-----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, CIHVK6b8FK9oh77yTuyjPt21ThPpk4hZX4R0hoMhjnCHrHVlGSIs3BXI3hlMeqDe SmZSFnQGQ/Bomq2R6/xdFg== 0000950144-01-004391.txt : 20010402 0000950144-01-004391.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950144-01-004391 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUINTILES TRANSNATIONAL CORP CENTRAL INDEX KEY: 0000919623 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561714315 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23520 FILM NUMBER: 1586423 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-K 1 g67690e10-k.txt QUINTILES TRANSNATIONAL 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 000-23520 QUINTILES TRANSNATIONAL CORP. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1714315 (State of incorporation) (I.R.S. Employer Identification Number) 4709 CREEKSTONE DRIVE, SUITE 200 DURHAM, NORTH CAROLINA 27703-8411 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (919) 998-2000 Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (AND RIGHTS ATTACHED THERETO) (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock at January 31, 2001 held by those persons deemed by the registrant to be non-affiliates was approximately $2,351,946,877. As of January 31, 2001 (the latest practicable date), there were 116,062,330 shares of the registrant's Common Stock, $.01 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 2, 2001 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 QUINTILES TRANSNATIONAL CORP. FORM 10-K ANNUAL REPORT INDEX
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 14 Item 6. Selected Consolidated Financial Data........................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................... 16 Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................................ 28 Item 8. Financial Statements and Supplementary Data................. 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 53 PART III Item 10. Directors and Executive Officers of the Registrant.......... 53 Item 11. Executive Compensation...................................... 56 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 56 Item 13. Certain Relationships and Related Transactions.............. 56 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 56
i 3 PART I Information set forth in this Annual Report on Form 10-K contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," "continue," or "target" or the negative thereof or other variations thereof or comparable terminology. We caution you that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including without limitation, the risk that our PharmaBio transactions, e-commerce services or Informatics products and services will not generate revenues or profit at the rate or levels we anticipate, our ability to distribute backlog among project management groups and match demand to resources, actual operating performance, the actual savings and operating improvements resulting from our 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, the ability to operate successfully in new lines of business and the other risk factors described elsewhere in this report. ITEM 1. BUSINESS GENERAL We are a market leader in providing a full range of integrated product development and commercial development solutions to the pharmaceutical, biotechnology and medical device industries. We also provide market research solutions and strategic analyses to support healthcare decisions and healthcare policy consulting to governments and other organizations worldwide. Supported by our extensive information technology capabilities, we provide a broad range of contract services to help our clients reduce the length of time from the beginning of development to peak sales of a new drug or medical device. Our product development services include a full range of services focused on helping our clients through the development and regulatory approval of a new drug or medical device. Our commercial development services, including sales and specialized marketing support services, focus on helping our clients achieve commercial success for a new product or medical device. We also offer healthcare policy research and management consulting, which emphasize improving the quality, availability and cost-effectiveness of healthcare, as well as data analysis and market research services, which form the core of our healthcare informatics services. Since our formation in 1982, we have continued to expand the scope of our services and our geographic presence to support the needs of our customers on a worldwide basis. We have implemented a number of strategic initiatives to broaden our array of services and create new opportunities for growth. As part of this strategy, we have completed approximately 33 acquisitions over the past five years although our acquisition rate has slowed over the last two years, with 10 acquisitions completed in 1999 and none in 2000, as we focused our efforts on reorganizing our operating units, creating new ways of marketing and selling our services and developing our informatics business in both stand alone service offerings and support services for our other business units. In December 2000, we announced the acquisition of Pharmacia Corporation's clinical development unit in Sweden, which became effective January 1, 2001. Also, in 2000, we sold our electronic data interchange subsidiary, ENVOY Corporation, to WebMD Corporation. As a result of this transaction, we have treated ENVOY's services as a discontinued operation. In connection with the sale of ENVOY, we entered into an agreement with WebMD to form a strategic alliance with WebMD to develop and market a Web-based integrated suite of products and services for the pharmaceutical industry. Under this agreement, WebMD has agreed to perform development services, and we have agreed to provide funding for such services. We are currently involved in a dispute regarding this agreement. We also entered into a data rights agreement under which WebMD agreed to provide us with de-identified ENVOY and other WebMD data. We initiated a lawsuit against WebMD on February 25, 2001 after it unilaterally suspended delivery of data to us on February 24, 2001 and obtained a temporary restraining 1 4 order requiring them to continue delivery of the data. On March 16 and March 21, 2001 the court entered a preliminary injunction requiring WebMD to continue the unaltered and uninterrupted flow of data to us. This data is critical to our informatics service offerings, and we plan to pursue our rights to access the data. In addition to these events, we created the PharmaBio Development group to help facilitate non-traditional customer alliances, including gain sharing and risk sharing strategies. PharmaBio Development works hand in hand with our service groups to enter strategic alliances and make strategic investments that we believe will position us to explore new opportunities and areas for potential growth. For example, in a recent agreement, we are providing the resources for the sales and marketing of Scios Inc.'s lead product in exchange for a percentage of the drug's future revenue. SERVICES We provide globally integrated contract research, sales, marketing and healthcare policy consulting and health information management services to the global pharmaceutical, biotechnology, medical device and healthcare industries. We also provide market research and strategic analysis services to support healthcare decisions. We manage our operations through three reportable segments, namely the Product Development Group, the Commercial Services Group, and the QUINTERNET(TM) Informatics Group. Management has distinguished these segments based on our normal operations. The Product Development Group is primarily responsible for all phases of clinical research. The Commercial Services Group is primarily responsible for sales force deployment and strategic marketing services, as well as healthcare policy research and consulting services. The QUINTERNET(TM) Informatics Group provides market research and healthcare information to pharmaceutical and healthcare customers. Note 17 of the notes to our consolidated financial statements includes financial information regarding each segment. We provide our customers with a continuum of services which span across our three segments. We believe that the broad scope of our services allows us to help our customers rapidly assess the viability of a growing number of new drugs, cost-effectively accelerate development of the most promising drugs, launch new drugs to the market quickly and evaluate their impact on healthcare. The following discussion describes our service offerings in greater detail. PRODUCT DEVELOPMENT OFFERINGS Through our Product Development Group, we provide a full range of drug development services focused on helping our clients achieve regulatory success, from strategic planning and preclinical services to regulatory submission and approval. Early Development and Laboratory Services Preclinical services. Our preclinical unit provides customers with a wide array of early development services. These services are designed to produce the data required to identify, quantify and evaluate the risks to humans resulting from the manufacture or use of pharmaceutical and biotechnology products, and include general toxicology, carcinogenicity testing, pathology, efficacy and safety pharmacology, bioanalytical chemistry, drug metabolism and clinical pharmacokinetics. During 2000, we sold our general toxicology operations in Ledbury, Herefordshire, UK, which is consistent with our shift in focus of our preclinical operations from basic toxicology to more advanced technologies such as genomics and proteomics. Formulation, manufacturing and packaging services. We offer services in the design, development, analytical testing and commercial manufacture of pharmaceutical dose forms. We provide study medications for preclinical and clinical studies along with necessary good manufacturing practice, or GMP, and chemistry, manufacturing and controls, or CMC, regulatory documentation. Medications for use in clinical studies are packaged, labeled and distributed globally. These services can expedite the drug development process because clinical trials are often postponed by delays in the manufacture of study drug materials. Phase I services. Phase I clinical trials involve testing a new drug on a limited number of healthy individuals. Our Phase I services include dose ranging, bioavailability/bioequivalence studies, 2 5 pharmacokinetic/pharmacodynamic modeling, first administration to humans, multiple dose tolerance, dose effect relationship and metabolism studies. Centralized clinical trial laboratories. Our centralized laboratories provide globally integrated clinical laboratory services to support all phases of regional and global clinical trials with owned facilities in the United States, Europe, South Africa and Singapore. Services include the provision of protocol-specific study materials, customized lab report design and specimen archival and management for study sponsors. In addition to providing comprehensive safety and efficacy testing for clinical trials, our centralized laboratories allow for global standardization of clinical testing, database development and electronic data transfer and provide direct electronic integration of laboratory data into safety and efficacy reports for new drug application, or NDA, submissions. Clinical Development Services Clinical trial services. We offer comprehensive clinical trial services which are the basis for obtaining regulatory approval for drugs and medical devices. On a global basis, our employees are aligned with key customers to provide a full-range of management and scientific services tailored to their specific requirements. Clinical unit employees working with our customers include specialists in therapeutic areas of the central nervous system, cardiovascular, infectious, allergic and respiratory diseases. We have extensive experience in clinical trials within therapeutic areas of endocrinological, gastroenterological, genitourinary and musculoskeletal diseases, as well as in the area of stroke. Additional specialized offerings include oncology, as well as development services in neonatal, pediatric and adolescent care. Because of our global presence and ability to coordinate clinical staff to service customers on an international basis, we are experienced in managing trials involving several thousand patients at hundreds of sites concurrently in the Americas, Europe, the Asia-Pacific region and South Africa. We provide our customers with one or more of the following core clinical trial services: Study design. We assist our customers in preparing the study protocol and designing case report forms, or CRFs. The study protocol defines the medical issues to be examined, the number of patients required to produce statistically valid results, the period of time over which they must be tracked, the frequency and dosage of drug administration, and the study procedures. A study's success often depends on the protocol's ability to predict the requirements of the applicable regulatory authorities. Investigator recruitment. During clinical trials, the drug is administered to patients by physicians, referred to as investigators, at hospitals, clinics or other sites. We have access to several thousand investigators who have conducted our clinical trials worldwide. Patient recruitment. We assist our customers in recruiting patients to participate in clinical trials through investigator relationships, media advertising and other methods. Study monitoring. We provide study monitoring services which include investigational site initiation, patient enrollment assistance, and data collection and clarification. Site visits help to assure the quality of the data, which are gathered according to good clinical practice, or GCP, regulations and guidelines, and to meet the sponsors' and regulatory agencies' requirements according to the study protocol. Clinical data management and biostatistical services. We have extensive experience in the United States and Europe in the creation of scientific databases for all phases of the drug development process. These databases include: (1) customized databases to meet customer-specific formats, (2) integrated databases to support NDA submissions and (3) databases in accordance with the United States Food and Drug Administration, or FDA, and European specifications. Regulatory affairs services. We provide comprehensive medical and regulatory services for our pharmaceutical and biotechnology customers. Our medical services include medical oversight of studies, review and interpretation of adverse experiences, medical writing of reports and study protocols and strategic planning of 3 6 drug development programs. Regulatory services for product registration include regulatory strategy design, document preparation, consultation and liaison with various regulatory agencies. Our regulatory affairs professionals help to define the steps necessary to obtain registration as quickly as possible. We are able to provide such services in numerous countries to meet our clients' needs to launch products in multiple countries simultaneously. Medical device services. Our service offerings for medical devices include (1) review of global strategies for device development and introduction, (2) identification of regulatory requirements in targeted markets, (3) clinical study design and planning, (4) data management, (5) statistical analysis of report preparations, (6) global clinical trial management and monitoring capabilities, (7) consulting on quality control and quality assurance issues, (8) regulatory filings, (9) compliance with United States, European and European Union regulations relating to medical devices, (10) long-range planning for multinational product launches, (11) compliance with legislative requirements for market access, (12) post-marketing requirements, (13) management of relationships with national governments and regulatory authorities and (14) European pricing strategies. COMMERCIAL SERVICES OFFERINGS Our Commercial Services Group provides sales force deployment and strategic marketing services, as well as healthcare policy research and consulting services designed to bring an integrated approach to outsourcing solutions for our customers. Quintiles Integrated Strategic Solutions We provide integrated strategic health and human services consulting and medical communications services for international and United States domestic customers. Our clinical and marketing expertise spans the healthcare spectrum, from pharmaceutical, biotechnology, and medical device customers to hospitals, long-term care facilities, foundations, managed care organizations, employers, the military, and federal and state governments. Late phase clinical studies. Through our late phase clinical services, which include Phase IV clinical trials, clinical experience trials and patient registries, we offer post-submission studies in support of marketing claims, post-marketing surveillance, health management support programs and other disease management activities. In designing and implementing these services, we use clinical and health management programs to establish and promote a favorable environment for new product introductions in advance of product launch and to assist in sales generation post-launch. Disease management services. Our disease management services consist of applying healthcare outcomes analysis to the economic valuation of drugs and the treatment of diseases. Our expertise also includes developing patient registries and designing disease management programs. These services enable regulators, healthcare providers, pharmaceutical and biotechnology companies and others to assess the pricing and cost-effectiveness of new medical therapies. We typically include these services in comprehensive launch programs with other clinical activities to help our customers maximize product launch and sales opportunities. Healthcare policy research and consulting. Our management consulting services focus on improving the quality, availability and cost-effectiveness of healthcare in the highly regulated and rapidly changing healthcare industry. These services include corporate strategic planning and management, program and policy development, financial and cost-effectiveness analysis, evaluation design, microsimulation modeling and data analysis. They represent the core competencies of The Lewin Group, a nationally recognized healthcare consulting firm. Regulatory and compliance consulting. We supply regulatory and compliance consulting services to the medical device, pharmaceutical, and biotechnology industries. Services include global regulatory consulting, quality systems, and engineering and validation. We assist companies in preparing for FDA interactions, including inspections and resolution of enforcement actions; complying with good manufacturing, good clinical 4 7 practice and quality systems regulations; meeting process validation requirements; and in bringing new medical devices to market. Strategic marketing and communications services. Our strategic marketing and communications services span the development and commercialization cycles for a new drug, beginning in the early stages of product development and continuing through product launch and peak market penetration. Services include communications strategy and planning, product positioning and branding, opinion leader development, symposia organization, continuing medical education programs, promotional programs, sponsored publications, patient education, clinical experience programs, large-scale exhibitions, and Internet and new media-based programs. As early as Phase II trials, we begin to disseminate scientific information and develop and present educational forums to gain opinion leader support for a new drug. These services are the core competencies of Medical Action Communications Limited, a strategic marketing and medical communications consultancy that focuses on international customers, and Q.E.D. Communications, a provider of strategic marketing and medical communications services in the United States. Commercialization Offerings Contract sales. We provide sales and marketing services focused on accelerating the commercial success of pharmaceutical, biotechnology, veterinary and other health related products. We offer a flexible range of contract sales services, which are delivered through dedicated and syndicated sales teams. Dedicated sales teams are comprised of sales representatives we recruit in accordance with customer specifications regarding specific sales and market share objectives. We can manage these dedicated sales teams or they can report directly to the customer, depending on customer preference. In certain circumstances, we can transfer an entire dedicated sales team to the customer for an additional placement fee, which is agreed upon at the beginning of the contract. Syndicated sales teams can promote a number of non-competing drugs for different customers at the same time, and we always manage these teams directly. Our contract sales teams form a highly skilled network of professionals that afford customers substantial flexibility in selecting the extent of product promotion, as well as their level of involvement in managing the sales effort. We offer rapid sales force recruitment utilizing an extensive computerized candidate database, dedicated internal staff and regionally based recruiting. In the United States, we also offer our ITMS sales force automation system, a proprietary web-enabled automated system for call reporting, sample accountability, territory planning and alignment. We also offer training services to support our contract sales offerings, including traditional outsourced pharmaceutical sales representative training services. In June 2000, we opened a 43,000 square foot in-residence training facility in Gotenba City, Japan to meet the training needs of the growing pharmaceutical industry in Japan. Marketing services. We provide customized product marketing services for pharmaceutical companies aimed at influencing the decisions of patients and physicians and accelerating the acceptance of drugs into treatment guidelines and formularies. We can assess markets, conduct research, develop strategies and tactics, assist in discussions with regulatory bodies, identify distribution channels and coordinate vendors in every region in the country. The marketing departments of pharmaceutical companies are typical purchasers of these services. Our team of industry experts, with experience in most therapeutic areas, can provide marketing insight into a wide range of geographic markets while optimizing commercial success. We also provide peer-to-peer educational programs, including physician meetings and other events, as well as telemarketing and other marketing services. Health management. We also provide teams of health professionals, including nurses, pharmacists and physicians, dedicated to assisting customers with disease-management issues. Our health management services offer customized solutions to bridge the gap between the clinical and commercial phases of product development, providing expertise across a broad range of pre-launch, launch, and post-launch opportunities. We believe that our commercial orientation, clinical and promotional expertise and international experience enable us to tailor programs to meet the diverse needs of the global pharmaceutical industry across a wide range of disciplines and local market conditions. 5 8 QUINTERNET(TM) Informatics Offerings QUINTERNET(TM) Informatics provides a broad range of knowledge-rich products and services that are used by the pharmaceutical, biotechnology and medical and surgical device industries, and healthcare providers, payors and patients to improve the quality of care and to efficiently manage the delivery of care at multiple points along the continuum of healthcare delivery. In addition, QUINTERNET(TM) Informatics serves as the foundation for our corporate strategy of providing a comprehensive electronic network to streamline communications and enhance information flow throughout the healthcare industry. Since its inception in early 1999, QUINTERNET(TM) Informatics has continued to expand the scope of the products and services offered to meet the needs of our customers. We are implementing a number of strategic initiatives to broaden our product and service offerings and to create opportunities for growth. We currently compete in two key market segments: Market Research and Sales Management and Optimization. Through the integration of our QUINTERNET(TM) proprietary database, which we believe is the healthcare industry's largest database combining medical and pharmaceutical data, with our Internet initiative, we intend to (1) develop innovative new Market Research and Sales Management and Optimization products and services, (2) build upon our initial success in the Clinical Research & Development knowledge-rich information products and services market segment and (3) leverage our investment into opportunities for both our Product Development and Commercial Services offerings. Market Research. Through our Scott-Levin brand, QUINTERNET(TM) Informatics provides pharmaceutical and healthcare customers market research analysis and information tools. The Scott-Levin products and services include (1) proprietary healthcare databases and syndicated market research audits, (2) managed healthcare services, (3) state government affairs services, (4) issues-oriented strategic studies and surveys and (5) consulting services and software solutions. Proprietary healthcare databases and syndicated market research audits. Through self-administered surveys, we maintain comprehensive proprietary databases that contain (1) information collected from physicians on their diagnoses and prescribing activities, (2) information regarding the incidence of, and response to, direct selling and other promotion activities, (3) information regarding healthcare legislation and key influencers in the United States and (4) managed care information, detailing cost containment measures imposed by United States managed care organizations, or MCOs, that influence or restrict physicians' prescribing activities. Our databases hold de-identified patient-level data. In addition, pursuant to a contract with National Data Corporation, or NDC, we obtain prescription information that NDC collects from approximately 34,000 pharmacies located across the United States. With this prescription information, we create projected state and national data on product-level prescription movement. Our syndicated market research audits are generated from databases containing information collected by questionnaire, diary or personal interview, dispensed prescriptions and secondary research. These audits include (1) the Source Prescription Audit, which analyzes pharmaceutical prescription activity, (2) the Physician Drug and Diagnosis Audit, which analyzes the pharmaceuticals prescribed by physicians relative to associated diagnosis, (3) the Personal Selling Audit, or PSA, which analyzes the effectiveness of the client's sales activities to office-based physicians compared with those of its competitors, (4) the Hospital Personal Selling Audit, which complements the PSA by monitoring and analyzing sales activity to hospital-based physicians, (5) the Physician Meeting and Event Audit and Rx Link, which assesses the impact of promotional activity on subsequent attendee prescribing, (6) the HIV Therapy Audit, which provides a projectable database tracking physicians who treat HIV positive patients, (7) the Direct-to-Consumer Advertising Audit, designed to evaluate and measure the impact of direct-to-consumer advertising on physicians and consumers, (8) the Professional Journal Audit, which provides a recap of advertising in medical and professional publications, and (9) the NP/PA Promotional Audit, which measures personal selling activity to Nurse Practitioners and Physician Assistants. Managed health care services. We provide a range of services designed to enable pharmaceutical companies to assess the impact of their promotions on the managed care and long-term care markets. These data also include managed care formulary status as well as prescription share analysis. Other 6 9 services include three-tier co-pay analysis and tracking of pharmaceutical industry managed healthcare sales forces. State government affairs. We offer a comprehensive state level healthcare legislation and regulation database, known as StateLine. This service tracks healthcare and healthcare related issues of interest in all 50 states, the District of Columbia and Puerto Rico. In addition, we supply profiles of the key government officials who are involved in shaping state healthcare legislation and regulations. Strategic studies and consulting. Services provided in this area include Pharmaceutical Sales Force Structures and Strategies and Pharmaceutical Company Image, two industry-standard reports on sales force activity and overall pharmaceutical company image. In addition, this service area offers other research services our customers use (1) to study specific issues and trends in the marketplace and the broader healthcare industry, (2) to evaluate the effectiveness of marketing programs, (3) to analyze in depth particular components of a product marketing program at any stage of its implementation and (4) for guidance on optimizing company strategy, sales and marketing activities and product commercialization. Custom studies. Our custom studies services provide customers with insights into how patients, physicians and payors utilize their products, and how their products can best be positioned. These services quantify the value of pharmaceuticals in terms of cost effectiveness and outcomes, helping pharmaceutical manufacturers to differentiate their products beyond the traditional measures of safety and efficacy. Sales Management and Optimization. Through our domain expertise and innovation in information technology, QUINTERNET(TM) Informatics provides sales management and optimization products and services to the pharmaceutical industry. We provide services that help pharmaceutical companies determine return on investment for targeted prescribers, optimal sales force resource allocation, territory alignment and product positioning. We also provide domain expertise in data warehousing, data cleansing and value-added consulting. QUINTERNET(TM) Informatics data warehousing and business information solutions integrate data from disparate sources, such as third party vendors, market research groups, promotional and contract groups, and customer databases into a central repository that can be accessed by geographically dispersed decision-makers. Our data cleansing solutions employ advanced techniques to transform raw and disparate customer data into what we believe is clean, accurate and actionable information. We also maintain proprietary regional profiling databases covering most United States healthcare facilities. Our profiling databases contain information on more than 200,000 healthcare facilities nationwide, including health management organizations, or HMOs, preferred provider organizations, pharmacy benefit managers, integrated health networks, group purchasing organizations, employer coalitions, mail service pharmacies and HMO-affiliated physicians. We also provide advanced software applications to help customers access healthcare information over the Internet to help solve healthcare marketing business problems. For example, WebInSite(TM) is an Internet-based managed care data and account management product designed to offer pharmaceutical national account managers and sales representatives a competitive edge in managing their managed care accounts. This product integrates data profiles of companies operating in the managed care environment into analytical reports and interactive applications to enable pharmaceutical marketers to achieve maximum efficiency and sales potential in each of their managed accounts. QUINTERNET(TM) Proprietary Database. Our QUINTERNET(TM) proprietary database together with our Internet initiative provides us with opportunities to broaden our product and service offerings. We use what we believe is the healthcare industry's largest database combining medical and pharmaceutical data to provide real-time information about pharmaceutical market use, medical interventions and outcomes. The data used are aggregated from pharmacy and medical transactions, de-identified and linked at the patient level, allowing in-depth analysis across the continuum of patient care -- from initial diagnosis to drug intervention and follow-up, without identifying individual patients. We obtain much of this data through an agreement with WebMD that gives us exclusive rights to de-identified ENVOY transaction data, as well as other data received by WebMD. We are dependent on WebMD for this data, and any interruption in the flow 7 10 of data to us from WebMD, as has happened on one occasion, would disrupt our current ability to provide QUINTERNET-based products and services. We are continuing development of our Rx Market Monitor product suite, formerly known as the QUINTERNET(TM) Series. Also, we are developing two portals, QUINTERNET(TM) Real-time Pharma Management (R.P.M.) and QUINTERNET(TM) Physician R.P.M., that will provide access as appropriate to key information from an integrated repository of data. These portals are targeted for beta testing starting in mid-2001. CUSTOMERS AND MARKETING We coordinate our business development efforts across our service offerings through integrated business development functions, which direct the activities of business development personnel in each of our United States locations, as well as other key locations throughout Europe, Asia-Pacific, Canada and Latin America. For the year ended December 31, 2000, approximately 56.0% of our net revenue from external customers was attributed to operations in the United States and 44.0% to operations outside the United States. Please refer to the notes to our consolidated financial statements included in Item 8 of this Form 10-K for further details regarding our foreign and domestic operations. Approximately 34.5%, 38.8%, and 39.1% of our net revenue was attributed to our clinical development services in 2000, 1999 and 1998, respectively; approximately 39.4%, 37.5% and 41.2% of our net revenue was attributed to our commercialization services in 2000, 1999 and 1998, respectively; and approximately 14.3%, 13.6% and 11.3% of our net revenue was attributed to our early development and laboratory services in 2000, 1999 and 1998 respectively. Neither our integrated strategic services nor our informatics services accounted for more than 10% of our net revenue in any of these years. ENVOY is accounted for as a discontinued operation as a result of its sale to WebMD in May 2000; therefore, the results of ENVOY through the date of sale are not included in our net revenue and are reported separately. In the past, we have derived, and may in the future derive, a significant portion of our net revenue from a relatively limited number of major projects or customers. As pharmaceutical companies continue to outsource large projects and studies to fewer full-service providers, the concentration of business could increase. We may experience concentration in 2001 and in future years. Although no customer accounted for more than 10% of our consolidated net revenue in 1998, Aventis S.A. accounted for approximately 10% and 11% of our consolidated net revenue in 2000 and 1999, respectively. COMPETITION The market for our product development services is highly competitive, and we compete against traditional contract research organizations, or CROs, and the in-house research and development departments of pharmaceutical companies, as well as universities and teaching hospitals. Among the traditional CROs, there are several hundred small, limited-service providers, several medium-sized firms, and only a few full-service companies with global capabilities. Consolidation among CROs likely will result in greater competition among the larger contract research providers for customers and acquisition candidates. Our primary contract research competitors include Covance Inc., PAREXEL International Corp. and Pharmaceutical Product Development, Inc. In commercial development services, we compete against the in-house sales and marketing departments of pharmaceutical companies and other contract sales organizations in each country in which we operate. We also compete against national consulting firms offering healthcare consulting and medical communications services, including boutique firms specializing in the healthcare industry and the healthcare departments of large firms. Our primary commercial services competitors include Ventiv Health and Professional Detailing, Inc. Competitors for our informatics services include IMS Health Incorporated and NDC. We believe that we compete favorably in these areas. Competitive factors for product development services include (1) previous experience, (2) medical and scientific experience in specific therapeutic areas, (3) the quality of contract research, (4) speed to completion, (5) the ability to organize and manage large-scale trials on a global basis, (6) the ability to manage large and complex medical databases, (7) the ability to provide statistical and regulatory services, (8) the ability to recruit investigators, (9) the ability to integrate information technology with systems to 8 11 improve the efficiency of contract research, (10) an international presence with strategically located facilities and (11) financial viability and price. The primary competitive factors affecting commercial services are the proven ability to quickly assemble, train and manage large qualified sales forces to handle broad scale launches of new drugs and price. Competitive factors affecting healthcare consulting and medical communications services include experience, reputation and price. Although our informatics services have been systematically established over many years, our market position may be affected in the future by competitors' efforts to create or acquire enhanced databases or to develop and market new information products and services. In addition, our market position could be adversely affected if our competitors secure exclusive rights to data that we require for our informatics services. Notwithstanding all these competitive factors, we believe that the synergies arising from integrating product development services with commercial development services, supported by global operations and information technology and supplemented by our informatics capabilities differentiate us from our competitors. EMPLOYEES As of January 31, 2001, we had approximately 18,219 employees, comprised of approximately 7,717 in the Americas, 8,829 in Europe and Africa and 1,673 in the Asia-Pacific region. As of January 31, 2001, our Product Development Group had 8,953 employees, our Commercial Services Group had 8,448 employees, and our QUINTERNET Informatics Group had 480 employees. In addition, 56 employees worked on our Internet capabilities and 282 were in our centralized operations/corporate office. BACKLOG We report backlog based on anticipated net revenue from uncompleted projects which have been authorized by the customer, through a written contract or otherwise. Once work begins on a project, net revenue is recognized over the duration of the project. Using this method of reporting backlog, at December 31, 2000, backlog was approximately $1.9 billion, as compared to approximately $2.2 billion at December 31, 1999. We believe that backlog may not be a consistent indicator of future results because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be terminated by the customer or delayed by regulatory authorities. Moreover, the scope of work can change during the course of a project. POTENTIAL LIABILITY In conjunction with our product development services, we contract with physicians to serve as investigators in conducting clinical trials to test new drugs on human volunteers. 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. Although we do not believe we are legally accountable for the medical care rendered by third party investigators, it is possible that we could be held liable for the claims and expenses 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. In addition, as a result of our Phase I clinical trial facilities, we could be liable for the general risks associated with a Phase I facility including, but 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 the services we perform through each of our service groups. For example, we could be held liable for errors or omissions or breach of contract if one of our labs inaccurately reports or fails to report lab results or if our informatics products violate rights of third parties. We believe that some of our risks are reduced by one or more of the following: (1) contractual indemnification provisions with customers and investigators, (2) insurance maintained by customers and investigators and by us and (3) various regulatory requirements, including the use of institutional review boards and the procurement of each volunteer's informed consent to participate in the study. The contractual indemnifications generally do not fully protect us against certain of our own actions such as negligence. Contractual arrangements are subject to negotiation with customers and the terms and scope of such indemnification vary from customer to 9 12 customer and from trial to trial. Additionally, financial performance of these indemnities is not secured. Therefore, we bear the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations. We maintain professional liability insurance that covers worldwide territories in which we currently do business and includes drug safety issues as well as data processing errors and omissions. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim outside the scope of or in excess of a contractual indemnification provision or beyond the level of insurance coverage or in the event that an indemnifying party does not fulfill its indemnification obligations. GOVERNMENT REGULATION Our preclinical, laboratory and clinical trial supply services are subject to various regulatory requirements designed to ensure the quality and integrity of the data or products of these services. The industry standard for conducting preclinical laboratory testing is embodied in the good laboratory practice, or GLP, regulations. The requirements for facilities engaging in clinical trial supplies preparation, labeling and distribution are set forth in the current good manufacturing practices, or cGMP, regulations. GLP and cGMP regulations have been mandated by the FDA and the Department of Health in the U.K., and adopted by similar regulatory authorities in other countries. GLP and cGMP stipulate requirements for facilities, equipment, supplies and personnel engaged in the conduct of studies to which these regulations apply. The regulations require adherence to written, standardized procedures during the conduct of studies and the recording, reporting and retention of study data and records. To help assure compliance, we have established Quality Assurance programs at our preclinical, laboratory and clinical trial supply facilities which monitor ongoing compliance with GLP and cGMP regulations by auditing study data and conducting regular inspections of testing procedures. Our clinical laboratory services are subject to the requirements of the Clinical Laboratory Improvement Amendments of 1988. GCP regulations and guidelines contain the industry standard for the conduct of clinical research and development studies. The FDA and many other regulatory authorities require that study results and data submitted to such authorities be based on studies conducted in accordance with GCP provisions. These provisions include: (1) complying with specific regulations governing the selection of qualified investigators, (2) obtaining specific written commitments from the investigators, (3) ensuring the protection of human subjects by verifying that Institutional Review Board independent ethics committee approval and patient informed consent are obtained, (4) instructing investigators to maintain records and reports, (5) verifying drug or device accountability, (6) reporting of adverse events, (7) adequate monitoring of the study for compliance with GCP requirements and (8) permitting appropriate governmental authorities access to data for their review. Records for clinical studies must be maintained for specified periods for inspection by the FDA during audits. Significant non-compliance with GCP requirements can result in the disqualification of data collected during the clinical trial. FDA regulations on electronic records and signatures set forth requirements for data in electronic format supporting any submissions to the FDA. We write our standard operating procedures related to clinical studies in accordance with regulations and guidelines appropriate to the region where they will be used, thus helping to ensure compliance with GCP. Within Europe, we perform our work subject to the European Community Note for Guidance "Good Clinical Practice for Trials on Medicinal Products in the European Community." Studies to be submitted to the European Medicines Evaluation Agency must meet the requirements of the International Congress of Harmonization -- GCP. In addition, FDA regulations and guidelines serve as a basis for our North American standard operating procedures. Our offices in the Asia-Pacific region have developed standard operating procedures in accordance with their local requirements and in harmony with our North American and European operations. Our commercial development services are subject to detailed and comprehensive regulation in each geographic market in which we operate. Such regulation relates, among other things, to the distribution of drug samples, the qualifications of sales representatives and the use of healthcare professionals in sales 10 13 functions. In the United States our commercial development services are subject to the Prescription Drug Marketing Act with regard to the distribution of drug samples. In the U.K., they are subject to the Association of the British Pharmaceutical Industry Code of Practice for the Pharmaceutical Industry, which prescribes, among other things, an examination that must be passed by sales representatives within two years of their taking up employment, and which prevents the employment of healthcare professionals as sales representatives. We follow similar guidelines which are in effect in the other countries where we offer commercial development services. Our United States laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as the safety and health of laboratory employees. All of our laboratories are subject to applicable federal, state and national laws and regulations relating to the storage and disposal of all laboratory specimens including the regulations of the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Transportation, the National Fire Protection Agency and the Resource Conservation and Recovery Act. The use of controlled substances in testing for drugs of abuse is regulated by the United States Drug Enforcement Administration, or DEA. All of our laboratories using controlled substances for testing purposes are licensed by the DEA. The regulations of the United States Department of Transportation, the Public Health Service and the Postal Service apply to the surface and air transportation of laboratory specimens. Our laboratories also are subject to International Air Transport Association regulations, which govern international shipments of laboratory specimens. Furthermore, when the materials are sent to a foreign country, the transportation of such materials becomes subject to the laws, rules and regulations of such foreign country. In addition to its comprehensive regulation of safety in the workplace, the United States Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals, and transmission of blood-borne and airborne pathogens. Furthermore, certain employees receive initial and periodic training to ensure compliance with applicable hazardous materials regulations and health and safety guidelines. Although we believe that we are currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. Our disease management and healthcare information management services relate to the diagnosis and treatment of disease and are, therefore, subject to substantial governmental regulation. In addition, 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 heavily regulated. Legislation has been proposed at both the state and federal levels that may (1) require us to implement security measures that could involve substantial expenditures or (2) limit our ability to offer some of our products and services. Specifically, various initiatives being considered at the federal level could impact the manner in which we conduct our informatics business. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires the use of standard transactions, standard identifiers, security and other administrative simplification provisions and instructs the Secretary of Health and Human Services, or HHS, to promulgate regulations regarding these standards. Final rules requiring standardized electronic transactions of health information were published by the Secretary in August 2000 and have a compliance deadline of October 16, 2002. The Act also requires the Secretary of HHS to develop recommendations regarding the privacy of individually identifiable health information. On September 11, 1997, the Secretary presented her recommendations, which, among other things, advised that patient information should not be disclosed except when authorized by the patient. This Act further established an August 1999 deadline for Congress to enact privacy legislation and directed the Secretary to issue regulations setting privacy standards to protect health information that is transmitted electronically in the event that Congress missed its deadline. Congress did not meet the August 1999 deadline. 11 14 On December 28, 2000, the Secretary issued the final rule on Standards for Privacy of Individually Identifiable Health Information to implement the privacy requirements for HIPAA. These regulations generally (1) impose standards for entities transmitting or maintaining protected data in an electronic, paper or oral form with respect to the rights of individuals who are the subject of protected health information; and (2) establish procedures for (a) the exercise of those individuals' rights and (b) the uses and disclosure of protected health information. Unless properly extended by Congress or the current Administration, the effective date of the final rule is April 14, 2001 and the compliance date is April 14, 2003. The impact of such legislation and regulations relating to health information cannot be predicted. Such legislation or regulations could materially affect our business. Compliance with the final regulations must be no later than 24 months after their effective date, and we are preparing to comply with this timetable. In addition, broad-based health information privacy legislation restricting third party processors from using, transmitting or disclosing certain patient data without specific patient consent has been introduced in the United States Congress and certain state legislatures. If such legislation were adopted, it could prevent or restrict third party processors from using, transmitting or disclosing certain treatment and clinical data. It is difficult to predict the impact of the legislation and regulations described above, but such legislation and regulations could materially adversely affect our business. The Market Research Code of Conduct, a pharmaceutical industry-promulgated code of conduct to which we adhere to in connection with our informatics business, provides that the identity of the individual researched may never be disclosed to the company sponsoring such research without such individual's consent. We supply only aggregated statistics to the sponsoring company when information is generated from market research databases. As recommended by the board of directors of the Pharmaceutical Manufacturer's Association, our informatics databases do not contain patient names and certain other personal identifiers, thus preserving confidentiality. We are directly subject to certain restrictions on the collection and use of data. In the United States, certain states have enacted legislation prohibiting the use of personally identifiable prescription drug information without consent. Because our informatics business generally does not receive information regarding the identity of patients, we believe that such state legislation will have no material adverse effect on our business. There can be no assurance that future legislation or regulations will not directly or indirectly restrict the dissemination of information regarding physicians or prescriptions. Such legislation, if enacted, could have a material adverse effect on our informatics operations. ITEM 2. PROPERTIES As of January 31, 2001 we had approximately 124 offices located in 39 countries. Our executive headquarters is located adjacent to Research Triangle Park, North Carolina. We maintain substantial offices serving our Product Development Group in Durham, North Carolina; Kansas City, Missouri; Smyrna, Georgia; Bracknell, England; Irene, South Africa; Tokyo, Japan; and Singapore. We also maintain substantial offices serving our Commercial Development Group in Parsippany, New Jersey; Falls Church, Virginia; Hawthorne, New York; Marlow, England, and Tokyo, Japan. Substantial offices serving our Informatics Group are located in Newtown, Pennsylvania and Chicago, Illinois. We own facilities that serve our Product Development Group in Lenexa, Kansas; London, England; Riccarton, Scotland; Bathgate, Scotland; Glasgow, Scotland; Freiburg, Germany; and Pretoria, South Africa. We also own a facility in Gotenba City, Japan that serves our Commercial Development Group. Additionally, we own a corporate office in London, England. All of our other offices are leased. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. ITEM 3. 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 12 15 amended complaint purporting to represent a class of purchasers of our stock or call options, and sellers of put options, during the period between April 21, 1999, and September 15, 1999. The amended complaint alleges 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 believed the claims to be without merit and intended to defend the suit vigorously. Accordingly, we and the named officers and directors filed a motion to dismiss the amended complaint. Immediately prior to the hearing scheduled on February 6, 2001, on the motion to dismiss, the parties agreed to settle the lawsuit. The parties are negotiating a memorandum of understanding to present before the court for approval. In February 1999, Kenneth Hodges ("Hodges") 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 reached a settlement with Hodges under which Hodges acknowledged that we had no liability with respect to the lawsuit. Hodges released all claims against us and has filed a Stipulation of Dismissal with Prejudice which has been entered by the Court. On August 17, 2000, Joseph Lewis filed a civil lawsuit in the State Court of Fulton County, State of Georgia naming as defendants Richard L. Borison, Bruce I. Diamond, Janssen Pharmaceutica, Inc., Zeneca, Inc., Novartis Pharmaceuticals Corporation and Quintiles Laboratories Limited, one of our subsidiaries. The plaintiff alleged that he suffered from schizophrenia and that he was given experimental drugs for this condition in connection with numerous clinical drug trials conducted by defendants Borison and Diamond between January 1988 and June 1996. The plaintiff alleged that the defendants and their agents conspired to conduct these drug trials on him, and that they improperly supervised, monitored and regulated the trials, causing him to have violent adverse reactions to the drugs involved in the trials. The plaintiff sought to recover his actual damages in unspecified amounts, medical expenses, litigation costs and punitive damages. The Plaintiff dismissed his claims against us, without prejudice. On January 26, 2001, a purported class action lawsuit was filed in the State Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp., Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited, one of our subsidiaries, on behalf of 185 Alzheimer's patients who participated in drug studies involving an experimental drug manufactured by defendant Novartis and their surviving spouses. The complaint alleges claims for breach of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia RICO violations, infliction of emotional distress, battery, negligence and loss of consortium as to class member spouses. The complaint seeks unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. We believe the claims to be without merit and intend to defend the suit vigorously. On February 25, 2001, we initiated a lawsuit in Superior Court of Wake County, North Carolina against WebMD Corporation. Our complaint alleged that WebMD's suspension of the delivery of data to us on February 24, 2001 was a material breach of the Data Rights Agreement we entered into with WebMD in May 2000, and we requested a preliminary injunction to require WebMD to continue providing the data to us pending final resolution of the action. We obtained a temporary restraining order on February 25, 2001 requiring WebMD to continue the delivery of data to us pursuant to the Data Rights Agreement. WebMD removed the suit to the United States District Court for the Eastern District of North Carolina on March 1, 2001 and moved to dissolve the temporary restraining order. On March 5, 2001, the court denied the defendant's motion to dissolve the temporary restraining order and, subsequently extended the temporary restraining order through March 16, 2001. On March 16 and March 21, the court entered a preliminary injunction requiring WebMD to continue the unaltered and uninterrupted flow of data. We intend to vigorously pursue the protection of our rights under the Data Rights Agreement. 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. 13 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICES Our common stock is traded on The Nasdaq Stock Market under the symbol "QTRN." The following table shows, for the periods indicated, the high and low sale prices per share on The Nasdaq Stock Market, based on published financial sources.
CALENDAR PERIOD HIGH LOW --------------- ---- --- Quarter ended March 31, 1999................................ $53.375 $34.625 Quarter ended June 30, 1999................................. 45.500 34.750 Quarter ended September 30, 1999............................ 41.938 16.875 Quarter ended December 31, 1999............................. 25.031 16.000 Quarter ended March 31, 2000................................ 35.000 15.313 Quarter ended June 30, 2000................................. 17.438 12.000 Quarter ended September 30, 2000............................ 20.250 12.563 Quarter ended December 31, 2000............................. $22.500 $12.500
As of February 2, 2001, there were approximately 30,399 beneficial owners of our common stock, including 1,399 holders of record. DIVIDEND POLICIES We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future, and we intend to retain future earnings for the development and expansion of our business. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. 14 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected Consolidated Statement of Operations Data set forth below for each of the years in the three-year period ended December 31, 2000 and the Consolidated Balance Sheet Data set forth below as of December 31, 2000 and 1999 are derived from our audited consolidated financial statements and notes thereto as included elsewhere herein. The selected Consolidated Statement of Operations Data set forth below for the years ended December 1997 and 1996, and the Consolidated Balance Sheet Data set forth below as of December 31, 1998, 1997 and 1996 are derived from our consolidated financial statements. During 2000, we completed the sale of our electronic data interchange unit, ENVOY Corporation, and as such the results of ENVOY, for all periods presented, have been reported separately as a discontinued operation in the consolidated financial statements. Our consolidated financial statements have been restated to reflect material acquisitions in transactions accounted for as poolings of interests. However, the consolidated financial statements have not been restated to reflect certain other acquisitions accounted for as pooling of interests where we determined that the consolidated financial data would not have been materially different if the pooled companies had been included. For such immaterial pooling of interests transactions, which include three transactions in 1998 and one transaction in 1997, our financial statements for the year of each transaction have been restated to include the pooled companies from January 1 of that year, but the financial statements for years prior to the year of each transaction have not been restated because the effect of such restatement would be immaterial. The selected consolidated financial data presented below should be read in conjunction with our audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- -------- -------- Net revenue....................................... $1,659,910 $1,607,087 $1,221,776 $885,557 $627,251 (Loss) income from operations..................... (68,170) 136,355 129,389 91,814 46,495 (Loss) income from continuing operations before income taxes.................................... (51,005) 115,910 125,567 89,439 26,864 (Loss) income from continuing operations.......... (34,174) 73,168 85,643 58,063 11,625 Income from discontinued operation, net of income taxes........................................... 16,770 36,123 2,926 (9,197) (37,217) Extraordinary gain from sale of discontinued operation, net of income taxes.................. 436,327 -- -- -- -- Net income (loss) available for common shareholders.................................... $ 418,923 $ 109,291 $ 88,569 $ 48,866 $(27,377) ========== ========== ========== ======== ======== Basic net income (loss) per share: (Loss) income from continuing operations........ $ (0.29) $ 0.64 $ 0.82 $ 0.58 $ 0.13 Income (loss) from discontinued operation....... 0.14 0.32 0.03 (0.09) (0.41) Extraordinary gain from sale of discontinued operation..................................... 3.76 -- -- -- -- ---------- ---------- ---------- -------- -------- Basic net income (loss) per share............... $ 3.61 $ 0.96 $ 0.85 $ 0.49 $ (0.30) ========== ========== ========== ======== ======== Diluted net income (loss) per share: (Loss) income from continuing operations........ $ (0.29) $ 0.63 $ 0.77 $ 0.54 $ 0.13 Income (loss) from discontinued operation....... 0.14 0.31 0.03 (0.09) (0.41) Extraordinary gain from sale of discontinued operation..................................... 3.76 -- -- -- -- ---------- ---------- ---------- -------- -------- Diluted net income (loss) per share............. $ 3.61 $ 0.94 $ 0.80 $ 0.46 $ (0.30) ========== ========== ========== ======== ======== Weighted average shares outstanding:(1) Basic........................................... 115,968 113,525 104,799 99,908 91,693 Diluted......................................... 115,968 115,687 110,879 107,141 91,693
AS OF DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- -------- -------- Cash and cash equivalents......................... $ 330,214 $ 191,653 $ 128,621 $ 84,597 $ 76,129 Working capital, excluding discontinued operation(2).................................... 308,684 78,039 197,005 166,866 103,736 Total assets...................................... 1,961,578 1,607,565 1,171,777 960,803 694,517 Long-term debt including current portion.......... 38,992 185,765 193,270 189,507 191,509 Shareholders' equity.............................. $1,404,706 $ 991,759 $ 646,132 $517,283 $278,574 Employees......................................... 18,060 20,496 16,732 12,717 8,998
- --------------- (1) Restated to reflect the two-for-one stock split of our common stock effected in the form of a 100% stock dividend in December 1997. (2) Working capital of discontinued operation was $36.0 million in 1999, $42.4 million in 1998, $18.0 million in 1997 and $47.5 million in 1996. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Unless otherwise noted, all foreign currency denominated amounts due, subsequent to December 31, 2000, have been translated using the Thursday, December 28, 2000 foreign exchange rates as published in the December 29, 2000 edition of the Wall Street Journal. OVERVIEW Quintiles Transnational Corp. improves healthcare by bringing new medicines to patients faster and providing knowledge-rich medical and drug data to advance the quality and cost effectiveness of healthcare. We are a global market leader in helping pharmaceutical, biotechnology and medical device companies market and sell their products. We also provide insightful market research solutions and strategic analyses to support healthcare decisions. Based on industry analyst reports, we are the largest company in the pharmaceutical outsourcing services industry as ranked by 2000 net revenue; the net revenue of the second largest company was over $790 million less than our 2000 net revenue. During 2000, we generated solutions to help guide the pharmaceutical industry through a period of transformation by helping our customers stay ahead of ever-changing market conditions. Our evolution from outsourcing to partnering, we believe, reinforces our global position. The following initiatives were implemented in 2000 to align our business more closely with our customers needs: During 2000, we announced and implemented a restructuring plan designed to streamline the organization by consolidating operations. As part of the restructuring, we began the implementation of a shared services environment for our finance, human resources and information technology services worldwide, and we also adopted a more centralized approach to the product development group's clinical data management, regulatory and drug safety, and business development functions. In May 2000, we completed the sale of our electronic data interchange unit, ENVOY Corporation, to WebMD Corporation. Prior to the sale, ENVOY transferred its informatics subsidiary, Synergy Health Care, Inc., to us. We received $400 million in cash and 35 million shares of WebMD common stock in exchange for our entire interest in ENVOY and a warrant to acquire 10 million shares of our common stock at $40 per share. We retained exclusive rights to de-identified ENVOY transaction data and to certain other de-identified data available from WebMD, subject to limited exceptions. We agreed to share with WebMD a royalty derived from net operating income of products using the licensed data. We are currently in a dispute with WebMD regarding our rights to this data. Upon closing the sale of ENVOY, we formed a strategic alliance with WebMD to develop and market a web-based suite of integrated products and services for the pharmaceutical industry. These products and services will be designed to bring Internet speed and efficiency to the drug development and marketing process. We are currently in a dispute with WebMD regarding this alliance. Consistent with the shift in focus of our pre-clinical operations from basic toxicology to more advanced technologies, such as genomics and proteomics, we sold our general toxicology operations in Ledbury, Hereforeshire, U.K. in June 2000. CONTRACT REVENUE We consider net revenue, which excludes reimbursed costs, our primary measure of revenue growth. Substantially all net revenue for the product development and commercialization service groups is earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. Many of our contracts are fixed price, with some variable components, and range in duration from a few months to several years. We are also party to fee-for-service and unit-of-service contracts. We recognize net revenue based upon (1) percentage of completion (utilizing input or output measures as appropriate) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed for fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. 16 19 Our commercialization service group has entered into agreements with certain customers, whereby we provide a dedicated sales force and fund certain sales and marketing expenses, and we receive payments based on the achievement of certain sales levels of the promoted product. During the sales force recruitment and training phase, we defer certain costs and will amortize those costs over the lesser of the contractual termination period (generally one year) or the proportion to revenue recognized. Our contracts generally provide for price negotiation upon scope of work changes. We recognize revenue related to these scope changes when the underlying services are performed according to a binding commitment. Most contracts are terminable upon 15 - 90 days' notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Each contract specifies billing and payment procedures. Generally, the procedures require a portion of the contract fee to be paid at the time the project is initiated with subsequent contract billings and payments due periodically over the length of the project's term in accordance with contractual provisions. Revenue recognized in excess of billings is classified as unbilled services, while billings in excess of revenue recognized are classified as unearned income. We report backlog based on anticipated net revenue from uncompleted projects which have been authorized by the customer through a written contract or otherwise. Using this method of reporting backlog, at December 31, 2000, 1999 and 1998, our backlog was approximately $1.9 billion, $2.2 billion and $1.9 billion, respectively. We believe that backlog may not be a consistent indicator of future results because backlog can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, loss or significant delay of contracts or a change in the scope of a project during the course of a contract. RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 Net revenue for the year ended December 31, 2000 was $1.7 billion, an increase of $52.8 million or 3.3% over 1999 net revenue of $1.6 billion. Factors contributing to the growth included an increase of contract service offerings, an increase in services rendered under existing contracts, the initiation of services under contracts awarded subsequent to December 31, 1999 and our acquisitions accounted for under purchase accounting completed subsequent to January 1, 1999 which contributed approximately $48.4 million of 2000 net revenue as compared to $36.2 million of 1999 net revenue. These factors were partially offset by less than expected new business and the effects of large commercialization contracts being converted in-house instead of being renewed. We experienced growth in the Americas and Asia Pacific regions. The decrease that we experienced in the Europe and Africa region was primarily due to the effect of foreign currency fluctuations related to the strengthening of the US dollar relative to the euro and other European currencies. Direct costs, which include compensation and fringe benefits for billable employees, and other expenses directly related to contracts, were $993.8 million or 59.9% of 2000 net revenue versus $883.3 million or 55.0% of 1999 net revenue. The increase in direct costs as a percentage of net revenue was primarily attributable to a decrease in our realization rates during 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 $565.8 million or 34.1% of net revenue for 2000 versus $505.2 million or 31.4% of 1999 net revenue. 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, approximately 770 positions worldwide will be eliminated and as of December 31, 2000, 601 individuals have been terminated. Most of the eliminated positions were in the product development service group. 17 20 In the fourth quarter of 2000 we updated our expectations for the restructuring plan which resulted in a reduction of the expected cost by $6.9 million. This reduction was made up of $6.3 million in severance payments and $632,000 in exit costs. The severance reduction resulted primarily from a higher than expected number of voluntary terminations, reduced outplacement costs and related fringe benefits. Also during the fourth quarter, management conducted a detailed review of the resource levels within selected service groups. Based on this review, we adopted a follow-on restructuring plan resulting in a restructuring charge of $7.1 million. The restructuring charge consists of $5.8 million related to severance payments and $1.3 million related to exit costs. As part of this plan, approximately 220 positions will be eliminated and as of December 31, 2000, 42 individuals have been terminated. Most of the eliminated positions were in the commercialization service group. Also included in general and administrative expenses for year-ended December 31, 1999 were $8.8 million of incremental costs related to our Year 2000 program. Excluding these incremental costs, general and administrative expenses increased $69.4 million primarily due to costs associated with our Internet initiative of $21.4 million, the implementation of a global shared service center of $5.7 million and the implementation of global account teams of $6.5 million, as well as delays in realizing the benefits of our restructuring program. Depreciation and amortization were $92.6 million or 5.6% of 2000 net revenue versus $82.3 million or 5.1% of 1999 net revenue. Amortization expenses increased $1.9 million primarily due to the goodwill amortization resulting from our 1999 acquisitions accounted for under purchase accounting. The remaining $8.4 million increase is primarily due to the increase in our capitalized asset base. Consistent with the 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. Loss from operations was $68.2 million or (4.1%) of 2000 net revenue versus income from operations of $136.4 million or 8.5% of 1999 net revenue. Excluding the non-recurring charges of $75.9 million and the $24.3 million for the Internet initiative, income from operations was $32.0 million or 1.9% of 2000 net revenue. Other income was $17.2 million in 2000 as compared to other expense of $20.4 million in 1999. Included in other income are net realized gains from investments in equity securities of $578,000 and $2.1 million for the year ended December 31, 2000 and 1999, respectively. Excluding transaction costs and these gains, other income was $16.6 million in 2000 versus $3.8 million in 1999. The $12.8 million increase is primarily due to an increase in net interest income. The effective income tax rate for 2000 was (33.0%) versus a 36.9% rate in 1999. Excluding transaction costs, which are not generally deductible for tax purposes, the effective income tax rate for 1999 would have been 30.1%. Since we conduct operations on a global basis, our effective income tax rate may vary. See "-- Income Taxes." Analysis By Segment The following table summarizes the operating activities for our three reportable segments for the years ended December 31, 2000 and 1999. We do not include net revenue and expenses related to the Internet initiative and non-recurring charges in our segment analysis (stated in millions).
NET REVENUE (LOSS)/INCOME FROM OPERATIONS ------------------------------ ------------------------------------- % OF NET % OF NET 2000 1999 GROWTH % 2000 REVENUE 1999 REVENUE -------- -------- -------- ------ -------- ------ -------- Product development....... $ 809.1 $ 848.6 (4.7)% $ (9.3) (1.2)% $ 74.4 8.8% Commercialization......... 790.2 706.1 11.9 55.6 7.0 66.0 9.4 QUINTERNET(TM) informatics............. 59.7 52.4 14.0 (14.2) (23.8) (4.1) (7.8) -------- -------- ------ ------ $1,659.0 $1,607.1 3.2% $ 32.0 1.9% $136.4 8.5% ======== ======== ====== ======
18 21 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 historically achieved. During 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. During the second half of 2000, the product development group began to realize benefits from the restructuring plan. The commercialization group's net revenue growth includes net revenue from an acquisition accounted for as a purchase that was completed subsequent to January 1, 1999 of $12.1 million for the year ended December 31, 2000 as compared to $6.3 million for the year ended December 31, 1999. The financial performance of this group is the result of strong growth in the Americas, primarily the US, and Asia Pacific regions offset by a weakening in the Europe and Africa region, primarily in the United Kingdom and Continental Europe. A portion of this stems from growth in the medical communications and strategic consulting services. During the second half of 2000, the commercialization group was negatively impacted by less than expected new business and the effect of large contracts being taken in-house by our customers instead of being renewed. The net revenue for the QUINTERNET(TM) informatics includes net revenue from an acquisition accounted for as a purchase that was completed subsequent to January 1, 1999 of $29.8 million for the year ended December 31, 2000 as compared to $24.6 million for the year ended December 31, 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 unique data products of the QUINTERNET(TM) informatics group. YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 Net revenue for the year ended December 31, 1999 was $1.6 billion, an increase of $385.3 million or 31.5% over net revenue for the year ended December 31, 1998 of $1.2 billion. Growth occurred across each of our geographic regions and each of our major service groups. 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 January 1, 1999 and our 1999 acquisitions accounted for under purchase accounting which contributed approximately $36.0 million of net revenue for the year ended December 31, 1999. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $883.3 million or 55.0% of 1999 net revenue versus $640.8 million or 52.4% of 1998 net revenue. The increase in direct costs as a percentage of net revenue was primarily attributable to a decrease in the utilization rates during the year ended December 31, 1999. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $505.2 million or 31.4% of 1999 net revenue versus $394.4 million or 32.3% of 1998 net revenue. Also included in general and administrative expenses were incremental costs related to our Year 2000 Program of $8.8 million for the year ended December 31, 1999 as compared to $2.6 million for the year ended December 31, 1998. The remaining $104.6 million increase in general and administrative expenses was primarily due to an increase in personnel, facilities and locations and outside services resulting from our growth. Depreciation and amortization expense was $82.3 million or 5.1% of 1999 net revenue versus $57.2 million or 4.7% of 1998 net revenue. Amortization expense increased $4.7 million due to the goodwill amortization resulting from our 1999 acquisitions accounted for under purchase accounting. The remaining $20.4 million increase is primarily due to the increase in our capitalized asset base. Income from operations was $136.4 million or 8.5% of 1999 net revenue versus $129.4 million or 10.6% of 1998 net revenue. 19 22 Other expense, which consists primarily of transaction costs and interest, increased to $20.4 million in 1999 from $3.8 million in 1998. Transaction costs included in other expense were $26.3 million in 1999 versus $3.5 million in 1998. Excluding these transaction costs, other income was $5.9 million for the year ended December 31, 1999 versus other expense of $347,000 for the year ended December 31, 1998. The $5.5 million fluctuation was due to an increase of $3.3 million of net interest income, an increase of $645,000 of gains on foreign currency and a $2.1 million realized gain on the sale of an investment in marketable equity securities. The effective income tax rate for 1999 was 36.9% versus a 31.8% rate in 1998. Excluding transaction costs, which are not generally deductible for income tax purposes, the effective income tax rate for 1999 would have been 30.1% versus a 30.9% rate for 1998. Since we conduct operations on a global basis, our effective income tax rate may vary. See "-- Income Taxes." The following table summarizes the operating activities for our three reportable segments for the years ended December 31, 1999 and 1998. We do not include net revenue and expenses related to the Internet initiative and non-recurring charges in our segment analysis (stated in millions).
NET REVENUE (LOSS)/INCOME FROM OPERATIONS ------------------------------ ------------------------------------- % OF NET % OF NET 1999 1998 GROWTH % 1999 REVENUE 1998 REVENUE -------- -------- -------- ------ -------- ------ -------- Product development....... $ 848.6 $ 615.5 37.9% $ 74.4 8.8% $ 67.9 11.0% Commercialization......... 706.1 580.1 21.7 66.0 9.4 55.2 9.5 QUINTERNET(TM) informatics............. 52.4 26.2 100.0 (4.1) (7.8) 6.3 24.1 -------- -------- ------ ------ $1,607.1 $1,221.8 31.5% $136.4 8.5% $129.4 10.6% ======== ======== ====== ======
The product development group's growth was slower than anticipated as a result of several factors, including, early termination and delays in clinical trials, utilization rates that were lower than historical levels and an increase of approximately $5.6 million in incremental costs incurred related to our Year 2000 Program. The commercialization group's net revenue includes approximately $6.3 million of net revenue contributed by a 1999 acquisition accounted for as a purchase. The net revenue for the QUINTERNET(TM) informatics includes net revenue from an acquisition accounted for as a purchase that was completed during 1999 of approximately $24.6 million. The QUINTERNET(TM) informatics group's financial performance was negatively impacted by an increase in amortization expense due to a 1999 acquisition accounted for as a purchase and the allocation of corporate overhead costs attributable to increased costs incurred to develop the informatics market in 1999. LIQUIDITY AND CAPITAL RESOURCES Cash flows generated from operations were $10.5 million in 2000 versus $123.8 million and $125.6 million in 1999 and 1998, respectively. Cash flows provided by investing activities in 2000 were $270.4 million, versus cash used in investing activities of $104.5 million and $76.0 million in 1999 and 1998, respectively. Investing activities for 2000 consisted primarily of $390.7 million of net proceeds from the sale of ENVOY, partially offset by capital asset purchases. Of these investing activities, capital asset purchases required $108.8 million in 2000 versus $158.1 million and $97.0 million in 1999 and 1998, respectively. Capital asset expenditures in 2000 included $25.2 million for the implementation of the shared service centers and $8.0 million for the purchase of the training academy in Japan. Capital asset expenditures in 1999 included approximately $35 million in connection with the acquisition of Aventis S.A.'s (formerly Hoechst Marion Roussel) Drug Innovation and Approval Facility. We believe that we will either pay the remainder of the purchase price, approximately $58 million, or enter into a long-term lease for the facility in 2001. The remaining capital expenditures were predominantly incurred in connection with the expansion of existing operations, the enhancement of information technology capabilities and the opening of new offices. Total working capital, excluding net assets of discontinued operation, increased $230.6 million to $308.7 million at December 31, 2000 from $78.0 million at December 31, 1999. This increase primarily results from 20 23 receiving $390.7 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. Trade accounts receivable and unbilled services increased 9.7% to $414.0 million at December 31, 2000 from $377.3 million at December 31, 1999. Trade accounts receivable and unbilled services, net of unearned income, increased 7.4% to $219.8 million at December 31, 2000 from $204.7 million at December 31, 1999. The number of days revenue outstanding in trade accounts receivable and unbilled services, net of unearned income, were 43 and 38 days at December 31, 2000 and December 31, 1999, respectively. Investments in debt securities were $107.8 million at December 31, 2000 versus $109.4 million at December 31, 1999. Our investments in debt securities consist primarily of U.S. Government Securities and money funds. Investments in strategic marketable equity securities at December 31, 2000 were $384.0 million, which includes $79.6 million of net unrealized losses, as compared to $45.2 million, which includes $29.7 million of net unrealized gains, at December 31, 1999. The increase in value primarily results from the 35 million shares of WebMD common stock we acquired in connection with the sale of ENVOY. In May 1999, we signed a commercialization agreement with CV Therapeutics, a development stage biopharmaceutical company, to commercialize one of its products. The agreement calls for us to conduct certain pre-launch activities, hire and train a dedicated sales force to promote the product and provide post- launch marketing and sales services for at least three years after launch and provide services in years four and five, if certain product sales levels are achieved. As part of this agreement, we acquired approximately $5.0 million of CVT common stock and will be required to provide a $10.0 million secured credit facility to CVT if the Federal Drug Administration accepts CVT's New Drug Application for the product. We have a $150 million senior unsecured credit facility with a U.S. bank. In addition, we have available to us a L10.0 million (approximately $14.9 million) unsecured line of credit with a U.K. bank and a L1.5 million (approximately $2.2 million) general bank facility with the same U.K. bank. At December 31, 2000, we did not have any outstanding balances on these facilities. In February 2000, the Board of Directors authorized us to repurchase up to $200 million of our common stock until February 2001. During 2000, we repurchased approximately 1.4 million shares for an aggregate price of $21.9 million. To enhance our repurchase program, we sold put options to an independent third party. The put options entitled the holder to sell a total of 500,000 shares of our common stock to us on January 2, 2001 at $13.7125 per share. The put options expired on January 2, 2001 in accordance with its terms. Shareholders' equity increased $412.9 million to $1.4 billion at December 31, 2000 from $991.8 million at December 31, 1999. In March 2001, the Board of Directors authorized us to repurchase up to $100 million of our common stock from time to time until March 1, 2002. Based on our current operating plan, we believe that our available cash and cash equivalents, 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. INCOME TAXES Since we conduct operations on a global basis, our effective income tax rate has depended and will continue to depend on the amount of profits in locations with varying income tax rates. Our results of operations will be impacted by changes in the income tax rates of the various jurisdictions and by changes in any applicable tax treaties. In particular, as the portion of our non-U.S. business varies, our effective income tax rate may vary significantly from period to period. Our effective tax rate may also depend upon the extent to 21 24 which we are allowed (and are able to use under applicable limitations) U.S. foreign tax credits in respect of income taxes paid on its foreign operations. INFLATION We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition. CONVERSION TO THE EURO CURRENCY On January 1, 1999, a new currency, the euro, became the legal currency for 11 of the 15 member countries of the European Economic Community. Between January 1, 1999 and January 1, 2002, governments, companies and individuals may conduct business in the member countries in both the euro and existing national currencies. On January 1, 2002, the euro will become the sole currency in the member countries. We conduct business in the member countries. We have reviewed the issues involved with the introduction of the euro including: (1) whether we may have to change the prices of our services in the different countries and (2) whether we will have to change the terms of any financial instruments in connection with our hedging activities. The use of the euro has not had a significant impact on our business or operations. Based on current information, we do not expect the conversion to the euro to have a material effect on our financial condition or results of operations. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," subsequently amended by SFAS No. 138. SFAS Nos. 133 and 138 require that upon adoption, all derivative instruments be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in other comprehensive income pending recognition in earnings. We adopted SFAS Nos. 133 and 138 when required to do so on January 1, 2001. Because of our limited use of derivatives, the adoption did not have a material impact nor do we not expect the application of Statement No. 133 and 138 to have a significant impact on our financial position or results of operations. MARKET RISK Market risk is the potential loss arising from adverse changes in the market rates and prices, such as foreign currency rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, we are exposed to various market risks, including changes in foreign currency exchange rates, interest rates and equity price changes, and we regularly evaluate our exposure to such changes. Our overall risk management strategy seeks to balance the magnitude of the exposure and the cost and availability of appropriate financial instruments. From time to time, we have utilized forward exchange contracts to manage our foreign currency exchange rate risk. We do not hold or issue derivative instruments for trading purposes. The following analyses present the sensitivity of our financial instruments to hypothetical changes in interest and foreign currency exchange rates that are reasonably possible over a one-year period. Foreign Currency Exchange Rates Approximately 44.0%, 45.8% and 50.9% of our net revenue for the years ended December 31, 2000, 1999, and 1998, respectively, was derived from our operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly-inflationary. Our financial statements are denominated in U.S. dollars, and accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries' financial results into U.S. dollars for purposes of reporting our consolidated financial results. Accumulated currency translation adjustments recorded as a 22 25 separate component (reduction) of shareholders' equity were ($42.2) million at December 31, 2000 as compared to ($15.5) million at December 31, 1999. We may be subject to foreign currency transaction risk when our service contracts are denominated in a currency other than the currency in which we earn fees or incur expenses related to such contracts. At December 31, 2000, our most significant foreign currency exchange rate exposures were in the British pound and the euro. We limit our foreign currency transaction risk through exchange rate fluctuation provisions stated in our contracts with customers, or we may hedge our transaction risk with foreign currency exchange contracts or options. We recognize changes in value in income only when foreign currency exchange contracts or options are settled or exercised, respectively. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2000. As of December 31, 2000, we had a short-term obligation denominated in a foreign currency (approximately L1.75 million). Assuming a hypothetical change of 10% in year-end exchange rates (a weakening of the U.S. dollar), the fair value of these instruments would increase by approximately $261,000. Interest Rates At December 31, 2000, our investment in debt securities portfolio consists primarily of U.S. Government securities, of which most are callable by the issuer at par, and money funds. The portfolio is primarily classified as available-for-sale and therefore these investments are recorded at fair value in the financial statements. These securities are exposed to market price risk which also takes into account interest rate risk. As of December 31, 2000, the fair value of the investment portfolio was $107.8 million, based on quoted market prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted market price is approximately $10.8 million. Equity Prices At December 31, 2000, we had investments in marketable equity securities. These investments are classified as available-for-sale and are recorded at fair value in the financial statements. These securities are subject to equity price risk. As of December 31, 2000, the fair value of these investments was $384.0 million, based on quoted equity prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted equity price is approximately $38.4 million. 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 23 26 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. 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 WebMD and certain other vendors for them to provide web-enablement services to help us develop this platform. Performance and other issues regarding the agreement currently are under dispute with WebMD. If WebMD or other vendors fail to perform as required, if we are unable to favorably resolve our current dispute with WebMD or if there are substantial delays in developing and implementing this platform, we may have to make substantial further investments, internally or with WebMD or third parties, to achieve our objectives. Also, these expenditures are likely to negatively impact 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. Our ability to provide informatics services depends on our agreement with WebMD. In order to provide our informatics products and 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 WebMD, we entered into a data rights agreement with WebMD to continue to provide us with the ENVOY data, as well as other data collected by WebMD. If WebMD fails to perform under this agreement, for example, by stopping transmission of data to us, or our access to data is otherwise significantly limited, we would be unable to provide some or all of our informatics services, which would have a negative impact on our business. On February 24, 2001, WebMD unilaterally stopped the transmission of data to us in violation of our rights under the data rights agreement. We have obtained a preliminary injunction requiring WebMD to 24 27 continue the unaltered and uninterrupted flow of data to us until the matter can be resolved, and we intend to pursue our rights under the data agreement. If we are unable to enforce our rights to this data, we would have to re-negotiate the terms of our agreement with WebMD or seek to obtain similar data from alternate sources. These options may not be available if WebMD or third parties are not willing to negotiate or provide terms that are acceptable to us, or are unable to give us access to the quality and timeliness of data that we need to support our informatics products. If we do not have continued access to data on the terms we negotiated with WebMD or on similar terms, our QUINTERNET Informatics service group would not be able to support its contracts with existing customers or continue development projects as currently planned, which would have a material adverse effect 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 eighteen months 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, $1.9 billion at December 31, 2000, based on anticipated net revenue from uncompleted projects that our customers have 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. Underperformance of our risk-sharing and gain-sharing strategies could have a negative impact on our financial performance. As part of our sales strategy, we enter into creative arrangements with customers in which we take on some of the risk of the potential success or failure of the customer's product. We may take risk through our PharmaBio transactions, which may include a strategic investment in a customer, or by taking an interest in the revenues from a customer's product. For example, we may build a sales organization for a biotechnology customer to commercialize a new product in exchange for a share in the revenues of the product. We must carefully analyze and select the customers and products with which we are willing to structure our risk-based deals. Our financial results would be adversely affected if our customers' products do not achieve the level of success that we anticipate and/or our return from the product or investment is less than our costs of performance or investment. 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 25 28 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. 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 26 29 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 and final laws and regulations may create a risk of liability and 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 or adopted at both the state and federal levels. Proposed and final federal regulations governing patient-specific information may (1) require us to implement new security measures that may require substantial expenditures or (2) limit our ability to offer some of our products and services. These regulations may also increase costs by creating new privacy requirements for our informatics business and mandating additional privacy procedures for our clinical research business. Additionally, states may adopt health information legislation or regulations that contain privacy and security provisions that are more burdensome than the proposed federal regulations. In our dispute with WebMD, WebMD has advised us that a number of state laws apply which may require modifications to access specifications for specific types of de-identified patient-level data. 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. There is a risk of civil or criminal liability if we are found to be responsible for any violations of applicable laws, regulations or duties relating to the use, privacy or security of health information. 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. We also have certain obligations to indemnify parties which provide us data for losses they may incur arising from claims that they have provided us data in violation of contract or other rights. 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. 27 30 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 44.0% of our 2000 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. Although we may hedge our transaction risk, there were no open foreign exchange contracts or options relating to service contracts at December 31, 2000. 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. We have one customer that accounted for 10.2% of our net revenues for the year ended December 31, 2000. These revenues resulted from services provided by each of our three 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. New healthcare legislation or regulation could restrict our informatics business. On December 28, 2000, the Secretary of the Department of Health and Human Services issued the final rule on Standards for Privacy of Individually Identifiable Health Information to implement the privacy requirements for HIPAA. These regulations generally (1) impose standards for covered entities transmitting or maintaining protected data in an electronic, paper or oral form with respect to the rights of individuals who are the subject of protected health information; and (2) establish limitations on and procedures for (a) the exercise of those individuals' rights and (b) the uses and disclosures of protected health information. Unless properly extended by Congress or President Bush's Administration the effective date of the final rule is April 14, 2001 and the compliance date is April 14, 2003. If state or federal 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. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is included under Item 7 of this report under the caption "Market Risk." 28 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue................................................ $1,659,910 $1,607,087 $1,221,776 Costs and expenses: Direct................................................... 993,795 883,274 640,764 General and administrative............................... 565,801 505,166 394,432 Depreciation and amortization............................ 92,567 82,292 57,191 Non-recurring charges: Restructuring......................................... 58,592 -- -- Disposal of business.................................. 17,325 -- -- ---------- ---------- ---------- 1,728,080 1,470,732 1,092,387 ---------- ---------- ---------- (Loss) income from operations.............................. (68,170) 136,355 129,389 Other income (expense): Interest income.......................................... 20,703 14,391 11,646 Interest expense......................................... (4,842) (11,233) (11,810) Transaction costs........................................ -- (26,322) (3,475) Other.................................................... 1,304 2,719 (183) ---------- ---------- ---------- 17,165 (20,445) (3,822) ---------- ---------- ---------- (Loss) income from continuing operations before income taxes.................................................... (51,005) 115,910 125,567 Income tax (benefit) expense............................... (16,831) 42,742 39,924 ---------- ---------- ---------- (Loss) income from continuing operations................... (34,174) 73,168 85,643 Income from discontinued operation, net of income taxes.... 16,770 36,123 2,926 Extraordinary gain from sale of discontinued operation, net of income taxes.......................................... 436,327 -- -- ---------- ---------- ---------- Net income................................................. $ 418,923 $ 109,291 $ 88,569 ========== ========== ========== Basic net income per share: (Loss) income from continuing operations................. $ (0.29) $ 0.64 $ 0.82 Income from discontinued operation....................... 0.14 0.32 0.03 Extraordinary gain from sale of discontinued operation... 3.76 -- -- ---------- ---------- ---------- Basic net income per share............................... $ 3.61 $ 0.96 $ 0.85 ========== ========== ========== Diluted net income per share: (Loss) income from continuing operations................. $ (0.29) $ 0.63 $ 0.77 Income from discontinued operation....................... 0.14 0.31 0.03 Extraordinary gain from sale of discontinued operation... 3.76 -- -- ---------- ---------- ---------- Diluted net income per share............................. $ 3.61 $ 0.94 $ 0.80 ========== ========== ========== Shares used in computing net income per share: Basic.................................................... 115,968 113,525 104,799 Diluted.................................................. 115,968 115,687 110,879
The accompanying notes are an integral part of these consolidated statements. 29 32 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 330,214 $ 191,653 Trade accounts receivable and unbilled services, net...... 413,992 377,278 Investments in debt securities............................ 31,080 32,476 Prepaid expenses.......................................... 31,984 37,216 Other receivables......................................... 16,850 21,571 Other current assets...................................... 12,555 6,420 Net assets of discontinued operation...................... -- 122,981 ---------- ---------- Total current assets................................ 836,675 789,595 Property and equipment: Land, buildings and leasehold improvements................ 199,197 182,648 Equipment and software.................................... 321,844 296,843 Furniture and fixtures.................................... 45,564 47,356 Motor vehicles............................................ 36,345 47,243 ---------- ---------- 602,950 574,090 Less accumulated depreciation............................. (210,990) (174,406) ---------- ---------- 391,960 399,684 Intangibles and other assets: Intangibles, net.......................................... 194,814 208,946 Investments in debt securities............................ 76,732 76,902 Investments in marketable equity securities............... 384,040 45,237 Deferred income taxes..................................... 29,175 49,786 Deposits and other assets................................. 48,182 37,415 ---------- ---------- 732,943 418,286 ---------- ---------- Total Assets........................................ $1,961,578 $1,607,565 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit........................................... $ 44 $ 12 Accounts payable.......................................... 65,027 69,349 Accrued expenses.......................................... 190,211 165,446 Unearned income........................................... 194,201 172,557 Income taxes payable...................................... 51,284 5,561 Deferred income taxes..................................... 4,774 5,744 Current portion of obligations held under capital leases.................................................. 12,640 14,727 Current portion of long-term debt and obligation.......... 7,387 154,671 Other current liabilities................................. 2,423 508 ---------- ---------- Total current liabilities........................... 527,991 588,575 Long-term liabilities: Obligations held under capital leases, less current portion................................................. 8,496 8,589 Long-term debt and obligation, less current portion....... 10,469 7,778 Deferred income taxes..................................... -- 6,108 Other liabilities......................................... 9,916 4,756 ---------- ---------- 28,881 27,231 ---------- ---------- Total liabilities................................... 556,872 615,806 Commitments and contingencies Shareholders' Equity: Preferred stock, none issued and outstanding at December 31, 2000 and 1999, respectively......................... -- -- Common Stock and additional paid-in capital, 115,933,182 and 115,118,347 shares issued and outstanding at December 31, 2000 and 1999, respectively................ 876,407 788,247 Retained earnings......................................... 622,985 204,062 Accumulated other comprehensive income (loss)............. (94,686) 1,677 Other equity.............................................. -- (2,227) ---------- ---------- Total shareholders' equity.......................... 1,404,706 991,759 ---------- ---------- Total liabilities and shareholders' equity.......... $1,961,578 $1,607,565 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 30 33 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- (IN THOUSANDS) Operating activities: Net income................................................ $ 418,923 $ 109,291 $ 88,569 Income from discontinued operation, net of income taxes... (16,770) (36,123) (2,926) Extraordinary gain from sale of discontinued operation, net of income taxes..................................... (436,327) -- -- --------- --------- --------- (Loss) income from continuing operations.................. (34,174) 73,168 85,643 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization............................. 92,567 82,292 57,191 Non-recurring transaction costs........................... -- 26,322 -- Restructuring charge...................................... 25,886 -- -- Loss on disposal of business.............................. 17,325 -- -- Net loss (gain) on sale of property and equipment......... 190 (355) 534 Gain on sale of marketable equity securities.............. (578) (2,057) -- Provision for (benefit from) deferred income taxes........ 12,460 (1,448) (1,728) Change in operating assets and liabilities: Accounts receivable and unbilled services............... (48,226) (76,156) (85,657) Prepaid expenses and other assets....................... (15,881) (16,493) (5,291) Accounts payable and accrued expenses................... 16,429 16,320 26,275 Unearned income......................................... 28,706 13,960 49,332 Income taxes payable and other current liabilities...... (84,285) 7,659 (780) Other..................................................... 95 585 81 --------- --------- --------- Net cash provided by operating activities................... 10,514 123,797 125,600 Investing activities: Proceeds from disposition of property and equipment....... 8,591 6,535 6,297 Proceeds from disposal of discontinued operation, net of expenses................................................ 390,722 -- -- Purchase of investments held-to-maturity.................. (1,296) (6,215) -- Maturities of investments held-to-maturity................ 465 86,683 10,593 Purchase of investments available-for-sale................ (2,717) (110,310) (125,413) Proceeds from sale of investments available-for-sale...... 5,296 25,296 130,422 Purchase of marketable equity securities.................. (14,379) (12,424) -- Proceeds from sale of marketable equity securities........ 3,514 5,913 -- Purchase of other investments............................. (1,617) -- -- Proceeds from other investments........................... 2,959 -- -- Acquisition of property and equipment..................... (108,782) (158,128) (96,954) Acquisition of businesses, net of cash acquired........... (15,169) 84,746 2,403 Payment of non-recurring transaction costs................ -- (26,322) -- Payment from (loan to) ESOP, net.......................... 2,857 -- (3,429) Other..................................................... (2) (233) 85 --------- --------- --------- Net cash provided by (used in) investing activities......... 270,442 (104,459) (75,996) Financing activities: Increase (decrease) in lines of credit, net............... 33 (909) (8,597) Proceeds from issuance of debt............................ 11,183 -- -- Repayment of debt......................................... (151,653) (4,341) (677) Principal payments on capital lease obligations........... (14,419) (13,865) (18,656) Issuance of common stock.................................. 21,748 19,724 24,280 Repurchase of common stock................................ (21,883) -- -- Dividend from discontinued operation...................... 17,086 47,070 150 Dividends paid by pooled entity........................... -- (1,089) (3,499) Other..................................................... -- (28) 827 --------- --------- --------- Net cash (used in) provided by financing activities......... (137,905) 46,562 (6,172) Effect of foreign currency exchange rate changes on cash.... (4,490) (2,868) 592 --------- --------- --------- Increase in cash and cash equivalents....................... 138,561 63,032 44,024 Cash and cash equivalents at beginning of year.............. 191,653 128,621 84,597 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 330,214 $ 191,653 $ 128,621 ========= ========= ========= Supplemental Cash Flow Information: Interest paid............................................. $ 5,435 $ 12,550 $ 11,617 Income taxes paid......................................... 64,451 32,961 22,286 Non-cash Investing and Financing Activities: Acquisition of property and equipment utilizing capitalized leases...................................... 12,948 12,871 19,531 Equity impact of mergers, acquisitions and dispositions... 82,557 206,275 5,046 Equity impact from exercise of non-qualified stock options................................................. 6,752 3,711 5,498 Marketable equity securities received from sale of discontinued operation.................................. 447,353 -- -- Unrealized (loss) gain on marketable securities, net of income tax.............................................. $ (69,619) $ 17,781 $ (572)
The accompanying notes are an integral part of these consolidated statements. 31 34 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE ADDITIONAL COMPREHENSIVE RETAINED INCOME PREFERRED COMMON PAID-IN INCOME EARNINGS (LOSS) STOCK STOCK CAPITAL ------------- -------- ------------- --------- ------ ---------- (IN THOUSANDS) Balance, December 31, 1997...... $ -- $ 12,002 $ (7,302) $ 43 $1,019 $512,123 Issuance of common stock........ -- -- -- -- 17 24,263 Principal payments on ESOP loan.......................... -- -- -- -- -- -- Loan to ESOP.................... -- -- -- -- -- -- Stock issued for acquisitions... -- (272) -- -- 11 4,474 Tax benefit from the exercise of non-qualified stock options... -- -- -- -- -- 15,603 Conversion of preferred stock by pooled entity................. -- -- -- (10) 10 -- Dividends paid by pooled entity........................ -- (3,181) -- -- -- -- Other equity transactions....... -- (1,500) -- -- -- 1,976 Comprehensive income: Net income.................... 88,569 88,569 -- -- -- -- Unrealized loss on marketable securities, net of tax...... (572) -- (572) -- -- -- Foreign currency adjustments................. 2,676 -- 2,676 -- -- -- -------- -------- -------- ---- ------ -------- Comprehensive income for year ended December 31, 1998....... 90,673 ======== Balance, December 31, 1998...... 95,618 (5,198) 33 1,057 558,439 Issuance of common stock........ -- -- -- -- 8 19,716 Principal payments on ESOP loan.......................... -- -- -- -- -- -- Stock issued for acquisitions... -- -- -- -- 51 206,224 Tax benefit from the exercise of non-qualified stock options... -- -- -- -- -- 3,711 Conversion of preferred stock by pooled entity................. -- -- -- (33) 33 -- Dividends paid by pooled entity........................ -- (1,089) -- -- -- -- Effect due to change in fiscal year of pooled entity......... -- 200 -- -- -- -- Other equity transactions....... -- 42 (128) -- -- (992) Comprehensive income: Net income.................... 109,291 109,291 -- -- -- -- Unrealized gain on marketable securities, net of tax...... 17,781 -- 17,781 -- -- -- Foreign currency adjustments................. (10,778) -- (10,778) -- -- -- -------- -------- -------- ---- ------ -------- Comprehensive income for year ended December 31, 1999....... 116,294 ======== Balance, December 31, 1999...... 204,062 1,677 -- 1,149 787,098 Issuance of common stock........ -- -- -- -- 22 21,018 Repurchase of common stock...... -- -- -- -- (13) (21,870) Issuance of stock warrants...... -- -- -- -- -- 32,300 Issuance of put option.......... -- -- -- -- -- 925 Stock option charge in ENVOY sale.......................... -- -- -- -- -- 50,040 Principal payments on ESOP loan.......................... -- -- -- -- -- -- Tax benefit from the exercise of non-qualified stock options... -- -- -- -- -- 6,752 Other equity transactions....... -- -- -- -- -- (1,014) Comprehensive income: Net income.................... 418,923 418,923 -- -- -- -- Unrealized loss on marketable securities, net of tax...... (69,619) -- (69,619) -- -- -- Foreign currency adjustments................. (26,744) -- (26,744) -- -- -- -------- -------- -------- ---- ------ -------- Comprehensive income for year ended December 31, 2000....... $322,560 ======== Balance, December 31, 2000...... $622,985 $(94,686) $ -- $1,158 $875,249 ======== ======== ==== ====== ======== EMPLOYEE STOCK OWNERSHIP PLAN LOAN GUARANTEE & OTHER TOTAL ---------------- ---------- (IN THOUSANDS) Balance, December 31, 1997...... $ (602) $ 517,283 Issuance of common stock........ -- 24,280 Principal payments on ESOP loan.......................... 215 215 Loan to ESOP.................... (3,429) (3,429) Stock issued for acquisitions... -- 4,213 Tax benefit from the exercise of non-qualified stock options... -- 15,603 Conversion of preferred stock by pooled entity................. -- -- Dividends paid by pooled entity........................ -- (3,181) Other equity transactions....... (1) 475 Comprehensive income: Net income.................... -- 88,569 Unrealized loss on marketable securities, net of tax...... -- (572) Foreign currency adjustments................. -- 2,676 ------- ---------- Comprehensive income for year ended December 31, 1998....... Balance, December 31, 1998...... (3,817) 646,132 Issuance of common stock........ -- 19,724 Principal payments on ESOP loan.......................... 756 756 Stock issued for acquisitions... -- 206,275 Tax benefit from the exercise of non-qualified stock options... -- 3,711 Conversion of preferred stock by pooled entity................. -- -- Dividends paid by pooled entity........................ -- (1,089) Effect due to change in fiscal year of pooled entity......... -- 200 Other equity transactions....... 834 (244) Comprehensive income: Net income.................... -- 109,291 Unrealized gain on marketable securities, net of tax...... -- 17,781 Foreign currency adjustments................. -- (10,778) ------- ---------- Comprehensive income for year ended December 31, 1999....... Balance, December 31, 1999...... (2,227) 991,759 Issuance of common stock........ -- 21,040 Repurchase of common stock...... -- (21,883) Issuance of stock warrants...... -- 32,300 Issuance of put option.......... -- 925 Stock option charge in ENVOY sale.......................... -- 50,040 Principal payments on ESOP loan.......................... 1,214 1,214 Tax benefit from the exercise of non-qualified stock options... -- 6,752 Other equity transactions....... 1,013 (1) Comprehensive income: Net income.................... -- 418,923 Unrealized loss on marketable securities, net of tax...... -- (69,619) Foreign currency adjustments................. -- (26,744) ------- ---------- Comprehensive income for year ended December 31, 2000....... Balance, December 31, 2000...... $ -- $1,404,706 ======= ==========
The accompanying notes are an integral part of these consolidated statements. 32 35 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Quintiles Transnational Corp. (the "Company") improves healthcare by bringing new medicines to patients faster and providing knowledge-rich medical and drug data to advance the quality and cost effectiveness of healthcare. The Company is a global market leader in helping pharmaceutical, biotechnology and medical device companies market and sell their products. The Company also provides insightful market research solutions and strategic analyses to support healthcare decisions. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCIES Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are recorded at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to equity. Gains and losses on foreign currency transactions are included in other income (expense). FOREIGN CURRENCY HEDGING The Company may use foreign exchange contracts and options to hedge the risk of changes in foreign currency exchange rates associated with contracts in which the expenses for providing services are incurred in one currency and paid for by the customer in another currency. The Company recognizes changes in value in income only when contracts are settled or options are exercised. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2000. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company does not report in the accompanying balance sheets cash held for customers for investigator payments in the amount of $3.1 million and $7.5 million at December 31, 2000 and 1999, respectively, that pursuant to agreements with these customers, remains the property of the customers. The Company's investments in debt and marketable equity securities are classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are recorded at amortized cost. Investments classified as available-for-sale are measured at market value and net unrealized gains and losses 33 36 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are recorded as a component of shareholders' equity until realized. In addition, the Company has recorded $18.4 million and $10.2 million in deposits and other assets at December 31, 2000 and 1999, respectively, that represents investments in equity securities of and advances to companies for which there are not readily available market values and for which the Company does not exercise significant influence or control; such investments are accounted for using the cost method. Any gains or losses on sales of investments are computed by specific identification. UNBILLED SERVICES AND UNEARNED INCOME In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, submission of appropriate billing detail or the achievement of contract milestones, depending on the type of contract. Unbilled services arise when services have been rendered but customers have not been billed. Similarly, unearned income represents prebillings for services that have not yet been rendered. PROPERTY AND EQUIPMENT Property and equipment are carried at historical cost and are depreciated using the straight-line method over the shorter of the asset's estimated useful life or the lease term as follows: Buildings and leasehold improvements........................ 3 - 50 years Equipment and software...................................... 3 - 10 years Furniture and fixtures...................................... 5 - 10 years Motor vehicles.............................................. 3 - 5 years
INTANGIBLE ASSETS Intangibles consist principally of the excess cost over the fair value of net assets acquired ("goodwill"). Goodwill and other intangible assets are being amortized on a straight-line basis over periods from two to 40 years. Accumulated amortization totaled $25.0 million and $22.3 million at December 31, 2000 and 1999, respectively. The carrying values of property, equipment and intangible assets are reviewed if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, the Company will reduce carrying values to estimated fair value. REVENUE RECOGNITION Many of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. The Company is also party to fee-for-service and unit-of-service contracts. The Company recognizes net revenue primarily based upon (1) percentage of completion (utilizing input or output measures as appropriate) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed under fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. The Company's commercialization service group has entered into agreements with certain customers, whereby the Company will provide a dedicated sales force and fund certain sales and marketing expenses and receive payments based on the achievement of certain sales levels of the promoted product. During the sales force recruitment and training phase, the Company defers certain costs and will amortize those costs over the lesser of the contractual termination period (generally one year) or in proportion to revenue recognized. 34 37 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's contracts provide for price renegotiation upon scope of work changes. The Company recognizes revenue related to these scope changes when the underlying services are performed according to a binding commitment. Most contracts are terminable upon 15 - 90 days' notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. CONCENTRATION OF CREDIT RISK Substantially all net revenue is earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company's customers. The Company does not require collateral or other securities to support customer receivables. Credit losses have been immaterial and consistently within management's expectations. One customer accounted for 10.2% and 11.3% of consolidated net revenue in 2000 and 1999, respectively. These revenues were derived from each of the Company's segments. RESEARCH AND DEVELOPMENT COSTS Research and development costs relating principally to new software applications and computer technology are charged to expense as incurred. These expenses totaled $29.0 million, $3.0 million and $3.5 million in 2000, 1999 and 1998, respectively. INCOME TAXES Income tax expense includes U.S., state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Income tax credits are accounted for as a reduction of income tax expense in the year in which the credits reduce income taxes payable. Valuation allowances are provided against deferred income tax assets which are not likely to be realized. NET INCOME PER SHARE The Company determines basic net income per share by dividing net income by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the potential dilution that could occur assuming conversion or exercise of all convertible securities and issued and unexercised stock options. A reconciliation of the number of shares used in computing basic and diluted net income per share is in Note 14. EMPLOYEE STOCK COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 35 38 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMPREHENSIVE INCOME The Company includes foreign currency translation adjustments and unrealized gains and losses on the available-for sale securities in other comprehensive income. Accumulated other comprehensive loss at December 31, 2000 was $94.7 million which consisted of $42.2 million in foreign currency translation adjustments and $52.5 million in unrealized losses on available-for-sale securities. RECENTLY ADOPTED ACCOUNTING STANDARD In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") that provides guidance for revenue recognition under certain circumstances. The Company adopted the provisions of SAB 101 in 2000. The adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations. RECENTLY ISSUED ACCOUNTING STANDARD As required on January 1, 2001, the Company will recognize all derivative instruments in the balance sheet at fair value with changes in fair values recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related effects of the hedged items; effects of certain changes in fair value are recorded in other comprehensive income pending recognition in earnings. Because of the limited use of derivatives, the recently issued accounting standards did not have a significant impact on the Company's financial position or results of operations. 2. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES Accounts receivable and unbilled services consist of the following (in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Trade: Billed.................................................... $251,108 $221,827 Unbilled services......................................... 167,665 157,022 -------- -------- 418,773 378,849 Allowance for doubtful accounts............................. (4,781) (1,571) -------- -------- $413,992 $377,278 ======== ========
36 39 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Substantially all of the Company's trade accounts receivable and unbilled services are due from companies in the pharmaceutical, biotechnology, medical device, and healthcare industries and are a result of contract research, sales, marketing, healthcare consulting and health information management services provided by the Company on a global basis. The percentage of accounts receivable and unbilled services by region is as follows:
DECEMBER 31, ------------ REGION 2000 1999 ------ ---- ---- Americas: United States............................................. 59% 55% Other..................................................... 1 1 --- --- Americas.......................................... 60 56 Europe and Africa: United Kingdom............................................ 24 30 Other..................................................... 11 11 --- --- Europe and Africa................................. 35 41 Asia -- Pacific............................................. 5 3 --- --- 100% 100% === ===
3. INVESTMENTS The following is a summary as of December 31, 2000 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- HELD-TO-MATURITY SECURITIES: State Securities -- maturing in one year or less............. $ 562 $ -- $ -- $ 562 maturing in over five years.............. 6,483 -- -- 6,483 -------- -------- -------- -------- $ 7,045 $ -- $ -- $ 7,045 ======== ======== ======== ======== AVAILABLE-FOR-SALE SECURITIES: U.S. Government Securities: maturing in one year or less............. $ 2,500 $ -- $ (10) $ 2,490 maturing between one and three years..... 43,566 -- (413) 43,153 maturing between three and five years.... 24,998 -- (222) 24,776 State and Municipal Securities -- maturing in one year or less............. 1,521 3 -- 1,524 Equity Securities........................... 463,618 -- (79,578) 384,040 Money Funds................................. 27,186 -- (682) 26,504 Other....................................... 2,320 -- -- 2,320 -------- -------- -------- -------- $565,709 $ 3 $(80,905) $484,807 ======== ======== ======== ========
37 40 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary as of December 31, 1999 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- HELD-TO-MATURITY SECURITIES: State Securities -- maturing in one year or less............. $ 798 $ -- $ -- $ 798 maturing in over five years.............. 5,416 -- -- 5,416 -------- ------- ------- -------- $ 6,214 $ -- $ -- $ 6,214 ======== ======= ======= ======== AVAILABLE-FOR-SALE SECURITIES: U.S. Government Securities -- maturing in one year or less............. $ 5,438 $ -- $ (27) $ 5,411 maturing between one and three years..... 12,535 -- (315) 12,220 maturing between three and five years.... 58,538 -- (2,421) 56,117 State and Municipal Securities -- maturing between one and three years..... 1,544 -- (3) 1,541 Equity Securities........................... 15,523 29,714 -- 45,237 Money Funds................................. 27,013 -- (746) 26,267 Other....................................... 1,608 -- -- 1,608 -------- ------- ------- -------- $122,199 $29,714 $(3,512) $148,401 ======== ======= ======= ========
The gross realized gains on sales of available-for-sale securities were $3.3 million, $2.1 million and $81,000 in 2000, 1999 and 1998, respectively. Gross realized losses on sales of available-for-sale securities were $1,000 in 1999 and $210,000 in 1998. The net after-tax adjustment to unrealized holding gains (losses) on available-for-sale securities included as a separate component of shareholders' equity was ($69.6) million, $17.8 million and ($572,000) in 2000, 1999 and 1998, respectively. 4. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Compensation and payroll taxes.............................. $ 58,153 $ 51,704 Acquisition related accruals................................ 60,261 67,086 Restructuring............................................... 14,655 -- Other....................................................... 57,142 46,656 -------- -------- $190,211 $165,446 ======== ========
38 41 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. CREDIT ARRANGEMENTS AND OBLIGATIONS The following is a summary of the credit facilities available to the Company during 2000:
FACILITY INTEREST RATES BALANCE OUTSTANDING - -------- -------------- ------------------- $150 million senior unsecured credit At the Company's option, interest is None facility with a U.S. bank charged at the Bank's prime (9.5% at December 31, 2000) or LIBOR (6.56125% at December 31, 2000) plus an applicable rate (0.17% at December 31, 2000) L10.0 million (approximately $14.9 Base (6.0% at December 31, 2000) plus None million) unsecured line of credit 0.75% L1.5 million (approximately $2.2 1% per annum fee for each guarantee None million) general banking facility issued with the same U.K. bank used for the issuance of guarantees
The Company had $143.75 million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. In accordance with its terms, the Notes were repaid and cancelled in May 2000. Long-term debt and obligations consist of the following (in thousands):
DECEMBER 31, ------------------ 2000 1999 ------- -------- Missouri tax incentive bonds due October 2009 (6.7% annual interest rate)............................................ $ 5,192 $ 5,614 2% Note payable due April 2001.............................. 1,493 -- 2% Note payable due October 2001............................ 1,746 -- 2% Note payable due September 2006.......................... 6,746 -- Purchase commitment (L1.75 million) due May 2001............ 2,614 2,831 Other notes payable......................................... 65 148 4.25% Convertible Subordinated Notes due May 2000........... -- 143,747 Purchase commitment (L6.3 million) due April 2000........... -- 10,109 ------- -------- 17,856 162,449 Less: current portion.................................. 7,387 154,671 ------- -------- $10,469 $ 7,778 ======= ========
Maturities of long-term debt and obligations at December 31, 2000 are as follows (in thousands): 2001........................................................ $ 7,387 2002........................................................ 1,848 2003........................................................ 1,621 2004........................................................ 1,913 2005........................................................ 1,690 Thereafter.................................................. 3,397 ------- $17,856 =======
The fair value of the Company's long-term debt approximates its carrying value. 39 42 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES 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 the Company and two of its executive officers and directors on behalf of all persons who purchased or otherwise acquired shares of the Company's Common Stock between July 16, 1999 and September 15, 1999. These actions were subsequently consolidated and the 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 amended complaint alleges violations of federal securities laws, including violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint sought unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. The Company believed the claims to be without merit and intended to defend the suit vigorously. Accordingly, the Company and the named executive officers and directors filed a motion to dismiss the amended complaint. Immediately prior to the hearing scheduled on February 6, 2001, on the motion to dismiss, the parties agreed to settle the lawsuit. The parties are negotiating a memorandum of understanding to present before the court for approval. In February 1999, Kenneth Hodges ("Hodges") 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, a subsidiary of the Company. The Company reached a settlement with Hodges under which Hodges acknowledged that the Company had no liability with respect to the lawsuit. Hodges released all claims against the Company and has filed a Stipulation of Dismissal with Prejudice which has been entered by the Court. On August 17, 2000, Joseph Lewis ("Lewis") filed a civil lawsuit in the State Court of Fulton County, State of Georgia naming as defendants Richard L. Borison, Bruce I. Diamond, Janssen Pharmaceutica, Inc., Zeneca, Inc., Novartis Pharmaceuticals Corporation and Quintiles Laboratories Limited, a subsidiary of the Company. Lewis alleges that he suffered from schizophrenia and that he was given experimental drugs for this condition in connection with numerous clinical drug trials conducted by defendants Borison and Diamond between January 1988 and June 1996. Lewis alleged that the defendants and their agents conspired to conduct these drug trials on him, and that they improperly supervised, monitored and regulated the trials, causing him to have violent adverse reactions to the drugs involved in the trials. Lewis seeks to recover his actual damages in unspecified amounts, medical expenses, litigation costs and punitive damages. Lewis has dismissed his claims against the Company, without prejudice. On January 26, 2001, a purported class action lawsuit was filed in the State Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp., Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited, a subsidiary of the Company, on behalf of 185 Alzheimer's patients who participated in drug studies involving an experimental drug manufactured by defendant Novartis and their surviving spouses. The complaint alleges claims for breach of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia RICO violations, infliction of emotional distress, battery, negligence and loss of consortium as to class member spouses. The complaint seeks unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. The Company believes the claims to be without merit and intends to defend the suit vigorously. The Company is also a party in certain other pending litigation arising in the normal course of business. In the opinion of management, based on consultation with its legal counsel, the outcome of such litigation currently pending will not have a material affect on the Company's consolidated financial statements. 7. SHAREHOLDERS' EQUITY The Company is authorized to issue 25 million shares of preferred stock, $.01 per share par value. At December 31, 2000, 200 million common shares of $.01 par value were authorized. 40 43 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In November 1999, the Board of Directors declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of the Company's Common Stock. Each Right, if activated, entitles the holder to purchase one one-thousandth of a share of the Company's Series A Preferred Stock at a purchase price of $150, subject to adjustment in certain circumstances. Each one one-thousandth of a preferred share will have the same voting and dividend rights as a share of the Company's Common Stock. The Rights become exercisable if any person or group announces it has acquired or obtained the right to acquire 15% or more of the outstanding shares of the Company's Common Stock or commences a tender offer or exchange offer for more than 15% of the Company's Common Stock, subject to limited exceptions. In the event that any party should acquire more than 15% of the Company's Common Stock without the Board's approval, the rights entitle all other shareholders to purchase shares of the Company's Common Stock at a substantial discount. In addition, if any person holding 15% of the Common Stock acquires the Company or substantially all of its assets, the Rights entitle all other shareholders to purchase common stock of the acquirer at a substantial discount. The Rights expire on November 15, 2009, unless redeemed earlier at the discretion of the Company at the redemption price of $0.0001 per right. On February 3, 2000, the Board of Directors authorized the Company to repurchase $200 million of the Company's Common Stock. The authorization expires in February 2001. During 2000, the Company repurchased 1,365,500 shares of its Common Stock for an aggregate price of approximately $21.9 million. To enhance its stock repurchase program, the Company sold put options to an independent third party. These put options entitled 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 put options expired in accordance with its terms on January 2, 2001. The transaction has been recorded as a component of shareholders' equity. 8. 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. 9. DISCONTINUED OPERATION On May 26, 2000, the Company completed the sale of its electronic data interchange unit, ENVOY Corporation ("ENVOY"), to Healtheon/WebMD Corp. which subsequently changed its name to WebMD Corporation ("WebMD"). Prior to the sale, ENVOY transferred its informatics subsidiary, Synergy Health Care, Inc., to the Company. The Company received $400 million in cash and 35 million shares of WebMD common stock in exchange for its entire interest in ENVOY and a warrant to acquire 10 million shares of the Company's Common Stock at $40 per share, exercisable for four years. The Company recorded an extraordinary gain on the sale of $436.3 million, net of taxes of $184.7 million. The Company retained exclusive rights to de-identified ENVOY transaction data and certain other de-identified data available from WebMD, subject to limited exceptions. The Company agreed to share with WebMD a royalty derived from sales of products using the licensed data. The Company formed a strategic alliance with WebMD to develop a web-based suite of integrated products and services for the pharmaceutical industry and may provide funding for development of the products. On March 30, 1999, the Company acquired ENVOY in exchange for 28,465,160 shares of the Company's Common Stock. Outstanding ENVOY options became options to acquire 3,914,583 shares of the Company's Common Stock ("Exchanged Options"). On May 26, 2000, employees of ENVOY held 3,312,200 options to acquire Company Common Stock as a result of the Exchanged Options and ENVOY employees' participation in Company stock option plans. In connection with the sale, all of the options 41 44 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding immediately vested and became exercisable over a three year term. Subsequently, 2,516,062 of the outstanding options were cancelled and issued with new terms to certain ENVOY employees ("ENVOY Options"). This transaction resulted in a charge of $50.0 million, based on the fair value of the options at the date of grant, which reduced the extraordinary gain from sale of discontinued operation. The ENVOY Options have an exercise price of $6.84, vested immediately, have a term of three years and are automatically exercised if the market price of the Company's Common Stock reaches $23.34. During 2000, 1,000,378 of these options were exercised, resulting in 1,515,684 options outstanding at December 31, 2000. The results of ENVOY through the date of closing have been reported separately as a discontinued operation in the Consolidated Statement of Operations. 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 for ENVOY through the date of closing (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- -------- -------- Net revenue............................................. $99,041 $219,908 $181,943 ======= ======== ======== Income before income taxes.............................. $27,121 $ 61,438 $ 21,407 Income taxes............................................ 10,351 25,315 18,481 ------- -------- -------- Net income.................................... $16,770 $ 36,123 $ 2,926 ======= ======== ========
The assets and liabilities of ENVOY are reported in the accompanying consolidated balance sheet as net assets of discontinued operation. The following is a summary of these net assets of discontinued operation as of December 31, 1999 (in thousands): Current assets.............................................. $ 70,006 Other assets................................................ 88,794 Current liabilities......................................... (33,977) Long-term liabilities....................................... (1,842) -------- Net assets of discontinued operation.............. $122,981 ========
10. BUSINESS COMBINATIONS On March 29, 1999, the Company acquired Pharmaceutical Marketing Services, Inc. ("PMSI") and its core company, Scott-Levin, a leader in pharmaceutical market information and research services in the U.S. The Company acquired PMSI in exchange for approximately 4,993,787 shares of the Company's Common Stock. Outstanding PMSI options became options to acquire approximately 440,426 shares of the Company's Common Stock. The total purchase price of the PMSI acquisition approximates $201.8 million. The PMSI net assets acquired included approximately $90.0 million in cash. The Company recorded as goodwill approximately $111.5 million related to the excess cost over the fair value of net assets acquired, which amount is being amortized over 30 years. The acquisition of PMSI has been accounted for as a purchase and accordingly, the results of PMSI have been included from the date of acquisition. On January 1, 1999, the Company acquired substantial assets of Aventis S.A.'s (formerly Hoechst Marion Roussel) Kansas City-based Drug Innovation and Approval facility for approximately $93 million in cash. The Company paid $35 million in cash to Aventis S.A. in 1999 for the facility and expects to pay the remainder of the purchase price, approximately $58 million, or enter into a long-term lease for the facility in 2001. As a part of this transaction, the Company was awarded a $436 million contract for continued support and completion of ongoing Aventis S.A. development projects over a five-year period. In addition, Aventis 42 45 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) S.A. will offer the Company the opportunity to provide all U.S. clinical research services up to an additional $144 million over the same period. The following transactions were accounted for by the pooling of interests method and the financial statements of the Company have been restated to reflect the results of operations of these acquisitions.
NUMBER OF SHARES OF THE DATE ACQUIRED COMPANY COMPANY'S COMMON STOCK ISSUED ---- ---------------- ----------------------------- June 3, 1999......... SMG Marketing Group, Inc. 1,170,291 May 19, 1999......... Minerva Medical plc 1,143,625 March 31, 1999....... Medlab Pty Ltd. and the assets of 271,146 the Niehaus & Botha partnership October 12, 1998..... QED International, Inc. 523,520 September 9, 1998.... Data Analysis Systems, Inc. 358,897 August 24, 1998...... Royce Consultancy, Limited 664,194 May 31, 1998......... Crossbox Limited t/a Cardiac 70,743 Alert February 26, 1998.... T2A S.A. 311,899 February 2, 1998..... Pharma Networks N.V. 132,000
11. LEASES The Company leases certain office space and equipment under operating leases. The leases expire at various dates through 2014 with options to cancel certain leases at five-year increments. Some leases contain renewal options. Annual rental expenses under these agreements were approximately $73.9 million, $46.5 million and $36.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. The Company leases certain assets, primarily vehicles, under capital leases. Capital lease amortization is included with depreciation and amortization expenses and accumulated depreciation in the accompanying financial statements. The following is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2000 (in thousands):
CAPITAL LEASES OPERATING LEASES -------------- ---------------- 2001...................................................... $12,640 $ 59,826 2002...................................................... 10,294 45,315 2003...................................................... 88 31,371 2004...................................................... 18 20,961 2005...................................................... 3 14,976 Thereafter................................................ -- 52,388 ------- -------- Total minimum lease payments.............................. 23,043 $224,837 ======== Amounts representing interest............................. 1,907 ------- Present value of net minimum payments..................... 21,136 Current portion........................................... 12,640 ------- Long-term capital lease obligations....................... $ 8,496 =======
12. RESTRUCTURING In January 2000, the Company announced the adoption of a restructuring plan ("Original Plan"). In connection with this plan, the company recognized a restructuring charge of $58.6 million. The restructuring 43 46 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 part of this plan, approximately 770 positions worldwide will be eliminated and as of December 31, 2000, 601 individuals have been terminated. Although positions eliminated were across all functions, most of the eliminated positions were in the product development service group. In the fourth quarter of 2000, the Company revised its estimates of the Original Plan adopted in Q1 2000. This revision resulted in a reduction of the Original Plan of $6.9 million. This reduction was made up of $6.3 million in severance payments and $0.6 million in exit costs. The severance reduction resulted primarily from a higher than expected number of voluntary terminations, reduced outplacement costs and related fringes. During the fourth quarter, management conducted a detailed review of the resource levels within each business group. Based on this review, the Company adopted a follow-on restructuring plan ("New Plan") resulting in a restructuring charge of $7.1 million. The restructuring charge consists of $5.8 million related to severance payments and $1.3 million related to exit costs. As part of this plan, approximately 220 positions will be eliminated mostly in the commercialization service group. As of December 31, 2000, 42 individuals have been terminated. As of December 31, 2000, the following amounts were recorded (in thousands):
ACTIVITY TWELVE MONTHS ENDED DECEMBER 31, 2000 ------------------------------------------------------------------------------------ ORIGINAL ORIGINAL REVISIONS TO PLAN BALANCE AT PLAN ORIGINAL REVISED WRITE-OFFS/ NEW PLAN DECEMBER 31, ACCRUAL PLAN NEW PLAN ACCRUAL PAYMENTS PAYMENTS 2000 -------- ------------ -------- ------- ----------- -------- ------------ Severance and related costs................... $33,228 $(6,321) $5,833 $32,740 $(23,136) $(737) $ 8,867 Asset impairment write-offs.............. 11,315 -- -- 11,315 (11,315) -- -- Exit costs................ 14,049 (632) 1,309 14,726 (8,938) -- 5,788 ------- ------- ------ ------- -------- ----- ------- Totals.......... $58,592 $(6,953) $7,142 $58,781 $(43,389) $(737) $14,655 ======= ======= ====== ======= ======== ===== =======
13. INCOME TAXES The components of income tax expense attributable to continuing operations are as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 -------- ------- ------- Current: Federal................................................ $(46,052) $21,351 $26,640 State.................................................. 2,248 3,764 3,995 Foreign................................................ 15,752 10,099 12,736 -------- ------- ------- (28,052) 35,214 43,371 -------- ------- ------- Deferred expense (benefit): Federal................................................ 24,213 11,320 (1,068) Foreign................................................ (12,992) (3,792) (2,379) -------- ------- ------- 11,221 7,528 (3,447) -------- ------- ------- $(16,831) $42,742 $39,924 ======== ======= =======
Income tax expense attributable to continuing operations excludes income tax expense from the Company's discontinued operation. The Company has allocated directly to additional paid-in capital approximately $6.8 million in 2000, $3.7 million in 1999 and $15.6 million in 1998 related to the tax benefit from non-qualified stock options exercised. 44 47 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between the Company's consolidated income tax expense attributable to continuing operations and the expense computed at the 35% U.S. statutory income tax rate were as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 -------- ------- ------- Federal income taxes at statutory rate................... $(17,852) $40,569 $43,949 State and local income taxes, net of federal benefit..... (1,787) 2,446 2,597 Non-deductible expenses and transaction costs............ -- 9,966 -- Foreign earnings taxed at different rates................ (8,833) (4,240) (519) Losses not utilized (utilized)........................... 12,725 (461) (2,194) Non-taxable income....................................... -- -- (590) Other.................................................... (1,084) (5,538) (3,319) -------- ------- ------- $(16,831) $42,742 $39,924 ======== ======= =======
Income (loss) before income taxes from foreign operations was approximately $(40.3) million, $27.8 million and $30.8 million for the years 2000, 1999 and 1998, respectively. (Loss) income from foreign operations was approximately $(11.6) million, $59.5 million and $63.0 million for the years 2000, 1999 and 1998, respectively. The difference between income from operations and income (loss) before income taxes is due primarily to intercompany charges which eliminate in consolidation. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $120.2 million at December 31, 2000. Those earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries. The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below (in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Deferred income tax liabilities: Depreciation and amortization............................. $(34,990) $(25,834) Prepaid expenses.......................................... (6,958) (6,274) Unrealized gain on equity investments..................... -- (9,297) Revenue and ENVOY disposition gain........................ (50,446) -- Other..................................................... (15,487) (11,386) -------- -------- Total deferred income tax liabilities....................... (107,881) (52,791) Deferred income tax assets: Unrealized loss on debt and equity investments............ 30,159 -- Net operating loss carryforwards.......................... 59,923 29,398 Accrued expenses and unearned income...................... 19,262 15,469 Goodwill, net of amortization............................. 80,009 87,304 Other..................................................... 7,459 14,778 -------- -------- 196,812 146,949 Valuation allowance for deferred income tax assets.......... (64,114) (56,224) -------- -------- Total deferred income tax assets............................ 132,698 90,725 -------- -------- Net deferred income tax assets.............................. $ 24,817 $ 37,934 ======== ========
45 48 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The increase in the Company's valuation allowance for deferred income tax assets to $64.1 million at December 31, 2000 from $56.2 million at December 31, 1999 is primarily due to the uncertainty related to the deferred income tax asset for certain foreign net operating losses generated in 2000 that may not be utilized in the future. The Company's deferred income tax expense (benefit) results from the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 -------- ------- ------- Excess (deficiency) of income tax over financial reporting: Depreciation and amortization.......................... $ 16,905 $ 8,322 $10,326 Net operating loss carryforwards....................... (29,880) 795 (6,816) Valuation allowance increase........................... 7,890 (2,120) (2,194) Accrued expenses and unearned income................... (4,379) (2,397) (6,611) Prepaid expenses....................................... 919 -- -- Deferred Revenue....................................... 12,050 -- -- Other items, net....................................... 7,716 2,928 1,848 -------- ------- ------- $ 11,221 $ 7,528 $(3,447) ======== ======= =======
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for 100% of capital expenditures on certain assets under the Inland Revenue Service guidelines. For 2000, 1999 and 1998, these allowances were $15.1 million, $9.7 million and $23 million, respectively, which helped to generate net operating loss carryforwards of $22.8 million to be used to offset taxable income in that country. Assuming the U.K. subsidiaries continue to invest in qualified capital expenditures at an adequate level, the portion of the deferred income tax liability relating to the U.K. subsidiaries may be deferred indefinitely. The Company recognizes a deferred income tax benefit for foreign generated operating losses at the time of the loss when the Company believes it is more likely than not that the benefit will be realized. The Company has net operating loss and capital loss carryforwards of approximately $139.4 million in various entities within the United Kingdom which have no expiration date and has over $25.5 million of net operating loss carryforwards from various foreign jurisdictions which have different expiration periods. In addition, the Company has approximately $127.1 million of U.S. state operating loss carryforwards which expire through 2015 and has approximately $1.4 million of U.S. federal operating loss carryforwards which begin to expire in 2005. 14. WEIGHTED AVERAGE SHARES OUTSTANDING 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):
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- Weighted average shares: Basic weighted average shares........................... 115,968 113,525 104,799 Effect of dilutive securities: Stock options........................................ -- 2,162 2,815 Preferred stock...................................... -- -- 3,265 ------- ------- ------- Diluted weighted average shares......................... 115,968 115,687 110,879 ======= ======= =======
The effect of options outstanding during 2000 were not included in the computation of diluted net income per share because the effect on loss from continuing operations would have been antidilutive. 46 49 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Warrants to purchase 10 million shares of common stock were outstanding during 2000, but were not included in the computation of diluted net income per share because the effect on loss from continuing operations would have been antidilutive. Put options that entitle the holder to sell 500,000 shares of the Company's Common Stock to the Company were outstanding during 2000 but were not included in the computation of diluted net income per share because the effect would be antidilutive. 15. EMPLOYEE BENEFIT PLANS The Company has numerous employee benefit plans, which cover substantially all eligible employees in the countries where the plans are offered. Contributions are primarily discretionary, except in some countries where contributions are contractually required. Plans include Approved Profit Sharing Schemes in the U.K. and Ireland that are funded with Company stock; a defined contribution plan funded by Company stock in Australia, Belgium, Canada and Singapore; defined contribution plans in Belgium, Holland, Sweden, Israel and Great Britain; a profit sharing scheme in France; and defined benefit plans in Germany and the U.K. The defined benefit plan in Germany is an unfunded plan, which is provided for in the balance sheet. In addition, the Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees. Effective May 1, 1999, the Company merged, for administrative purposes only, its leveraged employee stock ownership plan (the "ESOP") and employee savings and investment plan (the "401(k)"). The eligibility requirements and benefits offered to employees under each plan were not affected by the merger. During 1998, the Company loaned the ESOP approximately $4.0 million to purchase 100,000 shares of the Company's Common Stock. As of December 31, 2000, the leveraged loans were repaid in full. The ESOP's trustee held such shares in suspense and released them for allocation to participants as the loan was repaid. The Company's contributions to the ESOP were used to repay the loan principal and interest. The ESOP expense recognized is equal to the cost of the shares allocated to plan participants and the interest expense on the leveraged loans for the year. ESOP expense totaled $6.2 million, $1.3 million and $1.7 million in 2000, 1999 and 1998, respectively. As of December 31, 2000, 1999 and 1998, 1,667,449, 1,510,654 and 1,520,950 shares, respectively, were allocated to participants. There are no unallocated shares held in suspense as of December 31, 2000. All ESOP shares are considered outstanding for income per share calculations. Under the 401(k), the Company matches employee deferrals at varying percentages, set at the discretion of the Board of Directors. For the years ended December 31, 2000, 1999 and 1998, the Company expensed $5.1 million, $4.3 million and $3.4 million, respectively, as matching contributions. Participating employees in the Company's employee stock purchase plan (the "Purchase Plan") have the option to purchase shares at 85% of the lower of the closing price per share of common stock on the first or last day of the calendar quarter. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. During 2000, 1999 and 1998, 663,531, 414,971 and 141,727 shares, respectively, were purchased under the Purchase Plan. At December 31, 2000, 1,692,236 shares were available for issuance under the Purchase Plan. The Company has stock option plans to provide incentives to eligible employees, officers and directors in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock. The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Options, particularly those assumed or exchanged as a result of acquisitions, have various vesting schedules and expiration periods. The majority of options granted under the Executive Compensation Plan typically vest 25% per year over four years expiring ten years from the date of grant. 47 50 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity during the periods indicated is as follows:
NUMBER WEIGHTED-AVERAGE EXERCISE PRICE ---------- ------------------------------- Outstanding at December 31, 1997................ 9,335,516 $20.02 Granted....................................... 3,148,054 43.26 Exercised..................................... (1,535,542) 12.38 Canceled...................................... (728,087) 25.40 ---------- Outstanding at December 31, 1998................ 10,219,941 27.99 Granted....................................... 9,064,319 27.56 Exercised..................................... (530,872) 20.21 Canceled...................................... (868,908) 36.69 ---------- Outstanding at December 31, 1999................ 17,884,480 27.59 Granted....................................... 15,340,516 14.78 Exercised..................................... (508,412) 9.24 Canceled...................................... (5,558,403) 21.98 ---------- Outstanding at December 31, 2000................ 27,158,181 $21.80 ==========
Pro forma information regarding net income and net income per share is required by Statement No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement No. 123. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $4.93, $9.05 and $16.07 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
EMPLOYEE STOCK EMPLOYEE STOCK OPTIONS PURCHASE PLAN ------------------ ------------------ 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Expected dividend yield...................... 0% 0% 0% 0% 0% 0% Risk-free interest rate...................... 5.1% 5.8% 4.8% 5.9% 4.7% 4.9% Expected volatility.......................... 40.0% 40.0% 42.0% 40.0% 40.0% 40.0% Expected life (in years from vesting)........ 0.86 1.40 1.35 0.25 0.25 0.25
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are transferable. All available option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information (which includes pretax pro forma stock compensation expense related to discontinued operation of approximately $1.5 million in 2000, $5.0 million in 1999 and $4.5 million in 1998) follows (in thousands, except for net income per share information):
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 -------- ------- ------- Pro forma net income..................................... $381,204 $81,793 $70,252 Pro forma basic net income per share..................... 3.29 0.72 0.67 Pro forma diluted net income per share................... 3.29 0.71 0.63
48 51 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Selected information regarding stock options as of December 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------- ----------------------------- NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE RANGE EXERCISE PRICE REMAINING LIFE OPTIONS EXERCISE PRICE - ---------- -------------------- ---------------- ---------------- ---------- ---------------- 923,757 $ 1.04 - $ 6.68 $ 5.89 1.28 913,187 $ 5.94 11,572,688 $ 7.31 - $13.43 13.31 9.11 611,544 11.12 6,994,314 $13.44 - $22.00 18.36 7.79 3,315,590 18.89 5,815,982 $22.03 - $42.44 35.82 6.93 4,013,573 36.05 1,851,440 $42.56 - $56.25 51.72 7.20 1,206,711 51.81 - ---------- ---------- 27,158,181 $19.90 7.25 10,060,605 $23.93 ========== ==========
16. OPERATIONS BY GEOGRAPHIC LOCATION The table below presents the Company's operations by geographical location. The Company attributes revenues to geographical locations based upon (1) customer service activities, (2) operational management, (3) business development activities and (4) customer contract coordination. The Company's operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals (in thousands):
2000 1999 1998 ---------- ---------- ---------- Net revenue: Americas: United States......................................... $ 929,916 $ 870,559 $ 599,757 Other................................................. 28,710 23,987 15,078 ---------- ---------- ---------- Americas......................................... 958,626 894,546 614,835 Europe and Africa: United Kingdom........................................ 348,267 378,099 346,090 Other................................................. 233,231 260,096 232,047 ---------- ---------- ---------- Europe and Africa................................ 581,498 638,195 578,137 Asia-Pacific............................................. 119,786 74,346 28,804 ---------- ---------- ---------- $1,659,910 $1,607,087 $1,221,776 ========== ========== ========== Long-lived assets: Americas: United States......................................... $ 222,727 $ 214,503 $ 78,599 Other................................................. 2,067 2,211 1,544 ---------- ---------- ---------- Americas......................................... 224,794 216,714 80,143 Europe and Africa: United Kingdom........................................ 133,025 156,067 149,101 Other................................................. 16,911 20,473 20,713 ---------- ---------- ---------- Europe and Africa................................ 149,936 176,540 169,814 Asia-Pacific............................................. 17,230 6,430 5,374 ---------- ---------- ---------- $ 391,960 $ 399,684 $ 255,331 ========== ========== ==========
49 52 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. 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. 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 analyses to support healthcare decisions. During 2000 there were reclassifications between segments due to management changes of certain business units. These changes are reflected in all periods presented. The Company does not include net revenue and expenses relating to the Internet initiative (approximately $952,000 and $25.2 million, respectively, in 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 (in thousands):
2000 1999 1998 ---------- ---------- ---------- Net revenue: Product development.............................. $ 809,050 $ 848,611 $ 615,521 Commercialization................................ 790,199 706,092 580,059 QUINTERNET(TM) informatics....................... 59,709 52,384 26,196 ---------- ---------- ---------- $1,658,958 $1,607,087 $1,221,776 ========== ========== ========== Income (loss) from operations: Product development.............................. $ (9,330) $ 74,388 $ 67,929 Commercialization................................ 55,568 66,029 55,156 QUINTERNET(TM) informatics....................... (14,234) (4,062) 6,304 ---------- ---------- ---------- $ 32,004 $ 136,355 $ 129,389 ========== ========== ========== Total assets: Product development.............................. $ 972,047 $ 864,785 $ 712,567 Commercialization................................ 366,204 334,706 306,521 QUINTERNET(TM) informatics....................... 344,725 285,093 22,231 Internet initiative.............................. 278,602 -- -- Net assets of discontinued operation............. -- 122,981 130,458 ---------- ---------- ---------- $1,961,578 $1,607,565 $1,171,777 ========== ========== ========== Expenditures to acquire long-lived assets: Product development.............................. $ 78,111 $ 129,873 $ 77,732 Commercialization................................ 22,563 21,942 17,900 QUINTERNET(TM) informatics....................... 7,196 6,313 1,322 Internet initiative.............................. 912 -- -- ---------- ---------- ---------- $ 108,782 $ 158,128 $ 96,954 ========== ========== ========== Depreciation and amortization expense: Product development.............................. $ 54,118 $ 47,798 $ 31,130 Commercialization................................ 29,167 27,653 24,785 QUINTERNET(TM) informatics....................... 9,242 6,841 1,276 Internet initiative.............................. 40 -- -- ---------- ---------- ---------- $ 92,567 $ 82,292 $ 57,191 ========== ========== ==========
50 53 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly results of operations (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------------- -------------- -------------- -------------- Net revenue.............................. $ 414,845 $ 423,107 $ 412,344 $ 409,614 (Loss) income from operations............ (57,407) (15,465) 791 3,911 (Loss) income from continuing operations............................. (37,159) (8,222) 4,565 6,642 Income from discontinued operation, net of income taxes........................ 10,594 6,176 -- -- Extraordinary gain from sale of discontinued operation, net of income taxes.................................. -- 436,327 -- -- Net (loss) income........................ $ (26,565) $ 434,281 $ 4,565 $ 6,642 ============== ============== ============== ============== Basic net (loss) income per share: (Loss) income from continuing operations........................... $ (0.32) $ (0.07) $ 0.04 $ 0.06 Income from discontinued operation..... 0.09 0.05 -- -- Extraordinary gain from sale of discontinued operation............... -- 3.78 -- -- -------------- -------------- -------------- -------------- Basic net (loss) income per share...... $ (0.23) $ 3.76 $ 0.04 $ 0.06 ============== ============== ============== ============== Diluted net (loss) income per share: (Loss) income from continuing operations........................... $ (0.32) $ (0.07) $ 0.04 $ 0.06 Income from discontinued operation..... 0.09 0.05 -- -- Extraordinary gain from sale of discontinued operation............... -- 3.78 -- -- -------------- -------------- -------------- -------------- Diluted net (loss) income per share.... $ (0.23) $ $3.76 $ 0.04 $ 0.06 ============== ============== ============== ============== Range of stock prices.................... $15.313-35.000 $12.000-17.438 $12.563-20.250 $12.500-22.500
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------------- -------------- -------------- -------------- Net revenue.......................... $ 359,705 $ 402,276 $ 402,497 $ 442,609 Income from operations............... 38,517 42,455 27,997 27,386 Income from continuing operations.... 3,364 25,139 20,500 24,165 Income from discontinued operation, net of taxes....................... 5,250 10,041 10,679 10,153 Net income........................... $ 8,614 $ 35,180 $ 31,179 $ 34,318 ============== ============== ============== ============== Basic net income per share: Income from continuing operations....................... $ 0.03 $ 0.22 $ 0.18 $ 0.21 Income from discontinued operation........................ 0.05 0.09 0.09 0.09 -------------- -------------- -------------- -------------- Basic net income per share......... $ 0.08 $ 0.31 $ 0.27 $ 0.30 ============== ============== ============== ============== Diluted net income per share: Income from continuing operations....................... $ 0.03 $ 0.21 $ 0.18 $ 0.21 Income from discontinued operation........................ 0.05 0.09 $ 0.09 0.09 -------------- -------------- -------------- -------------- Diluted net income per share....... $ 0.08 $ 0.30 $ 0.27 $ 0.30 ============== ============== ============== ============== Range of stock prices................ $34.625-53.375 $34.750-45.500 $16.875-41.938 $16.000-25.031
51 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: We have audited the accompanying consolidated balance sheets of Quintiles Transnational Corp. (a North Carolina corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quintiles Transnational Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Raleigh, North Carolina, January 26, 2001, except with respect to the matter discussed in the first paragraph of Note 6, as to which the date is February 6, 2001 52 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to each of our directors and executive officers who serve in such capacities as of the filing date of this Form 10-K or have consented to serve in such capacities as of a specified future date. There are no family relationships between any of our directors or executive officers.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- James L. Bierman.......................... 48 Chief Financial Officer Robert C. Bishop, Ph.D.................... 58 Director E.G.F. Brown.............................. 56 Director Vaughn D. Bryson.......................... 62 Director Santo J. Costa............................ 55 Vice Chairman and Director Chester W. Douglass, DMD, Ph.D............ 60 Director Dennis B. Gillings, Ph.D.................. 56 Chairman and Chief Executive Officer Jim D. Kever.............................. 48 Director Pamela J. Kirby, Ph.D..................... 47 Chief Executive Officer-Elect Arthur M. Pappas.......................... 53 Director John S. Russell........................... 46 Senior Vice President, General Counsel and Head Global Human Services Eric J. Topol, M.D........................ 46 Director Virginia W. Weldon, M.D................... 65 Director
JAMES L. BIERMAN became Chief Financial Officer in February 2000 and served as our Senior Vice President, Corporate Development since 1998. Previously, Mr. Bierman spent 22 years with Arthur Andersen L.L.P. As a partner of this international professional services organization, he worked with a diversified broad-base of companies solving complex business problems. His experience ranges from applying knowledge of complex business processes to improve operational efficiency and effectiveness while reducing risk to researching and developing leading-edge accounting issues. He has been a frequent speaker at various industry trade group-sponsored symposiums on various financial and accounting topics. He has authored several articles, the latest of which was published in Bank Director White Paper Mergers and Acquisitions: Strategies and Trends Shaping the Industry. The article is titled "Mergers of Equals vs. Acquisition: Strategies for Success." Mr. Bierman is a director of Mediconsult Inc., a provider of online health information. Mr. Bierman received his B.A. degree in Economics/History from Dickinson College in Carlisle, Pennsylvania, and attended Cornell University's Johnson Graduate School of Management, where he received his M.B.A. ROBERT C. BISHOP, PH.D. has served as a director since April 1994. Since June 1999, Dr. Bishop has served as Chairman of the Board for AutoImmune, Inc., a biotechnology company. From May 1992 to December 1999, Dr. Bishop served as President, Chief Executive Officer and director of AutoImmune, Inc. From February 1991 to April 1992, Dr. Bishop served as President of Allergan Therapeutics Group, a division of Allergan, Inc., an eye and skin care company. From August 1989 to February 1991, Dr. Bishop served as President of Allergan Pharmaceuticals, a division of Allergan, Inc. Dr. Bishop serves as a director of Millipore Corporation, a multinational company that applies its purification technology to research and manufacturing applications in the microelectronics and biopharmaceutical industries. Dr. Bishop received an M.B.A. from the University of Miami and a Ph.D. in Biochemistry from the University of Southern California. E. G. F. BROWN has served as a director since January 1998. Mr. Brown was Chairman -- Mainland Europe of Tibbett & Britten Group plc. Mr. Brown was previously an Executive Director of T.D.G. PLC, a European logistics company, and a director of Datrontech PLC, a distributor of personal computer components. Prior to joining TDG in 1996, Mr. Brown served as Operations Director for NFC PLC, a supply 53 56 chain logistics company. Mr. Brown was educated at Exeter and Reading Universities and the London Business School. VAUGHN D. BRYSON has served as a director since March 1997. Mr. Bryson is President of Life Science Advisors, LLC, a consulting firm focused on assisting biopharmaceutical and medical device firms in building shareholder value. Mr. Bryson is also the President and founder of Clinical Products, a medical foods company. Mr. Bryson was a 32 year employee of Eli Lilly & Co. ("Lilly"), a global research-based pharmaceutical corporation, where he served as President and Chief Executive Officer from 1991 until June 1993; he was Executive Vice President from 1986 until 1991. He served as a director of Lilly from 1984 until his retirement in 1993. From April 1994 to December 1996, Mr. Bryson served as Vice Chairman of Vector Securities International, Inc., an investment banking firm. Mr. Bryson is a director of Ariad Pharmaceuticals, Inc., a company dedicated to the development of gene, cell and protein therapy products featuring dose dependent regulation by small molecule drugs, as well as small molecule inhibitors of signal transduction; AtheroGenics Inc., a biopharmaceutical company focused on research and development of genes that regulate atherosclerosis and cancer; Chiron Corporation, a global healthcare company participating in biopharmaceuticals, vaccines and blood testing; and Amylin Pharmaceuticals, Inc., a developmental stage biopharmaceutical company focusing on metabolic disorders. SANTO J. COSTA became Vice Chairman in November 1999 and has been a director since April 1994. Mr. Costa served as our President and Chief Operating Officer from April 1994 to November 1999. From July 1993 to March 1994, Mr. Costa directed the affairs of his own consulting firm, Santo J. Costa & Associates, which focused on pharmaceutical and biotechnology companies. Prior to July 1993, Mr. Costa served seven years at Glaxo, Inc., a pharmaceutical company, as Senior Vice President Administration and General Counsel and a member of the Board of Directors. Mr. Costa serves as a director of NPS Pharmaceuticals Inc., a pharmaceutical company engaged in the discovery and development of small molecule drugs that address a variety of diseases. Mr. Costa received a law degree from St. John's University. CHESTER W. DOUGLASS, DMD, PH.D. has served as a director since 1983. Dr. Douglass is Professor and Chairman of the Department of Oral Health Policy and Epidemiology, Harvard University School of Dental Medicine and Professor, Department of Epidemiology, Harvard University School of Public Health. Dr. Douglass has served over 30 years in various academic appointments at Temple University, the University of North Carolina at Chapel Hill and Harvard University. Dr. Douglass received a D.M.D. from the Temple University School of Dentistry, an M.P.H. from the University of Michigan School of Public Health and a Ph.D. from the University of Michigan Rackham School of Graduate Studies. DENNIS B. GILLINGS, PH.D. founded Quintiles in 1982 and has served as Chief Executive Officer and Chairman of the Board of Directors since its inception. Effective April 2, 2001, Dr. Gillings will resign as Chief Executive Officer. From 1972 to 1988, Dr. Gillings served as a professor in the Department of Biostatistics at the University of North Carolina at Chapel Hill. During his tenure as a professor, he was active in statistical consulting for the pharmaceutical industry. Dr. Gillings currently serves on the Dean's Advisory Council of the University of North Carolina School of Public Health. Dr. Gillings has been published widely in scientific and medical journals. Dr. Gillings serves as a director of Triangle Pharmaceuticals, Inc., a company engaged in the development of new drug candidates primarily in the antiviral area; WebMD Corporation, a company providing online services to the healthcare industry; and the Medicines Company, a company that develops and commercializes selected pharmaceutical products in late stages of development. Dr. Gillings received a Diploma in Mathematical Statistics from the University of Cambridge and a Ph.D. in Mathematics from the University of Exeter. JIM D. KEVER has served as a director since June 1999. Mr. Kever currently serves as Co-Chief Executive Officer of the Transaction Services Division of WebMD. Mr. Kever served as Chief Executive Officer of ENVOY Corporation ("ENVOY") from the Company's acquisition of ENVOY in March 1999 as a wholly- owned subsidiary until its sale in May 2000. Mr. Kever served as President and Co-Chief Executive Officer of ENVOY from August 1995 until March 1999 and as a director of ENVOY from its incorporation in August 1994 until March 1999. Prior to such time, he served as ENVOY's Executive Vice President, Secretary and General Counsel from the date of incorporation. Mr. Kever previously served as a director and Secretary, 54 57 Treasurer and General Counsel of ENVOY's former parent corporation since 1981 and as Executive Vice President since 1984. Mr. Kever also is a director of Transaction System Architects, Inc., a supplier of electronic payment software products and network integration solutions; 3D Systems Corporation, a manufacturer of technologically advanced solid imaging systems and prototype models; and Tyson Foods, a food production company, where he also serves on the audit and ethics committees. PAMELA J. KIRBY, PH.D. will become the Company's Chief Executive Officer on April 2, 2001. Previously, she served as Head of Global Strategic Marketing and Business Development of the Pharmaceuticals Division of F. Hoffmann-La Roche Ltd. in Basel, Switzerland. Dr. Kirby served from 1996 until 1998 as global commercial director with British Biotech plc, a drug development company. Prior to that, Dr. Kirby held several positions with Astra AB, a pharmaceuticals company, including serving as corporate vice president for Strategy, Marketing and Business Development. She also served as managing director of Astra's subsidiaries in the United Kingdom and Ireland. She has held several board positions in the pharmaceutical industry. Dr. Kirby holds a doctoral degree in clinical pharmacology and an undergraduate degree in pharmacology from the University of London. ARTHUR M. PAPPAS has served as a director since September 1994. Mr. Pappas is Chairman and Chief Executive Officer of A. M. Pappas & Associates, LLC, an international consulting, investment and venture company that works with life science companies, products and related technologies. Prior to founding A. M. Pappas & Associates in 1994, Mr. Pappas was a director on the main board of Glaxo Holdings plc with executive responsibilities for operations in Asia Pacific, Latin America, and Canada. In this capacity, he served as Chairman and Chief Executive Officer of Glaxo Far East (Pte) Ltd. and Glaxo Latin America Inc., as well as Chairman of Glaxo Canada Inc. Mr. Pappas has held various senior executive positions with Abbott Laboratories International Ltd., Merrell Dow Pharmaceuticals, and the Dow Chemical Company, in the United States and internationally. Mr. Pappas is a director of Valentis Inc., a gene therapy research company; Embrex Inc., a research and development company specializing in poultry in-the-egg delivery systems; KeraVision, Inc., a company developing products for reversible vision correction surgery; and AtheroGenics Inc., a biopharmaceutical company focused on research and development of genes that regulate atherosclerosis and cancer. He is also a director of privately-held ArgoMed, Inc., EBM Solutions, Inc. and Elitra Pharmaceuticals. Mr. Pappas received a B.S. in biology from Ohio State University and an M.B.A. in finance from Xavier University. JOHN S. RUSSELL serves as Senior Vice President and General Counsel and Head Global Human Resources. He is also the Corporate Secretary. Mr. Russell joined the Company in 1998 after 12 years in private practice as a partner in the Raleigh office of the Moore and Van Allen law firm, where he was head of the Corporate Practice group. Prior to that time, he was an editor in the trade books division of Houghton Mifflin Company in New York City. Mr. Russell has served as Director of the North Carolina Railroad Company as well as several nonprofit concerns. He has spoken and published widely on legal and literary topics. His novel, Favorite Sons, was published by Algonquin Books in 1992. Mr. Russell received a B.A. degree from the University of North Carolina at Chapel Hill, his M.A. from Columbia University and a J.D. degree from Harvard Law School. ERIC J. TOPOL, M.D. has served as a director since November 1997. Dr. Topol is the Chairman of the Department of Cardiology and co-director of the Heart Center at The Cleveland Clinic Foundation. He has served as Study Chairman for clinical trials of well over 100,000 patients over the past decade. Dr. Topol was a faculty member of the University of Michigan from 1985 until 1991 before moving to his current post. He has authored more than 500 publications in leading peer-review medical journals and is the editor of more than 10 books. Dr. Topol has been elected to the American Society of Clinical Investigation and the American Association of Physicians. He previously served as a director for Rhone Poulenc Rorer, a leading life sciences company specializing in innovations in human, plant and animal health. Dr. Topol received his M.D. at the University of Rochester and completed post-doctoral training at the University of California, San Francisco and the Johns Hopkins Medical Center. VIRGINIA V. WELDON, M.D. has served as a director since November 1997. Dr. Weldon served as Senior Vice President, Public Policy, Monsanto Company, an agro-chemicals and biotechnology (life sciences) 55 58 company, from October 1993 until her retirement in March 1998. Previously, she was Professor of Pediatrics, Vice Chancellor for Medical Affairs and Vice President of the Medical Center at Washington University in St. Louis. Dr. Weldon has received recognition from numerous medical, scientific and educational organizations, among them the Association of American Medical Colleges, of which she served as Chairman. In 1994, Dr. Weldon was one of 18 individuals appointed to the President's Committee of Advisors on Science and Technology. More recently, she became a member of the California Institute of Technology Board of Trustees. Dr. Weldon received her medical degree from the State University of New York at Buffalo. She also completed post-doctoral studies at the Johns Hopkins University. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 2, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 2, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 2, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.
FINANCIAL STATEMENTS FORM 10-K PAGE - -------------------- -------------- Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......................... 29 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... 30 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......................... 31 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.............. 32 Notes to Consolidated Financial Statements.................. 33 Report of Independent Public Accountants.................... 52
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements. (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
EXHIBIT DESCRIPTION - ------- ----------- 3.01(1) -- Amended and Restated Articles of Incorporation, as amended 3.02(2) -- Amended and Restated Bylaws, as amended 4.01 -- Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01) 4.02 -- Amended and Restated Bylaws, as amended (see Exhibit 3.02) 4.03(3) -- Specimen certificate for Common Stock, $0.01 par value per share
56 59
EXHIBIT DESCRIPTION - ------- ----------- 4.04(4) -- Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock 10.01(5)(6) -- Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.02(6)(7) -- Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.03(6)(7) -- Amended and Restated Executive Employment Agreement, dated November 30, 1999, by and between Santo J. Costa and Quintiles Transnational Corp. 10.04(6)(7) -- Amended and Restated Executive Employment Agreement, dated March 17, 2000, by and between Dr. Ludo Reynders and Quintiles, Inc. 10.05(6)(7) -- Amended and Restated Employment Agreement, dated March 30, 1999 by and between Jim D. Kever and Envoy Corporation 10.06(6)(7) -- Amendment to Executive Employment Agreement, dated November 23, 1999, by and between Jim D. Kever and Envoy Corporation 10.07(6)(7) -- Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp. 10.08(6)(7) -- Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp. 10.09(6)(7) -- Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp. 10.10(5)(6) -- Quintiles Transnational Corp. Non-Qualified Employee Incentive Stock Option Plan 10.11(6)(7) -- Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on November 4, 1999 10.12(6)(7) -- Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated 10.13(6)(7) -- Quintiles Transnational Corp. Nonqualified Stock Option Plan 10.14(8) -- Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company 10.15(7) -- Consulting Agreement dated as of January 1, 2000 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on June 15, 2000. 10.16(9) -- Agreement for the Provision of Research Services and Lease of Business Assets dated as of March 3, 1995, between Syntex Pharmaceuticals Limited, Quintiles Scotland Limited, Quintiles (UK) Limited, and Roche Products Limited 10.17(10) -- Credit Agreement dated as of August 7, 1998 10.18 -- Amendment, dated November 8, 2000, to Credit Agreement 10.19(11) -- Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc. 10.20(12) -- Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and Qfinance, Inc.
57 60
EXHIBIT DESCRIPTION - ------- ----------- 10.21(13) -- Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and Quintiles Transnational Corp. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on November 22, 2000. 21 -- Subsidiaries 23.01 -- Consent of Arthur Andersen LLP 24.01 -- Power of Attorney (included on the signature page hereto)
- --------------- (1) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission, on November 15, 1999, and incorporated herein by reference. (2) Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference. (3) Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference. (4) Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference. (5) Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference. (6) Executive compensation plans and arrangements. (7) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference. (8) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference. (9) Exhibit to our Current Report on Form 8-K dated March 6, 1995, as filed with the Securities and Exchange Commission on March 20, 1995, and incorporated herein by reference. (10) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1998, as filed with the Securities and Exchange Commission on November 16, 1998, and incorporated herein by reference. (11) Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference. (12) Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference. (13) Exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 14, 2000, and incorporated herein by reference. (b) Reports on Form 8-K. We filed a Current Report on Form 8-K dated October 19, 2000, including as an exhibit a press release regarding our financial results for the period ended September 30, 2000. 58 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in Durham, North Carolina, on the 30th day of March, 2001. QUINTILES TRANSNATIONAL CORP. By: /s/ DENNIS B. GILLINGS, PH.D. ------------------------------------ Dennis B. Gillings, Ph.D. Chairman and Chief Executive Officer 59 62 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis B. Gillings and James L. Bierman and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DENNIS B. GILLINGS, PH.D. Chairman and Chief Executive March 30, 2001 - ----------------------------------------------------- Officer Dennis B. Gillings, Ph.D. /s/ JAMES L. BIERMAN Chief Financial Officer March 30, 2001 - ----------------------------------------------------- James L. Bierman /s/ ROBERT C. BISHOP Director March 30, 2001 - ----------------------------------------------------- Robert C. Bishop, Ph.D. /s/ E.G.F. BROWN Director March 30, 2001 - ----------------------------------------------------- E. G. F. Brown /s/ VAUGHN D. BRYSON Director March 30, 2001 - ----------------------------------------------------- Vaughn D. Bryson /s/ SANTO J. COSTA Vice-Chairman and Director March 30, 2001 - ----------------------------------------------------- Santo J. Costa /s/ CHESTER W. DOUGLASS Director March 30, 2001 - ----------------------------------------------------- Chester W. Douglass, Ph.D. /s/ JIM D. KEVER Director March 30, 2001 - ----------------------------------------------------- Jim D. Kever /s/ ARTHUR M. PAPPAS Director March 30, 2001 - ----------------------------------------------------- Arthur M. Pappas /s/ ERIC J. TOPOL, M.D. Director March 30, 2001 - ----------------------------------------------------- Eric J. Topol, M.D. /s/ VIRGINIA V. WELDON, M.D. Director March 30, 2001 - ----------------------------------------------------- Virginia V. Weldon, M.D.
60 63 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 3.01(1) -- Amended and Restated Articles of Incorporation, as amended 3.02(2) -- Amended and Restated Bylaws, as amended 4.01 -- Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01) 4.02 -- Amended and Restated Bylaws, as amended (see Exhibit 3.02) 4.03(3) -- Specimen certificate for Common Stock, $0.01 par value per share 4.04(4) -- Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock 10.01(5)(6) -- Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.02(6)(7) -- Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.03(6)(7) -- Amended and Restated Executive Employment Agreement, dated November 30, 1999, by and between Santo J. Costa and Quintiles Transnational Corp. 10.04(6)(7) -- Amended and Restated Executive Employment Agreement, dated March 17, 2000, by and between Dr. Ludo Reynders and Quintiles, Inc. 10.05(6)(7) -- Amended and Restated Employment Agreement, dated March 30, 1999 by and between Jim D. Kever and Envoy Corporation 10.06(6)(7) -- Amendment to Executive Employment Agreement, dated November 23, 1999, by and between Jim D. Kever and Envoy Corporation 10.07(6)(7) -- Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp. 10.08(6)(7) -- Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp. 10.09(6)(7) -- Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp. 10.10(5)(6) -- Quintiles Transnational Corp. Non-Qualified Employee Incentive Stock Option Plan 10.11(6)(7) -- Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on November 4, 1999 10.12(6)(7) -- Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated 10.13(6)(7) -- Quintiles Transnational Corp. Nonqualified Stock Option Plan 10.14(8) -- Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company 10.15(7) -- Consulting Agreement dated as of January 1, 2000 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on June 15, 2000. 10.16(9) -- Agreement for the Provision of Research Services and Lease of Business Assets dated as of March 3, 1995, between Syntex Pharmaceuticals Limited, Quintiles Scotland Limited, Quintiles (UK) Limited, and Roche Products Limited 10.17(10) -- Credit Agreement dated as of August 7, 1998 10.18 -- Amendment, dated November 8, 2000, to Credit Agreement
61 64
EXHIBIT DESCRIPTION - ------- ----------- 10.19(11) -- Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc. 10.20(12) -- Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and Qfinance, Inc. 10.21(13) -- Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and Quintiles Transnational Corp. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on November 22, 2000. 21 -- Subsidiaries 23.01 -- Consent of Arthur Andersen LLP 24.01 -- Power of Attorney (included on the signature page hereto)
- --------------- (1) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission, on November 15, 1999, and incorporated herein by reference. (2) Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference. (3) Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference. (4) Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference. (5) Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference. (6) Executive compensation plans and arrangements. (7) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference. (8) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference. (9) Exhibit to our Current Report on Form 8-K dated March 6, 1995, as filed with the Securities and Exchange Commission on March 20, 1995, and incorporated herein by reference. (10) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1998, as filed with the Securities and Exchange Commission on November 16, 1998, and incorporated herein by reference. (11) Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference. (12) Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference. (13) Exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 14, 2000, and incorporated herein by reference. 62 EX-10.18 2 g67690ex10-18.txt AMENDMENT TO CREDIT AGREEMENT DATED 11/8/2000 1 Amendment to Credit Agreement EXHIBIT 10.18 [FIRST UNION Logo] November 8, 2000 Denise M. Corey Director, Treasury Quintiles Transnational Corp. PO Box 13979 Research Triangle Park, NC 27709-3979 RE: The Credit Agreement dated as of August 7, 1998 by and among Quintiles Transnational Corp., as borrower (the "Borrower"), the Lenders referred to therein, and First Union National Bank, as Administrative Agent (as amended, restated, or otherwise modified, the "Credit Agreement"). Dear Denise: The Borrower has requested that First Union National Bank ("First Union"), in its capacity as Lender under the Credit Agreement, approve the following modification and, subject to the conditions set forth below, First Union has approved such modification of the Credit Agreement. I. Section 9.2 of the Credit Agreement is hereby deleted in its entirety and the following Section 9.2 is inserted in lieu thereof: "Section 9.2 Minimum Interest Coverage Ratio: The Borrower shall not permit, as of any fiscal quarter end, the ratio of (a) the sum of Adjusted EBITR for the four (4) consecutive fiscal quarter period ending on or immediately prior to such date plus the one-time $58.6 million restructuring charge of the Borrower (to the extent deducted during such period) plus interest income to (b) the sum of Interest Expense plus Rental Expense, in each case for the four (4) consecutive fiscal quarter period ending on or immediately prior to such date, to be less than 1.75 to 1.00. For purposes of this covenant calculation, the effect of the Borrower's e-commerce initiative on the Borrower's financial performance will be excluded. II. Any expenses and capital expenditures relating to the Borrower's e-commerce initiative will be deemed to be an "investment" for purposes of Section 10.4(f) of the 2 Amendment to Credit Agreement EXHIBIT 10.18 Credit Agreement, subject to the limitation on investments equal to an amount equal to 15% of Tangible Net Worth, as set forth in the proviso of such Section 10.4. In consideration for this amendment, Quintiles can choose to (1) pay an amendment fee of 5 basis points ($75,000) or (2) place on deposit with First Union's Capital Management Group ("CMG") a minimum of $30,000,000 in cash to be managed by CMG at the direction of Quintiles. The acceptance and payment of option (1) or the acceptance and agreement to a transfer of cash prior to November 30, 2000 pursuant to option (2) is a condition to the effectiveness of this modification letter. All other terms, conditions and provisions of the Note and Loan Documents remain unchanged and in full force and effect, and the Borrower hereby confirms that all of the Representations and Warranties contained in the Credit Agreement are true as of the date hereof. Please indicate your approval of the foregoing by executing the appropriate signature block below. Sincerely. /s/ Mendel Lay Mendel Lay Senior Vice President First Union National Bank AGREED TO AND ACCEPTED AS OF THIS 8th DAY OF NOVEMBER, 2000: QUINTILES TRANSNATIONAL CORP. By: /s/ James L. Bierman -------------------------------------------- Name: James L. Bierman -------------------------------------------- Title: Chief Financial Officer -------------------------------------------- EX-21 3 g67690ex21.txt SUBSIDIARIES OF THE COMPANY 1 SUBSIDIARIES EXHIBIT 21 SUBSIDIARY JURISDICTION - -------------------------------------------------------------------------- Action International Marketing Services Limited England Alchemy Pharmaceuticals Pty. Limited Australia Amaxis, Inc. North Carolina AR-MED Limited England Benefit Canada Medico-Economic Studies, Inc. Canada Benefit Holding, Inc. North Carolina Benefit Research Italia S.r.l. Italy Benefit Transnational Holding Corp. North Carolina Benefit, Inc. North Carolina BRI International Holdings N.V. Belgium BRI International Limited England BRI International SARL France ClinData International (PTY) Limited South Africa G.D.R.U. Limited England Histological Services Limited England Innovex (Australia) Pty Limited Australia Innovex (Australia) Holdings Pty. Limited Australia Innovex (Benelux) BV Holland Innovex (North America) Inc. Delaware Innovex (UK) Limited England Innovex America Holding Company Delaware Innovex Belgium NV Belgium Innovex Brasil Limitada Brazil Innovex GmbH Germany Innovex Holdings Limited England Innovex Limited England Innovex, L.P. New Jersey Innovex Medcom Marketing Group New Jersey Innovex Merger Corp. North Carolina Innovex Overseas Holdings, Ltd./Limited England Innovex SA France Innovex S.r.l. Italy Innovex South Africa Pty Limited [f/k/a PPMS] South Africa Innovex Staff Services. S.r.l. Italy Innovex Turkey S.A. Turkey Laboratorie Novex Pharma Sarl France McPharma (Pty) Limited South Africa Mazebonus Limited England Medical Action Communications Limited England Medical Alliances Pty. Limited Australia Medical Informatics KK Japan Medical Technology Consultants Limited England Medicines Control Consultants Pty Limited South Africa MedLab (Pty) Limited South Africa Minerva Ireland Limited Ireland Minerva Medical Limited United Kingdom MSM Group Limited Partnership North Carolina Nexan PLC England Novex Pharma Ltd. England Penderwood Limited England PharmaBio Development, Inc. North Carolina 1 2 SUBSIDIARIES EXHIBIT 21 Pharma Informatics, Inc. Delaware Phytotherapy Pty. Ltd. South Africa PMSI Database Services, Inc. Delaware PMSI Finance Limited Delaware PMSI Holdings Limited Delaware PMSI Limited England PMSI Scott-Levin, Inc. Delaware QED Communications, Inc. New York QFinance, Inc. Delaware Quintiles (Israel) Ltd. Israel Quintiles (UK) Limited England Quintiles AB Sweden Quintiles Argentina S.A. Argentina Quintiles Asia, Inc. North Carolina Quintiles Benefit France SNC France Quintiles Australia Pty. Limited Australia Quintiles Brasil Ltda. Brazil Quintiles BV The Netherlands Quintiles Canada, Inc. Canada Quintiles Cardiac Alert Limited England Quintiles Clindepharm (Pty.) Limited South Africa Quintiles Clinical Supplies Americas, Inc. New Jersey Quintiles East Asia Pte. Limited Singapore Quintiles Estonia OU Estonia Quintiles European Holdings Limited England Quintiles Finance Limited BV The Netherlands Quintiles Finance Uruguay SRL Uruguay Quintiles GesmbH Ltd. Austria Quintiles GmbH Germany Quintiles Holdings Limited England Quintiles Holdings SNC France Quintiles Hong Kong Limited Hong Kong Quintiles Hungary Kft. Hungary Quintiles, Inc. North Carolina Quintiles Ireland (Finance) Limited Ireland Quintiles Ireland Limited Ireland Quintiles Laboratories Limited North Carolina Quintiles Latin America, Inc. North Carolina Quintiles Limited England Quintiles Medical Development (Shanghai) Company Limited China Quintiles Mexico, S. de R.L. de C.V. Mexico Quintiles Mauritius Holdings, Inc. Mauritius Quintiles NV/SA Belgium Quintiles Oy Finland Quintiles Pacific, Inc. North Carolina Quintiles Phase One Services, Inc. Kansas Quintiles Philippines, Inc. Philippines Quintiles Poland Sp. Zoo Poland Quintiles s.l. Spain Quintiles, S.r.l. Italy Quintiles Scott-Levin, Inc. Delaware Quintiles Services AB Sweden Quintiles South Africa (Pty.) Limited South Africa 2 3 SUBSIDIARIES EXHIBIT 21 Quintiles Spectral (India) Limited. India Quintiles Taiwan Limited Taiwan Quintiles Technologies, Inc. North Carolina Quintiles Thailand Ltd. Thailand Quintiles Transnational Corp. North Carolina Quintiles Transnational Japan KK Japan Quintiles Transnational Korea Co. Ltd. Korea Quintiles Trustees Ltd. England Quintiles Uruguay S.A. Uruguay Royce Recruitment Limited England Servicios Clinicos, S.A. de C.V. Mexico SMG Marketing Group, Inc. North Carolina Source Informatics European Finance, Inc. Delaware Source Informatics European Holdings LLC Delaware Source Informatics European Holdings, Inc. Delaware Spectral Laboratories Limited India Strategic Medical Publishing Limited England Synapse Pharmaceuticals Pty. Limited Australia Synergy Health Care, Inc. Delaware The Clinical Research Foundation (UK) Ltd. England The Lewin Group, Inc. North Carolina The Royce Consultancy Limited Scotland Transforce, S.A. de C.V. Mexico 3 EX-23.01 4 g67690ex23-01.txt CONSENT OF ARTHUR ANDERSEN LLP 1 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: As independent public accountants, we hereby consent to the incorporation of our report dated January 26, 2001 (except with respect to the matter discussed in the first paragraph of Note 6, as to which the date is February 6, 2001) included in this Form 10-K, into the Company's previously filed Registration Statements 33-91026 on Form S-8, 333-03603 on Form S-8, 333-16553 on Form S-8, 333-40493 on Form S-8, 333-60797 on Form S-8, 333-75183 on Form S-8, 333-92987 on Form S-8, and 333-51272 on Form S-8. ARTHUR ANDERSEN LLP Raleigh, North Carolina, March 27, 2001. -----END PRIVACY-ENHANCED MESSAGE-----