0000950144-01-508254.txt : 20011106 0000950144-01-508254.hdr.sgml : 20011106 ACCESSION NUMBER: 0000950144-01-508254 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011101 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23520 FILM NUMBER: 1772421 BUSINESS ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: RIVERBIRCH BLDG STE 200 CITY: DURHAM STATE: NC ZIP: 27703-8411 BUSINESS PHONE: 9199982000 MAIL ADDRESS: STREET 1: 4709 CREEKSTONE DR STREET 2: STE 300 CITY: DURHAM STATE: NC ZIP: 27703-8411 10-Q 1 g72361e10-q.txt QUINTILES TRANSNATIONAL CORP. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2001 Commission file number 000-23520 QUINTILES TRANSNATIONAL CORP. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 56-1714315 ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4709 Creekstone Dr., Suite 200 Durham, NC 27703-8411 ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (919) 998-2000 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes No [ ] The number of shares of Common Stock, $.01 par value, outstanding as of September 30, 2001 was 119,612,095. QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Index
Page ---- Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - September 30, 2001 and December 31, 2000 3 Condensed consolidated statements of operations - Three months ended September 30, 2001 and 2000; nine months ended September 30, 2001 and 2000 4 Condensed consolidated statements of cash flows - Nine months ended September 30, 2001 and 2000 5 Notes to condensed consolidated financial statements - September 30, 2001 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Part II. Other Information Item 1. Legal Proceedings 26 Item 2. Changes in Securities and Use of Proceeds 27 Item 3. Defaults upon Senior Securities - Not Applicable 27 Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 27 Item 5. Other Information - Not Applicable 27 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 Exhibit Index 30
2 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31 2001 2000 ------------ ----------- (unaudited) (Note 1) (In thousands) ASSETS Current assets: Cash and cash equivalents $ 441,912 $ 330,214 Trade accounts receivable and unbilled services, net 450,438 413,992 Investments in debt securities 27,369 31,080 Prepaid expenses 30,169 31,984 Other current assets and receivables 31,158 29,405 ----------- ----------- Total current assets 981,046 836,675 Property and equipment 647,394 602,950 Less accumulated depreciation (260,099) (210,990) ----------- ----------- 387,295 391,960 Intangibles and other assets: Intangibles, net 176,453 194,814 Investments in debt securities 9,502 76,732 Investments in marketable equity securities 204,052 384,040 Deferred income taxes 153,902 29,175 Deposits and other assets 64,350 48,182 ----------- ----------- 608,259 732,943 ----------- ----------- Total assets $ 1,976,600 $ 1,961,578 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $ -- $ 44 Accounts payable and accrued expenses 304,086 255,238 Credit arrangements, current 15,057 20,027 Unearned income 193,916 194,201 Income taxes payable 8,856 51,284 Deferred income taxes 4,399 4,774 Other current liabilities 2,151 2,423 ----------- ----------- Total current liabilities 528,465 527,991 Long-term liabilities: Credit arrangements, less current portion 21,879 18,965 Other liabilities 8,279 9,916 ----------- ----------- 30,158 28,881 ----------- ----------- Total liabilities 558,623 556,872 Shareholders' equity: Preferred stock, none issued and outstanding at September 30, 2001 and December 31, 2000, respectively -- -- Common stock and additional paid-in capital, 119,612,095 and 115,933,182 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 913,921 876,407 Retained earnings 516,566 622,985 Accumulated other comprehensive loss (12,510) (94,686) ----------- ----------- Total shareholders' equity 1,417,977 1,404,706 ----------- ----------- Total liabilities and shareholders' equity $ 1,976,600 $ 1,961,578 =========== ===========
The accompanying notes are an integral part of these condensed consolidated statements. 3 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- ----------------------------- 2001 2000 2001 2000 --------- ---------- ----------- ----------- (in thousands, except per share data) Net revenue $ 407,103 $ 412,344 $ 1,215,873 $ 1,250,296 Costs and expenses: Direct 242,745 247,577 724,859 755,887 General and administrative 128,089 141,042 392,208 421,768 Depreciation and amortization 24,597 22,934 71,143 68,805 Restructuring 52,023 -- 54,169 58,592 Write-off of goodwill and other assets 20,120 -- 20,120 -- Disposal of business -- -- -- 17,325 --------- ---------- ----------- ----------- 467,574 411,553 1,262,499 1,322,377 --------- ---------- ----------- ----------- (Loss) income from operations (60,471) 791 (46,626) (72,081) Impairment of investments (341,949) -- (345,048) -- Gain on sale of investments, net 235 1,387 4,702 1,387 Other income 3,580 4,635 14,433 9,776 --------- ---------- ----------- ----------- Total other (expense) income (338,134) 6,022 (325,913) 11,163 --------- ---------- ----------- ----------- (Loss) income from continuing operations before income taxes (398,605) 6,813 (372,539) (60,918) Income tax (benefit) expense (132,694) 2,248 (124,093) (20,102) --------- ---------- ----------- ----------- (Loss) income from continuing operations (265,911) 4,565 (248,446) (40,816) Income from discontinued operation, net of income taxes -- -- -- 16,770 Extraordinary gain from sale of discontinued operation, net of income taxes 142,030 -- 142,030 436,327 --------- ---------- ----------- ----------- Net (loss) income $(123,881) $ 4,565 $ (106,416) $ 412,281 ========= ========== =========== =========== Basic net (loss) income per share: (Loss) income from continuing operations $ (2.22) $ 0.04 $ (2.11) $ (0.35) Income from discontinued operation -- -- -- 0.14 Extraordinary gain from sale of discontinued operation 1.19 -- 1.21 3.77 --------- ---------- ----------- ----------- Basic net (loss) income per share $ (1.03) $ 0.04 $ (0.90) $ 3.56 ========= ========== =========== =========== Diluted net (loss) income per share: (Loss) income from continuing operations $ (2.22) $ 0.04 $ (2.11) $ (0.35) Income from discontinued operation -- -- -- 0.14 Extraordinary gain from sale of discontinued operation 1.19 -- 1.21 3.77 --------- ---------- ----------- ----------- Diluted net (loss) income per share $ (1.03) $ 0.04 $ (0.90) $ 3.56 ========= ========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated statements. 4 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ 2001 2000 --------- ---------- (In thousands) OPERATING ACTIVITIES Net (loss) income $(106,416) $ 412,281 Income from discontinued operation, net of income taxes -- (16,770) Gain on the sale of discontinued operation, net of income taxes (142,030) (436,327) --------- --------- Loss from continuing operations (248,446) (40,816) Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 71,143 68,805 Restructuring charge accrual, net 32,872 50,874 Loss on disposal of business -- 17,325 Loss (gain) from impairments and sales of investments, net 340,346 (1,387) Benefit from deferred income taxes (229,256) (8,437) Change in operating assets and liabilities 134,445 (146,299) Other 1,332 1,203 --------- --------- Net cash provided by (used in) operating activities 102,436 (58,732) INVESTING ACTIVITIES Proceeds from disposition of property and equipment 7,460 6,379 Acquisition of property and equipment (59,769) (73,323) Proceeds from disposal of discontinued operation, net of expenses -- 391,500 Acquisition of businesses, net of cash acquired (6,620) (15,169) Proceeds from redemption of (purchases of) debt securities, net 71,882 (2,160) Purchases of equity investments, net (25,836) (6,092) Other -- (3) --------- --------- Net cash (used in) provided by investing activities (12,883) 301,132 FINANCING ACTIVITIES (Decrease) increase in lines of credit, net (44) 10,351 Principal payments on credit arrangements, net (12,466) (156,402) Issuance of common stock, net 46,050 14,394 Repurchase of common stock (7,709) (13,455) Dividend from discontinued operation -- 17,086 Other -- 1 --------- --------- Net cash provided by (used in) financing activities 25,831 (128,025) Effect of foreign currency exchange rate changes on cash (3,686) (6,120) --------- --------- Increase in cash and cash equivalents 111,698 108,255 Cash and cash equivalents at beginning of period 330,214 191,653 --------- --------- Cash and cash equivalents at end of period $ 441,912 $ 299,908 ========= =========
The accompanying notes are an integral part of these condensed consolidated statements. 5 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) September 30, 2001 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements of the Company. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2000 of Quintiles Transnational Corp. (the "Company"). For an update of the Company's legal proceedings, refer to Item 1 of Part II of this Form 10-Q. 2. Acquisitions During the first quarter of 2001, the Company acquired OEC, SA, a Switzerland-based company that provides drug safety services to the pharmaceutical industry, and Ungerer Laboratory, a laboratory based in Pretoria, South Africa specializing in microbiology, molecular biology and hematology. These transactions were accounted for as purchases with an aggregate purchase price of approximately $7.1 million. 3. Stock Repurchase The authorization by the Board of Directors to repurchase up to $200 million of the Company's Common Stock expired March 1, 2001. The Company did not enter into any agreements to repurchase its Common Stock under this authorization during 2001. On March 13, 2001, the Board of Directors authorized the Company to repurchase up to $100 million of the Company's Common Stock. During the first nine months of 2001, the Company repurchased 520,000 shares of its Common Stock for an aggregate price of approximately $8.6 million. 4. Significant Customers One customer accounted for 10.2%, 10.6% and 10.5% of consolidated net revenue for the three and nine months ended September 30, 2001 and the three months ended September 30, 2000, respectively. No one customer accounted for greater than 10% of consolidated net revenue for the nine months ended September 30, 2000. These revenues were derived from each of the Company's segments. 6 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 5. Restructuring Charges During the third quarter of 2001, the Company adopted a restructuring plan which resulted in the recognition of a restructuring charge of $50.9 million. In addition, the Company recognized a restructuring charge of approximately $1.1 million as a revision of an estimate to a 2000 restructuring plan. The restructuring charge consists of $31.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.7 million of exit costs. As part of this restructuring, approximately 1,000 positions worldwide will be eliminated and as of September 30, 2001, 561 individuals have been notified of their termination. Positions will be eliminated in each of our segments. During the second quarter of 2001, the Company recognized a $2.1 million restructuring charge relating primarily to a reorganization of the Internet initiative and the commercialization group in the United States. All of the 40 positions to be eliminated as a part of this restructuring were terminated as of June 30, 2001. As of September 30, 2001, the following amounts were recorded for the 2001 restructurings (in thousands):
Activity Nine-Months Ended September 30, 2001 -------------------------------------------------------------------------- Balance at Write-Offs/ Balance at December 31, 2000 Accruals Payments September 30, 2001 ----------------- -------- ----------- ------------------ Severance and related costs $ -- $ 33,104 $ (6,637) $26,467 Exit costs -- 11,743 (1,306) 10,437 Asset impairment write-offs -- 8,237 (8,237) -- ------- -------- -------- ------- $ -- $ 53,084 $(16,180) $36,904 ======= ======== ======== =======
During 2000, the Company adopted a restructuring plan in January ("January 2000 Plan") and a follow-on restructuring plan later in the year, which resulted in the recognition of an aggregate restructuring charge of $58.6 million. Of the approximately 990 positions that were to be eliminated under these two plans, 909 positions have been terminated as of September 30, 2001, which includes 764 positions under the January 2000 Plan. Activity during the first nine months of 2001 is as follows for the 2000 restructurings (in thousands):
Balance at Write-Offs/ Balance at December 31, 2000 Accruals Payments September 30, 2001 ----------------- -------- ----------- ------------------ Severance and related costs $ 8,867 $ -- $ (7,265) $1,602 Exit costs 5,788 1,085 (3,767) 3,106 ------- -------- -------- ------ $14,655 $ 1,085 $(11,032) $4,708 ======= ======== ======== ======
7 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 6. Write-off of Goodwill and Other Assets In the third quarter of 2001, the Company recognized a $20.1 million charge to write-off goodwill and other operating assets primarily relating to goodwill recorded in four separate acquisitions in the commercialization segment. The goodwill was deemed impaired and written-off due to changing business conditions and strategic direction. 7. Impairment of Investments The Company continually reviews declines in fair value of investments in marketable equity securities for declines that may be other than temporary. In connection with this, the Company recognized a loss of approximately $345.0 million for the nine months ended September 30, 2001 to establish a new cost basis for certain investments, primarily WebMD Corporation ("WebMD"). 8. Discontinued Operation During the third quarter of 2001, the Company completed a tax basis study for ENVOY Corporation ("ENVOY") which was sold to WebMD during 2000. As a result of this study, the Company's tax basis in ENVOY was determined which resulted in an approximate $142.0 million reduction in the income taxes provided on the sale of ENVOY. 9. Net Income Per Share The following table sets forth the computation of the weighted-average shares used when calculating the basic and diluted net income per share (in thousands):
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 2001 2000 2001 2000 ------- ------- ------- ------- Weighted average shares: Basic weighted average shares 119,838 115,702 117,786 115,711 Effect of dilutive securities: Stock options -- 2,437 -- -- ------- ------- ------- ------- Diluted weighted average shares 119,838 118,139 117,786 115,711 ======= ======= ======= =======
The effect of options to purchase approximately 27.7 million shares of common stock outstanding during the three and nine months ended September 30, 2001 were not included in the computation of diluted net income per share because the effect on loss from continuing operations would have been antidilutive. The effect of warrants to purchase 10 million shares of common stock outstanding during the three and nine months ended September 30, 2001 were not included in the computation of diluted net income per share because the effect on loss from continuing operations would have been antidilutive. 8 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 10. Comprehensive Income The following table represents the Company's comprehensive income for the three and nine months ended September 30, 2001 and 2000 (in thousands):
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 2001 2000 2001 2000 --------- -------- --------- --------- Net (loss) income $(123,881) $ 4,565 $(106,416) $ 412,281 Other comprehensive income (loss): Reclassification adjustment, WebMD common stock, net of income taxes 206,155 -- 206,155 -- Unrealized (loss) gain on marketable securities, net of income taxes (89,109) 49,617 (116,354) 116,240 Foreign currency adjustment 13,722 (11,984) (7,622) (31,473) --------- -------- --------- --------- Comprehensive income (loss) $ 6,887 $ 42,198 $ (24,237) $ 497,048 ========= ======== ========= =========
9 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 11. 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 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 informatics group is primarily responsible for providing market research solutions and strategic analysis to support healthcare decisions. The Company does not include net revenue and expenses relating to the Internet initiative, charges relating to restructurings, write-off of goodwill and other assets and disposal of business, other income (expense) and income tax expense (benefit) in segment profitability. Overhead costs are allocated based upon management's best estimate of efforts expended in managing the segments. There are not any significant intersegment revenues.
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- --------------------------------- 2001 2000 2001 2000 --------- ----------- ----------- ----------- Net revenue: Product development $ 222,519 $ 201,610 $ 664,151 $ 604,575 Commercialization 171,595 196,167 508,620 602,780 Informatics 12,989 14,339 43,069 42,143 Internet initiative -- 228 33 798 --------- ----------- ----------- ----------- $ 407,103 $ 412,344 $ 1,215,873 $ 1,250,296 ========= =========== =========== =========== Income from operations: Product development $ 10,376 $ 2,220 $ 28,166 $ (11,610) Commercialization 9,007 11,433 24,666 43,813 Informatics (5,433) (4,017) (12,543) (11,784) Internet initiative (2,278) (8,845) (12,626) (16,583) --------- ----------- ----------- ----------- $ 11,672 $ 791 $ 27,663 $ 3,836 ========= =========== =========== ===========
10 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 12. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," that requires all business combinations initiated after June 30, 2001 to be accounted for as purchases. The Company adopted SFAS No. 141 as required on July 1, 2001. The adoption did not have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," requiring that all intangible assets without a contractual life no longer be amortized but reviewed at least annually for impairment. The Company will adopt SFAS No. 142 when required to do so on January 1, 2002. The adoption of SFAS No. 142 is expected to reduce the Company's amortization expense before income taxes by approximately $2.0 million per quarter. The Company has not assessed the impact of any impairment under the new tests prescribed by the standard. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The statement is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the provisions of this statement to determine their impact on the Company's results of operations and financial position. 13. Subsequent Event On October 12, 2001, the Company jointly announced with WebMD the settlement of litigation and the resolution of the disputes between the companies. As part of the settlement, WebMD agreed to pay the Company $185 million in cash for all 35 million shares of WebMD common stock owned by the Company. The Company will also receive an additional payment from WebMD if, on or before June 30, 2004, WebMD is acquired for a price greater than $4.00 per share or ENVOY is acquired for a price greater than $500 million. In addition, as part of the settlement, the outstanding warrant to purchase up to 10 million shares of the Company's common stock, at $40 per share, held by WebMD, was cancelled. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Information set forth in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent our judgement 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," 11 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES "estimate," "believe," or "continue," 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 the market for our products and services will not grow as we expect, the risk that our PharmaBio transactions will not generate revenues, profits or return on investment at the rate or levels we expect, our ability to efficiently distribute backlog among project management groups and match demand to resources, our actual operating performance, the actual savings and operating improvements resulting from our restructuring activities, our ability to maintain large client contracts or to enter into new contracts, changes in trends in the pharmaceutical industry, and our ability to operate successfully in new lines of business. In addition, our data products business remains subject to state and federal regulations and contracts with data vendors. See "Risk Factors" below for additional factors that could cause actual results to differ. Results of Continuing Operations Three Months Ended September 30, 2001 and 2000 Net revenue for the third quarter of 2001 was $407.1 million, a decrease of $5.2 million or (1.3%) as compared to the third quarter of 2000 net revenue of $412.3 million. Net revenue decreased as a result of large commercialization contracts that were terminated or converted in-house by our customers instead of being renewed. Net revenue was also negatively impacted due to the travel restrictions implemented after the terrorist acts on September 11, 2001 and reduced data management activities as a result of the Nimda virus. The decrease was partially offset by an increase of approximately $2.9 million from our Phase I development services. Net revenue in the Asia Pacific region increased $10.4 million or 31.6% to $43.2 million but decreased $20.8 million or 8.7% to $217.5 million in the Americas region primarily resulting from the decline in the commercialization segment. Net revenue in the Europe and Africa region increased $5.2 million or 3.6% to $146.5 million. The growth in net revenue was negatively impacted by approximately $9.9 million due to the effect of foreign currency fluctuations related to the strengthening of the US Dollar relative to the euro, other European currencies and the Japanese yen. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $242.7 million or 59.6% of net revenue for the third quarter of 2001 versus $247.6 million or 60.0% of net revenue for the third quarter of 2000. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $128.1 million or 31.5% of net revenue for the third quarter of 2001 versus $141.0 million or 34.2% of net revenue for the third quarter of 2000. General and administrative expenses decreased primarily due to the effects of reductions relating to our restructuring activities including a decrease in spending on our Internet initiative. These reductions were partially offset by an increase of $2.5 million in costs associated with the continued implementation of our shared service center initiative and $2.3 million in costs associated with the realignment of business development. 12 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Depreciation and amortization were $24.6 million or 6.0% of net revenue for the third quarter of 2001 versus $22.9 million or 5.6% of net revenue for the third quarter of 2000. Depreciation expense increased $1.6 million due to the increase in our capitalized asset base. During the third quarter of 2001, we announced a strategic plan that we are implementing across each service line and geographic area of our business which we believe will allow us to meet the changing needs of our customers and to increase our opportunity for growth by committing ourselves to innovation, quality and efficiency. We intend to successfully implement this plan through: - partnering structures - leveraging technology and information - realigning business development - hiring and retaining quality employees - creating efficiencies through shared service centers and real time human resource management In connection with this plan, we recognized a $50.9 million restructuring charge. In addition, we recognized a restructuring charge of approximately $1.1 million as a revision of an estimate to a 2000 restructuring plan. The restructuring charge consists of $31.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.7 million of exit costs. As part of this restructuring, approximately 1,000 positions will be eliminated and as of September 30, 2001, 561 individuals have been notified of their termination. We are targeting the restructuring to result in annualized cost savings of approximately $50 million to $55 million. Also, in the third quarter of 2001, we recognized a $20.1 million charge to write-off goodwill and other operating assets primarily relating to goodwill recorded in four separate acquisitions in our commercialization segment. The goodwill was deemed impaired and written-off due to changing business conditions and strategic direction. Loss from operations was $60.5 million for the third quarter of 2001 versus income from operations of $791,000 for the third quarter of 2000. Excluding the $52.0 million restructuring charge and $20.1 million write-off of goodwill and other assets, income from operations was $11.7 million for the third quarter of 2001. Other expense was $338.1 million for the third quarter of 2001. Included in other expense for the third quarter of 2001 was a $341.9 million write-down of our cost basis in investments held by us, primarily WebMD Corporation, which management deemed to be an other than temporary decline in their fair value. Excluding this charge, other income for the third quarter of 2001 was $3.8 million versus $6.0 million for the third quarter of 2000. The decrease was primarily the result of a $2.1 million decrease in net interest income, due to a decline in interest rates and a $1.2 million decrease in gains from the sale of investments. The effective income tax rate for the third quarter of 2001 was (33.3%) versus a 33.0% effective income tax rate for the third quarter of 2000. Since we conduct operations on a global basis, our effective income tax rate may vary. 13 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Analysis by Segment: The following table summarizes the operating activities for our three reportable segments for the three months ended September 30, 2001 and 2000. We do not include net revenue and expenses relating to the Internet initiative, charges related to restructurings, write-off of goodwill and other assets and disposal of a business, other income (expense) and income tax expense (benefit) in our segment analysis (dollars in millions).
Net Revenue (Loss)/Income From Operations -------------------------------------- --------------------------------------------------- Growth % of Net % of Net 2001 2000 % 2001 Revenue 2000 Revenue ------ ------ ------ ----- -------- ----- -------- Product development $222.5 $201.6 10.4% $10.4 4.7% $ 2.2 1.1% Commercialization 171.6 196.2 (12.5) 9.0 5.2 11.4 5.8 Informatics 13.0 14.3 (9.4) (5.4) (41.8) (4.0) (28.0) ------ ------ ----- ----- $407.1 $412.1 (1.2)% $14.0 3.4% $ 9.6 2.3% ====== ====== ===== =====
The product development group's financial performance improvement was a result of several factors, including process enhancements and cost reduction efforts in the American operations and growth in our Phase I development services. These improvements were partially offset by the effects of lost revenue, estimated to be approximately $2.2 million, due to the September 11, 2001 terrorist acts and the Nimda virus. The commercialization group's financial performance was negatively impacted during the quarter by the continuing effects of large contracts converted in-house or terminated by our customers instead of being renewed. The decrease in net revenues and operating margins in our informatics group was due, in part, to our restructuring plans and the uncertainty that such plans created among the employees in the informatics group. As a percentage of our total number of employees, the employees in our informatics group represent by far the largest group of our employees impacted by the restructuring plans. As a result, since the announcement of our restructuring plans, the net revenues and operating margins in our informatics group have been negatively impacted more than other segments of our business. The details of the strategic plan and related restructuring, which is being communicated to the employees, are expected to reduce the uncertainty surrounding our overall restructuring plans and the related impact such plans will have on the employees of this group. Nine Months Ended September 30, 2001 and 2000 Net revenue for the nine months ended September 30, 2001 was $1.22 billion, a decrease of $34.4 million or (2.8%) as compared to the nine months ended September 30, 2000 net revenue of $1.25 billion. Net revenue decreased primarily as a result of large commercialization contracts that were terminated or converted in-house by our customers instead of being renewed. The decrease was partially offset by an increase of approximately $10.6 million from our Phase I development services. Net revenue in the Asia Pacific region increased $29.4 million or 33.5% to $117.1 million but decreased $70.2 million or 9.7% to $654.0 million 14 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES in the Americas region primarily resulting from the decline in the commercialization segment. Net revenue in the Europe and Africa region increased $6.5 million or 1.5% to $444.8 million. The growth in net revenue was negatively impacted by approximately $43.4 million due to the effect of foreign currency fluctuations related to the strengthening of the US Dollar relative to the euro, other European currencies and the Japanese yen. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $724.9 million or 59.6% of net revenue for the first nine months of 2001 versus $755.9 million or 60.5% of net revenue for the first nine months of 2000. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $392.2 million or 32.3% of net revenue for the first nine months of 2001 versus $421.8 million or 33.7% of net revenue for the first nine months of 2000. General and administrative expenses decreased primarily due to the effects of reductions relating to our restructuring activities including a decrease in the spending for our Internet initiative. These reductions were partially offset by an increase of $4.9 million in costs associated with the realignment of our internal business development structure and $8.1 million in costs associated with the continued implementation of our shared service center initiative. During 2001, we opened our finance shared service center in Scotland. We anticipate the implementation of the global finance and human resources shared service centers to continue during the remainder of 2001. Depreciation and amortization were $71.1 million or 5.9% of net revenue for the first nine months of 2001 versus $68.8 million or 5.5% of net revenue for the first nine months of 2000. Depreciation expense increased $2.5 million due to the increase in our capitalized asset base. In response to a decrease in demand for our services, we announced a restructuring plan during the nine months ended September 30, 2000, resulting in a $58.6 million restructuring charge. This charge consisted of $33.2 million related to severance payments, $11.3 million related to asset impairment write-offs and $14.0 million in exit costs. As of September 30, 2001, approximately 909 positions have been eliminated and approximately $3.6 million remains to be spent in connection with the restructuring plan. In connection with the aforementioned strategic plan announced during 2001, we recognized $54.2 million of restructuring charges which included approximately $1.1 million relating to a 2000 restructuring plan. The restructuring charges consist of $33.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.9 million of exit costs. As part of these restructurings, approximately 1,040 positions will be eliminated, and as of September 30, 2001, approximately 601 individuals have been notified of their termination. For the nine months ended September 30, 2001, we recognized a $20.1 million charge to write-off goodwill and other operating assets. For the nine months ended September 30, 2000, we recognized a $17.3 million loss on the disposal of a business. Loss from operations was $46.6 million for the first nine months of 2001 versus $72.1 million for the first nine months of 2000. Excluding the charges relating to the restructurings, the write-off of goodwill and other 15 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES assets, and the disposal of a business, income from operations was $27.7 million for the first nine months of 2001 versus $3.8 million for the first nine months of 2000. Other expense was $325.9 million for the first nine months of 2001. Included in other expense for the first nine months of 2001 was a $345.0 million write-down of our cost basis in investments held by us, primarily WebMD, which management deemed to be an other than temporary decline in their fair value. Excluding this charge, other income for the nine months ended September 30, 2001 was $19.1 million versus $11.2 million for the first nine months of 2000. The increase was primarily due to a $3.3 million increase in gains from the sale of investments and a $3.9 million increase in net interest income as a result of an increase in investable funds and a decrease in debt which was partially offset by the decline in interest rates. The effective income tax rate for the first nine months of 2001 was (33.3%) versus a (33.0%) effective income tax rate for the first nine months of 2000. Since we conduct operations on a global basis, our effective income tax rate may vary. Analysis by Segment: The following table summarizes the operating activities for our three reportable segments for the nine months ended September 30, 2001 and 2000. We do not include net revenue and expenses relating to the Internet initiative, charges relating to restructurings, write-off of goodwill and other assets and the disposal of a business, other income (expense) and income tax expense (benefit) in our segment analysis (dollars in millions).
Net Revenue (Loss)/Income From Operations --------------------------------------- -------------------------------------------------- Growth % of Net % of Net 2001 2000 % 2001 Revenue 2000 Revenue --------- ---------- ------ -------- ------- -------- -------- Product development $ 664.2 $ 604.6 9.9% $ 28.2 4.2% $ (11.6) (1.9)% Commercialization 508.6 602.8 (15.6) 24.7 4.8 43.8 7.3 Informatics 43.1 42.1 2.2 (12.5) (29.1) (11.8) (28.0) ---------- ---------- -------- -------- $ 1,215.8 $ 1,249.5 (2.7)% $ 40.3 3.3% $ 20.4 1.6% ========== ========== ======== ========
The product development group's financial performance improvement was a result of several factors, including process enhancements and cost reduction efforts in the American and European operations and growth in our Phase I development services. The commercialization group's financial performance was negatively impacted by several factors, including the effects of large contracts converted in-house or terminated by our customers instead of being renewed and the effects of a collection issue with a non-pharmaceutical customer receivable. These were partially offset by the effects of cost reduction efforts, primarily in the United States. The informatics group's financial performance was impacted by the uncertainty created among the employees in this group due to the strategic plan and related restructuring and the costs associated with developing new data products. 16 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Liquidity and Capital Resources Cash provided by operations were $102.4 million for the nine months ended September 30, 2001 versus cash used in operations of $58.7 million for the comparable period of 2000. Included in cash provided by operations for the nine months ended September 30, 2001 was an income tax refund of $47.6 million. Investing activities, for the nine months ended September 30, 2001, consisted primarily of capital asset and equity investment purchases. These expenditures were offset by proceeds from the redemption of debt securities. Capital asset purchases required an outlay of cash of $59.8 million for the nine months ended September 30, 2001 compared to an outlay of $73.3 million for the same period in 2000. In 1999, we acquired substantial assets of Aventis' Kansas City-based Drug Innovation and Approval Facility. Subsequent to September 30, 2001, we paid approximately $58 million, which constitutes the remainder of the purchase price for that facility. Total working capital was $452.6 million as of September 30, 2001, an increase of $143.9 million versus working capital of $308.7 million as of December 31, 2000. Net receivables from customers (trade accounts receivable and unbilled services, net of unearned income) were $256.5 million at September 30, 2001 as compared to $219.8 million at December 31, 2000. As of September 30, 2001, trade accounts receivable were $253.2 million versus $246.3 million at December 31, 2000. Unbilled services were $197.2 million at September 30, 2001 versus $167.7 million at December 31, 2000, offset by unearned income balances of $193.9 million and $194.2 million, respectively. The number of days revenue outstanding in trade accounts receivable and unbilled services, net of unearned income, were 49 days at September 30, 2001, as compared to 43 days at December 31, 2000, as a result of customer payment patterns. Investments in debt securities were $36.9 million at September 30, 2001 as compared to $107.8 million at December 31, 2000. Our investments in debt securities consist primarily of U.S. Government Securities, which are callable by the issuer, at par, and money funds. The $70.9 million decrease is a result of investments being called by the issuer. Investments in strategic marketable equity securities at September 30, 2001 were $204.1 million, a decrease of $180.0 million, as compared to $384.0 million at December 31, 2000. This decrease is primarily due to the decline in the market price of WebMD Corporation common stock. Excluding the decline in the market price of WebMD common stock, investments in marketable equity securities decreased approximately $51.2 million due to unrealized losses on the portfolio as a result of market price declines. In accordance with our policy to continually review declines in fair value of our marketable equity securities for declines that may be other than temporary, we recorded a loss of approximately $345.0 million for the nine months ended September 30, 2001 to establish a new cost basis for certain investments, primarily WebMD common stock. On October 12, 2001, we jointly announced with WebMD the settlement of litigation and the resolution of the disputes between the companies. As part of the settlement, WebMD agreed to pay us $185.0 million in cash for all 35 million shares of WebMD common stock owned by us. We will also receive an additional payment from WebMD if, on or before June 30, 2004, WebMD is acquired for a price greater than $4.00 per share or ENVOY is acquired for a price greater than $500 million. As part of this settlement, we will continue to receive data from WebMD only through February 28, 2002. In addition, as part of the settlement, we have 17 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES terminated our existing contracts with WebMD, which, among other things, absolves us from any obligation to fund WebMD up to $100 million to develop a web-based suite of integrated products. We have available to us a (pound)10.0 million (approximately $14.7 million) unsecured line of credit and a (pound)1.5 million (approximately $2.2 million) general banking facility with a U.K. bank. At September 30, 2001, we did not have any outstanding balances on these facilities. Our $150 million senior unsecured credit facility with a U.S. bank expired in August 2001 in accordance with its terms. In March 2001, the Board of Directors authorized us to repurchase up to $100 million of our common stock until March 1, 2002. During the first nine months of 2001, we entered into agreements to repurchase 520,000 shares for an aggregate price of $8.6 million. Shareholders' equity at September 30, 2001 was $1.42 billion versus $1.40 billion at December 31, 2000. Based on our current operating plan, we believe that our available cash and cash equivalents and investments in marketable securities, together with future cash flows from operations and borrowings under our line of credit agreements will be sufficient to meet our foreseeable cash needs in connection with our operations. As part of our business strategy, we review many acquisition candidates in the ordinary course of business, and in addition to acquisitions already made, we are continually evaluating new acquisition and expansion possibilities. We may from time to time seek to obtain debt or equity financing in our ordinary course of business or to facilitate possible acquisitions or expansion. 18 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES RISK FACTORS In addition to the other information provided in our reports, you should consider the following factors carefully in evaluating our business and us. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impair our business operations. If any of the following risks occur, our business, financial condition, or results of operations could be materially adversely affected. Changes in outsourcing trends in the pharmaceutical and biotechnology industries could adversely affect our operating results and growth rate. Economic factors and industry trends that affect our primary customers, pharmaceutical and biotechnology companies, also affect our business. For example, the practice of many companies in these industries has been to hire outside organizations like us to conduct large clinical research and sales and marketing projects. This practice has grown substantially over the past decade, and we have benefited from this trend. Some industry commentators believe that the rate of growth of outsourcing will continue to trend downward. If these industries reduce their tendency to outsource those projects, our operations, financial condition and growth rate could be materially and adversely affected. Recently, we also believe we have been negatively impacted by mergers and other factors in the pharmaceutical industry, which appear to have slowed decision making by our customers and delayed certain trials. A continuation of these trends would have an ongoing adverse effect on our business. In addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future regulatory cost containment efforts limit the profits which can be derived on new drugs, our customers may reduce their research and development spending, which could reduce the business they outsource to us. We cannot predict the likelihood of any of these events or the effects they would have on our business, results of operations or financial condition. If we are unable to successfully develop and market potential new services, our growth could be adversely affected. Another key element of our growth strategy is the successful development and marketing of new services that complement or expand our existing business. If we are unable to succeed in (1) developing new services and (2) attracting a customer base for those newly developed services, we will not be able to implement this element of our growth strategy, and our future business, results of operations and financial condition could be adversely affected. 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 19 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 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 developing an Internet platform for our product development and commercialization services. We have entered into agreements with certain vendors for them to provide web-enablement services to help us develop this platform. If such vendors fail to perform as required or if there are substantial delays in developing and implementing this platform, we may have to make substantial further investments, internally or with third parties, to achieve our objectives. Meeting our objectives is dependent on a number of factors which may not take place as we anticipate, including obtaining adequate web-enablement services, creating web-enablement services which our customers will find desirable and implementing our business model with respect to these services. Also, these expenditures are likely to negatively impact our profitability, at least until our web-enabled products are operationalized. Over time, we envision continuing to invest in extending and enhancing our Internet platform in other ways to further support and improve our services. We cannot assure you that any improvements in operating income resulting from our Internet capabilities will be sufficient to offset our investments in the Internet platform. Our results could be further negatively impacted if our competitors are able to execute their services on a web-based platform before we can launch our Internet services or if they are able to structure a platform that attracts clients away from our services. Our ability to provide informatics services depends on agreements with third parties to access healthcare data. 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. On October 12, 2001, we entered into a settlement agreement with WebMD which ended the litigation and resolved the disputes between our two companies. In connection with the settlement agreement, we will continue to receive healthcare data from WebMD only through February 28, 2002. As a result, we have begun to seek to obtain similar data from alternate sources. While we believe that we will be able to secure alternative sources prior to February 28, 2002, we cannot assure you that we will be able to do so, or that third parties which provide data will be willing to negotiate or provide terms that are acceptable to us, or will be able 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 acceptable terms, our informatics service group will not be able to support its contracts with existing customers or continue development projects as currently planned, which would have an adverse effect on our business. 20 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES The potential loss or delay of our large contracts could adversely affect our results. Many of our customers can terminate our contracts upon 15-90 days' notice. In the event of termination, our contracts often provide for fees for winding down the project, but these fees may not be sufficient for us to maintain our margins, and termination may result in lower resource utilization rates. 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. Also, since 1999 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, $1.93 billion at June 30, 2001, 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 arrangements with customers in which we take on some of the risk of the potential success or failure of the customer's product. These transactions may include a strategic investment in a customer, providing financing to a customer, or 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 or payment from the product, investment or financing is less than our costs of performance, investment or financing. 21 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES If we lose the services of Dennis Gillings, Pamela Kirby 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, and Pamela Kirby, Ph.D., our Chief Executive Officer. Our performance also depends on our ability to attract and retain qualified management and professional, scientific and technical operating staff, as well as our ability to recruit qualified representatives for our contract sales services. The departure of Dr. Gillings, Dr. Kirby 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. 22 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Relaxation of government regulation could decrease the need for the services we provide. Governmental agencies throughout the world, but particularly in the United States, highly regulate the drug development/approval process. A large part of our business involves helping pharmaceutical and biotechnology companies through the regulatory drug approval process. Any relaxation in regulatory approval standards could eliminate or substantially reduce the need for our services, and, as a result, our business, results of operations and financial condition could be materially adversely affected. Potential regulatory changes under consideration in the United States and elsewhere include mandatory substitution of generic drugs for patented drugs, relaxation in the scope of regulatory requirements or the introduction of simplified drug approval procedures. These and other changes in regulation could have an impact on the business opportunities available to us. Failure to comply with existing regulations could result in a loss of revenue. Any failure on our part to comply with applicable regulations could result in the termination of ongoing clinical research or sales and marketing projects or the disqualification of data for submission to regulatory authorities, either of which could have a material adverse effect on us. For example, if we were to fail to verify that informed consent is obtained from patient participants in connection with a particular clinical trial, the data collected from that trial could be disqualified, and we could be required to redo the trial under the terms of our contract at no further cost to our customer, but at substantial cost to us. Proposed and final laws and regulations may create a risk of liability and along with certain contractual obligations may increase the cost of our business or limit our service offerings. The confidentiality of individually identifiable health information and the circumstances under which such individually identifiable health records may be released for inclusion in our databases or used in other aspects of our business are subject to substantial government regulation both domestically and internationally. Additional U.S. 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 U.S. and international regulations governing individually identifiable health 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 in the U.S. may adopt health information legislation or regulations that contain privacy and security provisions that are more burdensome than the proposed U.S. federal regulations. In the recently settled dispute with WebMD, WebMD had opined that a number of state laws in the U.S. could apply which may require modifications to access specifications for particular data elements in de-identified health information. 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 privacy or security of individually identifiable health information. In addition, in connection with our settlement agreement with WebMD we have agreed to indemnify WebMD for losses arising out of or in connection with the settlement agreement itself, the cancelled Data Rights Agreement with WebMD, our data business, the collection, accumulation, storage or use of data by ENVOY for the purpose 23 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES of transmitting or delivering data to us, any transmission or delivery by ENVOY of data to us, or violations of law or contract attributable to any such event, action or circumstance. Under the terms of our agreement, our indemnification obligation for the first $20 million in aggregate losses is limited to 50%. 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 informatics services, which include our data analysis services, are characterized by rapidly changing technology, evolving industry standards and frequent introduction of new and enhanced services. To succeed, we must continue to: - enhance our existing services; - introduce new services on a timely and cost-effective basis to meet evolving customer requirements; - achieve market acceptance for new services; and - respond to emerging industry standards and other technological changes. Exchange rate fluctuations may affect our results of operations and financial condition. We derive a large portion of our net revenue from international operations; for example, we derived approximately 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. 24 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES We try to limit these risks through exchange rate fluctuation provisions stated in our service contracts, or we may hedge our transaction risk with foreign currency exchange contracts or options. Although we may hedge our transaction risk, there were no open foreign exchange contracts or options relating to service contracts at September 30, 2001. 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% and 10.6% of our net revenues for the three and nine months ended September 30, 2001, respectively. 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 Health and Human Services, also referred to as HHS, issued the final rule on Standards for Privacy of Individually Identifiable Health Information to implement the privacy requirements for HIPAA. This rule generally (1) imposes 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) establishes limitations on and procedures for (a) the exercise of those individuals' rights, (b) the uses and disclosures of protected health information and (c) language in contractual agreements between covered entities and their business associates with regards to protected health information. The effective date of the final rule was April 14, 2001 and the compliance date is April 14, 2003. HHS' Office for Civil Rights, the enforcement office for the rule, issued guidance in the form of questions and answers on the rule in July 2001 and according to the Secretary, further modifications and/or guidelines to the regulation will be forthcoming in the next few months. If state or federal legislation or a more restrictive rule 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 (any such state law may be subject to enforceability challenges based on constitutional and federal preemption issues). 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. If we are unable to submit electronic records to the FDA according to FDA regulations, our ability to service our clients during the FDA approval process could be adversely affected. The United States Food and Drug Administration, also referred to as the FDA, published 21 CFR Part 11 "Electronic Records; Electronic Signatures; Final Rule" ("Part 11") in 1997. Part 11 became effective in August 1997 and defines the regulatory requirements that must be met for FDA acceptance of electronic records and/or electronic signatures in place of the paper equivalents. Part 11 requires that those utilizing such electronic records and/or signatures employ procedures and controls designed to ensure the authenticity, 25 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES integrity and, as appropriate confidentiality of electronic records and, in certain circumstances, Part 11 requires those utilizing electronic records to ensure that a person appending an electronic signature cannot readily repudiate the signed record. Pharmaceutical and biotechnology companies are increasing their utilization of electronic records and electronic signatures and are requiring their service providers and partners to do likewise. Many of our customers, or potential customers, are targeting 2003 for full compliance of all their affected systems. Becoming compliant with Part 11 involves considerable complexity and cost. Our ability to provide services to our customers in full compliance with applicable regulations includes a requirement that, over time, we become compliant with the requirements of Part 11. If we are unable to achieve this objective, our ability to provide services to our customers which meet FDA requirements may be adversely affected. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company did not have any material changes in market risk from December 31, 2000. PART II. Other Information Item 1. Legal Proceedings Beginning on September 30, 1999, several purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina against us and several of our executive officers and directors on behalf of all persons who purchased or otherwise acquired shares of our common stock between July 16, 1999, and September 15, 1999. These actions were subsequently consolidated and plaintiffs filed an amended complaint purporting to represent a class of purchasers of 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. On October 5, 2001, the district court judge approved the settlement, ending the dispute. 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 26 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES 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, which WebMD appealed to the United States Court of Appeals for the Fourth Circuit on April 16, 2001. On October 12, 2001, we entered into a settlement agreement with WebMD which settled the litigation and resolved our dispute. The United States District Court for the Eastern District of North Carolina approved the conditional voluntary dismissal on October 17, 2001. Additionally, the United States Court of Appeals for the Fourth Circuit dismissed the appeal on October 18, 2001. 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, based on consultation with legal counsel, that the outcome of these matters would not materially affect our consolidated financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds During the three months ended September 30, 2001, options to purchase 8,512 shares of our common stock were exercised at an average exercise price of $2.2258 per share in reliance on Rule 701 under the Securities Act of 1933. We granted such options prior to becoming subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to our Non-qualified Employee Incentive Stock Option Plan. Item 3. Defaults upon Senior Securities -- Not applicable Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information -- Not applicable 27 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.01 Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation (b) During the three months ended September 30, 2001, the Company filed two reports on Form 8-K. The Company filed a Form 8-K, dated July 19, 2001, including its press release announcing the Company's earnings information for the period ended June 30, 2001. The Company filed a Form 8-K, dated September 11, 2001, including its press release announcing the Company's operational and earnings targets for 2002. No other reports on Form 8-K were filed during the three months ended September 30, 2001. 28 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Quintiles Transnational Corp. --------------------------------------- Registrant Date November 1, 2001 /s/ Dennis B. Gillings ------------------------- ---------------------------------- Dennis B. Gillings, Chairman Date November 1, 2001 /s/ Pamela J. Kirby ------------------------- ---------------------------------- Pamela J. Kirby, Chief Executive Officer Date November 1, 2001 /s/ James L. Bierman ------------------------- ---------------------------------- James L. Bierman, Chief Financial Officer
29 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Description ------- ----------- 10.01 Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation
30 EX-10.01 3 g72361ex10-01.txt SETTLEMENT AGREEMENT DATED 10/12/01 EXHIBIT 10.01 SETTLEMENT AGREEMENT This Settlement Agreement ("Agreement" or "Settlement Agreement") is made this 12th day of October 2001 by and among Quintiles Transnational Corp. ("Quintiles"), a corporation organized and existing under the laws of the State of North Carolina; WebMD Corporation ("WebMD"), a corporation organized and existing under the laws of the State of Delaware; and ENVOY Corporation ("ENVOY"), a corporation organized and existing under the laws of the State of Delaware. This Agreement shall become binding and take effect as of the date hereof (the "Effective Date"). BACKGROUND 1. On January 22, 2000, Quintiles and Healtheon/WebMD Corp. ("HWMD") entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which they agreed, inter alia, for Quintiles' wholly-owned subsidiary ENVOY to become a wholly-owned subsidiary of HWMD (the "Merger"). 2. The parties consummated the Merger on May 26, 2000. In connection therewith the parties entered into (a) a Data Rights Agreement (the "Data Rights Agreement") under which they agreed, inter alia, that HWMD would furnish certain data to Quintiles, (b) an Internet Product Development and Marketing Agreement (the "Internet Agreement") under which they agreed, inter alia, to engage in the collaborative development, marketing and commercialization of a portfolio of Internet-based products and services for the pharmaceutical industry, and (c) a Tax Sharing Agreement (the "Tax Sharing Agreement") under which they agreed, inter alia, to allocate certain tax burdens and benefits which occurred prior to the consummation of the Merger and certain other tax matters. Simultaneously, Quintiles issued HWMD a warrant to purchase ten million (10,000,000) shares of Quintiles Common Stock (the "Warrant"). Quintiles and HWMD amended the Data Rights Agreement through a Temporary Addendum to Data Rights Agreement (the "Temporary Addendum"), dated as of May 22, 2000. 3. On September 12, 2000, HWMD changed its name to WebMD Corporation. 4. On February 24, 2001, WebMD suspended its delivery of data under the Data Rights Agreement. 5. On or about February 25, 2001, Quintiles commenced a lawsuit against WebMD in the Superior Court of Wake County, North Carolina captioned Quintiles Transnational Corp. v. WebMD Corporation, Civil Action No. 01 CVS 2289, which lawsuit was subsequently removed by WebMD to the United States District Court for the Eastern District of North Carolina, Western Division, where it is captioned Quintiles Transnational Corp. v. WebMD Corporation, 5:01 CV 180 BO(3) (the "Litigation"). 6. Quintiles alleges in the Litigation, inter alia, that WebMD's suspension of the delivery of data on February 24, 2001 constituted a material breach of the Data Rights Agreement by WebMD. 7. On March 20, 2001, the United States District Court for the Eastern District of North Carolina entered in the Litigation a written order granting Quintiles' motion for a preliminary injunction requiring the uninterrupted and unaltered flow of data (the "Preliminary Injunction"). 8. On April 26, 2001 WebMD filed a Notice of Appeal with the United States Court of Appeals for the Fourth Circuit, appealing the District Court's March 20, 2001 order (the "Appeal"). 9. On October 9, 2001 Quintiles filed and served its Amended Complaint in the Litigation asserting various claims against WebMD, ENVOY, Martin J. Wygod, and W. Michael Long, and on that same date WebMD filed its Appeal Brief. 10. In addition to the matters in dispute in the Litigation, additional disputes have also arisen between Quintiles and WebMD concerning the parties' respective rights and obligations under the Data Rights Agreement, Internet Agreement and Tax Sharing Agreement. 11. Quintiles and WebMD have agreed to resolve and to compromise between them on a permanent and final basis all matters and issues in dispute regarding the Litigation, the Data Rights Agreement including the Temporary Addendum, the Internet Agreement, the Tax Sharing Agreement, the Warrant, and certain other matters, as set forth in this Agreement. TERMS NOW, THEREFORE, for and in consideration of the mutual promises set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Quintiles and WebMD hereby agree as follows: 1. Definitions As used in this Agreement, the following terms shall have the meanings set forth below: (a) "Acquirer" means any person or entity, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, other than Quintiles, WebMD or one of their Affiliates. (b) "Affiliate" shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, Quintiles or WebMD, respectively, as defined and used under Rule 405 of Regulation C of the Securities Act of 1933, as amended. (c) "Closing" shall mean the date WebMD makes payment of the purchase price for, and Quintiles transfers its title, interest and ownership rights in, the Shares. (d) "ENVOY Liquidity Event" means the closing of a transaction pursuant to which WebMD sells or otherwise transfers to an Acquirer all or substantially all of the stock or assets of ENVOY in one or a series of related transactions including through sale, consolidation, merger, business combination or similar transaction, provided that there may be no more than one ENVOY Liquidity Event and provided further that there shall be no ENVOY Liquidity Event after or concurrent with a WebMD Liquidity Event. (e) "Liquidity Event" means either an ENVOY Liquidity Event or a WebMD Liquidity Event. (f) "WebMD Liquidity Event" means the closing of a transaction pursuant to which (i) WebMD consolidates with, merges into or engages in a business combination or similar transaction, or a series of related transactions, with an Acquirer with the effect that the persons who were the shareholders of WebMD immediately prior to the effective time of such merger, consolidation or other transaction hold, immediately following the consummation of such transaction, less than 50% of the combined voting power of the surviving or resulting corporation (or other entity) ordinarily (and apart from rights accruing 2 under special circumstances) having the right to vote in the election of directors; or (ii) all or substantially all of WebMD's assets or more than 50% of its common stock are sold or otherwise transferred to any Acquirer. (g) "WebMD Share Price" means the average of the volume weighted average trading price per share of common stock of WebMD for the three consecutive trading days up to and including the trading day that is two trading days before the date of the Liquidity Event. 2. Delivery of Data (a) Delivery of Data. WebMD will deliver and provide data to Quintiles, at no charge, at all times as of and after the Effective Date and through February 28, 2002 (the "Transition Period"), from the sources, in the manner and in the de-identified, encrypted format (such format being the "Access Specifications") as WebMD, ENVOY or any of WebMD's Affiliates (collectively, "WebMD Companies" and each a "WebMD Company") has been providing under the Data Rights Agreement and the Preliminary Injunction in the period immediately prior to the Effective Date, for use by Quintiles internally and in data products. The data to be delivered pursuant to this Agreement will be delivered free of any liability to make any royalty payment and will be delivered completely without charge or cost to Quintiles. The parties hereto agree that after February 28, 2002, Quintiles may continue to use the data previously provided, to the full extent provided by law, all without any liability to make any royalty payment to WebMD and all without any charge or cost to Quintiles. Nothing in this Section 2(a) is intended or shall be construed to relieve Quintiles of its obligations under the Indemnification and Contribution Arrangement (as defined below). (b) Suspension of Access to Data. Notwithstanding Section 2(a), if during the Transition Period any existing or future customer of a WebMD Company (a "WebMD Customer") requests in writing such WebMD Company to cease the flow of data transmitted to or received from such customer by such WebMD Company to Quintiles, WebMD may cease the flow of such data to Quintiles to the extent of such written request, provided that WebMD delivers prompt written notice to Quintiles of any such request and that WebMD continues or resumes providing such suspended data (as the case requires) as soon as possible (but not later than five (5) business days) after receiving authorization and instruction from such customer to do so on such customer's behalf. 3. Customer Contact During the Transition Period, the content of any communication by Quintiles with any WebMD Customer during the Transition Period must be approved by WebMD in writing, which approval will not be unreasonably withheld or delayed. In addition, Quintiles agrees to notify WebMD in advance of any such communication. During the Transition Period, any communication or action with WebMD Customers by Quintiles and WebMD must be consistent with each party's desire to maintain good relations with such customers and must not impair either party's relationship with such customers, provided that this Section 3 is neither intended to be nor shall be construed as creating an agreement not to solicit each other's customers (except as provided by this Section 3) or not to compete. No non-solicitation, except as provided by this Section 3, or non-competition rights or obligations are imposed on either party by this Agreement. 3 4. Post-Transition Period After the Transition Period, WebMD shall have no further obligation to provide data to Quintiles, nor shall WebMD initiate action with a court or governmental authority that is intended to restrict, prohibit, or otherwise impair Quintiles' use of data provided on or prior to February 28, 2002; provided, however, that nothing in this Section 4 or elsewhere in this Agreement shall be construed to prevent WebMD from (i) responding truthfully to inquiries from third parties; (ii) providing documents, information or testimony in response to subpoenas and other requests from governmental authorities or in connection with judicial or administrative proceedings; or (iii) raising any claim or defense in connection with enforcement or other actions initiated by governmental authorities or lawsuits filed by consumers, customers or other parties. 5. Purchase of WebMD Stock Owned by Quintiles WebMD agrees to purchase and Quintiles agrees to sell thirty-five million (35,000,000) shares of WebMD common stock, par value $.0001 per share, now held by Quintiles (the "Shares") for a purchase price of One Hundred Eighty-Five Million Dollars ($185,000,000) in immediately available funds. As soon as practicable following execution of this Agreement, not to exceed three (3) business days, Quintiles shall transfer its entire title, interest and ownership rights in the Shares to WebMD by delivery to WebMD or its designee of share certificate(s) evidencing the Shares and endorsed for transfer to WebMD, against (and contingent upon) payment of the purchase price therefor by WebMD by certified check, wire transfer or such other form of payment in same day funds as shall be mutually agreed upon by Quintiles and WebMD. Quintiles shall deliver to WebMD all certificates representing the Shares free and clear of any Encumbrances. WebMD hereby waives any applicable transfer restrictions contained in Section 8.13 of the Merger Agreement solely to permit the sale of Shares by Quintiles to WebMD. 6. Quintiles' Liquidity Event Recapture Rights (a) If (i) a Liquidity Event occurs on or before June 30, 2003 or (ii) on or before June 30, 2003, WebMD enters into a written definitive agreement with an Acquirer to consummate a Liquidity Event that closes on or before June 30, 2004, WebMD shall pay Quintiles (in the manner specified below) 100% of the Liquidity Event Price Difference (defined below) upon the closing of such Liquidity Event. If on or before June 30, 2004, but after June 30, 2003, WebMD enters into a written definitive agreement with an Acquirer to consummate a Liquidity Event that closes on or before June 30, 2004, WebMD shall pay Quintiles (in the manner specified below) 80% of the Liquidity Event Price Difference upon the closing of such Liquidity Event. (b) The Liquidity Event Price Difference will equal: (i) in the case of a WebMD Liquidity Event, (x) the amount by which the purchase price per WebMD common share applicable to such WebMD Liquidity Event exceeds Four Dollars ($4.00) per share times (y) thirty-five million (35,000,000); or (ii) in the case of an ENVOY Liquidity Event, 10% of the amount by which the sale price applicable to such Envoy Liquidity Event exceeds Five Hundred Million Dollars ($500,000,000). (c) If a WebMD Liquidity Event occurs, upon the closing of such WebMD Liquidity Event, WebMD will pay Quintiles the appropriate amount, as determined pursuant to Sections 6(a) and 6(b) above, at WebMD's option in cash or WebMD common stock. If WebMD pays Quintiles in WebMD 4 common stock, such common stock shall be delivered immediately prior to the closing of such WebMD Liquidity Event and shall be exchanged as part of such WebMD Liquidity Event for the same consideration received by other WebMD shareholders upon the occurrence of the WebMD Liquidity Event and such consideration will have the same degree of transferability and in all respects be the same as that received by other non-Affiliate shareholders of WebMD, provided that WebMD's obligation to pay the Liquidity Event Price Difference for such WebMD Liquidity Event shall be satisfied if WebMD pays Quintiles the lesser of (i) the number of shares of WebMD common stock otherwise payable under this Section 6 and (ii) 35,000,000 shares of WebMD common stock. (d) If an ENVOY Liquidity Event occurs, upon the closing of such ENVOY Liquidity Event, WebMD will pay Quintiles the appropriate amount, as determined pursuant to Sections 6(a) and 6(b) above, at WebMD's option in cash or the consideration received by WebMD in such ENVOY Liquidity Event or WebMD common stock (which is freely transferable or subject to an effective resale registration statement). If WebMD pays Quintiles in the consideration received by WebMD, such consideration shall have the same degree of transferability and in all respects be the same as that received by WebMD. If WebMD pays Quintiles in WebMD common stock, WebMD's obligation to pay the Liquidity Event Price Difference for such Envoy Liquidity Event shall be satisfied if WebMD pays Quintiles the lesser of (i) the number of shares of WebMD common stock otherwise payable under this Section 6 and (ii) 35,000,000 shares of WebMD common stock. (e) If the WebMD Liquidity Event is the first Liquidity Event to occur following the date hereof or if a WebMD Liquidity Event occurs concurrent with an ENVOY Liquidity Event, Quintiles will be entitled to the appropriate amount, as determined pursuant to Sections 6(a) and 6(b) above, only with respect to the WebMD Liquidity Event. If an ENVOY Liquidity Event occurs prior to any WebMD Liquidity Event, the amount of any Liquidity Event Price Difference otherwise payable by WebMD pursuant to Sections 6(a) and 6(b) above to Quintiles in respect of a subsequent WebMD Liquidity Event shall be reduced by the prior amount of any Liquidity Event Price Difference paid by WebMD to Quintiles in respect of the ENVOY Liquidity Event (except that such reduction shall be appropriately adjusted to the extent WebMD has made a special distribution to its shareholders of the consideration received in the ENVOY Liquidity Event). For the avoidance of doubt, this Section is intended to prevent double payment to the extent of any amount actually paid by WebMD to Quintiles in respect of an ENVOY Liquidity Event. (f) Quintiles' rights to receive any and all payments under this section will terminate following the occurrence of any WebMD Liquidity Event (except with respect to such WebMD Liquidity Event) whether or not such WebMD Liquidity Event gives rise to the payment of a Liquidity Event Price Difference under this Agreement. For the avoidance of doubt, a Liquidity Event shall not include any action by WebMD or its Affiliates designed to create an artificial Liquidity Event avoiding or seeking to avoid the observance or performance of any of WebMD's obligations regarding the Liquidity Event recapture rights of Quintiles set forth in this Agreement, including but not limited to, by means of amendment of WebMD's or an Affiliate's articles of incorporation, reorganization, transfer of capital stock or assets, consolidation, dissolution, issue or sale of securities or any other similar action. (g) If, at any time after the date hereof, WebMD shall (i) pay a dividend or make a distribution on its common stock in additional shares of common stock, (ii) subdivide its outstanding shares of common stock into a larger number of shares of common stock, or (iii) combine its outstanding shares of common stock into a smaller number of shares of common stock, the Liquidity Event Price Difference (including the price per share and the number of shares referred to in Sections 6(b), (c) and (d)) shall be adjusted appropriately, The adjustments required by this Section 6(g) shall be made whenever and as often as any specified event requiring an adjustment shall occur, so that a calculation of 5 a Liquidity Event Price Difference made immediately before and immediately after the event or the record date therefor, as, applicable, requiring adjustment would be the same. (h) The following provisions shall apply: For purposes of Section 6(b)(i), the "purchase price per WebMD common share" in a WebMD Liquidity Event shall be (A) the cash amount per share paid by the Acquirer acquiring such shares (or otherwise received by holders of WebMD common stock), in the event of an acquisition of WebMD common stock for cash; (B) an amount equal to the WebMD Share Price, in the event of an acquisition of WebMD common stock for securities or cash and securities of an Acquirer; or (C) in the case of an acquisition of all or substantially all of the assets of WebMD, the fair market value, as determined in good faith by the board of directors of WebMD (and subject to the dispute resolution set forth below) on the day before the date of the WebMD Liquidity Event, of the consideration paid by the Acquirer acquiring all or substantially all of the assets of WebMD divided by the total number of outstanding shares of common stock of WebMD on a fully diluted basis (using the Treasury method for any unexercised options). For purposes of Section 6(b)(ii) the "sale price" in an ENVOY Liquidity Event shall be the fair market value, as determined in good faith by the board of directors of WebMD (and subject to the dispute resolution set forth below) on the day before the ENVOY Liquidity Event, of the consideration paid by the Acquirer acquiring all or substantially all of the assets of ENVOY. If WebMD elects to pay the Liquidity Event Price Difference in the form of the consideration received in an ENVOY Liquidity Event, the value of such consideration shall be the fair market value of such consideration as determined pursuant to the immediately preceding sentence. In the event Quintiles disputes the determination of the fair market value made by the board of directors of WebMD upon the occurrence of a Liquidity Event, then WebMD and Quintiles shall jointly appoint a nationally recognized accounting firm to determine such fair market value and such determination shall be final and binding upon the parties. In the event the parties cannot agree on the appointment of such accounting firm within ten (10) days of the commencement of the dispute, the parties agree that such appointment shall be referred to the American Arbitration Association for determination. If WebMD elects to pay the Liquidity Event Price Difference in the form of WebMD common stock, the value of each such share of common stock shall be the WebMD Share Price. 7. Entry of Voluntary Dismissal with Prejudice Quintiles and WebMD shall cause their respective attorneys of record to sign and to present to the U.S. District Court for the Eastern District of North Carolina for entry of a conditional voluntary dismissal with prejudice in the form attached hereto as Exhibit 1 (the "Voluntary Dismissal"). Such Voluntary Dismissal shall be entered as soon as practicable after the Closing. Immediately upon approval and entry of the Voluntary Dismissal by the Court, the parties shall cause their respective attorneys of record to sign and file with the U.S. Court of Appeals for the 4th Circuit a motion voluntarily dismissing the Appeal with prejudice, with each side to bear its own costs and attorneys' fees, all in the form as attached hereto as Exhibit 4. Notwithstanding the entry of the Voluntary Dismissal, this Agreement and all terms and conditions hereof shall survive and be enforceable against the parties. In the event the Court declines to enter the Voluntary Dismissal in the form proposed, Quintiles and WebMD agree to retract the proposed Voluntary Dismissal, in which case WebMD and the other defendants shall not serve an Answer or otherwise respond to Quintiles' Amended Complaint, Quintiles shall not seek an entry of default or default judgment, the parties shall not engage in discovery, the parties shall cooperate in placing the Litigation and Appeal in abeyance during the Transition Period, and the parties shall, immediately after 6 the expiration of the Transition Period, execute and file a stipulation of dismissal with prejudice of both the Litigation and Appeal wherein the parties shall each bear their own respective costs and attorneys' fees. In the event of a delay by the Court in entering the Voluntary Dismissal, WebMD shall consent to such motion or motions by Quintiles for extension(s) of time to file and serve Quintiles' responsive brief in the Appeal as Quintiles may reasonably require. 8. Termination of Agreements Effective upon Closing, the parties agree as follows: (a) without further action the Data Rights Agreement will terminate and be of no further force or effect. (b) without further action the Temporary Addendum will terminate and be of no further force or effect. (c) without further action the Internet Agreement will terminate and be of no further force or effect. (d) without further action the Tax Sharing Agreement will terminate and be of no further force or effect. The parties hereby acknowledge and agree that Quintiles intends to claim all available federal, state and local income tax deductions for compensation expenses incurred with respect to the exercise of Quintiles stock options by any current or former employee of (or service provider to) ENVOY or any of its subsidiaries, and WebMD covenants not to file any tax returns or take any reporting positions inconsistent with this Section 8(d). (e) without further action the Warrant will terminate and be of no further force or effect. Following Closing, except as otherwise provided herein and notwithstanding any provisions to the contrary contained in any of the agreements so terminated (including without limitation survival provisions), there will be no outstanding obligations, including without limitation any payment obligations, on the part of either Quintiles or WebMD under any of the agreements so terminated. 9. Transfer of Software (a) Upon Closing, WebMD will deliver the Software, as defined in the Temporary Addendum (including without limitation the MD-5 hashing program), in source code together with installation instructions, Initialization Vector documentation (as defined in the Temporary Addendum) and all other related documentation that ENVOY has prepared to Perot Systems Corporation, 12404 Park Central Drive, Dallas, Texas 75251, Attention: Mr. Paul Lake (the "Trusted Third Party"). WebMD will reasonably cooperate with Quintiles and the Trusted Third Party in connection with the delivery of the Software, installation on the Trusted Third Party's server and verification that the Software is successfully functioning after such installation. (b) Quintiles and the Trusted Third Party have executed an agreement, dated October 5, 2001, whereby the Trusted Third Party has agreed not to deliver the Software to Quintiles and not to re-identify any de-identified data. (c) WebMD will retain a copy of the Software as provided under the Software License Agreement, dated as of May 26, 2000 by and between the parties (the "Software License") solely to continue to de-identify data between the date hereof and March 1, 2002. Notwithstanding Section 6.1 of 7 the Software License Agreement the license granted thereunder will extend until March 1, 2002. Section 6.2 of the Software License is further amended to require WebMD to (a) cease using the Software on March 1, 2002, and (b) certify to Quintiles within ten (10) days that (1) WebMD has, at the election of Quintiles, either delivered to the Trusted Third Party or destroyed all copies of the Software and (2) that the licensed copy has not been copied or used for any other purpose. 10. Indemnification Effective upon Closing, without any further action by either party, WebMD and Quintiles agree to abide by the terms of the Indemnification and Contribution Arrangement incorporated herein by reference and attached hereto as Exhibit 2 (the "Indemnification and Contribution Arrangement"). 11. Limitation of Liability Neither party will be liable to the other for indirect, incidental, consequential, punitive or special damages, including damages for lost profits, business interruption or loss of business information. This limitation will not apply (i) in the event WebMD willfully refuses to provide Quintiles with the data in accordance with the terms hereof, (ii) to the Indemnification and Contribution Arrangement, as described in Section 10 above, and (iii) to the confidentiality provisions relating to the protection of WebMD customer information. 12. General Mutual Release (a) Upon Closing and except as provided in Section 12(d), WebMD (for itself and its subsidiaries, and its and their respective successors and assigns, and any persons or entities controlling, controlled by or under common control with, WebMD) and each of ENVOY, Martin J. Wygod and W. Michael Long (the "WebMD Releasors") hereby release and forever discharge Quintiles and Quintiles' directors, officers, shareholders, present and former parent corporations, present and former subsidiary corporations, present and former sister corporations, present and former affiliated entities, principals, employees, insurers, subrogors, subrogees, predecessors, successors, assigns, agents, attorneys, and any persons controlling, controlled by or under common control with, Quintiles (hereinafter the "Quintiles Released Parties"), from (i) any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, costs, contracts, agreements, controversies, liens, damages, judgments, claims and demands whatsoever whether in law or in equity, whether known or unknown, which the WebMD Releasors ever had or now have against the Quintiles Released Parties, or any one or group of the Quintiles Released Parties, for any reason whatsoever and (ii) any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, costs, contracts, agreements, controversies, liens, damages, judgments, claims and demands whatsoever whether in law or in equity, whether known or unknown, which the WebMD Releasors ever had, now have or may in the future have against the Quintiles Released Parties, or any one or group of the Quintiles Released Parties arising from or relating to: (1) The Litigation (or matters which could have been alleged in the Litigation); (2) The Appeal (or matters which could have been alleged in the Appeal); (3) The Data Rights Agreement and the Temporary Addendum, including but not limited to any representation or warranty thereunder; any party's performance or non-performance of any obligation thereunder; the transmittal of data thereunder by WebMD to Quintiles; and any amount due and payable or alleged to be due and payable thereunder by any party; 8 (4) The Internet Agreement, including but not limited to any representation or warranty thereunder; any party's performance or non-performance any obligation thereunder; and any amount due and payable or alleged to be due and payable thereunder by any party; (5) The Tax Sharing Agreement; (6) The Warrant; (7) Any claim arising in whole or in part from, or relating in any way to, the acquisition, purchase, ownership, sale or disposition of WebMD, ENVOY or Quintiles securities. The release set forth in this Section 12 is agreed to by the WebMD Releasors with full knowledge and understanding on the part of the WebMD Releasors that there may be more serious consequences, damages, or injuries than alleged or perceived in the Litigation or the Appeal. (b) Upon Closing and except as provided in Section 12(d), Quintiles (for itself and its subsidiaries, and its and their respective successors and assigns, and any persons or entities controlling, controlled by or under common control with, Quintiles) and Dennis B. Gillings (the "Quintiles Releasors") hereby release and forever discharge WebMD and WebMD's directors, officers, shareholders, present and former parent corporations, present and former subsidiary corporations, present and former sister corporations, present and former affiliated entities, principals, employees, insurers, subrogors, subrogees, predecessors, successors, assigns, agents, attorneys, and any persons controlling, controlled by or under common control with, WebMD (including, but not limited to, ENVOY, Martin J. Wygod and W. Michael Long) (hereinafter the "WebMD Released Parties"), from (i) any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, costs, contracts, agreements, controversies, liens, damages, judgments, claims and demands whatsoever whether in law or in equity, whether known or unknown, which the Quintiles Releasors ever had or now have against the WebMD Released Parties, or any one or group of the WebMD Released Parties, for any reason whatsoever and (ii) any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, costs, contracts, agreements, controversies, liens, damages, judgments, claims and demands whatsoever whether in law or in equity, whether known or unknown, which the Quintiles Releasors ever had, now have or may in the future have against the WebMD Released Parties, or any one or group of the WebMD Released Parties arising from or relating to: (1) The Litigation (or matters which could have been alleged in the Litigation); (2) The Appeal (or matters which could have been alleged in the Appeal); (3) The Data Rights Agreement and the Temporary Addendum, including but not limited to any representation or warranty thereunder; any party's performance or non-performance of any obligation thereunder; the transmittal of data thereunder by WebMD to Quintiles; and any amount due and payable or alleged to be due and payable thereunder by any party; (4) The Internet Agreement, including but not limited to any representation or warranty thereunder; any party's performance or non-performance any obligation thereunder; and any amount due and payable or alleged to be due and payable thereunder by any party; (5) The Tax Sharing Agreement; (6) The Warrant; 9 (7) Any claim arising in whole or in part from, or relating in any way to, the acquisition, purchase, ownership, sale or disposition of WebMD, ENVOY or Quintiles securities. The release set forth in this Section 12 is agreed to by the Quintiles Releasors with full knowledge and understanding on the part of the Quintiles Releasors that there may be more serious consequences, damages, or injuries than alleged or perceived in the Litigation or the Appeal. (c) The parties hereto acknowledge that the claims released herein encompass any and all claims that each party does not know or suspect to exist in its favor at the time of the release that, if known, might have affected that party's decision to enter into this Settlement Agreement and the mutual releases contained in this Section 12. As to any and all claims released herein, each party shall be deemed to have expressly waived and relinquished, to the fullest extent permitted by law, the provisions, rights and benefits of California Civil Code Section 1542, which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Each party shall be deemed to waive any and all provisions, rights and benefits conferred by any law or any state or territory of the United States, or principle of common law, that is similar, comparable or equivalent to Section 1542 of the California Civil Code. Each party may hereafter discover facts relating to the claims released herein in addition to or different from those which such persons believed to be true on the date of the execution of this Settlement Agreement. The claims released herein shall, nonetheless, be deemed to be fully, finally and forever settled and released upon the execution of this Settlement Agreement, without regard to the subsequent discovery or existence of such additional or different facts. (d) Nothing contained in this Section 12 shall release, acquit, discharge, waive, relinquish, diminish, or modify: (1) Any obligation, covenant, representation or warranty by Quintiles or WebMD in this Agreement (including any exhibits or attachment hereto) or any instrument required to be executed pursuant to this Agreement; (2) Any term or provision of the Voluntary Dismissal entered in the Litigation by the Court; (3) WebMD's obligations to indemnify officers and directors as set forth in Section 8.12 of the Merger Agreement, except with respect to those matters that are subject to Quintiles' indemnification obligations described under the Indemnification and Contribution Arrangement; (4) Quintiles' indemnification obligation in connection with the ENVOY class action litigation, as provided in Section 8.16 of the Merger Agreement and in Schedule 8.16 of the ENVOY Disclosure Letter delivered by Quintiles in connection with the Merger Agreement; or (5) WebMD's obligations to indemnify Dennis B. Gillings, pursuant to WebMD's Certificate of Incorporation, By-laws and the Indemnification Agreement between WebMD and Dennis B. Gillings, as a result of his having been a director of WebMD, except with respect to those matters that are subject to Quintiles' indemnification obligations described under the Indemnification and Contribution Arrangement. 10 13. Representations and Warranties by Quintiles Quintiles represents and warrants to WebMD as follows: (a) Quintiles has been represented in this matter by attorneys at law, whom it has selected; it has consulted its respective legal counsel as to the effects of this Agreement; it has received advice of its legal counsel as to the effects of this Agreement; and it has had full opportunity to seek any other advice it might consider to be desirable in connection with this matter. (b) Quintiles has fully investigated to its own satisfaction all facts surrounding the various claims, controversies, and disputes. (c) Quintiles has read this Agreement; it is entering into this Agreement freely and voluntarily; it has ascertained and weighed all facts and circumstances likely to influence its judgment herein; it has given due consideration to the provisions herein; it has been fully informed and has full knowledge of the terms, conditions, and effects of this Agreement; it thoroughly understands and consents to all provisions hereof; and it is fully satisfied with the terms of this Agreement. (d) No promise or agreement has been made by WebMD as a consideration for this Agreement except as herein recited, and the execution hereof has not been induced by any representation of WebMD except as herein recited. (e) Quintiles has all requisite power and authority to execute, deliver this Agreement and to perform the transactions contemplated herein; the execution, delivery and performance of his Agreement does not, and the consummation of the transactions contemplated herein will not, violate any provision of Quintiles' Articles of Incorporation or By-laws or any applicable law or regulation, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which Quintiles or any of its Affiliates is a party or by which Quintiles or any of its Affiliates is bound. (f) Quintiles has duly and properly taken all action required by law, its Articles of Incorporation, its By-laws, or otherwise to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein; and when so executed, this Agreement constitutes Quintiles' legal, valid and binding obligation in accordance with the terms hereof. (g) There has been no assignment, transfer, conveyance or other disposition, in whole or in part, of any of the accounts, actions, agreements, bills, bonds, causes of action, claims, contracts, controversies, covenants, damages, debts, demands, doings, dues, executions, expense, indemnities, judgments, liabilities, omission, promises, reckonings, suits, sums, sums of money, trespasses, and variances, in law or in equity, released, relieved, waived, relinquished, and discharged by this Agreement. (h) This Agreement, when duly executed by Quintiles and WebMD, will constitute legal, valid and binding obligations of Quintiles enforceable against it in accordance with its terms. (i) Quintiles is the true and lawful beneficial and record owner of the Shares and has good and marketable title thereto, free and clear of mortgages, pledges, liens, charges, security interests or other encumbrances (each, an "Encumbrance"). Quintiles has full right and power and authority to sell, transfer and deliver the Shares. Upon delivery of the purchase price as contemplated in Section 5 of this Agreement, Quintiles will transfer to WebMD valid and marketable title thereto, including all voting and other rights to the Shares, free and clear of all Encumbrances. The Shares constitute all of Quintiles' and its subsidiaries' shares of any class of stock, capital interest, ownership rights or securities of or in 11 WebMD, and after sale of the Shares, neither Quintiles nor any of its subsidiaries will have any interest in WebMD. There are no outstanding options, warrants, stock rights, agreements, contracts, puts, calls, commitments, pre-emptive rights, or demands of any character to which Quintiles or any of its subsidiaries is a party or under which Quintiles or its subsidiaries have any rights relating to any capital stock or other securities of WebMD, and, except for the restrictions contained in Section 8.13 of the Merger Agreement which have been waived by this Agreement, there are no agreements to which Quintiles is a party that restrict the transfer of shares or voting of the capital stock of WebMD held by Quintiles. Neither Quintiles nor any of its subsidiaries has granted to any person any proxies, powers of attorney, or similar rights or powers with respect to Shares. (j) Quintiles represents and warrants to WebMD that the Software will not be used to "re-identify" data, unless pursuant to U.S. Federal government instruction consistent with law where prior written notice (including a complete explanation of the government instruction and reasons for it) is provided to WebMD. (k) Quintiles has had access to such information from WebMD regarding the sale of the Shares as it has requested. (l) Quintiles has knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of the sale of the Shares. 14. Representations and Warranties and Covenants by WebMD WebMD represents and warrants and covenants to Quintiles as follows: (a) WebMD has been represented in this matter by attorneys at law, whom it has selected; it has consulted its respective legal counsel as to the effects of this Agreement; it has received advice of its legal counsel as to the effects of this Agreement; and it has had full opportunity to seek any other advice it might consider to be desirable in connection with this matter. (b) WebMD has fully investigated to its own satisfaction all facts surrounding the various claims, controversies, and disputes. (c) WebMD has read this Agreement; it is entering into this Agreement freely and voluntarily; it has ascertained and weighed all facts and circumstances likely to influence its judgment herein; it has given due consideration to the provisions herein; it has been fully informed and has full knowledge of the terms, conditions, and effects of this Agreement; it thoroughly understands and consents to all provisions hereof; and it is fully satisfied with the terms of this Agreement. (d) No promise or agreement has been made by Quintiles as a consideration for this Agreement except as herein recited, and the execution hereof has not been induced by any representation by Quintiles except as herein recited. (e) WebMD has all requisite power and authority to execute, deliver this Agreement and to perform the transactions contemplated herein; the execution, delivery and performance of his Agreement does not, and the consummation of the transactions contemplated herein will not, violate any provision of WebMD's Articles of Incorporation or By-laws or any applicable law or regulation, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which WebMD or any of its Affiliates is a party or by which WebMD or any of its Affiliates is bound. 12 (f) WebMD has duly and properly taken all action required by law, its Articles of Incorporation, its By-laws, or otherwise to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein; and when so executed, this Agreement constitutes WebMD's legal, valid and binding obligation in accordance with the terms hereof. (g) There has been no assignment, transfer, conveyance or other disposition, in whole or in part, of any of the accounts, actions, agreements, bills, bonds, causes of action, claims, contracts, controversies, covenants, damages, debts, demands, doings, dues, executions, expense, indemnities, judgments, liabilities, omission, promises, reckonings, suits, sums, sums of money, trespasses, and variances, in law or in equity, released, relieved, waived, relinquished, and discharged by this Agreement. (h) This Agreement, when duly executed by Quintiles and WebMD, will constitute legal, valid and binding obligations of WebMD enforceable against it in accordance with its terms. (i) WebMD is an "accredited investor", as such term in defined in Regulation D promulgated under the Securities Act of 1933, as amended. (j) WebMD has had access to such information from Quintiles regarding the purchase of the Shares as it has requested. (k) WebMD has knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of the purchase of the Shares and is able to bear the economic risks of the purchase of the Shares, including without limitation, the risk of complete loss on its investment. (l) WebMD acquired its interest in the Shares for its own account for investment and not with a view to, or in connection with, any distribution of such interest. (m) WebMD has not acquired its interest in the Shares for another entity. 15. Irreparable Harm Quintiles and WebMD each acknowledge that its failure to abide by the provisions of this Agreement would cause immediate and irreparable harm to the other, for which legal remedies would be inadequate. Therefore, in addition to any legal or other relief to which either party may be entitled by virtue of the other party's failure to abide by these provisions, the injured party shall be entitled to equitable relief, including but not limited to preliminary and permanent injunctive relief and specific performance, for the other party's actual or threatened failure to abide by these provisions. 16. Cooperation and Confidentiality Quintiles and WebMD hereby agree to cooperate fully in good faith to execute any and all supplementary documents and to take all additional actions not inconsistent with the terms set forth in this Agreement that are necessary and appropriate to give full force and effect to the terms and intent of this Agreement. Quintiles will not attempt to re-identify, or authorize third parties to attempt to re-identify, any de-identified data received from any WebMD Company, and will not disclose any confidential information of any WebMD Customer to any third party except pursuant to a binding confidentiality agreement with such third party, unless pursuant to U.S. Federal government instruction consistent with law where prior written notice (including a complete explanation of the government instruction and reasons for it) is provided to WebMD. Furthermore, Quintiles will not use any confidential information regarding the business relationship between WebMD and a WebMD Customer that it received from a 13 WebMD Company, such as claims transaction volume for such customer, for the purpose of engaging in the claims clearinghouse business or disclose such information to a claims clearinghouse. 17. Compliance with Emergency Requests In the event that the U.S. government seeks to obtain certain data products from Quintiles to assist it in confronting a national emergency, the parties agree to work together in good faith for WebMD to provide Quintiles data for use in such data products, consistent with legal requirements. If Quintiles seeks compensation for providing such data products to the U.S. government, the parties agree to share the operating income generated from their sale as follows: 70% to Quintiles and 30% to WebMD. If the parties do not work together in this area, then no payments shall be due WebMD in such area. The parties acknowledge that this Section 17 is an expression of intent and neither party is bound by this Section 17 or obligated in any way with respect to it. 18. Public Announcement Quintiles and WebMD hereby agree to issue the joint press release attached hereto as Exhibit 3 as soon as practicable following the execution of this Agreement. 19. Binding Effect The warranties and representations contained in this Agreement and the documents referenced herein shall survive the Closing anticipated herein. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing herein shall be construed to limit Quintiles' right to transfer or assign to others for lawful use the data it receives hereunder or under the Data Rights Agreement. The individual Released Parties identified in Section 12 above and the Indemnified Parties identified in the Indemnification and Contribution Arrangement shall be intended third party beneficiaries with respect to the rights and obligations contained in the mutual release (in the case of such Released Parties) and Indemnification and Contribution Arrangement (in the case of such Indemnified Parties) and shall be entitled to rely upon and enforce the terms and conditions of that provision. 20. Applicable Law This Agreement shall be governed by and shall be construed and interpreted according to the laws of the State of Delaware, without reference to any conflicts of law principles that would operate to make the internal laws of any other jurisdiction applicable and the parties consent to the exclusive jurisdiction and venue of the state and federal courts of Delaware to adjudicate any claims pursuant to this Agreement; provided however, that the Indemnification and Contribution Arrangement shall be governed by and shall be construed and interpreted according to the laws of the State of New York, without reference to any conflicts of law principles that would operate to make the internal laws of any other jurisdiction applicable and the parties consent to the exclusive jurisdiction and venue of the state and federal courts of New York to adjudicate any claims pursuant to the Indemnification and Contribution Arrangement. 14 21. Entire Agreement This Agreement, together with the exhibits and attachments hereto, constitutes the entire understanding among and between the parties hereto concerning the subject matter set forth herein, and this Agreement supersedes any and all prior understandings, written or oral, and any and all contemporaneous oral understandings, pertaining to the subject matter set forth herein. The terms of this Agreement are contractual and not a mere recital. 22. Modification This Agreement shall not be altered, amended, modified or rescinded except by an instrument in writing signed by each of the parties. 23. Severability If, after the date hereof, any provision of this Agreement, is for any reason found or held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and such finding and/or holding shall not affect the legality, validity or enforceability of the remaining portions of this Agreement. In lieu of any such illegal, invalid or unenforceable provision, a substitute or similar provision that is legal, valid and enforceable shall be supplied by agreement of the parties, to the extent possible. 24. Descriptive Headings The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 25. Drafting Each party acknowledges that it has participated in the negotiation and drafting of this Agreement, and agrees that this Agreement shall be construed without regard to the identity(s) of those who drafted the various provisions, that each and every provision of this Agreement shall be construed as though all of the parties participated equally in the drafting of them, and that any rule of construction that a document is to be construed against, interpreted less favorably toward, or applied to the disadvantage of any party hereto by reason of such person having or being deemed to have structured, dictated, or drafted such provision shall not apply to this Agreement. 26. Counterparts This Agreement may be executed in two (2) counterpart copies, each of which shall be deemed an original for all purposes. In making proof of this Agreement, it shall not be necessary to produce or account in any way for the other counterpart copy. IN WITNESS WHEREOF, Quintiles and WebMD have executed this Agreement, by and through their duly authorized representatives, each intending to be legally bound. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 15 QUINTILES TRANSNATIONAL CORP. By: /s/ Dennis Gillings (Signature) -------------------------- Name: Dennis Gillings (Printed/Typed) ------------------------ Title: Chairman ----------------------- ATTEST: /s/ John Russell (CORPORATE SEAL) ------------------------------ Secretary STATE OF NORTH CAROLINA COUNTY OF DURHAM I, a Notary Public, in and for said county and state, do hereby certify that John S. Russell, Secretary of QUINTILES TRANSNATIONAL CORP., personally appeared before me this day and acknowledged that by authority duly given and as the act of the corporation, the foregoing was signed in its name by its Secretary, sealed with its corporate seal and attested by its (Assistant) Secretary. Witness my hand and seal this 12th day of October, 2001. (signature illegible) ------------------------------- Notary Public (NOTARIAL SEAL) My commission expires: 7/13/02 ------- 16 WEBMD CORPORATION By: /s/ Anthony Vuolo (Signature) -------------------------- Name: Anthony Vuolo (Printed/Typed) ------------------------ Title: Exec. VP & CFO ----------------------- ATTEST: /s/ Lewis Leicher (CORPORATE SEAL) ------------------------------ (Assistant) Secretary STATE OF NEW JERSEY COUNTY BERGEN I, a Notary Public, in and for said county and state, do hereby certify that Lewis Leicher, (Assistant) Secretary of WEBMD CORPORATION, personally appeared before me this day and acknowledged that by authority duly given and as the act of the corporation, the foregoing was signed in its name by its Exec. VP & CFO, sealed with its corporate seal and attested by its (Assistant) Secretary. Witness my hand and seal this 12th day of October, 2001. /s/ Michelle Rea ------------------------------- Notary Public (NOTARIAL SEAL) My commission expires: October 5, 2003 --------------- 17 ENVOY CORPORATION By: /s/ Anthony Vuolo (Signature) -------------------------- Name: Anthony Vuolo (Printed/Typed) ------------------------ Title: Exec. VP & CFO ----------------------- ATTEST: /s/ Charles A. Mele (CORPORATE SEAL) ------------------------------ (Assistant) Secretary STATE OF NEW JERSEY COUNTY BERGEN I, a Notary Public, in and for said county and state, do hereby certify that Charles A. Mele, (Assistant) Secretary of ENVOY CORPORATION, personally appeared before me this day and acknowledged that by authority duly given and as the act of the corporation, the foregoing was signed in its name by its Exec. VP & CFO, sealed with its corporate seal and attested by its (Assistant) Secretary. Witness my hand and seal this 12th day of October, 2001. /s/ Michelle Rea ------------------------------- Notary Public (NOTARIAL SEAL) My commission expires: October 5, 2003 --------------- 18 Each of the undersigned hereby agrees to be bound by the provisions of Sections 7 and 12 they relate to such: Undersigned: /s/ Martin J. Wygod /s/ W. Michael Long --------------------------------------- ------------------------------------ Martin J. Wygod, Individually W. Michael Long, Individually /s/ Dennis B. Gillings --------------------------------------- Dennis B. Gillings, Ph.D., Individually