-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UKn5OV1ZeY8oDaGO3LnlBW8IYOCXT+RH/oP0/yxbiYohfMK5nUffugbq6CahkuHa 7W1PzjQHjhG89G381wSYeQ== /in/edgar/work/20000814/0000950144-00-010128/0000950144-00-010128.txt : 20000921 0000950144-00-010128.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950144-00-010128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUINTILES TRANSNATIONAL CORP CENTRAL INDEX KEY: 0000919623 STANDARD INDUSTRIAL CLASSIFICATION: [8731 ] IRS NUMBER: 561714315 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23520 FILM NUMBER: 696496 BUSINESS ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: RIVERBIRCH BLDG STE 200 CITY: DURHAM STATE: NC ZIP: 27703-8411 BUSINESS PHONE: 9199982000 MAIL ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: STE 300 CITY: DURHAM STATE: NC ZIP: 27703-8411 10-Q 1 e10-q.txt QUINTILES TRANSNATIONAL 1 Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 ------------- Commission file number 340-23520 --------- QUINTILES TRANSNATIONAL CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) North Carolina 56-1714315 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4709 Creekstone Dr., Suite 200 Durham, NC 27703-8411 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (919) 998-2000 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A --------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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. Yes [X] No [ ] The number of shares of Common Stock, $.01 par value, outstanding as of July 31, 2000 was 115,581,425. 2 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Index Page ---- Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - June 30, 2000 and December 31, 1999 3 Condensed consolidated statements of operations - Three months ended June 30, 2000 and 1999; six months ended June 30, 2000 and 1999 4 Condensed consolidated statements of cash flows - Six months ended June 30, 2000 and 1999 5 Notes to condensed consolidated financial statements - June 30, 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 23 Part II. Other Information Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Defaults upon Senior Securities - Not Applicable 25 Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 25 Item 5. Other Information - Not Applicable 25 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibit Index 28 2 3 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31 2000 1999 ---------- ---------- (unaudited) (Note 1) ASSETS (In thousands) Current assets: Cash and cash equivalents $ 345,824 $ 191,653 Trade accounts receivable and unbilled services, net 413,527 377,278 Investments in debt securities 33,527 32,476 Prepaid expenses 37,302 37,216 Deferred income taxes 16,685 -- Other current assets and receivables 26,932 27,991 Net assets of discontinued operation -- 122,981 ---------- ---------- Total current assets 873,797 789,595 Property and equipment 565,808 574,090 Less accumulated depreciation (191,885) (174,406) ---------- ---------- 373,923 399,684 Intangibles and other assets: Intangibles, net 194,642 208,946 Investments in debt securities 77,685 76,902 Investments in marketable equity securities 595,267 45,237 Deferred income taxes -- 52,975 Deposits and other assets 43,073 37,908 ---------- ---------- 910,667 421,968 ---------- ---------- Total assets $2,158,387 $1,611,247 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $ 713 $ 12 Accounts payable and accrued expenses 261,741 234,795 Credit arrangements, current 12,679 169,398 Unearned income 156,941 172,557 Income taxes payable 110,394 5,561 Deferred income taxes -- 15,041 Other current liabilities 835 508 ---------- ---------- Total current liabilities 543,303 597,872 Long-term liabilities: Credit arrangements, less current portion 8,745 9,570 Long-term obligations 12,574 7,290 Deferred income taxes 53,294 -- Other liabilities 9,750 4,756 ---------- ---------- 84,363 21,616 ---------- ---------- Total liabilities 627,666 619,488 Shareholders' equity: Preferred stock, none issued and outstanding at June 30, 2000 and December 31, 1999, respectively -- -- Common stock and additional paid-in capital, 115,334,607 and 115,118,347 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectfully 872,268 788,247 Retained earnings 611,777 204,062 Accumulated other comprehensive income 48,811 1,677 Other equity (2,135) (2,227) ---------- ---------- Total shareholders' equity 1,530,721 991,759 ---------- ---------- Total liabilities and shareholders' equity $2,158,387 $1,611,247 ========== ==========
The accompanying notes are an integral part of these consolidated condensed statements. 3 4 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) Net revenue $423,107 $402,276 $837,952 $761,981 Costs and expenses: Direct 255,901 216,687 508,310 410,593 General and administrative 142,597 123,119 280,726 232,601 Depreciation and amortization 22,749 20,015 45,871 37,815 Non-recurring charges: Restructuring -- -- 58,592 -- Disposal of business 17,325 -- 17,325 -- -------- -------- -------- -------- 438,572 359,821 910,824 681,009 -------- -------- -------- -------- (Loss) income from operations (15,465) 42,455 (72,872) 80,972 Transaction costs -- (3,464) -- (25,827) Other income, net 3,193 1,157 5,141 1,589 -------- -------- -------- -------- Total other income (expense), net 3,193 (2,307) 5,141 (24,238) -------- -------- -------- -------- (Loss) income from continuing operations before income taxes (12,272) 40,148 (67,731) 56,734 Income tax (benefit) expense (4,050) 15,009 (22,350) 28,231 -------- -------- -------- -------- (Loss) income from continuing operations (8,222) 25,139 (45,381) 28,503 Income from discontinued operation, net of income taxes 6,176 10,041 16,770 15,291 -------- -------- -------- -------- (Loss) income before extraordinary gain (2,046) 35,180 (28,611) 43,794 Extraordinary gain from sale of discontinued operation, net of income taxes 436,327 -- 436,327 -- -------- -------- -------- -------- Net income $434,281 $ 35,180 $407,716 $ 43,794 ======== ======== ======== ======== Basic net income per share: (Loss) income from continuing operations $ (0.07) $ 0.22 $ (0.39) $ 0.25 Income from discontinued operation 0.05 0.09 0.15 0.14 Extraordinary gain from sale of discontinued operation 3.78 -- 3.78 -- -------- -------- -------- -------- Basic net income per share $ 3.76 $ 0.31 $ 3.53 $ 0.39 ======== ======== ======== ======== Diluted net income per share: (Loss) income from continuing operations $ (0.07) $ 0.21 $ (0.39) $ 0.25 Income from discontinued operation 0.05 0.09 0.15 0.13 Extraordinary gain from sale of discontinued operation 3.78 -- 3.78 -- -------- -------- -------- -------- Diluted net income per share $ 3.76 $ 0.30 $ 3.53 $ 0.38 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed statements. 4 5 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30 2000 1999 --------- -------- (In thousands) OPERATING ACTIVITIES Net income $ 407,716 $ 43,794 Income from discontinued operation, net of income taxes (16,770) (15,291) Gain on the sale of discontinued operation, net of income taxes (436,327) -- --------- -------- (Loss) income from continuing operations (45,381) 28,503 Adjustments to reconcile (loss) income from continuing operations to net cash (used in) provided by operating activities: Depreciation and amortization 45,871 37,815 Transaction costs -- 25,827 Restructuring charge 50,874 -- Loss on disposal of business 17,325 -- Provision for deferred income tax expense 79 1,417 Change in operating assets and liabilities (113,540) (68,678) Other 93 581 --------- -------- Net cash (used in) provided by operating activities (44,679) 25,465 INVESTING ACTIVITIES Proceeds from disposition of property and equipment 3,574 4,132 Acquisition of property and equipment (43,050) (91,693) Proceeds from disposal of discontinued operation, net of expenses 391,500 -- Acquisition of businesses, net of cash acquired (8,419) 87,666 Payment of non-recurring transaction costs -- (22,755) Purchases of debt securities, net (3,989) (32,753) Purchases of equity investments (3,057) (10,640) Other 1 (234) --------- -------- Net cash provided by (used in) investing activities 336,560 (66,277) FINANCING ACTIVITIES Increase in lines of credit, net 700 5,459 Principal payments on credit arrangements, net (153,074) (4,911) Issuance of common stock, net 8,599 11,709 Repurchase of common stock (8,510) -- Dividend from discontinued operation 17,086 9,705 Other -- (790) --------- -------- Net cash (used in) provided by financing activities (135,199) 21,172 Effect of foreign currency exchange rate changes on cash (2,511) (3,175) --------- -------- Increase (decrease) in cash and cash equivalents 154,171 (22,815) Cash and cash equivalents at beginning of period 191,653 128,621 --------- -------- Cash and cash equivalents at end of period $ 345,824 $105,806 ========= ========
The accompanying notes are an integral part of these consolidated condensed statements. 5 6 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) June 30, 2000 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 footnotes required by generally accepted accounting principles 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 six month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. 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, 1999 of Quintiles Transnational Corp. (the "Company"). The balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements of the Company. Certain amounts in the 1999 financial statements have been reclassified to conform with the 2000 financial statement presentation. The reclassifications had no effect on previously reported net income, shareholders' equity or net income per share. The financial statements do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. 2. Stock Repurchase On February 3, 2000, the Board of Directors authorized the Company to repurchase up to $200 million of the Company's Common Stock. During the first six months of 2000, the Company repurchased 578,000 shares of its Common Stock for an aggregate price of approximately $9.9 million. To enhance its stock repurchase program, the Company sold put options to an independent third party. These put options entitle the holder to sell a total of 500,000 shares of the Company's Common Stock to the Company on January 2, 2001 at $13.7125 per share. The transaction has been recorded as a component of shareholders' equity. 3. Significant Customers No one customer accounted for greater than 10% of consolidated net revenue for the three and six months ended June 30, 2000. One customer accounted for 12.6% and 12.1% of consolidated net revenue for the three and six months ended June 30, 1999, respectively. These revenues were earned by the Company's product development and commercialization segments. 6 7 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 4. Restructuring Charge In January 2000, the Company announced the adoption of a restructuring plan. In connection with this plan, the Company recognized a restructuring charge of $58.6 million. The restructuring charge consists 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 a part of this plan, 770 positions worldwide will be eliminated and as of June 30, 2000, 438 individuals have been terminated. Although positions eliminated were across all functions, most of the eliminated positions were in the product development service group. As of June 30, 2000, the following amounts were recorded (in thousands):
Activity six months ended June 30, 2000 ------------------------------ Accruals Write-Offs/Payments Balance at June 30, 2000 -------- ------------------- ------------------------ Severance and related costs $33,228 $(14,799) $18,429 Asset impairment write-offs 11,315 (11,315) -- Exit costs 14,049 (4,632) 9,417 ------- -------- ------- $58,592 $(30,746) $27,846 ======= ======== =======
The above provisions and related restructuring reserves are estimates based on the Company's judgment at June 30, 2000. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. 5. Loss on Disposal The Company completed the sale of its general toxicology operations in Ledbury, Herefordshire, United Kingdom. This facility contributed less than one percent of consolidated net revenue and was included in the product development segment. In connection with the sale, the Company recognized a $17.3 million loss on disposal. 6. Discontinued Operation On May 26, 2000, the Company completed the sale of its electronic data interchange unit, ENVOY Corporation ("ENVOY"), to Healtheon/WebMD Corp. ("Healtheon/WebMD"). Prior to the sale, ENVOY transferred its informatics subsidiary, Synergy Health Care, Inc., to the Company. The Company received $400 million in cash and 35 million shares of Healtheon/WebMD common stock in exchange for its entire interest in ENVOY and a warrant to acquire 10 million shares of the Company's Common Stock at $40 per share, exercisable for four years. During the second quarter of 2000, the Company recorded an extraordinary gain on the sale of $436.3 million, net of income taxes of $184.7 million. 7 8 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES ENVOY has been treated as a discontinued operation. The accompanying consolidated financial statements reflect the operating results through the date of closing and balance sheet items of ENVOY separately. The results of the discontinued operation do not reflect any interest expense, management fee or transaction costs allocated by the Company. The following is a summary of income from operations through the date of closing of ENVOY (in thousands):
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net revenue $ 39,634 $ 54,137 $ 99,041 $ 107,746 ======== ======== ======== ========= Income before income taxes $ 10,562 $ 16,520 $ 27,121 $ 28,044 Income taxes 4,386 6,479 10,351 12,753 -------- -------- -------- --------- Net income $ 6,176 $ 10,041 $ 16,770 $ 15,291 ======== ======== ======== =========
7. Net Income Per Share The following table sets forth the computation of the weighted-average shares used when calculating the basic and diluted net income per share (in thousands):
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average shares: Basic weighted average shares 115,394 114,451 115,417 112,004 Effect of dilutive securities: Stock options -- 2,982 -- 3,080 ------- ------- ------- ------- Diluted weighted average shares 115,394 117,433 115,417 115,084 ======= ======= ======= =======
Options to purchase approximately 32.5 million shares of common stock were outstanding during the six months ended June 30, 2000, but were not included in the computation of diluted net income per share because the effect would be antidilutive. Warrants to purchase 10 million shares of common stock were outstanding as of June 30, 2000, but were not included in the computation of diluted net income per share because the effect would be antidilutive. Put options that entitle the holder to sell a total of 500,000 shares of the Company's Common Stock to the Company were outstanding during the three and six months ended June 30, 2000 but were not included in the computation of diluted net income per share because the effect would be antidilutive. 8 9 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 8. Segments The following table presents the Company's operations by reportable segment. The Company is managed through three reportable segments, namely, the product development service group, the commercialization service group and the QUINTERNET(TM) informatics service group. Management has distinguished these segments based on the normal operations of the Company. The product development group is primarily responsible for all phases of clinical research and outcomes research consulting. The commercialization group is primarily responsible for sales force deployment and strategic marketing services. The QUINTERNET(TM) informatics group is primarily responsible for providing market research solutions and strategic analysis to support healthcare decisions. During 2000 there were reclassifications between segments due to management changes of certain business units. These changes are reflected in both the 2000 and 1999 periods shown below. The Company does not include net revenue and expenses relating to the Internet initiative (approximately $125,000 and $5.1 million, respectively, for the three months ended June 30, 2000 and $570,000 and $8.3 million, respectively, for the six months ended June 30, 2000), non-recurring costs, interest income (expense) and income tax expense (benefit) in segment profitability. Overhead costs are allocated based upon management's best estimate of efforts expended in managing the segments. There are not any significant intersegment revenues.
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net revenue: Product development $202,469 $219,004 $402,965 $421,394 Commercialization 206,257 169,018 406,613 319,028 QUINTERNET(TM) informatics 14,256 14,254 27,804 21,559 -------- -------- -------- -------- $422,982 $402,276 $837,382 $761,981 ======== ======== ======== ======== Income from operations: Product development $ (4,585) $ 27,469 $(13,830) $ 52,772 Commercialization 16,711 16,871 32,380 30,687 QUINTERNET(TM) informatics (5,272) (1,885) (7,767) (2,487) -------- -------- -------- -------- $ 6,854 $ 42,455 $ 10,783 $ 80,972 ======== ======== ======== ========
As of June 30, 2000 As of December 31, 1999 ------------------- ----------------------- Total assets: Product development $ 934,556 $ 865,607 Commercialization 363,640 334,772 QUINTERNET(TM) informatics 336,192 287,887 Internet initiative 523,999 -- Net assets of discontinued operation -- 122,981 ---------- ---------- $2,158,387 $1,611,247 ========== ========== 9 10 9. Comprehensive Income The following table represents the Company's comprehensive income for the three and six months ended June 30, 2000 and 1999 (in thousands):
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net income $434,281 $35,180 $407,716 $ 43,794 Other comprehensive loss: Unrealized gain on marketable securities, net of income taxes 56,516 3,809 66,623 3,577 Foreign currency adjustment (12,042) (5,162) (19,489) (14,274) -------- ------- -------- -------- Comprehensive income $478,755 $33,827 $454,850 $ 33,097 ======== ======= ======== ========
10. Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of fiscal year 2001. The Company is currently evaluating the impact the application of SAB 101 will have on its financial position or results of operations. 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 and Section 21E of the Securities Act of 1934, which statements represent the Company's judgement concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," or "continue," or the negative thereof or other variations thereof or comparable terminology. 10 11 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES We caution you that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including without limitation, our ability to efficiently distribute backlog among therapeutic business units and match demand to resources, actual operating performance, the actual savings and operating improvements resulting from the restructuring, the ability to maintain large client contracts or to enter into new contracts, changes in trends in the pharmaceutical industry, the ability to create data products from data licensed to us and the ability to operate successfully in new lines of business, as set forth in its filings with the Securities and Exchange Commission. See "Risk Factors" below for additional factors that could cause actual results to differ. Results of Continuing Operations Three Months Ended June 30, 2000 and 1999 Net revenue for the second quarter of 2000 was $423.1 million, an increase of $20.8 million or 5.2% over the second quarter of 1999 net revenue of $402.3 million. Factors contributing to the growth included an increase of contract service offerings, the provision of increased services rendered under existing contracts, the initiation of services under contracts awarded subsequent to the second quarter of 1999 and the Company's acquisitions accounted for under purchase accounting completed subsequent to the second quarter of 1999 which contributed approximately $2.2 million of net revenue for the second quarter of 2000. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $255.9 million or 60.5% of net revenue for the second quarter of 2000 versus $216.7 million or 53.9% of net revenue for the second quarter of 1999. The increase in direct costs as a percentage of net revenue was primarily attributable to realization rates during the second quarter of 2000 being lower than historical levels. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $142.6 million or 33.7% of net revenue for the second quarter of 2000 versus $123.1 million or 30.6% of net revenue for the second quarter of 1999. Also included in general and administrative expenses for the quarter ended June 30, 1999 were $913,000 of incremental costs related to our Year 2000 Program. Excluding these incremental costs, general and administrative expenses increased $20.4 million primarily due to costs associated with our Internet initiative, implementation of a global shared service center and delays in realizing the benefits of our restructuring program. Depreciation and amortization were $22.7 million or 5.4% of net revenue for the second quarter of 2000 versus $20.0 million or 5.0% of net revenue for the second quarter of 1999. The $2.7 million increase is primarily due to the increase in the capitalized asset base of the Company. 11 12 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Consistent with our shift in focus of our preclinical operations from basic toxicology to more advanced technologies such as genomics and proteomics, we completed the sale of our general toxicology operations in Ledbury, Herefordshire, UK. This facility was not contributing to our profitability and represented less than one percent of our net revenue. In connection with this sale, we recognized a $17.3 million loss on the disposal during the second quarter of 2000. Loss from operations was $15.5 million or (3.7%) of net revenue for the second quarter of 2000 versus income from operations of $42.5 million or 10.6% of net revenue for the second quarter of 1999. Excluding the non-recurring charge of $17.3 million for the disposal of our Ledbury operations and the $5.0 million for the Internet initiative, income from operations was $6.9 million or 1.6% of net revenue for the second quarter of 2000. Other income was $3.2 million for the second quarter of 2000 versus other expense of $2.3 million for the second quarter of 1999. Excluding transaction costs, other income was $1.2 million for the second quarter of 1999. The $2.0 million variation was primarily due to an increase in net interest income. The effective income tax rate for the second quarter of 2000 was 33.0% versus a 37.4% effective income tax rate for the second quarter of 1999. Excluding the transaction costs which are not generally deductible for income tax purposes, the effective income tax rate for the second quarter of 1999 was 34.4%. Since we conduct operations on a global basis, our effective income tax rate may vary. Analysis by Segment: The following table summarizes the operating activities for our three reportable segments for the three months ended June 30, 2000 and 1999. We do not include net revenue and expenses relating to the Internet initiative and non-recurring charges in our segment analysis. (Stated in millions)
Net Revenue (Loss)/Income From Operations ------------------------------------ ------------------------------------------------- Growth % of Net % of Net 2000 1999 % 2000 Revenue 1999 Revenue ------ ------ ----------- ------ -------- ------ ------- Product development $ 202.5 $ 219.0 (7.5%) $ (4.6) (2.3)% $ 27.5 12.5% Commercialization 206.3 169.0 22.0 16.7 8.1 16.9 10.0 QUINTERNET(TM) informatics 14.3 14.3 -- (5.3) (37.0) (1.9) (13.2) ------- ------- ------- ------ $ 423.1 $ 402.3 5.2% $ 6.8 1.6% $ 42.5 10.6% ======= ======= ======= ======
The product development group's financial performance was negatively impacted during the quarter by several factors, including less than expected new business, realization rates that were lower than historical levels and the effects of contracts with lower profit margins than we have historically achieved. During the second quarter of 2000, the cancellation rate for clinical trials decreased to the level we experienced during the first half of 1999 as opposed to the second half of 1999. 12 13 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES The commercialization group's financial performance is the result of strong growth in the Americas region, primarily the US, offset by a weakening in the Europe and Africa region, primarily in the United Kingdom and continental Europe. A portion of this growth stems from the growth in the medical communications and strategic consulting services. The commercialization group is integrating informatics offerings into the commercialization offerings. The QUINTERNET(TM) informatics group's performance was impacted by the discontinuation of products that we expect to replace with more technologically advanced products and the costs associated with web-enabling the data products of the QUINTERNET(TM) informatics group. Six Months Ended June 30, 2000 and 1999 Net revenue for the six months ended June 30, 2000 was $838.0 million, an increase of $76.0 million or 10.0% over the six months ended June 30, 1999 net revenue of $762.0 million. Factors contributing to the growth included an increase of contract service offerings, the provision of increased services rendered under existing contracts, the initiation of services under contracts awarded subsequent to June 30, 1999 and the Company's acquisitions accounted for under purchase accounting completed subsequent to January 1, 1999 which contributed approximately $22.3 million of net revenue for the first six months of 2000 as compared to $10.3 million of net revenue for the first six months of 1999. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $508.3 million or 60.7% of net revenue for the first six months of 2000 versus $410.6 million or 53.9% of net revenue for the first six months of 1999. The increase in direct costs as a percentage of net revenue was primarily attributable to a decrease in the realization rates during the first six months of 2000. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $280.7 million or 33.5% of net revenue for the first six months of 2000 versus $232.6 million or 30.5% of net revenue for the first six months of 1999. Also included in general and administrative expenses for the six months ended June 30, 1999 were $3.6 million of incremental costs related to our Year 2000 Program. Excluding these incremental costs, general and administrative expenses increased $51.7 million primarily due to costs associated with our Internet initiative, implementation of a global shared service center and delays in realizing the benefits of our restructuring program. Depreciation and amortization were $45.9 million or 5.5% of net revenue for the first six months of 2000 versus $37.8 million or 5.0% of net revenue for the first six months of 1999. Amortization expense increased $1.7 million due to the goodwill amortization resulting from the Company's 1999 acquisitions accounted for under purchase accounting. The remaining $6.3 million increase is primarily due to the increase in the capitalized asset base of the Company. 13 14 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES In January 2000, we announced the adoption of a restructuring plan. In connection with this plan, we recognized a restructuring charge of $58.6 million during the quarter ended March 31, 2000. The restructuring charge consists 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 a part of this plan, 770 positions worldwide will be eliminated. Most of the eliminated positions were in the product development service group. During the six months ended June 30, 2000, we recognized a $17.3 million loss on the disposal of a business as discussed above. Loss from operations was $72.9 million or (8.7%) of net revenue for the first six months of 2000 versus income from operations of $81.0 million or 10.6% of net revenue for the first six months of 1999. Excluding the non-recurring charges of $75.9 million and the $7.7 million for the Internet initiative, income from operations was $10.8 million or 1.3% of net revenue for the first six months of 2000. Other income was $5.1 million for the first six months of 2000 versus other expense of $24.2 million for the first six months of 1999. Excluding transaction costs, other income was $1.6 million for the first six months of 1999. The $3.6 million variation was primarily due to an increase in net interest income. The effective income tax rate for the first six months of 2000 was 33.0% versus a 49.8% effective income tax rate for the first six months of 1999. Excluding the transaction costs which are not generally deductible for income tax purposes, the effective income tax rate for the first six months of 1999 was 34.2%. Since we conduct operations on a global basis, our effective income tax rate may vary. Analysis by Segment: The following table summarizes the operating activities for our three reportable segments for the six months ended June 30, 2000 and 1999. We do not include net revenue and expenses relating to the Internet initiative and non-recurring charges in our segment analysis. (Stated in millions)
Net Revenue (Loss)/Income From Operations ------------------------------------ ------------------------------------------------- Growth % of Net % of Net 2000 1999 % 2000 Revenue 1999 Revenue ------ ------ ----------- ------ -------- ------ ------- Product development $ 403.0 $ 421.4 (4.4)% $ (13.8) (3.4)% $ 52.8 12.5% Commercialization 406.6 319.0 27.5 32.4 8.0 30.7 9.6 QUINTERNET(TM) informatics 27.8 21.6 29.0 (7.8) (27.9) (2.5) (11.5) ------- ------- ------- ------ $ 837.4 $ 762.0 9.9% $ 10.8 1.3% $ 81.0 10.6% ======= ======= ======= ======
14 15 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES The product development group's financial performance was negatively impacted by several factors, including early termination and delays in clinical trials, less than expected new business, realization rates that were lower than historical levels, adjustments made in existing programs, higher operating costs in our laboratory services, and the effects of contracts with lower profit margins than we have historically achieved. During the second quarter of 2000, the cancellation rate for clinical trials decreased to the level we experienced during the first half of 1999 as opposed to the second half of 1999. The commercialization group's net revenue growth includes approximately $4.3 million from an acquisition accounted for as a purchase that was completed subsequent to the second quarter of 1999. The financial performance of this group is the result of strong growth in the Americas region, primarily the US, offset by a weakening in the Europe and Africa region, primarily in the United Kingdom and continental Europe. A portion of this stems from the growth in the medical communications and strategic consulting services. The commercialization group is integrating informatics offerings into the commercialization offerings. The net revenue for the QUINTERNET(TM) informatics group includes net revenue from an acquisition accounted for as a purchase that was completed subsequent to January 1, 1999 of $15.3 million for the first six months of 2000 as compared to $6.8 million for the first six months of 1999. The QUINTERNET(TM) informatics group's performance was impacted by the discontinuation of products that we expect to replace with more technologically advanced products and the costs associated with web-enabling the data products of the QUINTERNET(TM) informatics group. Liquidity and Capital Resources Cash outflows from operations were $44.7 million for the six months ended June 30, 2000 versus cash inflows of $25.5 million for the comparable period of 1999. Investing activities, for the six months ended June 30, 2000, consisted primarily of $391.5 million of net proceeds from the sale of ENVOY, offset by capital asset purchases. Capital asset purchases required an outlay of cash of $43.1 million for the six months ended June 30, 2000 compared to an outlay of $91.7 million for the same period in 1999. Capital asset expenditures for the six months ended June 30, 1999 included approximately $35 million in connection with the acquisition of the Hoechst Marion Roussel's Drug Innovation and Approval Facility. The remainder of the purchase price, approximately $58 million, is expected to be paid in the second half of 2000 when the acquisition of the physical facility is completed. 15 16 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Total working capital, excluding net assets of discontinued operation, was $330.5 million as of June 30, 2000, an increase of $261.8 million versus working capital of $68.7 million as of December 31, 1999. The increase results from receiving $391.5 million of cash from the sale of ENVOY which is partially offset by the cash payment of $143.75 million to redeem our 4.25% Convertible Subordinated Notes. Net receivables from customers (trade accounts receivable and unbilled services, net of unearned income) were $256.6 million at June 30, 2000 as compared to $204.7 million at December 31, 1999. As of June 30, 2000, trade accounts receivable were $239.3 million versus $220.3 million at December 31, 1999. Unbilled services were $174.3 million at June 30, 2000 versus $157.0 million at December 31, 1999, offset by unearned income balances of $156.9 million and $172.6 million, respectively. The number of days revenue outstanding in trade accounts receivable and unbilled services, net of unearned income, were 49 days at June 30, 2000, as compared to 38 days at December 31, 1999. We have a $150 million senior unsecured credit facility with a U.S. bank. In addition, we have available to us a (pound sterling) 10.0 million (approximately $15.2 million) unsecured line of credit and a (pound sterling) 1.5 million (approximately $2.3 million) general banking facility with a U.K. bank. At June 30, 2000, we did not have any outstanding balances on these facilities. Based on our current operating plan, we believe that our available cash and cash equivalents and investments in marketable securities, together with future cash flows from operations and borrowings under our line of credit agreements will be sufficient to meet our foreseeable cash needs in connection with our operations. 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. 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. 16 17 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES RISK FACTORS In addition to the other information provided in our reports, 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. Changes in 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 has grown substantially over the past decade, and we have benefited from this trend. Some industry commentators believe that the rate of growth of outsourcing will continue to trend downward. If these industries reduce their tendency to outsource those projects, our operations, financial condition and growth rate could be materially and adversely affected. Recently, we also believe we have been negatively impacted by pending mergers and other factors in the pharmaceutical industry, which appear to have slowed decision making by our customers and delayed certain trials. A continuation of these trends would have an ongoing adverse effect on our business. In addition, numerous governments 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 profits which can be derived on 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. Another 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. 17 18 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES For example, we are expanding our pharmaceutical and healthcare information and market research services. These services involve analyzing healthcare information to study aspects of current healthcare products and procedures for use in developing new products and services or in analyzing sales and marketing of existing products. In addition to the other difficulties associated with the development of any new service, our ability to develop these services may be limited further by contractual provisions limiting our use of the healthcare information or the legal rights of others that may prevent or impair our use of the healthcare information. Due to these and other limitations, we cannot assure you that we will be able to develop this type of service successfully. Our inability to develop new products or services or any delay in development may adversely affect our ability to maintain our rate of growth in the future. Our plan to web-enable our product development and commercialization services may negatively impact our results in the short term. We are currently making a substantial investment in developing an Internet platform for our product development and commercialization services, but we do not believe that we will see any positive impact to our revenues from this investment over the short term. We have entered into an agreement with Healtheon/WebMD for them to provide web-enablement services over an eighteen-month period to help us develop this platform. If Healtheon/WebMD fails to perform as expected under this agreement or if there are substantial delays in developing and implementing this platform, we may have to make substantial further investments, internally or with Healtheon/WebMD or third parties, to achieve our objectives. Also, these expenditures are likely to impact negatively our profitability, at least until our web-enabled products are commercialized. Over time, we envision continuing to invest in extending and enhancing our Internet platform in other ways to further support and improve our services. We cannot assure you that any improvements in revenues resulting from our Internet capabilities will be sufficient to offset our investments in the Internet platform. Our results could be further negatively impacted if our competitors are able to execute their services on a web-based platform before we can launch our Internet services or if they are able to structure a platform that attracts clients away from our services. 18 19 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Our ability to provide informatics services depends on our agreement with Healtheon/WebMD. In order to provide our informatics services, we need access to healthcare data. Prior to the sale of our ENVOY subsidiary, we obtained this data directly from ENVOY. Following the sale of ENVOY to Healtheon/WebMD, we entered into a data services agreement with Healtheon/WebMD to continue to provide us with the ENVOY data, as well as other data collected by Healtheon/WebMD. If Healtheon/WebMD fails to perform under this agreement or our access to data is otherwise significantly limited, we would be unable to provide some or all of those services, which would have a negative impact on our business. The potential loss or delay of our large contracts could adversely affect our results. Many of our contract research 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. 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 has potentially greater effect as we pursue larger outsourcing arrangements with global pharmaceutical companies, which may encompass global clinical trials at a number of sites and cross many service lines. Also, over the past year 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. Our backlog may not be indicative of future results. We report backlog, $2.09 billion at June 30, 2000, based on anticipated net revenue from uncompleted projects that a customer has authorized. We cannot assure you that the backlog we have reported will be indicative of our future results. A number of factors may affect our backlog, including: - the variable size and duration of projects (some are performed over several years); - the loss or delay of projects; and - a change in the scope of work during the course of a project. Also, 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 are not indicative of the future relationship. 19 20 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 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 Chairman of the Board of Directors and Chief Executive Officer. Our performance also depends on our ability to attract and retain qualified management and professional, scientific and technical operating staff, as well as our ability to recruit qualified representatives for our contract sales services. The departure of Dr. Gillings, or any key executive, or our inability to continue to attract and retain qualified personnel could have a material adverse effect on our business, results of operations or financial condition. Our product development services create a risk of liability from clinical trial participants and the parties with whom we contract. 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, patient recruitment and other 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 do not conform to contractual or regulatory standards, trial participants 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. We also contract with physicians to serve as investigators in conducting clinical trials. Such testing creates risk of liability for personal injury to or death of volunteers, particularly to volunteers with life-threatening illnesses, resulting from adverse reactions to the drugs administered during testing. It is possible third parties could claim that we should be held liable for losses arising from any professional malpractice of the investigators with whom we contract or in the event of personal injury to or death of persons participating in clinical trials. We do not believe we are legally accountable for the medical care rendered by third party investigators, and we would vigorously defend any such claims. Nonetheless, it is possible we could be found liable for those types of losses. In addition to supervising tests or performing laboratory analysis, we also own a number of labs where Phase I clinical trials are conducted. Phase I clinical trials involve testing a new drug on a limited number of healthy individuals, typically 20 to 80 persons, to determine the drug's basic safety. We also could be liable for the general risks associated with ownership of such a facility. These risks include, but are not limited to, adverse events resulting from the administration of drugs to clinical trial participants or the professional malpractice of Phase I medical care providers. We also 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 or if our informatics products violate rights of third parties. We maintain insurance to cover ordinary risks but any insurance might not be adequate, and it would not cover the risk of a customer deciding not to do business with us as a result of poor performance. 20 21 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Relaxation of 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. Any failure on our part to comply with applicable regulations 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. For example, 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. Proposed regulations may increase the cost of our business or limit our service offerings. The confidentiality of patient-specific information and the circumstances under which such patient-specific records may be released for inclusion in our databases or used in other aspects of our business are subject to substantial government regulation. Additional legislation governing the possession, use and dissemination of medical record information and other personal health information has been proposed at both the state and federal levels. This legislation may (1) require us to implement security measures that may require substantial expenditures or (2) limit our ability to offer some of our products and services. These and other changes in regulation could limit our ability to offer some of our products or have an impact on the business opportunities available to us. Industry regulation may restrict our ability to analyze and disseminate pharmaceutical and healthcare data. We are directly subject to certain restrictions on the collection and use of data. Laws relating to the collection and use of data are evolving, as are contractual rights. We cannot assure you that contractual restrictions imposed by our customers, legislation or regulations will not, now or in the future, directly or indirectly restrict the analysis or dissemination of the type of information we gather and therefore materially adversely affect our operations. 21 22 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Our services are subject to evolving industry standards and rapid technological changes. The markets for our services, particularly our QUINTERNET(TM) informatics services, which include our data analysis 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; - 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; for example, we derived approximately 45.8% of our 1999 net revenue from outside the United States. Our financial statements are denominated in U.S. dollars; thus, factors associated with international operations, including changes in foreign currency exchange rates and any trends associated with the transition to the euro, 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. 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 may be adversely affected by customer concentration. Although we do not have any customers that accounted for 10% of our net revenues for the three and six months ended June 30, 2000, we did have one customer that accounted for 11% of our net revenues for the year ended December 31, 1999. These revenues resulted from services provided by our product development and commercialization service groups. If any large customer decreases or terminates its relationship with us, our business, results of operations or financial condition could be materially adversely affected. 22 23 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES New healthcare legislation or regulation could restrict our informatics business. The Department of Health and Human Services published proposed regulations setting privacy standards to protect health information that is transmitted electronically in the Federal Register on November 3, 1999. The comment period for these proposed rules ended February 17, 2000. We understand generally that final regulations will be issued no earlier than 60 days after the end of the comment period, however, HHS has indicated that a significant delay is likely which will add additional months to the expected date of the final rules. While the proposed rules, if promulgated without modification, likely would not restrict us from de-identifying individual health information and providing such de-identified, aggregated data to our Synergy subsidiary for purposes of analysis, the proposed rule may be changed in response to comments and further modification and could be preempted by legislation. Such legislative or regulatory changes could occur as early as this year and their impact cannot be predicted. If legislation or a more restrictive regulation is adopted, it could inhibit third party processors in using, transmitting or disclosing health data (even if they have been de-identified) for purposes other than facilitating payment or performing other clearinghouse functions which would restrict our ability to obtain data for use in our informatics services. In addition, it could require us to establish uniform specifications for obtaining de-identified data, so that de-identified data obtained from different sources could be aggregated. Third party processors, under the proposed rules, or modified rules, also may require us to provide indemnity from claims against them arising from our use of data, even in de-identified form. While the impact of developments in legislation, regulations or the demands of third party processors is difficult to predict, each could materially adversely affect our informatics business. Item 3. Quantitative and Qualitative Disclosure About Market Risk As a result of the sale of ENVOY, the Company received 35 million shares of Healtheon/WebMD common stock. These securities are classified as available-for-sale and are recorded at fair value in the financial statements. These securities are subject to equity price risk. During the three months ended June 30, 2000, the Company's $143.75 million of 4.25% Convertible Subordinated Notes matured and was repaid. The Company did not have any other material changes in market risk from December 31, 1999. 23 24 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES PART II. Other Information Item 1. Legal Proceedings Beginning on September 30, 1999, several purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina against us and several of our executive officers and directors on behalf of all persons who purchased or otherwise acquired shares of our common stock between July 16, 1999, and September 15, 1999. These actions were subsequently consolidated and plaintiffs filed an amended complaint purporting to represent a class of purchasers of Quintiles stock or call options, and sellers of put options, during the period between April 21, 1999, and September 15, 1999. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs seek unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. We believe that the claims are without merit and intend to defend the suit vigorously. In February 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit in the State Court of Fulton County, Georgia, naming as defendants Richard L. Borison, Bruce I. Diamond, 14 pharmaceutical companies and Quintiles Laboratories Limited, one of our subsidiaries. We have reached a settlement with the Plaintiff under which the Plaintiff acknowledged that we had no liability with respect to the lawsuit, and the Plaintiff has released all claims against us under the lawsuit. The Plaintiff has filed a Stipulation of Dismissal with Prejudice, which when entered by the Court will serve to dismiss us from the case. We are also a party in certain other pending litigation arising in the normal course of our business. While the final outcome of such litigation cannot be predicted with certainty, it is the opinion of management that the outcome of these matters would not materially affect our consolidated financial position or results of operations. Item 2. Changes in Securities During the three months ended June 30, 2000, options to purchase 38,000 shares of Common Stock were exercised at an average exercise price of $3.8833 per share in reliance on Rule 701 under the Securities Act of 1933. Such options were issued by the Company prior to becoming subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to its Non-qualified Employee Incentive Stock Option Plan. On May 26, 2000, the Company issued to Healtheon/WebMD a warrant to purchase 10 million shares of the Company's Common Stock at an exercise price of $40 per share. The warrant was issued as part of the consideration exchanged for shares of Healtheon/WebMD common stock in connection with the Company's sale of its ENVOY subsidiary to Healtheon/WebMD. The Company issued the warrant under the exemptions provided by Section 3(a)(10) of the Securities Act, pursuant to a fairness hearing conducted by the Securities Administrator of the Office of the North Carolina Secretary of State, and Section 4(2) of the Securities Act, as a private placement. 24 25 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES On June 30, 2000, the Company sold put options to an institutional investor for consideration of $925,000. The put options entitle the holder to sell a total of 500,000 shares of the Company's Common Stock to the Company on January 2, 2001 at $13.7125 per share, if exercised. The Company sold the put options in a private placement in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. Item 3. Defaults upon Senior Securities -- Not applicable Item 4. Submission of Matters to a Vote of Security Holders On June 19, 2000, the Company held its Annual Meeting of Shareholders during which the shareholders: (1) Elected three nominees to serve as Class II directors with terms continuing until the Annual Meeting of Shareholders in 2003. The votes were cast as follows: Broker For Withheld Non-Vote ---------- --------- -------- Dennis B. Gillings, Ph.D. 93,755,177 1,394,418 -- Chester W. Douglass, Ph.D. 93,909,905 1,239,690 -- Virginia V. Weldon, M.D. 93,909,353 1,240,242 -- (2) Approved the Company's 1999 Employee Stock Purchase Plan. The votes were cast as follows: Broker For Against Abstain Non-Vote ---------- --------- ------- -------- Approval of the Company's 1999 Employee Stock Purchase Plan 87,961,631 6,665,145 522,819 -- (3) Ratified the appointment of Arthur Andersen LLP as independent public accountants for the Company and its subsidiaries for the fiscal year ending December 31, 2000. The votes were cast as follows: Broker For Against Abstain Non-Vote ---------- ------- ------- -------- Ratification of Arthur Andersen LLP 94,798,500 132,531 218,564 -- Item 5. Other Information -- Not applicable 25 26 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Description 10.01 Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and the Company [Note: Certain confidential portions of this exhibit have been omitted, as indicated in the exhibit with an asterisk (*) and filed separately with the Securities and Exchange Commission.] 27.01 Financial Data Schedule for the Six Months Ended June 30, 2000 (for SEC use only) (b) During the three months ended June 30, 2000, the Company filed three reports on Form 8-K. The Company filed a Form 8-K, dated April 20, 2000, including its press release announcing the Company's earnings information for the period ended March 31, 2000. The Company filed a Form 8-K, dated May 4, 2000, including its press release announcing the amendment of its Rights Agreement between the Company and First Union National Bank. The Company filed a Form 8-K, dated May 26, 2000, including its press release announcing the completion of the sale of its electronic data interchange unit, ENVOY Corporation, to Healtheon/WebMD Corp., and attaching the agreement as an exhibit. No other reports on Form 8-K were filed during the three months ended June 30, 2000. 26 27 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Quintiles Transnational Corp. ----------------------------- Registrant Date August 14, 2000 /s/ Dennis B. Gillings -------------------- ------------------------------------------- Dennis B. Gillings, Chief Executive Officer Date August 14, 2000 /s/ James L. Bierman -------------------- ------------------------------------------- James L. Bierman, Chief Financial Officer 27 28 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Description ------- ----------- 10.01 Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and the Company [Note: Certain confidential portions of this exhibit have been omitted, as indicated in the exhibit with an asterisk (*) and filed separately with the Securities and Exchange Commission.] 27.01 Financial Data Schedule for the Six Months Ended June 30, 2000 (for SEC use only) EX-10.01 2 ex10-01.txt DATA RIGHTS AGREEMENT 1 EXHIBIT 10.01 [*]--Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Commission Rule 24b-2 DATA RIGHTS AGREEMENT THIS DATA RIGHTS AGREEMENT (the "AGREEMENT") is made and entered into as of May 26, 2000 by and between HEALTHEON/WEBMD CORPORATION, a Delaware corporation ("HEALTHEON"), and QUINTILES TRANSNATIONAL CORP., a North Carolina corporation ("QUINTILES"). References in this Agreement to "schedules" refer to the documents attached as schedules to this Agreement, all of which form part of this Agreement; and unless otherwise indicated, references to "articles" or "sections" refer to the corresponding numbered articles and sections of this Agreement. As used in the body of this Agreement, the term "Healtheon" shall be deemed to include Healtheon and all of its Affiliates (as defined in Article I below). BACKGROUND (a) Quintiles provides product development and commercialization solutions, healthcare informatics services, and healthcare policy consulting to the healthcare industry worldwide. (b) Healtheon is applying advanced Internet technology to enable healthcare providers and consumers to interact with each other and the institutions of healthcare online. (c) Healtheon and Quintiles are parties to an Agreement and Plan of Merger dated as of January 22, 2000 (the "MERGER AGREEMENT") pursuant to which they have agreed, among other things, for Quintiles' wholly owned subsidiary Envoy Corporation ("Envoy") to become a wholly owned subsidiary of Healtheon by merger (the "ENVOY MERGER"). (d) As a principal component of the transactions surrounding the Merger Agreement, Quintiles desires to secure the right and license from Healtheon, effective upon consummation of the Envoy Merger, to develop and commercialize Data Products based on data available to Healtheon by virtue of Healtheon's Transaction Business (including without limitation that acquired through Envoy) and other healthcare businesses, all as provided below. NOW, THEREFORE, in consideration of their respective agreements set forth in this Agreement and of other good and valuable consideration, the receipt and legal sufficiency of which they acknowledge, and intending to be legally bound, Healtheon and Quintiles agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following capitalized terms shall have the respective meanings set forth below: 2 (a) "ACCESS SPECIFICATIONS" means the schedule, method, medium, format, structure, organization, archival, mapping, and other logistical, technical, legal, and other parameters by which Healtheon will provide Quintiles electronic access to and copies of the Licensed Data. The Access Specifications will be determined by the parties and may be modified from time to time pursuant to Section 2.2(a). (b) "AFFILIATE" of a Person means a Person controlling, controlled by or under common control with such Person at any time as of or after the date of this Agreement and, with respect to Healtheon, shall include WebMD International, LLC, Healtheon's international joint venture with an affiliate of The News Corporation Limited. (c) "CONFIDENTIAL INFORMATION" means and includes all information disclosed under this Agreement by either party to the other (subject to the exceptions defined below), including without limitation all business and product plans, marketing information, and other business information so disclosed; provided, however, that the Licensed Data shall constitute Confidential Information of Healtheon except as and to the extent reflected in Data Products commercialized by Quintiles under authority of this Agreement. Notwithstanding the foregoing, the following shall not constitute Confidential Information: information which (1) is known by the receiving party prior to disclosure by the disclosing party; (2) is or becomes available publicly other than as a result of a breach of this Agreement; (3) is developed independently by the receiving party without the use of or reliance on the disclosing party's Confidential Information; or (4) is provided to the receiving party by a third party under no duty of confidentiality to the disclosing party. (d) "DATA PRODUCT" means any product created for the purpose of sale or licensing to one or more third Persons which is based on the selective or strategic extraction, compilation, assimilation, manipulation, analysis, and/or presentation of aggregate De-Identified Data of the type that comprises the Licensed Data, with a view toward creation of a derivative compilation of data (or analytical conclusions thereon) having commercial utility. The term Data Product also shall include the sale or licensing of Licensed Data in a raw format data feed or any other form. (e) "DE-IDENTIFICATION" means the process of removing, coding, encrypting or otherwise eliminating or concealing the data elements that makes Licensed Data individually identifiable to a particular patient or consumer, and includes the removal or concealing of any data elements specifically required by Law or contractual obligation to be removed or concealed to make Licensed Data not individually identifiable as to the patient or consumer or other elements of the Licensed Data that are required by law to be de-identified. (f) "DE-IDENTIFIED DATA" means Licensed Data that has been through the De-Identification process. For the avoidance of doubt, De-Identified Data only de-identifies data elements that make the Licensed Data individually identifiable to a particular patient or consumer (unless other elements of the Licensed Data are required by Law to be de-identified), and those data elements (other than patient or consumer identifying data) of the Licensed Data that are not required to be de-identified constitute De-Identified Data notwithstanding their identifiable format. By way of example, and without limitation, specific identifiable data such as the names of specific pharmacies, physicians, hospitals and payors constitute De-Identified Data once the corresponding Licensed Data has been through the De-Identification process, provided that such items are not 2 3 required by Law to be de-identified. Licensed Data will also be considered De-Identified Data for purposes of this Agreement if the particular data set does not contain patient or consumer identifying data or any data elements that require de-identification pursuant to applicable Law and, accordingly, such data set does not go through the De-Identification process. (g) "EFFECTIVE TIME" means the effective time of the Envoy Merger, determined according to the Merger Agreement. (h) "FIELD OF USE" means on a worldwide basis the development of Data Products based on or including Licensed Data and commercialization or delivery of such Data Products to (1) the pharmaceutical industry, including without limitation pharmaceutical, biotechnology, genomics, and other companies in the business of research, development, production, manufacturing, marketing, sale, distribution, or other commercialization of pharmaceutical products or medical devices, as well as to foundations, government agencies, universities, private individuals, or others engaged in research regarding drug efficacy, epidemiology, disease control, diagnostic patterns, and similar areas of inquiry that in each case are related to pharmaceutical use and medical outcomes, and (2) physicians, patients, hospitals, health maintenance organizations, governmental entities, and other healthcare consumers, providers, pharmacies, and payors. (i) "LAW" means any United States federal, state, local or foreign law, statute, regulation, ordinance, order, judgment, decree, rule or other applicable governmental or judicial restriction or requirement, and any judicial or administrative interpretation or determination with respect thereto. (j) "LICENSED DATA" means all of the following transmitted to, from, or through or otherwise received, possessed or controlled from time to time by or for the benefit of Healtheon to the extent Healtheon is not prohibited by applicable Law or contractual arrangement from providing such data to Quintiles under this Agreement, regardless of the medium of or circumstances giving rise to transmission: (1) Transaction Data and (2) other data concerning (A) the health, medical condition, or treatment of actual, specific people, (B) the behavior of actual, specific people intended to treat, maintain, or otherwise influence their health or medical conditions, or (C) the providing of health care or reimbursement or payment therefor with respect to actual, specific physicians, hospitals, health maintenance organizations, governmental entities, and other providers, pharmacies, and payors. (k) "PERSON" means any person or entity. (l) "STEERING COMMITTEE" means the oversight committee formed pursuant to Section 7.1. (m) "TRANSACTION BUSINESS" refers to the business of processing or facilitating the processing of transactions, of the following type: reimbursement, indemnity, or payment or other related claims or encounters by and among physicians, hospitals, health maintenance organizations, governmental entities, and other providers, pharmacies, and payors, as well as eligibility, adjudication, referrals, formulary checks, and similar transactions, irrespective of the manner, mode, communications method or platform through which such business is conducted from time to time, and giving effect to evolutionary or other developments in the scope of and manner in which such 3 4 business generally is conducted going forward. Without limiting the foregoing, the term "Transaction Business" includes the business conducted as of the date of this Agreement (and evolutions thereof) by Envoy and by Healtheon's Affiliate MedeAmerica, Inc. (n) "TRANSACTION BUSINESS SERVICE AGREEMENT" means an agreement to render Transaction Business services for a customer. (o) "TRANSACTION DATA" means all data transmitted to, from, or through or otherwise received or possessed by or for the benefit of Healtheon from transactions processed or facilitated in the conduct of its Transaction Business. ARTICLE II DATA PRODUCTS 2.1 LICENSE. (a) Grant. Subject to the terms and conditions of this Agreement, Healtheon hereby grants Quintiles, effective as of the Effective Time, an irrevocable, perpetual, worldwide right and license to use the Licensed Data (after its De-Identification according to Section 2.2(a)(2)) to develop, license, sell, and otherwise commercialize Data Products, and in connection therewith to receive, collect, possess, process, combine, analyze, and transfer the Licensed Data to third parties. This license includes the right to sublicense, subject to Section 7.9 below. (b) Exclusivity. Subject to Section 2.1(d) below, Healtheon shall not (i) grant any right or license, whether exclusive or non-exclusive, to any Person to use the Licensed Data in the Field of Use, or (ii) engage directly or indirectly in the development or commercialization of Data Products in the Field of Use based on or including as a component thereof the Licensed Data. Nothing in this Agreement shall preclude Healtheon from using or analyzing Licensed Data solely for its internal purposes or for the development or marketing of products or services that do not themselves constitute Data Products. Nothing in this Agreement shall preclude Healtheon from providing to those Persons from whom Healthon has acquired Licensed Data (or the Persons in the same transaction chain) the same Licensed Data that was acquired from such Persons, which may be processed, compiled or analyzed, but which shall not be aggregated with the Licensed Data acquired from any other Person. (c) Exclusivity and Royalty Dispute; Future Use of Licensed Data.. The parties acknowledge and agree that there will be ambiguities concerning whether certain activities constitute Data Products or produce Gross Product Revenue or Operating Income from the sale or licensing of Data Products. Such ambiguities shall be resolved in good faith pursuant to the dispute resolution process set forth in Article V. If trends in the data product industry move toward a more significant use of patient or consumer identifiable data in informatics and other data products, Quintiles may request the Steering Committee to expand the definition of Data Products to include such patient or consumer identifiable data products. (d) Healtheon Affiliates. Healtheon and Quintiles acknowledge that Healtheon's Affiliates have or will have access to Licensed Data, and that Healtheon and Quintiles intend for all such Affiliates of Healtheon to be subject to and bound by this Agreement. In that regard, Healtheon 4 5 agrees (1) that Healtheon's representations, warranties, and covenants made under this Agreement shall be deemed also to include Healtheon Affiliates; and (2) to cause each Affiliate to comply with Healtheon's obligations under this Agreement as if parties hereto with obligations coextensive with Healtheon's. (e) Limited Exceptions to Restrictive Covenant. At its election, at any time three years after the Effective Date and from time to time thereafter, Healtheon may propose Data Products for development by Quintiles based on the Licensed Data for internal use or commercialization by Healtheon. If Healtheon makes any such proposal in writing to Quintiles, including certification by Healtheon that Healtheon intends to develop the proposed product immediately if Quintiles elects not to do so, and Quintiles fails within the Notice Period (defined below) to confirm for Healtheon in writing that Quintiles has developed, is developing, or intends to develop a Data Product substantially functionally comparable to that proposed by Healtheon, or if Quintiles does not in fact so develop such a Data Product within one year from the date of Quintiles' confirmation, then in either case Healtheon may develop and commercialize such proposed Data Product (but no other) itself or with a party other than Quintiles, and Quintiles' restrictive covenant in subsection 2.1(b) above shall be deemed thereafter to except such development and commercialization for so long as (but no longer than) Healtheon's development, internal use, or commercialization effort for such Data Product continues. Healtheon agrees and acknowledges that its rights arising in this subsection are not intended to enable broad commercial participation by Healtheon in the Data Products market, but rather to enable Healtheon to pursue its discrete, isolated Data Product needs. When used herein, the term Notice Period shall mean (i) twenty (20) days after actual receipt of Healtheon's written proposal, followed by (ii) to the extent Quintiles does not respond to such notice in writing within the twenty-day period, ten (10) days after a follow-up written notice indicating that Healtheon has not received a response to the initial written proposal. 2.2 ACCESS TO LICENSED DATA. (a) Determination of Access Specifications; Costs. (1) Promptly after execution of this Agreement, the parties will determine the Access Specifications. Each of the parties will cooperate in good faith with the other to modify the Access Specifications thereafter upon request. If the parties are unable to promptly agree on the Access Specifications, or changes thereto from time to time, the matter shall be promptly submitted to the Steering Committee and if it is unable to agree, Quintiles shall have the right to establish or modify the Access Specifications in Quintiles' reasonable discretion, provided that the Access Specifications or changes thereto address Healtheon's reasonable business concerns and delivery of Licensed Data in accordance therewith does not violate applicable Law or contractual obligations, and Quintiles agrees to bear any incremental out-of-pocket expenses related to such changes. (2) The parties acknowledge and agree that the Licensed Data provided to Quintiles will be delivered as De-Identified Data. In this regard, Quintiles and its Affiliates have developed certain computer software useful for De-Identification of data (such software, as it may be modified or replaced through internal or third party development, the "Quintiles De-Identification Software"). Quintiles may require Healtheon to use the Quintiles De-Identification Software during the De-Identification process, provided that the use of such software causes the data as delivered 5 6 hereunder to comply with applicable Law and contractual obligations. Quintiles will arrange for Healtheon to receive this software and a corresponding license at no charge, along with reasonable related technical support, solely for the purpose of fulfilling Healtheon's obligations under this Agreement. If the Access Specifications require De-Identification through other means, Quintiles shall pay Healtheon's related costs as provided in subsection (3) below. (3) Quintiles and Healtheon acknowledge that Healtheon is not primarily engaged in the business of collecting, preparing, selling or delivering data as contemplated in this Agreement. Accordingly, Quintiles shall pay to Healtheon all reasonable out-of-pocket expenses incurred by Healtheon in conforming the Licensed Data to the Access Specifications and delivering the Licensed Data under this Agreement to the extent such costs would not have been incurred by Healtheon but for this Agreement, including all such costs of satisfying the quality, accuracy and delivery criteria established in this Agreement and the Access Specifications. All such amounts shall be paid within thirty (30) days after invoicing by Healtheon, and all such amounts paid by Quintiles shall be deemed data acquisition costs for purposes of determining Quintiles' royalty obligations in Section 2.3. (b) Access to Licensed Data. (1) Healtheon will provide Quintiles access to and copies of the Licensed Data in compliance and conformity with the Access Specifications at all times as of and after the Effective Time; provided, however, that Healtheon will not be required to provide Licensed Data solely to the extent Healtheon is specifically prohibited from doing so by: (A) any Transaction Business Service Agreement in effect as of the Effective Time (including without limitation any acquired by Healtheon by virtue of the Envoy Merger), provided Healtheon complies with the procedures required by Section 2.4 with respect to securing data use rights in current service agreements; (B) any future Transaction Business Service Agreement (or any amendment to any existing Transaction Business Service Agreement) or any future request by any existing or future Transaction Business client to discontinue use of such client's data, provided Healtheon has complied with the procedures required by Section 2.4 with respect to securing data use rights in future service agreements; or (C) any applicable Law, provided Healtheon has complied with the procedures required by subsection (c) below concerning applicable Laws. For the avoidance of doubt, Healtheon shall not be entitled to withhold Licensed Data except as and to the extent specifically provided in subsections (1)(A) - (C) above or in subsection (d) below concerning defaults in Quintiles' payment obligations. (2) Quintiles and Healtheon agree to interpret the data rights provisions in all Envoy Transaction Business Service Agreements in effect as of the Effective Time in a manner consistent with Envoy's historical interpretation practices absent a breach of the warranty by Quintiles in Section 2.5(b)(2), developments in applicable Law or specific requests or challenges by clients, in which cases Section 2.2(c) or (d) shall apply, respectively. (c) Interruptions to Data Stream Due to Applicable Law. In the event Healtheon reasonably believes that developments to applicable Laws after the date of this Agreement prohibit or limit Healtheon from providing a material amount of data that would otherwise be Licensed Data but for the fact that provision of such data under this Agreement is prohibited by applicable Law, or that Quintiles breached its representation in Section 2.5(b)(2) below with respect to current Law such 6 7 that provision of data hereunder violates current Law, Healtheon will notify Quintiles immediately in writing of the specific prohibition under applicable Law and the nature of the corresponding prohibition or limitation and cooperate in good faith with Quintiles to develop modifications to the Access Specifications (if appropriate) or take other actions to fulfill the intent of this Agreement without violating any such Law. Immediately upon such notice (or on the date such Law takes effect, if later), Healtheon shall be entitled to suspend providing the Licensed Data to Quintiles under this Agreement solely to the extent that Healtheon believes in good faith that doing so would violate such Law. Healtheon shall resume provision of the suspended Licensed Data within five (5) business days after receiving a reasoned opinion of counsel reasonably satisfactory to Healtheon, addressed to Quintiles and Healtheon, that providing such Licensed Data (in the same or in a modified format) would not be prohibited under applicable Law identified by Healtheon as the basis for suspension, along with a specific undertaking by Quintiles to indemnify Healtheon from and against any and all losses, claims, actions, damages, liabilities, costs, and expenses (including attorneys' fees and expenses) arising from providing such data. In the event the opinion of counsel provides that the Licensed Data must or should be provided in modified form, Healtheon shall, at Quintiles' cost, use its commercially reasonable efforts expeditiously to modify the data accordingly, and the time period by which Healtheon shall resume providing the data shall be extended until such modifications can be made. (d) Limited Remedy for Payment Default. Healtheon shall be excused from providing Licensed Data under this Agreement for any period during which Quintiles is in material default of Quintiles' payment obligations to Healtheon under this Agreement (including obligations to pay costs), provided that Healtheon will not effect any such interruption (1) without giving Quintiles at least thirty (30) days' prior written notice of Healtheon's intent to do so, and (2) if and for so long as Quintiles disputes the alleged default in good faith (as evidenced by written notice to that effect to Healtheon), pays any undisputed amounts to Healtheon, and pays any disputed amounts into escrow. Healtheon will resume providing Licensed Data immediately upon such cure of any such default and the payment of any reasonable related out-of-pocket expenses incurred by Healtheon in connection therewith. Healtheon agrees and acknowledges that the suspension of provision of Covered Data described in this subsection and recovery of amounts due and costs incurred in connection therewith is Healtheon's sole and exclusive remedy for any such payment default by Quintiles, and that no other type of default by Quintiles will entitle Healtheon to withhold Licensed Data (except with respect to Section 2.2(c) as it relates to Quintiles' breach of warranty under Section 2.5(b)(2)) or to terminate this Agreement. 2.3 ROYALTIES. (a) Definitions. As used in this Section 2.3, the following capitalized terms shall have the respective meanings set forth below: (1) "GROSS PRODUCT REVENUES" means [*]. 7 8 (2) "OPERATING INCOME" means [*]. (b) Payments. (1) [*]. (2) Quintiles will make the payments required by subsection (1) above on a quarterly (calendar year) basis and accompany each payment with a statement of Quintiles' corresponding Gross Product Revenues and Operating Income for the applicable quarter, together with an explanation of Quintiles' calculation of the corresponding royalties due Healtheon. Quintiles will make such payments within forty-five (45) days after the end of each corresponding calendar quarter. (c) Audits. Quintiles will maintain records reasonably sufficient to document and record its Gross Product Revenues and Operating Income; and Healtheon shall have the right to audit Quintiles' books and records at Healtheon's expense on a confidential and otherwise commercially reasonable basis to confirm the accuracy of all of the foregoing. Quintiles and Healtheon will address any apparent payment discrepancy promptly and in good faith, and the affected party promptly will correct any confirmed mispayment. (d) Equitable Adjustments. In the event Quintiles pays Healtheon any royalty in respect of Licensed Data the parties later determine to have been provided by Healtheon to Quintiles improperly (such as in violation of applicable Law or any applicable Healtheon service agreement) and as a result Quintiles has not received or has refunded the related Gross Product Revenue, Quintiles and Healtheon will determine in good faith an appropriate corresponding royalty adjustment to be given effect as an offset against future royalties to or a refund from Healtheon. (e) Use of Licensed Data. Quintiles will use its commercially reasonable efforts to incorporate the Licensed Data in all Data Products that it develops that require the use of data of the type obtained from the conduct of a Transaction Business, or other data of the type constituting the Licensed Data. 2.4 DATA USE RIGHTS. (a) General. Healtheon will undertake or permit Quintiles to undertake, as the case may be, the procedures described in this Section relative to avoiding prohibitions or limitations on the provision of Licensed Data. (b) Current Service Agreements. Promptly after execution of this Agreement, Healtheon will identify for Quintiles in writing each of Healtheon's Transaction Business Service 8 9 Agreements (other than any obtained by Healtheon as a result of the Envoy Merger) which prohibit or limit Healtheon's right to provide data of the type which otherwise would be Licensed Data to Quintiles in the manner and for the purposes contemplated by this Agreement. Healtheon further agrees to undertake the access procedures described in subsection (d) below with respect to all such Transaction Business Service Agreements requested by Quintiles (including any originating from Envoy), to the end of eliminating or mitigating the corresponding prohibitions or limitations. Healtheon also will undertake the procedures described in this subsection with respect to Transaction Business Service Agreements acquired by Healtheon by virtue of future transactions in which Persons become Affiliates of Quintiles. (c) Future Service Agreements. [*]. (d) Access Procedure. [*]. 2.5 WARRANTIES. (a) Healtheon warrants and covenants to Quintiles that: (1) Healtheon is duly authorized to enter into and perform its obligations under this Agreement, and, other than with respect to any Law or contract which may prohibit or limit Healtheon's right to provide Licensed Data to Quintiles as contemplated by this Agreement, is free of any obligation or restriction that would prevent Healtheon from or impair or limit its right or ability to do so. 9 10 (2) The collection and accumulation of the Licensed Data by Healtheon to the date of this Agreement has not violated applicable Law or any agreement to which Healtheon is a party or by which it is bound as of the date of this Agreement. (3) Subject to the effects of being conformed to the Access Specifications pursuant to Section 2.2(b)(1), the provision of the Licensed Data by Healtheon to Quintiles pursuant to this Agreement will not violate the corresponding agreement or arrangement pursuant to which Healtheon rendered the services giving rise to such item of Licensed Data. All Licensed Data shall be provided "as is" in the form resulting after Healtheon's Transaction Business processing, De-Identification, and application of the Access Specifications. (4) To Healtheon's actual knowledge, after general consultation with its legal advisors, but without conducting a comprehensive investigation, Quintiles' current practices regarding the collection and accumulation of data of the type comprising the Licensed Data and its use of such data in Data Products would not violate applicable Law. (b) Quintiles warrants and covenants to Healtheon that: (1) Quintiles is duly authorized to enter into and perform its obligations under this Agreement, and is free of any obligation or restriction that would prevent Quintiles from or impair or limit its right or ability to do so. (2) There is no applicable Law as of the date of this Agreement, or any material agreement to which Envoy or Quintiles is a party or by which either is bound as of the date of this Agreement, that will prohibit the collection and accumulation of data of the type that is Licensed Data under this Agreement or its use by Quintiles in Data Products,. (3) Provided that Healtheon's collection and accumulation of the Licensed Data does not violate applicable Law, the use of the Licensed Data by Quintiles after the date hereof will not violate applicable Law as in effect from time to time; and the use of the Licensed Data by Quintiles after the date hereof will not violate any agreement to which Quintiles is a party or by which it is bound. 2.6 PRIVACY RELATED ACTIVITIES. (a) Technical Consultation. Healtheon will cooperate in good faith with Quintiles, through modifications to the Access Specifications or otherwise (and subject to Quintiles' expense reimbursement obligations to Healtheon described in Section 2.2(a)(3)), to develop "best practices" through which to achieve availability of the Licensed Data to Quintiles, with a view toward (1) achieving efficient technical processes for the parties and (2) complying in all respects with applicable Laws concerning the privacy of healthcare data. Such efforts may include periodic privacy compliance audits upon the request of either party made no more frequently than once every thirty-six (36) months. (b) Public Policy and Public Relations Cooperation. Healtheon and Quintiles also will cooperate in good faith to evaluate applicable Laws concerning the privacy or collection of 10 11 healthcare data or otherwise relevant to the transactions contemplated by this Agreement and, where appropriate and mutually beneficial, to influence the legislative process and public policy and perception on a coordinated basis through lawful and appropriate means determined from time to time, including without limitation public relations activities. Healtheon and Quintiles will determine in good faith how to allocate their respective expenses for these activities. (c) Ongoing Adaptation. Healtheon and Quintiles agree to cooperate in good faith on an ongoing basis to adapt the parties' arrangements under this Agreement to accommodate future changes in applicable Laws, relevant technology, or other changes in the Data Products industry or environment. 2.7 Distribution. Quintiles will not distribute Data Products on the Internet other than through Healtheon without mutual agreement, not to be unreasonably withheld. ARTICLE III INDEMNIFICATION 3.1 HEALTHEON. Healtheon shall defend, indemnify and hold Quintiles harmless, to the full extent permitted in law or equity, from and against any and all losses, claims, actions, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses), net of any corresponding insurance proceeds received by any indemnified party (collectively, "LOSSES"), proximately caused by or resulting from (i) any misrepresentation or non-fulfillment of any representation, warranty, covenant, obligation or agreement by Healtheon contained in or made pursuant to this Agreement, (ii) the negligence or willful misconduct of Healtheon or any of its employees, agents, or representatives, and (iii) the enforcement by Quintiles of its rights pursuant to this Section 3.1, and any litigation, proceeding or investigation relating to any of the foregoing. 3.2 QUINTILES. Quintiles shall defend, indemnify and hold Healtheon harmless, to the full extent permitted in law or equity, from and against any and all Losses proximately caused by or resulting from (i) Quintiles' use of the Licensed Data, (ii) any misrepresentation or non-fulfillment of any representation, warranty, covenant, obligation or agreement by Quintiles contained in or made pursuant to this Agreement, (iii) the negligence or willful misconduct of Quintiles or any of its employees, agents, or representatives, and (iv) the enforcement by Healtheon of its rights pursuant to this Section 3.2, and any litigation, proceeding or investigation relating to any of the foregoing. 3.3 PROCEDURES. Whenever either party shall become aware that a claim by a third party has been asserted or threatened which, if valid, would subject the other party to an indemnity obligation under this Agreement, the indemnified party promptly shall notify the indemnifying party in writing of such claim in sufficient detail to enable the indemnifying party to evaluate the claim. The indemnifying party or its designee will have the right, but not the obligation, to assume the defense of such claim. If an indemnifying party fails to assume the defense of such claim within fifteen (15) days after receipt of notice of the claim, the indemnified party will (upon delivering written notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise or settlement of such claim, subject to the right of the indemnifying party to assume the defense of such claim at any time prior to settlement, compromise, or final determination thereof, and provided, however, that the indemnified 11 12 party shall not enter into any such compromise or settlement without the written consent of the indemnifying party. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise, or settlement. The indemnifying party shall not be liable for any settlement of any claim effected without its consent. ARTICLE IV CONFIDENTIALITY Each of Quintiles and Healtheon will hold the other party's Confidential Information in confidence and refrain from using any such Confidential Information other than for purposes of exercising its respective rights and performing its respective obligations under this Agreement. Notwithstanding the foregoing, each party will be permitted to disclose the other party's Confidential Information as and to the extent required by applicable law, provided the party required to make any such disclosure notifies the party whose Confidential Information is required to be disclosed as far in advance of the required disclosure as is reasonably practicable under the circumstances and cooperates with such party (if reasonably requested to do so, and at the requesting party's expense) to secure confidential treatment for the required disclosure. ARTICLE V RELATIONSHIP MANAGEMENT 5.1 STEERING COMMITTEE. Promptly after execution of this Agreement, the parties will organize a six-member Steering Committee comprised of three designees from each party to provide open lines of communication and facilitate, coordinate, and oversee the performance of the parties' respective obligations under this Agreement. The initial Steering Committee designees shall be [*] and [*] and [*] from Quintiles and [*], [*] and [*] from Healtheon and shall be the same Steering Committee under the Internet Product Development and Marketing Agreement between the parties. Each party shall be entitled to replace its designees to the Steering Committee by written notice to the other party. The Steering Committee shall convene on such schedule (but not less frequently than quarterly) and employ such procedures as it shall determine from time to time in good faith, and, except as otherwise specifically required by this Agreement, shall act by unanimous consent. 5.2 DISPUTE RESOLUTION. (a) Executive Review. Each party shall have the right, at any time after good faith efforts have failed to resolve any dispute, difference or question concerning this Agreement at the Steering Committee level, to request review of the matter by the chief executive officer of each party (an "EXECUTIVE REVIEW"). Either party shall exercise its right to request an Executive Review by delivering written notice to that effect to the other party. The chief executive officers of each party shall meet in person or by telephone within ten (10) days of the date such notice is given and shall engage in good faith efforts to resolve the dispute within ten (10) days after such meeting. 12 13 (b) Mediation. In the event of a dispute which cannot be resolved by Executive Review, either party may commence a non-binding mediation to resolve the dispute by providing written notice to the other party (a "MEDIATION NOTICE") informing the other party of the dispute and the issues to be resolved and containing a list of five (5) recommended individuals to serve as the mediator. Within ten (10) business days after the receipt of a Mediation Notice, the other party shall respond by written notice to the party initiating mediation, providing a list of five (5) recommended individuals to serve as the mediator and which adds additional issues to be resolved. The recommended mediators shall be individuals with experience in the healthcare electronic data interchange industry and shall not be any employee, director, shareholder or agent of either party or an Affiliate of either party, or otherwise involved (whether by contract or otherwise) in the affairs of either party. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have been unable to agree upon an individual to serve as mediator, or to the extent the mediator selected by the parties is unable to resolve the dispute, the dispute will be settled by final and binding arbitration conducted in the manner described in subsection (c) below. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have agreed upon an individual to serve as mediator, the mediator shall conduct a mediation in an effort to resolve the dispute, employing commercially reasonable procedures selected by the mediator in consultation with the parties, completing such mediation no later than sixty (60) days after engagement. 5.3 REMEDIES. (a) Each of Healtheon and Quintiles acknowledges that its failure to abide by the provisions of this Agreement (and in particular Healtheon's obligations under Article II) would cause immediate and irreparable harm to the other, for which legal remedies would be inadequate. Therefore, in addition to any legal or other relief to which either party may be entitled by virtue of the other party's failure to abide by these provisions, the injured party shall be entitled to equitable relief, including but not limited to preliminary and permanent injunctive relief and specific performance, for the other party's actual or threatened failure to abide by these provisions. (b) Notwithstanding the procedures described in Section 5.2, each party shall be entitled to seek and obtain preliminary injunctive relief in any court of competent jurisdiction for the other party's actual or threatened breach of this Agreement, pending execution thereafter of the dispute resolution procedures described in Section 5.2. ARTICLE VI TERM AND TERMINATION TERM. The term of this Agreement shall be perpetual. This Agreement may not be terminated except by the mutual written agreement of Healtheon and Quintiles. 13 14 ARTICLE VII MISCELLANEOUS 7.1 RELATIONSHIP OF PARTIES. Healtheon and Quintiles agree that their legal relationship to one another under this Agreement is as independent contractors. Nothing in this Agreement shall be deemed to create a joint venture, agency, partnership, or other relationship between Healtheon and Quintiles, and neither shall have any power by virtue of this Agreement to enter into any contract or commitment on behalf of the other or to bind the other in any respect whatsoever. 7.2 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by a written agreement (referring specifically to this Agreement) of Healtheon and Quintiles. 7.3 SEVERABILITY. In the event one or more of the provisions of this Agreement or the application thereof to any circumstance are found to be invalid or unenforceable to any extent by a court with jurisdiction, the remaining provisions shall continue in full force and effect. If any provision of this Agreement is found to be so broad as to be unenforceable, such provision shall be interpreted to be only as broad as is enforceable. 7.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally or by next-day courier or telecopied with confirmation of receipt, to the parties at the addresses specified below (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally delivered or telecopied, or one day after delivery to a courier for next-day delivery. If to Quintiles, to: Quintiles Transnational Corp. 4709 Creekstone Drive Riverbirch Building, Suite 200 Durham, North Carolina 27703-8411 Telecopy Number: (919) 998-2177 Attention: John S. Russell, Senior Vice President, General Counsel with a copy to: Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. Post Office Box 2611 Raleigh, North Carolina 27602-2611 Telecopy Number: (919) 821-6800 Attention: Gerald F. Roach 14 15 If to HWMD, to: Healtheon/WebMD Corporation 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 Telecopy Number: (404) 479-7603 Attention: Jack Dennison, Executive Vice President, General Counsel with a copy to: Alston & Bird, L.L.P. 1211 East Morehead Street P.O. Drawer 34009 Charlotte, North Carolina 28234-4009 Telecopy Number: (704) 334-2014 Attention: H. Bryan Ives III 7.5 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.6 ENTIRE AGREEMENT. This Agreement (including its various Schedules) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to its subject matter. 7.7 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without giving effect to the provisions thereof relating to conflicts of law. 7.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 7.9 ASSIGNMENT. This Agreement and the rights, interests and obligations hereunder shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Quintiles may not assign, sublicense, or otherwise transfer its rights, interests or obligations under this Agreement without Healtheon's prior written consent (not to be withheld or delayed unreasonably), except (a) as a part of the sale or other disposition of all or a substantial portion of its Data Products business; (b) to make Data Products available to customers in the ordinary course of business; (c) in connection with any joint venture or strategic relationship with one or more pharmaceutical companies for the development or commercialization of Data Products; or (d) to any Affiliate of Quintiles. Healtheon may not assign or otherwise transfer its rights, interests or obligations under this Agreement without Quintiles' prior written consent (not to be withheld or delayed unreasonably), except in connection with the sale, transfer, or other disposition of all or any portion of its business or assets (other than in the ordinary 15 16 course of business) in a transaction in which the transferee or successor to such business or assets assumes Healtheon's corresponding obligations under this Agreement. 7.10 PUBLICITY. Except as otherwise required by applicable law, neither party shall refer to the other party in advertising, promotional activities, or other public disclosures or announcements without such other party's prior written consent, which shall not be withheld unreasonably. 7.11 LIMITATION OF LIABILITY. EXCEPT IN THE CASE THAT REDWOOD WILLFULLY REFUSES TO PROVIDE MAPLE ACCESS TO LICENSED DATA AS CONTEMPLATED HEREIN (UNLESS REDWOOD'S REFUSAL IS BASED ON GOOD FAITH ASSERTION OF ITS RIGHTS UNDER SECTIONS 2.2(C) OR (D)), NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR SPECIAL DAMAGES ARISING OUT OF OR RELATED TO SUCH ACTION OR OMISSION, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7.12 FORCE MAJEURE. Neither party will be responsible for any failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including without limitation acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice of such cause to the other party. The affected party's time for performance will be extended for a period equal to the duration of the force majeure. 7.13 TIME IS OF THE ESSENCE. Time is of the essence in the performance of both parties obligations hereunder. * * * * * * * * * * 16 17 [signature page to Data Rights Agreement] IN WITNESS WHEREOF, each of Healtheon and Quintiles has caused this Agreement to be executed on its behalf by its respective officer duly authorized to do so, all as of the date specified above in the preamble. HEALTHEON/WEBMD CORPORATION By: /s/ Jeff Arnold ------------------------------------------ Its: Chief Executive Officer ------------------------------------------ QUINTILES TRANSNATIONAL CORP. By: /s/ John S. Russell ------------------------------------------ John S. Russell Senior Vice President, General Counsel and Corporate Secretary 17 18 SCHEDULE 2.3(b) --------------------------------------------------------------------- [*] [*] -------------------------------------------- ---------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] --------------------------------------------------------------------- EX-27.01 3 ex27-01.txt FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 345,824 33,527 413,527 0 0 873,797 565,808 191,885 2,158,387 543,303 21,319 0 0 1,153 1,529,568 2,158,387 0 837,952 0 910,824 (8,993) 0 3,852 (67,731) (22,350) (45,381) 16,770 436,327 0 407,716 3.53 3.53
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