##### 



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




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##### 



Index PagePart I. Financial InformationItem 1. Financial Statements (unaudited)Condensed consolidated balance sheets  June 30, 2004 and December 31, 2003
    
    
    3Condensed consolidated statements of operations  Three months ended June 30, 2004 (successor) and 2003 (predecessor); Six months ended June 30, 2004 (successor) and 2003 (predecessor)
    
    
    4Condensed consolidated statements of cash flows  Six months ended June 30, 2004 (successor) and 2003 (predecessor)
    
    
    5Notes to condensed consolidated financial statements  June 30, 2004
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    61Item 4. Controls and Procedures
    
    
    61Part II. Other InformationItem 1. Legal Proceedings
    
    
    62Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  Not Applicable
    
    
    63Item 3. Defaults upon Senior Securities  Not Applicable
    
    
    63Item 4. Submission of Matters to a Vote of Security Holders  Not Applicable
    
    
    63Item 5. Other Information  Not Applicable
    
    
    63Item 6. Exhibits and Reports on Form 8-K
    
    
    64Signatures
    
    
    65Exhibit Index
    
    
    66
  2




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##### 



Quintiles Transnational Corp. and Subsidiaries 
 Condensed Consolidated Balance Sheets
  June 30
    
    December 312004
    
    2003Successor
    
    Successor(unaudited)
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    375,268
    
    
    $
    373,622Trade accounts receivable and unbilled services, net
    
    
    292,893
    
    
    
    237,142Investments in debt securities
    
    
    629
    
    
    
    611Prepaid expenses
    
    
    25,415
    
    
    
    20,096Other current assets and receivables
    
    
    55,818
    
    
    
    52,723Assets of discontinued operation
    
    
    88,459
    
    
    
    88,549Total current assets
    
    
    838,482
    
    
    
    772,743Property and equipment
    
    
    320,947
    
    
    
    300,902Less accumulated depreciation
    
    
    (39,940
    )
    
    
    (15,072
    )281,007
    
    
    
    285,830Intangibles and other assets:Investments in debt securities
    
    
    10,942
    
    
    
    10,426Investments in marketable equity securities
    
    
    34,392
    
    
    
    58,294Investments in non-marketable equity securities and loans
    
    
    53,021
    
    
    
    48,556Investments in unconsolidated affiliates
    
    
    121,125
    
    
    
    121,176Commercial rights and royalties
    
    
    8,211
    
    
    
    12,528Accounts receivable  unbilled
    
    
    45,181
    
    
    
    40,107Advances to customer
    
    
    70,000
    
    
    
    70,000Goodwill
    
    
    170,771
    
    
    
    181,327Other identifiable intangibles, net
    
    
    302,549
    
    
    
    335,251Deferred income taxes
    
    
    4,246
    
    
    
    4,093Deposits and other assets
    
    
    50,384
    
    
    
    52,380870,822
    
    
    
    934,138Total assets
    
    $
    1,990,311
    
    
    $
    1,992,711Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    312,927
    
    
    $
    312,700Credit arrangements
    
    
    20,822
    
    
    
    20,669Unearned income
    
    
    187,204
    
    
    
    191,255Income taxes payable
    
    
    23,335
    
    
    
    24,911Other current liabilities
    
    
    2,545
    
    
    
    3,169Liabilities of discontinued operation
    
    
    7,125
    
    
    
    7,081Total current liabilities
    
    
    553,958
    
    
    
    559,785Long-term liabilities:Credit arrangements, less current portion
    
    
    772,404
    
    
    
    773,587Deferred income taxes
    
    
    95,987
    
    
    
    99,622Minority interest
    
    
    36,310
    
    
    
    1,380Other liabilities
    
    
    21,918
    
    
    
    23,239926,619
    
    
    
    897,828Total liabilities
    
    
    1,480,577
    
    
    
    1,457,613Shareholders equity:Common stock and additional paid-in capital,
125,000,000 shares issued and outstanding at
June 30, 2004 and December 31, 2003
    
    
    521,725
    
    
    
    521,725Accumulated deficit
    
    
    (33,176
    )
    
    
    (7,427
    )Accumulated other comprehensive income
    
    
    21,185
    
    
    
    20,800Total shareholders equity
    
    
    509,734
    
    
    
    535,098Total liabilities and shareholders equity
    
    $
    1,990,311
    
    
    $
    1,992,711
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 3




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##### 



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


    Three months
    
    Six months
    


    Six monthsended
    


    ended
    
    ended
    


    endedJune 30,
    


    June 30,
    
    June 30,
    


    June 30,2004
    


    2003
    
    2004
    


    2003Successor
    


    Predecessor
    
    Successor
    


    PredecessorNet revenues
    
    $
    425,766
    
    


    $
    408,398
    
    
    $
    848,960
    
    


    $
    811,952Add: reimbursed service costs
    
    
    82,306
    
    


    
    96,797
    
    
    
    164,765
    
    


    
    191,138Gross revenues
    
    
    508,072
    
    


    
    505,195
    
    
    
    1,013,725
    
    


    
    1,003,090Costs, expenses and other:Costs of revenues
    
    
    372,062
    
    


    
    337,493

    
    
    
    728,664
    
    


    
    669,600General and administrative
    
    
    158,984
    
    


    
    137,232
    
    
    
    314,602
    
    


    
    268,236Interest expense (income), net
    
    
    14,576
    
    


    
    (4,360
    )
    
    
    29,195
    
    


    
    (8,128
    )Other (income) expense, net
    
    
    1,199
    
    


    
    (8,267
    )
    
    
    (1,992
    )
    


    
    (5,425
    )Transaction
    
    
    
    
    


    
    2,231
    
    
    
    
    
    


    
    3,887Gain on sale of portion of an investment in a subsidiary
    
    
    (24,688
    )
    


    
    
    
    
    
    (24,688
    )
    


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


    
    
    
    
    
    (10,030
    )
    


    
    512,103
    
    


    
    464,329
    
    
    
    1,035,751
    
    


    
    928,170(Loss) income before income taxes
    
    
    (4,031
    )
    


    
    40,866
    
    
    
    (22,026
    )
    


    
    74,920Income tax expense
    
    
    14,133
    
    


    
    14,531
    
    
    
    13,408
    
    


    
    27,020(Loss) income before equity in earnings of unconsolidated
affiliates and other
    
    
    (18,164
    )
    


    
    26,335
    
    
    
    (35,434
    )
    


    
    47,900Equity in losses of unconsolidated affiliates and other
    
    
    (201
    )
    


    
    20
    
    
    
    (456
    )

    


    
    16(Loss) income from continuing operations
    
    
    (18,365
    )
    


    
    26,355
    
    
    
    (35,890
    )
    


    
    47,916Income from discontinued operation
    
    
    8,280
    
    


    
    3,242
    
    
    
    10,141
    
    


    
    6,837Net (loss) income
    
    $
    (10,085
    )
    


    $
    29,597
    
    
    $
    (25,749
    )
    


    $
    54,753
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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##### 



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


    Six months endedJune 30,
    


    June 30,2004
    


    2003Successor
    


    PredecessorOperating activitiesNet (loss) income
    
    $
    (25,749
    )
    


    $
    54,753Income from discontinued operation
    
    
    (10,141
    )
    


    
    (6,837
    )(Loss) income from continuing operations
    
    
    (35,890
    )
    


    
    47,916Adjustments to reconcile (loss) income from continuing
operations to net cash (used in) provided by operating
activities:Depreciation and amortization
    
    
    66,882
    
    


    
    42,184Amortization of debt issuance costs
    
    
    1,661
    
    


    
    Restructuring charge (payments) accrual, net
    
    
    (3,244
    )
    


    
    (4,070
    )Loss (gain) from sales and impairments of investments, net
    
    
    3,795
    
    


    
    (28,448
    )Gain from sale of certain assets
    
    
    (5,114
    )
    


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


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


    
    Provision for (benefit from) deferred income tax expense
    
    
    5,270
    
    


    
    1,374Change in accounts receivable, unbilled services and
unearned income
    
    
    (63,397
    )
    


    
    (187
    )Change in other operating assets and liabilities
    
    
    (6,556
    )
    


    
    1,326Other
    
    
    (89
    )
    


    
    (1,269
    )Net cash (used in) provided by operating activities
    
    
    (71,400
    )
    


    
    58,826Investing activitiesAcquisition of property and equipment
    
    
    (24,583
    )
    


    
    (23,959
    )Payment of transaction costs in Transaction
    
    
    (7,039
    )
    


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

    


    
    Acquisition of intangible assets
    
    
    
    
    


    
    (3,739
    )Acquisition of commercial rights and royalties
    
    
    (3,000
    )
    


    
    (14,710
    )Proceeds from sale of certain assets
    
    
    9,068
    
    


    
    Proceeds from sale of minority interest in subsidiary
    
    
    35,976
    
    


    
    Proceeds from disposition of property and equipment
    
    
    3,495
    
    


    
    4,151Proceeds from (purchases of) debt securities, net
    
    
    (407
    )
    


    
    25,846Purchases of equity securities and other investments
    
    
    (7,736
    )
    


    
    (5,131
    )Proceeds from sale of equity securities and other investments
    
    
    27,930
    
    


    
    53,815Other
    
    
    250
    
    


    
    Net cash provided by investing activities
    
    
    33,702
    
    


    
    36,273Financing activitiesPrincipal payments on credit arrangements, net
    
    
    (9,432
    )
    


    
    (9,579
    )Dividend from discontinued operation
    
    
    7,929
    
    


    
    4,447Proceeds from change in interest transaction
    
    
    41,773
    
    


    
    Issuance of common stock, net (predecessor)
    
    
    
    
    


    
    5,079Net cash provided by (used in) financing activities
    
    
    40,270
    
    


    
    (53
    )Effect of foreign currency exchange rate changes on cash
    
    
    (926
    )
    


    
    14,896Increase in cash and cash equivalents
    
    
    1,646
    
    


    
    109,942Cash and cash equivalents at beginning of period
    
    
    373,622
    
    


    
    644,255Cash and cash equivalents at end of period
    
    $
    375,268
    
    


    $
    754,197
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 5




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##### 



Quintiles Transnational Corp. and Subsidiaries 
   June 30, 2004 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2003 of Quintiles Transnational Corp. (the
Company). The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 2003
financial statements have been reclassified to conform with the
2004 financial statement presentation. In August 2004, the Company completed its previously announced sale of certain
assets related to its Bioglan Pharmaceuticals business (Bioglan) as further
described in Note 10. Accordingly, the operating results and balance sheet
items of Bioglan have been reflected separately in the accompanying financial
statements as a discontinued operation. On September 25, 2003, the Company completed its merger transaction with Pharma
Services Holding, Inc. (Pharma Services) pursuant to which Pharma Services
Acquisition Corp. (Acquisition Corp.) was merged with and into the Company,
with the Company continuing as the surviving corporation and an indirect wholly
owned subsidiary of Pharma Services (the Transaction or Pharma Services
Transaction). As a result of the Transaction, the Companys results of
operations, financial position and cash flows prior to the date of the
Transaction are presented as the Predecessor. The financial effects of the
Transaction and the Companys results of operations, financial position and
cash flows as the surviving corporation following the Transaction are presented
as the Successor. To clarify and emphasize that the Successor Company has
been presented on an entirely new basis of accounting, the Company has
separated Predecessor and Successor operations with a vertical black line,
where appropriate. 2. Employee Stock Compensation Pharma Services granted options to purchase 212,500 shares of its common stock
to certain of the Companys employees during the six months ended June 30,
2004, none of which were granted during the quarter ended June 30, 2004. As of
June 30, 2004, there were options to acquire 3,525,000 shares of Pharma
Services Common Stock outstanding. 6




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##### 



Quintiles Transnational Corp. and Subsidiaries Pro forma information regarding net (loss) income is required by SFAS No. 123,
as amended by SFAS No. 148, and has been determined as if the Company had
accounted for the stock options granted by its parent company, Pharma Services,
to the Companys employees under the fair value method of SFAS No. 123. The Companys pro forma information follows (in thousands): Three months
    


    Three monthsended
    


    ended
    
    Six months ended
    


    Six months endedJune 30, 2004
    


    June 30, 2003
    
    June 30, 2004
    


    June 30, 2003Successor
    


    Predecessor
    
    Successor
    


    PredecessorNet (loss) income, as reported
    
    $
    (10,085
    )
    


    $
    29,597
    
    
    $
    (25,749
    )
    


    $
    54,753Add: stock based compensation
expense included in net
income (loss) as reported,
net of income tax
    
    
    
    
    


    
    
    
    
    
    
    
    


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


    
    (3,662
    )
    
    
    (1
    )
    


    
    (7,481
    )Pro forma net (loss) income
    
    $
    (10,085
    )
    


    $
    25,935
    
    
    $
    (25,750
    )
    


    $
    47,242
 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): June 30,
    
    December 31,2004
    
    2003Successor
    
    SuccessorCommercial rights and royalties
    
    $
    8,211
    
    
    $
    12,528Accounts receivable-unbilled
    
    
    45,181
    
    
    
    40,107Advances to customer
    
    
    70,000
    
    
    
    70,000Total
    
    $
    123,392
    
    
    $
    122,635
 Below is a brief description of these agreements: In May 1999, the Company entered into an agreement with CV Therapeutics, Inc.
(CVTX) to commercialize Ranexa for angina in the United States and Canada.
In July 2003, CVTX and the Company entered into a new agreement that superceded
the prior agreement. Under the terms of the July 2003 agreement, all rights to
RanexaTM reverted back to CVTX, and CVTX will owe no royalty payments to the
Company. Under the July 2003 agreement, the Company received a warrant to
purchase 200,000 shares of CVTX common stock at $32.93 per share during the
five-year term commencing July 9, 2003. CVTX also is obligated to purchase
from the Company, within six months of the approval of
RanexaTM, services of at
least $10.0 million in aggregate value or to pay the Company a lump sum amount
equal to 10% of any shortfall from $10.0 million in purchased services. 7




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##### 



Quintiles Transnational Corp. and Subsidiaries 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 June 30, 2004, the Company has capitalized 251.8 million Philippine pesos
(approximately $4.5 million) related to the cost of acquiring these commercial
rights, and is amortizing these costs over five years. Under the terms of the
agreement, the customer has the option to reacquire the rights to the four
products from the Company after seven years for a price to be determined at the
exercise date. 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 committed to funding 50% of sales
and marketing activities for AIROZIN over five years with a $6.0 million limit
per year. Following product launch, the agreement provides for the Company to
receive royalties based on the net sales of AIROZIN. The royalty percentage
will vary to allow the Company to achieve a minimum rate of return. The Form
10-QSB filed by PLTT on September 5, 2003 indicated that PLTT will need
significant additional financing to continue operations beyond September 15,
2003 and PLTT has not made any additional filings with the Securities and
Exchange Commission since that time. As such, the Company recorded an
impairment of $4.0 million during 2003 on the loan receivable from PLTT and
reduced its five-year contingent commitment for the sales force and marketing
activities to zero at December 31, 2003. In 2004, PLTT ceased active
operations and is pursuing a recapitalization strategy, which had not raised
additional funding to the Companys knowledge as of June 30, 2004. 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 June 30, 2004, the
Company has made $5.7 million available under the line of credit, of which $4.8
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 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 8




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##### 



Quintiles Transnational Corp. and Subsidiaries 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 April 2004, the Company used
the cashless feature to purchase 213,334 shares of common stock and received
160,318 shares of DSCO common stock. In 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 June 30, 2004, the
Company has received payments totaling approximately $15.4 million. The
proceeds are reported in the statement of cash flows as an operating activity 
change in operating assets and liabilities. During the second quarter of 2002, the Company finalized the arrangements under
its previously announced letter of intent with a large pharmaceutical customer
to market pharmaceutical products in Belgium, Germany and Italy. Either party
may cancel the contract at six-month intervals in the event that sales are not
above certain levels specified. In the first quarter of 2003 and the third
quarter of 2003, the agreements in Germany and Belgium, respectively, were
terminated. For the remaining portion of the contract in Italy, the Company
will provide, at its own expense, sales and marketing resources over the
five-year life of the agreement. As of June 30, 2004, the Company estimates
the cost of its minimum obligation over the remaining contract life for the
remaining territory of Italy to be approximately $13 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. 9




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##### 



Quintiles Transnational Corp. and Subsidiaries 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 New Drug Application, or NDA, for
Cymbalta, which was approved in the third quarter of 2004 by the FDA for the
treatment of depression. Under the terms of the agreement, the Company will
provide, at its expense, more than 500 sales representatives to supplement the
extensive LLY sales force in the promotion of Cymbalta for the five years
following product launch. The Companys sales force will promote Cymbalta in
its primary, or P1, position within sales calls. During the first three years
LLY will pay for the remainder of the capacity of this sales force, referred to
as the P2 and P3 positions, on a fee-for-service basis. The Company will make
marketing and milestone payments to LLY totaling $110.0 million of which $70.0
million was paid in 2002 and the remaining $40.0 million is due throughout the
four quarters following FDA approval. 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. In July 2002, the Company entered into an agreement with Columbia Laboratories,
Inc. (CBRX) to commercialize, in the United States, the following womens
health products: Prochieve 8%, Prochieve 4%, Advantage-S® and RepHresh.
Under the terms of the agreement, the Company purchased 1,121,610 shares of
CBRX common stock for $5.5 million. The Company also paid to CBRX four
quarterly payments of $1.125 million totaling $4.5 million. The payments are
reported in the statement of cash flows as an investing activity  acquisition
of commercial rights and royalties. In return, the Company will receive
royalties of 5% on the sales of the four CBRX womens healthcare products in
the United States for a five-year period beginning in the first quarter of
2003. The royalties are subject to minimum and maximum amounts of $8.0 million
and $12.0 million, respectively, over the life of the agreement. Through June
30, 2004, the Company has received payments totaling approximately $503,000.
The proceeds are reported in the statement of cash flows as an operating
activity  change in operating assets and liabilities. In addition, the
Company will provide to CBRX, at CBRXs expense on a fee-for-service basis, a
sales force to commercialize the products. In January 2004, the Company and
CBRX agreed to restructure the fee-for-service agreement to allow for an
accelerated transfer of the sales force management responsibility to CBRX. The
purchase of the CBRX common stock included participation rights to acquire
additional shares of CBRX. During July 2003, the Company exercised its
participation rights and purchased an additional 56,749 shares of CBRX for
$664,000. 10




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##### 



Quintiles Transnational Corp. and Subsidiaries In December 2002, the Company entered into an agreement with a large
pharmaceutical customer to market two products in Belgium. Under the terms of
an asset purchase agreement, the Company will have the rights to one product in
Belgium in exchange for payments of 5.5 million euros (approximately $6.7
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 June 30,
2004. The payments are reported in the statement of cash flows as an investing
activity  acquisition of intangible assets. The Company has also provided all
of the services to the customer under the 2.2 million euros service component.
The Companys service obligation is recorded as a cost of the distribution
rights and is being amortized over the six-year distribution agreement. The
customer will continue to manufacture the product for the six years of the
distribution agreement. In March 2003, the Company entered into an agreement with CBRX to commercialize
CBRXs StriantTM testosterone buccal bioadhesive product in the United States.
StriantTM was approved in June 2003 by the FDA for the treatment of
hypogonadism. Under the terms of the agreement, the Company has paid five
quarterly payments of $3.0 million each totaling $15.0 million. The payments
are reported in the statement of cash flows as an investing activity 
acquisition of commercial rights and royalties. In return, the Company will
receive a 9% royalty on the net sales of StriantTM in the United States up to
agreed levels of annual sales revenues, and a 4.5% royalty of net sales above
those levels. The royalty term is seven years. Royalty payments are subject
to minimum and maximum amounts of $30.0 million and $55.0 million,
respectively, over the life of the agreement. Through June 30, 2004, the
Company has received payments totaling approximately $306,000. The proceeds
are reported in the statement of cash flows as an operating activity  change
in operating assets and liabilities. In addition, the Company will provide to
CBRX, at CBRXs expense on a fee-for-service basis, a sales force to
commercialize the products for a two-and-a-half year term. In January 2004,
the Company and CBRX agreed to restructure the fee-for-service agreement to
allow for an accelerated transfer of the sales force management responsibility
to CBRX. 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.
Without revising the overall limits of the agreement, the agreement was
amended to allow increased spending for the second, third and fourth quarters
of 2004. The revised quarterly limits are $11 million for the second quarter
of 2004 and $13 million for each of the third and fourth quarters of 2004. The
Companys service obligations are anticipated to occur through the end of 2006,
but may run longer depending on the customers actual use of services and when,
and if, FDA approval of the new product occurs. Until the FDA approves the new 11




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##### 



Quintiles Transnational Corp. and Subsidiaries 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 $7.5 million of services
under this agreement through June 30, 2004. The Company has firm commitments under the arrangements described above to
provide funding of approximately $281.0 million in exchange for various
commercial rights. As of June 30, 2004, the Company has funded approximately
$218.0 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 $95-120 million per year for a
period of five to six years, subject to certain limitations and varying time
periods. Below is a summary of the remaining firm commitments with pre-determined
payment schedules under such arrangements (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    TotalService commitments
    
    $
    19,207
    
    
    $
    31,358
    
    
    $
    4,383
    
    
    $
    3,856
    
    
    $
    437
    
    
    $
    59,241Licensing and distribution rights
    
    
    1,538
    
    
    
    1,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,376$
    20,745
    
    
    $
    33,196
    
    
    $
    4,383
    
    
    $
    3,856
    
    
    $
    437
    
    
    $
    62,617
 12




---



##### 



Quintiles Transnational Corp. and Subsidiaries 4. Investments  Marketable Equity Securities The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment. The equity investments may be subject to certain trading
restrictions including lock-up agreements. The Companys portfolio in such
transactions as of June 30, 2004 is as follows (in thousands except share
data): Trading
    
    Number of
    
    
    
    
    
    Fair MarketCompany
    
    Symbol
    
    Shares
    
    Cost Basis
    
    ValueCommon Stock:The Medicines Company
    
    MDCO
    
    
    375,000
    
    
    $
    9,731
    
    
    $
    11,441Discovery Laboratories, Inc.
    
    DSCO
    
    
    1,499,657
    
    
    
    11,802
    
    
    
    14,382Columbia Laboratories, Inc.
    
    CBRX
    
    
    1,178,359
    
    
    
    4,077
    
    
    
    4,077Derivative instruments (see Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Other
    
    
    
    
    
    
    
    
    
    
    4,324
    
    
    
    4,937Total Marketable Equity Securities
    
    
    
    
    
    
    
    
    
    $
    29,934
    
    
    $
    34,392
 In accordance with its policy to continually review declines in fair value of
the marketable equity securities for declines that may be other than temporary,
the Company recognized losses due to the impairment of marketable equity
securities of $10.2 million for the three and six months ended June 30, 2004. 5. Investments  Non-marketable Equity Securities and Loans The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment in non-marketable securities or loans. These financial arrangements
are comprised of direct and indirect investments. The indirect investments are
made through eight venture capital funds in which the Company is an investor.
The Companys portfolio in such transactions as of June 30, 2004 is as follows
(in thousands): Remaining FundingCompany
    
    Cost Basis
    
    CommitmentVenture capital funds
    
    $
    34,398
    
    
    $
    13,944Equity investments (six companies)
    
    
    13,058
    
    
    
    Convertible loans (three companies)
    
    
    685
    
    
    
    112Loans (two companies)
    
    
    4,880
    
    
    
    3,749Total non-marketable equity securities and loans
    
    $
    53,021
    
    
    $
    17,805
 Below is a table representing managements best estimate as of June 30, 2004 of
the amount and timing of the above remaining funding commitments (in
thousands): 2004
    
    2005
    
    TotalVenture capital funds
    
    $
    8,140
    
    
    $
    5,804
    
    
    $
    13,944Convertible loans
    
    
    112
    
    
    
    
    
    
    
    112Loans
    
    
    3,000
    
    
    
    749
    
    
    
    3,749Total remaining funding commitments
    
    $
    11,252
    
    
    $
    6,553
    
    
    $
    17,805
 13




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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 $51,000, $1.6
million, $205,000 and $2.5 million of losses due to such impairments in the
three months ended June 30, 2004 and 2003, respectively, and six months ended
June 30, 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 June 30, 2004, the Company had the following derivative positions in
securities of other issuers: (1) conversion option positions that are embedded
in financing arrangements, (2) freestanding warrants to purchase shares of
common stock and (3) put and call instruments to hedge the cash flow from the
sale of certain marketable securities. As of June 30, 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 June 30, 2004, the Company has several freestanding warrants to purchase
common stock of various customers and other third parties. These freestanding
warrants primarily were acquired as part of the financial arrangements with
such customers and third parties. No quoted price is available for the
Companys freestanding warrants to purchase shares of common stock. The
Company uses various valuation techniques including the present value of
estimated expected future cash flows, option-pricing models and fundamental
analysis. Factors affecting the valuation include the current price of the
underlying asset, 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
June 30, 2004, the Company held warrants from various contracts valued at $6.0
million which are 14




---



##### 



Quintiles Transnational Corp. and Subsidiaries included in the accompanying balance sheet as deposits and other assets. The
Company recognized an investment loss of $59,000 during the three months ended
June 30, 2004 and investment revenues of $1.3 million, $2.5 million and $12.4
million during the three months ended June 30, 2003, and the six months ended
June 30, 2004 and 2003, respectively, related to changes in the fair values of
the warrants. In 2003, the Company had entered into three zero-cost-collar transactions to
hedge certain future cash flows occurring in 2004. As these transactions were
entered into to hedge the risk of the potential volatility in the cash flows
resulting from sales of the underlying security during the first three quarters
of 2004, these transactions are accounted for as a cash flow hedge. As such,
the effective portion of the gain or loss on the derivative instrument is
recorded as unrealized holding gains (losses) on marketable equity securities
included as a separate component of shareholders equity. This hedge is deemed
to be perfectly effective under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as defined. As of June 30, 2004, the
Company recorded a gross unrealized loss on these transactions of $445,000
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 $21.6 million in cash and a
gain of approximately $2.1 million for the six months ended June 30, 2004. 7. Goodwill and Identifiable Intangible Assets The Company has approximately $302.5 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 $19.1 million and $8.3 million for the three
months ended June 30, 2004 and 2003, respectively, and $38.5 million and $16.5
million for the six months ended June 30, 2004 and 2003, respectively. Estimated amortization expense for existing identifiable intangible assets is
targeted to be approximately, $71.8 million, $56.2 million, $25.8 million,
$15.1 million and $10.8 million for each of the years in the five-year period
ended December 31, 2008, respectively. Estimated amortization expense can be
affected by various factors including future acquisitions or divestitures of
product and/ or licensing and distribution rights. 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. 15




---



##### 



Quintiles Transnational Corp. and Subsidiaries The following is a summary of identifiable intangible assets as of June 30,
2004 (in thousands): AccumulatedGross Amount
    
    Amortization
    
    Net AmountIdentifiable intangible assets:Commercial rights and royalties,
licenses and customer relationships
    
    $
    125,578
    
    
    $
    28,343
    
    
    $
    97,235Trademarks, trade names and other
    
    
    164,720
    
    
    
    13,306
    
    
    
    151,414Software and related assets
    
    
    71,383
    
    
    
    17,483
    
    
    
    53,900Total identifiable intangible assets
    
    $
    361,681
    
    
    $
    59,132
    
    
    $
    302,549
 The following is a summary of goodwill by segment for the six months ended June
30, 2004 (in thousands): Product
    
    Commercial
    
    PharmaBioDevelopment
    
    Services
    
    Development
    
    ConsolidatedBalance as of December 31, 2003
    
    $
    116,931
    
    
    $
    61,750
    
    
    $
    2,646
    
    
    $
    181,327Less: goodwill allocated to certain
assets disposed of
    
    
    (519
    )
    
    
    
    
    
    
    
    
    
    
    (519
    )goodwill allocated to sale of a
portion of an investment in a
subsidiary
    
    
    (2,345
    )
    
    
    (4,424
    )
    
    
    
    
    
    
    (6,769
    )goodwill allocated to
non-operating change in
interest transaction
    
    
    (988
    )
    
    
    (1,865
    )
    
    
    
    
    
    
    (2,853
    )Privatization transaction fee adjustment
    
    
    (198
    )
    
    
    (52
    )
    
    
    
    
    
    
    (250
    )Impact of foreign currency fluctuations
    
    
    (167
    )
    
    
    2
    
    
    
    
    
    
    
    (165
    )Balance as of June 30, 2004
    
    $
    112,714
    
    
    $
    55,411
    
    
    $
    2,646
    
    
    $
    170,771
 8. Investment Revenues The following table is a summary of investment revenues (in thousands): Three months
    


    Three months
    
    Six months
    


    Six monthsended June 30,
    


    ended June 30,
    
    ended June 30,
    


    ended June 30,2004
    


    2003
    
    2004
    


    2003Successor
    


    Predecessor
    
    Successor
    


    PredecessorMarketable equity and derivative
securities:Gross realized gains
    
    $
    2,533
    
    


    $
    13,242
    
    
    $
    7,389
    
    


    $
    32,009Gross realized losses
    
    
    (340
    )
    


    
    
    
    
    
    (822
    )
    


    
    Impairment losses
    
    
    (10,157
    )
    


    
    (282
    )
    
    
    (10,157
    )
    


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


    
    
    
    
    
    
    
    


    
    Gross realized losses
    
    
    
    
    


    
    
    
    
    
    
    
    


    
    Impairment losses
    
    
    (51
    )
    


    
    (1,648
    )
    
    
    (205
    )
    


    
    (2,468
    )Total investment revenues
    
    $
    (8,015
    )
    


    $
    11,312
    
    
    $
    (3,795
    )
    


    $
    29,259
 9. Gain on Portion of an Investment in a Subsidiary and Change in Interest
Transactions In June 2004, Mitsui & Co., Ltd. (Mitsui) acquired a 20% voting interest in
one of the Companys subsidiaries, Quintiles Transnational Japan K.K. (QJPN)
through two transactions. Mitsui acquired 3,556 shares of QJPNs ordinary
shares from the Company for approximately 4.0 billion yen (approximately $37.0
million). As part of its sale of 3,556 ordinary shares, the Company may
receive up to an additional 2.0 billion yen (approximately $18.5 million) based
on QJPNs future financial performance. Due to the uncertainty associated with
the contingent consideration, the Company has not 16




---



##### 



Quintiles Transnational Corp. and Subsidiaries included this amount in its gain on the sale of a portion of an investment in a
subsidiary. During the second quarter of 2004, the Company recorded a gain on
the sale of a minority interest in a subsidiary of $24.7 million. In addition, QJPN issued 1,778 shares of its Class A preference shares and
1,778 ordinary shares to Mitsui for approximately 4.7 billion yen
(approximately $42.9 million). The issuance by QJPN of the additional ordinary
shares further reduced the ownership interest by the Company in QJPN. As the
proceeds from the issuance of preference shares are not considered realized
until the preference shares are converted into ordinary shares, the Company did
not include such proceeds in its non-operating gain on the change in interest
transaction. The Company recorded a non-operating gain on the change in
interest transaction of approximately $10.0 million. As the preference shares are substantially the same as the ordinary shares
since the holders participate equally in dividends, voting rights and
liquidation of residual assets, the Company included the preference shares in
determining its minoritys ownership interest. Therefore, the minority
interest percentage used by the Company in calculating the minority interest
will be 20%. 10. Discontinued Operation In August 2004, the Company completed its previously announced sale of certain
assets related to its Bioglan business to New Jersey-based Bradley
Pharmaceuticals, Inc. for approximately $188.3 million in cash including
approximately $5.4 million of direct costs for transferred inventory. The
sales agreement contains certain adjustment provisions that could decrease the
total purchase price by requiring the Company to make payments to Bradley.
The assets disposed of were part of the PharmaBio Development groups strategic
investment portfolio which is routinely analyzed to evaluate the return
potential of the assets within the portfolio. The Bioglan business consisted primarily of a number of dermatology products,
including Solaraze® and ADOXA®, that the Company acquired in 2001 and 2002.
In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc. for
a total consideration of approximately $27.9 million. The assets included
distribution rights to market ADOXA® in the United States for nine years along
with other products and product rights that Bioglan Pharma, Inc., had
previously marketed, as well as approximately $1.6 million in cash. Until the
Company entered into a plan to dispose of the Bioglan assets in May 2004, the
Company amortized the intangible assets in proportion to the estimated revenues
over the lives of these product rights. As a result of the discontinued
operation, these assets are classified as assets held for sale in the
Companys balance sheet and are no longer being amortized. Under certain of
the contracts acquired, the Company had commitments to pay royalties based on a
percentage of net sales of the acquired product rights. In December 2001, the Company acquired the license to market SkyePharmas
Solaraze® skin treatment in the United States, Canada and Mexico for 14 years
from Bioglan Pharma Plc for a total consideration of $26.7 million. Until the
Company entered into a plan to dispose of the Bioglan assets in May 2004, the
Company amortized the rights in proportion to the revenues earned over the 14
year life of the license. Until the completion of the sale of
Bioglan, the Company had a commitment to pay royalties to
SkyePharma based on a percentage of net sales of Solaraze®. 17




---



##### 



Quintiles Transnational Corp. and Subsidiaries The results of the Bioglan business have been reported separately as a
discontinued operation in the condensed consolidated statements of operations.
The results of the discontinued operation do not reflect any corporate costs or
management fees allocated by the Company. The following is a summary of the operations of the Bioglan business included
in discontinued operation (in thousands): Three months
    


    Three months
    
    Six months
    


    Six monthsended
    


    ended
    
    ended
    


    endedJune 30, 2004
    


    June 30, 2003
    
    June 30, 2004
    


    June 30, 2003Successor
    


    Predecessor
    
    Successor
    


    PredecessorGross revenues
    
    $
    21,952
    
    


    $
    14,838
    
    
    $
    35,601
    
    


    $
    28,550Income before income taxes
    
    
    9,451
    
    


    
    3,948
    
    
    
    11,722
    
    


    
    8,015Income taxes
    
    
    1,171
    
    


    
    706
    
    
    
    1,581
    
    


    
    1,178Net income
    
    $
    8,280
    
    


    $
    3,242
    
    
    $
    10,141
    
    


    $
    6,837
 The assets and liabilities of the Bioglan operations are reported separately in
the accompanying condensed consolidated balance sheets as assets and
liabilities of discontinued operation. The following is a summary of the
assets and liabilities of the discontinued operation (in thousands): As of June 30, 2004
    
    As of December 31, 2003Current assets
    
    $
    13,637
    
    
    $
    9,012Property and equipment, net
    
    
    460
    
    
    
    536Intangible assets
    
    
    74,357
    
    
    
    78,995Other assets
    
    
    5
    
    
    
    6Assets of discontinued operation
    
    $
    88,459
    
    
    $
    88,549Current liabilities
    
    $
    7,092
    
    
    $
    7,040Long-term liabilities
    
    
    33
    
    
    
    41Liabilities of discontinued operation
    
    $
    7,125
    
    
    $
    7,081
 In May 2000, the Company completed its sale of its electronic data interchange
unit, ENVOY Corporation (ENVOY). The Company recorded an extraordinary gain
on the sale of ENVOY in the amount of $436.3 million, net of income taxes of
$184.7 million. In 2001, the Company adjusted its estimate of its tax basis in
ENVOY resulting in a $142.0 million reduction in income taxes on the sale of
ENVOY which resulted in an increase in the extraordinary gain in the same
amount. In January 2004, the Company received a communication from the Internal Revenue
Service proposing an increase in its income taxes owed for 2000 by
approximately $153.1 million. After further discussions, the Internal Revenue
Service revised and reissued its prior communication, reducing the proposed
assessment to $84.6 million. The proposed increase relates to the Internal
Revenue Service challenging the Companys method for determining the basis it
applied to the sale of its ENVOY Corporation subsidiary. The Company is
contesting the proposed increase and is presently in the appeals process with
the Internal Revenue Service. 18




---



##### 



Quintiles Transnational Corp. and Subsidiaries 11. 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 June 30, 2004, 60
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
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
June 30, 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 19




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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. As of June 30, 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/
    
    June 30,2003
    
    Payments
    
    Payments
    
    Payments
    
    Payments
    
    2004Severance and
related costs
    
    $
    7,567
    
    
    $
    (2,181
    )
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    5,381Exit costs
    
    
    8,176
    
    
    
    (112
    )
    
    
    (4
    )
    
    
    (773
    )
    
    
    (169
    )
    
    
    7,118$
    15,743
    
    
    $
    (2,293
    )
    
    $
    (4
    )
    
    $
    (773
    )
    
    $
    (174
    )
    
    $
    12,499
 12. Comprehensive Income The following table represents the Companys comprehensive (loss) income (in
thousands): Three months
    


    Three months
    
    Six months
    
    
    Six monthsended June 30,
    
    
    ended June 30,
    
    ended June 30,
    
    
    ended June 30,2004
    
    
    2003
    
    2004
    
    
    2003Successor
    
    
    Predecessor
    
    Successor
    
    
    PredecessorNet (loss) income
    
    $
    (10,085
    )
    
    
    $
    29,597
    
    
    $
    (25,749
    )
    
    
    $
    54,753Other comprehensive income (loss):Unrealized gain (loss) on marketable
securities, net of income taxes
    
    
    (1,926
    )
    
    
    
    10,398
    
    
    
    157
    
    
    
    
    13,209Reclassification adjustment, net of income taxes
    
    
    3,434
    
    
    
    
    (4,780
    )
    
    
    2,032
    
    
    
    
    (9,587
    )Minimum pension liability, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,098
    )Foreign currency adjustment
    
    
    421
    
    
    
    
    17,416
    
    
    
    (1,804
    )
    
    
    
    21,297Comprehensive (loss) income
    
    $
    (8,156
    )
    
    
    $
    52,631
    
    
    $
    (25,364
    )
    
    
    $
    76,574
 20




---



##### 



Quintiles Transnational Corp. and Subsidiaries 13. Segments The following table presents the Companys operations by reportable segment.
The Company is managed through three reportable segments, namely, the product
development group, the commercial services group, and the PharmaBio Development
group. Management has distinguished these segments based on the normal
operations of the Company. The product development group is primarily
responsible for all phases of clinical research and outcomes research
consulting. The commercial services group is primarily responsible for sales
force deployment and strategic marketing services. The PharmaBio Development
group is primarily responsible for facilitating non-traditional customer
alliances and its results consist primarily of product revenues, royalties and
commissions and investment revenues relating to the financial arrangements with
customers and other third parties. In August 2004, the Company completed its
previously announced sale of certain assets related to its Bioglan
business. The results of operations for the Bioglan business have been
separately reported as a discontinued operation and are no longer included in
the PharmaBio Development group. All historical periods presented herein have
been restated to reflect the Bioglan business as a discontinued operation. The
Company does not include general and administrative expenses, depreciation and
amortization except amortization of commercial rights, interest (income)
expense, other (income) expense and income tax expense (benefit) in determining
segment profitability. Contribution is defined as gross revenues less of costs
of revenues, excluding depreciation and amortization expense as indicated
below. Intersegment revenues have been eliminated (in thousands): Three months ended June 30, 2004  Successor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    268,363
    
    
    $
    150,263
    
    
    $
    
    
    
    $
    
    
    
    $
    418,626Intersegment
    
    
    
    
    
    
    8,596
    
    
    
    
    
    
    
    (8,596
    )
    
    
    Total net services
    
    
    268,363
    
    
    
    158,859
    
    
    
    
    
    
    
    (8,596
    )
    
    
    418,626Reimbursed service costs
    
    
    67,863
    
    
    
    14,488
    
    
    
    
    
    
    
    (45
    )
    
    
    82,306Gross service revenues
    
    
    336,226
    
    
    
    173,347
    
    
    
    
    
    
    
    (8,641
    )
    
    
    500,932Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    15,155
    
    
    
    
    
    
    
    15,155Investment
    
    
    
    
    
    
    
    
    
    
    (8,015
    )
    
    
    
    
    
    
    (8,015
    )Total revenues
    
    $
    336,226
    
    
    $
    173,347
    
    
    $
    7,140
    
    
    $
    (8,641
    )
    
    $
    508,072Contribution:$
    128,353
    
    
    $
    61,310
    
    
    $
    (21,497
    )
    
    $
    
    
    
    $
    168,166
 21




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended June 30, 2003  Predecessor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    251,374
    
    
    $
    127,959
    
    
    $
    
    
    
    $
    
    
    
    $
    379,333Intersegment
    
    
    
    
    
    
    10,893
    
    
    
    
    
    
    
    (10,893
    )
    
    
    Total net services
    
    
    251,374
    
    
    
    138,852
    
    
    
    
    
    
    
    (10,893
    )
    
    
    379,333Reimbursed service costs
    
    
    81,627
    
    
    
    15,170
    
    
    
    
    
    
    
    
    
    
    
    96,797Gross service revenues
    
    
    333,001
    
    
    
    154,022
    
    
    
    
    
    
    
    (10,893
    )
    
    
    476,130Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    17,753
    
    
    
    
    
    
    
    17,753Investment
    
    
    
    
    
    
    
    
    
    
    11,312
    
    
    
    
    
    
    
    11,312Total revenues
    
    $
    333,001
    
    
    $
    154,022
    
    
    $
    29,065
    
    
    $
    (10,893
    )
    
    $
    505,195Contribution:$
    128,079
    
    
    $
    50,713
    
    
    $
    9,415
    
    
    $
    
    
    
    $
    188,207
 Six months ended June 30, 2004  Successor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    531,047
    
    
    $
    290,967
    
    
    $
    
    
    
    $
    
    
    
    $
    822,014Intersegment
    
    
    
    
    
    
    14,879
    
    
    
    
    
    
    
    (14,879
    )
    
    
    Total net services
    
    
    531,047
    
    
    
    305,846
    
    
    
    
    
    
    
    (14,879
    )
    
    
    822,014Reimbursed service costs
    
    
    135,724
    
    
    
    29,416
    
    
    
    
    
    
    
    (375
    )
    
    
    164,765Gross service revenues
    
    
    666,771
    
    
    
    335,262
    
    
    
    
    
    
    
    (15,254
    )
    
    
    986,779Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    30,741
    
    
    
    
    
    
    
    30,741Investment
    
    
    
    
    
    
    
    
    
    
    (3,795
    )
    
    
    
    
    
    
    (3,795
    )Total revenues
    
    $
    666,771
    
    
    $
    335,262
    
    
    $
    26,946
    
    
    $
    (15,254
    )
    
    $
    1,013,725Contribution:$
    256,415
    
    
    $
    115,865
    
    
    $
    (22,156
    )
    
    $
    
    
    
    $
    350,124
 Six months ended June 30, 2003  Predecessor Product
    
    Commercial
    
    PharmaBiodevelopment
    
    services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    501,410
    
    
    $
    246,579
    
    
    $
    
    
    
    $
    
    
    
    $
    747,989Intersegment
    
    
    
    
    
    
    18,988
    
    
    
    
    
    
    
    (18,988
    )
    
    
    Total net services
    
    
    501,410
    
    
    
    265,567
    
    
    
    
    
    
    
    (18,988
    )
    
    
    747,989Reimbursed service costs
    
    
    161,783
    
    
    
    29,355
    
    
    
    
    
    
    
    
    
    
    
    191,138Gross service revenues
    
    
    663,193
    
    
    
    294,922
    
    
    
    
    
    
    
    (18,988
    )
    
    
    939,127Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    34,704
    
    
    
    
    
    
    
    34,704Investment
    
    
    
    
    
    
    
    
    
    
    29,259
    
    
    
    
    
    
    
    29,259Total revenues
    
    $
    663,193
    
    
    $
    294,922
    
    
    $
    63,963
    
    
    $
    (18,988
    )
    
    $
    1,003,090Contribution:$
    254,394
    
    
    $
    95,623
    
    
    $
    24,126
    
    
    $
    
    
    
    $
    374,143
 22




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months
    


    Three months
    
    Six months ended
    


    Six months endedended June 30,
    


    ended June 30,
    
    June 30,
    


    June 30,2004
    


    2003
    
    2004
    


    2003Successor
    


    Predecessor
    
    Successor
    


    PredecessorDepreciation and amortization expense:Product development
    
    $
    21,182
    
    


    $
    14,427
    
    
    $
    42,772
    
    


    $
    29,374Commercial services
    
    
    7,823
    
    


    
    5,875
    
    
    
    16,007
    
    


    
    10,866PharmaBio Development (included in contribution)
    
    
    1,015
    
    


    
    771
    
    
    
    1,819
    
    


    
    1,531Corporate
    
    
    3,151
    
    


    
    203
    
    
    
    6,284
    
    


    
    413Total depreciation and amortization expense
    
    $
    33,171
    
    


    $
    21,276
    
    
    $
    66,882
    
    


    $
    42,184
 As of June 30, 2004
    
    As of December 31, 2003Assets:Product development
    
    $
    1,028,201
    
    
    $
    1,008,099Commercial services
    
    
    326,479
    
    
    
    266,021PharmaBio Development
    
    
    249,468
    
    
    
    267,572Corporate
    
    
    297,704
    
    
    
    362,470Assets of discontinued operation
    
    
    88,459
    
    
    
    88,549Total assets
    
    $
    1,990,311
    
    
    $
    1,992,711
 14. Guarantor Financial Information In connection with the issuance of the 10% Senior Subordinated Notes due 2013,
the Company and all of its wholly owned domestic subsidiaries (Guarantors)
have fully and unconditionally guaranteed, on a joint and several basis, the
Companys obligations under the related indenture (the Guarantees). Each
Guarantee is subordinated in right of payment to the Guarantors existing and
future senior debt, including obligations under the senior secured credit
facility. The accompanying Guarantor condensed financial information is presented on the
equity method of accounting for all periods presented. Under this method,
investments in subsidiaries are recorded at cost and adjusted for the Companys
share in the subsidiaries cumulative results of operations, capital
contributions and distributions and other changes in equity. Elimination
entries relate primarily to the elimination of investments in subsidiaries and
associated intercompany balances and transactions. The following are condensed consolidating statements of operations of the
Company for the three and six months ended June 30, 2004 and 2003 (in
thousands): 23




---



##### 



Quintiles Transnational
Corp. and Subsidiaries
Three months ended June 30, 2004 (successor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    37
    
    
    $
    184,368
    
    
    $
    324,280
    
    
    $
    (613
    )
    
    $
    508,072Costs, expenses and other:Costs of revenues
    
    
    4,739
    
    
    
    152,548
    
    
    
    214,775
    
    
    
    
    
    
    
    372,062General and administrative
    
    
    17,328
    
    
    
    48,426
    
    
    
    93,843
    
    
    
    (613
    )
    
    
    158,984Interest (income) expense, net
    
    
    15,477
    
    
    
    (6,568
    )
    
    
    5,667
    
    
    
    
    
    
    
    14,576Other (income) expense, net
    
    
    (15,568
    )
    
    
    13,630
    
    
    
    3,137
    
    
    
    
    
    
    
    1,199Gain on sale of portion of an
investment in a subsidiary
    
    
    (24,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,688
    )Non-operating gain on change
of interest transaction
    
    
    (10,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )(12,742
    )
    
    
    208,036
    
    
    
    317,422
    
    
    
    (613
    )
    
    
    512,103(Loss) income before income taxes
    
    
    12,779
    
    
    
    (23,668
    )
    
    
    6,858
    
    
    

    
    
    
    
    (4,031
    )Income tax (benefit) expense
    
    
    17,530
    
    
    
    (7,613
    )
    
    
    4,216
    
    
    
    
    
    
    
    14,133(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    (4,751
    )
    
    
    (16,055
    )
    
    
    2,642
    
    
    
    
    
    
    
    (18,164
    )Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    45
    
    
    
    (246
    )
    
    
    
    
    
    
    (201
    )Subsidiary income
    
    
    (5,334
    )
    
    
    (1,988
    )
    
    
    861
    
    
    
    6,461
    
    
    
    (Loss) income from operations
    
    
    (10,085
    )
    
    
    (17,998
    )
    
    
    3,257
    
    
    
    6,461
    
    
    
    (18,365
    )Income from discontinued operation
    
    
    
    
    
    
    526
    
    
    
    7,754
    
    
    
    
    
    
    
    8,280Net (loss) income
    
    $
    (10,085
    )
    
    $
    (17,472
    )
    
    $
    11,011
    
    
    $
    6,461
    
    
    $
    (10,085
    )
 24




---



##### 



Quintiles Transnational Corp. and Subsidiaries Three months ended June 30, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.

    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    (1,581
    )
    
    
    220,835
    
    
    $
    285,941
    
    
    $
    
    
    
    $
    505,195Costs, expenses and other:Costs of revenues
    
    
    2,788
    
    
    
    150,315
    
    
    
    184,390
    
    
    
    
    
    
    
    337,493General and administrative
    
    
    11,328
    
    
    
    44,862
    
    
    
    81,042
    
    
    
    
    
    
    
    137,232Interest (income) expense, net
    
    
    (1,192
    )
    
    
    (7,935
    )
    
    
    4,767
    
    
    
    
    
    
    
    (4,360
    )Other (income) expense, net
    
    
    (17,725
    )
    
    
    6,845
    
    
    
    2,613
    
    
    
    
    
    
    
    (8,267
    )Transaction
    
    
    2,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,231(2,570
    )
    
    
    194,087
    
    
    
    272,812
    
    
    
    
    
    
    
    464,329(Loss) income before income taxes
    
    
    989
    
    
    
    26,748
    
    
    
    13,129
    
    
    
    
    
    
    
    40,866Income tax (benefit) expense
    
    
    857
    
    
    
    7,342
    
    
    
    6,332
    
    
    
    
    
    
    
    14,531(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    132
    
    
    
    19,406
    
    
    
    6,797
    
    
    
    
    
    
    
    26,335Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    (8
    )
    
    
    28
    
    
    
    
    
    
    
    20Subsidiary income
    
    
    29,465
    
    
    
    (3,727
    )
    
    
    (37
    )
    
    
    (25,701
    )
    
    
    Income (loss) from operations
    
    
    29,597
    
    
    
    15,671
    
    
    
    6,788
    
    
    
    (25,701
    )
    
    
    26,355Income from discontinued operation
    
    
    
    
    
    
    433
    
    
    
    2,809
    
    
    
    
    
    
    
    3,242Net (loss) income
    
    $
    29,597
    
    
    $
    16,104
    
    
    $
    9,597
    
    
    $
    (25,701
    )
    
    $
    29,597
 25




---



##### 



Quintiles Transnational Corp. and Subsidiaries
Six months ended June 30, 2004 (successor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    (15
    )
    
    $
    370,185
    
    
    $
    644,168
    
    
    $
    (613
    )
    
    $
    1,013,725Costs, expenses and other:Costs of revenues
    
    
    10,609
    
    
    
    292,304
    
    
    
    425,751
    
    
    
    
    
    
    
    728,664General and administrative
    
    
    36,381
    
    
    
    89,327
    
    
    
    189,507
    
    
    
    (613
    )
    
    
    314,602Interest (income) expense, net
    
    
    31,066
    
    
    
    (13,355
    )
    
    
    11,484
    
    
    
    
    
    
    
    29,195Other (income) expense, net
    
    
    (35,032
    )
    
    
    25,683
    
    
    
    7,357
    
    
    
    
    
    
    
    (1,992
    )Gain on sale of a portion of
an investment in a subsidiary
    
    
    (24,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,688
    )Non-operating
gain on change of interest transaction
    
    
    (10,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )8,306
    
    
    
    393,959
    
    
    
    634,099
    
    
    
    (613
    )
    
    
    1,035,751(Loss) income before income taxes
    
    
    (8,321
    )
    
    
    (23,774
    )
    
    
    10,069
    
    
    
    
    
    
    
    (22,026
    )Income tax (benefit) expense
    
    
    14,784
    
    
    
    (10,976
    )
    
    
    9,600
    
    
    
    
    
    
    
    13,408(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    (23,105
    )
    
    
    (12,798
    )
    
    
    469
    
    
    
    
    
    
    
    (35,434
    )Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    (23
    )
    
    
    (433
    )
    
    
    
    
    
    
    (456
    )Subsidiary income
    
    
    (2,644
    )
    
    
    (11,413
    )
    
    
    1,658
    
    
    
    12,399
    
    
    
    Income (loss) from operations
    
    
    (25,749
    )
    
    
    (24,234
    )
    
    
    1,694
    
    
    
    12,399
    
    
    
    (35,890
    )Income from discontinued operation
    
    
    
    
    
    
    945
    
    
    
    9,196
    
    
    
    
    
    
    
    10,141Net (loss) income
    
    $
    (25,749
    )
    
    $
    (23,289
    )
    
    $
    10,890
    
    
    $
    12,399
    
    
    $
    (25,749
    )
 26




---



##### 



Quintiles Transnational Corp. and Subsidiaries Six months ended June 30, 2003 (predecessor) QuintilesTransnational
    
    Subsidiary
    
    SubsidiaryCorp.
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalGross revenues
    
    $
    (1,444
    )
    
    
    440,559
    
    
    $
    563,975
    
    
    $
    
    
    
    $
    1,003,090Costs, expenses and other:Costs of revenues
    
    
    4,489
    
    
    
    298,568
    
    
    
    366,543
    
    
    
    
    
    
    
    669,600General and administrative
    
    
    22,441
    
    
    
    86,932
    
    
    
    158,863
    
    
    
    
    
    
    
    268,236Interest (income) expense, net
    
    
    (2,256
    )
    
    
    (15,318
    )
    
    
    9,446
    
    
    
    
    
    
    
    (8,128
    )Other (income) expense, net
    
    
    (26,757
    )
    
    
    11,128
    
    
    
    10,204
    
    
    
    
    
    
    
    (5,425
    )Transaction
    
    
    3,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,8871,804
    
    
    
    381,310
    
    
    
    545,056
    
    
    
    
    
    
    
    928,170(Loss) income before income taxes
    
    
    (3,248
    )
    
    
    59,249
    
    
    
    18,919
    
    
    
    
    
    
    
    74,920Income tax (benefit) expense
    
    
    (807
    )
    
    
    16,627
    
    
    
    11,200
    
    
    
    
    
    
    
    27,020(Loss) income before equity in
losses of unconsolidated
affiliates and other
    
    
    (2,441
    )
    
    
    42,622
    
    
    
    7,719
    
    
    
    
    
    
    
    47,900Equity in losses of
unconsolidated affiliates and
other
    
    
    
    
    
    
    (8
    )
    
    
    24
    
    
    
    
    
    
    
    16Subsidiary income
    
    
    57,194
    
    
    
    (12,255
    )
    
    
    (1,000
    )
    
    
    (43,939
    )
    
    
    Income (loss) from operations
    
    
    54,753
    
    
    
    30,359
    
    
    
    6,743
    
    
    
    (43,939
    )
    
    
    47,916Income from discontinued operation
    
    
    
    
    
    
    11
    
    
    
    6,826
    
    
    
    
    
    
    
    6,837Net (loss) income
    
    $
    54,753
    
    
    $
    30,370
    
    
    $
    13,569
    
    
    $
    (43,939
    )
    
    $
    54,753
 The following are condensed consolidating balance sheets of the Company as of
June 30, 2004 and December 31, 2003 (in thousands): 27




---



##### 



Quintiles Transnational
Corp. and Subsidiaries
As of June 30, 2004 Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    41,089
    
    
    $
    76,765
    
    
    $
    257,414
    
    
    $
    
    
    
    $
    375,268Trade accounts receivable and unbilled
services, net
    
    
    
    
    
    
    120,900
    
    
    
    171,993
    
    
    
    
    
    
    
    292,893Other current assets
    
    
    8,077
    
    
    
    23,203
    
    
    
    50,582
    
    
    
    
    
    
    
    81,862Assets of discontinued operation
    
    
    
    
    
    
    13,953
    
    
    
    74,506
    
    
    
    
    
    
    
    88,459Total current assets
    
    
    49,166
    
    
    
    234,821
    
    
    
    554,495
    
    
    
    
    
    
    
    838,482Property and equipment, net
    
    
    1,782
    
    
    
    117,031
    
    
    
    162,194
    
    
    
    
    
    
    
    281,007Intangibles and other assets:Investments
    
    
    21,274
    
    
    
    320,488
    
    
    
    1,110
    
    
    
    
    
    
    
    342,872Goodwill and other identifiable
intangibles, net
    
    
    7,429
    
    
    
    239,140
    
    
    
    226,751
    
    
    
    
    
    
    
    473,320Deposits and other assets
    
    
    26,034
    
    
    
    11,340
    
    
    
    17,256
    
    
    
    
    
    
    
    54,630Investments in subsidiaries
    
    
    1,752,382
    
    
    
    (215,103
    )
    
    
    75,451
    
    
    
    (1,612,730
    )
    
    
    Total intangibles and other assets
    
    
    1,807,119
    
    
    
    355,865
    
    
    
    320,568
    
    
    
    (1,612,730
    )
    
    
    870,822Total assets
    
    $
    1,858,067
    
    
    $
    707,717
    
    
    $
    1,037,257
    
    
    $
    (1,612,730
    )
    
    $
    1,990,311Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    49,799
    
    
    $
    65,771
    
    
    $
    197,357
    
    
    $
    
    
    
    $
    312,927Credit arrangements
    
    
    3,100
    
    
    
    642
    
    
    
    17,080
    
    
    
    
    
    
    
    20,822Unearned income
    
    
    
    
    
    
    56,726
    
    
    
    130,478
    
    
    
    
    
    
    
    187,204Other current liabilities
    
    
    75,292
    
    
    
    (1,747
    )
    
    
    (47,665
    )
    
    
    
    
    
    
    25,880Liabilities of discontinued operation
    
    
    
    
    
    
    5,474
    
    
    
    1,651
    
    
    
    
    
    
    
    7,125Total current liabilities
    
    
    128,191
    
    
    
    126,866
    
    
    
    298,901
    
    
    
    
    
    
    
    553,958Long-term liabilities:Credit arrangements, less current
portion
    
    
    754,575
    
    
    
    3,266
    
    
    
    14,563
    
    
    
    
    
    
    
    772,404Minority interest
    
    
    9,427
    
    
    
    
    
    
    
    26,883
    
    
    
    
    
    
    
    36,310Other liabilities
    
    
    104,850
    
    
    
    (19,077
    )
    
    
    32,132
    
    
    
    
    
    
    
    117,905Net intercompany payables
    
    
    351,290
    
    
    
    (850,552
    )
    
    
    499,262
    
    
    
    
    
    
    
    Total long-term liabilities
    
    
    1,220,142
    
    
    
    (866,363
    )
    
    
    572,840
    
    
    
    
    
    
    
    926,619Total liabilities
    
    
    1,348,333
    
    
    
    (739,497
    )
    
    
    871,741
    
    
    
    
    
    
    
    1,480,577Total shareholders equity
    
    
    509,734
    
    
    
    1,447,214
    
    
    
    165,516
    
    
    
    (1,612,730
    )
    
    
    509,734Total liabilities and shareholders equity
    
    $
    1,858,067
    
    
    $
    707,717
    
    
    $
    1,037,257
    
    
    $
    (1,612,730
    )
    
    $
    1,990,311
 28




---



##### 



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

    
    
    535,098
    
    
    
    1,458,148
    
    
    
    156,528
    
    
    
    (1,614,676
    )
    
    
    535,098Total liabilities and shareholders equity
    
    $
    1,800,194
    
    
    $
    828,354
    
    
    $
    978,839
    
    
    $
    (1,614,676
    )
    
    $
    1,992,711
 The following are condensed consolidating statements of cash flows of the
Company for the six months ended June 30, 2004 and 2003(in thousands): 29




---



##### 



Quintiles Transnational
Corp. and Subsidiaries

Six months ended June 30, 2004 (successor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    (25,749
    )
    
    $
    (23,289
    )
    
    $
    10,890
    
    
    $
    12,399
    
    
    $
    (25,749
    )Income from discontinued operation
    
    
    
    
    
    
    (945
    )
    
    
    (9,196
    )
    
    
    
    
    
    
    (10,141
    )(Loss) income from continuing operations
    
    
    (25,749
    )
    
    
    (24,234
    )
    
    
    1,694
    
    
    
    12,399
    
    
    
    (35,890
    )Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    6,074
    
    
    
    31,006
    
    
    
    29,802
    
    
    
    
    
    
    
    66,882Amortization of debt issuance costs
    
    
    1,636
    
    
    
    25

    
    
    
    
    
    
    
    
    
    
    
    1,661Restructuring charge (payments) accrual, net
    
    
    (8
    )
    
    
    (1,769
    )
    
    
    (1,467
    )
    
    
    
    
    
    
    (3,244
    )(Gain) loss from sales and impairments of investments,
net
    
    
    2,962
    
    
    
    467
    
    
    
    366
    
    
    
    
    
    
    
    3,795Gain on sale of certain assets
    
    
    (4,660
    )
    
    
    
    
    
    
    (454
    )
    
    
    
    
    
    
    (5,114
    )Gain from sale of a portion of an investment in a
subsidiary
    
    
    (24,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,688
    )Non-operating gain on change of interest transaction
    
    
    (10,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )Provision for (benefit from) deferred income tax expense
    
    
    5,325
    
    
    
    (1,096
    )
    
    
    1,041
    
    
    
    
    
    
    
    5,270Change in accounts receivable, unbilled services and
unearned income
    
    
    651
    
    
    
    (56,284
    )
    
    
    (7,764
    )
    
    
    
    
    
    
    (63,397
    )Change in other operating assets and liabilities
    
    
    2,149
    
    
    
    1,091
    
    
    
    (9,796
    )
    
    
    
    
    
    
    (6,556
    )Investment in subsidiaries and intercompany
    
    
    60,300
    
    
    
    (70,052
    )
    
    
    22,151
    
    
    
    (12,399
    )
    
    
    Other
    
    
    (113
    )
    
    
    33
    
    
    
    (9
    )
    
    
    
    
    
    
    (89
    )Net cash (used in) provided by operating activities
    
    
    13,849
    
    
    
    (120,813
    )
    
    
    35,564
    
    
    
    
    
    
    
    (71,400
    )Investing activities:Acquisition of property and equipment
    
    
    (221
    )
    
    
    (9,204
    )
    
    
    (15,158
    )
    
    
    
    
    
    
    (24,583
    )Payment of transaction costs in Transaction
    
    
    (7,039
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,039
    )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
    
    
    
    
    
    
    
    
    
    
    9,068
    
    
    
    
    
    
    
    9,068Proceeds from sale of a portion of an investment in a
subsidiary
    
    
    35,976
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,976Proceeds from disposition of property and equipment
    
    
    258
    
    
    
    980
    
    
    
    2,257
    
    
    
    
    
    
    
    3,495Proceeds from (purchases of) debt securities, net
    
    
    (669
    )
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    (407
    )Purchases of equity securities and other investments
    
    
    (332
    )
    
    
    (7,403
    )
    
    
    (1
    )
    
    
    
    
    
    
    (7,736
    )Proceeds from sale of equity securities and other
investments
    
    
    
    
    
    
    27,930
    
    
    
    
    
    
    
    
    
    
    
    27,930Other
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Net cash provided by (used in) investing activities
    
    
    28,223
    
    
    
    9,565
    
    
    
    (4,086
    )
    
    
    
    
    
    
    33,702Financing activities:Principal payments on credit arrangements
    
    
    (1,774
    )
    
    
    (420
    )
    
    
    (7,238
    )
    
    
    
    
    
    
    (9,432
    )Dividend from discontinued operation
    
    
    7,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,929Proceeds from change in interest transaction
    
    
    
    
    
    
    
    
    
    
    41,773
    
    
    
    
    
    
    
    41,773Net cash (provided by) used in financing activities
    
    
    6,155
    
    
    
    (420
    )
    
    
    34,535
    
    
    
    
    
    
    
    40,270Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    3
    
    
    
    (929
    )
    
    
    
    
    
    
    (926
    )(Decrease) increase in cash and cash equivalents
    
    
    48,227
    
    
    
    (111,665
    )
    
    
    65,084
    
    
    
    
    
    
    
    1,646Cash and cash equivalents at beginning of period
    
    
    (7,138
    )
    
    
    188,430
    
    
    
    192,330
    
    
    
    
    
    
    
    373,622Cash and cash equivalents at end of period
    
    $
    41,089
    
    
    $
    76,765
    
    
    $
    257,414
    
    
    $
    
    

    
    $
    375,268
 30




---



##### 



Quintiles Transnational
Corp. and Subsidiaries

Six months ended June 30, 2003 (predecessor) Quintiles
    
    
    
    
    
    SubsidiaryTransnational
    
    Subsidiary
    
    Non-Corp.
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    TotalOperating activities:Net (loss) income
    
    $
    54,753
    
    
    $
    30,370
    
    
    $
    13,569
    
    
    $
    (43,939
    )
    
    $
    54,753Income from discontinued operation
    
    
    
    
    
    
    (11
    )
    
    
    (6,826
    )
    
    
    
    
    
    
    (6,837
    )(Loss) income from continuing operation
    
    
    54,753
    
    
    
    30,359
    
    
    
    6,743
    
    
    
    (43,939
    )
    
    
    47,916Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    703
    
    
    
    18,860
    
    
    
    22,621
    
    
    
    
    
    
    
    42,184Restructuring charge (payments) accrual, net
    
    
    (420
    )
    
    
    (1,095
    )
    
    
    (2,555
    )
    
    
    
    
    
    
    (4,070
    )Loss (gain) from sales and impairments of investments,
net
    
    
    1,076
    
    
    
    (29,524
    )
    
    
    
    
    
    
    
    
    
    
    (28,448
    )Provision for (benefit from) deferred income tax expense
    
    
    1,796
    
    
    
    (1,417
    )
    
    
    995
    
    
    
    
    
    
    
    1,374Change in accounts receivable, unbilled services and
unearned income
    
    
    2,704
    
    
    
    (13,945
    )
    
    
    11,054
    
    
    
    
    
    
    
    (187
    )Change in other operating assets and liabilities
    
    
    (21,387
    )
    
    
    18,913
    
    
    
    3,800
    
    
    
    
    
    
    
    1,326Investment in subsidiaries and intercompany
    
    
    (38,025
    )
    
    
    51,488
    
    
    
    (57,402
    )
    
    
    43,939
    
    
    
    Other
    
    
    (478
    )
    
    
    (981
    )
    
    
    190
    
    
    
    
    
    
    
    (1,269
    )Net cash (used in) provided by operating activities
    
    
    722
    
    
    
    72,658
    
    
    
    (14,554
    )
    
    
    
    
    
    
    58,826Investing activities:Acquisition of property and equipment
    
    
    (136
    )
    
    
    (12,452
    )
    
    
    (11,371
    )
    
    
    
    
    
    
    (23,959
    )Acquisition of intangible assets
    
    
    
    
    
    
    (500
    )
    
    
    (3,239
    )
    
    
    
    
    
    
    (3,739
    )Acquisition of commercial rights and royalties
    
    
    
    
    
    
    (14,710
    )
    
    
    
    
    
    
    
    
    
    
    (14,710
    )Proceeds from disposition of property and equipment
    
    
    
    
    
    
    746
    
    
    
    3,405
    
    
    
    
    
    
    
    4,151Proceeds from (purchases of) debt securities, net
    
    
    (775
    )
    
    
    26,621
    
    
    
    
    
    
    
    
    
    
    
    25,846Purchases of equity securities and other investments
    
    
    (3,292
    )
    
    
    (1,800
    )
    
    
    (39
    )
    
    
    
    
    
    
    (5,131
    )Proceeds from sale of equity securities and other
investments
    
    
    
    
    
    
    53,813
    
    
    
    2
    
    
    
    
    
    
    
    53,815Net cash (used in) provided by investing activities
    
    
    (4,203
    )
    
    
    51,718
    
    
    
    (11,242
    )
    
    
    
    
    
    
    36,273Financing activities:Principal payments on credit arrangements
    
    
    
    
    
    
    (483
    )
    
    
    (9,096
    )
    
    
    
    
    
    
    (9,579
    )Dividend from discontinued operation
    
    
    4,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,447Issuance of common stock, net (predecessor)
    
    
    5,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,079Net cash provided by (used in) financing activities
    
    
    9,526
    
    
    
    (483
    )
    
    
    (9,096
    )
    
    
    
    
    
    
    (53
    )Effect of foreign currency exchange rate changes on cash
    
    
    
    
    
    
    151
    
    
    
    14,745
    
    
    
    
    
    
    
    14,896(Decrease) increase in cash and cash equivalents
    
    
    6,045
    
    
    
    124,044
    
    
    
    (20,147
    )
    
    
    
    
    
    
    109,942Cash and cash equivalents at beginning of period
    
    
    220
    
    
    
    390,049
    
    
    
    253,986
    
    
    
    
    
    
    
    644,255Cash and cash equivalents at end of period
    
    $
    6,265
    
    
    $
    514,093
    
    
    $
    233,839
    
    
    $
    
    
    
    $
    754,197
 31




---



##### 



Quintiles Transnational Corp. and Subsidiaries 15. Commitments and Contingencies On January 22, 2002, Federal Insurance Company (Federal) and Chubb Custom
Insurance Company (Chubb) filed suit against the Company, Quintiles Pacific,
Inc. and Quintiles Laboratories Limited, two of the Companys subsidiaries, in
the United States District Court for the Northern District of Georgia. In the
suit, Chubb, the Companys primary commercial general liability carrier for
coverage years 2000-2001 and 2001-2002, and Federal, the Companys excess
liability carrier for coverage years 2000-2001 and 2001-2002, seek to rescind
the policies issued to the Company based on an alleged misrepresentation by the
Company on the policy application. Alternatively, Chubb and Federal seek a
declaratory judgment that there is no coverage under the policies for some or
all of the claims asserted against the Company and its subsidiaries in a class
action lawsuit that was settled earlier this year involving an Alzheimers
study and, if one or more of such claims is determined to be covered, Chubb and
Federal request an allocation of the defense costs between the claims they
contend are covered and non-covered claims. The Company has filed an answer
with counterclaims against Federal and Chubb in response to their complaint.
Additionally, the Company has amended its pleadings to add AON Risk Services
(AON) as a counterclaim defendant, as an alternative to the Companys
position that Federal and Chubb are liable under the policies. In order to
preserve its rights, on March 27, 2003, the Company also filed a separate
action against AON in the United States District Court for the Middle District
of North Carolina. The Company believes the allegations made by Federal and
Chubb are without merit and is defending this case vigorously. 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. On June 28, 2004, ML Laboratories PLC (ML) filed a request to the
International Chamber of Commerce seeking arbitration in connection with a
contract dispute with Novex Pharma Limited (Novex), a subsidiary of the
Company. This claim relates to a contract entered into by Novex with ML for
the marketing and sales promotion of MLs medical device product known as
Adept, a solution used for the treatment and prevention of adhesions in
abdominal surgery. MLs claim alleges breach of contract by Novex by failing
to provide an adequate UK sales force, failing to implement marketing effort in
European countries as required by the contract, and repudiatory breach of the
contract. The claim by ML is for damages of £55.1 million (approximately
$100.5 million). Novex intends to file a counter-claim asserting breach of
contract. The parties have reached agreement to stay the arbitration process
pending future discussions. The Company believes that the allegations made by
ML are without merit and intends to defend the case vigorously. 32




---



##### 



Quintiles Transnational Corp. and Subsidiaries The Company also is party to other legal proceedings incidental to its
business. While the Companys management currently believes that the ultimate
outcome of these proceedings, individually and in the aggregate, will not have
a material adverse effect on the Companys consolidated financial statements,
litigation is subject to inherent uncertainties. Were an unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the results
of operations for the period in which the ruling occurs. 16. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, which
requires the assets, liabilities and results of operations of variable interest
entities (VIE) be consolidated into the financial statements of the company
that has controlling financial interest. FIN 46 also provides the framework
for determining whether a VIE should be consolidated based on voting interest
or significant financial support provided to the VIE. The Company adopted
these provisions, as required, with respect to VIEs created after January 31,
2003. The Company has determined that it is a non-public entity as defined by
accounting guidance in FIN 46. The effective date for applying the provisions
of FIN 46 for interests held by non-public entities in VIEs or potential VIEs
created before February 1, 2003 is January 1, 2005. The Company is currently
evaluating the impact of FIN 46 on these interests held prior to February 1,
2003. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Cautionary Statement for Forward Looking Information Information set forth in this Form 10-Q, including Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Forward looking statements
represent our judgment concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology such as may, will,
expect, anticipate, estimate, believe, continue, or target or the
negative thereof or other variations thereof or comparable terminology. We caution you that any such forward looking statements are further qualified
by important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, the risk that our substantial debt could adversely affect our
financial condition, the limitations on the operation of our business imposed
by the covenants contained in our senior subordinated notes and senior secured
credit facility, the risk that the market for our products and services will
not grow as we expect, the risk that our PharmaBio Development transactions
will not generate revenues, profits or return on investment at the rate or
levels we expect or that royalty revenues under our PharmaBio Development
arrangements may not be adequate to offset our upfront and on-going expenses in
providing sales and marketing services or in making milestone and marketing
payments, our ability to efficiently distribute backlog among project
management groups and match demand to resources, our actual operating
performance, variation in the actual savings and operating improvements
resulting from previous restructurings, our ability to maintain large customer
contracts or to enter into 33




---



##### 



Quintiles Transnational Corp. and Subsidiaries new contracts, delays in obtaining or failure to receive required regulatory
approvals of our customers products or projects, changes in trends in the
pharmaceutical industry, our ability to operate successfully in a new line of
business, the risk that Verispan, our joint venture with McKesson Corporation,
or McKesson, relating to the informatics business, will not be successful,
changes in existing, and the adoption of new, regulations affecting the
pharmaceutical industry and liability risks associated with our business which
could result in losses or indemnity to others not covered by insurance. See
Risk Factors below for additional factors that could cause actual results to
differ. Results of Operations In August 2004, we completed our previously announced sale of certain assets
related to our Bioglan Pharmaceuticals business, or Bioglan, for approximately
$188.3 million including approximately $5.4 million of direct costs for transferred inventory. The
results of operations, assets and liabilities of the Bioglan business have been
reported separately as a discontinued operation. All historical periods
presented herein have been reclassified to reflect the Bioglan business as a
discontinued operation. Three Months Ended June 30, 2004 and 2003 Gross Revenues.Gross revenues for the second quarter of 2004 were $508.1
million versus $505.2 million for the second 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 June 302004
    
    2003Service revenues
    
    $
    500,932
    
    
    $
    476,130Less: reimbursed service costs
    
    
    82,306
    
    
    
    96,797Net service revenues
    
    
    418,626
    
    
    
    379,333Commercial rights and royalties
    
    
    15,155
    
    
    
    17,753Investments
    
    
    (8,015
    )
    
    
    11,312Total net revenues
    
    $
    425,766
    
    
    $
    408,398Reimbursed service costs
    
    
    82,306
    
    
    
    96,797Gross revenues
    
    $
    508,072
    
    
    $
    505,195
  
    
    Service Revenues.Service revenues were $500.9 million for the
second quarter of 2004 compared to $476.1 million for the second
quarter of 2003. Service revenues less reimbursed service costs, or
net service revenues, for the second quarter of 2004 were $418.6
million, an increase of $39.3 million or 10.4% over net service
revenues of $379.3 million for the second quarter of 2003. Net
service revenues for the second quarter of 2004 were positively
impacted by approximately $21.1 million due to the effect of the
weakening of the U.S. dollar relative to the euro, the British pound,
the South African rand and the Japanese yen. Net service revenues
increased in the Asia Pacific region $12.2 million or 21.9% to $67.8
million for the second quarter of 2004 from the second quarter of
2003 including a positive impact of approximately $5.0 million due to
the effect of foreign currency fluctuations. Net service revenues
increased $24.5 million or 14.9% to $189.2 million for the second
quarter of 2004 from the second quarter of 2003 in the Europe and
Africa region including a positive impact of approximately $16.3
million due to the effect of foreign currency fluctuations. Net
service revenues 34




---



##### 



Quintiles Transnational Corp. and Subsidiaries  increased $2.6 million or 1.7% to $161.7 million for the second quarter
of 2004 from the second quarter of 2003 in the Americas region.
    
    Commercial Rights and Royalties Revenues.Commercial rights and
royalties revenues, which include product revenues, royalties and
commissions, for the second quarter of 2004 were $15.2 million, a
decrease of $2.6 million over second quarter 2003 commercial rights
and royalties revenues of $17.8 million. Commercial rights and
royalties revenues were positively impacted by approximately $928,000
due to the effect of foreign currency fluctuations related to the
weakening of the U.S. dollar relative to the euro. Commercial rights
and royalties revenues for the second quarter of 2004 were reduced by
approximately $1.5 million versus $339,000 for the second 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. In December 2003, the service
contract with Kos Pharmaceuticals, Inc., or KOSP, concluded. We
recognized approximately $6.2 million of revenue in the second quarter
of 2003 relating to the contract with KOSP. Our contracts with
Columbia Labs, Inc., or CBRX, contributed approximately $1.6 million
of revenues during the second quarter of 2004 versus $1.9 million
during the second quarter of 2003. These decreases were partially
offset by increases resulting from the following (1) our contracts in
Europe with two large pharmaceutical customers which contributed
approximately $10.4 million of revenues during the second quarter of
2004 versus $9.0 million during the second quarter of 2003 and (2) our
September 2003 acquisition of a controlling interest in Pharmaplan
which contributed $3.2 million of revenues during the second quarter
of 2004. Revenues from miscellaneous contracts and activities
decreased approximately $586,000 for the second quarter of 2004 versus
the second quarter of 2003. Commercial rights and royalties revenues
for the second quarter of 2004 were attributable to the following: (1)
approximately 68.4% to our contracts with two large pharmaceutical
customers in Europe, (2) approximately 20.8% to the acquisition of
Pharmaplan during September 2003, and (3) approximately 10.4% to our
contracts with CBRX.  
    
    Investment Revenues.Investment revenues related to our
PharmaBio Development groups financing arrangements, which include
gains and losses from the sale of equity securities and impairments
from other-than-temporary declines in the fair values of our direct
and indirect investments, for the second quarter of 2004 were a loss
of $8.0 million versus a gain of $11.3 million for the second quarter
of 2003. Investment revenues for the second quarter of 2004 included
$2.2 million of net gains on marketable securities versus $13.0
million of net gains on marketable securities for the second quarter
of 2003. In addition, during the second quarter of 2004 and 2003, we
recognized $10.2 million and $1.6 million, respectively, of
impairment losses on investments whose decline in fair value was
considered to be other-than-temporary including the 2004 impairment
on our investment in CBRX in the amount of $10.2 million. 35




---



##### 



Quintiles Transnational Corp. and Subsidiaries Costs of Revenues.Costs of revenues were $372.1 million for the second
quarter of 2004 versus $337.5 million for the second quarter of 2003. Below is
a summary of the costs of revenues (in thousands): Three months ended June 30,2004
    
    2003Reimbursed service costs
    
    $
    82,306
    
    
    $
    96,797Service costs
    
    
    228,963
    
    
    
    200,541Commercial rights and royalties costs
    
    
    28,637
    
    
    
    19,650Depreciation and amortization
    
    
    32,156
    
    
    
    20,505$
    372,062
    
    
    $
    337,493
  
    
    Reimbursed Service Costs.Reimbursed service costs were $82.3
million and $96.8 million for the second 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 $229.0 million or 54.7% of net
service revenues versus $200.5 million or 52.9% of net service
revenues for the second quarter of 2004 and 2003, respectively.
Compensation and related expenses increased approximately $17.1
million primarily as a result of salary and wage increases including
an increase in our number of billable employees. Other expenses
directly related to our service contracts increased approximately
$11.3 million. Service costs were negatively impacted by
approximately $10.9 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 $28.6 million for the second
quarter of 2004 versus $19.7 million for the second 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 $8.6 million and $10.9 million for the second quarter
of 2004 and 2003, respectively. We also incurred approximately $4.7
million and $2.7 million of costs related to our
CymbaltaTM contract
for the second quarter of 2004 and 2003, respectively. In addition,
the second quarter of 2004 includes approximately $6.8 million and
$2.4 million of costs related to our February 2004 contract with a
large pharmaceutical company and our Pharmaplan operations which we
acquired in September 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 $32.2 million for the second quarter
of 2004 versus $20.5 million for the second quarter of 2003.
Amortization expense increased approximately $11.4 million as a
result of the increase in intangible assets which are being amortized
over their finite lives. We have approximately $109.7 million of
intangible assets which have an indefinite life and therefore are not
being amortized. Depreciation expense remained relatively constant
increasing approximately $266,000. 36




---



##### 



Quintiles Transnational Corp. and Subsidiaries General and administrative expenses.General and administrative expenses,
which include compensation and benefits for administrative employees,
non-billable travel, professional services, and expenses for advertising,
information technology and facilities, were $159.0 million or 37.3% of total
net revenues for the second quarter of 2004 versus $137.2 million or 33.6% of
total net revenues for the second quarter of 2003. Travel expenses increased
approximately $5.8 million for the second quarter of 2004 when compared to the
second 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
$3.1 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 $5.6 million as a
result of salary and wage increases including an increase in the number of
administrative employees. General and administrative expenses were negatively
impacted by approximately $7.7 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 second quarter of
2004 versus net interest income of $4.4 million for the second quarter of 2003.
Interest income decreased approximately $2.6 million to $2.3 million for the
second quarter of 2004 as a result of the decline in investable cash. Interest
expense increased approximately $16.4 million as a result of the interest on
the debt we incurred to fund the Pharma Services Transaction. Other expense was $1.2 million for the second quarter of 2004 versus other
income of $8.3 million for the second quarter of 2003. Net gains on foreign
currency translation were approximately $15,000 for the second quarter of 2004
compared to approximately $8.3 million in the second quarter of 2003. We recognized $2.2 million of transaction expenses for the second quarter of
2003 related to the activities of the special committee of our Board of
Directors and its financial and legal advisors. During the second quarter of 2004, we sold 3,556 shares of ordinary shares, or
approximately 11.1% of our ownership interest, in our Japanese subsidiary,
QJPN, to Mitsui & Co., or Mitsui, for approximately 4.0 billion yen
(approximately $37.0 million) of gross proceeds. We incurred approximately
$1.1 million of costs related to the sale. As a result, we recognized a gain
on the sale of a portion of an investment in a subsidiary of approximately
$24.7 million. In addition, our Japanese subsidiary issued 1,778 ordinary shares and 1,778
preference shares directly to Mitsui for an aggregate amount of approximately
4.7 billion yen (approximately $42.9 million) of gross proceeds. We incurred
approximately $463,000 of costs related to the issuance of the ordinary shares
and approximately $652,000 of costs related to the issuance of the preference
shares. The issuance of the new ordinary shares further reduced our ownership
interest in this subsidiary by an additional 4.7%. As a result, we recognized
a non-operating gain of approximately $10.0 million for the change in interest
transaction. We did not recognize any gain or loss associated with the new
issuance of preference shares which decreased our voting interest in this
subsidiary by an additional 4.2% to 80% and accounted for approximately 2.8
billion yen (approximately $25.1 million) of gross proceeds. 37




---



##### 



Quintiles Transnational Corp. and Subsidiaries Loss before income taxes was $4.0 million for the second quarter of 2004 versus
income before income taxes of $40.9 million or 10.0% of total net revenues for
the second quarter of 2003. The effective income tax rate was (350.6%) for the second quarter of 2004
versus 35.6% for the second quarter of 2003. Our effective income tax rate for
the second quarter of 2004 was negatively impacted due to the gains on the
Mitsui transactions. The tax effects of the gains on these transactions are
recognized as a period adjustment not a change in the annual effective income
tax rate. Our estimated annual effective income tax rate increased to
approximately 3.8% during the second quarter of 2004 versus an estimated 2.0%
at the first quarter of 2004. Since we conduct operations on a global basis,
our effective income tax rate may vary. During the second quarter of 2004 and 2003, we recognized losses of $201,000
and earnings of $20,000, respectively, from equity in unconsolidated affiliates
and other which represents a minority interest in consolidated affiliates net
of our pro rata share of the net loss of unconsolidated affiliates, primarily
Verispan. Loss from continuing operations was $18.2 million in the second quarter of 2004
versus income from continuing operations of $26.4 million in the second quarter
of 2003. Income from our discontinued operation, Bioglan, was $8.3 million in the second
quarter of 2004 versus $3.2 million in the second quarter of 2003. Gross
revenues of the discontinued operation increased approximately $7.1 million to
$22.0 million for the second quarter of 2004 as compared to gross revenues of
$14.8 million for the second quarter of 2003. Net loss was $10.1 million for the second quarter of 2004 versus net income of
$29.6 million for the second quarter of 2003. Analysis by Segment: The following table summarizes the operating activities for our reportable
segments for the second quarter of 2004 and 2003, respectively. In August
2004, we completed our previously announced sale of certain assets related to
our Bioglan business. The results of operations for the Bioglan
business have been separately reported as a discontinued operation and are no
longer included in the PharmaBio Development group. All historical periods
presented herein have been restated to reflect Bioglan as a discontinued
operation. We do not include reimbursed service costs, general and
administrative expenses, depreciation and amortization 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). 38




---



##### 



Quintiles Transnational Corp. and Subsidiaries Total Net Revenues
    
    Contribution% of Net
    
    
    
    
    
    % of Net2004
    
    2003
    
    Growth %
    
    2004
    
    Revenues
    
    2003
    
    RevenuesProduct development
    
    $
    268.4
    
    
    $
    251.4
    
    
    
    6.8
    %
    
    $
    128.4
    
    
    
    47.8
    %
    
    $
    128.1
    
    
    
    51.0
    %Commercial services
    
    
    158.9
    
    
    
    138.9
    
    
    
    14.4
    
    
    
    61.3
    
    
    
    38.6
    
    
    
    50.7
    
    
    
    36.5PharmaBio Development
    
    
    7.1
    
    
    
    29.1
    
    
    
    (75.4
    )
    
    
    (21.5
    )
    
    
    (301.1
    )
    
    
    9.4
    
    
    
    32.4Eliminations
    
    
    (8.6
    )
    
    
    (10.9
    )
    
    
    21.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    425.8
    
    
    $
    408.4
    
    
    
    4.3
    %
    
    $
    168.2
    
    
    
    39.5
    %
    
    $
    188.2
    
    
    
    46.1
    %
 Product Development Group.Net service revenues for the product development
group were $268.4 million for the second quarter of 2004 compared to $251.4
million for the second quarter of 2003. The increase in revenues is primarily
from clinical development services, or CDS. Net service revenues for the
second quarter of 2004 were positively impacted by approximately $12.7 million
due to the effect of foreign currency fluctuations. Net service revenues
increased in the Asia Pacific region $1.8 million or 6.3% to $30.4 million due
to a positive impact of approximately $2.2 million due to the effect of foreign
currency fluctuations. Net service revenues increased $11.9 million or 10.9%
to $120.9 million in the Europe and Africa region including a positive impact
of approximately $10.4 million due to the effect of foreign currency
fluctuations. The decline in early development and laboratory services, or
EDLS, revenues in the Europe and Africa region due to the sale of our reference
laboratory in South Africa in the first quarter of 2004 were offset by growth
in revenues from CDS. Net service revenues increased $3.3 million or 2.9% to
$117.1 million in the Americas region. Contribution for the product development group was $128.4 million for the
second quarter of 2004 compared to $128.1 million for the second quarter of
2003. As a percentage of net service revenues, contribution margin was 47.8%
for the second quarter of 2004 compared to 51.0% for the second quarter of
2003. The contribution margin was negatively impacted by the timing of project
start up costs which are expensed as incurred. Commercial Services Group.Net service revenues for the commercial services
group were $158.9 million for the second quarter of 2004 compared to $138.9
million for the second quarter of 2003. Net service revenues for the second
quarter of 2004 were positively impacted by approximately $8.7 million due to
the effect of foreign currency fluctuations. We experienced strong growth in
net revenues in the Asia Pacific region with net service revenues increasing
$10.1 million or 37.5% to $37.1 million including a positive impact of
approximately $2.9 million due to the effect of foreign currency fluctuations.
Net service revenues increased approximately $12.3 million or 21.0% to $70.7
million in the Europe and Africa region, including a positive impact of
approximately $6.0 million due to the effect of foreign currency fluctuations.
We experienced an improvement in the business conditions in Europe, primarily
Germany, Italy and the United Kingdom. Net service revenues decreased $2.4
million or (4.4%) to $51.0 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 $61.3 million for the second
quarter of 2004 compared to $50.7 million for the second quarter of 2003. As a
percentage of net service revenues, contribution margin was 38.6% for the
second quarter of 2004 compared to 36.5% for the second quarter of 2003.
Utilization of our syndicated sales forces in the United Kingdom improved which
contributed to 39




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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 $21.9 million during the second quarter of 2004 as
compared to the second quarter of 2003 due to a $19.3 million decrease in
investment revenues and a decrease of approximately $2.6 million in commercial
rights and royalties revenues. Investment revenues include impairment losses
$10.2 million and $1.6 million for the second quarter of 2004 and 2003,
respectively. Commercial rights and royalties costs increased by approximately
$9.0 million during the same period, as a result of several factors including
approximately $11.5 million of costs associated with our
CymbaltaTM contract
and our February 2004 contract with a large pharmaceutical company, as compared
to $2.7 million for the second quarter of 2003. These factors were partially
offset by a decrease of approximately $2.3 million in service costs relating to
services provided by our commercial services group. The contribution for the PharmaBio Development group decreased by $30.9 million
in the second quarter of 2004 compared to the second quarter of 2003. The
commercial rights and royalties revenues (net of related costs) in the second
quarter of 2004 decreased the contribution of this group by approximately $11.6
million when compared to the second 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 $11.5 million related to our
contracts for which no revenues are being recognized. The contribution from
investment revenues decreased by approximately $19.3 million for the second
quarter of 2004 to ($8.0) million versus $11.3 million for the second quarter
of 2003 as a direct result of the decrease in the investment revenues. Six Months Ended June 30, 2004 and 2003 Gross Revenues.Gross revenues for the first six months of 2004 were $1.01
billion versus $1.00 billion for the first six months of 2003. Below is a
summary of revenues (in thousands): Six months ended June 302004
    
    2003Service revenues
    
    $
    986,779
    
    
    $
    939,127Less: reimbursed service costs
    
    
    164,765
    
    
    
    191,138Net service revenues
    
    
    822,014
    
    
    
    747,989Commercial rights and royalties
    
    
    30,741
    
    
    
    34,704Investments
    
    
    (3,795
    )
    
    
    29,259Total net revenues
    
    $
    848,960
    
    
    $
    811,952Reimbursed service costs
    
    
    164,765
    
    
    
    191,138Gross revenues
    
    $
    1,013,725
    
    
    $
    1,003,090
  
    
    Service Revenues.Service revenues were $986.8 million for the
first six months of 2004 compared to $939.1 million for the first six
months of 2003. Service revenues less reimbursed service costs, or
net service revenues, for the first six months of 2004 were $822.0
million, an increase of $74.0 million or 9.9% over net service
revenues of $748.0 million for the first six months of 2003. Net
service revenues for the first six months of 2004 were positively
impacted by approximately $54.5 million due to the effect of the
weakening of the U.S. dollar relative to the euro, the British pound,
the South African rand and the Japanese yen. Net service revenues
increased in the Asia Pacific region $25.7 million or 23.6% to $134.6
million 40




---



##### 



Quintiles Transnational Corp. and Subsidiaries  for the first six months of 2004 from the first six months of 2003
including a positive impact of approximately $11.8 million due to the
effect of foreign currency fluctuations. Net service revenues
increased $53.9 million or 16.7% to $377.8 million for the first six
months of 2004 from the first six months of 2003 in the Europe and
Africa region including a positive impact of approximately $41.5
million due to the effect of foreign currency fluctuations. Net
service revenues decreased $5.7 million or (1.8%) to $309.6 million for
the first six months of 2004 from the first six months 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 six months of 2004 as compared to the first
six months of 2003.
    
    Commercial Rights and Royalties Revenues.Commercial rights and
royalties revenues for the first six months of 2004 were $30.7
million, a decrease of $4.0 million over first six months of 2003
commercial rights and royalties revenues of $34.7 million. Commercial
rights and royalties revenues were positively impacted by
approximately $2.7 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 six
months of 2004 were reduced by approximately $4.3 million versus
$628,000 for the first six months of 2003 for payments we made to our
customers. These payments are considered incentives and are amortized
against revenues over the service period of the contract. We
recognized approximately $11.2 million of revenue in the first six
months of 2003 relating to the service contract with KOSP which
concluded in December 2003. The decrease was partially offset by
increases resulting from the following (1) our contracts with CBRX,
which contributed $4.8 million during the first six months of 2004
versus $3.4 million during the first six months of 2003, (2) contracts
in Europe with two large pharmaceutical customers, which contributed
approximately $20.4 million of revenues during the first six months of
2004 versus $18.8 million during the first six months of 2003 and (3)
our September 2003 acquisition of a controlling interest in
Pharmaplan, which contributed $5.6 million of revenues during the
first six months of 2004. Revenues from miscellaneous contracts and
activities decreased approximately $1.1 million for the first six
months of 2004 versus the first six months of 2003. Commercial rights
and royalties revenues for the first six months of 2004 were
attributable to the following: (1) approximately 66.3% to our
contracts with two large pharmaceutical customers in Europe, (2)
approximately 18.2% to the acquisition of Pharmaplan during September
2003 and (3) approximately 15.5% to our contracts with CBRX.  
    
    Investment Revenues.Investment revenues related to our
PharmaBio Development groups financing arrangements for the first
six months of 2004 were a loss of $3.8 million versus a gain of $29.3
million for the first six months of 2003. Investment revenues for
the first six months of 2004 included $6.6 million of net gains on
marketable securities versus $31.7 million of net gains on marketable
securities for the first six months of 2003. Gains on marketable
securities for the first six months of 2003 included a $12.1 million
gain on the warrant to acquire 700,000 shares of Scios, Inc. In
addition, during the first six months of 2004 and 2003, we recognized
$10.4 million and $2.5 million, respectively, of impairment losses on
investments whose decline in fair value was considered to be
other-than-temporary. 41




---



##### 



Quintiles Transnational Corp. and Subsidiaries Costs of Revenues.Costs of revenues were $728.7 million for the first six
months of 2004 versus $669.6 million for the first six months of 2003. Below
is a summary of the costs of revenues (in thousands): Six months ended June 30,2004
    
    2003Reimbursed service costs
    
    $
    164,765
    
    
    $
    191,138Service costs
    
    
    449,734
    
    
    
    397,972Commercial rights and royalties costs
    
    
    49,102
    
    
    
    39,837Depreciation and amortization
    
    
    65,063
    
    
    
    40,653$
    728,664
    
    
    $
    669,600
  
    
    Reimbursed Service Costs.Reimbursed service costs were $164.8
million and $191.1 million for the first six months of 2004 and 2003,
respectively.  
    
    Service Costs.Service costs were $449.7 million or 54.7% of
net service revenues versus $398.0 million or 53.2% of net service
revenues for the first six months of 2004 and 2003, respectively.
Compensation and related expenses increased approximately $37.6
million primarily as a result of salary and wage increases including
an increase in the number of billable employees. Other expenses
directly related to our service contracts increased approximately
$14.1 million. Service costs were negatively impacted by
approximately $28.7 million from the effect of foreign currency
fluctuations.  
    
    Commercial Rights and Royalties Costs.Commercial rights and
royalties costs were $49.1 million for the first six months of 2004
versus $39.8 million for the first six months of 2003. These costs
include services and products provided by third parties, as well as
services provided by our other service groups, totaling approximately
$15.3 million and $19.0 million for the first six months of 2004 and
2003, respectively. The first six months of 2004 included
approximately $4.3 million of costs for our Pharmaplan operations
which we acquired in September 2003. Included in the first six
months of 2004 and 2003 are approximately $6.7 million and $2.8
million, respectively, of costs related to our CymbaltaTM contract.
In addition, the first six months of 2004 included approximately $7.5
million of costs related to our February 2004 contract with a large
pharmaceutical company.  
    
    Depreciation and Amortization.Depreciation and amortization
increased to $65.1 million for the first six months of 2004 versus
$40.7 million for the first six months of 2003. Amortization expense
increased approximately $23.7 million as a result of the increase in
intangible assets which are being amortized over their finite lives.
We have approximately $109.7 million of intangible assets which have
an indefinite life and therefore are not being amortized.
Depreciation expense remained relatively constant increasing
approximately $743,000. 42




---



##### 



Quintiles Transnational Corp. and Subsidiaries General and administrative expenses.General and administrative expenses were
$314.6 million or 37.1% of total net revenues for the first six months of 2004
versus $268.2 million or 33.0% of total net revenues for the first six months
of 2003. Travel expenses increased approximately $11.5 million for the first
six months of 2004 when compared to the first six months of 2003, primarily as
a result of increased activities associated with our global operations. These
travel expenses include reimbursements made to our Executive Chairman and Chief
Executive Officer for business related travel services he provides for himself
and other employees with the use of his own plane. Professional services
increased approximately $8.9 million during this same time period, including
approximately $1.9 million of management fees to our parent companys investor
group. In addition, compensation expense was negatively impacted by
approximately $12.3 million as a result of salary and wage increases including
an increase in the number of administrative employees. General and
administrative expenses were negatively impacted by approximately $19.6 million
from the effect of foreign currency fluctuations. Net interest expense was $29.2 million for the first six months of 2004 versus
net interest income of $8.1 million for the first six months of 2003. Interest
income decreased approximately $4.7 million to $4.6 million for the first six
months of 2004 as a result of the decline in investable cash. Interest expense
increased approximately $32.6 million as a result of the interest on the debt
we incurred to fund the Pharma Services Transaction. Other income was $2.0 million for the first six months of 2004 versus $5.4
million for the first six months of 2003. The first six months of 2004
included approximately $3.8 million of net gains on the sale of assets,
primarily certain assets of our reference laboratory in South Africa. During
the first six months of 2004, we recognized approximately $1.9 million of
foreign currency translation losses versus foreign currency translation gains
of approximately $4.6 million for the first six months of 2003. During the second quarter of 2004, we sold 3,556 ordinary shares, or
approximately 11.1% of our ownership interest, in our Japanese subsidiary,
QJPN, to Mitsui for approximately 4.0 billion yen (approximately $37.0 million)
of gross proceeds. We incurred approximately $1.1 million of costs related to
the sale. As a result, we recognized a gain on the sale of a portion of an
investment in a subsidiary of approximately $24.7 million. In addition, our Japanese subsidiary issued 1,778 ordinary shares and 1,778
preference shares directly to Mitsui for an aggregate amount of approximately
4.7 billion yen (approximately $42.9 million ) of gross proceeds. We incurred
approximately $463,000 of costs related to the issuance of the ordinary shares
and approximately $652,000 of costs related to the issuance of the preference
shares. The issuance of the new ordinary shares further reduced our ownership
interest in our subsidiary by an additional 4.7%. As a result, we recognized a
non-operating gain of approximately $10.0 million for the change in interest
transaction. We did not recognize any gain or loss associated with the new
issuance of preference shares which decreased our voting interest in this
subsidiary by an additional 4.2% to 80% and accounted for approximately 2.8
billion yen (approximately $25.1 million) of gross proceeds. We recognized $3.9 million of transaction expenses for the first six months 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 $22.0 million for the first six months of 2004
versus income before income taxes of $74.9 million or 9.2% of total net
revenues for the first six months of 2003. 43




---



##### 



Quintiles Transnational Corp. and Subsidiaries The effective income tax rate was (60.9%) for the first six months of 2004
versus 36.1% for the first six months of 2003. Our effective income tax rate
was negatively impacted by deferred income taxes provided on approximately
$55.7 million of earnings of our foreign subsidiaries. The earnings of our
foreign subsidiaries will be subject to taxation in the United States for
income tax purposes when repatriated. However, for financial reporting
purposes, income taxes are provided on the earnings of our foreign subsidiaries
as though they have currently been repatriated. Our effective income tax rate
for the first six months of 2004 was negatively impacted due to the gains on
the Mitsui transactions. The tax effects of the gains on these transactions
are recognized as a period adjustment not a change in the annual effective
income tax rate. Our estimated annual effective income tax rate increased to
approximately 3.8% during the second quarter of 2004 versus an estimated 2.0%
at the first quarter of 2004. Since we conduct operations on a global basis,
our effective income tax rate may vary. During the first six months of 2004 we recognized $456,000 of losses from
equity in unconsolidated affiliates and other which represents a minority
interest in consolidated subsidiaries net of our pro rata share of the net loss
of unconsolidated affiliates, primarily Verispan. During the first six months
of 2003 we recognized $16,000 of earnings from equity in unconsolidated
affiliates and other. Loss from continuing operations was $35.9 million for the first six months of
2004 versus income from continuing operations of $47.9 million for the first
six months of 2003. Income from our discontinued operation, Bioglan, was $10.1 million for the
first six months of 2004 versus $6.8 million for the first six months of 2003.
Gross revenues of the discontinued operation increased approximately $7.1
million to $35.6 million for the first six months of 2004 as compared to gross
revenues of $28.6 million for the first six months of 2003. Net loss was $25.7 million for the first six months of 2004 versus net income
of $54.8 million for the first six months of 2003. Analysis by Segment: The following table summarizes the operating activities for our reportable
segments for the first six months of 2004 and 2003, respectively. In August
2004, we completed our previously announced sale of certain assets related to
our Bioglan business.  The results of operations for the Bioglan
business have been separately reported as a discontinued operation and are no
longer included in the PharmaBio Development group. All historical periods
presented herein have been restated to reflect the Bioglan business as a
discontinued operation. We do not include reimbursed service costs, general
and administrative expenses, depreciation and amortization 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). 44




---



##### 



Quintiles Transnational Corp. and Subsidiaries Total Net Revenues
    
    Contribution% of Net
    
    
    
    
    
    % of Net2004
    
    2003
    
    Growth %
    
    2004
    
    Revenues
    
    2003
    
    RevenuesProduct development
    
    $
    531.0
    
    
    $
    501.4
    
    
    
    5.9
    %
    
    $
    256.4
    
    
    
    48.3
    %
    
    $
    254.4
    
    
    
    50.7
    %Commercial services
    
    
    305.8
    
    
    
    265.6
    
    
    
    15.2
    
    
    
    115.9
    
    
    
    37.9
    
    
    
    95.6
    
    
    
    36.0PharmaBio Development
    
    
    26.9
    
    
    
    64.0
    
    
    
    (57.9
    )
    
    
    (22.2
    )
    
    
    (82.2
    )
    
    
    24.1
    
    
    
    37.7Eliminations
    
    
    (14.9
    )
    
    
    (19.0
    )
    
    
    21.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    849.0
    
    
    $
    812.0
    
    
    
    4.6
    %
    
    $
    350.1
    
    
    
    41.2
    %
    
    $
    374.1
    
    
    
    46.1
    %
 Product Development Group.Net service revenues for the product development
group were $531.0 million for the first six months of 2004 compared to $501.4
million for the first six months of 2003. Net service revenues for the first
six months of 2004 were positively impacted by approximately $33.6 million due
to the effect of foreign currency fluctuations. Net service revenues increased
in the Asia Pacific region $3.7 million or 6.3% to $61.9 million primarily as a
result of a positive impact of approximately $5.4 million due to the effect of
foreign currency fluctuations. Net service revenues increased $27.8 million or
12.9% to $243.3 million in the Europe and Africa region primarily as a result
of the positive impact of approximately $26.8 million due to the effect of
foreign currency fluctuations. Net service revenues decreased $1.8 million or
(0.8%) to $225.8 million in the Americas region, primarily as a result of a
reduction in EDLS revenues, although we were positively impacted by
approximately $1.4 million due primarily to the effect of the strengthening
U.S. dollar relative to the Canadian dollar. Contribution for the product development group was $256.4 million for the first
six months of 2004 compared to $254.4 million for the first six months of 2003.
As a percentage of net service revenues, contribution margin was 48.3% for the
first six months of 2004 compared to 50.7% for the first six months of 2003.
The contribution margin was negatively impacted by the timing of project start
up costs in the CDS business and the decline in EDLS revenues which were not
offset by a proportional reduction in expenses. Commercial Services Group.Net service revenues for the commercial services
group were $305.8 million for the first six months of 2004 compared to $265.6
million for the first six months of 2003. Net service revenues for the first
six months of 2004 were positively impacted by approximately $21.6 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
$21.7 million or 42.9% to $72.4 million including a positive impact of
approximately $6.7 million due to the effect of foreign currency fluctuations.
Net service revenues increased approximately $25.3 million or 22.3% to $138.8
million in the Europe and Africa region, including a positive impact of
approximately $15.2 million due to the effect of foreign currency fluctuations.
The increase is primarily the result of improved business conditions in the
United Kingdom, Germany and Italy. Net service revenues decreased $6.8 million
or (6.7%) to $94.6 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 $115.9 million for the first
six months of 2004 compared to $95.6 million for the first six months of 2003.
As a percentage of net service revenues, contribution margin was 37.9% for the
first six months of 2004 compared to 36.0% for the first six months of 2003.
We experienced an improvement in the difficult market conditions for our
syndicated 45




---



##### 



Quintiles Transnational Corp. and Subsidiaries 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 $37.0 million during the first six months of 2004 as
compared to the first six months of 2003 due to a $33.1 million decrease in
investment revenues and a decrease of approximately $4.0 million in commercial
rights and royalties revenues. Commercial rights and royalties costs increased
by approximately $9.3 million during the same period as a result of several
factors including approximately $14.2 million of costs associated with our
CymbaltaTM contract and our February 2004 contract with a large pharmaceutical
company for the first six months of 2004 as compared to approximately $2.8
million for the first six months of 2003. These factors were partially offset
by a decrease of approximately $3.7 million in service costs relating to
services provided by our commercial services group. The contribution for the PharmaBio Development group decreased by $46.3 million
in the first six months of 2004 compared to the first six months of 2003. The
commercial rights and royalties revenues (net of related costs) in the first
six months of 2004 decreased the contribution of this group by approximately
$13.2 million when compared to the first six months 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 $14.2 million and $2.8 million
for the first six months of 2004 and 2003, respectively, related to our
contracts for which no revenues were recognized. The contribution from
investment revenues decreased by approximately $33.1 million for the first six
months of 2004 to ($3.8) million versus $29.3 million for the first six months
of 2003 as a direct result of the decrease in the investment revenues. Liquidity and Capital Resources Cash and cash equivalents were $375.3 million at June 30, 2004 as compared to
$373.6 million at December 31, 2003. Cash used in operations was $71.4 million for the six months ended June 30,
2004 versus cash provided by operations of $58.8 million for the six months
ended June 30, 2003. Cash provided by investing activities was $33.7 million for the six months
ended June 30, 2004 versus $36.3 million for the six months ended June 30,
2003. Investing activities included the purchases and sales of equity
securities and other investments, capital asset purchases, and the acquisition
of commercial rights. During the first six months of 2004, we sold 3,556 shares of ordinary shares or
approximately 11.11% of our ownership in our Japanese subsidiary, QJPN, to
Mitsui. We received net proceeds from this sale of approximately $36.0 million
net of related costs. We also received approximately $41.8 million of net
proceeds from the issuance of ordinary and preference shares by our Japanese
subsidiary, which is included as a source of cash in the cash provided by
financing activities, for total net proceeds received from Mitsui of
approximately $77.7 million. Capital asset purchases required an outlay of cash of $24.6 million for the six
months ended June 30, 2004 compared to an outlay of $24.0 million for the same
period in 2003. 46




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Quintiles Transnational Corp. and Subsidiaries Cash used for the acquisition of commercial rights and royalties related assets
was $3.0 million for the six months ended June 30, 2004 as compared to an
outlay of $18.4 million for the comparable period in 2003. The six months
ended June 30, 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 $7.7 million for the six months ended June 30, 2004 compared to an outlay of
$5.1 million for the same period in 2003. Proceeds from the sale of equity
securities and other investments were $27.9 million during the six months ended
June 30, 2004 as compared to $53.8 million for the same period in 2003. The
proceeds received during the six months ended June 30, 2004 included
approximately $25.9 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): June 30, 2004
    
    December 31, 2003Trade service accounts receivable, net
    
    $
    145,403
    
    
    $
    122,496Unbilled services
    
    
    133,651
    
    
    
    102,802Unearned income
    
    
    (189,350
    )
    
    
    (190,918
    )Net service receivables outstanding
    
    $
    89,704
    
    
    $
    34,380Number of days of service revenues
outstanding
    
    
    16
    
    
    
    7
 Investments in debt securities were $11.6 million at June 30, 2004 as compared
to $11.0 million at December 31, 2003. Our investments in debt securities
consist primarily of state and municipal securities. Investments in marketable equity securities decreased $23.9 million to $34.4
million at June 30, 2004 as compared to $58.3 million at December 31, 2003
primarily as a result of sales of equity securities. Investments in non-marketable equity securities and loans at June 30, 2004 were
$53.0 million, as compared to $48.6 million at December 31, 2003. Investments in unconsolidated affiliates, primarily Verispan, were $121.1
million at June 30, 2004 as compared to $121.2 million at December 31, 2003. Cash provided by financing activities was $40.3 million for the first six
months of 2004 versus cash used in financing activities of $53,000 for the
first six months of 2003. Financing activities included approximately $9.4
million and $9.6 million of principal payments on credit arrangements for the
first six months of 2004 and 2003, respectively. In August 2004, we completed the sale of our Bioglan business to Bradley
Pharmaceuticals Inc., or Bradley, for gross proceeds of approximately $188.3
million which includes approximately $5.4 million of direct costs for
transferred inventory. Due to certain adjustment provisions in the
sales agreement, we may have to make payments to Bradley which will
reduce the total purchase price. We have available to us a $75.0 million revolving loan facility under our
secured credit facility. As of June 30, 2004, we did not have any outstanding
balance on this facility. 47




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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
June 30, 2004 was $509.7 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. BACKLOG AND NET NEW BUSINESS REPORTING We report backlog, $2.16 billion at June 30, 2004, based on anticipated net
revenue from uncompleted projects that our customers have authorized. Backlog
at June 30, 2004 includes approximately $30.6 million of backlog related to
services contracted from our service groups primarily commercial services, in
connection with the strategic alliances forged by our PharmaBio Development
group. Net new business, which includes anticipated net revenue from contracts that we
entered into during the period and adjusted for contracts which were canceled
during the period, for the six months ended June 30, 2004 was $954.5 million.
Net new business for our product development and commercial services groups
during this time was $683.0 million and $270.9 million, respectively. We do not include product revenue or commercial rights-related revenues
(royalties and commissions) in backlog or net new business. Our backlog and
net new business is calculated based upon our estimate of forecasted currency
exchange rates. Annually, we adjust the beginning balance of our backlog to
reflect changes in our forecasted currency exchange rates. Our backlog and net
new business at any time can be affected by:  
    
    the variable size and duration of projects,  
    
    the loss or delay of projects, and  
    
    a change in the scope of work during the course of a project. 48




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Quintiles Transnational Corp. and Subsidiaries If customers delay projects, the projects will remain in backlog, but will not
generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues may not be indicative of
the future relationship. The reporting of revenue backlog and net new business is not authoritatively
prescribed, therefore practices tend to vary among competitors and reported
amounts are not necessarily comparable. 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 June 30, 2004, we had outstanding debt of approximately $793.2 million.
Of the total debt, approximately $343.2 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;  
    
    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 49




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Quintiles Transnational Corp. and Subsidiaries  
    
    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 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. 50




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Quintiles Transnational Corp. and Subsidiaries We are subject to additional risks and restrictions as a result of Intermediate
Holdings issuance of discount notes. On March 18, 2004, Intermediate Holding issued an aggregate principal amount at
maturity of $219.0 million in senior discount notes due April 1, 2014, or the
discount notes. The discount notes accrete at the rate of 11.5% per annum,
compounded semi-annually on April 1 and October 1 of each year to, but not
including April 1, 2009. From and after April 1, 2009, cash interest on the
discount notes will accrue at the rate of 11.5% per annum, and will be payable
semiannually in arrears on April 1 and October 1 of each year, commencing on
October 1, 2009, until maturity. Intermediate Holding is a holding company
that currently conducts all of its operations through us and our subsidiaries
and affiliates. As a result, all of Intermediate Holdings operating profit
and cash flows are generated by us and our subsidiaries and affiliates. The
discount notes, however, are the exclusive obligation of Intermediate Holding,
and we are not obligated to make funds available for payment on the discount
notes. Intermediate Holdings ability to make payments on the discount notes
is nevertheless dependent on our earnings and cash flows and our ability to
make distributions in the form of dividends or other advances and transfers to
Intermediate Holding. To the extent we have funds available and to the extent
permitted by our senior credit facility and the indenture governing our notes,
we may make funds available to Intermediate Holding to permit payment of its
obligations under the discount notes. In addition, the indenture governing the
discount notes prohibits Intermediate Holding from permitting us to take
certain actions substantially similar to those we would be prohibited from
taking under the covenants contained in our indenture. Despite our level of indebtedness, we and our parent companies are able to
incur substantially more debt and undertake additional obligations. Incurring
such debt or undertaking such obligations could further exacerbate the risks to
our financial condition. Although the indenture governing our notes and the credit agreement governing
our senior secured credit facility each contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions and the indebtedness incurred in compliance with
these restrictions could be substantial. To the extent new debt is added to
our current debt levels, our substantial leverage risks would increase. In
addition, to the extent new debt is incurred by Pharma Services or Intermediate
Holding, such as the 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. 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. 51




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Quintiles Transnational Corp. and Subsidiaries Mitsuis ownership interest in our Japanese subsidiary could give rise to
Mitsuis right to acquire our entire interest in QJPN or to require us to buy
out Mitsuis interest. As part of the terms of Mitsuis investment in QJPN, Mitsui acquired certain
rights that could potentially allow Mitsui to acquire the remainder of our
interest in QJPN. Upon the occurrence of certain actions by us or Pharma
Services, including liquidation, dissolution, bankruptcy or similar events,
Mitsui will have the option to (1) sell to us all or part of its interest in
QJPN or (2) purchase from us all or part of our interest in QJPN. In addition,
if there is a change in control of us or Pharma Services or a breach of certain
provisions of our investment agreement with Mitsui, Mitsui could sell to us its
entire interest in QJPN. As a result,
if such rights are triggered, we could lose control of our QJPN subsidiary or
be required to spend significant funds to acquire Mitsuis interest in QJPN,
either of which could have a material adverse effect on our business, results
of operations and financial condition. Changes in aggregate spending, research and development budgets and outsourcing
trends in the pharmaceutical and biotechnology industries could adversely
affect our operating results and growth rate. Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice grew substantially during the 1990s and we
benefited from this trend. Some industry commentators believe that the rate of
growth of outsourcing will tend to decrease. If these industries reduce their
outsourcing of clinical research and sales and marketing projects, our
operations and financial condition could be materially and adversely affected.
We also believe we have been negatively impacted recently by mergers and other
factors in the pharmaceutical industry, which appear to have slowed decision
making by our customers and delayed certain trials. We believe our
commercialization services have been particularly affected by recent reductions
in new product launches and increases in the number of drugs losing patent
protection. A continuation of these trends would have an ongoing adverse
effect on our business. In addition, U.S. federal and state legislatures and
numerous foreign governments have considered various types of healthcare
reforms and have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers
and pharmaceutical companies. If future regulatory cost containment efforts
limit the profitability of new drugs, our customers may reduce their research
and development spending, which could reduce the business they outsource to us.
We cannot predict the likelihood of any of these events or the effects they
would have on our business, results of operations or financial condition. 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. 52




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Quintiles Transnational Corp. and Subsidiaries Our plan to strengthen the technology platform for our product development and
commercialization services may negatively impact our results in the short term. We are currently undertaking significant programs to optimize business
processes in our product development and commercialization services. We have
entered into agreements with certain vendors for them to provide systems
development and integration services to help us develop the information
technology, or IT, platform for these programs. If such vendors fail to
perform as required or if there are substantial delays in developing and
implementing this platform, we may have to make substantial further
investments, internally or with third parties, to achieve our objectives.
Additionally, our progress may be limited by existing or claimed patents by
parties who seek to enjoin us from adopting or limiting preferred technology or
seek license payments from us. Meeting our objectives is dependent on a number
of factors which may not take place as we anticipate, including obtaining
adequate technology enabled services, creating IT-enabled services which our
customers will find desirable and implementing our business model with respect
to these services. Also, these expenditures are likely to negatively impact
our profitability, at least until our IT-enabled processes and services are
operationalized. Over time, we envision continuing to invest in extending and
enhancing our IT platform in other ways to further support and improve our
services. We cannot assure you that any improvements in operating income
resulting from our new capabilities will be sufficient to offset our
investments in them. Our results could be further negatively impacted if our
competitors are able to execute similar programs before we can launch our
optimized services or if they are able to structure a platform that attracts
customers away from our services. We may not be able to derive the benefits we hope to achieve from Verispan, our
joint venture with McKesson. In May 2002, we completed the formation of a joint venture, Verispan, with
McKesson designed to leverage the operational strengths of the healthcare
information business of each party. As part of the formation of Verispan, we
contributed our former informatics business. As a result, Verispan remains
subject to the risks to which our informatics business was exposed. If
Verispan is not successful or if it experiences any of the difficulties
described below, there could be an adverse effect on our results of operations
and financial condition, as Verispan is a pass-through entity and, as such, its
results are reflected in our financial statements to the extent of our interest
in Verispan. We may not achieve the intended benefits of Verispan if it is not
able to secure additional data in exchange for equity. Verispan also could
encounter other difficulties, including:  
    
    its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to
support its informatics products;  
    
    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; 53




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Quintiles Transnational Corp. and Subsidiaries  
    
    the risk that industry regulation may restrict Verispans ability to analyze and disseminate pharmaceutical and healthcare
data; and  
    
    the risk that it will not be able to effectively and cost-efficiently replace services previously provided to the
contributed businesses by the former parent corporations. Although we have a license to use Verispans commercially available data
products and we may pay Verispan to create customized data products for us, if
Verispan is unable to provide us with the quality and character of data
products that we need to support those services, we would need to seek other
strategic alternatives to achieve our goals. In contributing our former informatics business to Verispan, we assigned
certain contracts to Verispan. Verispan has agreed to indemnify us against any
liabilities we may incur in connection with these contracts after contributing
them to Verispan, but we still may be held liable under the contracts to the
extent Verispan is unable to satisfy its obligations, either under the
contracts or to us. The potential loss or delay of our large contracts could adversely affect our
results. Many of our customers can terminate our contracts upon 15-90 days notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. In
addition, we may not realize the full benefits of our backlog of contractually
committed services if our customers cancel, delay or reduce their commitments
under their contracts with us. Thus, the loss or delay of a large contract or
the loss or delay of multiple contracts could adversely affect our net revenue
and profitability. We believe that this risk of loss or delay of multiple
contracts potentially has greater effect as we pursue larger outsourcing
arrangements with global pharmaceutical companies. Also, over the past two
years we have observed that customers may be more willing to delay, cancel or
reduce contracts more rapidly than in the past. If this trend continues, it
could become more difficult for us to balance our resources with demands for
our services and our financial results could be adversely affected. 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 54




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Quintiles Transnational Corp. and Subsidiaries case we might not be able to earn a profit or recoup our investment with regard
to a particular transaction. In addition, the timing of regulatory approval
and product launch and the achievement of other milestones are generally beyond
our control and can affect our actual return from these investments. The
potential negative effect to us could increase depending on the nature and
timing of these transactions and the length of time before it becomes apparent
that the product will not achieve commercial success. Our financial results
would be adversely affected if our customers or their products do not achieve
the level of success that we anticipate and/or our return or payment from the
product investment or financing is less than our costs with respect to these
transactions. Our rights to market and sell certain pharmaceutical products expose us to
product risks typically associated with pharmaceutical companies. 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 pharmaceutical products also subject us to risks
associated with entering into a new line of business in which we have limited
experience. If we are unable to operate this new line of business as we
expect, the financial results from this new line of business could have a
negative impact on our results of operations as a whole. The risk that our
results may be affected if we are unable to successfully operate our
pharmaceutical operations may increase in proportion with (1) the number of
products or product rights we license or acquire in the future, (2) the
applicable stage of the drug approval process of the products and (3) the
levels of outsourcing involved in the development, manufacture and
commercialization of such products. If we lose the services of Dennis Gillings or other key personnel, our business
could be adversely affected. Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Executive Chairman and Chief Executive Officer. Our performance also depends
on our ability to identify, attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings or any key executive, or our 55




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Quintiles Transnational Corp. and Subsidiaries inability to continue to attract and retain qualified personnel, or replace any
departed personnel in a timely fashion could have a material adverse effect on
our business, results of operations or financial condition. Our product development services could result in potential liability to us. We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include 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 clinical trial participants, particularly to clinical trial
participants with life-threatening illnesses, resulting from adverse reactions
to the drugs administered during testing. It is possible third parties could
claim that we should be held liable for losses arising from any professional
malpractice of the investigators with whom we contract or in the event of
personal injury to or death of persons participating in clinical trials. We do
not believe we are legally accountable for the medical care rendered by third
party investigators, and we would vigorously defend any such claims. However,
such claims may still be brought against us, and it is possible we could be
found liable for these types of losses. For example, we were among the
defendants named in a class action by participants in an Alzheimers study
which sought to hold us liable for alleged injury to the participants
participating in the trial, allegedly caused as a result of that participation.
The 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 an investigational new drug on a limited number
of healthy individuals, typically 20 to 80 persons, to determine the drugs
basic safety. We also could be liable for the general risks associated with
ownership of such a facility. These risks include, but are not limited to,
adverse events resulting from the administration of drugs to clinical trial
participants or the professional malpractice of Phase I medical care providers. We also package, label and distribute clinical trial supplies. We could be
held liable for any problems that result from the trial drugs we package, label
and distribute, including any quality control problems in our clinical trial
supplies facilities. For example, accounting for controlled substances is
subject to regulation by the United States Drug Enforcement Administration, or
the DEA, and some of our facilities have been audited by the DEA. In one case,
the DEA indicated that it found that we miscounted certain drugs, which was
resolved to DEAs satisfaction by our providing a corrected accounting of these
drugs to the DEA. We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or
breach of contract if one of our laboratories inaccurately reports or fails to
report lab results. Although we maintain insurance to cover ordinary risks,
insurance 56




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Quintiles Transnational Corp. and Subsidiaries would not cover the risk of a customer deciding not to do business with us as a
result of poor performance, which could adversely affect our results of
operations and financial condition. Our insurance may not cover all of our indemnification obligations and other
liabilities associated with our operations. We maintain insurance designed to cover ordinary risks associated with our
operations and our ordinary indemnification obligations. This insurance might
not be adequate coverage or may be contested by our carriers. For example, our
insurance carrier, to whom we paid premiums to cover risks associated with our
product development services, filed suit against us seeking to rescind the
insurance policies or to have coverage denied for some or all of the claims
arising from class action litigation involving an Alzheimers study, which suit
has been subsequently settled. The availability and level of coverage provided
by our insurance could have a material impact on our profitability if we suffer
uninsured losses or are required to indemnify third parties for uninsured
losses. As part of the formation of Verispan, Verispan assumed our obligation under our
settlement agreement with WebMD Corporation, or WebMD, to indemnify WebMD for
losses arising out of or in connection with (1) the canceled Data Rights
Agreement with WebMD, (2) our data business, which was contributed to the joint
venture, (3) the collection, accumulation, storage or use of data by ENVOY
Corporation, or ENVOY, for the purpose of transmitting or delivering data to
us, (4) any actual transmission or delivery by ENVOY of data to us or (5)
violations of law or contract attributable to any of the events described in
(1)  (4) above. These indemnity obligations are limited to 50.0% for the
first $20.0 million in aggregate losses, subject to exceptions for certain
indemnity obligations that were not transferred to Verispan. Although Verispan
has assumed our indemnity obligations to WebMD relating to our former data
business, Verispan may have insufficient resources to satisfy these obligations
or may otherwise default with respect thereto. In addition, WebMD may seek
indemnity from us, and we would have to proceed against Verispan. In addition, we remain subject to other indemnity obligations to WebMD,
including for losses arising out of the settlement agreement itself or out of
the sale of ENVOY to WebMD. In particular, we could be liable for losses which
may arise in connection with a class action lawsuit filed against ENVOY prior
to our purchase and subsequent sale of it to WebMD, which lawsuit was recently
settled. ENVOY and its insurance carrier, Federal, filed a lawsuit against us
in June 2003 alleging that we should be responsible for payment of the
settlement amount of $11.0 million and related fees and costs in connection
with the class action lawsuit settlement. Our indemnity obligation with regard
to losses arising from the sale of ENVOY to WebMD including ENVOYs class
action lawsuit is not subject to the limitation on the first $20.0 million of
aggregate losses described above. In connection with the sale of certain assets relating to our Bioglan business,
including rights to certain dermatology products, to Bradley, we agreed to
indemnify Bradley for losses caused by the manufacture, packaging, labeling,
promotion, distribution, transportation, storage or sale of those products by
or on our behalf prior to the transaction closing or patients use of products
sold by or on our behalf prior to the transaction closing. For example, we
could face product liability claims in the event users of these products, who
bought them during the time we owned the product rights, experienced negative
reactions or adverse side effects or in the event such products cause injury or
are found to be unsuitable for their intended purposes or are otherwise
defective. 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 57




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Quintiles Transnational Corp. and Subsidiaries be held liable as a result of the use or misuse of products we sold and any
such product liability claims could adversely affect our operating results or
financial condition. We may be exposed to additional income tax liabilities. In January 2004, we received a written communication from the Internal Revenue
Service asserting that the income tax basis of the stock of our ENVOY
subsidiary (which we sold in 2000 in a taxable transaction) may have been
overstated and proposing an increase in our income taxes owed for 2000 by
approximately $153.1 million. After further discussions, the Internal Revenue
Service revised and reissued its prior communication, reducing the proposed
assessment to $84.6 million. If our income tax basis is reduced, we will be
required to pay additional income taxes, plus interest and possible penalties,
on the amount of such reduction. If the reduction in our income tax basis is
large enough, the resulting income tax effect could have a material adverse
impact on our liquidity and financial condition. We are contesting the
Internal Revenue Services challenge and are presently in the appeals process
with the Internal Revenue Service. Changes in government regulation could decrease the need for the services we
provide. Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for our
services, and, as a result, our business, results of operations and financial
condition could be materially adversely affected. Potential regulatory changes
under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on the
business opportunities available to us. Failure to comply with existing regulations could result in a loss of revenue. We are subject to a wide range of government regulations and review by a number
of regulatory agencies including, in the United States, the Department of
Justice, FDA, DEA, Department of Transportation and similar regulatory agencies
throughout the world. Any failure on our part to comply with applicable
regulations could materially impact our ability to perform our services. For
example, non-compliance could result in the termination of ongoing clinical
research or sales and marketing projects or the disqualification of data for
submission to regulatory authorities, either of which could have a material
adverse effect on us. If we were to fail to verify that informed consent is
obtained from patient participants in connection with a particular clinical
trial, the data collected from that trial could be 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 58




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Quintiles Transnational Corp. and Subsidiaries responsible for trial or program compliance. If our customers or regulatory
authorities make such claims against us and prove them, we could be subject to
substantial damages, fines or penalties. Our services are subject to evolving industry standards and rapid technological
changes. The markets for our services are characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. To succeed, we must continue to:  
    
    enhance our existing services;  
    
    introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;  
    
    integrate new services with existing services;  
    
    achieve market acceptance for new services; and  
    
    respond to emerging industry standards and other technological changes. Exchange rate fluctuations may affect our results of operations and financial
condition. We derive a large portion of our net revenue from international operations. Our
financial statements are denominated in U.S. dollars; thus, factors associated
with international operations, including changes in foreign currency exchange
rates, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:  
    
    Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.  
    
    Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts. We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at June 30, 2004. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably
reduce our currency transaction risk associated with our service contracts. 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; 59




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Quintiles Transnational Corp. and Subsidiaries  
    
    political changes and economic crises may lead to changes in the
business environment in which we operate; and  
    
    international conflict, including terrorist acts, could significantly
impact our financial condition and results of operations. New and proposed laws and regulations regarding confidentiality of patients
information could result in increased risks of liability or increased cost to
us, or could limit our service offerings. The confidentiality and release of patient-specific information are subject to
governmental regulation. Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human
Services has issued regulations mandating heightened privacy and
confidentiality protections for patients identifiable health information
(protected health information). We do not meet the definition of a covered
entity under HIPAA; however, we are indirectly affected by HIPAA because many
investigators with whom we are involved with in clinical trials are HIPAA
covered entities. Also, the European Union, or EU, and its member states, as
well as other countries, continue to issue new 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 privacy and
security measures, which may require us to make substantial expenditures or
cause us to limit the products and services we offer. In addition, if we
violate applicable laws, regulations or duties relating to the use, privacy or
security of health information, we could be subject to civil or criminal
penalty and be forced to alter our business practices. We may be adversely affected by customer concentration. Although we did not have any one customer that accounted for 10% of net service
revenues for the three and six months ended June 30, 2004, if any large
customer decreases or terminates its relationship with us, our business,
results of operations or financial condition could be materially adversely
affected. 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. Further, on June 9, 2004, the FDA accepted comments from the
public in order to re-evaluate and possibly amend Part 11. Currently, however,
the regulation requires that those utilizing such electronic records and/or
signatures employ 60




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Quintiles Transnational Corp. and Subsidiaries procedures and controls designed to ensure the authenticity, integrity and, as
appropriate, confidentiality of electronic records and, Part 11 requires those
utilizing electronic signatures to ensure that a person appending an electronic
signature cannot readily repudiate the signed record. Pharmaceutical, medical
device and biotechnology companies are increasing their utilization of
electronic records and electronic signatures and are requiring their service
providers and partners to do likewise. Our ability to provide services to our
customers depends in part on our compliance with the FDAs requirements
regarding Part 11. We are making steady and documented progress in bringing
our critical computer applications into compliance according to written
enhancement plans that have been reviewed and approved by third party
authorities. Lower-priority systems are, likewise, being reviewed and
revalidated. If we are unable to complete these compliance objectives, our
ability to provide services to our customers which meet FDA requirements may be
adversely affected. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk We did not have any material changes in market risk from December 31, 2003. 
 Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this Form 10-Q. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Form 10-Q, our
disclosure controls and procedures provide reasonable assurances that the
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the
time period required by the United States Securities and Exchange Commissions
rules and forms. From time to time, the Company makes changes to its
internal control over financial reporting that are intended to
enhance the effectiveness of its internal controls and which do not
have a material effect on our overall internal controls. For example,
subsequent to the end of the second quarter, management implemented a
change with respect to internal control over financial reporting at a
small business unit having less than $1 million in annual revenue.
The change is designed to improve internal controls with respect to
revenue recognition for the unit as a result of discovering, prior to
finalizing our second quarter financial statements, that the unit had
improperly recorded revenue for one contract in the quarter. We will
continue to evaluate the effectiveness of our disclosure controls and
procedures and internal control over financial reporting on an
ongoing basis and will take action as appropriate. There have been no changes in our internal 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 the Company believes materially affected, or will be reasonably
likely to materially affect, our company-wide
internal control over financial reporting. 61




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Quintiles Transnational Corp. and Subsidiaries 
 Part II. Other Information 
 Item 1. Legal Proceedings On January 22, 2002, Federal Insurance Company, or Federal, and Chubb Custom
Insurance Company, or Chubb, filed suit against us, Quintiles Pacific, Inc. and
Quintiles Laboratories Limited, two of our subsidiaries, in the United States
District Court for the Northern District of Georgia. In the suit, Chubb, our
primary commercial general liability carrier for coverage years 2000-2001 and
2001-2002, and Federal, our excess liability carrier for coverage years
2000-2001 and 2001-2002, seek to rescind the policies issued to us based on an
alleged misrepresentation by us on our policy application. Alternatively,
Chubb and Federal seek a declaratory judgment that there is no coverage under
the policies for some or all of the claims asserted against us and our
subsidiaries in a class action lawsuit that was settled earlier this year
involving an Alzheimers study and, if one or more of such claims is determined
to be covered, Chubb and Federal request an allocation of the defense costs
between the claims they contend are covered and non-covered claims. We have
filed an answer with counterclaims against Federal and Chubb in response to
their complaint. Additionally, we have amended our pleadings to add AON Risk
Services, or AON, as a counterclaim defendant, as an alternative to our
position that Federal and Chubb are liable under the policies. In order to
preserve our rights, on March 27, 2003, we also filed a separate action against
AON in the United States District Court for the Middle District of North
Carolina. We believe the allegations made by Federal and Chubb are without
merit and are defending this case vigorously. 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. 62




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Quintiles Transnational Corp. and Subsidiaries On June 28, 2004, ML Laboratories PLC (ML) filed a request to the
International Chamber of Commerce seeking arbitration in connection with a
contract dispute with Novex Pharma Limited, or Novex, one of our subsidiaries.
This claim relates to a contract entered into by Novex with ML for the
marketing and sales promotion of MLs medical device product known as Adept, a
solution used for the treatment and prevention of adhesions in abdominal
surgery. MLs claim alleges breach of contract by Novex by failing to provide
an adequate UK sales force, failing to implement marketing effort in European
countries as required by the contract, and repudiatory breach of the contract.
The claim by ML is for damages of £55.1 (approximately $100.5 million). Novex
intends to file a counter-claim asserting breach of contract. The parties have
reached agreement to stay the arbitration process pending future discussions.
We believe that the allegations made by ML are without merit and intend to
defend the case vigorously. We are also party to other legal proceedings incidental to our business. While
we currently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our consolidated financial statements, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations for the
period in which the ruling occurs. 
  Item 2.
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities  Not Applicable 
 Item 3. Defaults upon Senior Securities  Not applicable 
 lItem 4. Submission of Matters to a Vote of Security Holders  Not Applicable 
 Item 5. Other Information  Not applicable 63




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Quintiles Transnational Corp. and Subsidiaries 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits 10.1
    
    
    Executive Employment Agreement, dated June 14,
2004, among John D. Ratliff and the Company31.1
    
    
    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.
  (b)
    
    During the three months ended June 30, 2004, the Company filed
or furnished one report on Form 8-K. The Company furnished a Form 8-K to the Securities and Exchange Commission
dated June 1, 2004, announcing that the Companys Board of Directors
authorized management to proceed with a plan of disposition for certain
assets related to its Bioglan business in the form of a sale of assets.
This report shall not be deemed to be incorporated by reference into this
Form 10-Q or filed hereunder for purposes of liability under the Exchange
Act. No other reports on Form 8-K were filed or furnished during the three
months ended June 30, 2004. 64




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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
    
    August 13, 2004
    
    /s/ Dennis B. GillingsDennis B. Gillings, Executive Chairmanand Chief Executive OfficerDate
    
    August 13, 2004
    
    /s/ John D. RatliffJohn D. Ratliff, Executive Vice Presidentand Chief Financial Officer
 65




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Quintiles Transnational Corp. and Subsidiaries 
 EXHIBIT INDEX Exhibit
    
    Description10.1
    
    Executive Employment Agreement, dated June 14, 2004, among John D.
Ratliff and the Company.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.
 66