inc. (DSCO) to commercialize, in the United States, DSCOs
humanized lung surfactant, Surfaxin®, which is currently in Phase III
studies. Under the terms of the agreement, the Company acquired 791,905 shares
of DSCOs common stock and a warrant to purchase 357,143 shares of DSCOs
common stock at $3.48 per share for a total of $3.0 million, and agreed to make
available to DSCO a line of credit up to $10.0 million for pre-launch
commercialization services as certain milestones are achieved by DSCO. As of
March 31, 2004, the Company has made $5.7 million available under the line of
credit, of which $3.3 million has been funded. In addition, the Company
receives warrants to purchase approximately 38,000 shares of DSCO common stock
at an exercise price of $3.03 per share for each million dollars made available
by the Company under the line of credit as milestones are achieved. The
Company has also agreed to pay the sales and marketing activities of this
product up to $10.0 million per year for seven years. In return, the 9




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Quintiles Transnational Corp. and Subsidiaries Company will receive commissions based on net sales of Surfaxin® for meconium
aspiration syndrome, infant respiratory distress syndrome and all off-label
uses for 10 years. The subscription agreements under which the Company
acquired its shares of DSCO common stock included participation rights to
acquire additional shares of DSCO. The Company exercised its participation
rights in two such transactions with DSCO. During November 2002, the Company
purchased an additional 266,246 shares of DSCO common stock along with a
detachable warrant to purchase 119,811 shares of DSCO common stock for
$517,000. Using the cashless exercise feature, the Company exercised the
November 2002 warrant and received 83,357 shares of DSCO common stock. During
July 2003, the Company purchased an additional 218,059 shares of DSCO common
stock along with a detachable warrant to purchase 43,612 shares of DSCO common
stock for $1.2 million. In February 2004, the Company used the cashless
feature to exercise the warrant to purchase 357,143 shares of common stock and
received 249,726 shares of DSCO common stock. In December 2001, the Company acquired the license to market SkyePharmas
Solaraze skin treatment in the United States, Canada and Mexico for 14
years from Bioglan Pharma Plc for a total consideration of $26.7 million. The
Company amortizes the rights in proportion to the revenues earned over the 14
year life of the license. The Company has a commitment to pay royalties to
SkyePharma based on a percentage of net sales of Solaraze. This license
permits the Company to pursue additional indications for the compound, which
will be facilitated through the Companys ownership rights in the Solaraze
New Drug Application, or NDA, and Investigational New Drug. In January 2002, the Company entered into an agreement with Kos
Pharmaceuticals, Inc. (KOSP) to commercialize, in the United States, KOSPs
treatments for cholesterol disorders, Advicor® and Niaspan®. Advicor®
was launched in January 2002 and Niaspan® is also on the market. Under the
terms of the agreement, the Company provided, at its own expense, a dedicated
sales force of 150 cardiovascular-trained representatives who, in combination
with KOSPs sales force of 300 representatives, commercialized Advicor® and
Niaspan® for the first two years after launch (January 2002 to December
2003). In return, the Company received a warrant to purchase 150,000 shares of
KOSPs common stock at $32.79 per share, exercisable in installments over two
years. Further, the Company will receive commissions based on net sales of the
product from 2002 through 2006. The commission payments are subject to minimum
and maximum amounts, as amended June 30, 2003, of $50.0 million and $65.0
million, respectively, over the life of the agreement. Through March 31, 2004,
the Company has received payments totaling approximately $11.7 million. The
proceeds are reported in the statement of cash flows as an
operating activity  change in operating assets and liabilities. In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc. for
a total consideration of approximately $27.9 million. The assets included
distribution rights to market ADOXA in the United States for nine years
along with other products and product rights that Bioglan Pharma, Inc., had
previously marketed, as well as approximately $1.6 million in cash. Under the
purchase method of accounting, the results of operations of Bioglan Pharma,
Inc. are included in the Companys results of operations as of March 22, 2002.
The Company amortizes the intangible assets in proportion to the estimated
revenues over the lives of these products. Under certain of the contracts
acquired, the Company has commitments to pay royalties based on a percentage of
net sales of the acquired product rights. 10




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##### 



Quintiles Transnational Corp. and Subsidiaries 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, 2004, the Company estimates
the cost of its minimum obligation over the remaining contract life for the
remaining territory of Italy to be approximately $14 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
(LLY) to support LLY in its commercialization efforts for Cymbalta in the
United States. LLY has submitted a NDA for Cymbalta, which is currently under
review by the FDA for the treatment of depression. Under the terms of the
agreement, the Company will provide, at its expense, more than 500 sales
representatives to supplement the extensive LLY sales force in the promotion of
Cymbalta for the five years following product launch. The Companys sales
force will promote Cymbalta in its primary, or P1, position within sales
calls. During the first three years LLY will pay for the remainder of the
capacity of this sales force, referred to as the P2 and P3 positions, on a
fee-for-service basis. The Company will make marketing and milestone payments
to LLY totaling $110.0 million of which $70.0 million was paid in 2002 and the
remaining $40.0 million is due throughout the four quarters following FDA
approval. The $70.0 million in payments made by the Company is on an at-risk
basis, and is not refundable in the event the FDA does not grant final approval
for Cymbalta. However, if any such non-approval occurs solely as a result of
regulatory issues the FDA cites with respect to LLYs manufacturing processes
and facilities and either party cancels the agreement as a result, the Company
will be entitled to recoup its pre-approval outlays, plus interest at the prime
rate plus five percent, from a percentage of any revenues or royalties LLY
derives from the sales of Cymbalta by LLY or sublicense of Cymbalta to third
parties, if any. In addition, either party can terminate the agreement if
Cymbalta is not approved by January 31, 2005 for any other reason. If the
Company terminates the agreement, the Company will not recoup its prior
payments under the agreement, but if LLY terminates, the Company will be
entitled to recoup its pre-approval outlays, plus interest at the
prime rate, from a percentage of any revenues or royalties LLY
derives from the sales of Cymbalta or sublicense of
Cymbalta to third parties, if
any. The $110 million in payments will be capitalized and
amortized in proportion to the estimated revenues as a reduction of revenue
over the five-year service period. The sales force costs will be expensed as
incurred. The payments are reported in the statement of cash flows
as an investing activity  advances to customer. In return for the P1 position
for Cymbalta and the marketing and milestone payments, LLY will pay to the
Company 8.25% of U.S. Cymbalta sales for depression and other neuroscience
indications over the five-year service period followed by a 3% royalty over the
subsequent three years. In addition to the Companys obligations, LLY is
obligated to spend at specified levels. 11




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##### 



Quintiles Transnational Corp. and Subsidiaries In July 2002, the Company entered into an agreement with Columbia Laboratories,
Inc. (CBRX) to commercialize, in the United States, the following womens
health products: Prochieve 8%, Prochieve 4%, Advantage-S® and RepHresh.
Under the terms of the agreement, the Company purchased 1,121,610 shares of
CBRX common stock for $5.5 million. The Company also paid to CBRX four
quarterly payments of $1.125 million totaling $4.5 million. In return, the
Company will receive royalties of 5% on the sales of the four CBRXs womens
healthcare products in the United States for a five-year period beginning in
the first quarter of 2003. The payments are reported in the statement of cash flows as an investing activity  acquisition of commercial
rights and royalties. The royalties are subject to minimum and maximum amounts
of $8.0 million and $12.0 million, respectively, over the life of the
agreement. In addition, the Company will provide to CBRX, at CBRXs expense on
a fee-for-service basis, a sales force to commercialize the products. In
January 2004, the Company and CBRX agreed to restructure the fee-for-service
agreement to allow for an accelerated transfer of the sales force management
responsibility to CBRX. The purchase of the CBRX common stock included
participation rights to acquire additional shares of CBRX. During July 2003,
the Company exercised its participation rights and purchased an additional
56,749 shares of CBRX for $664,000. In December 2002, the Company entered into an agreement with a large
pharmaceutical customer to market two products in Belgium. Under the terms of
an asset purchase agreement, the Company will have the rights to one product in
Belgium in exchange for payments of 5.5 million euros (approximately $6.7
million). The customer will continue to manufacture the product through 2005.
Under the terms of a distribution agreement, the Company will have the rights
to market the other product in Belgium for a period of six years in exchange
for payments of 6.9 million euros (approximately $8.4 million) of which 2.2
million euros (approximately $2.7 million) are in the form of services to be
completed by December 31, 2008, based on the Companys standard pricing. The
Company has paid 7.5 million euros (approximately
$9.1 million) as of March
31, 2004. The payments are reported in the statement of cash
flows as an investing activity  acquisition of intangible assets. The Company
has also provided 1.8 million euros in services to the customer under the 2.2
million euros service component. The Companys service obligation is recorded
as a cost of the distribution rights and is being amortized over the six-year
distribution agreement. The customer will continue to manufacture the product
for the six years of the distribution agreement. In March 2003, the Company entered into an agreement with CBRX to commercialize
CBRXs Striant testosterone buccal bioadhesive product in the United
States. Striant 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. In return, the
Company will receive a 9% royalty on the net sales of Striant 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
will commence with the launch of Striant and are subject to minimum and
maximum amounts of $30.0 million and $55.0 million, respectively, over the life
of the agreement. The payments are reported in the statement of
cash flows as an investing activity  acquisition of commercial rights and
royalties. In addition, the Company will provide to CBRX, at CBRXs expense on
a fee-for-service basis, a sales force to commercialize the products for a
two-and-a-half year term. In January 2004, the Company and CBRX agreed to
restructure the fee-for-service agreement to allow for an accelerated transfer
of the sales force management responsibility to CBRX. 12




---



##### 



Quintiles Transnational Corp. and Subsidiaries In February 2004, the Company entered into an agreement with a large
pharmaceutical customer to provide services in connection with the customers
development and U.S. launch of a Phase III product, or the new product, which
is related to one of the customers currently marketed pharmaceutical products,
or the existing product. The existing product has historically achieved
multi-hundred million dollars in sales annually. Under the agreement, the
Company will provide, at its expense, up to $90.0 million of development and
commercialization services for the new and existing products. The customer has
agreed that at least $67.5 million of those services will be performed by the
Companys affiliates, at agreed upon rates. The customer, though, may direct
the Company to use third parties to perform up to $22.5 million of the $90.0
million of services. The agreement contains quarterly limits on the Companys
service obligations with a 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 performing the obligations, the Company will
receive (1) beginning in the first quarter of 2005, a low, single-digit royalty
on U.S. net sales of the existing product and (2) beginning on the U.S. launch
of the new product, a declining tiered royalty (beginning in the low teens) on
U.S. net sales of the new product. The Companys royalty period under the
agreement lasts for approximately nine years; however, the agreement limits the
amount of royalties the Company receives each year and also caps the aggregate
amount of royalties the Company can receive under the agreement at $180.0
million. The Company will also receive a $20.0 million payment from the
customer upon the U.S. launch of the new product. If the new product is not
approved by the FDA or a significant delay occurs in its approval process, the
Company may terminate its remaining service obligations and continue to receive
the royalty on the existing product subject to a return ceiling of no less than
8%. The agreement also provides for royalty term extensions, in the event of
certain other specified unfavorable circumstances such as product shortages or
recalls. The customer may terminate the agreement at any time subject to the
customers payment to the Company of the then-present value of its remaining
expected royalties. The Company has provided and expensed $756,000 of services
under this agreement through March 31, 2004. The Company has firm commitments under the arrangements described above to
provide funding of approximately $279.7 million in exchange for various
commercial rights. As of March 31, 2004, the Company has funded approximately
$210.0 million. Further, the Company has additional future funding commitments
that are contingent upon satisfaction of certain milestones by the third party
such as receiving FDA approval, obtaining funding from additional third
parties, agreeing to a marketing plan and other similar milestones. Due to the
uncertainty of the amounts and timing, these contingent commitments are not
included in the firm commitment amounts. If all of these contingencies were
satisfied over approximately the same time period, the Company estimates these
commitments to be a minimum of approximately $90-120 million per year for a
period of five to six years, subject to certain limitations and varying time
periods. 13




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##### 



Quintiles Transnational Corp. and Subsidiaries Below is a summary of the remaining firm commitments with pre-determined
payment schedules under such arrangements (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    TotalService commitments
    
    $
    26,285
    
    
    $
    30,788
    
    
    $
    4,350
    
    
    $
    3,916
    
    
    $
    437
    
    
    $
    65,776Licensing and distribution rights
    
    
    2,346
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,846$
    28,631
    
    
    $
    32,288
    
    
    $
    4,350
    
    
    $
    3,916
    
    
    $
    437
    
    
    $
    69,622
 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, 2004 (successor) is as follows (in thousands
except share data): Trading
    
    Number of
    
    
    
    
    
    Fair MarketCompany
    
    Symbol
    
    Shares
    
    Cost Basis
    
    ValueCommon Stock:The Medicines Company
    
    MDCO
    
    
    810,320
    
    
    $
    21,028
    
    
    $
    26,100Discovery Laboratories, Inc.
    
    DSCO
    
    
    1,339,339
    
    
    
    10,189
    
    
    
    16,233Columbia Laboratories, Inc.
    
    CBRX
    
    
    1,178,359
    
    
    
    14,235
    
    
    
    5,833Derivative
instruments (see Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,939
    )Other
    
    
    
    
    
    
    
    
    
    
    4,323
    
    
    
    5,763Total Marketable Equity Securities
    
    
    
    
    
    
    
    
    
    $
    49,775
    
    
    $
    51,990
 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, 2004 (successor)
is as follows (in thousands): Remaining FundingCompany
    
    Cost Basis
    
    CommitmentVenture capital funds
    
    $
    34,161
    
    
    $
    14,253Equity investments (six companies)
    
    
    11,564
    
    
    
    Convertible loans (three companies)
    
    
    685
    
    
    
    162Loans (two companies)
    
    
    3,308
    
    
    
    5,322Total non-marketable equity securities and loans
    
    $
    49,718
    
    
    $
    19,737
 Below is a table representing managements best estimate as of March 31, 2004
of the amount and timing of the above remaining funding commitments (in
thousands): 2004
    
    2005
    
    TotalVenture capital funds
    
    $
    11,789
    
    
    $
    2,464
    
    
    $
    14,253Convertible loans
    
    
    162
    
    
    
    
    
    
    
    162Loans
    
    
    5,322
    
    
    
    
    
    
    
    5,322Total remaining funding commitments
    
    $
    17,273
    
    
    $
    2,464
    
    
    $
    19,737
 14




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##### 



Quintiles Transnational Corp. and Subsidiaries The amount and timing of such funding events are subject to a number of
different variables and may differ materially from managements estimates. The Company also has future loan commitments that are contingent upon
satisfaction of certain milestones by the third party such as receiving FDA
approval, obtaining funding from additional third parties, agreement of a
marketing plan and other similar milestones. Due to the uncertainty of the
amounts and timing, these commitments are not included in the commitment
amounts described above. The Company reviews the carrying value of each individual investment at each
balance sheet date to determine whether or not an other-than-temporary decline
in fair value has occurred. The Company employs alternative valuation
techniques including: (1) the review of financial statements including
assessments of liquidity, (2) the review of valuations available to the Company
prepared by independent third parties used in raising capital, (3) the review
of publicly available information including press releases and (4) direct
communications with the investees management, as appropriate. If the review
indicates that such a decline in fair value has occurred, the Company adjusts
the carrying value to the estimated fair value of the investment and recognizes
a loss for the amount of the adjustment. The Company recognized $154,000 and
$820,000 of losses due to such impairments in the three months ended March 31,
2004 and 2003, respectively, relating to non-marketable equity securities and
loans mainly due to declining financial condition of investees that were deemed
by management to be other-than-temporary. 6. Derivatives As of March 31, 2004, the Company had the following derivative positions in
securities of other issuers: (1) conversion option positions that are embedded
in financing arrangements, (2) freestanding warrants to purchase shares of
common stock and (3) put and call instruments to hedge the cash flow from the
sale of certain marketable securities. As of March 31, 2004, the Company had funded five convertible loans with a
carrying value of approximately $685,000. Loans that are convertible into an
equity interest have an embedded option contract because the value of the
equity interest is based on the market price of another entitys common stock
and thus is not clearly and closely related to the value of the
interest-bearing note. The Company has not accounted for these embedded
conversion features as mark-to-market derivatives because the terms of
conversion do not allow for cash settlement and the Company believes that the
equity interest delivered upon conversion would not be readily convertible to
cash since these entities are privately held or have limited liquidity and
trading of their equity interest. As of March 31, 2004, the Company has several freestanding warrants to purchase
common stock of various customers and other third parties. These freestanding
warrants primarily were acquired as part of the financial arrangements with
such customers and third parties. No quoted price is available for the
Companys freestanding warrants to purchase shares of common stock. The
Company uses various valuation techniques including the present value of
estimated expected future cash flows, option-pricing models and fundamental
analysis. Factors affecting the valuation include the current price of the
underlying asset, strike price, time to expiration of the warrant, estimated
price volatility of the underlying asset over the life of the warrant and
restrictions on the transferability or ability to exercise the warrant. At
March 31, 2004, the Company held warrants from various contracts valued at $7.0
million which are 15




---



##### 



Quintiles Transnational Corp. and Subsidiaries included in the accompanying balance sheet as deposits and other assets. The
Company recognized investment revenues of $2.3 million and $11.1 million during
the three months ended March 31, 2004 and 2003, respectively, related to
changes in the fair values of the warrants. As of March 31, 2004, the Company had entered into three zero-cost-collar
transactions to hedge certain future cash flows occurring in 2004. As these
transactions were entered into to hedge the risk of the potential volatility in
the cash flows resulting from sales of the underlying security during the first
three quarters of 2004, these transactions are accounted for as a cash flow
hedge. As such, the effective portion of the gain or loss on the derivative
instrument is recorded as unrealized holding gains (losses) on marketable
equity securities included as a separate component of shareholders equity.
This hedge is deemed to be perfectly effective under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as defined. As of March
31, 2004, the Company recorded a gross unrealized loss on these transactions of
$1.9 million which is shown as a reduction of the fair value of the marketable
equity securities on the accompanying balance sheet. Upon expiration of the
hedging instruments, all amounts recorded as unrealized holding gains (losses)
on marketable equity securities included as a separate component of
shareholders equity will be reclassified into income. As the first
zero-cost-collar transaction expired unexercised, the zero-cost-collar contract
had no value; therefore, there were no amounts reclassified into income. The
underlying equity security was sold generating approximately $10.2 million in
cash and a gain of approximately $504,000. 7. Goodwill and Identifiable Intangible Assets The Company has approximately $438.4 million of intangible assets, of which
approximately $109.7 million is deemed to be indefinite-lived and, accordingly,
is not being amortized. Amortization expense associated with definite-lived
identifiable intangible assets was $20.9 million and $10.0 million for the
three months ended March 31, 2004 and 2003, respectively. In connection with the Pharma Services Transaction, the Company prepared an
allocation of the purchase price to the assets acquired and liabilities assumed
based upon their respective fair values. The fair values are subject to
refinement as additional information relative to their fair values as of the
date of September 25, 2003 becomes available and as certain contingencies are
resolved. The following is a summary of identifiable intangible assets as of March 31,
2004 (in thousands): AccumulatedGross Amount
    
    Amortization
    
    Net AmountIdentifiable intangible assets:Commercial rights and royalties,
licenses and customer relationships
    
    $
    204,765
    
    
    $
    24,056
    
    
    $
    180,709Trademarks, trade names and other
    
    
    164,720
    
    
    
    8,899
    
    
    
    155,821Software and related assets
    
    
    68,944
    
    
    
    11,600
    
    
    
    57,344Total identifiable intangible assets
    
    $
    438,429
    
    
    $
    44,555
    
    
    $
    393,874
 16




---



##### 



Quintiles Transnational Corp. and Subsidiaries The following is a summary of goodwill by segment for the three months ended
March 31, 2004 (in thousands): Product
    
    Commercial
    
    PharmaBioDevelopment
    
    Services
    
    Development
    
    ConsolidatedBalance as of December 31, 2003
    
    $
    116,931
    
    
    $
    61,750
    
    
    $
    2,646
    
    
    $
    181,327Less: goodwill allocated to certain
assets disposed of
    
    
    (519
    )
    
    
    
    
    
    
    
    
    
    
    (519
    )Impact of foreign currency fluctuations
    
    
    (180
    )
    
    
    
    
    
    
    
    
    
    
    (180
    )Balance as of March 31, 2004
    
    $
    116,232
    
    
    $
    61,750
    
    
    $
    2,646
    
    
    $
    180,628
 8. Investment Revenues The following table is a summary of investment revenues (in thousands): Three months ended
    

    Three months endedMarch 31,
    

    March 31,2004
    

    2003Successor
    

    PredecessorMarketable equity and derivative
securities:Gross realized gains
    
    $
    4,856
    
    

    $
    18,772Gross realized losses
    
    
    (482
    )
    

    
    Impairment losses
    
    
    
    
    

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

    
    Gross realized losses
    
    
    
    
    

    
    Impairment losses
    
    
    (154
    )
    

    
    (820
    )Total investment revenues
    
    $
    4,220
    
    

    $
    17,952
 9. Restructuring In connection with the Pharma Services Transaction, the Company adopted a
restructuring plan. As part of this plan, approximately 211 positions are to
be eliminated mostly in Europe and the United States. As of March 31, 2004, 47
positions were eliminated. During the period from July 1, 2003 through September 25, 2003 in connection
with the Pharma Services Transaction, the Company reviewed its estimates of
restructuring plans adopted during 2002, 2001 and 2000. This review resulted
in a decrease of $1.0 million and $310,000 in severance payments
for plans
adopted in 2002 and 2001, respectively. In addition, there was an increase of
$6.4 million and $421,000 in exit costs for abandoned leased facilities for
plans adopted in 2001 and 2000, respectively. During the second quarter of 2002, the Company revised its estimates of the
restructuring plan adopted during 2001 (2001 Plan) which resulted in a
reduction of $9.1 million in accruals for the 2001 Plan. The reduction
included approximately $5.7 million in severance payments and $3.4 million of
exit costs. Also during the second quarter of 2002, the Company recognized $9.1 million of
restructuring charges as a result of the continued implementation of the
strategic plan announced during 2001. This restructuring charge included
revisions to the 2001 and 2000 restructuring plans of approximately $2.5
million and $1.9 million, respectively, due to a revision in the estimates for
the exit costs relating to certain abandoned leased facilities. In addition,
the adopted follow-on restructuring plan (2002 Plan) consisted of $4.3 17




---



##### 



Quintiles Transnational Corp. and Subsidiaries million related to severance payments, $310,000 related to exit costs and
$112,000 of asset write-offs. As part of the 2002 Plan, approximately 99
positions were to be eliminated mostly in the Europe and Africa region. As of
March 31, 2004, 89 individuals have been terminated pursuant to the 2002 Plan. During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating primarily to severance costs from the
reorganization of the Companys Internet initiative and the commercial services
group in the United States. All of the 40 positions to be eliminated as part
of this restructuring were terminated as of June 30, 2001. During the third quarter of 2001, the Company recognized a $50.9 million
restructuring charge. In addition, the Company recognized a restructuring
charge of approximately $1.1 million as a revision of an estimate to a 2000
restructuring plan. The restructuring charge consisted of $31.1 million
related to severance payments, $8.2 million related to asset impairment
write-offs and $12.7 million of exit costs. As part of this restructuring,
approximately 1,000 positions worldwide were to be eliminated and as of
December 31, 2003, all individuals which were to be terminated under this plan
had been terminated. In certain circumstances, international regulations and
restrictions have caused the terminations to extend beyond one year. Positions
were eliminated in each of the Companys segments. In January 2000, the Company announced the adoption of a restructuring plan
(January 2000 Plan). In connection with this plan, the Company recognized a
restructuring charge of $58.6 million. The restructuring charge consisted of
$33.2 million related to severance payments, $11.3 million related to asset
impairment write-offs and $14.0 million of exit costs. As part of the January
2000 Plan, approximately 770 positions worldwide were eliminated as of December 31,
2001. Although positions eliminated were across all functions, most of the
eliminated positions were in the product development group. In the fourth quarter of 2000, the Company revised its estimates of the January
2000 Plan. This revision resulted in a reduction of the January 2000 Plan of
$6.9 million. This reduction included $6.3 million in severance payments and
$632,000 in exit costs. Also, during the fourth quarter of 2000, management conducted a detailed review
of the resource levels within each business group. Based on this review, the
Company adopted a follow-on restructuring plan resulting in a restructuring
charge of $7.1 million. The restructuring charge consisted of $5.8 million
related to severance payments and $1.3 million related to exit costs. As part
of the 2000 Follow-On Plan, approximately 220 positions were to be eliminated
mostly in the commercial services group. As of December 31, 2003, all
individuals, which were to be terminated under this plan, had been terminated.
In certain circumstances, international regulations and restrictions have
caused the terminations to extend beyond one year. 18




---



##### 



Quintiles Transnational Corp. and Subsidiaries As of March 31, 2004, the following amounts were recorded for the restructuring
plans discussed above (in thousands): Balance at
    
    2003 Plan
    
    2002 Plans
    
    2001 Plans
    
    2000 Plan
    
    Balance as ofDecember 31,
    
    Write-offs/
    
    Write-offs/
    
    Write-offs/
    
    Write-offs/
    
    March 31,2003
    
    Payments
    
    Payments
    
    Payments
    
    Payments
    
    2004Severance and
related costs
    
    $
    7,567
    
    
    $
    (962
    )
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    6,600Exit costs
    
    
    8,176
    
    
    
    (63
    )
    
    
    (2
    )
    
    
    (386
    )
    
    
    (50
    )
    
    
    7,675$
    15,743
    
    
    $
    (1,025
    )
    
    $
    (2
    )
    
    $
    (386
    )
    
    $
    (55
    )
    
    $
    14,275
 10. Net Income Per Share The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net (loss) income per share (in
thousands): Three months ended
    
    Three months endedMarch 31,
    
    March 31,2004
    
    2003Successor
    
    PredecessorWeighted average shares:Basic weighted average shares
    
    
    125,000
    
    
    
    118,100Effect of dilutive securities:Stock options
    
    
    
    
    
    
    464Diluted weighted average
shares
    
    
    125,000
    
    
    
    118,564
 Options to purchase 28.3 million shares of the Companys Common Stock were
outstanding during the three months ended March 31, 2003 but were not included
in the computation of diluted net (loss) income per share because the options
exercise price was greater than the average market price of the Companys
Common Stock and, therefore, the effect would be antidilutive. The Company did
not have any outstanding stock options during the three months ended March 31,
2004. 11. Comprehensive Income The following table
represents the Companys comprehensive (loss) income (in
thousands): Three months ended
    
    Three months endedMarch 31,
    
    March 31,2004
    
    2003Successor
    
    PredecessorNet (loss) income
    
    $
    (15,664
    )
    
    $
    25,156Other comprehensive income (loss):Unrealized gain (loss) on marketable
securities, net of income taxes
    
    
    2,083
    
    
    
    2,811Reclassification adjustment, net of income taxes
    
    
    (1,402
    )
    
    
    (4,807
    )Minimum pension liability, net of income taxes
    
    
    
    
    
    
    (3,098
    )Foreign currency adjustment
    
    
    (2,225
    )
    
    
    3,881Comprehensive
(loss) income
    
    $
    (17,208
    )
    
    $
    23,943
 19




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##### 



Quintiles Transnational Corp. and Subsidiaries 12. 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. Before being transferred to the joint venture,
the informatics group was primarily responsible for providing market research
solutions and strategic analysis to support healthcare decisions. 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. The Company does not
include general and administrative expenses, depreciation and amortization
except amortization of commercial rights, interest (income) expense, other
(income) expense and income tax expense (benefit) in determining segment
profitability. Contribution is defined as gross revenues less of costs of
revenues, excluding depreciation and amortization expense as indicated below.
Intersegment revenues have been eliminated (in thousands): Three months ended March 31, 2004 - SuccessorProduct
    
    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
    )
    
    
    403,388Reimbursed service costs
    
    
    67,861
    
    
    
    14,927
    
    
    
    
    
    
    
    (329
    )
    
    
    82,459Gross service revenues
    
    
    330,545
    
    
    
    161,914
    
    
    
    
    
    
    
    (6,612
    )
    
    
    485,847Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    29,235
    
    
    
    
    
    
    
    29,235Investment
    
    
    
    
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    4,220Total revenues
    
    $
    330,545
    
    
    $
    161,914
    
    
    $
    33,455
    
    
    $
    (6,612
    )
    
    $
    519,302Contribution:$
    128,061
    
    
    $
    54,555
    
    
    $
    1,614
    
    
    $
    
    
    
    $
    184,230
 Three months ended March 31, 2003 - PredecessorProduct
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    250,036
    
    
    $
    118,620
    
    
    $
    
    
    
    $
    
    
    
    $
    368,656Intersegment
    
    
    
    
    
    
    8,095
    
    
    
    
    
    
    
    (8,095
    )
    
    
    Total net services
    
    
    250,036
    
    
    
    126,715
    
    
    
    
    
    
    
    (8,095
    )
    
    
    368,656Reimbursed service costs
    
    
    80,156
    
    
    
    14,185
    
    
    
    
    
    
    
    
    
    
    
    94,341Gross service revenues
    
    
    330,192
    
    
    
    140,900
    
    
    
    
    
    
    
    (8,095
    )
    
    
    462,997Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    30,658
    
    
    
    
    
    
    
    30,658Investment
    
    
    
    
    
    
    
    
    
    
    17,952
    
    
    
    
    
    
    
    17,952Total revenues
    
    $
    330,192
    
    
    $
    140,900
    
    
    $
    48,610
    
    
    $
    (8,095
    )
    
    $
    511,607Contribution:$
    126,314
    
    
    $
    44,910
    
    
    $
    18,780
    
    
    $
    
    
    
    $
    190,004
 20




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months
    

    Three monthsended March 31,
    

    ended March 31,2004
    

    2003Successor
    

    PredecessorDepreciation and amortization expense:Product development
    
    $
    21,590
    
    

    $
    14,947Commercial services
    
    
    8,184
    
    

    
    4,991PharmaBio Development (included in contribution)
    
    
    2,339
    
    

    
    2,495Corporate
    
    
    3,133
    
    

    
    210Total depreciation and amortization expense
    
    $
    35,246
    
    

    $
    22,643
 13. 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, 2004 and 2003 (in thousands):  21




---



##### 



Quintiles Transnational Corp. and Subsidiaries
Three months ended March 31, 2004 (successor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    (52
    )
    
    $
    192,748
    
    
    $
    333,519
    
    
    $
    (6,913
    )
    
    $
    519,302Costs, expenses and other:Costs of revenues
    
    
    5,870
    
    
    
    139,103
    
    
    
    223,006
    
    
    
    
    
    
    
    367,979General and administrative
    
    
    19,053
    
    
    
    47,814
    
    
    
    95,664
    
    
    
    (6,913
    )
    
    
    155,618Interest (income) expense, net
    
    
    15,589
    
    
    
    (6,787
    )
    
    
    5,817
    
    
    
    
    
    
    
    14,619Other (income) expense, net
    
    
    (19,464
    )
    
    
    12,053
    
    
    
    4,220
    
    
    
    
    
    
    
    (3,191
    )21,048
    
    
    
    192,183
    
    
    
    328,707
    
    
    
    (6,913
    )
    
    
    535,025(Loss) income before income taxes
    
    
    (21,100
    )
    
    
    565
    
    
    
    4,812
    
    
    
    
    
    
    
    (15,723
    )Income tax (benefit) expense
    
    
    (2,521
    )
    
    
    (3,336
    )
    
    
    5,543
    
    
    
    
    
    
    
    (314
    )(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    (18,579
    )
    
    
    3,901
    
    
    
    (731
    )
    
    
    
    
    
    
    (15,409
    )Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    (68
    )
    
    
    (187
    )
    
    
    
    
    
    
    (255
    )Subsidiary income
    
    
    2,915
    
    
    
    (9,425
    )
    
    
    797
    
    
    
    5,713
    
    
    
    Net (loss) income
    
    $
    (15,664
    )
    
    $
    (5,592
    )
    
    $
    (121
    )
    
    $
    5,713
    
    
    $
    (15,664
    )
 Three months ended March 31, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    137
    
    
    $
    225,088
    
    
    $
    292,549
    
    
    $
    (6,167
    )
    
    $
    511,607Costs, expenses and other:Costs of revenues
    
    
    1,701
    
    
    
    147,333
    
    
    
    192,717
    
    
    
    
    
    
    
    341,751General and administrative
    
    
    11,113
    
    
    
    48,237
    
    
    
    77,821
    
    
    
    (6,167
    )
    
    
    131,004Interest (income) expense, net
    
    
    (1,064
    )
    
    
    (7,383
    )
    
    
    4,679
    
    
    
    
    
    
    
    (3,768
    )Other (income) expense, net
    
    
    (9,032
    )
    
    
    4,283
    
    
    
    7,592
    
    
    
    
    
    
    
    2,843Transaction and restructuring
    
    
    1,656
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,6564,374
    
    
    
    192,470
    
    
    
    282,809
    
    
    
    (6,167
    )
    
    
    473,486(Loss) income before income taxes
    
    
    (4,237
    )
    
    
    32,618
    
    
    
    9,740
    
    
    
    
    
    
    
    38,121Income tax (benefit) expense
    
    
    (1,664
    )
    
    
    9,824
    
    
    
    4,801
    
    
    
    
    
    
    
    12,961(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    (2,573
    )
    
    
    22,794
    
    
    
    4,939
    
    
    
    
    
    
    
    25,160Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Subsidiary income
    
    
    27,729
    
    
    
    (8,528
    )
    
    
    (963
    )
    
    
    (18,238
    )
    
    
    Net (loss) income
    
    $
    25,156
    
    
    $
    14,266
    
    
    $
    3,972
    
    
    $
    (18,238
    )
    
    $
    25,156
 22




---



##### 



Quintiles Transnational Corp. and Subsidiaries The following are condensed consolidating balance sheets of the Company as of
March 31, 2004 and December 31, 2003 (in thousands): As of March 31, 2004 Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    33,031
    
    
    $
    88,478
    
    
    $
    205,883
    
    
    $
    
    
    
    $
    327,392Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    113,566
    
    
    
    164,252
    
    
    
    
    
    
    
    277,818Other current assets
    
    
    3,939
    
    
    
    28,438
    
    
    
    47,556
    
    
    
    
    
    
    
    79,933Total current assets
    
    
    36,970
    
    
    
    230,482
    
    
    
    417,691
    
    
    
    
    
    
    
    685,143Property and equipment, net
    
    
    1,812
    
    
    
    121,437
    
    
    
    158,070
    
    
    
    
    
    
    
    281,319Intangibles and other assets:Investments
    
    
    22,082
    
    
    
    335,911
    
    
    
    1,106
    
    
    
    
    
    
    
    359,099Goodwill and other identifiable
intangibles, net
    
    
    10,428
    
    
    
    247,623
    
    
    
    316,451
    
    
    
    
    
    
    
    574,502Deposits and other assets
    
    
    26,545
    
    
    
    12,213
    
    
    
    17,563
    
    
    
    
    
    
    
    56,321Investments in subsidiaries
    
    
    1,744,879
    
    
    
    (215,334
    )
    
    
    76,312
    
    
    
    (1,605,857
    )
    
    
    Total intangibles and other assets
    
    
    1,803,934
    
    
    
    380,413
    
    
    
    411,432
    
    
    
    (1,605,857
    )
    
    
    989,922Total assets
    
    $
    1,842,716
    
    
    $
    732,332
    
    
    $
    987,193
    
    
    $
    (1,605,857
    )
    
    $
    1,956,384Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    63,774
    
    
    $
    61,533
    
    
    $
    194,086
    
    
    $
    
    
    
    $
    319,393Credit arrangements
    
    
    3,100
    
    
    
    642
    
    
    
    16,549
    
    
    
    
    
    
    
    20,291Unearned income
    
    
    
    
    
    
    63,247
    
    
    
    123,575
    
    
    
    
    
    
    
    186,822Other current liabilities
    
    
    66,424
    
    
    
    (3,009
    )
    
    
    (46,201
    )
    
    
    
    
    
    
    17,214Total current liabilities
    
    
    133,298
    
    
    
    122,413
    
    
    
    288,009
    
    
    
    
    
    
    
    543,720Long-term liabilities:Credit arrangements, less current
portion
    
    
    755,350
    
    
    
    3,607
    
    
    
    13,000
    
    
    
    
    
    
    
    771,957Other liabilities
    
    
    101,017
    
    
    
    (13,566
    )
    
    
    35,366
    
    
    
    
    
    
    
    122,817Net intercompany payables
    
    
    335,161
    
    
    
    (838,739
    )
    
    
    503,578
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,191,528
    
    
    
    (848,698
    )
    
    
    551,944
    
    
    
    
    
    
    
    894,774Total liabilities
    
    
    1,324,826
    
    
    
    (726,285
    )
    
    
    839,953
    
    
    
    
    
    
    
    1,438,494Total shareholders equity
    
    
    517,890
    
    
    
    1,458,617
    
    
    
    147,240
    
    
    
    (1,605,857
    )
    
    
    517,890Total liabilities and shareholders equity
    
    $
    1,842,716
    
    
    $
    732,332
    
    
    $
    987,193
    
    
    $
    (1,605,857
    )
    
    $
    1,956,384
 23




---



##### 



Quintiles Transnational Corp. and Subsidiaries
As of December 31, 2003 Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    (7,138
    )
    
    $
    188,475
    
    
    $
    193,826
    
    
    $
    
    
    
    $
    375,163Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    84,148
    
    
    
    155,846
    
    
    
    
    
    
    
    239,994Other current assets
    
    
    5,885
    
    
    
    23,669
    
    
    
    48,495
    
    
    
    
    
    
    
    78,049Total current assets
    
    
    (1,253
    )
    
    
    296,292
    
    
    
    398,167
    
    
    
    
    
    
    
    693,206Property and equipment, net
    
    
    1,863
    
    
    
    125,838
    
    
    
    158,666
    
    
    
    
    
    
    
    286,367Intangibles and other assets:Investments
    
    
    20,147
    
    
    
    339,797
    
    
    
    1,143
    
    
    
    
    
    
    
    361,087Goodwill and other identifiable
intangibles, net
    
    
    13,429
    
    
    
    255,552
    
    
    
    326,592
    
    
    
    
    
    
    
    595,573Deposits and other assets
    
    
    27,156
    
    
    
    12,158
    
    
    
    17,164
    
    
    
    
    
    
    
    56,478Investments in subsidiaries
    
    
    1,739,676
    
    
    
    (201,283
    )
    
    
    77,107
    
    
    
    (1,615,500
    )
    
    
    Total intangibles and other assets
    
    
    1,800,408
    
    
    
    406,224
    
    
    
    422,006
    
    
    
    (1,615,500
    )
    
    
    1,013,138Total assets
    
    $
    1,801,018
    
    
    $
    828,354
    
    
    $
    978,839
    
    
    $
    (1,615,500
    )
    
    $
    1,992,711Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    58,482
    
    
    $
    67,640
    
    
    $
    191,637
    
    
    
    
    
    
    $
    317,759Credit arrangements
    
    
    3,100
    
    
    
    752
    
    
    
    16,834
    
    
    
    
    
    
    
    20,686Unearned income
    
    
    
    
    
    
    76,126
    
    
    
    115,129
    
    
    
    
    
    
    
    191,255Other current liabilities
    
    
    58,871
    
    
    
    4,006
    
    
    
    (32,833
    )
    
    
    
    
    
    
    30,044Total current liabilities
    
    
    120,453
    
    
    
    148,524
    
    
    
    290,767
    
    
    
    
    
    
    
    559,744Long-term liabilities:Credit arrangements, less current
portion
    
    
    756,125
    
    
    
    3,634
    
    
    
    13,869
    
    
    
    
    
    
    
    773,628Other liabilities
    
    
    98,924
    
    
    
    (8,375
    )
    
    
    33,692
    
    
    
    
    
    
    
    124,241Net intercompany payables
    
    
    290,418
    
    
    
    (774,401
    )
    
    
    483,983
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,145,467
    
    
    
    (779,142
    )
    
    
    531,544
    
    
    
    
    
    
    
    897,869Total liabilities
    
    
    1,265,920
    
    
    
    (630,618
    )
    
    
    822,311
    
    
    
    
    
    
    
    1,457,613Total shareholders equity
    
    
    535,098
    
    
    
    1,458,972
    
    
    
    156,528
    
    
    
    (1,615,500
    )
    
    
    535,098Total liabilities and shareholders equity
    
    $
    1,801,018
    
    
    $
    828,354
    
    
    $
    978,839
    
    
    $
    (1,615,500
    )
    
    $
    1,992,711
 The following are condensed consolidating statements of cash flows of the
Company for the three months ended March 31, 2004 and 2003(in thousands): 24




---



##### 



Quintiles Transnational Corp. and Subsidiaries
Three months ended March 31, 2004 (successor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    (15,664
    )
    
    $
    (5,592
    )
    
    $
    (121
    )
    
    $
    5,713
    
    
    $
    (15,664
    )Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,158
    
    
    
    15,697
    
    
    
    16,391
    
    
    
    
    
    
    
    35,246Amortization 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
    )Gain on sale of certain assets
    
    
    (4,660
    )
    
    
    
    
    
    
    (663
    )
    
    
    
    
    
    
    (5,323
    )Provision for (benefit from) deferred income tax expense
    
    
    1,096
    
    
    
    (1,096
    )
    
    
    825
    
    
    
    
    
    
    
    825Change in accounts receivable, unbilled services and
unearned income
    
    
    809
    
    
    
    (42,788
    )
    
    
    (2,722
    )
    
    
    
    
    
    
    (44,701
    )Change in other operating assets and liabilities
    
    
    5,582
    
    
    
    (7,568
    )
    
    
    (6,208
    )
    
    
    
    
    
    
    (8,194
    )Investment in subsidiaries and intercompany
    
    
    53,926
    
    
    
    (55,449
    )
    
    
    7,236
    
    
    
    (5,713
    )
    
    
    Other
    
    
    
    
    
    
    (469
    )
    
    
    149
    
    
    
    
    
    
    
    (320
    )Net cash (used in) provided by operating activities
    
    
    47,891
    
    
    
    (105,791
    )
    
    
    14,909
    
    
    
    
    
    
    
    (42,991
    )Investing activities:Acquisition of property and equipment
    
    
    (92
    )
    
    
    (4,702
    )
    
    
    (6,536
    )
    
    
    
    
    
    
    (11,330
    )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
    
    
    
    
    
    
    
    2,092Proceeds from (purchases of) 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
    
    
    
    
    
    
    14,847
    
    
    
    
    
    
    
    
    
    
    
    14,847Net cash provided by (used in) investing activities
    
    
    (6,850
    )
    
    
    5,916
    
    
    
    3,472
    
    
    
    
    
    
    
    2,538Financing activities:Principal payments on credit arrangements
    
    
    (872
    )
    
    
    (139
    )
    
    
    (4,415
    )
    
    
    
    
    
    
    (5,426
    )Net cash used in financing activities
    
    
    (872
    )
    
    
    (139
    )
    
    
    (4,415
    )
    
    
    
    
    
    
    (5,426
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    17
    
    
    
    (1,909
    )
    
    
    
    
    
    
    (1,892
    )(Decrease) increase in cash and cash equivalents
    
    
    40,169
    
    
    
    (99,997
    )
    
    
    12,057
    
    
    
    
    
    
    
    (47,771
    )Cash and cash equivalents at beginning of period
    
    
    (7,138
    )
    
    
    188,475
    
    
    
    193,826
    
    
    
    
    
    
    
    375,163Cash and cash equivalents at end of period
    
    $
    33,031
    
    
    $
    88,478
    
    
    $
    205,883
    
    
    $
    
    
    
    $
    327,392
 25




---



##### 



Quintiles Transnational Corp. and Subsidiaries
Three months ended March 31, 2003 (predecessor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    25,156
    
    
    $
    14,266
    
    
    $
    3,972
    
    
    $
    (18,238
    )
    
    $
    25,156Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    355
    
    
    
    9,787
    
    
    
    12,501
    
    
    
    
    
    
    
    22,643Restructuring charge (payments) accrual, net
    
    
    (232
    )
    
    
    (642
    )
    
    
    (878
    )
    
    
    
    
    
    
    (1,752
    )Loss (gain) from sales and impairments of investments,
net
    
    
    229
    
    
    
    (18,181
    )
    
    
    
    
    
    
    
    
    
    
    (17,952
    )Provision for (benefit from) deferred income tax expense
    
    
    1,762
    
    
    
    (90
    )
    
    
    (3,760
    )
    
    
    
    
    
    
    (2,088
    )Change in accounts receivable, unbilled services and
unearned income
    
    
    (1,726
    )
    
    
    (165
    )
    
    
    24,624
    
    
    
    
    
    
    
    22,733Change in
other operating assets and liabilities
    
    
    (16,006
    )
    
    
    15,738
    
    
    
    9,701
    
    
    
    
    
    
    
    9,433Investment in subsidiaries and intercompany
    
    
    (8,977
    )
    
    
    (13,570
    )
    
    
    4,309
    
    
    
    18,238
    
    
    
    Other
    
    
    (478
    )
    
    
    (66
    )
    
    
    349
    
    
    
    
    
    
    
    (195
    )Net cash (used in) provided by operating activities
    
    
    83
    
    
    
    7,077
    
    
    
    50,818
    
    
    
    
    
    
    
    57,978Investing activities:Acquisition of property and equipment
    
    
    (16
    )
    
    
    (4,780
    )
    
    
    (4,566
    )
    
    
    
    
    
    
    (9,362
    )Acquisition of intangible assets
    
    
    
    
    
    
    (500
    )
    
    
    (4,019
    )
    
    
    
    
    
    
    (4,519
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (7,355
    )
    
    
    
    
    
    
    
    
    
    
    (7,355
    )Proceeds from disposition of property and equipment
    
    
    
    
    
    
    290
    
    
    
    1,975
    
    
    
    
    
    
    
    2,265Proceeds from (purchases of) debt securities, net
    
    
    (527
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (527
    )Purchases of equity securities and other investments
    
    
    (93
    )
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    (393
    )Proceeds from sale of equity securities and other
investments
    
    
    
    
    
    
    22,701
    
    
    
    2
    
    
    
    
    
    
    
    22,703Net cash (used in) provided by investing activities
    
    
    (636
    )
    
    
    10,056
    
    
    
    (6,608
    )
    
    
    
    
    
    
    2,812Financing activities:Principal payments on credit arrangements
    
    
    
    
    
    
    (124
    )
    
    
    (4,646
    )
    
    
    
    
    
    
    (4,770
    )Issuance of common stock, net (predecessor)
    
    
    2,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,328Net cash provided by (used in) financing activities
    
    
    2,328
    
    
    
    (124
    )
    
    
    (4,646
    )
    
    
    
    
    
    
    (2,442
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    126
    
    
    
    1,366
    
    
    
    
    
    
    
    1,492(Decrease) increase in cash and cash equivalents
    
    
    1,775
    
    
    
    17,135
    
    
    
    40,930
    
    
    
    
    
    
    
    59,840Cash and cash equivalents at beginning of period
    
    
    220
    
    
    
    390,064
    
    
    
    254,000
    
    
    
    
    
    
    
    644,284Cash and cash equivalents at end of period
    
    $
    1,995
    
    
    $
    407,199
    
    
    $
    294,930
    
    
    $
    
    
    
    $
    704,124
 26




---



##### 



Quintiles Transnational Corp. and Subsidiaries 14. Commitments and Contingencies On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories
Limited, a subsidiary of the Company, on behalf of 185 Alzheimers patients
who participated in drug studies involving an experimental drug manufactured
by defendant Novartis, and their surviving spouses. The complaint alleges
claims for breach of fiduciary duty, civil conspiracy, unjust enrichment,
misrepresentation, Georgia RICO violations, infliction of emotional distress,
battery, negligence and loss of consortium as to class member spouses. The
complaint seeks unspecified damages, plus costs and expenses, including
attorneys fees and experts fees. On September 27, 2003, the parties
entered into a settlement memorandum following a mediated settlement
conference. The parties subsequently agreed to final settlement documents,
which memorialized payments by several defendants to individual study
participants or their representatives. On March 10, 2004, the Court
dismissed the case with prejudice. On January 22, 2002, Federal Insurance Company (Federal) and Chubb Custom
Insurance Company (Chubb) filed suit against the Company, Quintiles
Pacific, Inc. and Quintiles Laboratories Limited, two of the Companys
subsidiaries, in the United States District Court for the Northern District
of Georgia. In the suit, Chubb, the Companys primary commercial general
liability carrier for coverage years 2000-2001 and 2001-2002, and Federal,
the Companys excess liability carrier for coverage years 2000-2001 and
2001-2002, seek to rescind the policies issued to the Company based on an
alleged misrepresentation by the Company on the policy application.
Alternatively, Chubb and Federal seek a declaratory judgment that there is no
coverage under the policies for some or all of the claims asserted against
the Company and its subsidiaries in the class action lawsuit filed on January
26, 2001 and described above and, if one or more of such claims is determined
to be covered, Chubb and Federal request an allocation of the defense costs
between the claims they contend are covered and non-covered claims. The
Company has filed an answer with counterclaims against Federal and Chubb in
response to their complaint. Additionally, the Company has amended its
pleadings to add AON Risk Services (AON) as a counterclaim defendant, as an
alternative to the Companys position that Federal and Chubb are liable under
the policies. In order to preserve its rights, on March 27, 2003, the Company
also filed a separate action against AON in the United States District Court
for the Middle District of North Carolina. The Company believes the
allegations made by Federal and Chubb are without merit and is defending this
case vigorously. 27




---



##### 



Quintiles Transnational Corp. and Subsidiaries On June 13, 2003, ENVOY and Federal filed suit against the Company, in the
United States District Court for the Middle District of Tennessee. One or both
plaintiffs in this case have alleged claims for breach of contract, contractual
subrogation, equitable subrogation, and equitable contribution. 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). Plaintiffs
claim that the Company is responsible for payment of the settlement amount and
associated fees and costs in the Envoy Securities Litigation based on merger
and settlement agreements between WebMD, ENVOY and the Company. The Company
has filed a motion to dismiss the suit, and the plaintiffs have filed motions
for summary judgment. These motions are pending before the court. All parties
have agreed to a stay of discovery. The Company believes that the allegations
made by ENVOY and Federal are without merit and intends to defend the case
vigorously. 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. 15. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, which
requires the assets, liabilities and results of operations of variable interest
entities (VIE) be consolidated into the financial statements of the company
that has controlling financial interest. FIN 46 also provides the framework
for determining whether a VIE should be consolidated based on voting interest
or significant financial support provided to the VIE. The Company adopted
these provisions, as required, with respect to VIEs created after January 31,
2003. The Company has determined that it is a non-public entity as defined by
accounting guidance in FIN 46. The effective date for applying the provisions
of FIN 46 for interests held by non-public entities in VIEs or potential VIEs
created before February 1, 2003 is January 1, 2005. The Company is currently
evaluating the impact of FIN 46 on these interests held prior to February 1,
2003. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement for Forward-Looking Information Information set forth in this Form 10-Q, including Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Forward-looking statements
represent our judgment concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology such as may, will,
expect, anticipate, estimate, believe, continue, or target or the
negative thereof or other variations thereof or comparable terminology. 28




---



##### 



Quintiles Transnational Corp. and Subsidiaries We caution you that any such forward looking statements are further qualified
by important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, the risk that our substantial debt could adversely affect our
financial condition, the limitations on the operation of our business imposed
by the covenants contained in our senior subordinated notes and senior secured
credit facility, the risk that the market for our products and services will
not grow as we expect, the risk that our PharmaBio Development transactions
will not generate revenues, profits or return on investment at the rate or
levels we expect or that royalty revenues under our PharmaBio Development
arrangements may not be adequate to offset our upfront and on-going expenses in
providing sales and marketing services or in making milestone and marketing
payments, our ability to efficiently distribute backlog among project
management groups and match demand to resources, our actual operating
performance, variation in the actual savings and operating improvements
resulting from previous restructurings, our ability to maintain large customer
contracts or to enter into 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 a new line of business, the risk that Verispan, our joint venture
with McKesson Corporation, or McKesson, relating to the informatics business,
will not be successful, changes in existing, and the adoption of new,
regulations affecting the pharmaceutical industry and liability risks
associated with our business which could result in losses or indemnity to
others not covered by insurance. See Risk Factors below for additional
factors that could cause actual results to differ. Results of Operations Three Months Ended March 31, 2004 and 2003 Gross Revenues.Gross revenues for the first quarter of 2004 were $519.3
million versus $511.6 million for the first quarter of 2003. Gross revenues
include service revenues, revenues from commercial rights and royalties and
revenues from investments. Net revenues exclude reimbursed service costs.
Reimbursed service costs may fluctuate due, in part, to the payment provisions
of the respective service contract. Below is a summary of revenues (in
thousands): Three months ended March 312004
    
    2003Service revenues
    
    $
    485,847
    
    
    $
    462,997Less: reimbursed service costs
    
    
    82,459
    
    
    
    94,341Net service revenues
    
    
    403,388
    
    
    
    368,656Commercial rights and royalties
    
    
    29,235
    
    
    
    30,658Investments
    
    
    4,220
    
    
    
    17,952Total net revenues
    
    $
    436,843
    
    
    $
    417,266Reimbursed service costs
    
    
    82,459
    
    
    
    94,341Gross revenues
    
    $
    519,302
    
    
    $
    511,607
  
    
    Service Revenues.Service revenues were $485.8 million for the
first quarter of 2004 compared to $463.0 million for the first quarter
of 2003. Service revenues less reimbursed service costs, or net
service revenues, for the first quarter of 2004 were $403.4 million,
an increase of $34.7 million or 9.4% over net service revenues of
$368.7 million for the first quarter of 2003. Net service revenues for
the first quarter of 2004 were positively impacted by approximately
$33.0 million due to the effect of the weakening of the U.S. dollar
relative to 29




---



##### 



Quintiles Transnational Corp. and Subsidiaries  the euro, the British pound, the South African rand and the Japanese
yen. Net service revenues increased in the Asia Pacific region $13.6
million or 25.4% to $66.9 million for the first quarter of 2004 from
the first quarter of 2003 including a positive impact of approximately
$6.8 million due to the effect of foreign currency fluctuations. Net
service revenues increased $29.5 million or 18.5% to $188.6 million for
the first quarter of 2004 from the first quarter of 2003 in the Europe
and Africa region including a positive impact of approximately $25.1
million due to the effect of foreign currency fluctuations. The
commercial services group benefited from an improvement in the business
conditions for its syndicated sales forces in the United Kingdom which
resulted in higher utilization of its syndicated sales forces in the
first quarter of 2004. Net service revenues decreased $8.3 million or
(5.3%) to $148.0 million for the first quarter of 2004 from the first
quarter of 2003 in the Americas region due to the timing of project
start-ups and a decrease in commercial services provided under our
PharmaBio Development contracts during the first quarter of 2004 as
compared to the first quarter of 2003.
    
    Commercial Rights and Royalties Revenues.Commercial rights and
royalties revenues, which include product revenues, royalties and
commissions, for the first quarter of 2004 were $29.2 million, a
decrease of $1.4 million over first quarter 2003 commercial rights and
royalties revenues of $30.7 million. Commercial rights and royalties
revenues were positively impacted by approximately $3.8 million due to
the effect of foreign currency fluctuations related to the weakening
of the U.S. dollar relative to the euro. Commercial rights and
royalties revenues for the first quarter of 2004 were reduced by
approximately $2.8 million versus $289,000 for the first quarter of
2003 for payments made by us to our customers. These payments are
considered incentives and are amortized against revenues over the
service period of the contract. The $1.4 million decrease is
primarily the result of the conclusion of our service contract with
Kos Pharmaceuticals, Inc., or KOSP, in December 2003. We recognized
approximately $5.0 million of revenue in the first quarter of 2003
relating to the contract with KOSP. The decrease was partially offset
by increases resulting from the following (1) our contracts with
Columbia Labs, Inc., or CBRX, which contributed $3.2 million during
the first quarter of 2004 versus $1.6 million during the first quarter
of 2003, (2) contracts in Europe with two large pharmaceutical
customers which contributed approximately $10.0 million of revenues
during the first quarter of 2004 versus $9.8 million during the first
quarter of 2003 and (3) our September 2003 acquisition of Pharmaplan
which contributed $2.4 million of revenues during the first quarter of
2004. Revenues from miscellaneous contracts and activities decreased
approximately $600,000 for the first quarter of 2004 versus the first
quarter of 2003. Commercial rights and royalties revenues for the
first quarter of 2004 were attributable to the following: (1)
approximately 46.7% to our suite of dermatology products, (2)
approximately 34.2% to our contracts with two large pharmaceutical
customers in Europe, (3) approximately 10.9% to our contracts with
CBRX and (4) approximately 8.3% to the acquisition of Pharmaplan
during September 2003.
    
    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 2004 were a gain
of $4.2 million versus $18.0 million for the first quarter of 2003.
Investment revenues for the first quarter of 2003 included a $11.0 30




---



##### 



Quintiles Transnational Corp. and Subsidiaries  million gain on the warrant to acquire 700,000 shares of Scios, Inc.
In addition, during the first quarter of 2004 and 2003, we recognized
$154,000 and $820,000, 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 $368.0 million for the first quarter
of 2004 versus $341.8 million for the first quarter of 2003. Below is a
summary of the costs of revenues (in thousands): Three months ended March 31,2004
    
    2003Reimbursed service costs
    
    $
    82,459
    
    
    $
    94,341Service costs
    
    
    220,772
    
    
    
    197,432Commercial rights and royalties costs
    
    
    31,841
    
    
    
    29,830Depreciation and amortization
    
    
    32,907
    
    
    
    20,148$
    367,979
    
    
    $
    341,751
  
    
    Reimbursed Service Costs.Reimbursed service costs were $82.5
million and $94.3 million for the first quarter of 2004 and 2003,
respectively.
    
    Service Costs.Service costs, which include compensation and
benefits for billable employees, and certain other expenses directly
related to service contracts, were $220.8 million or 54.7% of net
service revenues versus $197.4 million or 53.6% of net service
revenues for the first quarter of 2004 and 2003, respectively.
Service costs increased primarily as a result of annual salary and
wage increases. Service costs were negatively impacted by
approximately $17.7 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 $31.8 million for the first
quarter of 2003 versus $29.8 million for the first quarter of 2003.
These costs include services and products provided by third parties,
as well as services provided by our other service groups, totaling
approximately $6.3 million and $8.1 million for the first quarter of
2004 and 2003, respectively.
    
    Depreciation and Amortization.Depreciation and amortization,
which include depreciation of our property and equipment and
amortization of our definite-lived intangible assets except
commercial rights, increased to $32.9 million for the first quarter
of 2004 versus $20.1 million for the first quarter of 2003.
Amortization expense increased approximately $12.3 million as a
result of the increase in finite-lived identifiable intangible
assets. Depreciation expense remained relatively constant increasing
approximately $477,000. 31




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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 $155.6
million or 35.6% of total net revenues for the first quarter of 2004 versus
$131.0 million or 31.4% of total net revenues for the first quarter of 2003.
Travel expenses increased approximately $5.8 million for the first quarter of
2004 when compared to the first quarter of 2003, primarily as a result of
increased activities associated with our global operations. These travel
expenses include reimbursements made to our Executive Chairman and Chief
Executive Officer for business related travel services he provides for himself
and other employees with the use of his own plane. Professional services
increased approximately $5.7 million during this same time period, including
approximately $938,000 of management fees to our parent companys investor
group. In addition, compensation expense was negatively impacted by
approximately $6.7 million as a result of salary and wage increases. General
and administrative expenses were negatively impacted by approximately $11.9
million from the effect of foreign currency fluctuations. Net interest expense, which represents interest income received from bank
balances and investments in debt securities, and the accretion of discounts
provided pursuant to commercial rights and royalties assets relating to certain
PharmaBio Development contracts, net of interest expense incurred on lines of
credit, notes and capital leases, was $14.6 million for the first quarter of
2004 versus net interest income of $3.8 million for the first quarter of 2003.
Interest income decreased approximately $2.2 million to $4.5 million for the
first quarter of 2004 as a result of the decline in investable cash. Interest
expense increased approximately $16.2 million as a result of the interest on
the debt we incurred to fund the Pharma Services Transaction. Other income was $3.2 million for the first quarter of 2004 versus other
expense of $2.8 million for the first quarter of 2003. 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. We recognized $1.7 million of transaction expenses for the first quarter of
2003 related to the activities of the special committee of our Board of
Directors and its financial and legal advisors. Loss before income taxes was $15.7 million for the first quarter of 2004 versus
income before income taxes of $38.1 million or 9.1% of total net revenues for
the first quarter of 2003. The effective income tax rate was 2.0% for the first quarter of 2004 versus
34.0% for the first quarter of 2003. Our effective income tax rate was
negatively impacted by deferred income taxes provided on earnings of our
foreign subsidiaries. Presently, we do not consider the undistributed earnings
of our foreign subsidiaries to be indefinitely reinvested. Since we conduct
operations on a global basis, our effective income tax rate may vary. During the first quarter of 2004 and 2003, we recognized $255,000 and $4,000,
respectively, of losses from equity in unconsolidated affiliates and other
which represents our pro rata share of the net loss of unconsolidated
affiliates, primarily Verispans net loss, net of a minority interest in a
consolidated subsidiary. Net loss was $15.7 million for the first quarter of 2004 versus net income of
$25.2 million for the first quarter of 2003. 32




---



##### 



Quintiles Transnational Corp. and Subsidiaries Analysis by Segment: The following table summarizes the operating activities for our reportable
segments for the first quarter of 2004 and 2003, respectively. We do not
include reimbursed service costs, general and administrative expenses,
depreciation and amortization except amortization of commercial rights,
interest (income) expense, other (income) expense and income tax expense
(benefit) in our segment analysis. Intersegment revenues have been eliminated
and the profit on intersegment revenues is reported within the service group
providing the services (dollars in millions). Total Net Revenues
    
    Contribution% of Net
    
    
    
    
    
    % of Net2004
    
    2003
    
    Growth %
    
    2004
    
    Revenues
    
    2003
    
    RevenuesProduct development
    
    $
    262.7
    
    
    $
    250.0
    
    
    
    5.1
    %
    
    $
    128.1
    
    
    
    48.8
    %
    
    $
    126.3
    
    
    
    50.5
    %Commercial services
    
    
    147.0
    
    
    
    126.7
    
    
    
    16.0
    
    
    
    54.6
    
    
    
    37.1
    
    
    
    44.9
    
    
    
    35.4PharmaBio Development
    
    
    33.5
    
    
    
    48.6
    
    
    
    (31.2
    )
    
    
    1.6
    
    
    
    4.8
    
    
    
    18.8
    
    
    
    38.6Eliminations
    
    
    (6.3
    )
    
    
    (8.1
    )
    
    
    (22.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    436.8
    
    
    $
    417.3
    
    
    
    4.7
    %
    
    $
    184.2
    
    
    
    42.2
    %
    
    $
    190.0
    
    
    
    45.5
    %
 Product Development Group.Net service revenues for the product development
group were $262.7 million for the first quarter of 2004 compared to $250.0
million for the first quarter of 2003 primarily as a result of a decrease in
revenues from early development and laboratory services, or EDLS. Net service
revenues for the first quarter of 2004 were positively impacted by
approximately $20.6 million due to the effect of foreign currency fluctuations.
Net service revenues increased in the Asia Pacific region $3.1 million or 11.3%
to $30.4 million including a positive impact of approximately $3.2 million due
to the effect of foreign currency fluctuations. The decline in the EDLS
revenues in the Asia Pacific region were offset by the growth of revenues from
our clinical development services, or CDS. Net service revenues increased
$15.9 million or 14.9% to $122.5 million in the Europe and Africa region as a
result of the positive impact of approximately $16.4 million due to the effect
of foreign currency fluctuations. The decline in EDLS revenues in the Europe
and Africa region were offset by growth in revenues from CDS. Net service
revenues decreased $6.3 million or (5.5%) to $109.9 million in the Americas
region including a positive impact of approximately $1.1 million due to the
effect of the strengthening U.S. dollar relative to the Canadian dollar. Contribution for the product development group was $128.1 million for the first
quarter of 2004 compared to $126.3 million for the first quarter of 2003. As a
percentage of net service revenues, contribution margin was 48.8% for the first
quarter of 2004 compared to 50.5% for the first quarter of 2003. The decrease
in the contribution margin was directly related to the decrease in EDLS
revenues. Commercial Services Group.Net service revenues for the commercial services
group were $147.0 million for the first quarter of 2004 compared to $126.7
million for the first quarter of 2003. Net service revenues for the first
quarter of 2004 were positively impacted by approximately $12.9 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
$11.6 million or 49.1% to $35.3 million including a positive impact of
approximately $3.8 million due to the effect of foreign currency fluctuations.
Net service revenues increased approximately $13.1 million or 23.8% to $68.1
million in the Europe and Africa region, including a positive impact of
approximately $9.1 million due to the effect of foreign currency 33




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Quintiles Transnational Corp. and Subsidiaries fluctuations. We experienced an improvement in the difficult business
conditions for our syndicated sales forces in the United Kingdom. Net service
revenues decreased $4.4 million or (9.2%) to $43.6 million in the Americas
region primarily as a result of a decrease in the services provided under our
PharmaBio Development contracts during the year including the effect of the
conclusion of the services portion of our contract with KOSP. Contribution for the commercial services group was $54.6 million for the first
quarter of 2004 compared to $44.9 million for the first quarter of 2003. As a
percentage of net service revenues, contribution margin was 37.1% for the first
quarter of 2004 compared to 35.4% for the first quarter of 2003. We
experienced an improvement in the difficult market conditions for our
syndicated sales forces in the United Kingdom which contributed to the increase
in contribution as the costs for the syndicated sales forces are relatively
constant and do not fluctuate in proportion to the revenues. PharmaBio Development Group.Net revenues for the PharmaBio Development group
decreased approximately $15.2 million during the first quarter of 2004 as
compared to the first quarter of 2003 due to a $13.7 million decrease in
investment revenues and a slight decrease of approximately $1.4 million in
commercial rights and royalties revenues. Commercial rights and royalties
costs increased by approximately $5.7 million during the same period primarily
as a result of several factors including $4.6 million of costs associated with
the marketing of Solaraze and ADOXA for the first quarter of 2004 as
compared to $4.1 million for the first quarter of 2003. These factors were
partially offset by a decrease of approximately $1.8 million in service costs
relating to services provided by our commercial services group. The contribution for the PharmaBio Development group decreased by $17.2 million
from the first quarter of 2004 to the first quarter of 2003. The commercial
rights and royalties revenues (net of related costs) in the first quarter of
2004 decreased the contribution of this group by approximately $3.4 million
when compared to the first quarter of 2003 primarily due to the conclusion of
the services portion of our contract with KOSP in December 2003. The
contribution from the commercial rights and royalties revenues was negatively
impacted by costs of approximately $2.0 million related to the
Cymbalta
contract for which no revenues are being recognized. The contribution from
investment revenues decreased by approximately $13.7 million for the first
quarter of 2004 to $4.2 million versus $18.0 million for the first quarter of
2003. Liquidity and Capital Resources Cash and cash equivalents were $327.4 million at March 31, 2004 as compared to
$375.2 million at December 31, 2003. Cash used in operations was $43.0 million for the three months ended March 31,
2004 versus cash provided by operations of $58.0 million for the comparable
period of 2003. 34




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Quintiles Transnational Corp. and Subsidiaries Cash provided by investing activities was $2.5 million for the three months
ended March 31, 2004 versus $2.8 million for the comparable period of 2003.
Investing activities included the purchases and sales of equity securities and
other investments, capital asset purchases, and the acquisition of commercial
rights. Capital asset purchases required an outlay of cash of $11.3 million for the
three months ended March 31, 2004 compared to an outlay of $9.4 million for the
same period in 2003. Cash used for the acquisition of commercial rights and royalties related assets
was $3.0 million for the three months ended March 31, 2004 as compared to an
outlay of $11.9 million for the comparable period in 2003. The three months
ended March 31, 2004 reflected a payment of $3.0 million pursuant to a contract
with CBRX. Purchases of equity securities and other investments required an outlay of cash
of $3.8 million for the three months ended March 31, 2004 compared to an outlay
of $393,000 for the same period in 2003. Proceeds from the sale of equity
securities and other investments were $14.8 million during the three months
ended March 31, 2004 as compared to $22.7 million for the same period in 2003.
The proceeds received during the three months ended March 31, 2004 included
approximately $14.8 million from the sale of a portion of our equity
investments in The Medicines Company and Discovery Laboratories, Inc. The following table is a summary of our net service receivables outstanding
(dollars in thousands): March 31, 2004
    
    December 31, 2003Trade service accounts receivable, net
    
    $
    135,467
    
    
    $
    122,496Unbilled services
    
    
    127,192
    
    
    
    102,802Unearned income
    
    
    (186,701
    )
    
    
    (190,918
    )Net service receivables outstanding
    
    $
    75,958
    
    
    $
    34,380Number of days of service revenues
outstanding
    
    
    14
    
    
    
    7
 Investments in debt securities were $11.5 million at March 31, 2004 as compared
to $11.0 million at December 31, 2003. Our investments in debt securities
consist primarily of state and municipal securities. Investments in marketable equity securities decreased $6.3 million to $52.0
million at March 31, 2004 as compared to $58.3 million at December 31, 2003
primarily as a result of sales of equity securities which were partially offset
by an increase in the market value of the securities. Investments in non-marketable equity securities and loans at March 31, 2004
were $49.7 million, as compared to $48.6 million at December 31, 2003. Investments in unconsolidated affiliates, primarily Verispan, were $121.1
million at March 31, 2004 as compared to $121.2 million at December 31, 2003. We have available to us a $75.0 million revolving loan facility under our
secured credit facility. In addition, we have available to us a £1.5 million
(approximately $2.7 million) general banking facility with a U.K. bank. As of
March 31, 2004, we did not have any outstanding balance on either of these
facilities. 35




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Quintiles Transnational Corp. and Subsidiaries 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. Shareholders equity at March 31, 2004 was $517.9 million versus $535.1 million
at December 31, 2003. 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 our revolving portion of our senior credit facility
and line of credit agreements will be sufficient to meet our foreseeable cash
needs in connection with our operations and debt repayment obligations. As
part of our business strategy, we review many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, we
are continually evaluating new acquisition and expansion possibilities. In
addition, as part of our business strategy going forward, we intend to review
and consider opportunities to acquire additional, or dispose of our existing
product rights, as appropriate. We may from time to time seek to obtain debt
or equity financing in our ordinary course of business or to facilitate
possible acquisitions or expansion. Any such acquisitions or equity or debt
financings may be limited by the terms and restrictions contained in the credit
agreement governing our senior secured facility, our indenture or the indenture
governing the senior discount notes issued by Pharma Services Intermediate
Holding Corp., or Intermediate Holding. 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, 2004, we had outstanding debt of approximately $792.2 million.
Of the total debt, approximately $342.2 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 and the significant reduction in our available
cash resulting from the financing of the Pharma Services Transaction 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 and significant reduction in available cash could
also:  
    
    increase our vulnerability to adverse general economic and industry conditions; 36




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Quintiles Transnational Corp. and Subsidiaries  
    
    require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby
reducing the availability of our cash flows to fund working capital, investments, capital expenditures, research and
development efforts and other general corporate purposes;
    
    limit our ability to make required payments under our existing contractual commitments;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
    
    place us at a competitive disadvantage compared to our competitors that have less debt;
    
    increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates; and
    
    limit our ability to borrow additional funds on terms that are satisfactory to us or at all. The indenture governing the senior subordinated notes and the senior secured
credit facility contain covenants that limit our flexibility and prevent us
from taking certain actions. The indenture governing the notes and the credit agreement governing the senior
secured credit facility include a number of significant restrictive covenants.
These covenants could adversely affect us by limiting our ability to plan for
or react to market conditions, meet our capital needs and execute our business
strategy. These covenants, among other things, limit our ability and the
ability of our restricted subsidiaries to:  
    
    incur additional debt;
    
    pay dividends on, redeem or repurchase capital stock;
    
    issue capital stock of restricted subsidiaries;
    
    make certain investments;
    
    enter into certain types of transactions with affiliates;
    
    engage in unrelated businesses;
    
    create liens; and
    
    sell certain assets or merge with or into other companies. These covenants may significantly limit our operating and financial flexibility
and limit our ability to respond to changes in our business or competitive
activities. In addition, the senior secured credit facility includes other and
more restrictive covenants and prohibits us from prepaying our other debt,
including the notes, while borrowings under our senior secured credit facility
are outstanding. The senior secured 37




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Quintiles Transnational Corp. and Subsidiaries credit facility also requires us to maintain certain financial ratios and meet
other financial tests. These covenants are broadly drafted and we must apply
our judgment on a daily basis to whether our actions comply; however, our
lenders may interpret these covenants differently and could claim that our
actions are in violation of the covenants. Our failure to comply with these
covenants could result in an event of default, which, if not cured or waived,
could result in our being required to repay these borrowings before their
scheduled due date. If we were unable to make this repayment or otherwise
refinance these borrowings, the lenders under the senior secured credit
facility could elect to declare all amounts borrowed under the senior secured
credit facility, together with accrued interest, to be due and payable, which,
in some instances, would be an event of default under the indenture governing
the notes. In addition, these lenders could foreclose on our assets. If we
were unable to refinance these borrowings on favorable terms, our results of
operations and financial condition could be adversely impacted by increased
costs and less favorable terms, including interest rates and covenants. Any
future refinancing of the senior secured credit facility is likely to contain
similar restrictive covenants and financial tests. We are subject to additional risks and restrictions as a result of Intermediate
Holdings issuance of discount notes. On March 18, 2004,
Intermediate Holding issued an aggregate principal
amount at maturity of $219.0 million in senior discount notes due April 1,
2014, or the discount notes. The discount notes accrete at the rate of 11.5%
per annum, compounded semi-annually on April 1 and October 1 of each year to,
but not including April 1, 2009. From and after April 1, 2009, cash interest
on the discount notes will accrue at the rate of 11.5% per annum, and will be
payable semiannually in arrears on April 1 and October 1 of each year,
commencing on October 1, 2009, until maturity. Intermediate Holding is a
holding company that currently conducts all of its operations through us and
our subsidiaries and affiliates. As a result, all of Intermediate Holdings
operating profit and cash flows are generated by us and our subsidiaries and
affiliates. The discount notes, however, are the exclusive obligation of
Intermediate Holding, and we are not obligated to make funds available for
payment on the discount notes. Intermediate Holdings ability to make payments
on the discount notes is nevertheless dependent on our earnings and cash flows
and our ability to make distributions in the form of dividends or other
advances and transfers to Intermediate Holding. To the extent we have funds
available and to the extent permitted by our senior credit facility and the
indenture governing our notes, we may make funds available to Intermediate
Holding to permit payment of its obligations under the discount notes. In
addition, the indenture governing the discount notes prohibits Intermediate
Holding from permitting us to take certain actions substantially similar to
those we would be prohibited from taking under the covenants contained in our
indenture. Despite our level of indebtedness, we and our parent companies are able to
incur substantially more debt. Incurring such debt could further exacerbate the
risks to our financial condition. Although the indenture governing our notes and the credit agreement governing
our senior secured credit facility each contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions and the indebtedness incurred in compliance with
these restrictions could be substantial. To the extent new debt is added to
our current debt levels, our substantial leverage risks would increase. In
addition, to the extent new debt is incurred by Pharma Services or Intermediate
Holding, such as the 11.5% senior discount notes due 2014 issued by
Intermediate Holding on March 18, 2004, we may be required to generate
sufficient cash flow to satisfy such obligations. 38




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Quintiles Transnational Corp. and Subsidiaries While the indenture and the credit agreement also contain restrictions on our
ability to make investments, these restrictions are subject to a number of
qualifications and exceptions and the investments we may make in compliance
with these restrictions could be substantial. The restrictions do not prevent
us from incurring certain expenses in connection with our PharmaBio Development
group transactions, including expenses we may incur to provide sales forces for
the products of our PharmaBio Development customers at our cost under the terms
of our agreements with those customers. Changes in aggregate spending, research and development budgets and outsourcing
trends in the pharmaceutical and biotechnology industries could adversely
affect our operating results and growth rate. Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice grew substantially during the 1990s and we
benefited from this trend. Some industry commentators believe that the rate of
growth of outsourcing will tend to decrease. If these industries reduce their
outsourcing of clinical research and sales and marketing projects, our
operations and financial condition could be materially and adversely affected.
We also believe we have been negatively impacted recently by mergers and other
factors in the pharmaceutical industry, which appear to have slowed decision
making by our customers and delayed certain trials. We believe our
commercialization services have been particularly affected by recent reductions
in new product launches and increases in the number of drugs losing patent
protection. A continuation of these trends would have an ongoing adverse
effect on our business. In addition, U.S. federal and state legislatures and
numerous foreign governments have considered various types of healthcare
reforms and have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers
and pharmaceutical companies. If future regulatory cost containment efforts
limit the profitability of new drugs, our customers may reduce their research
and development spending, which could reduce the business they outsource to us.
We cannot predict the likelihood of any of these events or the effects they
would have on our business, results of operations or financial condition. If we are unable to successfully develop and market potential new services, our
growth could be adversely affected. A key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If
we are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected. Our plan to strengthen and web-enable the technology platform for our product
development and commercialization services may negatively impact our results in
the short term. We are currently developing an Internet platform for our product development
and commercialization services. We have entered into agreements with certain
vendors for them to provide systems development and integration services to
help us develop this platform. If such vendors fail to perform as required or
if there are substantial delays in developing and implementing this
platform, we may have to make 39




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Quintiles Transnational Corp. and Subsidiaries substantial further investments, internally or with third
parties, to achieve our objectives. 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 web-enablement
services which our customers will find desirable and implementing our business
model with respect to these services. Also, these expenditures are likely to
negatively impact our profitability, at least until our web-enabled products
are operationalized. Over time, we envision continuing to invest in extending
and enhancing our Internet platform in other ways to further support and
improve our services. We cannot assure you that any improvements in operating
income resulting from our Internet capabilities will be sufficient to offset
our investments in the Internet platform. Our results could be further
negatively impacted if our competitors are able to execute their services on a
web-based platform before we can launch our Internet services or if they are
able to structure a platform that attracts customers away from our services. We may not be able to derive the benefits we hope to achieve from Verispan, our
joint venture with McKesson. In May 2002, we completed the formation of a joint venture, Verispan, with
McKesson designed to leverage the operational strengths of the healthcare
information business of each party. As part of the formation of Verispan, we
contributed our former informatics business. As a result, Verispan remains
subject to the risks to which our informatics business was exposed. If
Verispan is not successful or if it experiences any of the difficulties
described below, there could be an adverse effect on our results of operations
and financial condition, as Verispan is a pass-through entity and, as such, its
results are reflected in our financial statements to the extent of our interest
in Verispan. We may not achieve the intended benefits of Verispan if it is not
able to secure additional data in exchange for equity. Verispan also could
encounter other difficulties, including:  
    
    its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to
support its informatics products;
    
    its ability to process and use the volume of data received from a variety of data providers;
    
    its ability to attract customers, besides us and McKesson, to purchase its products and services;
    
    the risk of changes in healthcare information privacy laws and regulations that could create a risk of liability, increase
the cost of Verispans business or limit its service offerings;
    
    the risk that industry regulation may restrict Verispans ability to analyze and disseminate pharmaceutical and healthcare
data; and
    
    the risk that it will not be able to effectively and cost-efficiently replace services previously provided to the
contributed businesses by the former parent corporations. Although we have a license to use Verispans commercially available data
products and we may pay Verispan to create customized data products for us, if
Verispan is unable to provide us with the quality and character of data
products that we need to support those services, we would need to seek other
strategic alternatives to achieve our goals. 40




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Quintiles Transnational Corp. and Subsidiaries In contributing our former informatics business to Verispan, we assigned
certain contracts to Verispan. Verispan has agreed to indemnify us against any
liabilities we may incur in connection with these contracts after contributing
them to Verispan, but we still may be held liable under the contracts to the
extent Verispan is unable to satisfy its obligations, either under the
contracts or to us. The potential loss or delay of our large contracts could adversely affect our
results. Many of our customers can terminate our contracts upon 15-90 days notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. In
addition, we may not realize the full benefits of our backlog of contractually
committed services if our customers cancel, delay or reduce their commitments
under their contracts with us. Thus, the loss or delay of a large contract or
the loss or delay of multiple contracts could adversely affect our net revenue
and profitability. We believe that this risk of loss or delay of multiple
contracts potentially has greater effect as we pursue larger outsourcing
arrangements with global pharmaceutical companies. Also, over the past two
years we have observed that customers may be more willing to delay, cancel or
reduce contracts more rapidly than in the past. If this trend continues, it
could become more difficult for us to balance our resources with demands for
our services and our financial results could be adversely affected. Underperformance of our commercial rights strategies could have a negative
impact on our financial performance. As part of our PharmaBio Development groups business strategy, we enter into
transactions with customers in which we take on some of the risk of the
potential success or failure of the customers product. These transactions may
include making a strategic investment in a customer, providing financing to a
customer, or acquiring an interest in the revenues from a customers product.
For example, we may build or provide a sales organization for a biotechnology
customer to commercialize a new product in exchange for a share in the revenues
of the product. We anticipate that in the early periods of many of these
relationships, our expenses will exceed revenues from these arrangements,
particularly where we are providing a sales force for the product at our own
cost. Aggregate royalty or other payments made to us under these arrangements
may not be adequate to offset our total expenditure in providing a sales force
or in making milestone or marketing payments to our customers. We carefully
analyze and select the customers and products with which we are willing to
structure our risk-based deals. Products underlying our commercial rights
strategies may not complete clinical trials, receive approval from the FDA or
achieve the level of market acceptance or consumer demand that we expect, in
which case we might not be able to earn a profit or recoup our investment with
regard to a particular transaction. In addition, the timing of regulatory
approval and product launch, such as with respect to the pending review of
Cymbalta, and the achievement of other milestones are generally beyond our
control and can affect our actual return from these investments. The potential
negative effect to us could increase depending on the nature and timing of
these transactions and the length of time before it becomes apparent that the
product will not achieve commercial success. Our financial results would be
adversely affected if our customers or their products do not achieve the level
of success that we anticipate and/or our return or payment from the product investment
or financing is less than our costs with respect to these transactions. 41




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Quintiles Transnational Corp. and Subsidiaries Our rights to market and sell certain pharmaceutical products expose us to
product risks typically associated with pharmaceutical companies. Our acquisition of the rights to market and sell Solaraze and the rights to
other dermatology products acquired from Bioglan Pharma, Inc. at the end of
2001, as well as any other product rights we may hold in the future, 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 these products, or of
any other pharmaceutical product rights we may acquire in the future,
experience negative reactions or adverse side effects or in the event such
products cause injury, are found to be unsuitable for their intended purpose or
are otherwise defective. While we believe we currently have adequate insurance
in place to protect against these risks, we may nevertheless be unable to
satisfy any claims for which we may be held liable as a result of the use or
misuse of products which we manufacture or sell, and any such product liability
claim could adversely affect our business, operating results or financial
condition. In addition, like pharmaceutical companies, our commercial success
in this area will depend in part on our obtaining, securing and defending our
intellectual property rights covering our pharmaceutical product rights. These risks may be augmented by certain risks relating to our outsourcing of
the manufacturing and distribution of these products or any pharmaceutical
product rights we may acquire in the future. For example, as a result of our
decision to outsource the manufacturing and distribution of Solaraze, we are
unable to directly monitor quality control in the manufacturing and
distribution processes. Our plans to market and sell Solaraze and other pharmaceutical products also
subject us to risks associated with entering into a new line of business in
which we have limited experience. If we are unable to operate this new line of
business as we expect, the financial results from this new line of business
could have a negative impact on our results of operations as a whole. The risk
that our results may be affected if we are unable to successfully operate our
pharmaceutical operations may increase in proportion with (1) the number of
products or product rights we license or acquire in the future, (2) the
applicable stage of the drug approval process of the products and (3) the
levels of outsourcing involved in the development, manufacture and
commercialization of such products. If we lose the services of Dennis Gillings or other key personnel, our business
could be adversely affected. Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Executive Chairman and Chief Executive Officer. In connection with and
following the Pharma Services Transaction, we have experienced some turnover in
our senior management. For instance, our Executive Vice President and Chief
Financial Officer has announced his intention to retire from his position. Our
performance also depends on our ability to identify, attract and retain
qualified management and professional, scientific and technical operating
staff, as well as our ability to recruit qualified representatives for our
contract sales services. The departure of Dr. Gillings or any key executive,
or our inability to continue to attract and retain qualified personnel, or
replace any departed personnel in a timely fashion could have a material
adverse effect on our business, results of operations or financial condition. 42




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Quintiles Transnational Corp. and Subsidiaries 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 supervising clinical
trials, data and laboratory analysis, electronic data capture, patient
recruitment and other related services. The process of bringing a new drug to
market is time-consuming and expensive. If we do not perform our services to
contractual or regulatory standards, the clinical trial process could be
adversely affected. Additionally, if clinical trial services such as
laboratory analysis or electronic data capture and related services do not
conform to contractual or regulatory standards, trial participants or trial
results could be affected. These events would create a risk of liability to us
from the drug companies with whom we contract or the study participants.
Similar risks apply to our product development services relating to medical
devices. We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. However, such claims may still be brought
against us, and it is possible we could be found liable for these types of
losses. For example, we were among the defendants named in a class action by
participants in an Alzheimers study which sought to hold us liable for alleged
injury to the participants participating in the trial, allegedly caused as a
result of that participation. The case has subsequently been settled. 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 a new drug on a limited number of healthy
individuals, typically 20 to 80 persons, to determine the drugs basic safety.
We also could be liable for the general risks associated with ownership of such
a facility. These risks include, but are not limited to, adverse events
resulting from the administration of drugs to clinical trial participants or
the professional malpractice of Phase I medical care providers. We also provide some clinical trial packaging services. We could be held
liable for any problems that result from the trial drugs we package, including
any quality control problems in our packaging facilities. For example,
accounting for controlled substances is subject to regulation by the United
States Drug Enforcement Administration, or the DEA, and some of our facilities
have been audited by the DEA. In one case, the DEA indicated that it found
that we miscounted certain drugs, which was resolved to DEAs satisfaction by
our providing a corrected accounting of these drugs to the DEA. We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or
breach of contract if one of our laboratories inaccurately reports or fails to
report lab results. Although we maintain insurance to cover ordinary risks,
insurance would not cover the risk of a customer deciding not to do business
with us as a result of poor performance, which could adversely affect our
results of operations and financial condition. 43




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Quintiles Transnational Corp. and Subsidiaries Our insurance may not cover all of our indemnification obligations and other
liabilities associated with our operations. We maintain insurance designed to cover ordinary risks associated with our
operations and our ordinary indemnification obligations. This insurance might
not be adequate coverage or may be contested by our carriers. For example, our
insurance carrier, to whom we paid premiums to cover risks associated with our
product development services, filed suit against us seeking to rescind the
insurance policies or to have coverage denied for some or all of the claims
arising from class action litigation involving an Alzheimers study, which suit
has been subsequently settled. The availability and level of coverage provided
by our insurance could have a material impact on our profitability if we suffer
uninsured losses or are required to indemnify third parties for uninsured
losses. As part of the formation of Verispan, Verispan assumed our obligation under our
settlement agreement with WebMD Corporation, or WebMD, to indemnify WebMD for
losses arising out of or in connection with the (1) canceled Data Rights
Agreement with WebMD, (2) our data business, which was contributed to the joint
venture, (3) the collection, accumulation, storage or use of data by ENVOY
Corporation, or ENVOY, for the purpose of transmitting or delivering data to
us, (4) any actual transmission or delivery by ENVOY of data to us or (5)
violations of law or contract attributable to any of the events described in
(1)  (4) above. These indemnity obligations are limited to 50.0% for the
first $20.0 million in aggregate losses, subject to exceptions for certain
indemnity obligations that were not transferred to Verispan. Although Verispan
has assumed our indemnity obligations to WebMD relating to our former data
business, Verispan may have insufficient resources to satisfy these obligations
or may otherwise default with respect thereto. In addition, WebMD may seek
indemnity from us, and we would have to proceed against Verispan. In addition, we remain subject to other indemnity obligations to WebMD,
including for losses arising out of the settlement agreement itself or out of
the sale of ENVOY to WebMD. In particular, we could be liable for losses which
may arise in connection with a class action lawsuit filed against ENVOY prior
to our purchase and subsequent sale of it to WebMD, which lawsuit was recently
settled. ENVOY and its insurance carrier, Federal, filed a lawsuit against us
in June 2003 alleging that we should be responsible for payment of the
settlement amount of $11.0 million and related fees and costs in connection
with the class action lawsuit settlement. Our indemnity obligation with regard
to losses arising from the sale of ENVOY to WebMD including ENVOYs class
action lawsuit is not subject to the limitation on the first $20.0 million of
aggregate losses described above. Changes in government regulation could decrease the need for the services we
provide. Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for our
services, and, as a result, our business, results of operations and financial
condition could be materially adversely affected. Potential regulatory changes
under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on the
business opportunities available to us. 44




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Quintiles Transnational Corp. and Subsidiaries 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 FDA, DEA,
Department of Transportation and similar regulatory agencies throughout the
world. Any failure on our part to comply with applicable regulations could
materially impact our ability to perform our services. For example,
non-compliance could result in the termination of ongoing clinical research or
sales and marketing projects or the disqualification of data for submission to
regulatory authorities, either of which could have a material adverse effect on
us. If we were to fail to verify that informed consent is obtained from patient
participants in connection with a particular clinical trial, the data collected
from that trial could be disqualified, and we could be required to redo the
trial under the terms of our contract at no further cost to our customer, but
at substantial cost to us. Moreover, from time to time, including the present,
one or more of our customers are investigated by regulatory authorities or
enforcement agencies with respect to regulatory compliance of their clinical
trials and programs. In these situations, we often have provided services to
our customers with respect to the trials and programs 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. For example, our customer,
Biovail Corporation, recently became the subject of government inquiries
relating to Cardizem LA P.L.A.C.E. late phase clinical program, and has
asserted publicly that we have warranted that this program complies with all
laws and regulations, to which we have taken exception. If our customers or
regulatory authorities make such claims against us and prove them, we could be
subject to substantial damages, fines or penalties. Our services are subject to evolving industry standards and rapid technological
changes. The markets for our services are characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. To succeed, we must continue to:  
    
    enhance our existing services;
    
    introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
    
    integrate new services with existing services;
    
    achieve market acceptance for new services; and
    
    respond to emerging industry standards and other technological changes. Exchange rate fluctuations may affect our results of operations and financial
condition. We derive a large portion of our net revenue from international operations. Our
financial statements are denominated in U.S. dollars; thus, factors associated
with international operations, including changes in foreign currency exchange
rates, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including: 45




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Quintiles Transnational Corp. and Subsidiaries  
    
    Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
    
    Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts. We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at March 31, 2004. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably
reduce our currency transaction risk associated with our service contracts. We face other risks in connection with our international operations. We have significant operations in foreign countries. As a result, we are
subject to certain risks inherent in conducting business internationally,
including the following:  
    
    foreign countries could change regulations or impose currency restrictions
and other restraints;
    
    political changes and economic crises may lead to changes in the
business environment in which we operate; and
    
    international conflict, including terrorist acts, could significantly
impact our financial condition and results of operations. New and proposed laws and regulations regarding confidentiality of patients
information could result in increased risks of liability or increased cost to
us, or could limit our service offerings. The confidentiality and release of patient-specific information are subject to
governmental regulation. Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human
Services has issued regulations mandating heightened privacy and
confidentiality protections. Similarly, the European Union, or EU, and its
member states, as well as other countries, continue to issue new regulations.
National and U.S. state governments are contemplating or have proposed or
adopted additional legislation governing the possession, use and dissemination
of medical record information and other personal health information. In
particular, proposals being considered by state governments may contain privacy
and security protections that are more burdensome than the federal regulations.
In order to comply with these regulations, we may need to implement new
security measures, which may require us to make substantial expenditures or
cause us to limit the products and services we offer. In addition, if we
violate applicable laws, regulations or duties relating to the use, privacy or
security of health information, we could be subject to civil or criminal
penalty and be forced to alter our business practices. 46




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Quintiles Transnational Corp. and Subsidiaries We may be adversely affected by customer concentration. Although we did not have any one customer that accounted for 10% of net service
revenues for the three months ended March 31, 2004, if any large customer
decreases or terminates its relationship with us, our business, results of
operations or financial condition could be materially adversely affected. 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 that addressed the FDAs current thinking
on this topic. Part 11 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. Becoming
compliant with Part 11 involves considerable complexity and cost. Our ability
to provide services to our customers in full compliance with applicable
regulations includes a requirement that, over time, we become compliant and
maintain compliance with the requirements of Part 11. We are making steady and
documented progress in bringing our critical computer applications into
compliance according to written enhancement plans that have been reviewed and
approved by third party authorities. Lower-priority systems are, likewise,
being reviewed and revalidated. If we are unable to complete these compliance
objectives, our ability to provide services to our customers which meet FDA
requirements may be adversely affected. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk We did not have any material changes in market risk from December 31, 2003. 
 Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act as of the end of the period covered by this Form 10-Q. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Form 10-Q, our
disclosure controls and procedures provide reasonable assurances that the
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the
time period required by the United States Securities and Exchange Commissions
rules and forms. There have been no 47




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Quintiles Transnational Corp. and Subsidiaries changes in our internal controls 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 have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
one of our subsidiaries, on behalf of 185 Alzheimers patients who participated
in drug studies involving an experimental drug manufactured by defendant
Novartis, and their surviving spouses. The complaint alleges claims for breach
of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation,
Georgia RICO violations, infliction of emotional distress, battery, negligence
and loss of consortium as to class member spouses. The complaint seeks
unspecified damages, plus costs and expenses, including attorneys fees and
experts fees. On September 27, 2003, the parties entered into a settlement
memorandum following a mediated settlement conference. The parties
subsequently agreed to final settlement documents, which memorialized payments
by several defendants to individual study participants or their
representatives. On March 10, 2004 the Court dismissed the case with
prejudice. On January 22, 2002, Federal Insurance Company, or Federal, and Chubb Custom
Insurance Company, or Chubb, filed suit against us, Quintiles Pacific, Inc. and
Quintiles Laboratories Limited, two of our subsidiaries, in the United States
District Court for the Northern District of Georgia. In the suit, Chubb, our
primary commercial general liability carrier for coverage years 2000-2001 and
2001-2002, and Federal, our excess liability carrier for coverage years
2000-2001 and 2001-2002, seek to rescind the policies issued to us based on an
alleged misrepresentation by us on our policy application. Alternatively,
Chubb and Federal seek a declaratory judgment that there is no coverage under
the policies for some or all of the claims asserted against us and our
subsidiaries in the class action lawsuit filed on January 26, 2001 and
described above and, if one or more of such claims is determined to be covered,
Chubb and Federal request an allocation of the defense costs between the claims
they contend are covered and non-covered claims. We have filed an answer with
counterclaims against Federal and Chubb in response to their complaint.
Additionally, we have amended our pleadings to add AON Risk Services, or AON,
as a counterclaim defendant, as an alternative to our position that Federal and
Chubb are liable under the policies. In order to preserve our rights, on March
27, 2003, we also filed a separate action against AON in the United States
District Court for the Middle District of North Carolina. We believe the
allegations made by Federal and Chubb are without merit and are defending this
case vigorously. 48




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Quintiles Transnational Corp. and Subsidiaries 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. 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. 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. We are also party to other legal proceedings incidental to our business. While
we currently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our consolidated financial statements, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations for the
period in which the ruling occurs. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities  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 and Reports on Form 8-K  31.1
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.31.2
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.  (a)
    
    During the three months ended March 31, 2004, the Company filed
or furnished two reports on Form 8-K. The Company furnished a Form 8-K to the Securities and Exchange Commission
dated March 4, 2004, providing information regarding its net new business
wins during 2003. This report shall 49




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Quintiles Transnational Corp. and Subsidiaries not be deemed to be incorporated by reference into this Form 10-Q or filed
hereunder for purposes of liability under the Exchange Act. The Company furnished a Form 8-K, dated March 9, 2004, reporting that
Intermediate Holding announced its intent to offer senior discount notes
due 2014 with gross proceeds to Intermediate Holding of approximately
$125.0 million. No other reports on Form 8-K were filed or furnished during the three
months ended March 31, 2004. 50




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Quintiles Transnational Corp. and Subsidiaries 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Quintiles Transnational Corp.  Date
    
    April 30, 2004
    
    /s/ Dennis B. GillingsDennis B. Gillings, Executive Chairmanand Chief Executive OfficerDate
    
    April 30, 2004
    
    /s/ James L. BiermanJames L. Bierman, Executive Vice Presidentand Chief Financial Officer
 51




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Quintiles Transnational Corp. and Subsidiaries 
 EXHIBIT INDEX Exhibit
    
    Description31.1
    

    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.31.2
    

    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.32.1
    

    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.32.2
    

    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002. 52