-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TL2q8I6vcyZWkNo2evEPpVZd65JgdIdnsdIjxIPBq8+50pfOHmZfZNPoJoAlt8bC x9bkEMdQyyNN26qd1Kpa9A== 0000950144-02-002588.txt : 20020415 0000950144-02-002588.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-002588 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020322 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23520 FILM NUMBER: 02582392 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-K405 1 g74742e10-k405.txt QUINTILES TRANSNATIONAL CORP - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 000-23520 QUINTILES TRANSNATIONAL CORP. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1714315 (State of incorporation) (I.R.S. Employer Identification Number)
4709 CREEKSTONE DRIVE, SUITE 200 DURHAM, NORTH CAROLINA 27703-8411 (Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (919) 998-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PER SHARE (AND RIGHTS ATTACHED THERETO) (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The aggregate market value of the registrant's Common Stock at January 31, 2002 held by those persons deemed by the registrant to be non-affiliates was approximately $1,756,481,571. As of January 31, 2002 (the latest practicable date), there were 118,605,385 shares of the registrant's Common Stock, $.01 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 1, 2002 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- QUINTILES TRANSNATIONAL CORP. FORM 10-K ANNUAL REPORT INDEX
PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 16 Item 3. Legal Proceedings........................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6. Selected Consolidated Financial Data........................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................... 20 Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................................ 40 Item 8. Financial Statements and Supplementary Data................. 41 PART III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 73 Item 10. Directors and Executive Officers of the Registrant.......... 73 Item 11. Executive Compensation...................................... 73 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 73 Item 13. Certain Relationships and Related Transactions.............. 73 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 73
1 PART I Information set forth in this Annual Report on Form 10-K contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," "continue," or "target" or the negative thereof or other variations thereof or comparable terminology. We caution you that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including without limitation, our ability to 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 customer contracts or to enter into new contracts, changes in trends in the pharmaceutical industry, the risk that our PharmaBio transactions will not generate revenues, profit or return on investment at the rate or levels we expect, risks associated with entering into a new line of business such as those being entered into by PharmaBio, the risk that our Informatics business will not be able to operate as expected using new and multiple data sources, the risk that our proposed joint venture with McKesson Corporation relating to the Informatics business will not be consummated, or if consummated, will not be successful, liability risks associated with our business which could result in losses or indemnity to others not covered by insurance, risks associated with data use and use of our data products which are regulated by state and federal laws and contracts, and other risks described under "Risk Factors" and elsewhere in this report. ITEM 1. BUSINESS GENERAL We are a market leader in providing a full range of integrated product development and commercial development solutions to the pharmaceutical, biotechnology and medical device industries. We also provide market research solutions and strategic analyses to support healthcare decisions and healthcare policy consulting to governments and other organizations worldwide. Supported by our extensive information technology capabilities, we provide a broad range of contract services to help our customers reduce the length of time from the beginning of development to peak sales of a new drug or medical device. Our product development services include a full range of services focused on helping our customers through the development and regulatory approval of a new drug or medical device. Our commercial services, including sales and specialized marketing support services, focus on helping our customers achieve commercial success for a new product or medical device. We also offer healthcare policy research and management consulting, which emphasize improving the quality, availability and cost-effectiveness of healthcare, as well as data analysis and market research services which form the core of our healthcare informatics services. Since our formation in 1982, we have continued to expand the scope of our services and our geographic presence to support the needs of our customers on a worldwide basis. As part of this strategy, we completed approximately 35 acquisitions over the past six years to expand or strengthen our services. Although our acquisition rate slowed over the last three years, with 10 acquisitions completed in 1999, none in 2000 and two completed in 2001, we have focused our efforts on reorganizing our operating units, creating new ways of marketing and selling our services and developing and restructuring our informatics business, both for stand alone service offerings and to provide support services for our other business units. In addition, we have begun to pursue strategic alliances with our customers which pair the services of our commercial services and product development groups with funding support for our customers. As part of our normal course of business, we also evaluate opportunities to acquire specific products and/or marketing rights to products. 2 During 2001, we began implementing a global strategic plan that we believe will allow us to meet the changing needs of our customers and increase our opportunity for growth. Our strategy is built on the following initiatives: - Implementing strategic alliances. Through our PharmaBio Development group, we are pursuing strategic alliances with customers in which we combine the services of our commercial services and product development groups with funding support for our customer. In appropriate circumstances, we may also acquire the rights to receive royalties or commissions based on sales of the customer's product. - Leveraging technology and information. We are focusing on leveraging our technology to increase the value of our services to our customers and to increase our own efficiency. For example, our commercial services group is using our iQLearning Network to deliver Internet based programs as eCME and E-detailing products to supplement office visits and allow us to reach doctors who are not easily accessed, while at the same time, leveraging our recruitment services across the iQLearning Network to drive down our costs. Our product development group is focusing on gaining operating efficiency in data management by eliminating duplicate offices and shifting capabilities to low-cost, high quality regions and eventually through the use of secure Internet links. - Realigning business development. We are moving towards a business development strategy which focuses on specific customers to acquire a better understanding of the whole of that customer's needs. We may achieve this understanding by acquiring some of the customer's infrastructure, bringing along with it a relationship with the customer. In other cases, we may expand existing customer relationships into preferred provider relationships, such as by forming long-term clinical development alliances designed to enable the customer to boost efficiencies in its drug development programs. - Hiring and retaining quality employees. Our employees are our business, and we are dedicated to strengthening and stabilizing our workforce. - Creating efficiencies through shared service centers and near real-time human resources management. We believe we can create operational efficiencies by centralizing our finance and human resources functions in professional services centers that we established regionally in the United States and Europe. In 2000, we sold our electronic data interchange subsidiary, ENVOY Corporation, to WebMD Corporation. In connection with the sale of ENVOY, we entered into an agreement with WebMD to form a strategic alliance with WebMD to develop and market a Web-based integrated suite of products and services for the pharmaceutical industry. We also entered into a data rights agreement under which WebMD agreed to provide us with de-identified ENVOY and other WebMD data. We initiated a lawsuit against WebMD on February 25, 2001 after it unilaterally suspended delivery of data to us. On October 12, 2001, the companies entered into a settlement agreement resolving their disputes. As part of the settlement, WebMD agreed to pay us $185 million in cash for all of the 35 million shares of WebMD Common Stock we had held since WebMD's acquisition of ENVOY and to resolve our disputes. We also will receive additional payment from WebMD if, on or before June 30, 2004, WebMD is acquired for a price greater than $4.00 per share or its ENVOY subsidiary is acquired for a price greater than $500 million. Under the terms of the settlement, any obligations to pay WebMD for development of Web-based products and share informatics revenues terminated, and we continued to receive de-identified data from WebMD until February 28, 2002. STRATEGIC ALLIANCES Our PharmaBio Development group, created in 2000, continues to help facilitate non-traditional customer alliances. PharmaBio Development works with our service groups to enter into strategic alliances and make strategic investments that we believe will position us to explore new opportunities and areas for potential growth. PharmaBio has entered into a series of similarly structured transactions that typically involve providing funding to the customer, either through direct milestone payments or loans. We may invest directly in the customer's common stock, and sometimes we receive warrants to purchase shares of our customer's 3 common stock. In some cases, the loans are convertible into capital stock of the customer. This funding is typically used by the customer to help pay for the services provided by us. In addition, the customer may agree to pay us royalties or commissions based on sales of the customer's product. We believe this business model adds value for both pharmaceutical and biotechnology companies. Pharmaceutical companies gain additional resources in support of their new and/or existing products, and biotechnology companies gain capital and services. This model allows us to expand on the traditional fee-for-service model of our core business by using available cash to create the potential for a greater return on a customer relationship by direct investment, allowing us to take advantage of our customer's growth, or participating in a product revenue stream that may depend in part on how successful we are in providing our services with regard to the product. As of December 31, 2001, we have entered into five of these transactions involving commercial rights and royalties. For example, in January 2001 we entered into an agreement under which we are providing funding for the sales and marketing of Scios Inc.'s recently launched lead product for acute congestive heart failure, Natrecor(R), in exchange for a percentage of the drug's future sales. Also, in December 2001 we entered into an agreement under which we are providing funding for the commercialization of Discovery Laboratories, Inc.'s lung surfactant, Surfaxin(R), in exchange for a percentage of future sales. Overall, our expected revenues and operating income from these transactions depends on the performance or success of the customer's product, which in some cases has not yet been approved by the U.S. Food and Drug Administration, or FDA. We have recently expanded this business model to include the acquisition of rights to market products directly. In December 2001, PharmaBio Development acquired the North American license to market and sell Solaraze(TM), a topical gel approved by the FDA for the treatment of actinic keratosis, a pre-cancerous skin condition linked to over-exposure to the sun. We obtained this license from Bioglan Pharma Plc, which subsequently became insolvent and is managed by an administrator effective as of February 20, 2002. Until March 22, 2002, its affiliate, Bioglan Pharma Inc., or Bioglan, provided the marketing and sales support for the product. On March 22, 2002, we acquired certain assets of Bioglan, including its management team and sales force. As part of the transaction, we also acquired Bioglan's rights to certain other dermatology products now on the market in the United States, including ADOXA(TM) for the treatment of severe acne. This acquisition provides us with the infrastructure and capabilities to help support our commercial rights strategies. We review many candidates for strategic alliances under our PharmaBio Development business model, and in addition to the transactions already under way, we are continually evaluating new strategic possibilities, including opportunities to acquire rights to market additional pharmaceutical products, and we may enter into additional transactions in the future. JOINT VENTURE On March 15, 2002, we entered into a joint venture agreement with McKesson Corporation pursuant to which we agreed to form a joint venture company that would combine our Informatics business with de-identified healthcare data flow from McKesson. McKesson also is contributing its Kelly/Waldron business, which provides sales and marketing information and services, with a focus on primary market research and data integration. The agreement contemplates that we would be co-equal owners of the joint venture company with McKesson, with a portion of the equity in the joint venture company to be allocated to key providers of de-identified healthcare data. The formation of the joint venture company is contingent upon at least one provider of de-identified healthcare data, other than McKesson, agreeing to take an equity interest in the joint venture company in exchange for its contribution of de-identified healthcare data flow to the joint venture company. We currently are in discussions with several major data providers regarding joining the joint venture company and/or contributing de-identified healthcare data to the joint venture company. The agreement also provides for the joint venture company to license data products to us and McKesson for use in our core businesses. Under the license arrangement with the joint venture company, our product development and commercial services groups will continue to have access to the joint venture's market information and products to enhance delivery of their services to pharmaceutical and biotechnology customers. 4 SERVICES We provide globally integrated contract research, sales, marketing and healthcare policy consulting and health information management services to the worldwide pharmaceutical, biotechnology, medical device and healthcare industries. We also provide market research and strategic analysis services to support healthcare decisions. We manage our operations through three segments, namely the product development group, the commercial services group and the informatics group. Management has distinguished these segments based on our normal operations. The product development group is primarily responsible for all phases of preclinical and clinical research. The commercial services group is primarily responsible for sales force deployment and strategic marketing services, as well as healthcare policy research and consulting services. The informatics group provides market research and healthcare information to pharmaceutical and healthcare customers. Note 21 of the notes to our consolidated financial statements includes financial information regarding each segment. We provide our customers with a continuum of services which span our three segments. We believe that the broad scope of our services allows us to help our customers rapidly assess the viability of a growing number of new drugs, cost-effectively accelerate development of the most promising drugs, launch new drugs to the market quickly and evaluate their impact on healthcare. The following discussion describes our service offerings in greater detail. PRODUCT DEVELOPMENT OFFERINGS Through our product development group, we provide a full range of drug development services focused on helping our customers achieve regulatory success, from strategic planning and preclinical services to regulatory submission and approval. EARLY DEVELOPMENT AND LABORATORY SERVICES PRECLINICAL SERVICES. Our preclinical unit provides customers with a wide array of early development services. These services are designed to produce the data required to identify, quantify and evaluate the risks to humans resulting from the manufacture or use of pharmaceutical and biotechnology products, and include general toxicology, carcinogenicity testing, pathology, efficacy and safety pharmacology, bioanalytical chemistry, drug metabolism and pharmacokinetics. During 2001, we opened a safety pharmacology unit in Kansas City, Missouri. The opening of the unit in combination with our Edinburgh, Scotland unit will allow us to provide full service safety pharmacology to our U.S. customers while further strengthening our global position. FORMULATION, MANUFACTURING AND PACKAGING SERVICES. We offer services in the design, development, analytical testing and commercial manufacture of pharmaceutical dose forms. We provide study medications for preclinical and clinical studies along with necessary good manufacturing practice, or GMP, and chemistry, manufacturing and controls, or CMC, regulatory documentation. Medications for use in clinical studies are packaged, labeled and distributed globally. These services can expedite the drug development process because clinical trials are often postponed by delays in the manufacture of study drug materials. During 2001, we opened a new clinical trials supplies facility in Singapore to serve companies conducting trials in Asia and the Pacific Rim countries. We also opened a 3,200 square-foot stability storage facility in Kansas City, Missouri, which will allow further expansion of our formulation development and analytical testing capabilities. PHASE I SERVICES. Phase I clinical trials involve testing a new drug on a limited number of healthy individuals. Our Phase I services include dose ranging, bioavailability/bioequivalence studies, pharmacokinetic/pharmacodynamic modeling, first administration to humans, multiple dose tolerance, dose effect relationship and metabolism studies. CENTRALIZED CLINICAL TRIAL LABORATORIES. Our centralized laboratories provide globally integrated clinical laboratory services to support all phases of regional and global clinical trials with facilities in the United States, Europe, South Africa and Singapore. Services include the provision of protocol-specific study materials, customized lab report design and specimen archival and management for study sponsors. In addition to 5 providing comprehensive safety and efficacy testing for clinical trials, our centralized laboratories allow for global standardization of clinical testing, database development and electronic data transfer and provide direct electronic integration of laboratory data into safety and efficacy reports for new drug application, or NDA, submissions. CLINICAL DEVELOPMENT SERVICES CLINICAL TRIAL SERVICES. We offer comprehensive clinical trial services throughout the lifecycle of a product. In addition to Phase I through III studies, which are the basis for obtaining initial regulatory approval for drugs and medical devices, we provide expertise in the development and execution of Phase IIIb and IV studies, which includes drug safety, regulatory affairs, clinical trial supplies, central laboratory services, quality assurance, health economics, data management and biostatistics. On a global basis, our employees are aligned with key customers to provide a full-range of management and scientific services tailored to their specific requirements. We have specialist expertise in therapeutic areas of the central nervous system, cardiovascular, infectious, allergic and respiratory diseases as well as within therapeutic areas of endocrinological, gastroenterological, genitourinary, musculoskeletal diseases, and stroke, with respect to clinical trials. Other specialized offerings include oncology and development services in neonatal, pediatric and adolescent care. Because of our global presence and ability to coordinate clinical staff to service customers on an international basis, we are experienced in managing trials involving several thousand patients at hundreds of sites concurrently in the Americas, Europe, the Asia-Pacific region and South Africa. We provide our customers with one or more of the following core clinical trial services: Study design. We assist our customers in preparing the study protocol and designing case report forms, or CRFs. The study protocol defines the medical issues to be examined, the number of patients required to produce statistically valid results, the period of time over which they must be tracked, the frequency and dosage of drug administration and the study procedures. A study's success often depends on the protocol's ability to predict the requirements of the applicable regulatory authorities. Investigator recruitment. During clinical trials, the drug is administered to patients by physicians, referred to as investigators, at hospitals, clinics or other sites. We have access to several thousand investigators who have conducted our clinical trials worldwide. Patient recruitment. We assist our customers in recruiting patients to participate in clinical trials through investigator relationships, media advertising, use of web-based techniques and other methods. Study monitoring. We provide study monitoring services which include investigational site initiation, patient enrollment assistance, and data collection and clarification. Site visits help to assure the quality of the data, which are gathered according to good clinical practice, or GCP, regulations and guidelines, and to meet the sponsors' and regulatory agencies' requirements according to the study protocol. Clinical data management and biostatistical services. We have extensive experience in the United States and Europe in the creation of scientific databases for all phases of the drug development process. These databases include: (1) customized databases to meet customer-specific formats, (2) integrated databases to support NDA submissions and (3) databases in accordance with the FDA and European specifications. REGULATORY AFFAIRS SERVICES. We provide comprehensive medical and regulatory services for our pharmaceutical and biotechnology customers. Our medical services include medical oversight of studies, review and interpretation of adverse experiences, medical writing of reports and study protocols and strategic planning of drug development programs. Regulatory services for product registration include regulatory strategy design, document preparation, consultation and liaison with various regulatory agencies. Our regulatory affairs professionals help to define the steps necessary to obtain registration as quickly as possible. We are able to provide such services in numerous countries to meet our customers' needs to launch products in multiple countries simultaneously. 6 MEDICAL DEVICE SERVICES. Our service offerings for medical devices include (1) review of global strategies for device development and introduction, (2) identification of regulatory requirements in targeted markets, (3) clinical study design and planning, (4) data management, (5) statistical analysis of report preparations, (6) global clinical trial management and monitoring capabilities, (7) consulting on quality control and quality assurance issues, (8) regulatory filings, (9) compliance with United States, European and European Union regulations relating to medical devices, (10) long-range planning for multinational product launches, (11) compliance with legislative requirements for market access, (12) post-marketing requirements, (13) management of relationships with national governments and regulatory authorities and (14) European pricing strategies. COMMERCIAL SERVICES OFFERINGS We deliver integrated, strategic solutions designed to meet the diverse needs of our customers in the United States and globally. Our extensive clinical and marketing expertise spans the healthcare spectrum, from pharmaceutical, biotechnology and medical device customers to hospitals, long-term care facilities, foundations, managed care organizations, employers, the military, and federal and state governments. For pharmaceutical, biotechnology and medical device customers, our commercial services group provides a comprehensive range of specialized pre-launch, launch and post-launch services, from strategic planning early in the development of a new medicine, market research and medical education services to build product awareness and support to sales force recruitment, training and deployment, product marketing, clinical experience programs and health management services. These integrated service offerings help maximize sales throughout the product lifecycle. Our extensive clinical and marketing expertise spans the healthcare spectrum, from pharmaceutical, biotechnology and medical device customers to hospitals, long-term care facilities, foundations, managed care organizations, employers, the military and federal and state governments. QUINTILES INTEGRATED STRATEGIC SOLUTIONS LATE PHASE CLINICAL STUDIES. Our late phase clinical services include Phase IV clinical trials, clinical experience trials and patient registries, which are designed to build physician awareness, drive product usage and deepen our customer's understanding of physician practice and product adoption patterns. We also offer post-marketing safety surveillance programs to track safety information on a global scale and provide immediate access to safety databases. Our late phase studies incorporate tools for measuring treatment satisfaction and quality of life to help maximize product launch and sales opportunities. Reimbursement support services include specialized reimbursement hotlines and patient assistance programs to facilitate coverage and payment for treatment using new technologies. In 2001, we launched an international effort, called Quintiles Late Phase, to help our customers maximize sales by using integrated late phase services that bridge clinical development and product commercialization. STRATEGIC MARKETING SERVICES. Our expert consultants support pharmaceutical, biotechnology and medical device product commercialization through a continuum of services. We begin in the conceptualization phase of development with strategic market research. Through a combination of secondary data and qualitative primary research, we assist customers in making development decisions. Once a product proceeds to large-scale clinical trials, our group creates product positioning, pricing and formulary access/reimbursement strategies based on extensive primary research with providers, patients, payors and other administrative decision-makers. Finally, in support of product marketing at launch, we create health economic models to justify price to formulary decision-makers, and, post-launch, we track actual product costs and outcomes through medical claims data, medical records and patient interviews. The combination of these services provide our customers with the marketing, economic and reimbursement support they need to help to maximize commercial potential at each stage of the product lifecycle. HEALTHCARE POLICY RESEARCH AND CONSULTING. Our management consulting services focus on improving the quality, availability and cost-effectiveness of healthcare in the highly regulated and rapidly changing healthcare industry. These services include corporate strategic planning and management, program and policy development, financial and cost-effectiveness analysis, evaluation design, microsimulation modeling and data 7 analysis. They represent the core competencies of The Lewin Group, an internationally recognized healthcare consulting firm. REGULATORY AND COMPLIANCE CONSULTING. We supply regulatory and compliance consulting services to the medical device, pharmaceutical and biotechnology industries. Services include global regulatory consulting, quality systems and engineering and validation. We assist companies in preparing for FDA interactions, including inspections and resolution of enforcement actions; complying with good manufacturing, good clinical practice and quality systems regulations; meeting process validation requirements; and bringing new medical devices to market. STRATEGIC MEDICAL COMMUNICATIONS. Focused on growth strategies, our strategic medical communications services begin in the early stages of product development and continue through introduction of a product into the market until it reaches its peak market penetration. Our core competencies in this area include communications strategy and planning, product positioning and branding, opinion leader development, faculty training, symposia, continuing medical education programs, promotional programs, sponsored publications, patient education, clinical experience programs, large-scale exhibitions and Internet and new media-based programs. As early as Phase II clinical trials, we can begin to disseminate scientific information and develop and present educational forums to help gain opinion leader support for a new drug. COMMERCIALIZATION OFFERINGS CONTRACT SALES. The focus of our sales and marketing services is on accelerating the commercial success of pharmaceutical, biotechnology, veterinary and other health-related products. We offer our customers a highly-trained, flexible, variable sales force resource able to respond quickly to a changing marketplace and deploy rapidly which can save costs for our customers. To enhance our customer focus in the United States, we have divided our services into six business lines -- primary care sales, specialty sales, innovative promotional solutions, recruitment, training and health management services. Customers may contract for dedicated sales teams or syndicated sales teams. For dedicated sales teams, who are recruited in accordance with the customer's sales and market share objectives, we can take a primary management role or a supporting role, thereby allowing customer field management to take the lead on strategic and tactical implementation. In certain circumstances, we can transfer an entire dedicated sales team to the customer for an additional placement fee, which is agreed upon at the beginning of the contract. Syndicated sales teams, on the other hand, can promote a number of non-competing drugs for different customers simultaneously, and we always manage these teams directly. We offer rapid sales force recruitment utilizing an extensive computerized candidate database, dedicated internal staff, regionally-based recruiting and a proprietary screening process. Our training and development services integrate traditional and Web-based services and support all of our commercialization activities, as well as help our customers design or revamp their programs to meet marketplace demands. In the United States, we also offer our ITMS sales force automation system, a proprietary Web-enabled automated system for call reporting, sample accountability, territory planning and alignment. MARKETING SERVICES. We provide customized product marketing services for pharmaceutical and biotechnology companies designed to influence the decisions of patients and physicians and accelerate the acceptance of drugs into treatment guidelines and formularies. We assess markets, conduct research, develop strategies and tactics, assist in discussions with regulatory bodies, identify distribution channels and coordinate vendors in every region of the country. Our industry experts, with experience in many therapeutic areas, can provide marketing insight into a wide range of geographic markets while working to optimize commercial success. INTERNET-BASED SALES AND MARKETING SERVICES. In October 2001, we launched the Innovex e-Health Solutions Group, which provides Internet-based sales and marketing services for the pharmaceutical, biotechnology and medical device industries. The group's first product, iQLearning, is a Web-based system that has the capability to provide a variety of online products and educational programs for physicians and sales representatives. In January 2002, we launched iQLearning.com, an Internet service portal that further 8 expands our range of healthcare information resources and services to physicians in the United States. In the United Kingdom, in partnership with Synigence Plc, we have access to a unique service called Clinnix Pro, which sits on the desktops of over 50% of general practitioners in the United Kingdom. Through Clinnix Pro we can promote a wide range of e-business solutions to these general practitioners via a secured network. For example, we use Clinnix Pro to help healthcare professionals obtain continuing medical education, participate in market research and access information about medicines. HEALTH MANAGEMENT SERVICES. We also provide teams of healthcare professionals, including nurses, pharmacists and physicians, who are dedicated to assisting customers with disease-management issues. Our health management services offer customized clinical solutions to bridge the gap between the clinical and commercial phases of product development and to provide expertise across a broad range of pre-launch, launch and post-launch opportunities. We believe that our clinical and promotional expertise, commercial orientation and international experience enable us to tailor these programs to meet the diverse needs of the global pharmaceutical industry across a wide range of disciplines and local market conditions. INFORMATICS OFFERINGS Informatics provides a broad range of knowledge-rich products and services that are used by the pharmaceutical, biotechnology, and medical and surgical device industries, and healthcare providers, payors and patients to improve the quality of care and to efficiently manage the delivery of care at multiple points along the continuum of healthcare delivery. Since its inception in early 1999, Informatics has continued to expand the scope of the products and services offered to meet the needs of our customers. We currently compete in two key market segments: Market Research and Sales Management and Optimization. Through the commercialization of our proprietary database, which we believe is the healthcare industry's largest database combining medical and pharmaceutical data, we have focused on (1) developing innovative new Market Research and Sales Management and Optimization products and services, (2) building upon our initial success in the Clinical Research & Development knowledge-rich information products and services market segment and (3) leveraging our investment into opportunities for both our product development and commercial services offerings. On March 15, 2002, we entered into a joint venture agreement with McKesson Corporation pursuant to which we agreed to form a joint venture company designed to leverage the healthcare information business of each company. The agreement contemplates that we would be co-equal owners of the joint venture company with McKesson, with a portion of the equity in the joint venture company to be allocated to key providers of de-identified healthcare data. Our primary contribution will be the assets of our informatics group. Subject to the prior satisfaction or waiver of applicable conditions, completion of the joint venture is targeted for the second quarter of 2002. The agreement also provides for the joint venture company to license data products to us and McKesson for use in our core businesses. Under the license arrangement, our product development and commercial services groups will continue to have access to the joint venture's market information and products to enhance their service delivery to our customers. MARKET RESEARCH. Through our Scott-Levin brand, Informatics provides pharmaceutical and healthcare customers market research analysis and information tools. The Scott-Levin products and services include (1) proprietary healthcare databases and syndicated market research audits, (2) managed healthcare services, (3) state government affairs services, (4) issues-oriented strategic studies and surveys and (5) consulting services and software solutions. Proprietary healthcare databases and syndicated market research audits. Through self-administered surveys, we maintain comprehensive proprietary databases that contain (1) information collected from physicians on their diagnoses and prescribing activities, (2) information regarding the incidence of, and response to, direct selling and other promotion activities, (3) information regarding healthcare legislation and key influencers in the United States and (4) managed care information, detailing cost containment measures imposed by United States managed care organizations, or MCOs, that influence or restrict physicians' 9 prescribing activities. Our databases hold de-identified patient-level data. In addition, pursuant to a contract with National Data Corporation, or NDC, we obtain prescription information that NDC collects from approximately 34,000 pharmacies located across the United States. With this prescription information, we create projected state and national data on product-level prescription movement. Our syndicated market research audits are generated from databases containing information collected by questionnaire, diary or personal interview, dispensed prescriptions and secondary research. These audits include (1) the Source Prescription Audit, which analyzes pharmaceutical prescription activity, (2) the Physician Drug and Diagnosis Audit, which analyzes the pharmaceuticals prescribed by physicians relative to associated diagnosis, (3) the Personal Selling Audit, or PSA, which analyzes the effectiveness of the customer's sales activities to office-based physicians compared with those of its competitors, (4) the Hospital Personal Selling Audit, which complements the PSA by monitoring and analyzing sales activity to hospital-based physicians, (5) the Physician Meeting and Event Audit and Rx Link, which assesses the impact of promotional activity on subsequent attendee prescribing, (6) the HIV Therapy Audit, which provides a projectable database tracking physicians who treat HIV positive patients, (7) the Direct-to-Consumer Advertising Audit, designed to evaluate and measure the impact of direct-to-consumer advertising on physicians and consumers, (8) the Professional Journal Audit, which provides a recap of advertising in medical and professional publications, and (9) the NP/PA Promotional Audit, which measures personal selling activity to Nurse Practitioners and Physician Assistants. Managed health care services. We provide a range of services designed to enable pharmaceutical companies to assess the impact of their promotions on the managed care and long-term care markets. These data also include managed care formulary status as well as prescription share analysis. Other services include three-tier co-pay analysis and tracking of pharmaceutical industry managed healthcare sales forces. State government affairs. We offer a comprehensive state level healthcare legislation and regulation database, known as StateLine. This service tracks healthcare and healthcare related issues of interest in all 50 states, the District of Columbia and Puerto Rico. In addition, we supply profiles of the key government officials who are involved in shaping state healthcare legislation and regulations. Strategic studies and consulting. Services provided in this area include Pharmaceutical Sales Force Structures and Strategies and Pharmaceutical Company Image, two industry-standard reports on sales force activity and overall pharmaceutical company image. In addition, this service area offers other research services our customers use (1) to study specific issues and trends in the marketplace and the broader healthcare industry, (2) to evaluate the effectiveness of marketing programs, (3) to analyze in depth particular components of a product marketing program at any stage of its implementation and (4) for guidance on optimizing company strategy, sales and marketing activities and product commercialization. Custom studies. Our custom studies services provide customers with insights into how patients, physicians and payors utilize their products, and how their products can best be positioned. These services quantify the value of pharmaceuticals in terms of cost effectiveness and outcomes, helping pharmaceutical manufacturers to differentiate their products beyond the traditional measures of safety and efficacy. SALES MANAGEMENT AND OPTIMIZATION. Through our domain expertise and innovation in information technology, Informatics provides sales management and optimization products and services to the pharmaceutical industry. We provide services that help pharmaceutical companies determine return on investment for targeted prescribers, optimal sales force resource allocation, territory alignment and product positioning. We also provide domain expertise in data warehousing, data cleansing and value-added consulting. Informatics data warehousing and business information solutions integrate data from disparate sources, such as third party vendors, market research groups, promotional and contract groups, and customer databases into a central repository that can be accessed by geographically dispersed decision-makers. Our data cleansing solutions employ advanced techniques to transform raw and disparate customer data into what we believe is clean, accurate and actionable information. 10 We also maintain proprietary regional profiling databases covering most United States healthcare facilities. Our profiling databases contain information on more than 200,000 healthcare facilities nationwide, including health management organizations, or HMOs, preferred provider organizations, pharmacy benefit managers, integrated health networks, group purchasing organizations, employer coalitions, mail service pharmacies and HMO-affiliated physicians. We also provide advanced software applications to help customers access healthcare information over the Internet to help solve healthcare marketing business problems. For example, WebInSite(TM) is an Internet-based managed care data and account management product designed to offer pharmaceutical national account managers and sales representatives a competitive edge in managing their managed care accounts. This product integrates data profiles of companies operating in the managed care environment into analytical reports and interactive applications to enable pharmaceutical marketers to achieve maximum efficiency and sales potential in each of their managed accounts. QUINTERNET (TM) PROPRIETARY DATABASE. Our QUINTERNET(TM) proprietary database together with our Internet initiative provides us with opportunities to broaden our product and service offerings. We use what we believe is the healthcare industry's largest database combining medical and pharmaceutical data to provide real-time information about pharmaceutical market use, medical interventions and outcomes. The data used are aggregated from pharmacy and medical transactions, de-identified and linked at the patient level, allowing in-depth analysis across the continuum of patient care -- from initial diagnosis to drug intervention and follow-up, without identifying individual patients. Until February 28, 2002, we obtained much of this data through an agreement with WebMD that gave us exclusive rights to de-identified ENVOY transaction data, as well as other data received by WebMD. We have reached agreements to obtain additional data from other sources, including de-identified prescription data from approximately 10 pharmacy chains, enabling us to have access to more usable prescription data than we were receiving from WebMD at the end of 2001. On March 15, 2002, we entered into a joint venture agreement with McKesson Corporation pursuant to which we agreed to form a joint venture company designed to leverage the healthcare information business of each company. Several major data providers are to contribute de-identified prescription or medical data to the joint venture. With McKesson's contributions, the joint venture is expected to have annual access to more than one billion U.S. retail pharmacy transactions, which we believe to be between 35% and 40% of all such transactions, and more than 200 million electronic medical transactions, or about 20% of all such transactions. The joint venture agreement also provides for the joint venture to license data products to McKesson and us for use in our core businesses. Under the license agreement with the joint venture, our product development and commercial services groups will continue to have access to the joint venture's market information and products to enhance the delivery of services to our customers. CUSTOMERS AND MARKETING We coordinate our business development efforts across our service offerings through integrated business development functions, which direct the activities of business development personnel in each of our United States locations, as well as other key locations throughout Europe, Asia-Pacific, Canada and Latin America. For the year ended December 31, 2001, approximately 50.3% of our net revenue from external customers was attributed to operations in the United States and 49.7% to operations outside the United States. Please refer to the notes to our consolidated financial statements included in Item 8 of this Form 10-K for further details regarding our foreign and domestic operations. Approximately 39.1%, 34.5%, and 38.8% of our net revenue was attributed to our clinical development services in 2001, 2000 and 1999, respectively; approximately 34.5%, 39.4% and 37.5% of our net revenue was attributed to our commercialization services in 2001, 2000 and 1999, respectively; and approximately 15.4%, 14.3% and 13.6% of our net revenue was attributed to our early development and laboratory services in 2001, 2000 and 1999 respectively. Neither our integrated strategic services nor our informatics services accounted for more than 10% of our net revenue in any of these years. ENVOY is accounted for as a discontinued operation as a result of its sale to WebMD in May 2000; therefore, the results of ENVOY through the date of sale are not included in our net revenue and are reported separately. 11 In the past, we have derived, and may in the future derive, a significant portion of our net revenue from a relatively limited number of major projects or customers. As pharmaceutical companies continue to outsource large projects and studies to fewer full-service providers, the concentration of business could increase. We may experience concentration in 2002 and in future years. Aventis S.A. accounted for approximately 11%, 10% and 11% of our consolidated net revenue in 2001, 2000 and 1999, respectively. COMPETITION The market for our product development services is highly competitive, and we compete against traditional contract research organizations, or CROs, and the in-house research and development departments of pharmaceutical companies, as well as universities and teaching hospitals. Among the traditional CROs, there are several hundred small, limited-service providers, several medium-sized firms, and only a few full-service companies with global capabilities. Consolidation among CROs likely will result in greater competition among the larger contract research providers for customers and acquisition candidates. Our primary contract research competitors include Covance Inc., PPD Inc. and PAREXEL International Corp. In commercial development services, we compete against the in-house sales and marketing departments of pharmaceutical companies and other contract sales organizations in each country in which we operate. We also compete against national consulting firms offering healthcare consulting and medical communications services, including boutique firms specializing in the healthcare industry and the healthcare departments of large firms. Our primary commercial services competitors include Ventiv Health and Professional Detailing, Inc. Competitors for our informatics services include IMS Health Incorporated and NDC. Competitive factors for product development services include (1) previous experience, (2) medical and scientific experience in specific therapeutic areas, (3) the quality of contract research, (4) speed to completion, (5) the ability to organize and manage large-scale trials on a global basis, (6) the ability to manage large and complex medical databases, (7) the ability to provide statistical and regulatory services, (8) the ability to recruit investigators, (9) the ability to integrate information technology with systems to improve the efficiency of contract research, (10) an international presence with strategically located facilities and (11) financial viability and price. The primary competitive factors affecting commercial services are the proven ability to quickly assemble, train and manage large qualified sales forces to handle broad scale launches of new drugs and price. Competitive factors affecting healthcare consulting and medical communications services include experience, reputation and price. Although our informatics services have been systematically established over many years, our market position may be affected over time by competitors' efforts to create or acquire enhanced databases or to develop and market new information products and services. In addition, our market position could be adversely affected if our competitors secure exclusive rights to data that we require for our informatics services. Notwithstanding all these competitive factors, we believe that the synergies arising from integrating product development services with commercial development services, supported by global operations and information technology and supplemented by our informatics capabilities differentiate us from our competitors. EMPLOYEES As of January 31, 2002, we had approximately 17,224 employees, comprised of approximately 6,745 in the Americas, 8,484 in Europe and Africa and 1,995 in the Asia-Pacific region. As of January 31, 2002, our product development group had 8,325 employees, our commercial services group had 7,921 employees, and our informatics group had 419 employees. In addition, 559 employees were in our centralized operations/corporate office. BACKLOG We report backlog based on anticipated net revenue from uncompleted projects which have been authorized by the customer, through a written contract or otherwise. Once work begins on a project, net revenue is recognized over the duration of the project. Using this method of reporting backlog, at December 31, 2001, backlog was approximately $2.0 billion, as compared to approximately $1.9 billion at December 31, 2000. The backlog at December 31, 2001 includes approximately $32.2 million of backlog related to services contracted from our service groups, primarily commercialization, in connection with the 12 strategic alliances forged by our PharmaBio group. Backlog does not include any product revenues, royalties and commissions related to our commercial rights. We believe that backlog may not be a consistent indicator of future results because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be terminated by the customer or delayed by regulatory authorities. Moreover, the scope of work can change during the course of a project. If our product revenues, royalties and commissions related to our commercial rights increase, an increasing proportion of our revenues will not be reflected in our reported backlog. POTENTIAL LIABILITY In conjunction with our product development services, we contract with physicians to serve as investigators in conducting clinical trials to test new drugs on human volunteers. Such testing creates risk of liability for personal injury to or death of volunteers, particularly to volunteers with life-threatening illnesses, resulting from adverse reactions to the drugs administered. Although we do not believe we are legally accountable for the medical care rendered by third party investigators, it is possible that we could be held liable for the claims and expenses arising from any professional malpractice of the investigators with whom we contract or in the event of personal injury to or death of persons participating in clinical trials. In addition, as a result of our Phase I clinical trial facilities, we could be liable for the general risks associated with a Phase I facility including, but not limited to, adverse events resulting from the administration of drugs to clinical trial participants or the professional malpractice of Phase I medical care providers. We also could be held liable for errors or omissions in connection with the services we perform through each of our service groups. For example, we could be held liable for errors or omissions or breach of contract if one of our labs inaccurately reports or fails to report lab results or if our informatics products violate rights of third parties. We believe that some of our risks are reduced by one or more of the following: (1) contractual indemnification provisions with customers and investigators, (2) insurance maintained by customers and investigators and by us and (3) various regulatory requirements, including the use of institutional review boards and the procurement of each volunteer's informed consent to participate in the study. The contractual indemnifications generally do not fully protect us against certain of our own actions such as negligence. Contractual arrangements are subject to negotiation with customers and the terms and scope of such indemnification vary from customer to customer and from trial to trial. Additionally, financial performance of these indemnities is not secured. Therefore, we bear the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations. We maintain professional liability insurance that covers worldwide territories in which we currently do business and includes drug safety issues as well as data processing errors and omissions. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim outside the scope of or in excess of a contractual indemnification provision or beyond the level of insurance coverage or in the event that an indemnifying party does not fulfill its indemnification obligations. For example, we are among the defendants in a purported class action by participants in an Alzheimer's study seeking to hold us liable for alleged damages to the participants arising from the study. Our insurance carrier to whom we paid premiums to cover this type of risk has since filed suit against us seeking to rescind the insurance policies or to have coverage denied for some or all of the claims arising from the Alzheimer study litigation. We believe these claims are without merit and intend to contest them vigorously. See "Legal Proceedings." GOVERNMENT REGULATION Our preclinical, laboratory and clinical trial supply services are subject to various regulatory requirements designed to ensure the quality and integrity of the data or products of these services. The industry standard for conducting preclinical laboratory testing is embodied in the good laboratory practice, or GLP, regulations. The requirements for facilities engaging in clinical trial supplies preparation, labeling and distribution are set forth in the current good manufacturing practices, or cGMP, regulations. GLP and cGMP regulations have been mandated by the FDA and the Department of Health in the United Kingdom, and adopted by similar regulatory authorities in other countries. GLP and cGMP stipulate requirements for facilities, equipment, 13 supplies and personnel engaged in the conduct of studies to which these regulations apply. The regulations require adherence to written, standardized procedures during the conduct of studies and the recording, reporting and retention of study data and records. To help assure compliance, we have established Quality Assurance programs at our preclinical, laboratory and clinical trial supply facilities which monitor ongoing compliance with GLP and cGMP regulations by auditing study data and conducting regular inspections of testing procedures. Our clinical laboratory services, to the extent they are carried out in the United States, are subject to the requirements of the Clinical Laboratory Improvement Amendments of 1988. GCP regulations and guidelines contain the industry standard for the conduct of clinical research and development studies. The FDA and many other regulatory authorities require that study results and data submitted to such authorities be based on studies conducted in accordance with GCP provisions. These provisions include: (1) complying with specific regulations governing the selection of qualified investigators, (2) obtaining specific written commitments from the investigators, (3) ensuring the protection of human subjects by verifying that Institutional Review Board or independent Ethics Committee approval and patient informed consent are obtained, (4) instructing investigators to maintain records and reports, (5) verifying drug or device accountability, (6) reporting of adverse events, (7) adequate monitoring of the study for compliance with GCP requirements and (8) permitting appropriate regulatory authorities access to data for their review. Records for clinical studies must be maintained for specified periods for inspection by the FDA and other regulators. Significant non-compliance with GCP requirements can result in the disqualification of data collected during the clinical trial. We are also obligated to comply with regulations issued by national and supra-national regulators such as FDA and the European Medicines Evaluation Agency, or EMEA. By way of example these regulations include FDA's regulations on electronic records and signatures (21 CFR Part 11) which set out requirements for data in electronic format supporting any submissions made to FDA and EMEA's Note For Guidance "Good Clinical Practice for Trials on Medicinal Products in the European Community." We write our standard operating procedures related to clinical studies in accordance with regulations and guidelines appropriate to the region where they will be used, thus helping to ensure compliance with GCP. Within Europe, we perform our work subject to the European Community Note for Guidance "Good Clinical Practice for Trials on Medicinal Products in the European Community." Studies to be submitted to the EMEA must meet the requirements of the International Congress of Harmonization -- GCP. In addition, FDA regulations and guidelines serve as a basis for our North American standard operating procedures. Our offices in the Asia-Pacific region have developed standard operating procedures in accordance with their local requirements and in harmony with our North American and European operations. Our commercial development services are subject to detailed and comprehensive regulation in each geographic market in which we operate. Such regulation relates, among other things, to the distribution of drug samples, the qualifications of sales representatives and the use of healthcare professionals in sales functions. In the United States our commercial development services are subject to the Prescription Drug Marketing Act, or PDMA, with regard to the distribution of drug samples. In the United Kingdom, they are subject to the Association of the British Pharmaceutical Industry Code of Practice for the Pharmaceutical Industry, which prescribes, among other things, an examination that must be passed by sales representatives within two years of their taking up employment. We follow similar regulations which are in effect in the other countries where we offer commercial development services. Our United States laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as the safety and health of laboratory employees. All of our laboratories are subject to applicable federal, state and national laws and regulations relating to the storage and disposal of all laboratory specimens including the regulations of the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Transportation, the National Fire Protection Agency and the Resource Conservation and Recovery Act. The use of controlled substances in testing for drugs of abuse is regulated by the United States Drug Enforcement Administration, or DEA. All of our laboratories using controlled substances for testing purposes are licensed by the DEA. The regulations of the United States Department of Transportation, the Public Health Service and the Postal 14 Service apply to the surface and air transportation of laboratory specimens. Our laboratories also are subject to International Air Transport Association regulations, which govern international shipments of laboratory specimens. Furthermore, when the materials are sent to a foreign country, the transportation of such materials becomes subject to the laws, rules and regulations of such foreign country. In addition to its comprehensive regulation of safety in the workplace, the United States Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals, and transmission of blood-borne and airborne pathogens. Furthermore, certain employees receive initial and periodic training to ensure compliance with applicable hazardous materials regulations and health and safety guidelines. Although we believe that we are currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. Our disease management and healthcare information management services relate to the diagnosis and treatment of disease and are, therefore, subject to substantial governmental regulation. In addition, the confidentiality of patient-specific information and the circumstances under which such patient-specific records may be released for inclusion in our databases or used in other aspects of our business are heavily regulated. Legislation has been proposed at both the state and federal levels that may (1) require us to implement security measures that could involve substantial expenditures or (2) limit our ability to offer some of our products and services. Specifically, various initiatives at the federal level could impact the manner in which we conduct our informatics business. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires the use of standard transactions, privacy and security standards and other administrative simplification provisions and instructs the Secretary of Health and Human Services, or HHS, to promulgate regulations implementing these standards. Final rules requiring standardized electronic transactions of health information were published by the Secretary in August 2000 and the initial compliance deadline of October 16, 2002 was recently extended to October 16, 2003 (October 16, 2004 for small health plans). Covered entities can file plans to request extensions of this deadline to October 16, 2003 (October 16, 2004 for small health plans). On December 28, 2000, the Secretary issued the final rule on Standards for Privacy of Individually Identifiable Health Information to implement the privacy requirements for HIPAA. These regulations generally (1) impose standards for entities transmitting or maintaining protected data in an electronic, paper or oral form with respect to the rights of individuals who are the subject of protected health information; and (2) establish procedures for (a) the exercise of those individuals' rights, (b) the uses and disclosure of protected health information, and (c) the methods permissible for de-identification of health information. Unless properly extended by Congress or the current Administration, the effective date of the final rule is April 14, 2001 and the compliance date is April 14, 2003. The final regulation for the HIPAA security standards is still pending. The impact of such legislation and regulations relating to health information cannot be predicted. Such legislation or regulations could materially affect our business. Compliance with the final regulations must be no later than 24 months after their effective date, and we are preparing to comply with this timetable. In addition, broad-based health information privacy legislation restricting third party processors from using, transmitting or disclosing certain patient data without specific patient consent has been introduced in the United States Congress and certain state legislatures. If such legislation were adopted, it could prevent or restrict third party processors from using, transmitting or disclosing certain treatment and clinical data. It is difficult to predict the impact of the legislation and regulations described above, but such legislation and regulations could materially adversely affect our business. At a minimum, such legislation could negatively impact our ability to obtain data for our informatics products from third party processors. 15 The Market Research Code of Conduct, a pharmaceutical industry-promulgated code of conduct to which we adhere to in connection with our informatics business, provides that the identity of the individual researched may never be disclosed to the company sponsoring such research without such individual's consent. We supply only aggregated statistics to the sponsoring company when information is generated from market research databases. As recommended by the board of directors of the Pharmaceutical Manufacturer's Association, our informatics databases do not contain patient names and certain other personal identifiers, thus preserving confidentiality. We are directly subject to certain restrictions on the collection and use of data. In the United States, certain states have enacted legislation prohibiting the use of personally identifiable prescription drug information without consent. Because our informatics business generally does not receive information regarding the identity of patients, we believe that such state legislation will have no material adverse effect on our business. There can be no assurance that future legislation or regulations will not directly or indirectly restrict the dissemination of information regarding physicians or prescriptions. Such legislation, if enacted, could have a material adverse effect on our informatics operations. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to each of our executive officers who serve in such capacities as of the filing date of this Form 10-K. There are no family relationships between any of our directors or executive officers.
NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- Dennis B. Gillings................... 57 Chairman Pamela J. Kirby...................... 48 Chief Executive Officer James L. Bierman..................... 49 Executive Vice President and Chief Financial Officer John S. Russell...................... 47 Executive Vice President, General Counsel and Head Global Human Resources
DENNIS B. GILLINGS, PH.D. founded the Company in 1982 and has served as Chairman of the Board of Directors since its inception and as Chief Executive Officer from its inception until April 2, 2001. Dr. Gillings serves as a director of Triangle Pharmaceuticals, Inc., a company engaged in the development of new drug candidates primarily in the antiviral area. PAMELA J. KIRBY, PH.D. became the Company's Chief Executive Officer in April 2001. Previously, she served as Head of Global Strategic Marketing and Business Development department of the Pharmaceuticals Division of F. Hoffmann-La Roche Ltd. in Basel, Switzerland. Dr. Kirby served from 1996 until 1998 as global commercial director with British Biotech plc, a drug development company. Dr. Kirby is a director of Smith & Nephew, plc. JAMES L. BIERMAN became Chief Financial Officer in February 2000, was appointed Executive Vice President in July 2001, and served as our Senior Vice President, Corporate Development since 1998. Previously, Mr. Bierman spent 22 years with Arthur Andersen LLP. JOHN S. RUSSELL serves as Executive Vice President and General Counsel and Head Global Human Resources. He also serves as the Corporate Secretary and directs our government relations. Mr. Russell joined us in 1998 after 12 years in private practice as a partner in the Raleigh office of the Moore and Van Allen law firm, where he was head of the Corporate Practice group. ITEM 2. PROPERTIES As of January 31, 2002 we had approximately 112 offices located in 44 countries. Our executive headquarters is located adjacent to Research Triangle Park, North Carolina. We maintain substantial offices serving our product development group in Durham, North Carolina; Kansas City, Missouri; Smyrna, Georgia; Bracknell, England; Irene, South Africa; Tokyo, Japan; and Singapore. We also maintain substantial offices serving our commercial services group in Parsippany, New Jersey; Falls Church, Virginia; Hawthorne, New 16 York; Marlow, England, and Tokyo, Japan. Substantial offices serving our informatics group are located in Newtown, Pennsylvania and Chicago, Illinois. We own facilities that serve our product development group in Lenexa, Kansas; Kansas City, Missouri; London, England; Riccarton, Scotland; Bathgate, Scotland; Glasgow, Scotland; Livingston, Scotland; Freiburg, Germany; and Pretoria, South Africa. We also own a facility in Gotenba City, Japan, which is subject to a mortgage, that serves our product development and commercial services groups. All of our other offices are leased. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. ITEM 3. LEGAL PROCEEDINGS Beginning on September 30, 1999, several purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina against us and several of our executive officers and directors on behalf of all persons who purchased or otherwise acquired shares of our common stock between July 16, 1999, and September 15, 1999. These actions were subsequently consolidated and plaintiffs filed an 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 alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs sought unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. We believed that the claims were without merit and intended to defend the suit vigorously. Accordingly, we and the named officers and directors filed a motion to dismiss the amended complaint. Immediately prior to the hearing scheduled on February 6, 2001, on the motion to dismiss, the parties agreed to settle the lawsuit. The settlement amount was covered by insurance. On October 5, 2001, the district court judge approved the settlement, ending the dispute. On October 12, 2001, we entered into a settlement agreement with WebMD Corporation which settled the litigation pending in the United States District Court for the Eastern District of North Carolina between us and WebMD 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, as part of the settlement, the United States Court of Appeals for the Fourth Circuit dismissed WebMD's appeal of the preliminary injunction previously issued by the district court in our favor on October 18, 2001. 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 January 22, 2002, Federal Insurance Company and Chubb Custom Insurance Company filed suit against us, Quintiles Pacific, Inc. and Quintiles Laboratories Limited., two of our subsidiaries, in the United States District Court for the Northern District of Georgia. In the suit, Chubb, our primary commercial general liability carrier, and Federal, our excess liability carrier, seek to rescind the policies issued to us for coverage years 2000-2001 and 2001-2002 based on an alleged misrepresentation by us on our policy application, which we deny; contending that the information was material to their determination to accept the risk of coverage. Alternatively, Chubb and Federal seek a declaratory judgment that there is no coverage under the policies for some or all of the claims asserted against us and our subsidiaries in the litigation described in the prior paragraph, and, if one or more of such claims is determined to be covered, Chubb and Federal request an allocation of the defense costs between the claims they contend are covered and non-covered claims. We believe these allegations are without merit and intend to vigorously defend this case. We are also a party in certain other pending litigation arising in the normal course of our business. While the final outcome of such litigation cannot be predicted with certainty, it is the opinion of management that 17 the outcome of these matters would not materially affect our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICES Our common stock is traded on The Nasdaq Stock Market under the symbol "QTRN." The following table shows, for the periods indicated, the high and low sale prices per share on The Nasdaq Stock Market, based on published financial sources.
CALENDAR PERIOD HIGH LOW - --------------- ------- ------- Quarter ended March 31, 2000................................ $35.000 $15.313 Quarter ended June 30, 2000................................. 17.438 12.000 Quarter ended September 30, 2000............................ 20.250 12.563 Quarter ended December 31, 2000............................. 22.500 12.500 Quarter ended March 31, 2001................................ 22.875 14.688 Quarter ended June 30, 2001................................. 26.050 15.000 Quarter ended September 30, 2001............................ 25.500 12.450 Quarter ended December 31, 2001............................. 18.900 13.610
As of February 15, 2002, there were approximately 30,915 beneficial owners of our common stock, including 1,715 holders of record. DIVIDEND POLICIES We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future, and we intend to retain future earnings for the development and expansion of our business. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected Consolidated Statement of Operations Data set forth below for each of the years in the three-year period ended December 31, 2001 and the Consolidated Balance Sheet Data set forth below as of December 31, 2001 and 2000 are derived from our audited consolidated financial statements and notes thereto as included elsewhere herein. The selected Consolidated Statement of Operations Data set forth below for the years ended December 1998 and 1997, and the Consolidated Balance Sheet Data set forth below as of December 31, 1999, 1998 and 1997 are derived from our consolidated financial statements. During 2000, we completed the sale of our electronic data interchange unit, ENVOY Corporation, and as such the results of ENVOY, for all periods presented, have been reported separately as a discontinued operation in the consolidated financial statements. Our consolidated financial statements have been restated to reflect material acquisitions in transactions accounted for as poolings of interests. However, the consolidated financial statements have not been restated to reflect certain other acquisitions accounted for as pooling of interests where we determined that the consolidated financial data would not have been materially different if the pooled companies had been included. For such immaterial pooling of interests transactions, which include three transactions in 1998, our financial statements for the year of each transaction have been restated to include the pooled companies from January 1 of that year, but the financial statements for years prior to the year of each transaction have not been restated because the effect of such restatement would be immaterial. The selected consolidated financial data presented below should be read in conjunction with our audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- -------- Net revenue..................................... $1,619,872 $1,659,910 $1,607,087 $1,221,776 $885,557 Income (loss) from operations................... 48,177 (68,170) 136,355 129,389 91,814 (Loss) income from continuing operations before income taxes.................................. (262,496) (51,005) 115,910 125,567 89,439 (Loss) income from continuing operations........ (175,873) (34,174) 73,168 85,643 58,063 Income (loss) from discontinued operation, net of income taxes............................... -- 16,770 36,123 2,926 (9,197) Extraordinary gain from sale of discontinued operation, net of income taxes................ 142,030 436,327 -- -- -- Net (loss) income available for common shareholders.................................. $ (33,843) $ 418,923 $ 109,291 $ 88,569 $ 48,866 ========== ========== ========== ========== ======== Basic net (loss) income per share: (Loss) income from continuing operations...... $ (1.49) $ (0.29) $ 0.64 $ 0.82 $ 0.58 Income (loss) from discontinued operation..... -- 0.14 0.32 0.03 (0.09) Extraordinary gain from sale of discontinued operation................................... 1.20 3.76 -- -- -- ---------- ---------- ---------- ---------- -------- Basic net (loss) income per share............. $ (0.29) $ 3.61 $ 0.96 $ 0.85 $ 0.49 ========== ========== ========== ========== ======== Diluted net (loss) income per share: (Loss) income from continuing operations...... $ (1.49) $ (0.29) $ 0.63 $ 0.77 $ 0.54 Income (loss) from discontinued operation..... -- 0.14 0.31 0.03 (0.09) Extraordinary gain from sale of discontinued operation................................... 1.20 3.76 -- -- -- ---------- ---------- ---------- ---------- -------- Diluted net (loss) income per share........... $ (0.29) $ 3.61 $ 0.94 $ 0.80 $ 0.46 ========== ========== ========== ========== ======== Weighted average shares outstanding: Basic......................................... 118,223 115,968 113,525 104,799 99,908 Diluted....................................... 118,223 115,968 115,687 110,879 107,141
AS OF DECEMBER 31, ------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- -------- Cash and cash equivalents....................... $ 565,063 $ 330,214 $ 191,653 $ 128,621 $ 84,597 Working capital, excluding discontinued operation(1).................................. 617,552 308,684 78,039 197,005 166,866 Total assets.................................... 1,947,740 1,961,578 1,607,565 1,171,777 960,803 Long-term debt including current portion........ 37,864 38,992 185,765 193,270 189,507 Shareholders' equity............................ $1,455,088 $1,404,706 $ 991,759 $ 646,132 $517,283 Employees....................................... 17,639 18,060 20,496 16,732 12,717
- --------------- (1) Working capital of discontinued operation was $36.0 million in 1999, $42.4 million in 1998 and $18.0 million in 1997. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Unless otherwise noted, all foreign currency denominated amounts due, subsequent to December 31, 2001, have been translated using the Friday, December 28, 2001 foreign exchange rates as published by OandA.com on December 31, 2001. OVERVIEW Quintiles Transnational Corp. is a global leading provider of information, technology and services to help bring new medicines to patients faster and improve healthcare. Based on industry analyst reports, we are the largest company in the pharmaceutical outsourcing services industry as ranked by 2001 net revenue. The net revenue of the second largest company was over $760 million less than our 2001 net revenue. During 2001, we began implementing a global strategic plan that we believe will allow us to meet the changing needs of our customers and increase our opportunity for growth. Our strategy is built on the following initiatives: - Implementing partnering structures. Through our PharmaBio Development group, we are pursuing strategic alliances with customers that pair the services of our commercialization group with funding support for our customer. We provide funding to our customer, either through direct milestone payments or loans. We may invest directly in the customer's common stock, and sometimes we receive warrants to purchase shares of our customer's common stock. In some cases, the loans are convertible into capital stock of our customer. Additionally, the customer may agree to pay us royalties or commissions based on sales of the customer's product. Overall, our revenue and operating income from these transactions depends on the performance or success of our customer's product, which in some cases has not yet been approved by the FDA. These transactions expose us to new risks, including the risk of investing in non-marketable securities and risks associated with the marketing and sale of pharmaceutical products, in most cases to the extent the revenue streams from those products may be adversely affected. We believe this strategy allows us to leverage the strength of our financial position to help drive service revenue, margins and profits through our service relationships with our partners. We completed four of these transactions during 2001. - Leveraging technology and information. We are focusing on leveraging our technology to increase the value of our services to our customers and to increase our own efficiency. Our commercial services group is using our iQLearning Network to deliver Internet based programs such as eCME and E-detailing to supplement office visits and allow us to reach doctors who are not easily accessed, while at the same time, leveraging our recruitment services across the iQLearning Network to drive down our costs. Our product development group is focusing on gaining operating efficiency in data management by eliminating duplicate offices and shifting capabilities to low-cost, high quality regions and eventually through the use of secure Internet links. We believe that the conversion to an Internet standard will have a number of advantages to us, including allowing us to maintain less staff on a relative basis, reduce the number of data management facilities we maintain and provide flexibility as to where that work is conducted, for example, shifting from an office to a home-based strategy. We are also moving E-commerce products into our service groups as the products enter the implementation phase. - Realigning business development. We are moving towards a business development strategy which focuses on specific customers to acquire a better understanding of the whole of that customer's needs. Sometimes, we are able to achieve this understanding by acquiring some of the customer's infrastructure, bringing along with it a relationship with the customer. For example, in January 2001, we acquired and assumed operation of Pharmacia's Stockholm-based clinical development unit, which continued to serve Pharmacia projects under contract with us at full capacity. Subsequently, Pharmacia extended the original four-year, $65 million agreement to a five-year alliance encompassing global clinical trials, laboratory and consulting services. We also are focusing on expanding existing customer relationships into preferred provider relationships, such as forming long-term clinical development alliances designed to enable the customer to boost efficiencies in its drug development programs. For example, in 2001, we expanded our relationship with Solvay Pharmaceuticals to a five- 20 year agreement under which Solvay has committed at least 40% of its outsourced clinical projects to us in the first year and at least 50% over the next four years. This relationship will allow Solvay to achieve more speed, economies of scale and geographic reach than it could accomplish alone. - Hiring and retaining quality employees. Our employees are our business, and, in order to achieve the highest quality in our work, we are maintaining our focus on strengthening and stabilizing our workforce. - Creating efficiencies through shared service centers and near real-time human resources management. We believe we can create efficiencies by centralizing our finance and human resources functions in professional service centers. We have established regional centers in each of the United States and Europe. To date, approximately 59% of our employees are covered under the services provided by our finance and human resources service centers, respectively. We believe our ability to support near real-time human resources assessment is fundamental to achieving the efficiencies we are seeking through our restructuring activities. Through our human resource centers, we have in place systems that allow us to match financial metrics with headcount to monitor and manage our resources more efficiently. In December 2001, we acquired the marketing rights to market SkyePharma's Solaraze(TM) skin treatment in the United States, Canada and Mexico for 15 years from Bioglan Pharma Plc for a total consideration of $26.7 million. Under the terms of this agreement, we have committed to pay royalties to SkyePharma based on a percentage of net sales of Solaraze(TM). Until March 22, 2002, Bioglan Pharma Plc's U.S. affiliate, Bioglan Pharma Inc., or Bioglan, provided the marketing and sales support for Solaraze(TM). On March 22, 2002, we acquired certain assets of Bioglan, including its management team and sales force, for L18.5 million (approximately $26.7 million). As part of the transaction, we also acquired Bioglan's rights to certain other dermatology products now on the market in the United States, including ADOXA(TM) for the treatment of severe acne. This acquisition provides us with the infrastructure and capabilities to help support our commercial rights strategies. As a result of these transactions we have acquired products and the rights to market products, as opposed to the rights to receive revenues or royalties relating to a product's performance. Therefore, we are now exposed to the risks typically faced by pharmaceutical companies, including the risk of product liability claims, and we will bear the entire risk of the product's commercial success, without the ability to offset those risks by the receipt of fees for performing services relating to the product. As part of our normal course of business, we will continue to evaluate opportunities to acquire specific products and/or marketing rights to products. On March 15, 2002, we entered into a joint venture agreement with McKesson Corporation pursuant to which we agreed to form a joint venture company designed to leverage the healthcare information business of each company. The agreement contemplates that we would be co-equal owners of the joint venture company with McKesson, with a portion of the equity in the joint venture company to be allocated to key providers of de-identified healthcare data. Our primary contribution will be the assets of our informatics group. Subject to the prior satisfaction or waiver of applicable conditions, completion of the joint venture is targeted for the second quarter of 2002. The agreement also provides for the joint venture company to license data products to us and McKesson for use in our core businesses. Under the license arrangement with the joint venture company, our product development and commercial services groups will continue to have access to the joint venture's market information and products to enhance their service delivery to our customers. RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Net revenue for the year ended December 31, 2001 was $1.62 billion, a decrease of $40.0 million or (2.4%) over net revenue for the year ended December 31, 2000 of $1.66 billion. However, there was a negative impact of approximately $49.0 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 combined with the effects of the devaluation of several currencies including the South African Rand; therefore, using a constant exchange rate, revenues increased by approximately $8.9 million or 0.5%. Net revenue for the 21 commercial services group decreased $110.2 million or (14.0%) as a result of large 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 $11.7 million from our Phase I development services and an increase of approximately $76.6 million from our clinical development services, primarily Phase II and III services. Net revenue increased in the Asia Pacific region $44.0 million or 36.7% to $163.8 million but decreased $104.3 million or (10.9%) to $854.3 million in the Americas region primarily resulting from the decline in the commercial services segment. Net revenue in the Europe and Africa region increased $20.3 million or 3.5% to $601.8 million. Direct costs, which include compensation and related fringe benefits for billable employees, and other expenses directly related to contracts, were $956.7 million or 59.1% of 2001 net revenue versus $993.8 million or 59.9% of 2000 net revenue. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $520.8 million or 32.1% of 2001 net revenue versus $565.8 million or 34.1% of 2000 net revenue. General and administrative expenses decreased primarily due to the effects of reductions relating to our restructuring activities including a decrease of approximately $15.4 million in the spending for our Internet initiative. These reductions were partially offset by an increase in costs of approximately $7.8 million associated with the continued implementation of our shared service center initiative and approximately $9.0 million associated with the realignment of our business development strategy. Depreciation and amortization were $96.1 million or 5.9% of 2001 net revenue versus $92.6 million or 5.6% of 2000 net revenue. Depreciation expense increased $3.8 million due to the increase in our capitalized asset base while amortization expense decreased $300,000 primarily as a result of the write-off of goodwill. In response to a change in demand for our services, we announced restructuring plans during 2000, resulting in a $58.6 million restructuring charge. This 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 December 31, 2001, all affected individuals, approximately 990 positions, have been notified of their termination and approximately $1.5 million remains to be spent. 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. In connection with this plan, 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. As of December 31, 2001, 755 individuals have been notified of their termination of which 485 have been paid and are no longer employed by us. We are targeting the 2001 restructuring to result in annualized cost savings of approximately $50 million to $55 million. During 2001, we recognized a $27.1 million charge to write-off goodwill and other operating assets primarily relating to goodwill recorded in four separate acquisitions in our commercial services group and personal computers including desktops and laptops that are no longer in service. The goodwill was deemed impaired and written off due to changing business conditions and strategic direction. During 2000, we recognized a $17.3 million loss on the disposal of our general toxicology operations in Ledbury, Herefordshire, UK. During 2001, we recognized $83.2 million of income from the settlement of litigation between WebMD Corporation and us. We received $185.0 million in cash for all 35 million shares of WebMD common stock we owned and to resolve the remaining disputes. Also as part of the settlement, WebMD surrendered the warrant to purchase 10 million shares of our common stock. 22 Income from operations was $48.2 million for 2001 versus a loss from operations of $68.2 million for 2000. Excluding the charges relating to the restructurings, the write-off of goodwill and other assets, the disposal of a business and the income from the settlement of litigation with WebMD, income from operations was $46.3 million for 2001 versus $7.7 million for 2000. Other expense was $310.7 million in 2001. Included in other expense in 2001 was a $334.0 million write-down of our cost basis in our investment in WebMD due to an other than temporary decline in its fair value and an $8.5 million gain on our investment in WebMD as a result of the sale of all 35 million shares of WebMD common stock to WebMD. We obtained the WebMD common stock as part of the consideration for the sale of our electronic data interchange unit, ENVOY Corporation, to WebMD in 2000. Excluding these transactions, other income in 2001 was $14.9 million versus $17.2 million in 2000. Included in the variance was an increase of approximately $800,000 in net interest income offset by a decrease of approximately $1.9 million of gains on the sale of investments, net of impairments and an increase of approximately $2.1 million of net foreign currency losses. The effective income tax rate was (33.0%) for 2001 and 2000, respectively. Since we conduct operations on a global basis, our effective income tax rate may vary. See "-- Income Taxes." ANALYSIS BY SEGMENT The following table summarizes the operating activities for our three segments for the years ended December 31, 2001 and 2000. We do not include net revenue and expenses related to the Internet initiative, charges related to restructurings, write-off of goodwill and other assets, disposal of a business, other income (expense) and income tax expense (benefit) in our segment analysis (dollars in millions).
NET REVENUE INCOME/(LOSS) FROM OPERATIONS ------------------------------ ------------------------------------- % OF NET % OF NET 2001 2000 GROWTH % 2001 REVENUE 2000 REVENUE -------- -------- -------- ------ -------- ------ -------- Product development................. $ 881.8 $ 809.1 9.0% $ 37.2 4.2% $ (9.3) (1.2)% Commercial services................. 680.0 790.2 (14.0) 37.6 5.5 55.6 7.0 Informatics......................... 58.1 59.7 (2.7) (14.3) (24.7) (14.2) (23.8) -------- -------- ------ ------ $1,619.9 $1,659.0 (2.4)% $ 60.5 3.7% $ 32.0 1.9% ======== ======== ====== ======
The improvement in the product development group's financial performance was a result of several factors, including process enhancements and cost reduction efforts in the American and European operations, growth in our Phase I and clinical development services, primarily Phase II and III services, and an improvement in the quality of our contracts. The commercial services 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 our cost reduction efforts. The informatics group's financial performance was impacted by several factors, including the effects of the strategic plan and related restructuring, the costs associated with developing new data products and a decrease in new business as a result of the dispute with WebMD and concerns regarding our continuing ability to receive data from WebMD. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 Net revenue for the year ended December 31, 2000 was $1.66 billion, an increase of $52.8 million or 3.3% over 1999 net revenue of $1.61 billion. However, use of constant exchange rates results in a growth of approximately $108.7 million or 6.8%. Factors contributing to the growth included an increase of contract service offerings, an increase in services rendered under existing contracts, the initiation of services under contracts awarded subsequent to December 31, 1999 and our acquisitions accounted for under purchase accounting completed subsequent to January 1, 1999 which contributed approximately $48.4 million of 2000 23 net revenue as compared to $36.2 million of 1999 net revenue. These factors were partially offset by less than expected new business and the effects of large commercialization contracts being converted in-house instead of being renewed. We experienced growth in the Americas and Asia Pacific regions. The decrease that we experienced in the Europe and Africa region was primarily due to the effect of foreign currency fluctuations related to the strengthening of the US dollar relative to the euro and other European currencies. Direct costs, which include compensation and fringe benefits for billable employees, and other expenses directly related to contracts, were $993.8 million or 59.9% of 2000 net revenue versus $883.3 million or 55.0% of 1999 net revenue. The increase in direct costs as a percentage of net revenue was primarily attributable to a decrease in our realization rates during 2000. General and administrative expenses, which include compensation and fringe benefits for administrative employees, non-billable travel, professional services, advertising, computer and facility expenses, were $565.8 million or 34.1% of net revenue for 2000 versus $505.2 million or 31.4% of 1999 net revenue. In January 2000, we announced a restructuring plan. In connection with this plan, we recognized a restructuring charge of $58.6 million during the quarter ended March 31, 2000. This consisted of $33.2 million related to severance payments, $11.3 million related to asset impairment write-offs and $14.0 million of exit costs. Approximately 770 positions worldwide were to be eliminated and as of December 31, 2000, 601 individuals were terminated. Most of the eliminated positions were in the product development service group. In the fourth quarter of 2000 we updated our expectations for the restructuring plan which resulted in a reduction of the expected cost by $6.9 million. This reduction was made up of $6.3 million in severance payments and $632,000 in exit costs. The severance reduction resulted primarily from a higher than expected number of voluntary terminations, reduced outplacement costs and related fringe benefits. Also during the fourth quarter of 2000, management conducted a detailed review of the resource levels within selected service groups. Based on this review, we adopted a follow-on restructuring plan resulting in a restructuring charge of $7.1 million. The restructuring charge consists of $5.8 million related to severance payments and $1.3 million related to exit costs. As part of this plan, approximately 220 positions were to be eliminated and as of December 31, 2000, 42 individuals were terminated. Most of the eliminated positions were in our commercial services group. Also included in general and administrative expenses for year-ended December 31, 1999 were $8.8 million of incremental costs related to our Year 2000 program. Excluding these incremental costs, general and administrative expenses increased $69.4 million primarily due to costs associated with our Internet initiative of $21.4 million, the implementation of a global shared service center of $5.7 million and the implementation of global account teams of $6.5 million, as well as delays in realizing the benefits of our restructuring program. Depreciation and amortization were $92.6 million or 5.6% of 2000 net revenue versus $82.3 million or 5.1% of 1999 net revenue. Amortization expenses increased $1.9 million primarily due to the goodwill amortization resulting from our 1999 acquisitions accounted for under purchase accounting. The remaining $8.4 million increase was primarily due to the increase in our capitalized asset base. Consistent with the shift in focus of our preclinical operations from basic toxicology to more advanced technologies such as genomics and proteomics, we completed the sale of our general toxicology operations in Ledbury, Herefordshire, UK. This facility was not contributing to our profitability and represented less than one percent of our net revenue. In connection with this sale, we recognized a $17.3 million loss on the disposal. Loss from operations was $68.2 million or (4.1)% of 2000 net revenue versus income from operations of $136.4 million or 8.5% of 1999 net revenue. Excluding the charges for restructuring and disposal of a business totaling $75.9 million, income from operations was $7.7 million or .5% of 2000 net revenue. Other income was $17.2 million in 2000 as compared to other expense of $20.4 million in 1999. Included in other income are net realized gains from investments in equity securities of $578,000 and $2.1 million for the year ended December 31, 2000 and 1999, respectively. Excluding transaction costs and these gains, other income was $16.6 million in 2000 versus $3.8 million in 1999. The $12.8 million increase was primarily due to an increase in net interest income. 24 The effective income tax rate for 2000 was (33.0)% versus a 36.9% rate in 1999. Excluding transaction costs, which are not generally deductible for tax purposes, the effective income tax rate for 1999 would have been 30.1%. Since we conduct operations on a global basis, our effective income tax rate may vary. See "-- Income Taxes." ANALYSIS BY SEGMENT The following table summarizes the operating activities for our three segments for the years ended December 31, 2000 and 1999. We do not include net revenue and expenses related to the Internet initiative, charges related to restructurings, write-off of goodwill and other assets, disposal of a business, other income (expense) and income tax expense (benefit) in our segment analysis (stated in millions).
NET REVENUE (LOSS)/INCOME FROM OPERATIONS ------------------------------ ------------------------------------- % OF NET % OF NET 2000 1999 GROWTH % 2000 REVENUE 1999 REVENUE -------- -------- -------- ------ -------- ------ -------- Product development......... $ 809.1 $ 848.6 (4.7)% $ (9.3) (1.2)% $ 74.4 8.8% Commercial services......... 790.2 706.1 11.9 55.6 7.0 66.0 9.4 Informatics................. 59.7 52.4 14.0 (14.2) (23.8) (4.1) (7.8) -------- -------- ------ ------ $1,659.0 $1,607.1 3.2% $ 32.0 1.9% $136.4 8.5% ======== ======== ====== ======
The product development group's financial performance was negatively impacted by several factors, including early termination and delays in clinical trials, less than expected new business, realization rates that were lower than historical levels, adjustments made in existing programs, higher operating costs in our laboratory services, and the effects of contracts with lower profit margins than we historically achieved. During 2000, the cancellation rate for clinical trials decreased to the level we experienced during the first half of 1999 as opposed to the second half of 1999. During the second half of 2000, the product development group began to realize benefits from the restructuring plan. The commercial services group's net revenue growth included net revenue from an acquisition accounted for as a purchase that was completed subsequent to January 1, 1999 of $12.1 million for the year ended December 31, 2000 as compared to $6.3 million for the year ended December 31, 1999. The financial performance of this group was the result of strong growth during the first half of 2000 in the Americas, primarily the United States. A portion of this stemmed from growth in the medical communications and strategic consulting services. The growth in the Americas and Asia Pacific regions were offset by a weakening in the Europe and Africa region, primarily in the United Kingdom and Continental Europe. During the second half of 2000, the commercial services group was negatively impacted by less than expected new business and the effect of large contracts being taken in-house by our customers instead of being renewed. The net revenue for the informatics group included net revenue from an acquisition accounted for as a purchase that was completed subsequent to January 1, 1999 of $29.8 million for the year ended December 31, 2000 as compared to $24.6 million for the year ended December 31, 1999. The informatics group's performance was impacted by the discontinuation of products that we expect to replace with more technologically advanced products and the costs associated with web-enabling the unique data products of the informatics group. PRO FORMA RESULTS When evaluating our performance, we exclude certain items that we believe are one-time in nature. These one-time items include restructuring charges, write-off of goodwill and other assets, disposal of a business and WebMD related transactions which include: gain from the settlement of litigation including the sale of WebMD common stock, impairment of investment in WebMD common stock, gain on sale of discontinued operation and 1999 transaction costs which relate primarily to the acquisition of ENVOY Corporation. 25 Below is a summary of our pro forma results (stated in thousands):
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Net revenue.............................................. $1,619,872 $1,659,910 $1,607,087 Costs and expenses: Direct................................................. 956,748 993,795 883,274 General and administrative............................. 520,753 565,801 505,166 Depreciation and amortization.......................... 96,103 92,567 82,292 ---------- ---------- ---------- Total costs and expenses................................. 1,573,604 1,652,163 1,470,732 ---------- ---------- ---------- Income from operations................................... 46,268 7,747 136,355 Impairment of investments................................ (13,992) (5,466) -- Gain on investments, net................................. 12,689 6,045 2,057 Other income, net........................................ 16,183 16,586 3,820 ---------- ---------- ---------- Total other income....................................... 14,880 17,165 5,877 ---------- ---------- ---------- Income before income taxes............................... 61,148 24,912 142,232 Income taxes............................................. 20,189 8,220 42,742 ---------- ---------- ---------- Income from continuing operations........................ $ 40,959 $ 16,692 $ 99,490 ========== ========== ========== Summary of reconciling (income or benefit)/expense items excluded above: Restructuring charges.................................. $ 54,169 $ 58,592 $ -- Write-off of goodwill and other assets................. 27,122 -- -- Disposal of a business................................. -- 17,325 -- Settlement of litigation............................... (83,200) -- -- Impairment of investments in WebMD..................... 334,023 -- -- Gain on investments in WebMD........................... (8,470) -- -- Transaction costs...................................... -- -- 26,322 Income taxes........................................... (106,812) (25,051) -- ---------- ---------- ---------- Total expenses excluded, net of income taxes............. 216,832 50,866 26,322 ---------- ---------- ---------- (Loss) income from continuing operations, as reported.... $ (175,873) $ (34,174) $ 73,168 ========== ========== ==========
Net revenue decreased approximately $40.0 million to $1.62 billion in 2001 from $1.66 billion in 2000. Although we experienced a decrease in net revenue, income from operations on a pro forma basis increased $38.5 million. Direct expenses were $956.7 million or 59.1% of net revenue in 2001 as compared to $993.8 million or 59.9% in 2000. The $37.0 million decrease is a result of a decrease in the net revenue and a reduction in expenses primarily due to the effects of the restructuring activities. General and administrative expenses decreased $45.0 million to $520.8 million in 2001 from $565.8 million in 2000. The decrease is a result of several factors, including a reduction in expenses primarily due to the effects of our restructuring activities and a reduction in the spending for our Internet initiative. These reductions were partially offset by an increase in costs relating to the continued implementation of our shared service center and the realignment of our business development strategy. Net revenue increased approximately $52.8 million or 3.3% to $1.66 billion in 2000 as compared to $1.61 billion in 1999. Although we experienced an increase in net revenue, income from operations decreased $128.6 million to $7.7 million in 2000 as compared to $136.4 million in 1999. Direct expenses increased to $993.8 million or 59.9% of 2000 net revenue as compared to $883.3 million or 55.0% of 1999 net revenue due to a decrease in our realization rates during 2000. General and administrative expenses increased $60.6 million 26 to $565.8 million in 2000 from $505.2 million in 1999. This increase was a result of several factors, including an increase of approximately $21.4 million in the spending for our Internet initiative, $5.7 million in the implementation of our shared service center, and $6.5 million for the implementation of our global account teams, as well as delays in realizing the benefits of our restructuring program. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $565.1 million at December 31, 2001 as compared to $330.2 million at December 31, 2000. Cash flows generated from operations were $247.4 million in 2001 versus $10.5 million and $123.8 million in 2000 and 1999, respectively. Included in cash flows generated from operations in 2001 was $63.2 million related to the settlement of the litigation with WebMD and $56.2 million for net income tax refunds. Cash flows used in investing activities in 2001 were $16.4 million and $104.5 million in 1999, versus $270.4 million of cash flows provided by investing activities in 2000. Investing activities for 2000 consisted primarily of $390.7 million of net proceeds from the sale of ENVOY, partially offset by capital asset purchases. Of these investing activities, capital asset purchases were $134.0 million in 2001 versus $108.8 million and $158.1 million in 2000 and 1999, respectively. Capital asset expenditures in 2001 included the final payment of $58 million in connection with the 1999 acquisition of Aventis S.A's Drug Innovation and Approval Facility, $19.9 million for the implementation of the shared service centers and $5.7 million for our informatics group's data center. Capital asset expenditures in 2000 included $25.2 million for the implementation of the shared service centers and $8.0 million for the purchase of the training academy in Japan. Capital asset expenditures in 1999 included the initial payment of $35 million in connection with the acquisition of Aventis' facility. During December 2001, we acquired the rights to market for 15 years in the United States, Canada and Mexico SkyePharma's Solaraze(TM), a treatment of actinic keratosis, for $26.7 million. We will pay royalties to SkyePharma based on a percentage of net sales of Solaraze(TM). We acquired these rights from Bioglan Pharma Plc. Until March 22, 2002, its U.S. affiliate, Bioglan, provided the marketing and sales support for the product. On March 22, 2002, we acquired certain assets of Bioglan, including its management team and sales force. As part of the transaction, we also acquired Bioglan's rights to certain other dermatology products now on the market in the United States, including ADOXA(TM) for the treatment of severe acne. As part of our normal course of business, we will continue to evaluate opportunities to acquire specific products and/or marketing rights to products. We have also entered into four other financial arrangements with customers in which a portion of our net revenue and operating income will be based on the performance of a specific product. These arrangements typically involve funding, either by direct investment or in the form of a loan, which we commit to provide to our customers. Any securities we may acquire as a result of our investment or upon conversion of the loan may not be readily marketable, and we will bear the risk of carrying these investments for an indefinite period of time. This funding may be applied to certain pre-launch and sales and marketing activities or it may represent payment for a royalty stream relating to a specific product. In 2001, we entered into an agreement with Scios, Inc. whereby we will provide commercialization services for Natrecor(R), a treatment for acute congestive heart failure. As part of this agreement, we made a commitment to fund $30.0 million for commercialization activities related to Natrecor(R). In return, we received warrants and rights to royalty payments for 6 1/2 years based on sales of Natrecor(R) in the United States and Canada. We intend to continue to pursue these types of strategic arrangements, and we are actively seeking additional opportunities to create alliances with our customers. On October 12, 2001, we jointly announced with WebMD the settlement of litigation between the companies and the resolution of our disputes. As part of the settlement, WebMD paid us $185.0 million in cash for all 35 million shares of WebMD common stock and to resolve the remaining disputes. 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 its ENVOY subsidiary is acquired for a price greater than $500 million. Also as part of the settlement, WebMD surrendered the warrant to purchase 10 million shares of our common stock. We continued to receive data from WebMD only through February 28, 2002. We also no longer have any 27 obligation to share informatics profits with WebMD or to fund WebMD $100 million to develop a web-based suite of integrated products. Net receivables from customers (trade accounts receivable and unbilled services, net of unearned income) were $221.2 million at December 31, 2001 as compared to $219.8 million at December 31, 2000. As of December 31, 2001, net trade accounts receivable were $260.2 million versus $246.3 million at December 31, 2000. Unbilled services were $166.7 million at December 31, 2001 versus $167.7 million at December 31, 2000, offset by unearned income balances of $205.8 million and $194.2 million, respectively. The number of days revenue outstanding in trade accounts receivable and unbilled services, net of unearned income, were 42 and 43 days at December 31, 2001 and December 31, 2000, respectively. Investments in debt securities were $37.0 million at December 31, 2001 versus $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 $70.8 million decrease is primarily a result of investments being called by the issuer. Investments in marketable equity securities at December 31, 2001 were $78.0 million, a decrease of $306.0 million, as compared to $384.0 million at December 31, 2000. This decrease is primarily due to the sale of our investment in WebMD common stock. We obtained the WebMD common stock as part of the consideration for the sale of our electronic data interchange unit, ENVOY Corporation, to WebMD in 2000. Excluding the effect of the sale of the WebMD common stock, investments in marketable equity securities decreased approximately $28.2 million due to the sale of equity investments and 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 $348.0 million in 2001 to establish a new cost basis for certain investments, which includes $334.0 million relating to our investment in WebMD common stock. Investments in non-marketable equity securities and loans at December 31, 2001 were $37.6 million, an increase of $19.2 million, as compared to $18.4 million at December 31, 2000 primarily as a result of our PharmaBio transactions. Our $150 million senior unsecured credit facility with a U.S. bank expired in August 2001 in accordance with its terms. We have available to us a L10.0 million (approximately $14.5 million) unsecured line of credit with a U.K. bank and a L1.5 million (approximately $2.2 million) general bank facility with the same U.K. bank. At December 31, 2001 we did not have any outstanding balances on these facilities. In March 2001, the Board of Directors authorized us to repurchase up to $100 million of our common stock from time to time until March 1, 2002. In February 2002, the Board extended this authorization until March 1, 2003. During 2001, we entered into agreements to repurchase approximately 1.7 million shares for an aggregate price of $27.5 million. Shareholders' equity increased $50.4 million to $1.46 billion at December 31, 2001 from $1.40 billion at December 31, 2000. Below is a summary of our future payment commitments by year under contractual obligations as of December 31, 2001 (in thousands):
2002 2003 2004 2005 2006 THEREAFTER TOTAL -------- ------- ------- ------- ------- ---------- -------- Long-term debt....................... $ 2,969 $ 2,292 $ 2,033 $ 1,835 $ 1,606 $ 2,569 $ 13,304 Obligations held under capital leases............................. 13,881 11,150 368 218 177 115 25,909 Operating leases..................... 56,574 40,003 29,011 20,592 20,967 75,152 242,299 Service agreement.................... 20,000 20,000 20,000 20,000 20,000 35,007 135,007 Natrecor(R).......................... 13,540 6,460 -- -- -- -- 20,000 -------- ------- ------- ------- ------- -------- -------- $106,964 $79,905 $51,412 $42,645 $42,750 $112,843 $436,519 ======== ======= ======= ======= ======= ======== ========
Through our PharmaBio financial transactions, we have committed to provide $45.9 million of funding in the form of an equity investment in non-marketable securities or loans with various customers and other third parties. We have also additional future commitments that are contingent upon satisfaction of certain milestones by the third party such as receiving FDA approval, obtaining funding from additional third parties, 28 agreement of a marketing plan and other similar milestones. Due to the uncertainty of the amounts and timing of these commitments, they are not included in the commitment amounts above. If all of these contingencies were satisfied, and if this was to occur in the same time period, then we estimate these commitments to be a minimum of approximately $40 million per year, subject to certain limitations and varying time periods. Based on our current operating plan, we believe that our available cash and cash equivalents, together with future cash flows from operations and borrowings under our line of credit agreements will be sufficient to meet our foreseeable cash needs in connection with our operations. As part of our business strategy, we review many acquisition candidates in the ordinary course of business, and in addition to acquisitions already made, we are continually evaluating new acquisition and expansion possibilities. In addition, as part of our business strategy going forward, we intend to review and consider opportunities to acquire additional product rights, as appropriate. We may from time to time seek to obtain debt or equity financing in our ordinary course of business or to facilitate possible acquisitions or expansion. CRITICAL ACCOUNTING POLICIES As we believe these policies require difficult, subjective and complex judgements, we have identified the following critical accounting policies which we use in the preparation of our financial statements. CONTRACT REVENUE We recognize revenue for service contracts based upon (1) percentage of completion (utilizing input or output measures as appropriate) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed for fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. The percentage of completion method requires us to estimate total expected revenue, costs, profitability, duration of the contract and outputs. These estimates are reviewed periodically and, if any of these estimates change or actual results differ from expected results then an adjustment is recorded in the period in which they become reasonably estimable. These adjustments could have a material effect on our results of operations. We recognize revenues and costs for our commercial rights and royalty agreements as one of the following, based upon each agreement's specific facts and circumstances: (1) product revenues and product costs are recognized through earnings in the period in which they are earned or incurred, respectively, and investments in product rights are amortized ratably over the license period or (2) revenues are recognized as earned when payment is fixed and determinable, and certain direct costs, which we deem to be recoverable, may be deferred and amortized over the expected period of revenue recognition. ACCOUNTS RECEIVABLE, UNBILLED SERVICES AND UNEARNED INCOME Accounts receivable represents amounts billed to customers. Revenues recognized in excess of billings are classified as unbilled services, while billings in excess of revenue recognized are classified as unearned income. The realization of these amounts is based on the customer's willingness and ability to pay us. We have an allowance for doubtful accounts based on management's estimate of probable incurred losses resulting from a customer failing to pay us. If any of these estimates change or actual results differ from expected results, then an adjustment is recorded in the period in which they become reasonably estimable. These adjustments could have a material effect on our results of operations. MARKETABLE DEBT AND EQUITY INVESTMENTS We have investments in debt securities and investments in marketable equity securities. Periodically, we review our investments for declines in fair value that we believe may be other than temporary. When we identify such a decline in fair value we record a loss through earnings to establish a new cost basis for the investment. In addition, we may experience future material declines in the fair value of our investments which would require us to record additional losses. These adjustments could have a material adverse effect on our results of operations. 29 NON-MARKETABLE EQUITY INVESTMENTS AND LOANS We have investments in non-marketable equity securities and loans. These arrangements typically involve funding, either by direct investment or in the form of a loan, which we commit to provide. Any securities we may acquire as a result of our investment or upon conversion of the loan may not be readily marketable, and we will bear the risk of carrying these investments for an indefinite period of time. We may not be able to recover our cost of the investment or loan at any time in the future, and we could experience an impairment in the carrying value of these investments, which would require us to record additional losses, which could have a material adverse effect on our results of operations. INCOME TAXES We have undistributed earnings of our foreign subsidiaries. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. Federal and State income taxes have been provided. If those earnings are distributed, we would be subject to both U.S. income taxes and withholding taxes payable to the various countries. Any resulting income tax obligations could materially adversely affect our results of operations. Certain items of income and expense are not recognized on our income tax returns and financial statements in the same year, which creates timing differences. The income tax effect of these timing differences results in (1) deferred income tax assets that create a reduction in future income taxes and (2) deferred income tax liabilities that create an increase in future income taxes. Recognition of deferred income tax assets is based on management's belief that it is more likely than not that the income tax benefit associated with certain temporary differences, income tax operating loss and capital loss carry forwards and income tax credits, will be realized. We record a valuation allowance to reduce our deferred income tax assets for those deferred income tax items for which it is more likely than not that realization will not occur. We determine the amount of the valuation allowance based, in part, on our assessment of future taxable income and in light of our ongoing prudent and feasible income tax strategies. If we are not able to recover our deferred income tax assets at any time in the future, we would be required to record an additional income tax provision; recording such a provision could have a material adverse effect on our results of operations. FOREIGN CURRENCIES We derive a large portion of our net revenue from international operations. Our financial statements are denominated in U.S. dollars; thus, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect our results of operations and financial condition. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including the risk of translating revenues and expenses of foreign operations into U.S. dollars, known as translation risk, and the risk that we incur expenses in a currency other than that in which the contract revenues are paid, known as transaction risk. Gains and losses on foreign currency transactions are reported in results of operations, translation adjustments are reported as a component of accumulated other comprehensive income within shareholders' equity. If certain balances owed by our foreign subsidiaries are deemed to be not of a long-term nature, then the translation effect related to those balances would not be classified as translation adjustments but rather transaction adjustments, which could have a material effect on our results of operations. LONG-LIVED ASSETS Realization of identifiable tangible and intangible assets in which we have invested is exposed to a changing regulatory and competitive market. Examples include investments we have made in technology to expand our pharmaceutical and healthcare information and market research services or investments made to develop an Internet platform for our product development and commercialization services. The realization of these assets could be affected by technological changes and proposed and final laws and regulations, such as regulations governing individually identifiable health information or FDA requirements for use of electronic records and/or electronic signatures. 30 Periodically, we review the carrying values of property, equipment and identified intangible assets if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, we will reduce carrying values to estimated fair value. The inherent subjectivity of our estimates of future cash flows could have a significant impact on our analysis. Any future write-offs of long-lived assets could have a material adverse effect on our financial condition or results of operations. GOODWILL Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition. The recoverability of the excess of the cost over the fair value of the net assets acquired, known as goodwill, is evaluated if events or circumstances indicate a possible impairment. Prior to January 1, 2002 such evaluation was based on various analyses, including undiscounted cash flow projections. Effective January 1, 2002, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", or SFAS No. 142, requiring all goodwill and indefinite-lived intangible assets be reviewed at least annually for impairment. We have not assessed the impact of any impairment under the new tests prescribed by SFAS No. 142; however, any future write-offs of goodwill could have a material effect on our financial condition or results of operations. EMPLOYEE STOCK COMPENSATION We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Options Issued to Employees", or APB 25, and related interpretations in accounting for our employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", or SFAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. If we accounted for stock options under SFAS 123, we would have recorded additional compensation expense for the stock option grants to employees. If we are unable to continue to account for stock options under ABP 25, our financial results would be materially adversely affected to the extent of the additional compensation expense we would have to recognize, which could change significantly from period to period based on several factors including the number of stock options granted and fluctuations of our stock price and/or interest rates. BACKLOG REPORTING We report revenue backlog based on anticipated net revenue from uncompleted projects that our customers have authorized. We report only service-related revenue as backlog, and we do not include product revenue or commercial rights-related revenue (royalties and commissions) in backlog. Our backlog is calculated based upon our estimate of forecasted currency exchange rates. Annually, we adjust the beginning balance of our backlog to reflect changes in our forecasted currency exchange rates. Our backlog at anytime can be affected by: - the variable size and duration of projects, - the loss or delay of projects, and - a change in the scope of work during the course of a project. If customers delay projects, the projects will remain in backlog, but will not generate revenue at the rate originally expected. Accordingly, historical indications of the relationship of backlog to revenues may not be indicative of the future relationship. The reporting of revenue backlog is not authoritatively prescribed, therefore practices tend to vary among competitors and reported amounts are not necessarily comparable. 31 INFLATION We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition. MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates and other relevant market rate or price changes. In the ordinary course of business, we are exposed to various market risks, including changes in foreign currency exchange rates, interest rates and equity price changes, and we regularly evaluate our exposure to such changes. Our overall risk management strategy seeks to balance the magnitude of the exposure and the cost and availability of appropriate financial instruments. From time to time, we have utilized forward exchange contracts to manage our foreign currency exchange rate risk. We do not hold or issue derivative instruments for trading purposes. The following analyses present the sensitivity of our financial instruments to hypothetical changes in interest and foreign currency exchange rates that are reasonably possible over a one-year period. FOREIGN CURRENCY EXCHANGE RATES Approximately 49.7%, 44.0% and 45.8% of our net revenue for the years ended December 31, 2001, 2000, and 1999, respectively, was derived from our operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly-inflationary. Our financial statements are denominated in U.S. dollars, and accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries' financial results into U.S. dollars for purposes of reporting our consolidated financial results. Accumulated currency translation adjustments recorded as a separate component (reduction) of shareholders' equity were ($60.6) million at December 31, 2001 as compared to ($42.2) million at December 31, 2000. We may be subject to foreign currency transaction risk when our service contracts are denominated in a currency other than the currency in which we earn fees or incur expenses related to such contracts. At December 31, 2001, our most significant foreign currency exchange rate exposures were in the British pound and the euro. We limit our foreign currency transaction risk through exchange rate fluctuation provisions stated in our contracts with customers, or we may hedge our transaction risk with foreign currency exchange contracts or options. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2001. INTEREST RATES At December 31, 2001, our investment in debt securities portfolio consists primarily of U.S. Government securities, of which most are callable by the issuer at par, and money funds. The portfolio is primarily classified as available-for-sale and therefore these investments are recorded at fair value in the financial statements. These securities are exposed to market price risk which also takes into account interest rate risk. As of December 31, 2001, the fair value of the investment portfolio was $37.0 million, based on quoted market prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted market price is approximately $3.7 million. EQUITY PRICES At December 31, 2001, we had investments in marketable equity securities. These investments are classified as available-for-sale and are recorded at fair value in the financial statements. These securities are subject to equity price risk. As of December 31, 2001, the fair value of these investments was $78.0 million, based on quoted equity prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted equity price is approximately $7.8 million. 32 RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets" requiring that upon adoption all goodwill and indefinite-lived intangible assets no longer be amortized but reviewed at least annually for impairment. We adopted SFAS No. 142 when required to do so on January 1, 2002. The effect of the non-amortization provisions of SFAS No. 142 on 2002 results depend on various factors including 2002 acquisitions and therefore, cannot be estimated. If these had applied in 2001, we believe that our amortization expense before income taxes would have decreased by approximately $8.0 million. We have not completed the assessment of 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 on Disposal of Long-Lived Assets." This standard supersedes SFAS No. 121, "Accounting for 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." We adopted SFAS No. 144 when required to do so on January 1, 2002. We anticipate that the adoption of SFAS No. 144 will not have a material impact on our results of operations and financial condition. SUBSEQUENT EVENTS On March 18, 2002, we announced along with McKesson Corporation the signing of a definitive agreement to form a private joint venture designed to leverage the operational strengths of the healthcare information businesses of each company. Under the agreement, we would be co-equal owners of the joint venture with McKesson, with a portion of the equity in the joint venture to be allocated to providers of de-identified healthcare data. Our primary contribution will be the assets of our informatics group. The agreement also provides for the joint venture company to license data products to us and McKesson for use in our core businesses. Under the license arrangement, our product development and commercial services groups will continue to have access to the joint venture's market information and products to enhance their service delivery to our customers. Subject to the prior satisfaction or waiver of applicable conditions, completion of the joint venture is targeted for the second quarter of 2002. On March 22, 2002, we acquired certain assets of Bioglan, the U.S. subsidiary of U.K. based Bioglan Pharma Plc, in a transaction valued at L18.5 million (approximately $26.7 million). As part of the agreement, we have also acquired Bioglan's rights to certain other dermatology products now on the market in the United States, including ADOXA(TM), a treatment for severe acne. RISK FACTORS In addition to the other information provided in this Annual Report on Form 10-K, 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 33 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 successfully. Our inability to develop new products or services or any delay in development may adversely affect our ability to maintain our rate of growth in the future. OUR PLAN TO WEB-ENABLE OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION SERVICES MAY NEGATIVELY IMPACT OUR RESULTS IN THE SHORT TERM. We are currently 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 customers 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 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 services agreement with WebMD to continue to provide us with the ENVOY data, as well as other data collected by WebMD. 34 On February 24, 2001, WebMD unilaterally stopped the transmission of data to us in violation of our rights under the data rights agreement which resulted in litigation. 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 continued to receive healthcare data from WebMD, but only through February 28, 2002. While we have been able to secure agreements for similar data from alternate sources, we cannot assure you that access to such data will not be more costly than in the past or that we will have continuous access to the data that we need to support our informatics products. Furthermore, we must aggregate the volume of data from a variety of sources, and we do not have a track record for being able to process and use the data we receive from different sources effectively. On March 15, 2002, we entered into a joint venture agreement with McKesson Corporation pursuant to which we agreed to form a joint venture company designed to leverage the operational strengths of the healthcare information business of each company. Several major data providers are to contribute de-identified prescription and medical data to the joint venture company. There can be no assurances, however, that any of the data providers with which we currently are in discussions will join the joint venture company or otherwise provide data to the joint venture company. If continued access to data is not available on acceptable terms, our informatics 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. THE CONSUMMATION OF OUR PROPOSED JOINT VENTURE WITH MCKESSON MAY NOT OCCUR AND, IF CONSUMMATED, THE JOINT VENTURE MAY NOT SUCCEED. The consummation of our joint venture with McKesson may not occur and, even if consummated, the joint venture's success will be subject to the risks of our informatics business as well as new risks applicable to its operation as a stand-alone entity. The proposed joint venture with McKesson is important to our business and, if the transaction fails to close or the closing is delayed, we may not be able to derive the benefits we hoped to achieve by leveraging our informatics business with outside resources. If the conditions to closing are not satisfied or the agreement is otherwise terminated prior to closing, we will continue to own our informatics business and be subject to the risks associated with that business. If the joint venture company is formed as contemplated, we may not achieve the intended benefits of the joint venture if it is not able to secure additional data in exchange for equity. Although we and McKesson currently are in discussions with several major data providers to participate in the joint venture company, it is possible that these or other data providers will prefer to receive cash as payment for data, instead of equity in the joint venture company, or will not want to participate at all. Such a trend could have a material adverse effect on the joint venture's operations and financial condition. The joint venture also could encounter other difficulties, including: - its ability to aggregate the volume of data received from data providers; - its ability to attract customers, besides Quintiles and McKesson, to purchase its products and services; - the risk of changes in healthcare information privacy regulations that could have an adverse impact on the joint venture's operations; - the risk that it will not be able to effectively and cost-efficiently replace services previously provided to the contributed businesses by the former parent corporations; and - other risks currently faced by our Informatics business and described elsewhere in these risk factors. Although we will have a license to the joint venture company's data products for use by our product development and commercial services groups, if the joint venture is unable to provide us with the quality and character of data products that we need to support those services, we will not be able to fully realize the benefits of the joint venture and will need to seek other strategic alternatives to achieve our goals. Also, if the joint venture company is not successful, it could have a material adverse effect on our results of operation and 35 financial condition because it is a pass-through entity and, as such, its results will be reflected in our financial statements to the extent of our interest in the joint venture. 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, over the past two years we have observed that customers may be more willing to delay, cancel or reduce contracts more rapidly than in the past. If this trend continues, it could become more difficult for us to balance our resources with demands for our services and our financial results could be adversely affected. UNDERPERFORMANCE OF OUR COMMERCIAL RIGHTS STRATEGIES COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE. As part of our PharmaBio Development business 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 customer or its 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. OUR RECENT ACQUISITION OF A LICENSE TO MARKET AND SELL CERTAIN PHARMACEUTICAL PRODUCTS IN THE UNITED STATES EXPOSES US TO PRODUCT RISKS TYPICALLY ASSOCIATED WITH PHARMACEUTICAL COMPANIES. Our recent acquisition of the rights to market and sell Solaraze(TM) and the rights to other dermatology products acquired from Bioglan subject us to a number of risks typical to the pharmaceutical industry. For example, we could face product liability claims in the event users of these products, or of any other pharmaceutical product we may license in the future, experience negative reactions or adverse side effects or in the event it causes injury, is found to be unsuitable for its intended purpose or is otherwise defective. While we believe we currently have adequate insurance in place to protect against these risks, we may nevertheless be unable to satisfy any claims for which we may be held liable as a result of the use or misuse of products which we manufacture or sell, and any such product liability claim could adversely affect our business, operating results or financial condition. In addition, like pharmaceutical companies, our commercial success in this area will depend in part on our obtaining, securing and defending our intellectual property rights covering our pharmaceutical products. These risks may be augmented by certain risks relating to our outsourcing of the manufacturing and distribution of these products or any pharmaceutical product we may license in the future. For example, as a result of our decision to outsource the manufacturing and distribution of Solaraze(TM), we are unable to directly monitor quality control in the manufacturing and distribution processes. Our plans to market and sell Solaraze(TM) and other pharmaceutical products also subject us to risks associated with entering into a new line of business. We have limited experience operating as this type of company. If we are unable to operate this new line of business as we expect, the financial results from this new line of business could have a negative impact on our results of operations as a whole. The risk that our results may be affected if we are unable to successfully operate our pharmaceutical operations may increase in proportion with (1) the number of products we license in the future, (2) the applicable stage of the drug 36 approval process of the products and (3) the levels of outsourcing involved in the development, manufacture and commercialization of such products. IF WE LOSE THE SERVICES OF DENNIS GILLINGS, 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 J. 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. Similar risks apply to our product development services relating to medical devices. We also contract with physicians to serve as investigators in conducting clinical trials. Such testing creates risk of liability for personal injury to or death of volunteers, particularly to volunteers with life-threatening illnesses, resulting from adverse reactions to the drugs administered during testing. It is possible third parties could claim that we should be held liable for losses arising from any professional malpractice of the investigators with whom we contract or in the event of personal injury to or death of persons participating in clinical trials. We do not believe we are legally accountable for the medical care rendered by third party investigators, and we would vigorously defend any such claims. For example, we are among the defendants named in a purported class action by participants in an Alzheimer's study seeking to hold us liable for alleged damages to the participants arising from the study. 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. Although, we maintain insurance to cover ordinary risks, insurance would not cover the risk of a customer deciding not to do business with us as a result of poor performance. OUR INSURANCE MAY NOT COVER ALL OF OUR INDEMNIFICATION OBLIGATIONS AND OTHER LIABILITIES ASSOCIATED WITH OUR OPERATIONS. We maintain insurance designed to cover ordinary risks associated with our operations and our ordinary indemnification obligations. This insurance might not be adequate coverage or may be contested by our carriers. For example, our insurance carrier, to whom we paid premiums to cover risks associated with our 37 product development services, has filed suit against us seeking to rescind the insurance policies or to have coverage denied for some or all of the claims arising from class action litigation involving an Alzheimer study. The availability and level of coverage provided by our insurance could have a material impact on our profitability if we suffer uninsured losses or are required to indemnify third parties for uninsured losses. 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 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 recent litigation, a party took the position that various state laws could be construed to require modifications to access specifications for particular data elements in de-identified health information that we receive. These laws or further changes to existing laws having similar effects could limit our ability to offer some of our products or have an impact on the business opportunities 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 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%, except that this limitation does not apply to indemnity obligations we may have to WebMD arising from the sale of ENVOY, including a class action lawsuit filed against ENVOY prior to its purchase by us and subsequent sale to WebMD. 38 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. 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; - integrate new services with existing services; - achieve market acceptance for new services; and - respond to emerging industry standards and other technological changes. EXCHANGE RATE FLUCTUATIONS MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We derive a large portion of our net revenue from international operations. Our financial statements are denominated in U.S. dollars; thus, factors associated with international operations, including changes in foreign currency exchange rates and any trends associated with the transition to the euro, could significantly affect our results of operations and financial condition. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including: -- Foreign Currency Translation Risk. The revenue and expenses of our foreign operations are generally denominated in local currencies. -- Foreign Currency Transaction Risk. Our service contracts may be denominated in a currency other than the currency in which we incur expenses related to such contracts. We try to limit these risks through exchange rate fluctuation provisions stated in our service contracts, or we may hedge our transaction risk with foreign currency exchange contracts or options. Although we may hedge our transaction risk, there were no open foreign exchange contracts or options relating to service contracts at December 31, 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 10.8% of our net revenues for the year ended December 31, 2001. 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 39 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 (April 14, 2004 for small health plans). 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 CUSTOMERS DURING THE FDA APPROVAL PROCESS COULD BE ADVERSELY AFFECTED. If we were unable to submit electronic records to the United States Food and Drug Administration, also referred to as the FDA, according to FDA regulations, our ability to service our customers during the FDA approval process could be adversely affected. 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, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is included under Item 7 of this report under the caption "Market Risk." 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue.............................................. $1,619,872 $1,659,910 $1,607,087 Costs and expenses: Direct................................................. 956,748 993,795 883,274 General and administrative............................. 520,753 565,801 505,166 Depreciation and amortization.......................... 96,103 92,567 82,292 Restructuring.......................................... 54,169 58,592 -- Write-off of goodwill and other assets................. 27,122 -- -- Disposal of business................................... -- 17,325 -- Settlement of litigation............................... (83,200) -- -- ---------- ---------- ---------- 1,571,695 1,728,080 1,470,732 ---------- ---------- ---------- Income (loss) from operations............................ 48,177 (68,170) 136,355 Other (expense) income: Interest income........................................ 19,844 20,703 14,391 Interest expense....................................... (3,172) (4,842) (11,233) Gain on investments, net............................... 21,159 6,045 2,057 Impairment of investments.............................. (348,015) (5,466) -- Transaction costs...................................... -- -- (26,322) Other.................................................. (489) 725 662 ---------- ---------- ---------- (310,673) 17,165 (20,445) ---------- ---------- ---------- (Loss) income from continuing operations before income taxes.................................................. (262,496) (51,005) 115,910 Income tax (benefit) expense............................. (86,623) (16,831) 42,742 ---------- ---------- ---------- (Loss) income from continuing operations................. (175,873) (34,174) 73,168 Income from discontinued operation, net of income taxes.................................................. -- 16,770 36,123 Extraordinary gain from sale of discontinued operation, net of income taxes.................................... 142,030 436,327 -- ---------- ---------- ---------- Net (loss) income........................................ $ (33,843) $ 418,923 $ 109,291 ========== ========== ========== Basic net (loss) income per share: (Loss) income from continuing operations............... $ (1.49) $ (0.29) $ 0.64 Income from discontinued operation..................... -- 0.14 0.32 Extraordinary gain from sale of discontinued operation........................................... 1.20 3.76 -- ---------- ---------- ---------- Basic net (loss) income per share...................... $ (0.29) $ 3.61 $ 0.96 ========== ========== ========== Diluted net (loss) income per share: (Loss) income from continuing operations............... $ (1.49) $ (0.29) $ 0.63 Income from discontinued operation..................... -- 0.14 0.31 Extraordinary gain from sale of discontinued operation........................................... 1.20 3.76 -- ---------- ---------- ---------- Diluted net (loss) income per share.................... $ (0.29) $ 3.61 $ 0.94 ========== ========== ========== Shares used in computing net (loss) income per share: Basic.................................................. 118,223 115,968 113,525 Diluted................................................ 118,223 115,968 115,687
The accompanying notes are an integral part of these consolidated statements. 41 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 2001 2000 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 565,063 $ 330,214 Trade accounts receivable and unbilled services, net...... 426,954 413,992 Investments in debt securities............................ 27,489 31,080 Prepaid expenses.......................................... 28,085 31,984 Other receivables......................................... 19,630 16,850 Other current assets...................................... 12,517 12,555 ---------- ---------- Total current assets............................... 1,079,738 836,675 Property and equipment: Land, buildings and leasehold improvements................ 192,290 199,197 Equipment and software.................................... 348,527 321,844 Furniture and fixtures.................................... 44,020 45,564 Motor vehicles............................................ 33,597 36,345 ---------- ---------- 618,434 602,950 Less accumulated depreciation............................. (256,128) (210,990) ---------- ---------- 362,306 391,960 Intangibles and other assets: Intangibles, net.......................................... 199,119 194,814 Investments in debt securities............................ 9,510 76,732 Investments in marketable equity securities............... 77,992 384,040 Investments in non-marketable equity securities and loans................................................... 37,590 18,419 Deferred income taxes..................................... 136,686 29,175 Deposits and other assets................................. 44,799 29,763 ---------- ---------- 505,696 732,943 ---------- ---------- Total Assets....................................... $1,947,740 $1,961,578 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit........................................... $ -- $ 44 Accounts payable.......................................... 54,400 65,027 Accrued expenses.......................................... 169,173 190,211 Unearned income........................................... 205,783 194,201 Income taxes payable...................................... 14,073 51,284 Deferred income taxes..................................... 738 4,774 Current portion of obligations held under capital leases.................................................. 13,147 12,640 Current portion of long-term debt......................... 2,969 7,387 Other current liabilities................................. 1,903 2,423 ---------- ---------- Total current liabilities.......................... 462,186 527,991 Long-term liabilities: Obligations held under capital leases, less current portion................................................. 11,415 8,496 Long-term debt, less current portion...................... 10,335 10,469 Other liabilities......................................... 8,716 9,916 ---------- ---------- 30,466 28,881 ---------- ---------- Total liabilities.................................. 492,652 556,872 Commitments and contingencies Shareholders' Equity: Preferred stock, none issued and outstanding at December 31, 2001 and 2000, respectively......................... -- -- Common stock and additional paid-in capital, 118,623,669 and 115,933,182 shares issued and outstanding at December 31, 2001 and 2000, respectively................ 897,075 876,407 Retained earnings......................................... 589,142 622,985 Accumulated other comprehensive loss...................... (31,129) (94,686) ---------- ---------- Total shareholders' equity......................... 1,455,088 1,404,706 ---------- ---------- Total liabilities and shareholders' equity......... $1,947,740 $1,961,578 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 42 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- (IN THOUSANDS) Operating activities: Net (loss) income......................................... $ (33,843) $ 418,923 $ 109,291 Income from discontinued operation, net of income taxes... -- (16,770) (36,123) Extraordinary gain from sale of discontinued operation, net of income taxes..................................... (142,030) (436,327) -- --------- --------- --------- (Loss) income from continuing operations.................. (175,873) (34,174) 73,168 Adjustments to reconcile (loss) income from continuing operations to net cash provided by operating activities: Depreciation and amortization............................. 96,103 92,567 82,292 Non-recurring transaction costs........................... -- -- 26,322 Restructuring accrual and write-off of other assets, net..................................................... 42,975 25,886 -- Loss on disposal of business.............................. -- 17,325 -- Net loss (gain) on sale of property and equipment......... 287 190 (355) Loss (gain) on investments, net........................... 304,942 (578) (2,057) (Benefit from) provision for deferred income taxes........ (64,360) 12,460 (1,448) Change in operating assets and liabilities: Accounts receivable and unbilled services............... (24,495) (48,226) (76,156) Prepaid expenses and other assets....................... 6,935 (15,881) (16,493) Accounts payable and accrued expenses................... 19,263 16,429 16,320 Unearned income......................................... 15,993 28,706 13,960 Income taxes payable and other current liabilities...... 25,139 (84,285) 7,659 Other..................................................... 447 95 585 --------- --------- --------- Net cash provided by operating activities................... 247,356 10,514 123,797 Investing activities: Proceeds from disposition of property and equipment....... 7,548 8,591 6,535 Proceeds from disposal of discontinued operation, net of expenses................................................ -- 390,722 -- Purchase of investments held-to-maturity.................. -- (1,296) (6,215) Maturities of investments held-to-maturity................ 437 465 86,683 Purchase of investments available-for-sale................ -- (2,717) (110,310) Proceeds from sale of investments available-for-sale...... 71,422 5,296 25,296 Purchase of marketable equity securities.................. (22,660) (14,379) (12,424) Proceeds from sale of marketable equity securities........ 134,379 3,514 5,913 Purchase of other investments............................. (40,247) (1,617) -- Proceeds from other investments........................... 103 2,959 -- Acquisition of property and equipment..................... (133,983) (108,782) (158,128) Acquisition of businesses, net of cash acquired........... (6,620) (15,169) 84,746 Acquisition of product rights............................. (26,735) -- -- Payment of non-recurring transaction costs................ -- -- (26,322) Payment from ESOP, net.................................... -- 2,857 -- Other..................................................... -- (2) (233) --------- --------- --------- Net cash provided by (used in) investing activities......... (16,356) 270,442 (104,459) Financing activities: (Decrease) increase in lines of credit, net............... (44) 33 (909) Proceeds from issuance of debt............................ -- 11,183 -- Repayment of debt......................................... (3,263) (151,653) (4,341) Principal payments on capital lease obligations........... (10,618) (14,419) (13,865) Issuance of common stock.................................. 48,439 21,748 19,724 Repurchase of common stock................................ (22,694) (21,883) -- Dividend from discontinued operation...................... -- 17,086 47,070 Dividends paid by pooled entity........................... -- -- (1,089) Other..................................................... -- -- (28) --------- --------- --------- Net cash provided by (used in) financing activities......... 11,820 (137,905) 46,562 Effect of foreign currency exchange rate changes on cash.... (7,971) (4,490) (2,868) --------- --------- --------- Increase in cash and cash equivalents....................... 234,849 138,561 63,032 Cash and cash equivalents at beginning of year.............. 330,214 191,653 128,621 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 565,063 $ 330,214 $ 191,653 ========= ========= ========= Supplemental Cash Flow Information: Interest paid............................................. $ 2,724 $ 5,435 $ 12,550 Income taxes (refunded) paid, net......................... (56,243) 64,451 32,961 Non-cash Investing and Financing Activities: Acquisition of property and equipment utilizing capitalized leases...................................... 14,578 12,948 12,871 Equity impact of mergers, acquisitions and dispositions... (20,952) 82,557 206,275 Equity impact from exercise of non-qualified stock options................................................. 15,871 6,752 3,711 Marketable equity securities received from sale of discontinued operation.................................. -- 447,353 -- Unrealized (loss) gain on marketable securities, net of income tax.............................................. $(124,182) $ (69,619) $ 17,781
The accompanying notes are an integral part of these consolidated statements. 43 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE RETAINED COMPREHENSIVE PREFERRED COMMON PAID-IN INCOME EARNINGS INCOME (LOSS) STOCK STOCK CAPITAL ------------- -------- ------------- --------- ------ ---------- (IN THOUSANDS) Balance, December 31, 1998... $ -- $ 95,618 $ (5,198) $ 33 $1,057 $558,439 Issuance of common stock..... -- -- -- -- 8 19,716 Principal payments on ESOP loan....................... -- -- -- -- -- -- Stock issued for acquisitions............... -- -- -- -- 51 206,224 Tax benefit from the exercise of non-qualified stock options.................... -- -- -- -- -- 3,711 Conversion of preferred stock by pooled entity........... -- -- -- (33) 33 -- Dividends paid by pooled entity..................... -- (1,089) -- -- -- -- Effect due to change in fiscal year of pooled entity..................... -- 200 -- -- -- -- Other equity transactions.... -- 42 (128) -- -- (992) Comprehensive income: Net income................. 109,291 109,291 -- -- -- -- Unrealized gain on marketable securities, net of tax............... 17,781 -- 17,781 -- -- -- Foreign currency adjustments.............. (10,778) -- (10,778) -- -- -- --------- -------- --------- ---- ------ -------- Comprehensive income for year ended December 31, 1999.... 116,294 ========= Balance, December 31, 1999... 204,062 1,677 -- 1,149 787,098 Issuance of common stock..... -- -- -- -- 22 21,018 Repurchase of common stock... -- -- -- -- (13) (21,870) Issuance of stock warrants... -- -- -- -- -- 32,300 Issuance of put option....... -- -- -- -- -- 925 Stock option charge in ENVOY sale....................... -- -- -- -- -- 50,040 Principal payments on ESOP loan....................... -- -- -- -- -- -- Tax benefit from the exercise of non-qualified stock options.................... -- -- -- -- -- 6,752 Other equity transactions.... -- -- -- -- -- (1,014) Comprehensive income: Net income................. 418,923 418,923 -- -- -- -- Unrealized loss on marketable securities, net of tax............... (69,619) -- (69,619) -- -- -- Foreign currency adjustments.............. (26,744) -- (26,744) -- -- -- --------- -------- --------- ---- ------ -------- Comprehensive income for year ended December 31, 2000.... 322,560 ========= Balance, December 31, 2000... 622,985 (94,686) -- 1,158 875,249 Issuance of common stock..... -- -- -- -- 46 48,393 Repurchase of common stock... -- -- -- -- (14) (22,680) Cancellation of stock warrants................... -- -- -- -- -- (20,000) Tax benefit from the exercise of non-qualified stock options.................... -- -- -- -- -- 15,871 Other equity transactions.... -- -- -- -- -- (948) Comprehensive income: Net loss................... (33,843) (33,843) -- -- -- -- Unrealized loss on marketable securities, net of tax............... (124,182) -- (124,182) -- -- -- Reclassification adjustment, net of income taxes.................... 206,151 -- 206,151 -- -- -- Foreign currency adjustments.............. (18,412) -- (18,412) -- -- -- --------- -------- --------- ---- ------ -------- Comprehensive income for year ended December 31, 2001.... $ 29,714 ========= Balance, December 31, 2001... $589,142 $ (31,129) $ -- $1,190 $895,885 ======== ========= ==== ====== ======== EMPLOYEE STOCK OWNERSHIP PLAN LOAN GUARANTEE & OTHER TOTAL -------------- ---------- (IN THOUSANDS) Balance, December 31, 1998... $(3,817) $ 646,132 Issuance of common stock..... -- 19,724 Principal payments on ESOP loan....................... 756 756 Stock issued for acquisitions............... -- 206,275 Tax benefit from the exercise of non-qualified stock options.................... -- 3,711 Conversion of preferred stock by pooled entity........... -- -- Dividends paid by pooled entity..................... -- (1,089) Effect due to change in fiscal year of pooled entity..................... -- 200 Other equity transactions.... 834 (244) Comprehensive income: Net income................. -- 109,291 Unrealized gain on marketable securities, net of tax............... -- 17,781 Foreign currency adjustments.............. -- (10,778) ------- ---------- Comprehensive income for year ended December 31, 1999.... Balance, December 31, 1999... (2,227) 991,759 Issuance of common stock..... -- 21,040 Repurchase of common stock... -- (21,883) Issuance of stock warrants... -- 32,300 Issuance of put option....... -- 925 Stock option charge in ENVOY sale....................... -- 50,040 Principal payments on ESOP loan....................... 1,214 1,214 Tax benefit from the exercise of non-qualified stock options.................... -- 6,752 Other equity transactions.... 1,013 (1) Comprehensive income: Net income................. -- 418,923 Unrealized loss on marketable securities, net of tax............... -- (69,619) Foreign currency adjustments.............. -- (26,744) ------- ---------- Comprehensive income for year ended December 31, 2000.... Balance, December 31, 2000... -- 1,404,706 Issuance of common stock..... -- 48,439 Repurchase of common stock... -- (22,694) Cancellation of stock warrants................... -- (20,000) Tax benefit from the exercise of non-qualified stock options.................... -- 15,871 Other equity transactions.... -- (948) Comprehensive income: Net loss................... -- (33,843) Unrealized loss on marketable securities, net of tax............... -- (124,182) Reclassification adjustment, net of income taxes.................... -- 206,151 Foreign currency adjustments.............. -- (18,412) ------- ---------- Comprehensive income for year ended December 31, 2001.... Balance, December 31, 2001... $ -- $1,455,088 ======= ==========
The accompanying notes are an integral part of these consolidated statements. 44 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Quintiles Transnational Corp. (the "Company") is a global leading provider of information, technology and services to help bring new medicines to patients faster and improve healthcare. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 financial statement presentation. The reclassifications had no effect on previously reported net income, shareholders' equity or net income per share. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCIES Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are recorded at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to equity. Gains and losses on foreign currency transactions are included in other income (expense). FOREIGN CURRENCY HEDGING The Company may use foreign exchange contracts and options to hedge the risk of changes in foreign currency exchange rates associated with contracts in which the expenses for providing services are incurred in one currency and paid for by the customer in another currency. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2001. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. The Company does not report in the accompanying balance sheets cash held for customers for investigator payments in the amount of $3.5 million and $3.1 million at December 31, 2001 and 2000, respectively, that pursuant to agreements with these customers, remains the property of the customers. The Company's investments in debt and marketable equity securities are classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are recorded at amortized cost. Investments classified as available-for-sale are measured at market value and net unrealized gains and losses are recorded as a component of shareholders' equity until realized. The market value is based on the closing price as quoted by the respective stock exchanges or Nasdaq. In addition, the Company has investments in equity securities of and advances to companies for which there are not readily available market values and for 45 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which the Company does not exercise significant influence or control; such investments are accounted for using the cost method. Any gains or losses on sales of investments are computed by specific identification. DERIVATIVES On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. The difference between the carrying amounts of the Company's then existing derivatives and their fair value was estimated to be insignificant. Therefore, the adoption did not have a significant impact on the Company's financial position or results of operations; however, future earnings will be subject to volatility arising from changes in valuation. This accounting change did not involve cash. From time to time the Company may use derivative instruments to manage exposures to equity prices and interest rates. The Company also holds freestanding warrants and other embedded derivatives (conversion options in financing arrangements). Derivatives meeting the criteria established by SFAS No. 133 are recorded in the balance sheet at fair value at each balance sheet date. When the derivative instrument is entered into, the Company designates whether or not the derivative instrument is an effective hedge of an asset, liability or firm commitment which is then classified as either a cash flow hedge or a fair value hedge. If determined to be an effective cash flow hedge, changes in the fair value of the derivative instrument are recorded as a component of accumulated other comprehensive loss until realized. Changes in fair value of effective fair value hedges are recorded in earnings as an offset to the changes in the fair value of the related hedge item. Changes in the fair values of derivative instruments that are not an effective hedge are recognized in earnings. The Company has, and may in the future, enter into derivative contracts (calls or puts, for example) related to its investments in marketable equity securities. While these contracts do not qualify for hedge accounting, the Company utilizes these transactions to mitigate its economic exposure to market price fluctuations. UNBILLED SERVICES AND UNEARNED INCOME In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, submission of appropriate billing detail or the achievement of contract milestones, depending on the type of contract. Unbilled services arise when services have been rendered but customers have not been billed. Similarly, unearned income represents prebillings for services that have not yet been rendered. LONG-LIVED ASSETS Property and equipment are carried at historical cost and are depreciated using the straight-line method over the shorter of the asset's estimated useful life or the lease term as follows: Buildings and leasehold improvements........................ 3 - 50 years Equipment and software...................................... 3 - 10 years Furniture and fixtures...................................... 5 - 10 years Motor vehicles.............................................. 3 - 5 years
Intangibles consist principally of the excess cost over the fair value of net assets acquired ("goodwill") and product and royalty rights. Product and royalty rights are amortized ratably, based on estimated cash flows, over the life of the rights, which is currently 15 years. Goodwill and other intangible assets have been amortized on a straight-line basis over periods from five to 40 years. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and will no longer amortize indefinite-lived intangible assets. Accumulated amortization totaled $33.1 million and $25.0 million at December 31, 2001 and 2000, respectively. 46 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying values of property, equipment and intangible assets are reviewed if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, the Company will reduce carrying values to estimated fair value. During 2001, the Company recognized a $24.7 million charge to write-off goodwill recorded in four separate acquisitions in the commercial services segment and personal computers including desktops and laptops that are no longer in service. The goodwill was deemed impaired due to changing business conditions and strategic direction. REVENUE RECOGNITION Many of the Company's contracts for services are fixed price, with some variable components, and range in duration from a few months to several years. The Company is also party to fee-for-service and unit-of-service contracts. The Company recognizes net revenue primarily based upon (1) percentage of completion (utilizing input or output measures as appropriate) for fixed price contracts, (2) contractual per diem or hourly rate basis as work is performed under fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. The Company has entered into agreements with various customers, with which the Company may have service agreements, whereby the Company may provide services and may also fund certain activities of the customers in return for product or royalty rights that provide for future revenues based on the achievement of certain sales levels of the promoted product. The Company records revenues and costs for these agreements as one of the following, based upon each agreement's specific facts and circumstances; (1) product revenues and product costs are recognized through earnings in the period in which they are earned or incurred, respectively, and investments in product rights are amortized ratably over the license period or (2) revenues are recognized as earned when payment is fixed and determinable, and certain direct costs, which management deems to be recoverable, may be deferred and amortized over the expected period of revenue recognition. The Company's contracts for services provide for price renegotiation upon scope of work changes. The Company recognizes revenue related to these scope changes when the underlying services are performed according to a binding commitment. Most contracts are terminable upon 15 - 90 days' notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. CONCENTRATION OF CREDIT RISK Substantially all net revenue is earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company's customers. The Company does not require collateral or other securities to support customer receivables. Credit losses have been immaterial and consistently within management's expectations. One customer accounted for 10.8%, 10.2% and 11.3% of consolidated net revenue in 2001, 2000 and 1999, respectively. These revenues were derived from each of the Company's segments. RESEARCH AND DEVELOPMENT COSTS Research and development costs relating principally to new software applications and computer technology are charged to expense as incurred. These expenses totaled $18.1 million, $29.0 million and $3.0 million in 2001, 2000 and 1999, respectively. 47 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Income tax expense includes U.S., state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Income tax credits are accounted for as a reduction of income tax expense in the year in which the credits reduce income taxes payable. Valuation allowances are provided against deferred income tax assets for which are not likely to be realized. NET INCOME PER SHARE The Company determines basic net income per share by dividing net income by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the assumed conversion or exercise of all convertible securities and issued and unexercised stock options, unless the effects would be anti-dilutive to results from continuing operations. A reconciliation of the number of shares used in computing basic and diluted net income per share is in Note 18. EMPLOYEE STOCK COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. COMPREHENSIVE INCOME The Company includes foreign currency translation adjustments and unrealized gains and losses on the available-for sale securities in other comprehensive income. Accumulated other comprehensive loss at December 31, 2001 was $31.1 million which consisted of $60.6 million in foreign currency translation adjustments and $29.6 million in unrealized gains on available-for-sale securities. During 2001, the Company reclassified $206.1 million of net holding losses to other expense as the related securities were sold or deemed to be impaired. RECENTLY ADOPTED ACCOUNTING STANDARD In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," that requires all business combinations initiated after June 30, 2001 to be accounted for as purchases. The Company adopted the provisions of SFAS No. 141 in 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's financial position or results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," requiring that upon adoption all goodwill and indefinite-lived intangible assets no longer be amortized but reviewed at least annually for impairment. The Company adopted SFAS No. 142 as required to do so on January 1, 2002. The effect of the non-amortization provisions of SFAS No. 142 on 2002 results will be affected by various factors including 2002 acquisitions and, therefore cannot be estimated. If these provisions had applied in 2001, management believes that the Company's amortization expense before income taxes would have decreased by approximately $8.0 million. The Company has not assessed the impact of any impairment under the new tests prescribed by the standard. 48 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment on Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for 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 Company adopted SFAS No. 144 as required to do so on January 1, 2002. The Company anticipates that the adoption of SFAS No. 144 will not have a material impact on the Company's results of operations and financial position. 2. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES Accounts receivable and unbilled services consist of the following (in thousands):
DECEMBER 31, ------------------- 2001 2000 -------- -------- Trade: Billed.................................................... $271,706 $251,108 Unbilled services......................................... 166,712 167,665 -------- -------- 438,418 418,773 Allowance for doubtful accounts............................. (11,464) (4,781) -------- -------- $426,954 $413,992 ======== ========
Substantially all of the Company's trade accounts receivable and unbilled services are due from companies in the pharmaceutical, biotechnology, medical device and healthcare industries and are a result of contract research, sales, marketing, healthcare consulting and health information management services provided by the Company on a global basis. The percentage of accounts receivable and unbilled services by region is as follows:
DECEMBER 31, ------------- REGION 2001 2000 - ------ ----- ----- Americas: United States............................................. 45% 59% Other..................................................... 3 1 --- --- Americas............................................... 48 60 Europe and Africa: United Kingdom............................................ 33 24 Other..................................................... 10 11 --- --- Europe and Africa...................................... 43 35 Asia -- Pacific............................................. 9 5 --- --- 100% 100% === ===
3. COMMERCIAL RIGHTS AND ROYALTIES The Company has entered into financial transactions and other arrangements with customers and other parties in which a portion of the Company's revenues and operating income depends on the performance of a specific pharmaceutical product. These transactions may include providing product development and/or commercialization services to customers, as well as the funding of such services, in return for royalties or 49 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commissions based on the sales of the customer's product. As of December 31, 2001, The Company has entered into five such agreements. Below is a brief description of these agreements: In May 1999, the Company entered into an agreement with CV Therapeutics, Inc. ("CVTX") to commercialize Ranolazine for angina in the United States and Canada. Under the terms of this agreement, the Company purchased 1,043,705 shares of CVTX's common stock for $5 million of which the Company owns 681,705 shares as of December 31, 2001, and has made available a $10 million credit line for pre-launch sales and marketing activities. Once Ranolazine, which is currently in Phase III studies, is approved, the Company will provide a $10 million milestone payment to CVTX which will be used to pay off any outstanding balances on the credit line. The Company will also make available an additional line of credit to help fund a portion of the first year sales and marketing expenses. Additionally, the Company has committed to provide a minimum of approximately $14.4 million per year of commercialization services and to fund a minimum of $7.8 million per year of marketing activities, for a period of five years. In return it will receive payment for services rendered by the Company in year one and royalties based on the net sales of Ranolazine in years two through five subject to a cap not to exceed 300% of funding by the Company in any year or over the life of the contract. In addition, the Company will also receive royalties in years six and seven. In January 2001, the Company entered into an agreement with Scios Inc. ("SCIO") to market Natrecor(R) for acute congestive heart failure in the United States and Canada. Under the terms of the agreement, the Company agreed to provide $30 million in funding over a two and one-half year period for sales and marketing activities following product launch, of which $10 million was funded by the Company during 2001. The Company also received warrants to purchase 700,000 shares of SCIO's common stock at $20 per share, exercisable in installments over two and one-half years. In addition to receiving payments on a fee for service basis for providing commercialization services, the Company will receive royalties based on net sales of the product from 2002 through 2008. The royalty payments are subject to minimum and maximum amounts of $50 million and $65 million, respectively, over the life of the agreement. In June 2001, the Company entered into an agreement with Pilot Therapeutics, Inc.'s ("PLTT") to commercialize a natural therapy for asthma, AIROZIN(TM), in the United States and Canada. Under the terms of the agreement, the Company will provide commercialization services for AIROZIN(TM) and a milestone-based $6 million line of credit which is convertible into PLTT's common stock, of which $4 million was funded by the Company during 2001. Further, the Company has committed to funding 50% of sales and marketing activities for AIROZIN(TM) over five years with a $6 million limit per year. For the term of the agreement, the Company will receive royalties based on the net sales of AIROZIN(TM). The royalty percentage will vary to allow the Company to achieve a minimum rate of return. In December 2001, the Company entered into an agreement with Discovery Laboratories, Inc. ("DSCO") to commercialize, in the United States, DSCO's humanized lung surfactant, Surfaxin(R), which is currently in Phase III studies. Under the terms of the agreement, the Company acquired 791,905 shares of DSCO's common stock and a warrant to purchase 357,143 shares of its common stock at $3.48 per share for a total of $3 million, and has agreed to make available a line of credit up to $10 million for pre-launch commercialization services as certain milestones are achieved by DSCO. In addition, the Company will receive additional warrants to purchase approximately 38,000 shares of DSCO common stock at an exercise price of $3.03 per share for each million dollars made available by the Company under the line of credit as milestones are achieved. The Company has agreed to fund the sales and marketing activities of this product up to $10 million per year for seven years. In return, the Company will receive commissions based on net sales of Surfaxin(R) for meconium aspiration syndrome, infant respiratory distress syndrome and all "off-label" uses for 10 years. In December 2001, the Company acquired the license to market SkyePharma's Solaraze(TM) skin treatment in the United States, Canada and Mexico for 15 years from Bioglan Pharma Plc for a total consideration of $26.7 million. The Company will amortize the rights ratably over 15 years. The Company has 50 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a commitment to pay royalties to SkyePharama based on a percentage of net sales of Solaraze(TM). Pursuant to the license, the Company may pursue additional indications for the compound, which will be facilitated through the Company's ownership rights in the Solaraze(TM) New Drug Application and Investigational New Drug. The Company has firm commitments under the above arrangements to provide funding of approximately $56.7 million in exchange for various commercial rights. As of December 31, 2001, the Company has funded approximately $36.7 million of these commitments. Further, the Company has future funding commitments that are contingent upon satisfaction of certain milestones being met by the third party such as receiving the United States Food and Drug Administration ("FDA") approval, obtaining funding from additional third parties, agreement of marketing plan and other similar milestones. Due to the uncertainty of the amounts and timing, these commitments are not included in the commitment amounts. Below is a summary of the remaining commitments with pre-determined payment schedules under such arrangements (in thousands):
COMMITMENTS ----------- 2002........................................................ $13,540 2003........................................................ 6,460 ------- $20,000 =======
4. INVESTMENTS -- DEBT SECURITIES The following is a summary as of December 31, 2001 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- HELD-TO-MATURITY SECURITIES: State Securities -- maturing in one year or less.............. $ 591 $-- $ -- $ 591 maturing in over five years............... 6,016 -- -- 6,016 ------- --- ----- ------- $ 6,607 $-- $ -- $ 6,607 ======= === ===== ======= AVAILABLE-FOR-SALE SECURITIES: Money Funds................................. $27,186 $-- $(288) $26,898 Other....................................... 3,494 -- -- 3,494 ------- --- ----- ------- $30,680 $-- $(288) $30,392 ======= === ===== =======
51 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary as of December 31, 2000 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- HELD-TO-MATURITY SECURITIES: State Securities -- maturing in one year or less............. $ 562 $ -- $ -- $ 562 maturing in over five years.............. 6,483 -- -- 6,483 -------- ----- ------- -------- $ 7,045 $ -- $ -- $ 7,045 ======== ===== ======= ======== AVAILABLE-FOR-SALE SECURITIES: U.S. Government Securities: maturing in one year or less............. $ 2,500 $ -- $ (10) $ 2,490 maturing between one and three years..... 43,566 -- (413) 43,153 maturing between three and five years.... 24,998 -- (222) 24,776 State and Municipal Securities -- maturing in one year or less............. 1,521 3 -- 1,524 Money Funds................................ 27,186 -- (682) 26,504 Other...................................... 2,320 -- -- 2,320 -------- ----- ------- -------- $102,091 $ 3 $(1,327) $100,767 ======== ===== ======= ========
Gross realized losses on sales of available-for-sale debt securities were $1,000 in 1999. The net after-tax adjustment to unrealized holding gains (losses) on available-for-sale debt securities included as a separate component of shareholders' equity was $668,000, ($18.4) million and $18.2 million in 2001, 2000 and 1999, respectively. 5. INVESTMENTS -- MARKETABLE EQUITY SECURITIES The Company has entered into financial arrangements with various customers and other parties in which the Company provides funding in the form of an equity investment. The equity investments may be subject to certain trading restrictions including "lock-up" agreements. The Company's portfolio in such transactions as of December 31, 2001 is as follows (in thousands except share data):
ESTIMATED TRADING NUMBER OF BENEFICIAL FAIR MARKET COMPANY SYMBOL SHARES OWNERSHIP %(1) COST BASIS VALUE - ------- ------- --------- -------------- ---------- ----------- COMMON STOCK: CV Therapeutics, Inc. ....... CVTX 681,705 2.6% $ 3,320 $35,463 The Medicines Company........ MDCO 1,896,245 6.3% 8,462 21,977 Triangle Pharmaceuticals Inc. ...................... VIRS 3,775,000 4.9% 15,029 15,138 Other........................ -- -- 4,740 5,414 ------- ------- Total Marketable Equity Securities................. $31,551 $77,992 ======= =======
- --------------- (1) The estimated beneficial ownership percentage calculation is based upon the investee's filings with the United States Securities and Exchange Commission. The beneficial ownership percentage is subject to 52 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) change due to the Company's transactions in these investments and changes in the investee's capitalization. The Company's portfolio in such transactions as of December 31, 2000 is as follows (in thousands except share data):
TRADING NUMBER OF FAIR MARKET COMPANY SYMBOL SHARES COST BASIS VALUE - ------- ------- ---------- ---------- ----------- COMMON STOCK: WebMD Corporation......................... HLTH 35,000,000 $447,353 $277,813 CV Therapeutics, Inc. .................... CVTX 993,705 4,834 70,305 The Medicines Company..................... MDCO 1,696,245 6,262 34,773 Other..................................... -- -- 5,169 1,149 -------- -------- Total Marketable Equity Securities........ $463,618 $384,040 ======== ========
The Company may from time to time acquire equity instruments of companies in which a current market value is not readily available. As such, these investments are included in the Investments -- Non-marketable Equity Securities and Loans. In 2000, the Company sold its electronic data interchange unit, ENVOY Corporation, to WebMD Corporation ("WebMD"). As part of the consideration received in the sale, the Company received 35 million shares of WebMD common stock. In 2001, WebMD paid the Company $185 million in cash for all of the 35 million shares of WebMD common stock and in settlement of the disputes. The Company recognized $22.9 million, $3.3 million and $2.1 million of gains from the sale of marketable equity securities during 2001, 2000 and 1999, respectively. The Company recorded cumulative gross unrealized gains of $46.4 million as of December 31, 2001 and $79.6 million of gross unrealized losses as of December 31, 2000 from investments in marketable equity securities. The net after-tax adjustment to unrealized holding gains (losses) on marketable equity securities included as a separate component of shareholders' equity was $81.3 million, ($51.2) million and ($447,000) in 2001, 2000 and 1999, respectively. In accordance with its policy to continually review declines in fair value of the marketable equity securities for declines that may be other than temporary, the Company also recognized losses due to the impairment of marketable equity securities of $338.8 million and $5.5 million in 2001 and 2000, respectively. Included in the 2001 amount is $334.0 million relating to the Company's investment in WebMD common stock. 6. INVESTMENTS -- NON-MARKETABLE EQUITY SECURITIES AND LOANS The Company has entered into financial arrangements with various customers and other parties in which the Company provides funding in the form of an equity investment in non-marketable securities or loans. These financial arrangements are comprised of direct and indirect investments. The indirect investments are made through six venture capital funds in which the company is an investor. The Company's portfolio in such transactions as of December 31, 2001 is as follows (in thousands):
REMAINING FUNDING COMPANY COST BASIS COMMITMENT - ------- ---------- ----------------- Venture capital funds..................................... $19,702 $23,159 Equity investments (seven companies)...................... 10,547 -- Convertible loans (five companies)........................ 7,341 2,721 Loans (two companies)..................................... -- 20,000 ------- ------- Total non-marketable equity securities and loans.......... $37,590 $45,880 ======= =======
53 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Included in the venture capital funds is $5.9 million of investments in funds which are managed by A.M. Pappas & Associates, LLC whose chief executive officer is a member of the Company's Board of Directors. The Company also has remaining commitments to these funds totaling $10.6 million as of December 31, 2001. Below is a table representing management's best estimate as of December 31, 2001 of the amount and timing of the above commitments (in thousands):
TOTAL ------- 2002........................................................ $22,966 2003........................................................ 17,914 2004........................................................ 5,000 ------- $45,880 =======
The Company also has future loan commitments that are contingent upon satisfaction of certain milestones by the third party such as receiving FDA approval, obtaining funding from additional third parties, agreement of a marketing plan and other similar milestones. Due to the uncertainty of the amounts and timing, these commitments are not included in the commitment amounts described above. The Company's portfolio in such transactions as of December 31, 2000 is as follows (in thousands):
COMPANY COST BASIS - ------- ---------- Venture capital funds....................................... $ 5,593 Equity investments (five companies)......................... 6,108 Convertible loans (one company)............................. 897 Loans (three companies)..................................... 5,821 ------- Total non-marketable equity securities and loans............................................ $18,419 =======
In accordance with its policy to review each specific investment for potential impairment of fair value, the Company recognized $9.2 million of losses due to such impairments in 2001 relating to non-marketable equity securities and loans mainly due to declining financial condition of investees. The Company has determined that it is not practicable at each reporting date to estimate the fair value of its investments in non-marketable equity securities and loans. 7. DERIVATIVES As of December 31, 2001, the Company had the following derivative positions in securities of other issuers: (1) conversion option positions that are embedded in financing arrangements, (2) freestanding warrants to purchase shares of common stock and (3) put options to sell shares of marketable equity securities. As of December 31, 2001, the Company had extended five convertible loans with a carrying value of approximately $7.3 million. Loans that are convertible into common stock have an embedded option contract because the value of the equity interest is based on the market price of another entity's common stock and thus is not clearly and closely related to the value of the interest-bearing note. The Company has not accounted for these embedded conversion features as mark-to-market derivatives because the terms of conversion do not allow for cash settlement and the Company believes that the common stock delivered upon conversion would not be readily convertible to cash since these entities are privately held or have limited liquidity and trading of its common stock. 54 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2001, the Company had several freestanding warrants to purchase common stock of various customers and other third parties. These freestanding warrants primarily were acquired as part of the financial arrangements with such customers and third parties. No quoted price is available for the Company's freestanding warrants to purchase shares of common stock. The Company uses various valuation techniques including the present value of estimated expected future cash flows, option-pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying asset, strike price, time to expiration of the option, estimated price volatility of the underlying asset over the life of the option and restrictions on the transferability or ability to exercise the option. As of January 1, 2001, the Company's derivative instruments included two warrants to purchase up to 282,385 shares of common stock of The Medicines Company (NASDAQ: MDCO). The Company estimated the fair value of these derivative instruments to be insignificant at January 1, 2001 and December 31, 2001 because the Company concluded that the implicit restrictions on exercisability and transferability impaired the value of the warrants. The most significant of these restrictions were eliminated in January 2002. The Company has exchange-traded put option contracts with a fair value as of December 31, 2001 of approximately $1.3 million. These contracts expire in January 2002 and April 2002. During 2001, the Company recorded a $1.9 million loss in earnings related to changes in the fair value of put and call option contracts. 8. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
DECEMBER 31, ------------------- 2001 2000 -------- -------- Compensation and payroll taxes.............................. $ 63,458 $ 58,153 Acquisition related accruals................................ 388 60,261 Restructuring............................................... 30,737 14,655 Other....................................................... 74,590 57,142 -------- -------- $169,173 $190,211 ======== ========
9. CREDIT ARRANGEMENTS The following is a summary of the credit facilities available to the Company at December 31, 2001:
FACILITY INTEREST RATES - -------- -------------- L10.0 million (approximately $14.5 Base (4.0% at December 31, 2001) plus million) unsecured line of credit 0.75% L1.5 million (approximately $2.2 million) 1% per annum fee for each guarantee general banking facility with the same issued U.K. bank used for the issuance of guarantees
The Company did not have any outstanding balances on these facilities at December 31, 2001 and 2000. The Company had a $150.0 million senior unsecured credit facility with a U.S. bank which expired in August 2001 in accordance with its terms. 55 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term debt and obligations consist of the following (in thousands):
DECEMBER 31, ----------------- 2001 2000 ------- ------- Missouri tax incentive bonds due October 2009............... $ 4,755 $ 5,192 (6.7% annual interest rate) Other notes payable......................................... 8,549 6,811 Long-term debt paid in 2001................................. -- 5,853 ------- ------- 13,304 17,856 Less: current portion..................................... 2,969 7,387 ------- ------- $10,335 $10,469 ======= =======
Other notes payable include various notes payables, primarily in foreign currencies, with interest rates ranging between 1.875% and 6%. Maturities of long-term debt and obligations at December 31, 2001 are as follows (in thousands): 2002........................................................ $ 2,969 2003........................................................ 2,292 2004........................................................ 2,033 2005........................................................ 1,835 2006........................................................ 1,606 Thereafter.................................................. 2,569 ------- $13,304 =======
The fair value of the Company's long-term debt approximates its carrying value. 10. LEASES The Company leases certain office space and equipment under operating leases. The leases expire at various dates through 2074 with options to cancel certain leases at five-year increments. Some leases contain renewal options. Annual rental expenses under these agreements were approximately $76.3 million, $73.9 million and $46.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company leases certain assets, primarily vehicles, under capital leases. Capital lease amortization is included with depreciation and amortization expenses and accumulated depreciation in the accompanying financial statements. 56 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2001 (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 2002........................................................ $13,881 $ 56,574 2003........................................................ 11,150 40,003 2004........................................................ 368 29,011 2005........................................................ 218 20,592 2006........................................................ 177 20,967 Thereafter.................................................. 115 75,152 ------- -------- Total minimum lease payments................................ 25,909 $242,299 ======== Amounts representing interest............................... 1,347 ------- Present value of net minimum payments....................... 24,562 Current portion............................................. 13,147 ------- Long-term capital lease obligations......................... $11,415 =======
11. COMMITMENTS AND CONTINGENCIES Beginning on September 30, 1999, several purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina against the Company and two of its executive officers and directors on behalf of all persons who purchased or otherwise acquired shares of the Company's Common Stock between July 16, 1999, and September 15, 1999. These actions were subsequently consolidated and plaintiffs filed an amended complaint purporting to represent a class of purchasers of the Company's stock or call options, and sellers of put options, during the period between April 21, 1999, and September 15, 1999. The amended complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs sought unspecified damages, plus costs and expenses, including attorneys' fees and experts' fees. The Company believed the claims were without merit and intended to defend the suit vigorously. Accordingly, the Company and the named executive officers and directors filed a motion to dismiss the amended complaint. Immediately prior to the hearing scheduled on February 6, 2001, on the motion to dismiss, the parties agreed to settle the lawsuit. On October 5, 2001, the district court judge approved the settlement, ending the dispute. On October 12, 2001, the Company entered into a settlement agreement with WebMD which settled the litigation pending in the United States District Court for the Eastern District of North Carolina between the Company and WebMD and resolved the dispute. The United States District Court for the Eastern District of North Carolina approved the conditional voluntary dismissal on October 17, 2001. Additionally, as part of the settlement, the United States Court of Appeals for the Fourth Circuit dismissed WebMD's appeal of the preliminary injunction previously issued by the district court in the Company's favor on October 18, 2001. On January 26, 2001, a purported class action lawsuit was filed in the State Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp., Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited, a subsidiary of the Company, on behalf of 185 Alzheimer's patients who participated in drug studies involving an experimental drug manufactured by defendant Novartis and their surviving spouses. The complaint alleges claims for breach of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia RICO violations, infliction of emotional distress, battery, negligence and loss of consortium as to class member spouses. The complaint seeks unspecified damages, plus costs and 57 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expenses, including attorneys' fees and experts' fees. The Company believes the claims to be without merit and intends to defend the suit vigorously. On January 22, 2002, Federal Insurance Company ("Federal") and Chubb Custom Insurance Company ("Chubb") filed suit against the Company, Quintiles Pacific, Inc. and Quintiles Laboratories Limited, two of the Company's subsidiaries, in the United States District Court for the Northern District of Georgia. In the suit, Chubb, the Company's primary commercial general liability carrier, and Federal, the Company's excess liability carrier, seek to rescind the policies issued to the Company for coverage years 2000-2001 and 2001-2002 based on an alleged misrepresentation by the Company on the policy application, which the Company denies; contending that the information was material to their determination to accept the risk of coverage. Alternatively, Chubb and Federal seek a declaratory judgment that there is no coverage under the policies for some or all of the claims asserted against the Company and its subsidiaries in the litigation described in the prior paragraph, and, if one or more of such claims is determined to be covered, Chubb and Federal request an allocation of the defense costs between the claims they contend are covered and non-covered claims. The Company believes these allegations are without merit and intends to vigorously defend this case. The Company is also a party in certain other pending litigation arising in the normal course of business. In the opinion of management, based on consultation with its legal counsel, the outcome of such litigation currently pending will not have a material affect on the Company's consolidated financial statements. The Company has entered into a seven-year service agreement with a third party vendor to provide fully integrated information technology infrastructure services in the United States and Europe to the Company. The Company can terminate this agreement with six months notice and a penalty, which is based upon a sliding scale. The Company's annual commitment under this service agreement is approximately $20.0 million. 12. SHAREHOLDERS' EQUITY The Company is authorized to issue 25 million shares of preferred stock, $.01 per share par value. At December 31, 2001, 200 million common shares of $.01 par value were authorized. In March 2001, the Board of Directors authorized the Company to repurchase up to $100 million of the Company's Common Stock from time to time until March 2002. During 2001, the Company entered into agreements to repurchase 1,702,500 shares of its Common Stock for an aggregate price of approximately $27.5 million. In February 2000, the Board of Directors authorized the Company to repurchase up to $200 million of the Company's Common Stock from time to time until February 2001. The authorization expired in February 2001. During 2000, the Company repurchased 1,365,500 shares of its Common Stock for an aggregate price of approximately $21.9 million. To enhance its stock repurchase program, the Company sold put options during 2000 to an independent third party. These put options entitled the holder to sell a total of 500,000 shares of the Company's Common Stock to the Company on January 2, 2001 at $13.7125 per share. The put options expired unexercised in accordance with its terms on January 2, 2001. The transaction has been recorded as a component of shareholders' equity. In November 1999, the Board of Directors declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of the Company's Common Stock. Each Right, if activated, entitles the holder to purchase one one-thousandth of a share of the Company's Series A Preferred Stock at a purchase price of $150, subject to adjustment in certain circumstances. Each one one-thousandth of a preferred share will have the same voting and dividend rights as a share of the Company's Common Stock. The Rights become exercisable 10 business days after (1) any person or group announces it has acquired or 58 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) obtained the right to acquire 15% or more of the outstanding shares of the Company's Common Stock or (2) commencement of a tender offer or exchange offer for more than 15% of the Company's Common Stock, subject to limited exceptions. In the event that any party should acquire more than 15% of the Company's Common Stock without the Board's approval, the rights entitle all other shareholders to purchase shares of the Company's Common Stock at a substantial discount. In addition, if the Company engages in certain types of mergers or business combinations after a group or person acquires 15% or more of the Company's Common Stock, the Rights entitle all other shareholders to purchase common stock of the acquirer at a substantial discount. The Rights expire on November 15, 2009, unless redeemed earlier at the discretion of the Company at the redemption price of $0.0001 per right. 13. LOSS ON DISPOSAL In June 2000, the Company completed the sale of its general toxicology operations in Ledbury, Herefordshire, United Kingdom. This facility contributed less than one percent of consolidated net revenue and was included in the product development segment. In connection with the sale, the Company recognized a $17.3 million loss on disposal. 14. DISCONTINUED OPERATION On May 26, 2000, the Company completed the sale of its electronic data interchange unit, ENVOY, to Healtheon/WebMD Corp., which subsequently changed its name to WebMD. Prior to the sale, ENVOY transferred its informatics subsidiary, Synergy Health Care, Inc., to the Company. The Company received $400 million in cash and 35 million shares of WebMD common stock in exchange for its entire interest in ENVOY and a warrant to acquire 10 million shares of the Company's Common Stock at $40 per share, exercisable for four years. The Company recorded an extraordinary gain on the sale of $436.3 million, net of taxes of $184.7 million. During 2001, the Company completed a tax basis study for ENVOY. 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 income taxes provided on the sale of ENVOY. The Company retained exclusive rights to de-identified ENVOY transaction data and certain other de-identified data available from WebMD, subject to limited exceptions. The Company agreed to share with WebMD a royalty derived from sales of products using the licensed data. The Company formed a strategic alliance with WebMD to develop a web-based suite of integrated products and services for the pharmaceutical industry and may provide funding for development of the products. As a result of the settlement of litigation between the Company and WebMD, the Company will continue to receive data from WebMD only through February 28, 2002. In addition, as part of the settlement, the existing contracts with WebMD have been terminated, which among other things, absolves the Company from any obligation to fund WebMD to develop a web-based suite of integrated products and services. Also, 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. The Company recorded an $83.2 million gain from the settlement of litigation during 2001. On March 30, 1999, the Company acquired ENVOY in exchange for 28,465,160 shares of the Company's Common Stock. Outstanding ENVOY options became options to acquire 3,914,583 shares of the Company's Common Stock ("Exchanged Options"). On May 26, 2000, employees of ENVOY held 3,312,200 options to acquire Company Common Stock as a result of the Exchanged Options and ENVOY employees' participation in Company stock option plans. In connection with the sale, all of the options outstanding immediately vested and became exercisable over a three-year term. Subsequently, 2,516,062 of the outstanding options were cancelled and issued with new terms to certain ENVOY employees ("ENVOY Options"). This transaction resulted in a charge of $50.0 million, based on the fair value of the options at the date of grant, which reduced the extraordinary gain from sale of discontinued operation. The ENVOY Options 59 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) have an exercise price of $6.84, vested immediately, have a term of three years and are automatically exercised if the market price of the Company's Common Stock reaches $23.34. As of December 31, 2001, all of the stock options have been exercised. The results of ENVOY through the date of closing have been reported separately as a discontinued operation in the Consolidated Statement of Operations. The results of the discontinued operation do not reflect any interest expense, management fee or transaction costs allocated by the Company. The following is a summary of income from operations for ENVOY through the date of closing (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 --------- ---------- Net revenue................................................. $99,041 $219,908 ======= ======== Income before income taxes.................................. $27,121 $ 61,438 Income taxes................................................ 10,351 25,315 ------- -------- Net income.................................................. $16,770 $ 36,123 ======= ========
15. BUSINESS COMBINATIONS 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. On March 29, 1999, the Company acquired Pharmaceutical Marketing Services, Inc. ("PMSI") and its core company, Scott-Levin, a leader in pharmaceutical market information and research services in the U.S. The Company acquired PMSI in exchange for approximately 4,993,787 shares of the Company's Common Stock. Outstanding PMSI options became options to acquire approximately 440,426 shares of the Company's Common Stock. The total purchase price of the PMSI acquisition approximates $201.8 million. The PMSI net assets acquired included approximately $90.0 million in cash. The Company recorded as goodwill approximately $111.5 million related to the excess cost over the fair value of net assets acquired, which amount is being amortized over 30 years. The acquisition of PMSI has been accounted for as a purchase and accordingly, the results of PMSI have been included from the date of acquisition. On January 1, 1999, the Company acquired substantial assets of Aventis S.A.'s Kansas City-based Drug Innovation and Approval facility for approximately $93 million in cash of which $58 million and $35 million was paid in 2001 and 1999, respectively. As a part of this transaction, the Company was awarded a $436 million contract for continued support and completion of ongoing Aventis S.A. development projects over a five-year period. The Company has recognized approximately $333 million since inception on this portion of the contract including adjustments for inflation. In addition, Aventis S.A. offered the Company the opportunity to provide all U.S. clinical research services up to an additional $144 million over the same period of which approximately $91 million, including adjustments for inflation, is remaining at December 31, 2001. The Company has provided services in excess of the annual opportunity specified in the contract resulting in revenue of approximately $57 million since contract inception. 60 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following transactions were accounted for by the pooling of interests method and the financial statements of the Company have been restated to reflect the results of operations of these acquisitions.
NUMBER OF SHARES OF THE DATE ACQUIRED COMPANY COMPANY'S COMMON STOCK ISSUED - ---- ---------------- ----------------------------- June 3, 1999 SMG Marketing Group, Inc. ................. 1,170,291 May 19, 1999 Minerva Medical plc........................ 1,143,625 March 31, 1999 Medlab Pty Ltd. and the assets of the Niehaus & Botha partnership................ 271,146
16. RESTRUCTURING During the second quarter of 2001, the Company recognized a $2.1 million restructuring charge ("2001 A Plan") relating primarily to severance costs from the reorganization of the Internet initiative and the commercial services group in the United States. All of the 40 positions to be eliminated as part of this restructuring were terminated as of June 30, 2001. During the third quarter of 2001, the company recognized a $50.9 million restructuring charge ("2001 B Plan"). 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 December 31, 2001, 485 individuals have been terminated. Positions will be eliminated in each of the segments. As of December 31, 2001, the following amounts were recorded (in thousands):
2001 A 2001 B 2001 A 2001 B PLAN BALANCE AT PLAN PLAN TOTAL PLAN WRITE-OFFS/ DECEMBER 31, ACCRUAL ACCRUAL ACCRUAL PAYMENTS PAYMENTS 2001 ------- ------- ------- -------- ----------- ------------ Severance and related costs.................... $1,970 $31,134 $33,104 $(1,970) $(11,811) $19,323 Asset impairment write-offs............... -- 8,237 8,237 -- (8,237) -- Exit costs................. 176 11,567 11,743 (176) (2,761) 8,806 ------ ------- ------- ------- -------- ------- $2,146 $50,938 $53,084 $(2,146) $(22,809) $28,129 ====== ======= ======= ======= ======== =======
In January 2000, the Company announced the adoption of a restructuring plan ("January 2000 Plan"). In connection with this plan, the company recognized a restructuring charge of $58.6 million. The restructuring charge consisted of $33.2 million related to severance payments, $11.3 million related to asset impairment write-offs and $14.0 million of exit costs. As part of this plan, approximately 770 positions worldwide were eliminated as of December 31, 2001. Although positions eliminated were across all functions, most of the eliminated positions were in the product development group. In the fourth quarter of 2000, the Company revised its estimates of the January 2000 Plan. This revision resulted in a reduction of the January 2000 Plan of $6.9 million. This reduction included $6.3 million in severance payments and $632,000 in exit costs. The severance reduction resulted primarily from a higher than expected number of voluntary terminations, reduced outplacement costs and related fringes. Also during the fourth quarter of 2000, management conducted a detailed review of the resource levels within each business group. Based on this review, the Company adopted a follow-on restructuring plan ("2000 Follow-On Plan") resulting in a restructuring charge of $7.1 million. The restructuring charge consisted of $5.8 million related to severance payments and $1.3 million related to exit costs. As part of this plan, approximately 220 positions were to be eliminated mostly in the commercial services group. As of December 31, 2001, 145 individuals have been terminated. 61 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2001, the following amounts were recorded (in thousands):
ACTIVITY TWELVE MONTHS ENDED DECEMBER 31, 2001 ------------------------------------------------------------------------------------ BALANCE AT REVISIONS TO JANUARY 2000 BALANCE AT DECEMBER 31, JANUARY REVISED 2000 FOLLOW-ON DECEMBER 31, 2000 2000 PLAN ACCRUAL PLAN PAYMENTS PLAN PAYMENTS 2001 ------------ ------------ ------- ------------- ------------- ------------ Severance and related costs.............. $ 8,867 $ -- $ 8,867 $(3,530) $(4,443) $ 894 Exit costs........... 5,788 1,085 6,873 (4,351) (808) 1,714 ------- ------ ------- ------- ------- ------ Totals...... $14,655 $1,085 $15,740 $(7,881) $(5,251) $2,608 ======= ====== ======= ======= ======= ======
As of December 31, 2000, the following amounts were recorded (in thousands):
ACTIVITY TWELVE MONTHS ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------------- ORIGINAL ORIGINAL PLAN BALANCE AT PLAN REVISIONS TO REVISED WRITE-OFFS/ NEW PLAN DECEMBER 31, ACCRUAL ORIGINAL PLAN NEW PLAN ACCRUAL PAYMENTS PAYMENTS 2000 -------- ------------- -------- ------- ------------- -------- ------------ Severance and related costs................... $33,228 $(6,321) $5,833 $32,740 $(23,136) $(737) $ 8,867 Asset impairment write-offs.............. 11,315 -- -- 11,315 (11,315) -- -- Exit costs................ 14,049 (632) 1,309 14,726 (8,938) -- 5,788 ------- ------- ------ ------- -------- ----- ------- Totals........... $58,592 $(6,953) $7,142 $58,781 $(43,389) $(737) $14,655 ======= ======= ====== ======= ======== ===== =======
17. INCOME TAXES The components of income tax (benefit) expense attributable to continuing operations are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 --------- -------- ------- Current: Federal............................................ $ 13,130 $(46,052) $21,351 State.............................................. 1,196 2,248 3,764 Foreign............................................ 17,617 15,752 10,099 --------- -------- ------- 31,943 (28,052) 35,214 --------- -------- ------- Deferred (benefit) expense: Federal............................................ (109,228) 24,213 11,320 Foreign............................................ (9,338) (12,992) (3,792) --------- -------- ------- (118,566) 11,221 7,528 --------- -------- ------- $ (86,623) $(16,831) $42,742 ========= ======== =======
Income tax (benefit) expense attributable to continuing operations excludes income tax expense from the Company's discontinued operation. The Company has allocated directly to additional paid-in capital approximately $15.9 million in 2001, $6.8 million in 2000 and $3.7 million in 1999 related to the tax benefit from non-qualified stock options exercised. 62 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between the Company's consolidated income tax (benefit) expense attributable to continuing operations and the (benefit) expense computed at the 35% U.S. statutory income tax rate were as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 2001 2000 1999 -------- -------- ------- Federal income taxes at statutory rate................ $(91,874) $(17,852) $40,569 State and local income taxes, net of federal (detriment) benefit................................. (1,407) (1,787) 2,446 Non-deductible expenses and transaction costs......... 6,337 -- 9,966 Foreign earnings taxed at different rates............. (3,208) (8,833) (4,240) Losses not utilized (utilized)........................ 911 12,725 (461) Other................................................. 2,618 (1,084) (5,538) -------- -------- ------- $(86,623) $(16,831) $42,742 ======== ======== =======
Income (loss) before income taxes from foreign operations was approximately $14.9 million, ($40.3) million and $27.8 million for the years 2001, 2000 and 1999, respectively. Income (loss) from foreign operations was approximately $41.2 million, ($11.6) million and $59.5 million for the years 2001, 2000 and 1999, respectively. The difference between income from operations and income (loss) before income taxes is due primarily to intercompany charges which eliminate in consolidation. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $149.6 million at December 31, 2001. Those earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries. 63 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below (in thousands):
DECEMBER 31, -------------------- 2001 2000 -------- --------- Deferred income tax liabilities: Depreciation and amortization............................. $(31,176) $ (34,990) Prepaid expenses.......................................... (6,330) (6,958) Unrealized gain on equity investments..................... (12,082) -- Revenue and Envoy disposition gain........................ (7,388) (50,446) Other..................................................... (15,054) (15,487) -------- --------- Total deferred income tax liabilities....................... (72,030) (107,881) Deferred income tax assets: Unrealized loss on debt and equity investments............ -- 30,159 Net operating and capital loss carryforwards.............. 173,034 59,923 Accrued expenses and unearned income...................... 21,644 19,262 Goodwill, net of amortization............................. 72,719 80,009 Other..................................................... 8,067 7,459 -------- --------- 275,464 196,812 Valuation allowance for deferred income tax assets.......... (65,025) (64,114) -------- --------- Total deferred income tax assets............................ 210,439 132,698 -------- --------- Net deferred income tax assets.............................. $138,409 $ 24,817 ======== =========
The increase in the Company's valuation allowance for deferred income tax assets to $65.0 million at December 31, 2001 from $64.1 million at December 31, 2000 is primarily due to the uncertainty related to the deferred income tax asset for certain foreign net operating losses generated in 2001 that may not be utilized in the future. The Company's deferred income tax (benefit) expense attributable to continuing operations results from the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 --------- -------- ------- (Deficiency) excess of income tax over financial reporting: Depreciation and amortization...................... $ 3,731 $ 16,905 $ 8,322 Net operating and capital loss carryforwards....... (113,129) (29,880) 795 Valuation allowance increase (decrease)............ 911 7,890 (2,120) Accrued expenses and unearned income............... (1,888) (4,379) (2,397) Prepaid expenses................................... (628) 919 -- Deferred revenue................................... (4,037) 12,050 -- Other items, net................................... (3,526) 7,716 2,928 --------- -------- ------- $(118,566) $ 11,221 $ 7,528 ========= ======== =======
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for 100% of capital expenditures on certain assets under the Inland Revenue Service guidelines. For 2001, 2000 and 1999, these 64 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) allowances were $7.8 million, $15.1 million and $9.7 million, respectively, which helped to generate net operating loss carryforwards of $15.3 million to be used to offset taxable income in that country. Assuming the U.K. subsidiaries continue to invest in qualified capital expenditures at an adequate level, the portion of the deferred income tax liability relating to the U.K. subsidiaries may be deferred indefinitely. The Company recognizes a deferred income tax benefit for foreign generated operating losses at the time of the loss when the Company believes it is more likely than not that the benefit will be realized. The Company has net operating loss and capital loss carryforwards of approximately $161.9 million in various entities within the United Kingdom which have no expiration date and has over $32.7 million of net operating loss carryforwards from various foreign jurisdictions which have different expiration periods. In addition, the Company has approximately $211.4 million of U.S. state operating loss carryforwards which expire through 2021 and has approximately $1.5 million of U.S. federal operating loss carryforwards which begin to expire in 2005. The company also has a U.S. capital loss carryforward of approximately $262 million which expires in 2007. The Company evaluates its deferred income tax assets for realization based upon the more likely than not criteria prescribed in SFAS No. 109, "Accounting for Income Taxes." Based upon current estimates, management believes it is more likely than not that the Company's deferred income tax assets, after the effect of the recorded valuation allowance, will be realizable. The ultimate realization of deferred income tax assets is dependent upon the Company generating future taxable income and capital gains in sufficient amounts within the applicable carryforward period. Actual results could differ materially from management's estimates. 18. WEIGHTED AVERAGE SHARES OUTSTANDING The following table sets forth the computation of the weighted-average shares used when calculating the basic and diluted net (loss) income per share (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- Weighted average shares: Basic weighted average shares......................... 118,223 115,968 113,525 Effect of dilutive securities: Stock options...................................... -- -- 2,162 ------- ------- ------- Diluted weighted average shares....................... 118,223 115,968 115,687 ======= ======= =======
The effect of options outstanding during 2001 were not included in the computation of diluted net (loss) income per share because the effect on loss from continuing operations would have been antidilutive. Warrants to purchase 10 million shares of common stock were outstanding from May 2000 until October 2001, but were not included in the computation of diluted net (loss) income per share because the effect on loss from continuing operations would have been antidilutive. 19. EMPLOYEE BENEFIT PLANS The Company has numerous employee benefit plans, which cover substantially all eligible employees in the countries where the plans are offered. Contributions are primarily discretionary, except in some countries where contributions are contractually required. Plans include Approved Profit Sharing Schemes in the U.K. and Ireland that are funded with Company stock; a defined contribution plan funded by Company stock in Australia, Belgium, Canada and Singapore; defined contribution plans in Austria, Belgium, Holland, Israel, Netherlands, Poland and Great Britain; profit sharing schemes in Australia and France; and defined benefit plans in Germany, Japan and the U.K. The defined benefit plan in Germany is an unfunded plan, which is provided for in the balance sheet. In addition, the Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees. 65 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective May 1, 1999, the Company merged, for administrative purposes only, its leveraged employee stock ownership plan (the "ESOP") and employee savings and investment plan (the "401(k)"). The eligibility requirements and benefits offered to employees under each plan were not affected by the merger. During 1998, the Company loaned the ESOP approximately $4.0 million to purchase 100,000 shares of the Company's Common Stock. As of December 31, 2000, the leveraged loans were repaid in full. The ESOP's trustee held such shares in suspense and released them for allocation to participants as the loan was repaid. The Company's contributions to the ESOP were used to repay the loan principal and interest. The ESOP expense recognized is equal to the cost of the shares allocated to plan participants and the interest expense on the leveraged loans for the year. ESOP expense totaled $6.2 million and $1.3 million in 2000 and 1999, respectively. No shares were allocated to the Plan in 2001; therefore, there is no expense. As of December 31, 2001, 2000 and 1999, 1,511,476, 1,667,449 and 1,510,654 shares, respectively, were allocated to participants. There are no unallocated shares held in suspense as of December 31, 2001. All ESOP shares are considered outstanding for income per share calculations. Under the 401(k), the Company matches employee deferrals at varying percentages, set at the discretion of the Board of Directors. For the years ended December 31, 2001, 2000 and 1999, the Company expensed $9.5 million, $5.1 million and $4.3 million, respectively, as matching contributions. Participating employees in the Company's employee stock purchase plan (the "Purchase Plan") have the option to purchase shares at 85% of the lower of the closing price per share of common stock on the first or last day of the calendar quarter. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. During 2001, 2000 and 1999, 382,968, 663,531 and 414,971 shares, respectively, were purchased under the Purchase Plan. At December 31, 2001, 1,309,163 shares were available for issuance under the Purchase Plan. The Company has stock option plans to provide incentives to eligible employees, officers and directors in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock. The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Options, particularly those assumed or exchanged as a result of acquisitions, have various vesting schedules and expiration periods. The majority of options granted under the Executive Compensation Plan typically vest 25% per year over four years expiring 10 years from the date of grant. 66 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ---------- ---------------- Outstanding at December 31, 1998......................... 10,219,941 $27.99 Granted................................................ 9,064,319 27.56 Exercised.............................................. (530,872) 20.21 Canceled............................................... (868,908) 36.69 ---------- Outstanding at December 31, 1999......................... 17,884,480 27.59 Granted................................................ 15,340,516 14.78 Exercised.............................................. (508,412) 9.24 Canceled............................................... (5,558,403) 21.98 ---------- Outstanding at December 31, 2000......................... 27,158,181 21.80 Granted................................................ 8,399,811 18.40 Exercised.............................................. (2,514,514) 12.88 Canceled............................................... (3,158,609) 22.89 ---------- Outstanding at December 31, 2001......................... 29,884,869 $21.44 ==========
Pro forma information regarding net income and net income per share is required by Statement No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement No. 123. The per share weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $5.57, $4.93 and $9.05 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN ----------------------- ---------------------------- 2001 2000 1999 2001 2000 1999 ----- ----- ----- ------ ------ ------ Expected dividend yield................ 0% 0% 0% 0% 0% 0% Risk-free interest rate................ 5.0% 5.1% 5.8% 3.9% 5.9% 4.7% Expected volatility.................... 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Expected life (in years from vesting)............................. 0.83 0.86 1.40 0.25 0.25 0.25
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are transferable. All available option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information (which includes pro forma stock compensation expense before income taxes related to discontinued operation of approximately $1.5 million in 2000 and $5.0 million in 1999) follows (in thousands, except for net (loss) income per share information):
YEAR ENDED DECEMBER 31, ----------------------------- 2001 2000 1999 -------- -------- ------- Pro forma net (loss) income........................... $(59,399) $381,204 $81,793 Pro forma basic net (loss) income per share........... (0.50) 3.29 0.72 Pro forma diluted net (loss) income per share......... (0.50) 3.29 0.71
67 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Selected information regarding stock options as of December 31, 2001 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------- ----------------------------- NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE RANGE EXERCISE PRICE REMAINING LIFE OPTIONS EXERCISE PRICE - --------- -------------------- ---------------- ---------------- ---------- ---------------- 694,350 $ 1.04 - $ 8.58 $ 6.51 1.54 683,780 $ 6.59 8,694,836 $ 8.75 - $13.44 13.42 8.14 5,196,346 13.41 6,008,542 $13.50 - $16.99 15.12 8.92 1,048,462 14.94 7,811,795 $17.00 - $25.25 20.79 7.77 4,865,957 20.58 6,675,346 $25.44 - $56.25 39.90 6.00 5,716,681 40.09 - ---------- ---------- 29,884,869 $21.44 7.57 17,511,226 $23.94 ========== ==========
20. OPERATIONS BY GEOGRAPHIC LOCATION The table below presents the Company's operations by geographical location. The Company attributes revenues to geographical locations based upon (1) customer service activities, (2) operational management, (3) business development activities and (4) customer contract coordination. The Company's operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals (in thousands):
2001 2000 1999 ---------- ---------- ---------- Net revenue: Americas: United States............................... $ 814,593 $ 929,916 $ 870,559 Other....................................... 39,710 28,710 23,987 ---------- ---------- ---------- Americas.................................. 854,303 958,626 894,546 Europe and Africa: United Kingdom.............................. 330,087 348,267 378,099 Other....................................... 271,730 233,231 260,096 ---------- ---------- ---------- Europe and Africa......................... 601,817 581,498 638,195 Asia-Pacific................................... 163,752 119,786 74,346 ---------- ---------- ---------- $1,619,872 $1,659,910 $1,607,087 ========== ========== ========== Property and equipment, net: Americas: United States............................... $ 203,685 $ 222,727 $ 214,503 Other....................................... 1,856 2,067 2,211 ---------- ---------- ---------- Americas.................................. 205,541 224,794 216,714 Europe and Africa: United Kingdom.............................. 125,702 133,025 156,067 Other....................................... 13,640 16,911 20,473 ---------- ---------- ---------- Europe and Africa......................... 139,342 149,936 176,540 Asia-Pacific................................... 17,423 17,230 6,430 ---------- ---------- ---------- $ 362,306 $ 391,960 $ 399,684 ========== ========== ==========
68 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. SEGMENTS The following table presents the Company's operations by reportable segment. The Company is managed through three reportable segments, namely, the product development group, the commercial services group and the informatics 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 commercial services 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 analyses to support healthcare decisions. The Company allocates corporate assets and assets of the shared service centers to each segment base upon management's estimates. The Company does not include net revenue and expenses relating to the Internet initiative, charges related to restructurings, write-off of goodwill and other assets, disposal of a 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 (in thousands):
2001 2000 1999 ---------- ---------- ---------- Net revenue: Product development............................ $ 881,789 $ 809,050 $ 848,611 Commercial services............................ 679,931 790,199 706,092 Informatics.................................... 58,119 59,709 52,384 Internet initiative............................ 33 952 -- ---------- ---------- ---------- $1,619,872 $1,659,910 $1,607,087 ========== ========== ========== Income (loss) from operations: Product development............................ $ 37,218 $ (9,330) $ 74,388 Commercial services............................ 37,606 55,568 66,029 Informatics.................................... (14,329) (14,234) (4,062) Internet initiative............................ (14,227) (24,257) -- ---------- ---------- ---------- $ 46,268 $ 7,747 $ 136,355 ========== ========== ========== Total assets: Product development............................ $1,280,830 $ 972,047 $ 864,785 Commercial services............................ 443,407 366,204 334,706 Informatics.................................... 213,730 344,725 285,093 Internet initiative............................ 9,773 278,602 -- Net assets of discontinued operation........... -- -- 122,981 ---------- ---------- ---------- $1,947,740 $1,961,578 $1,607,565 ========== ========== ========== Expenditures to acquire long-lived assets: Product development............................ $ 113,516 $ 78,111 $ 129,873 Commercial services............................ 7,517 22,563 21,942 Informatics.................................... 12,950 7,196 6,313 Internet initiative............................ -- 912 -- ---------- ---------- ---------- $ 133,983 $ 108,782 $ 158,128 ========== ========== ========== Depreciation and amortization expense: Product development............................ $ 61,385 $ 54,118 $ 47,798 Commercial services............................ 23,415 29,167 27,653 Informatics.................................... 11,303 9,242 6,841 Internet initiative............................ -- 40 -- ---------- ---------- ---------- $ 96,103 $ 92,567 $ 82,292 ========== ========== ==========
69 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly results of operations (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 2001 ----------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------- -------------- -------------- -------------- Net revenue................................ $ 404,470 $ 404,300 $ 407,103 $ 403,999 Income (loss) from operations.............. 6,094 7,751 (60,471) 94,803 Income (loss) from continuing operations... 7,791 9,674 (265,911) 72,573 Extraordinary gain from sale of discontinued operation, net of income taxes.................................... -- -- 142,030 -- Net income (loss).......................... $ 7,791 $ 9,674 $ (123,881) $ 72,573 ============== ============== ============== ============== Basic net income (loss) per share: Income (loss) from continuing operations............................. $ 0.07 $ 0.08 $ (2.22) $ 0.61 Extraordinary gain from sale of discontinued operation................. -- -- 1.19 -- -------------- -------------- -------------- -------------- Basic net income (loss) per share........ $ 0.07 $ 0.08 $ (1.03) $ 0.61 ============== ============== ============== ============== Diluted net income (loss) per share: Income (loss) from continuing operations............................. $ 0.06 $ 0.08 $ (2.22) $ 0.60 Extraordinary gain from sale of discontinued operation................. -- -- 1.19 -- -------------- -------------- -------------- -------------- Diluted net income (loss) per share...... $ 0.06 $ 0.08 $ (1.03) $ 0.60 ============== ============== ============== ============== Range of stock prices...................... $14.688-22.875 $15.000-26.050 $12.450-25.500 $13.610-18.900
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------- -------------- -------------- -------------- Net revenue................................ $ 414,845 $ 423,107 $ 412,344 $ 409,614 (Loss) income from operations.............. (57,407) (15,465) 791 3,911 (Loss) income from continuing operations... (37,159) (8,222) 4,565 6,642 Income from discontinued operation, net of income taxes............................. 10,594 6,176 -- -- Extraordinary gain from sale of discontinued operation, net of income taxes.................................... -- 436,327 -- -- Net (loss) income.......................... $ (26,565) $ 434,281 $ 4,565 $ 6,642 ============== ============== ============== ============== Basic net (loss) income per share: (Loss) income from continuing operations............................. $ (0.32) $ (0.07) $ 0.04 $ 0.06 Income from discontinued operation....... 0.09 0.05 -- -- Extraordinary gain from sale of discontinued operation................. -- 3.78 -- -- -------------- -------------- -------------- -------------- Basic net (loss) income per share........ $ (0.23) $ 3.76 $ 0.04 $ 0.06 ============== ============== ============== ============== Diluted net (loss) income per share: (Loss) income from continuing operations............................. $ (0.32) $ (0.07) $ 0.04 $ 0.06 Income from discontinued operation....... 0.09 0.05 -- -- Extraordinary gain from sale of discontinued operation................. -- 3.78 -- -- -------------- -------------- -------------- -------------- Diluted net (loss) income per share...... $ (0.23) $ 3.76 $ 0.04 $ 0.06 ============== ============== ============== ============== Range of stock prices...................... $15.313-35.000 $12.000-17.438 $12.563-20.250 $12.500-22.500
70 QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 23. SUBSEQUENT EVENTS On March 18, 2002, the Company and McKesson Corporation ("McKesson") announced the signing of a definitive agreement to form a private joint venture ("JV") designed to leverage the operational strengths of the healthcare information businesses of each company. Under the agreement, the Company and McKesson would be co-equal owners of the JV, with a portion of the equity in the JV to be allocated to providers of de-identified healthcare data. The primary contribution by the Company will be the assets of the Company's informatics group. Subject to the prior satisfaction or waiver of applicable conditions, completion of the JV is targeted for the second quarter of 2002. On March 22, 2002, the Company acquired certain assets of Bioglan Pharma Inc. ("Bioglan"), the U.S. subsidiary of U.K.-based Bioglan Pharma Plc, in a transaction valued at L18.5 million (approximately $26.7 million). As part of the agreement, the Company has also acquired Bioglan's rights to certain other dermatology products now on the market in the United States, including ADOXA(TM), a treatment for severe acne. 71 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: We have audited the accompanying consolidated balance sheets of Quintiles Transnational Corp. (a North Carolina corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quintiles Transnational Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Raleigh, North Carolina, January 23, 2002, except with respect to the matters discussed in Note 23, as to which the date is March 22, 2002 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on the Company's directors is incorporated by reference from the Company's definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 1, 2002. Information on the Company's executive officers is included in Part I under the caption Executive Officers of the Registrant on page 16 of this report. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 1, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 1, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference from our definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 1, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.
FINANCIAL STATEMENTS FORM 10-K PAGE - -------------------- -------------- Consolidated Statements of Operations for the years ended 41 December 31, 2001, 2000 and 1999.......................... Consolidated Balance Sheets as of December 31, 2001 and 42 2000...................................................... Consolidated Statements of Cash Flows for the years ended 43 December 31, 2001, 2000 and 1999.......................... Consolidated Statements of Shareholders' Equity for the 44 years ended December 31, 2001, 2000 and 1999.............. Notes to Consolidated Financial Statements.................. 45 Report of Independent Public Accountants.................... 72
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements. (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
EXHIBIT DESCRIPTION - ------- ----------- 3.01(1) -- Amended and Restated Articles of Incorporation, as amended 3.02(2) -- Amended and Restated Bylaws, as amended 4.01 -- Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01)
73
EXHIBIT DESCRIPTION - ------- ----------- 4.02 -- Amended and Restated Bylaws, as amended (see Exhibit 3.02) 4.03(3) -- Specimen certificate for Common Stock, $0.01 par value per share 4.04(4) -- Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock 10.01(6)(13) -- Employment Agreement, dated March 13, 2001, by and between Dr. Pamela J. Kirby and Quintiles Transnational Corp. 10.02(5)(6) -- Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.03(6)(7) -- Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.04(6) -- Second Amendment to Contract of Employment, dated April 1, 2001, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.05(6)(7) -- Amended and Restated Executive Employment Agreement, dated November 30, 1999, by and between Santo J. Costa and Quintiles Transnational Corp. 10.06(6) -- Independent Consultant Agreement, dated November 20, 2001, by and between Santo J. Costa and Quintiles Transnational Corp. 10.07(6)(7) -- Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp. 10.08(6)(7) -- Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp. 10.09(6)(7) -- Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp. 10.10(6) -- Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on January 1, 2001 10.11(6)(7) -- Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated 10.12(6) -- Quintiles Transnational Corp. Nonqualified Stock Option Plan, amended January 1, 2001 10.13(8) -- Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company 10.14(9) -- Agreement for the Provision of Research Services and Lease of Business Assets dated as of March 3, 1995, between Syntex Pharmaceuticals Limited, Quintiles Scotland Limited, Quintiles (UK) Limited, and Roche Products Limited 10.15(10) -- Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc. 10.16(11) -- Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and Qfinance, Inc. 10.17(12) -- Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and Quintiles Transnational Corp. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on November 22, 2000. 10.18(14) -- Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation 10.19 -- Master Services Agreement dated as of January 1, 2001 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. [Note: Certain confidential portions of this exhibit have been omitted as indicated in the exhibit with an asterisk (*), and filed with the Securities and Exchange Commission.]
74
EXHIBIT DESCRIPTION - ------- ----------- 21 -- Subsidiaries 23.01 -- Consent of Arthur Andersen LLP 24.01 -- Power of Attorney (included on the signature page hereto) 99.01 -- Letter to the Commission regarding representations made by Arthur Andersen LLP.
- --------------- (1) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission, on November 15, 1999, and incorporated herein by reference. (2) Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference. (3) Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference. (4) Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference. (5) Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference. (6) Executive compensation plans and arrangements. (7) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference. (8) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference. (9) Exhibit to our Current Report on Form 8-K dated March 6, 1995, as filed with the Securities and Exchange Commission on March 20, 1995, and incorporated herein by reference. (10) Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference. (11) Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference. (12) Exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 14, 2000, and incorporated herein by reference. (13) Exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2001, as filed with the Securities and Exchange Commission on May 15, 2001, and incorporated herein by reference. (14) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 1, 2001, and incorporated herein by reference. (b) Reports on Form 8-K. We filed a Current Report on Form 8-K dated October 17, 2001, including as an exhibit a press release regarding our financial results for the period ended September 30, 2001. 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Durham, North Carolina, on the 22nd day of March, 2002. QUINTILES TRANSNATIONAL CORP. By: /s/ DENNIS B. GILLINGS ------------------------------------ Dennis B. Gillings, Ph.D. Chairman of the Board of Directors 76 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis B. Gillings and James L. Bierman and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ PAMELA J. KIRBY Chief Executive Officer March 22, 2002 --------------------------------------------------- Pamela J. Kirby, Ph.D. /s/ DENNIS B. GILLINGS Chairman of the Board of March 22, 2002 --------------------------------------------------- Directors Dennis B. Gillings, Ph.D. /s/ JAMES L. BIERMAN Executive Vice President and March 22, 2002 --------------------------------------------------- Chief Financial Officer James L. Bierman /s/ ROBERT C. BISHOP Director March 22, 2002 --------------------------------------------------- Robert C. Bishop, Ph.D. /s/ VAUGHN D. BRYSON Director March 22, 2002 --------------------------------------------------- Vaughn D. Bryson /s/ E. G. F. BROWN Director March 22, 2002 --------------------------------------------------- E. G. F. Brown /s/ CHESTER W. DOUGLASS Director March 22, 2002 --------------------------------------------------- Chester W. Douglass, DMD, Ph.D. /s/ JIM D. KEVER Director March 22, 2002 --------------------------------------------------- Jim D. Kever /s/ ARTHUR M. PAPPAS Director March 22, 2002 --------------------------------------------------- Arthur M. Pappas /s/ ERIC J. TOPOL Director March 22, 2002 --------------------------------------------------- Eric J. Topol, M.D. /s/ VIRGINIA V. WELDON Director March 22, 2002 --------------------------------------------------- Virginia V. Weldon, M.D.
77 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 3.01(1) -- Amended and Restated Articles of Incorporation, as amended 3.02(2) -- Amended and Restated Bylaws, as amended 4.01 -- Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01) 4.02 -- Amended and Restated Bylaws, as amended (see Exhibit 3.02) 4.03(3) -- Specimen certificate for Common Stock, $0.01 par value per share 4.04(4) -- Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock 10.01(6)(13) -- Employment Agreement, dated March 13, 2001, by and between Dr. Pamela J. Kirby and Quintiles Transnational Corp. 10.02(5)(6) -- Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.03(6)(7) -- Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.04(6) -- Second Amendment to Contract of Employment, dated April 1, 2001, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp. 10.05(6)(7) -- Amended and Restated Executive Employment Agreement, dated November 30, 1999, by and between Santo J. Costa and Quintiles Transnational Corp. 10.06(6) -- Independent Consultant Agreement, dated November 20, 2001, by and between Santo J. Costa and Quintiles Transnational Corp. 10.07(6)(7) -- Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp. 10.08(6)(7) -- Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp. 10.09(6)(7) -- Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp. 10.10(6) -- Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on January 1, 2001 10.11(6)(7) -- Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated 10.12(6) -- Quintiles Transnational Corp. Nonqualified Stock Option Plan, amended January 1, 2001 10.13(8) -- Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company 10.14(9) -- Agreement for the Provision of Research Services and Lease of Business Assets dated as of March 3, 1995, between Syntex Pharmaceuticals Limited, Quintiles Scotland Limited, Quintiles (UK) Limited, and Roche Products Limited 10.15(10) -- Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc. 10.16(11) -- Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and Qfinance, Inc.
EXHIBIT DESCRIPTION - ------- ----------- 10.17(12) -- Data Rights Agreement, dated as of May 26, 2000, by and between Healtheon/WebMD Corporation and Quintiles Transnational Corp. Confidential treatment of portions of this exhibit was granted by the Securities and Exchange Commission on November 22, 2000. 10.18(14) -- Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation 10.19 -- Master Services Agreement dated as of January 1, 2001 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. [Note: Certain confidential portions of this exhibit have been omitted as indicated in the exhibit with an asterisk (*), and filed with the Securities and Exchange Commission.] 21 -- Subsidiaries 23.01 -- Consent of Arthur Andersen LLP 24.01 -- Power of Attorney (included on the signature page hereto) 99.01 -- Letter to the Commission regarding representations made by Arthur Andersen LLP.
- --------------- (1) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission, on November 15, 1999, and incorporated herein by reference. (2) Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference. (3) Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference. (4) Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference. (5) Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference. (6) Executive compensation plans and arrangements. (7) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference. (8) Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference. (9) Exhibit to our Current Report on Form 8-K dated March 6, 1995, as filed with the Securities and Exchange Commission on March 20, 1995, and incorporated herein by reference. (10) Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference. (11) Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference. (12) Exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 14, 2000, and incorporated herein by reference. (13) Exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2001, as filed with the Securities and Exchange Commission on May 15, 2001, and incorporated herein by reference. (14) Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 1, 2001, and incorporated herein by reference. EX-10.04 3 g74742ex10-04.txt AMEND TO CONTRACT OF EMPLOYMENT/DENNIS B. GILLINGS EXHIBIT 10.04 SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT This Second Amendment to Executive Employment Agreement ("Second Amendment") is made and entered into this the 1st day of April, 2001, by and between QUINTILES TRANSNATIONAL CORP., a North Carolina Corporation (hereinafter the "Company"), and DENNIS B. GILLINGS, PH.D. (hereinafter the "Executive"). WHEREAS, the Company and Executive are parties to an Executive Employment Agreement dated February 22, 1994 (the "Employment Agreement"), a copy of which is attached hereto as Exhibit A and incorporated herein, as amended by Amendment to Executive Employment Agreement dated October 26, 1999 ("First Amendment"), a copy of which is attached hereto as Exhibit B and incorporated herein; and WHEREAS, the Company and Executive further desire to amend the Employment Agreement; NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the legal sufficiency and adequacy of which are hereby acknowledged, the parties agree to amend the Employment Agreement as follows: 1. The Employment Agreement is amended by deleting the term "Chief Executive Officer" from Sections 1, 4(c) and 4(f) and related references to that term. 2. Also, the Employment Agreement is amended by changing all references to "Chairman of the Board" to "Executive Chairman." 3. Except as herein set forth, the Employment Agreement and First Amendment are not modified or amended and the parties hereto reaffirm and agree to all of the terms and provisions of the Employment Agreement and First Amendment, as herein amended, in all respects. IN WITNESS WHEREOF, the parties have executed this Second Amendment to Executive Employment Agreement as of the day and year first written above. QUINTILES TRANSNATIONAL CORP. By: /s/ Beverly L. Rubin ------------------------------ Name: Beverly L. Rubin Title: VP, Global HR Ops and Assoc. Gen'l Counsel /s/ Dennis B. Gillings ----------------------------- DENNIS B. GILLINGS EX-10.06 4 g74742ex10-06.txt INDEPENDENT CONSULTANT AGREEMENT/SANTO J. COSTA EXHIBIT 10.06 INDEPENDENT CONSULTANT AGREEMENT This Independent Consultant Agreement (the "Agreement") is made as of the 20th day of November, 2001, by and between QUINTILES TRANSNATIONAL CORP., a North Carolina corporation ("Quintiles"), and SANTO J. COSTA, a resident of Cary, North Carolina ("Consultant"). RECITALS A. Quintiles is a contract research organization that provides services on behalf of entities engaged in the development, manufacture, distribution, and/or sale of pharmaceutical products, biotechnology products, and/or medical devices ("Clients"). Consultant is an individual who is professionally qualified to provide consulting services relating to such Client services. B. Quintiles desires to contract with Consultant for Consultant's provision of consulting services, in accordance with the terms and conditions set forth herein. C. Consultant currently has a Contract of Employment dated February 22, 1994, as amended on October 1, 1999 ("Employment Agreement"). D. Effective December 31, 2001, Consultant shall retire from Quintiles. AGREEMENTS 1. PROVISION OF CONSULTING SERVICES. Quintiles hereby engages Consultant, and Consultant hereby accepts and confirms such engagement, to provide certain consulting services, subject to terms and conditions contained herein (the "Services"), as well as the terms of the Employment Agreement that survive termination of employment. The nature and scope of the Services and other specific details relating to the Services are set forth in a Scope of Work which is attached hereto as Schedule 1 (the "Scope of Work"), and constitutes an integral part of this Agreement. Consultant agrees that he will not assign or subcontract this Agreement or use or retain any other person or entity to perform the Services, without the prior written approval of Quintiles. 2. RELATIONSHIP OF THE PARTIES. (a) Consultant acknowledges and agrees that this Agreement involves specified fees for the completion of certain tasks, and that Quintiles is not undertaking by virtue of this Agreement any responsibility for supervising, controlling or directing the conduct or performance of Consultant's obligations, and that Consultant shall exercise Consultant's own professional judgement and shall control the manner by which the Services are performed, subject only to the terms and standards of the this Agreement. (b) Notwithstanding any provision herein to the contrary or any course of conduct between the parties, the parties hereto are independent contractors, and nothing contained in this Agreement shall be construed to place them in the relationship of partners, principal and agent, employer and employee, or joint venturers. Each party agrees that it shall have no power or right to bind or obligate the other, and neither party shall hold itself out as having such authority. Consultant further represents that Consultant intends to provide services for customers other than Quintiles and its affiliates, and Consultant agrees to provide evidence of such other work upon request. (c) Quintiles shall not be responsible for providing or paying any benefits (including, but not limited to, unemployment, disability, insurance, or medical, and any pension or profit sharing plans) to Consultant, or to any employees of Consultant or any persons retained or used by Consultant to perform Services hereunder, including independent contractors, subcontractors, agents, and consultants (collectively, "Consultant Personnel"). Quintiles shall not be responsible for any federal, state, or local income tax withholding, FICA contributions, contributions to state disability funds or liability funds, or similar withholdings, or payment of any overtime wages or workers' compensation, or compliance with any laws, rules or regulations governing employees, as to Consultant or any Consultant Personnel. Quintiles has no obligation to Consultant to maintain insurance to cover the risk, if any, that Consultant creates in performing Services under this Agreement. Consultant agrees that Consultant is and will continue to be solely responsible for: (i) all matters relating to the payment of compensation and provision of benefits to Consultant and any Consultant Personnel; (ii) payment of all taxes relating to the Services, including payment of quarterly estimated taxes; and, (iii) compliance with all applicable laws, rules and regulations governing Consultant's provision of the Services, including, but not limited to, all applicable laws, rules and regulations governing unemployment, taxation, occupational safety and health, and discrimination. 3. COMPENSATION. Consultant shall be compensated in accordance with the terms of the Scope of Work attached hereto, and Consultant agrees to accept the payments described as payment in full for the Services. Prior to any payments being made to Consultant, Consultant agrees to either complete a W-9 form and supply Consultant's social security number to Quintiles. Consultant is responsible for maintaining adequate records for tax purposes. If Consultant requests summaries or break-downs of compensation in addition to the 1099 form or analogous form that Quintiles provides, Quintiles will charge Consultant a fee for preparing the requested documents, based on the amount of time expended by Quintiles. Consultant shall invoice Quintiles monthly. If an invoice or any portion thereof is the subject if a dispute, Quintiles shall withhold payment of any disputed amounts pending resolution of the dispute. 4. REPRESENTATIONS AND COVENANTS OF CONSULTANT. Consultant agrees and covenants without limitation that: (a) Consultant and any Consultant Personnel are professionally trained and duly qualified and have the equipment (if applicable), experience and expertise to perform the Services, and all such Services shall be performed in a manner commensurate with professional standards generally applicable in this industry. -2- (b) Consultant has sufficient time to dedicate to the provision of the Services to ensure that the Services are completed within any time frames or deadlines set forth in this Agreement, including any Schedules attached hereto. (c) Consultant and any Consultant Personnel shall perform all Services in compliance with: (i) all applicable federal and state laws, statutes, rules, regulations and orders (including all applicable approval and qualification requirements thereunder), including, without limitation, the Federal Food, Drug and Cosmetic Act, as amended, and all regulations thereunder; (ii) all applicable good clinical practices and guidelines; (iii) all applicable standard operating procedures; (iv) all applicable Protocols; and, (iv) the provisions of this Agreement. (d) Consultant and any Consultant Personnel have not been, and will not use in any capacity in the performance of this Agreement, the services of any person or entity, currently or ever debarred under 21 U.S.C. ss.335a or convicted of a felony for conduct relating to the regulation or handling of any drug product. (e) Consultant shall notify Quintiles immediately if, during the term of this Agreement, Consultant or any Consultant Personnel comes under investigation by the U.S. Food & Drug Administration (the "FDA") for debarment or disqualification or is debarred or disqualified. Consultant shall notify Quintiles immediately if the FDA or any other regulatory authority requests permission to or does inspect Consultant's records in connection with the Services provided under this Agreement, and Consultant will deliver to Quintiles promptly all materials, correspondence, statements, forms, and records which Consultant receives, obtains or generates pursuant to any such inspection. (f) Consultant will not divulge or improperly use any confidential information of any third party or infringe upon any intellectual property right of third party, (including, but not limited to, any current or former employer or client) in performing the Services. (g) During the term of this Agreement, Consultant will permit Quintiles' representatives to examine the work performed hereunder and the facilities at which the work is conducted at reasonable times and in a reasonable manner to determine that the project assignment is being conducted in accordance with the agreed task and that the facilities are adequate. (h) Consultant agrees that Consultant will not act in a manner that will detrimentally affect the operations, prospects, or reputation of Quintiles. 5. CONFIDENTIAL AND PROPRIETARY INFORMATION. It is understood that during the course of this Agreement, Consultant may be exposed to documents, information and materials which are confidential and proprietary to Quintiles and/or the Client, including, but not limited to the Work Product (as defined in Section 6 below) and any data, materials, know-how, methods, techniques, inventions, processes, trade secrets, improvements, procedures, manuals, personnel data, financial -3- information, computer technical expertise, and other intellectual properties and assets relating to: (a) the Client's or Quintiles' business operations, procedures, methods, software, or pricing; or, (b) the research, development, manufacture, characteristics, use, testing, packaging, labeling, storage, distribution, processing or destruction of any pharmaceutical product, biotechnology product or medical device to which the Services pertain (hereinafter "Confidential Information"). All Confidential Information, whether written, verbal, electronic, tangible or intangible, made available, disclosed or otherwise made known to Consultant as a result of services under this Agreement shall be considered strictly confidential, and shall be considered the sole property of Quintiles and/or the Client, as the case may be. Consultant will not reveal, publish or otherwise disclose any such Confidential Information to any third party without the prior written consent of Quintiles. The Confidential Information shall be used by Consultant and disclosed to and used by Consultant Personnel only to the extent needed to perform the Services. Consultant agrees to ensure that all Consultant Personnel to whom Confidential Information is disclosed are informed of the confidential nature of the Confidential Information and agree to be bound by the provisions of Sections 5 and 6 herein. Consultant will be responsible for any disclosure or misuse by any Consultant Personnel of any Confidential Information. The duty of confidentiality in this Section shall not apply to disclosure of Confidential Information: (a) which Consultant can demonstrate from written records was previously known to it; (b) which is publicly available other than by breach of this Agreement by Consultant or Consultant Personnel; (c) which is lawfully disclosed to Consultant on a non-confidential basis by a third party who is not obligated to Quintiles and/or Client or any other party to retain such information in confidence; or (d) which is required by law to be disclosed; provided that, to the extent possible, Consultant gives prior notice to Quintiles of such required disclosure and cooperates in Quintiles' or Client's attempts to restrict such disclosure. The originals and all copies of Confidential Information and Work Product shall be promptly returned to Quintiles without request, in good order, upon completion or termination of the Services, or at any other time upon the request of Quintiles. 6. WORK PRODUCT. All data, information, analyses, materials, documentation, reports, computer programs, forms, inventions, improvements, modifications or works of authorship, generated, created, conceived or derived by Consultant or Consultant Personnel in connection with or as a result of the performance of Services by Consultant or Consultant Personnel (collectively, "Work Product") shall be considered works made for hire and shall be owned, together with all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property rights or laws, by Quintiles or the Client, as the case may be. Consultant shall hold all Work Product in trust for Quintiles or the Client, as the case may be. If any of the Work Product may not, by operation of law, be considered work made for hire, or if ownership of all right, title and interest of the intellectual property rights therein shall not otherwise vest exclusively in Quintiles or the Client, as appropriate, Consultant hereby assigns (and agrees to ensure that any Consultant Personnel assigns) and upon the future creation thereof automatically assigns, to Quintiles or the Client, as appropriate, without further consideration, the ownership of all Work Product. Consultant agrees to perform such further acts as may be reasonably necessary or desirable to transfer, perfect and defend Quintiles' or the Client's ownership of the Work Product, provided -4- that Consultant shall be reimbursed for reasonable expenses and time committed to such actions. If Quintiles is unable for any reason to secure Consultant's signature to apply for or to pursue any application for any United States or foreign letters patent, copyright registrations or other registrations covering inventions assigned hereunder to Quintiles or the Client, then Consultant irrevocably designates and appoints Quintiles and its authorized officers and agents as Consultant's agent and attorney-in-fact, to act for and in Consultant's behalf and stead to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, and registration of copyrights or trademarks, with the same legal force and effect as if executed by Consultant. Consultant shall disclose to Quintiles all Work Product made by Consultant or Consultant Personnel to permit a determination as to whether or not the Work Product should be the property of Quintiles or the Client, as appropriate. Consultant agrees that the Client shall be deemed a third-party beneficiary to this Agreement as to any Work Product or Confidential Information is owned by the Client, and the Client shall be entitled to enforce the provisions of Sections 5 and 6 with respect thereto. Any inventions or other intellectual property rights that Consultant can show by reliable evidence were developed by Consultant independently of any Confidential Information or Work Product, and independently of any other data, equipment or facilities supplied pursuant to this Agreement, shall remain the exclusive property of Consultant. 7. TERM AND TERMINATION. The term of the consulting engagement provided for in this Agreement shall commence upon the date written in Schedule 1 and shall continue until terminated pursuant to Schedule 1. Following expiration of the term of this Agreement, Consultant shall fully cooperate with Quintiles in all matters relating to the closure of Consultant's work on behalf of Quintiles, and with the orderly transfer of (and will not retain any copies of) all Work Product, Confidential Information, or other documents and materials relating to this Agreement to Quintiles. Consultant agrees that, upon termination, expiration, or completion of this Agreement, Consultant will sign and deliver to Quintiles a "Termination Certification" in the form attached hereto as Exhibit A. 8. RELEASE OF INFORMATION. Consultant shall not disclose publicly or utilize in any statement, advertisement or publicity the existence of this Agreement or Consultant's association with Quintiles or Client or use the name of Quintiles or Client without the authorization of Quintiles. Consultant shall also hold in confidence the nature of the Services to be performed hereunder. 9. MISCELLANEOUS. (a) Any notice to be given by one party to the other shall be in writing and delivered either personally, by a recognized overnight courier service, or by mail and shall be deemed given, if personally, upon presentation to an office of the other, if by overnight courier, upon delivery, and if by mail, seventy-two (72) hours after deposit in United States Mail in the mail district of the depositor, certified postage prepaid, addressed to the address of the other as set forth below, which addresses may be changed by giving notice thereof as provided herein. -5- If to Quintiles: If to Consultant: John S. Russell, Esq. Santo J. Costa 4709 Creekstone Drive, Ste.200 108 Martinique Place Durham, NC 27703 Cary, NC 27511 Phone: (919) 998-2418 Phone: (919) 467-1121 Fax: (919) 998-2090 Fax: (919) 380-7433 (b) This Agreement sets forth the entire Agreement and all representations between the parties concerning the Services except those provisions in the Employment Agreement that survive upon termination of employment. No oral statements or written material not specifically incorporated herein shall be of any force or effect. No modification or waiver of this Agreement shall be effected unless in writing and duly executed and delivered by each party to the other. (c) The validity of and the rights and duties of the parties under this Agreement shall be governed by the laws of the State of North Carolina, where this Agreement is deemed to have been entered into, exclusive of its choice of law provisions. (d) The waiver by any party of the breach or violation of this Agreement shall not operate as, or be construed to be, a waiver of any subsequent breach of the same or other provision hereof. (e) This Agreement and amendments thereto shall be in writing and may be executed in duplicate copies. Each such duplicate copy shall be deemed an original, but each duplicate copy shall constitute one and the same instrument. (f) Quintiles' corporate affiliates may use the services of Consultant under the terms of this Agreement. Any such Quintiles affiliate shall be subject to all of the terms and conditions applicable to Quintiles under this Agreement and entitled to all rights and protections afforded Quintiles under this Agreement. (g) Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator shall be binding and may be entered in any court having jurisdiction thereof. Such arbitration shall be filed and conducted at the office of the AAA closest to the Quintiles office where this Agreement was signed, and shall be conducted in English by one arbitrator mutually acceptable to the parties selected in accordance with AAA Rules. (h) Notwithstanding the termination, completion, or expiration of this Agreement, the rights and obligations under this Agreement which by intent or meaning have validity beyond the terms hereof (including, but not limited to, the rights and obligations surrounding confidentiality and work product) shall survive the termination or expiration of this Agreement. -6- IN WITNESS WHEREOF, this Agreement was entered into as of the date last written below. QUINTILES TRANSNATIONAL CORP. Consultant: By: /s/ John S. Russell By: /s/ Santo J. Costa ----------------------------------------- ------------------------------ (Print Name): John S. Russell (Print Name): Santo J. Costa ------------------------------- -------------------- Title: Sr. Vice President & General Counsel Title: -------------------------------------- --------------------------- Date: 11/27/01 Date: 20 November 2001 --------------------------------------- ---------------------------- -7- EXHIBIT A CONSULTING TERMINATION CERTIFICATION This is to certify that neither I nor any Consultant Personnel have possession of, or have failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, business plans, financial information, specifications, standard operating procedures, drawings, blueprints, sketches, materials, equipment, Confidential Information, Work Product, documents or other property, or copies or reproductions thereof (whether in electronic, paper, audio, video or any other format), belonging to Quintiles or to any Client, or their affiliates, successors, or assigns. I further agree that I understand and agree that I and any Consultant Personnel must continue to abide by the confidentiality and proprietary information provisions contained in the Master Independent Consultant Agreement. Date Nov 20, 2001 /s/ Santo J . Costa ------------------------------- ------------------------------------- Signature Santo J. Costa ------------------------------------- (Type or Print Name) -8- SCHEDULE 1 SCOPE OF WORK TERM: One (1) year, beginning on January 1, 2002. The parties shall review this Agreement in May of 2002, to determine whether to extend it for an additional period of time. FEE: Up to One Hundred Thousand Fifty Dollars ($150,000) per year to be paid as follows: Consultant shall receive $2,000 per day for business conducted in the United States, and $3,000 per day for business conducted outside of the United States. Consultant shall be paid monthly, and is to submit invoices for amounts charged on a daily basis and for reimbursement for expenses incurred. The Company can authorize additional services over the $150,000 maximum above. EXPENSES: Consultant shall be reimbursed for reasonable and necessary business expenses, including travel expenses of incurred in performing Consulting Services pursuant to this Agreement OTHER: (1) Consultant's title shall be "Senior Consulting Executive"; (2) Consultant shall maintain an office at Quintiles, complete with computer system, e-mail account and business telephone connection (including cellular telephone), along with administrative assistance; and (3) Consultant will be reimbursed for membership dues to the Governor's Club. SERVICES: Consulting Services shall include, but are not limited to, the following: o Maintain status as one of the senior relationship partners on the GlaxoSmithKline and J&J accounts o Assist PharmaBio team in identifying opportunities and providing access to senior executives o Assist Sr. VP of Corporate Strategic Development in identification of commercial opportunities, and the creation and review of customer relationship strategies o Harvest and channel business opportunities to Quintiles o Represent the company as necessary with PhRMA, as well as related industry associations and such other projects as reasonably requested by the Company. Consulting Services shall be rendered in Durham, North Carolina, or such locations as reasonably requested by the Company. -9- EX-10.10 5 g74742ex10-10.txt EQUITY COMPENSATION PLAN AS AMENDED 1-1-2001 EXHIBIT 10.10 QUINTILES TRANSNATIONAL CORP. EQUITY COMPENSATION PLAN (AS AMENDED AND RESTATED JANUARY 1, 2001) QUINTILES TRANSNATIONAL CORP. EQUITY COMPENSATION PLAN (AS AMENDED AND RESTATED JANUARY 1, 2001) TABLE OF CONTENTS ARTICLE I - GENERAL PROVISIONS.................................................1 ARTICLE II - DEFINITIONS.......................................................2 ARTICLE III - ADMINISTRATION...................................................6 ARTICLE IV - INCENTIVE STOCK OPTIONS..........................................11 ARTICLE V - NONQUALIFIED STOCK OPTIONS........................................13 ARTICLE VI - STOCK APPRECIATION RIGHTS........................................14 ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS.....................16 ARTICLE VIII - RESTRICTED STOCK...............................................18 ARTICLE IX - ACCELERATION EVENTS..............................................20 ARTICLE X - AMENDMENT AND TERMINATION.........................................22 ARTICLE XI - MISCELLANEOUS PROVISIONS.........................................23 QUINTILES TRANSNATIONAL CORP. EQUITY COMPENSATION PLAN ARTICLE I - GENERAL PROVISIONS 1.1 The Plan is designed for the benefit of the executives, directors and key employees of the Corporation and its Subsidiaries; to attract and retain for the Corporation and its subsidiaries personnel of exceptional ability; to motivate such personnel through added incentives to make a maximum contribution to greater profitability; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to executive compensation. 1.2 Awards under the Plan may be made to Participants in the form of (i) Incentive Stock Options; (ii) Nonqualified Stock Options; (iii) Stock Appreciation Rights; and (iv) Restricted Stock. 1.3 The Plan shall be effective February 21, 1994 (the "Effective Date"), subject to the approval of the Plan by a vote of a majority of the Board of Directors and by a majority of the votes cast by the holders of the Corporation's Common Stock that may be voted at the meetings of the Board of Directors and shareholders, respectively, scheduled for February 21, 1994. -1- ARTICLE II - DEFINITIONS DEFINITIONS. Except where the context otherwise indicates, the following definitions apply: 2.1 "Acceleration Event" means the occurrence of an event defined in Article IX of the Plan. 2.2 "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. (All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered.) 2.3 "Agreement" means the written agreement evidencing each Award granted to a Participant under the Plan. 2.4 "Award" means an award granted to a Participant in accordance with the provisions of the Plan, including, but not limited to, a Stock Option, Stock Right, Restricted Stock, or any combination of the foregoing. 2.5 "Board" means the Board of Directors of the Corporation. 2.6 "Board-Approved Change in Control" shall have the meaning set forth in Section 9.3 of the Plan. 2.7 "Change in Control" shall have the meaning set forth in Section 9.2 of the Plan. 2.8 "Change in Control Price" shall have the meaning set forth in Section 9.8 of the Plan. 2.9 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. (All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.) 2.10 "Committee" means the Compensation Committee or such other committee consisting of three (3) or more members as may be appointed by the Board to administer this Plan pursuant to Article III. To the extent required by Rule 16b-3 under the Act, the Committee shall consist of individuals who are members of the Board and Non-Employee Directors. Committee members may also be appointed for such limited purposes as may be provided by the Board. 2.11 "Corporation" means Quintiles Transnational Corp., a North Carolina corporation, and its successors and assigns. "Corporation" also means Quintiles Transnational Corp. and its Subsidiaries, unless the context clearly indicates otherwise. 2.12 "Disability" means disability as determined under procedures established by the Committee or in any Award. 2.13 "Discount Stock Options" means the Nonqualified Stock Options that provide for an exercise price of less than the Fair Market Value of the Stock at the date of the Award. -2- 2.14 "Early Retirement" means retirement from active employment with the Corporation or any Subsidiary, with the express consent of the Committee, pursuant to the early retirement provisions established by the Committee or in any Award. 2.15 "Effective Date" shall have the meaning set forth in Section 1.3 of the Plan. 2.16 "Eligible Participant" means any executive, key employee or director of the Corporation or its Subsidiaries, as shall be determined by the Committee, as well as any other person whose participation the Committee determines is in the best interest of the Corporation, subject to limitations as may be provided by the Code, the Act or the Committee. 2.17 "ERISA" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. 2.18 "Fair Market Value" means, with respect to any given day, the closing price of the Stock reported on the Nasdaq National Market for such day, or if the Stock is not traded on such day, then on the next day on which the Stock is traded, all as reported by such source as the Committee may select. The Committee may establish an alternative method of determining Fair Market Value. 2.19 "Incentive Stock Option" means a Stock Option granted under Article IV of the Plan, and as defined in Section 422 of the Code. 2.20 "Limited Stock Appreciation Rights" means a Stock Right that is exercisable only in the event of a Change in Control and/or a Potential Change in Control, as described in Section 6.8 of this Plan, that provides for an amount payable solely in cash, equal to the excess of the Stock Appreciation Right Fair Market Value of a share of Stock on the day the Stock Right is surrendered over the price at which a Participant could exercise a related Stock Option to purchase the share of Stock. 2.21 "Non-Employee Directors" shall have the meaning set forth under Rule 16b-3(b)(3) of the Act. 2.22 "Nonqualified Stock Option" means a Stock Option granted under Article V of the Plan. 2.23 "Normal Retirement" means retirement from active employment with the Corporation or any Subsidiary on or after age 65, or pursuant to such other requirements as may be established by the Committee or in any Award. 2.24 "Option Grant Date" means, as to any Stock Option, the latest of: (a) the date on which the Committee grants the Stock Option by entering into an Award Agreement with the Participant; (b) the date the Participant receiving the Stock Option becomes an employee of the Corporation or its Subsidiaries, to the extent employment status is a condition of the -3- grant or a requirement of the Code or the Act; or (c) such other date (later than the dates described in (i) and (ii) above) as the Committee may designate. 2.25 "Participant" means an Eligible Participant to whom an Award of equity-based compensation has been granted and who has entered into an Agreement evidencing the Award. 2.26 "Potential Change in Control" shall have the meaning set forth in Section 9.4 of the Plan. 2.27 "Plan" means the Quintiles Transnational Corp. Equity Compensation Plan, as amended from time to time. 2.28 "Restricted Stock" means an Award of Stock under Article VIII of the Plan, which Stock is issued with the restriction that the holder may not sell, transfer, pledge, or assign such Stock and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Stock, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. 2.29 "Restriction Period" means the period commencing on the date an Award of Restricted Stock is granted and ending on such date as the Committee shall determine. 2.30 "Retirement" means Normal or Early Retirement. 2.31 "Stock" means shares of Common Stock of the Corporation, as may be adjusted pursuant to the provisions of Section 3.11. 2.32 "Stock Appreciation Right" means a Stock Right, as described in Article VI of this Plan, that provides for an amount payable in Stock and/or cash, as determined by the Committee, equal to the excess of the Fair Market Value of a share of Stock on the day the Stock Right is exercised over the price at which the Participant could exercise a related Stock Option to purchase the share of Stock. 2.33 "Stock Appreciation Right Fair Market Value" means a value established by the Committee for the exercise of a Stock Appreciation Right or a Limited Stock Appreciation Right. 2.34 "Stock Option" means an Award under Article IV or V of the Plan of an option to purchase Stock. A Stock Option may be either an Incentive Stock Option or a Nonqualified Stock Option. 2.35 "Stock Right" means an Award under Article VI of the Plan. A Stock Right may be either a Stock Appreciation Right or a Limited Stock Appreciation Right. -4- 2.36 "Subsidiary" or "Subsidiaries" means: (a) for the purpose of an Incentive Stock Option, any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (b) for the purposes of all other types of equity-based compensation provided for under the Plan, any corporation (or partnership, joint venture, limited liability company, or other enterprise) of which the Corporation owns or controls, directly or indirectly, fifty percent (50%) or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). 2.37 "Termination of Employment" means the discontinuance of employment of a Participant with the Corporation or its Subsidiaries for any reason other than a Transfer. The determination of whether a Participant has discontinued employment shall be made by the Committee in its discretion. In determining whether a Termination of Employment has occurred, the Committee may provide that service as a consultant or service with a business enterprise in which the Corporation has a significant ownership interest shall be treated as employment with the Corporation. The Committee shall have the discretion, exercisable either at the time the Award is granted or at the time the Participant terminates employment, to establish as a provision applicable to the exercise of one or more Awards that during the limited period of exercisability following Termination of Employment, the Award may be exercised not only with respect to the number of shares of Stock for which it is exercisable at the time of the Termination of Employment but also with respect to one or more subsequent installments for which the Award would have become exercisable had the Termination of Employment not occurred. 2.38 "Transfer" means a change of employment of a Participant within the group consisting of the Corporation and its Subsidiaries. -5- ARTICLE III - ADMINISTRATION 3.1 This Plan shall be administered by the Committee. The Committee, in its discretion, may delegate to one or more of its members, or to one or more officers of the Corporation, all or part of the Committee's authority and duties with respect to grants and awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Act; provided, however, that such persons must exercise any authority so delegated to them within any guidelines established by the Committee. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. Members of the Committee shall be appointed originally, and as vacancies occur, by the Board, to serve at the pleasure of the Board. The Board may serve as the Committee, if by the terms of the Plan all Board members are otherwise eligible to serve on the Committee. 3.2 The Committee shall meet at such times and places as it determines. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Committee. A memorandum signed by all of its members shall constitute the decision of the Committee without necessity, in such event, for holding an actual meeting. 3.3 The Committee shall have the exclusive right to interpret, construe and administer the Plan, to select the persons who are eligible to receive an Award, and to act in all matters pertaining to the granting of an Award and the contents of the Agreement evidencing the Award, including, without limitation, the determination of the number of Stock Options, Stock Rights, and shares of Restricted Stock subject to an Award and the form, terms, conditions and duration of each Award, and any amendment thereof consistent with the provisions of the Plan. All acts, determinations and decisions of the Committee made or taken pursuant to grants of authority under the Plan or with respect to any questions arising in connection with the administration and interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Participants, Eligible Participants and their beneficiaries. 3.4 The Committee may adopt such rules, regulations and procedures of general application for the administration of this Plan, as it deems appropriate. 3.5 Without limiting the foregoing Sections 3.1, 3.2, 3.3 and 3.4, and notwithstanding any other provisions of the Plan, the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to an Award in the event of an Acceleration Event as defined in Article IX. Such action may include, but shall not be limited to, establishing, amending or waiving the forms, terms, conditions and duration of an Award and the Award Agreement, so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, an accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section 3.5 by adopting rules and regulations of general applicability to all Participants or to certain -6- categories of Participants, by including, amending or waiving terms and conditions in an Award and the Award Agreement, or by taking action with respect to individual Participants. 3.6 The maximum aggregate number of shares of Stock subject to Awards under the Plan shall be five million nine hundred fifty-eight thousand and four (5,958,004) shares, plus an annual increase to be added as of January 1 of each year equal to the lesser of (i) five hundred thousand (500,000) shares, (ii) five percent (5%) of any increase, other than any increase due to Awards under this Plan or any other similar plan of the Corporation, in the number of authorized and issued shares (on a fully diluted basis) above the number of authorized and outstanding shares as of the preceding January 1, or (iii) a lesser number determined by the Board. (a) If, for any reason, any shares of Stock awarded or subject to purchase under the Plan are not delivered or purchased, or are reacquired by the Corporation, for reasons including, but not limited to, a forfeiture of Restricted Stock or termination, expiration or cancellation of a Stock Option or Stock Right, or any other termination of an Award without payment being made in the form of Stock (whether or not Restricted Stock), such shares of Stock shall not be charged against the aggregate number of shares of Stock available for Award under the Plan, and shall again be available for Award under the Plan. (b) To the extent a Stock Right granted in connection with a Stock Option is exercised without payment being made in the form of Stock (whether or not Restricted Stock), the shares of Stock that otherwise would have been issued upon the exercise of such related Stock Option shall not be charged against the aggregate number of shares of Stock subject to an Award under the Plan, and shall again be available for Award under the Plan. 3.7 Each Award granted under the Plan shall be evidenced by a written Award Agreement. Each Award Agreement shall be subject to and incorporate (by reference or otherwise) the applicable terms and conditions of the Plan, and any other terms and conditions (not inconsistent with the Plan) required by the Committee. 3.8 The Corporation shall not be required to issue or deliver any certificates for shares of Stock prior to: (a) the listing of such shares on any stock exchange or the national market system on which the Stock may then be listed; and (b) the completion of any registration or qualification of such shares of Stock under any federal or state law, or any ruling or regulation of any government body that the Corporation shall, in its discretion, determine to be necessary or advisable. -7- 3.9 All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or the national market system upon which the Stock is then listed and any applicable federal or state laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Corporation. 3.10 Subject to the restrictions on Restricted Stock, as provided in Article VIII of the Plan and in the Restricted Stock Award Agreement, each Participant who receives an Award of Restricted Stock shall have all of the rights of a shareholder with respect to such shares of Stock, including the right to vote the shares to the extent, if any, such shares possess voting rights and receive dividends and other distributions. Except as provided otherwise in the Plan or in an Award Agreement, no Participant awarded a Stock Option or Stock Right shall have any right as a shareholder with respect to any shares of Stock covered by his or her Stock Option or Stock Right prior to the date of issuance to him or her of a certificate or certificates for such shares of Stock. 3.11 If any reorganization, recapitalization, reclassification, stock split-up, stock dividend, or consolidation of shares of Stock, merger or consolidation of the Corporation or its subsidiaries or sale or other disposition by the Corporation or its Subsidiaries of all or a portion of its assets, any other change in the Corporation's or its Subsidiaries' corporate structure, or any distribution to shareholders other than a cash dividend results in the outstanding shares of Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of Stock or other securities of the Corporation, or for shares of Stock or other securities of any other corporation; or new, different or additional shares or other securities of the Corporation or of any other corporation being received by the holders of outstanding shares of Stock, then equitable adjustments shall be made by the Committee in: (a) the limitation of the aggregate number of shares of Stock that may be awarded as set forth in Section 3.6 of the Plan; (b) the number and class of Stock that may be subject to an Award and that have not been issued or transferred under an outstanding Award; (c) the purchase price to be paid per share of Stock under outstanding Stock Options and the number of shares of Stock to be transferred in settlement of outstanding Stock Rights; and (d) the terms, conditions or restrictions of any Award and Award Agreement, including the price payable for the acquisition of Stock; provided, however, that all adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code. -8- 3.12 In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment or settlement in any such action, suit or proceeding, except as to matters as to which the Committee member has been negligent or engaged in misconduct in the performance of his duties; provided, that within sixty (60) days after institution of any such action, suit or proceeding, a Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 3.13 The Committee may require each person purchasing shares of Stock pursuant to a Stock Option or other Award under the Plan to represent to and agree with the Corporation in writing that he is acquiring the shares of Stock without a view to distribution thereof. The certificates for such shares of Stock may include any legend that the Committee deems appropriate to reflect any restrictions on transfer. 3.14 The Committee shall be authorized to make adjustments in the terms and conditions of Awards in recognition of unusual or nonrecurring events affecting the Corporation (or any Subsidiary, if applicable) or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement in the manner and to the extent it shall deem desirable to carry it into effect. If the Corporation (or any Subsidiary, if applicable) shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. 3.15 The Committee shall have full power and authority to determine whether, to what extent and under what circumstances, any Award shall be canceled or suspended. In particular, but without limitation, all outstanding Awards to any Participant shall be canceled if (a) the Participant, without the consent of the Committee, while employed by the Corporation or any Subsidiary or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in (other than any nonsubstantial interest, as determined by the Committee), any business that is in competition with the Corporation or with any business in which the Corporation and/or its Subsidiaries have a substantial interest as determined by the Committee; or (b) is terminated for cause as determined by the Committee. -9- 3.16 The following limitations shall apply to grants of Options: (a) No Eligible Participant shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 shares of Stock. (b) In connection with his or her initial service, an Eligible Participant may be granted Options to purchase up to an additional 200,000 shares that shall not count against the limit set forth in subsection (a) above. (c) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 3.11. (d) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Article IX of the Plan), the cancelled Option will be counted against the limits set forth in subsections (a) and (b) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. -10- ARTICLE IV - INCENTIVE STOCK OPTIONS 4.1 Each provision of this Article IV and of each Incentive Stock Option granted hereunder shall be construed in accordance with the provisions of Section 422 of the Code, and any provision hereof that cannot be so construed shall be disregarded. Incentive Stock Options shall be granted only to Eligible Participants, each of whom may be granted one or more such Incentive Stock Options at such time or times determined by the Committee following the Effective Date until February 21, 2004, subject to the following conditions: (a) The Incentive Stock Option price per share of Stock shall be set in the Award Agreement, but shall not be less than one hundred percent (100%) of the Fair Market Value of the Stock at the time of the Option Grant Date. (b) The Incentive Stock Option and its related Stock Right, if any, may be exercised in full or in part from time to time within ten (10) years from the Option Grant Date, or such shorter period as may be specified by the Committee in the Award; provided, that in any event, the Incentive Stock Option and related Stock Right shall lapse and cease to be exercisable upon, or within such period following, a Termination of Employment as shall have been determined by the Committee and as specified in the Incentive Stock Option Award Agreement or its related Stock Right Award Agreement; provided, however, that such period following a Termination of Employment shall not exceed three (3) months unless employment shall have terminated: (i) as a result of death or Disability, in which event such period shall not exceed one year after the date of death or Disability; and (ii) as a result of death, if death shall have occurred following a Termination of Employment and while the Incentive Stock Option or Stock Right was still exercisable, in which event such period shall not exceed one year after the date of death; provided further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Incentive Stock Option or any related Stock Right. (c) The aggregate Fair Market Value, determined as of the Option Grant Date, of the shares of Stock with respect to which Incentive Stock Options are first exercisable during any calendar year by any Eligible Participant shall not exceed one hundred thousand dollars (100,000); provided, however, to the extent permitted under Section 422 of the Code: (i) if a Participant's employment is terminated by reason of death, Disability or Retirement and the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period applied without regard to the one hundred thousand dollar (100,000) limitation contained in Section 422 -11- of the Code is greater than the portion of such option that is immediately exercisable as an Incentive Stock Option during such post-termination period under Section 422, such excess shall be treated as a Nonqualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of an Acceleration Event, any portion of such Award that is not exercisable as an Incentive Stock Option by reason of the one hundred thousand dollar ($100,000) limitation contained in Section 422 of the Code shall be treated as a Nonqualified Stock Option. (d) Incentive Stock Options shall be granted only to Eligible Participants who, at the time of the Option Grant Date, do not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation, unless the Incentive Stock Option Price per share of Stock shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Stock at the time of the Option Grant Date and the Incentive Stock Options by their terms are not exercisable after the expiration of five (5) years from the Option Grant Date. (e) The Committee may adopt any other terms and conditions that it determines should be imposed for Incentive Stock Options to qualify under Section 422 of the Code, as well as any other terms and conditions not inconsistent with this Article IV, as determined by the Committee. 4.2 The Committee may at any time offer to buy out for a payment in cash, Stock, or Restricted Stock an Incentive Stock Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. 4.3 If the Incentive Stock Option Award Agreement so provides, the Committee may require that all or part of the shares of Stock to be issued upon the exercise of an Incentive Stock Option shall take the form of Restricted Stock, which shall be valued on the date of exercise, as determined by the Committee, on the basis of the Fair Market Value of such Restricted Stock determined without regard to the forfeiture restrictions involved. -12- ARTICLE V - NONQUALIFIED STOCK OPTIONS 5.1 One or more Stock Options may be granted as Nonqualified Stock Options to Eligible Participants to purchase shares of Stock at such time or times determined by the Committee, following the Effective Date, subject to the terms and conditions set forth in this Article V. 5.2 The Nonqualified Stock Option price per share of Stock shall be established in the Award Agreement and may be less than one hundred percent (100%) of the Fair Market Value at the time of the grant. 5.3 The times and conditions upon which a Nonqualified Stock Option and its related Stock Right, if any, will terminate where a Participant to whom such an option and related right has been granted under the Plan terminates, or the Corporation terminates, his or her employment, consultant, or service relationship with the Corporation shall be determined by the Committee when the option and any related right are granted; provided, however, that in no event shall an option or related right be exercisable more than ten (10) years from the date it was granted. Nothing in the Plan or in any option or related right granted pursuant to the Plan shall (a) confer on any individual any right to continue in the employ of the Corporation or to continue any consultant or service relationship with the Corporation or (b) interfere in any way with the Corporation's right to terminate such individual's employment, consultant or service relationship at any time. 5.4 The Nonqualified Stock Option Award Agreement may include any other terms and conditions not inconsistent with this Article V or Article VII below, as determined by the Committee. -13- ARTICLE VI - STOCK APPRECIATION RIGHTS 6.1 A Stock Appreciation Right may be granted to an Eligible Participant in connection with an Incentive Stock Option or a Nonqualified Stock Option granted under Article IV or Article V of this Plan, or may be granted independent of any related Stock Option. 6.2 A related Stock Appreciation Right shall entitle a holder of a Stock Option, within the period specified for the exercise of the Stock Option, to surrender the unexercised Stock Option (or a portion thereof) and to receive in exchange therefor a payment in cash or shares of Stock having an aggregate value equal to the amount by which the Fair Market Value of each share of Stock exceeds the Stock Option price per share of Stock, times the number of shares of Stock under the Stock Option, or portion thereof, that is surrendered. 6.3 Each related Stock Appreciation Right granted hereunder shall be subject to the same terms and conditions as the related Stock Option, including limitations on transferability, and shall be exercisable only to the extent such Stock Option is exercisable and shall terminate or lapse and cease to be exercisable when the related Stock Option terminates or lapses. The grant of Stock Appreciation Rights related to Incentive Stock Options must be concurrent with the grant of the Incentive Stock Options. With respect to Nonqualified Stock Options, the grant either may be concurrent with the grant of the Nonqualified Stock Options or in connection with Nonqualified Stock Options previously granted under Article V, which are unexercised and have not terminated or lapsed. 6.4 The Committee shall have sole discretion to determine in each case whether the payment with respect to the exercise of a Stock Appreciation Right will be in the form of all cash, all Stock, or any combination thereof. If payment is to be made in Stock, the number of shares of Stock shall be determined based on the Fair Market Value of the Stock on the date of exercise. If the Committee elects to make full payment in Stock, no fractional shares of Stock shall be issued and cash payments shall be made in lieu of fractional shares. 6.5 The Committee shall have sole discretion as to the timing of any payment made in cash, Stock, or a combination thereof, upon exercise of Stock Appreciation Rights. Payment may be made in a lump sum, in annual installments or may be otherwise deferred; and the Committee shall have sole discretion to determine whether any deferred payments may bear amounts equivalent to interest or cash dividends. 6.6 Upon exercise of a Stock Appreciation Right, the number of shares of Stock subject to exercise under any related Stock Option shall automatically be reduced by the number of shares of Stock represented by the Stock Option or portion thereof that is surrendered. 6.7 The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. -14- 6.8 In its sole discretion, the Committee may grant Limited Stock Appreciation Rights under this Article VI. Limited Stock Appreciation Rights become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee, in its sole discretion, may specify at grant. Such Limited Stock Appreciation Rights shall be settled solely in cash. A Limited Stock Appreciation Right shall entitle the holder of the related Stock Option to surrender such Stock Option, or any portion thereof, to the extent unexercised in respect of the number of shares of Stock as to which such Limited Stock Appreciation Right is exercised, and to receive a cash payment equal to the difference between (a) the Stock Appreciation Right Fair Market Value (at the date of surrender) of a share of Stock for which the surrendered Stock Option or portion thereof is then exercisable, and (b) the price at which a Participant could exercise a related Stock Option to purchase the share of Stock. Such Stock Option shall, to the extent so surrendered, thereupon cease to be exercisable. -15- ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS 7.1 Each Stock Option and Stock Right shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option or Stock Right and any provisions that may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. 7.2 Unless determined otherwise by the Committee (or a designee of the Committee, as applicable), a Stock Option or Stock Right shall not be transferable by the Participant other than by will or by the laws of descent and distribution, or, to the extent allowed by applicable law, pursuant to a qualified domestic relations order as defined by the Code or ERISA and the rules thereunder, and shall be exercisable during the lifetime of the Participant only by him or by his guardian or legal representative. If the Committee (or its designee) in its sole discretion permits an option or Stock Right to be transferable, it shall be transferable only by gift or by domestic relations order to or for the benefit of a "family member" of the Participant, as such term is defined in the General Instructions to Form S-8 under the Securities Act of 1933, as amended. 7.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee, subject to limitations set forth in the Stock Option Award Agreement. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options that permit the Participant to deliver shares of Stock (or other evidence of ownership of Stock satisfactory to the Corporation) with a Fair Market Value equal to the Stock Option price as payment. 7.4 No cash dividends shall be paid on shares of Stock subject to unexercised Stock Options. The Committee may provide, however, that a Participant to whom a Stock Option has been granted that is exercisable in whole or in part at a future time for shares of Stock shall be entitled to receive an amount per share equal in value to the cash dividends, if any, paid per share on issued and outstanding Stock, as of the dividend record dates occurring during the period between the date of the grant and the time each such share of Stock is delivered pursuant to exercise of such Stock Option or the related Stock Right. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (a) paid in cash or Stock either from time to time prior to, or at the time of the delivery of, such Stock, or upon expiration of the Stock Option if it shall not have been fully exercised; or (b) converted into contingently credited shares of Stock (with respect to which dividend equivalents may accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Stock (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 3.6. -16- 7.5 The Committee, in its sole discretion, may authorize payment of interest equivalents on dividend equivalents that are payable in cash at a future time. 7.6 In the event of death or Disability, the Committee, with the consent of the Participant or his legal representative, may authorize payment, in cash or in Stock, or partly in cash and partly in Stock, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Stock subject to a Stock Option and the Option price in consideration of the surrender of the Stock Option. 7.7 If a Participant is required to pay to the Corporation an amount with respect to income and employment tax withholding obligations in connection with exercise of a Nonqualified Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, in its discretion and subject to such rules as it may adopt, may permit the Participant to satisfy the obligation, in whole or in part, by making an irrevocable election that a portion of the total Fair Market Value of the shares of Stock subject to the Nonqualified Stock Option and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, be paid in the form of cash in lieu of the issuance of Stock and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction. 7.8 The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at the same price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Option surrendered shall be canceled and the shares of Stock previously subject to it shall be available for the grant of other Stock Options. -17- ARTICLE VIII - RESTRICTED STOCK 8.1 Restricted Stock Awards may be made to certain Participants as incentives for the performance of future services that will contribute materially to the successful operation of the Corporation and its Subsidiaries. Awards of Restricted Stock may be made either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash payments made outside of the Plan. 8.2 With respect to Awards of Restricted Stock, the Committee shall: (a) determine the purchase price, if any, to be paid for such Restricted Stock, which may be equal to or less than par value and may be zero, subject to such minimum consideration as may be required by applicable law; (b) determine the length of the Restriction Period; (c) determine any restrictions applicable to the Restricted Stock such as service or performance, other than those set forth in this Article VIII; (d) determine if the restrictions shall lapse as to all shares of Restricted Stock at the end of the Restriction Period or as to a portion of the shares of Restricted Stock in installments during the Restriction Period; and (e) determine if dividends and other distributions on the Restricted Stock are to be paid currently to the Participant or withheld by the Corporation for the account of the Participant. 8.3 Awards of Restricted Stock must be accepted within a period of sixty (60) days (or such shorter periods as the Committee may specify at grant) after the Award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required. The prospective recipient of a Restricted Stock Award shall not have any rights with respect to such Award, unless such recipient has executed a Restricted Stock Award Agreement and has delivered a fully executed copy thereof to the Committee, and has otherwise complied with the applicable terms and conditions of such Award. 8.4 Except when the Committee determines otherwise, or as otherwise provided in the Restricted Stock Award Agreement, if a Participant terminates employment with the Corporation or its Subsidiaries for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and shall be reacquired by the Corporation. 8.5 Except as otherwise provided in this Article VIII, no shares of Restricted Stock received by a Participant shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period. -18- 8.6 To the extent not otherwise provided in a Restricted Stock Award Agreement, in cases of death, Disability or Retirement or in cases of special circumstances, the Committee, if it finds that a waiver would be appropriate, may elect to waive any or all remaining restrictions with respect to such Participant's Restricted Stock. 8.7 In the event of hardship or other special circumstances of a Participant whose employment with the Corporation or any Subsidiary is involuntarily terminated (other than for cause), the Committee may waive in whole or in part any or all remaining restrictions with respect to any or all of the Participant's Restricted Stock, based on such factors and criteria as the Committee may deem appropriate. 8.8 The certificates representing shares of Restricted Stock may either: (a) be held in custody by the Corporation until the Restriction Period expires or until restrictions thereon otherwise lapse, and the Participant shall deliver to the Corporation a stock power endorsed in blank relating to the Restricted Stock; and/or (b) be issued to the Participant and registered in the name of the Participant, and shall bear an appropriate restrictive legend and shall be subject to appropriate stop-transfer orders. 8.9 Except as provided in this Article VIII, a Participant receiving a Restricted Stock Award shall have, with respect to the shares of Restricted Stock covered by any Award, all of the rights of a shareholder of the Corporation, including the right to vote the shares to the extent, if any, such shares possess voting rights, and the right to receive any dividends; provided, however, the Committee may require that any dividends on such shares of Restricted Stock shall be automatically deferred and reinvested in additional Restricted Stock subject to the same restrictions as the underlying Award, or may require that dividends and other distributions on Restricted Stock shall be withheld by the corporation for the account of the Participant. The Committee shall determine whether interest shall be paid on amounts withheld, the rate of any such interest, and the other terms applicable to such withheld amounts. 8.10 If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, unrestricted certificates for such shares shall be delivered to the Participant. 8.11 In order to better ensure that Award payments actually reflect the performance of the Corporation and its Subsidiaries and the service of the Participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. -19- ARTICLE IX - ACCELERATION EVENTS 9.1 For the purposes of the Plan, an Acceleration Event shall occur in the event of a "Potential Change in Control," or "Change in Control" or a "Board-Approved Change in Control", as those terms are defined below. 9.2 A "Change in Control" shall be deemed to have occurred if: (a) Any "Person" as defined in Section 3(a)(9) of the Act, including a "group" (as that term is used in Sections 3(d)(3) and 14(d)(2) of the Act), but excluding the Corporation and any Subsidiary and any employee benefit plan sponsored or maintained by the Corporation and any Subsidiary (including any trustee of such plan acting as trustee) or Dennis B. Gillings, Ph.D. individually, who: (i) makes a tender or exchange offer for any shares of the Corporation's Stock (as defined below) pursuant to which any shares of the Corporation's Stock are purchased (an "Offer"); or (ii) together with its "affiliates" and "associates" (as those terms are defined in Rule 12b-2 under the Act) becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under the Act) of at least twenty percent (20%) of the Corporation's Stock (an "Acquisition"); (b) The shareholders of the Corporation approve a definitive agreement or plan to merge or consolidate the Corporation with or into another corporation, to sell or otherwise dispose of all or substantially all of its assets, or to liquidate the Corporation (individually, a "Transaction"); or (c) When, during any period of twenty-four (24) consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such twenty-four (24) month period shall be deemed to have satisfied such twenty-four (24) month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such twenty-four (24) month period) or by prior operation of this Section 9.2(c). 9.3 A "Board-Approved Change in Control" shall be deemed to have occurred if the Offer, Acquisition or Transaction, as the case may be, is approved by a two-thirds (2/3) majority of the Directors serving as members of the Board at the time of the Potential Change in Control or Change in Control. -20- 9.4 A "Potential Change in Control" means the happening of any one of the following: (a) The approval by shareholders of an agreement by the Corporation, the consummation of which would result in a Change in Control of the Corporation, as defined in Section 9.2; or (b) The acquisition of Beneficial Ownership, directly or indirectly, by any entity, person or group (other than the Corporation or any Subsidiary or any Corporation or Subsidiary employee benefit plan (including any trustee of such plan acting as such trustee) or Dennis B. Gillings, Ph.D. individually), of securities of the Corporation representing ten percent (10%) or more of the combined voting power of the Corporation's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Corporation has occurred for the purposes of this Plan. 9.5 Upon the occurrence of an Acceleration Event, subject to the approval of the Committee if the Acceleration Event results from a Board-Approved Change in Control, the Committee in its discretion may declare any or all then outstanding Stock Options (and any or all related Stock Rights outstanding for at least six (6) months) not previously exercisable and vested as immediately exercisable and fully vested, in whole or in part. 9.6 Upon the occurrence of an Acceleration Event, subject to the approval of the Committee if the Acceleration Event results from a Board-Approved Change in Control, the Committee in its discretion, may declare the restrictions applicable to Awards of Restricted Stock to have lapsed, in which case the Corporation shall remove all restrictive legends and stop-transfer orders applicable to the certificates for such shares of Stock, and deliver such certificates to the Participants in whose names they are registered. 9.7 The value of all outstanding Stock Options, Stock Rights, and Restricted Stock, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price," as defined in Section 9.8 as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. 9.8 For purposes of Section 9.7, "Change in Control Price" means the highest price per share of Stock paid in any transaction reported on the Nasdaq National Market or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Corporation at any time during the sixty (60) day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights (or Limited Stock Appreciation Rights) relating to such Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights (or Limited Stock Appreciation Rights). -21- ARTICLE X - AMENDMENT AND TERMINATION 10.1 The Board, upon recommendation of the Committee, or otherwise, at any time and from time to time (subject to the provisions of Section 9.7), may amend or terminate the Plan as may be necessary or desirable to implement or discontinue this Plan or any provision thereof. To the extent required by Rule 16b-3 under the Act, no amendment, without approval by the Corporation's shareholders, shall: (a) alter the group of persons eligible to participate in the Plan; (b) except as provided in Section 3.6, increase the maximum number of shares of Stock or Stock Options or Stock Rights that are available for Awards under the Plan; (c) extend the period during which Incentive Stock Option Awards may granted beyond February 21, 2004; (d) limit or restrict the powers of the Committee with respect to the administration of this Plan; (e) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option; (f) materially increase the benefits accruing to Participants under this Plan; (g) materially modify the requirements as to eligibility for participation in this Plan; or (h) change any of the provisions of this Article X. 10.2 No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Corporation shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Award theretofore granted to such Participant under this Plan; provided, however, the Committee retains the right and power to: (a) annul any Award if the Participant is terminated for cause as determined by the Committee; (b) provide for the forfeiture of shares of Stock or other gain under an Award as determined by the Committee for competing against the Corporation or any Subsidiary; and (c) convert any outstanding Incentive Stock Option to a Nonqualified Stock Option. 10.3 If an Acceleration Event has occurred, no amendment or termination shall impair the rights of any person with respect to an outstanding Award as provided in Article IX. -22- ARTICLE XI - MISCELLANEOUS PROVISIONS 11.1 Nothing in the Plan or any Award granted hereunder shall confer upon any Participant any right to continue in the employ of the Corporation or its Subsidiaries (or to serve as a director thereof) or interfere in any way with the right of the Corporation or its subsidiaries to terminate his or her employment at any time. Unless specifically provided otherwise, no Award granted under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Corporation or its Subsidiaries for the benefit of its employees unless the Corporation shall determine otherwise. No Participant shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Corporation under the Plan, such right shall, except as otherwise provided by the Committee, be no greater than the right of an unsecured general creditor of the Corporation. All payments to be made hereunder shall be paid from the general funds of the Corporation, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as provided in Article VIII with respect to Restricted Stock and except as otherwise provided by the Committee. 11.2 The Corporation may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes that the Corporation or any Subsidiary is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, any Stock Right or the exercise thereof, or in connection with any Restricted Stock, including, but not limited to, the withholding of payment of all or any portion of such Award or another Award under this Plan until the Participant reimburses the Corporation or its Subsidiaries for the amount the Corporation or its Subsidiaries is required to withhold with respect to such taxes, or canceling any portion of such Award or another Award under this Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Corporation for the purpose of paying such Award or another Award under this Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. 11.3 The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. 11.4 The terms of the Plan shall be binding upon the Corporation, its Subsidiaries, and their successors and assigns. 11.5 Neither a Stock Option, Stock Right, nor any Restricted Stock shall be transferable except as provided for herein or in an Award Agreement. If any Participant makes such a transfer in violation hereof, any obligation of the Corporation shall forthwith terminate. -23- EX-10.12 6 g74742ex10-12.txt NONQUALIFIED STOCK OPTION PLAN, AMENDED 1-1-2001 EXHIBIT 10.12 QUINTILES TRANSNATIONAL CORP. NONQUALIFIED STOCK OPTION PLAN (Amended January 1, 2001) 1. PURPOSE The purpose of the Quintiles Transnational Nonqualified Stock Option Plan (the "Plan") is to further the success of Quintiles Transnational Corp. (the "Company") by making shares of the Company's Common Stock ("Common Stock") available for purchase by eligible employees, officers, directors and consultants of the Company, or any affiliated company or partnership in which the Company has an ownership interest, and other persons receiving services from or providing services to the Company, in order to provide an additional incentive to such persons to continue their relationship with the Company and in order to give such persons a greater interest in the Company's success. This purpose will be carried out through the granting of options which do not meet the statutory requirements of Sections 422 or 423 of the Internal Revenue Code of 1986, as amended. 2. STOCK SUBJECT TO PLAN Subject to the provisions of Section 9 of the Plan, the Company's Board of Directors (the "Board") shall reserve for issuance upon the exercise of the options an aggregate of 29,577,462 authorized and unissued shares of Common Stock, plus an annual increase to be added as of January 1 of each year equal to the lesser of (i) five hundred thousand (500,000) shares, (ii) five percent (5%) of any increase, other than any increase due to the issuance of shares under the Plan or any other similar plan of the Company, in the authorized and issued shares (on a fully diluted basis) of Common Stock, or other securities directly or indirectly exercisable for or convertible into Common Stock, since the immediately preceding January 1 or (iii) a lesser number determined by the Board. The Board may from time to time reserve additional shares of authorized and unissued Common Stock for issuance upon exercise of options. If any option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Common Stock subject to the expired or terminated option shall again be available for options under the Plan. 3. ADMINISTRATION The Board shall designate a committee of at least two "Non-Employee Directors" as defined in Rule 16b-3(b)(3) promulgated under Section 16 of the Securities Exchange Act of 1934 (the "Committee") to administer the Plan. The Committee shall report all of its actions to the Board. The Board may from time to time remove members from the Committee and appoint their successors. The Board shall fill all vacancies on the Committee however caused. Except as otherwise expressly provided in the Plan, the Committee shall have absolute discretionary authority (a) to determine the individuals to receive options, the times when options shall be granted, the number of shares to be subject to each option, the option price, the option period, and the time or times when each option shall be exercisable; (b) to interpret the Plan; (c) to prescribe, amend, and rescind rules and regulations relating to the Plan; (d) to determine the terms and provisions (and amendments of the terms and provisions) of the option agreements to be entered into between the Company and each Participant granted an option under the Plan (which option agreements need not be identical), including such terms and provisions as shall be required in the Committee's judgment to conform to any change in any applicable law or regulation; and (e) to make all other determinations the Committee shall deem necessary or advisable for the Plan's administration. No member of the Committee or the Board shall be liable to any person for any action or determination which he or she makes in good faith. 4. ELIGIBILITY Subject to the provisions of Section 3, any employee, officer, director, and consultant of the Company or any affiliated company or partnership in which the Company has an ownership interest and other persons receiving services from or providing services to the Company designated by the Committee shall be eligible to receive options under the Plan (the "Participants"). In designating Participants and in recommending the number of shares of Common Stock to be covered by each option granted to a Participant, the Committee may take into account the nature of the services rendered by or for each Participant, his or her present and potential contributions to the Company's success, and such other factors as the Committee in its discretion shall deem relevant. The Company may grant additional options to Participants who have already been granted options under the Plan. 5. OPTION PRICE The Committee shall determine the purchase price of the shares of Common Stock covered by each option, which purchase price may be above or below the fair market value of the Common Stock at the time of the grant, as determined by the Committee. 6. EXERCISE OF OPTION The period during which an option may be exercised shall be determined by the Committee when the option is granted and shall not extend more than ten (10) years from the date on which the option is granted. The term of each option, however, shall not extend for more than the period prescribed in Sections 8 or 10 of the Plan. Except as provided in the option agreement relating to such option, an option may be exercised in whole or in part at any time during its term. The Committee may impose vesting or other restrictions on the exercisability or conditions of options. Except as provided in the option agreement relating to such option, the purchase price of the shares of Common Stock subject to the option shall be paid in full in cash upon the exercise of the option. If the option agreement so provides, the purchase price may be paid in whole or in part by surrendering shares of Common Stock or by surrendering the option to the Company. If shares or options are used to pay all or part of the purchase price, the cash and any shares or options surrendered must have a fair market value (determined as of the day preceding the date of exercise) that is not less than the purchase price for the number of shares for which the option is being exercised. The holder of an option under the Plan shall not have any of the rights of a shareholder 2 with respect to the Common Stock subject to the option until such shares shall be issued to him or her upon the exercise of the option and payment of the purchase price. 7. TRANSFERABILITY OF OPTION Except as determined by the Committee and set forth in the option agreement relating to such option, no option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution (including by pledge or hypothecation) and shall be exercisable only by the Participant or his or her duly appointed legal representative. 8. TERMINATION OF RELATIONSHIP WITH THE COMPANY The times and conditions upon which an option will terminate where a Participant to whom an option has been granted under the Plan terminates, or the Company terminates, his or her employment, consultant, or service relationship with the Subsidiary or an affiliated company or partnership in which the Subsidiary has an ownership interest shall be determined by the Committee when the option is granted; provided, however, that in no event shall an option be exercisable more than ten (10) years from the date it was granted. Nothing in the Plan or any option granted pursuant to the Plan shall (a) confer on any individual any right to continue in the employ of the Company or to continue any consultant or service relationship with the Company or (b) interfere in any way with the Company's right to terminate such individual's employment, consultant or service relationship at any time. 9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION In the event of a change in the Company's Common Stock by reason of any stock dividend, split-up, recapitalization, combination or exchange of shares, merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation or similar action, the Committee shall make an appropriate adjustment of the number and class of shares of Common Stock subject to and the purchase price for each then outstanding option, consistent with and as provided in the corresponding option agreement under the Plan. In the event of any such change in the outstanding Common Stock, the Committee shall adjust appropriately the aggregate number and class of shares of Common Stock reserved and available under the Plan appropriately, and the Committee's determination on adjustment shall be conclusive. 10. TERMINATION OF OPTIONS ON MERGER OR SALE OF ASSETS Except as otherwise provided in an agreement, a liquidation of the Company, a merger or consolidation in which the Company is not the surviving or resulting corporation, or a sale of all or substantially all of the Company's assets shall cause every option outstanding under the Plan to terminate on the effective date of such action. In such an event, each option holder shall have the right, within his or her sole discretion, to exercise before the effective date of such action any or all of the options he or she then holds, but only to the extent that such options are otherwise exercisable under the terms of the Plan. Any options not so exercised shall terminate on the effective date of such action. (Amendment effective as of August 5, 1999). 3 11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted under the Plan may conform to any changes in the law or in any other respect which the Board may deem to be in the best interest of the Company. Modifications or amendments to the Plan are not required to be approved by the Company's shareholders, except to the extent required by law or by the Company's bylaws. No termination, modification, or amendment of the Plan without the consent of the Participant to whom any option shall have been previously granted shall adversely affect such Participant's rights under such option. Unless terminated earlier in accordance with this Section, the Plan shall terminate when all shares of Common Stock reserved for issuance under the Plan have been issued. 12. EFFECTIVENESS OF THE PLAN The Plan shall become effective on such date as the Board shall determine (the "Effective Date"). The exercise of each option granted pursuant to the Plan shall be subject to the condition that if at any time the Company shall determine in its discretion that (a) the satisfaction of withholding tax or other withholding liabilities, (b) the listing on any securities exchange or the registration or qualification under any state or federal law of any shares of Common Stock otherwise deliverable upon its exercise, or (c) the consent or approval of any regulatory body or the shareholders is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares of Common Stock pursuant to such exercise, then, in any such event, such exercise shall not be effective unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions unacceptable to the Company. 13. TIME OF GRANTING OPTIONS Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board or the Committee will constitute the granting of an option pursuant to the Plan. The granting of an option pursuant to the Plan will occur only when a written option agreement is duly executed and delivered by and on behalf of the Company and the Participant to whom such option is to be granted. 14. APPLICABLE LAW Except as otherwise provided herein, the Plan shall be construed and enforced according to the laws of the State of North Carolina. 4 EX-10.19 7 g74742ex10-19.txt MASTER SERVICES AGREEMENT DATED 1-1-2001 EXHIBIT 10.19 [*] --Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Commission Rule 24b-2. MASTER SERVICES AGREEMENT THIS MASTER SERVICES AGREEMENT (the "Agreement") is made as of the 1st day of January, 2001 by and between Quintiles Transnational Corporation, a North Carolina corporation (the "Company"), and A. M. Pappas & Associates, LLC, a North Carolina limited liability company ("AMP&A"). BACKGROUND AMP&A has experience beneficial to the Company's business and has access to a network of business associates and consultants with experience beneficial to the Company's business. The Company and AMP&A desire for the Company to engage AMP&A to provide certain consulting services to the Company on the terms and conditions set forth herein. NOW, THEREFORE, the Company and AMP&A agree as follows: ARTICLE I CONSULTING SERVICES Section 1.01 Engagement. On the terms and subject to the conditions set forth in this Agreement, the Company hereby engages AMP&A to perform, and AMP&A hereby agrees to provide, the consulting services agreed by the Company and AMP&A from time to time and set forth in written project statements separately executed by the Company and AMP&A (each, a "Project Statement"). Each Project Statement will specify for the corresponding project, as applicable, the services to be performed by AMP&A or at its direction, the compensation to be paid by the Company, and such other matters as the Company and AMP&A determine, and will constitute part of this Agreement. In the event of any inconsistency between the body of this Agreement and a Project Statement, the Project Statement will control. An optional sample form of Project Statement is attached as Exhibit A to this Agreement. Section 1.02 Status of AMP&A. The parties acknowledge and agree that AMP&A will be an independent contractor to the Company and will have the responsibility to provide all necessary employees, agents or consultants to properly perform its obligations under this Agreement. (a) AMP&A understands that it is responsible for paying its own income tax in accordance with United States law as well as all applicable state and local taxes. AMP&A further understands that it may be liable for Social Security ("FICA") tax, to be paid in accordance with all applicable laws with respect to its own employees. (b) The Company will not be required to withhold state and Federal income taxes, or to make payments for FICA, unemployment insurance or any other payroll taxes, with regard to any employees, agents or consultants of AMP&A. (c) Consistent with its duties and obligations under this Agreement, AMP&A shall at all times maintain sole and exclusive control and discretion over its business, operations, employees, agents, and consultants and the manner of performance of the services required to be rendered by AMP&A hereunder, including with respect to staffing and resource allocation. All decisions regarding whether or what assistance AMP&A will enlist in performing services pursuant to this Agreement will be entirely within the discretion of AMP&A, which will be free to employ or engage any person, firm, corporation or other entity to assist AMP&A in performing services pursuant to this Agreement, subject only to the requirements of Section 3.01 hereof regarding the disclosure of confidential information. (d) The Company shall not be responsible for and shall not obtain worker's compensation, disability benefits insurance, unemployment or employment security insurance coverage for any person whom AMP&A shall employ or engage to assist AMP&A in performing services pursuant to this Agreement. To the extent that any such insurance coverage, or any other type of insurance coverage, is or shall become required by law, it will be obtained by AMP&A at its own expense. (e) AMP&A is not eligible for, nor entitled to, and shall not participate in, any of the Company's pension, health or other fringe benefit plans, if any such plans exist, such participation in these fringe benefit plans being limited solely to the Company's employees. (f) At no time will either party hold itself out to be the employer, employee, lessee, sublessee, partner or joint venturer of the other party. Neither party hereto shall have the express or implied right or authority to assume or create any obligation on behalf of or in the name of the other party, or to bind the other party in regard to any contract, agreement or undertaking with any third party, unless otherwise agreed in a writing signed by both parties. (g) AMP&A and its agents, employees and contractors retain the right to perform work for others during the term of this Agreement, including work of the same kind as contemplated hereunder, pursuant to Section 3.03 hereof. Section 1.03. Information about the Company. The Company will cooperate with AMP&A and provide to AMP&A all such materials and information regarding the Company and its business and financial condition as AMP&A may request from time to time during and in connection with AMP&A's engagement hereunder. The Company acknowledges that AMP&A will rely primarily upon information so provided, without any independent investigation, and that AMP&A does not assume any responsibility for the accuracy or completeness thereof. -2- ARTICLE II COMPENSATION AND INDEMNIFICATION Section 2.01 Consulting Fee. (a) The Company shall pay AMP&A at the rate(s) specified in each corresponding Project Statement for each day of consulting work in the United States (each, a "USA Work Day") and each day of consulting work in markets other than the United States (each, an "International Work Day"). Collectively, USA Work Days and International Work Days shall be referred to herein as "Work Days". Each USA Work Day shall consist of eight (8) accumulated hours of consulting time and each International Work Day shall consist of ten (10) accumulated hours of consulting time, which shall include travel on behalf or at the request of the Company. (b) In addition, the Company shall pay AMP&A the success fees (if any) specified in each corresponding Project Statement for AMP&A's role in transactions between the Company and third parties. (c) Promptly upon execution of each Project Statement, the Company will pay AMP&A a retainer in the amount specified in such Project Statement, which AMP&A will apply to payment of AMP&A's invoices for services rendered in connection with such Project Statement. The portion of the retainer (if any) designated in each Project Statement as non-refundable will be non-refundable. AMP&A promptly will refund the Company any remaining balance of the refundable portion of any such retainer after resolution of AMP&A's final invoice upon termination or conclusion of the corresponding Project Statement. (d) Except as set forth in the applicable Project Statement, AMP&A will render monthly invoices by the last business day of each month for the total number of Work Days (including any fraction thereof) performed during that month, which shall be paid by the Company within fifteen (15) days of receipt. (e) In the event of termination of this Agreement for any reason, AMP&A shall render a final invoice, due and payable promptly following receipt by the Company, for all Work Days (including any fraction thereof) performed by AMP&A prior to termination and for all expenses incurred or committed to by AMP&A prior to termination. Section 2.02 Expenses. The Company will reimburse AMP&A within fifteen (15) days of receipt of AMP&A's invoice for all reasonable out-of-pocket and administrative expenses incurred by AMP&A in performing services pursuant to this Agreement, including, without limitation, travel, food, lodging, telephone and telecopier expenses, as well as the fees and expenses of any third party consultants engaged by AMP&A in connection with rendering services hereunder. -3- Section 2.03 Limited Liability. With regard to the services to be performed by AMP&A (which term shall include its affiliates and its and their respective officers, directors, employees, agents and consultants in this Section 2.03) pursuant to the terms of this Agreement, AMP&A shall not be liable in any manner whatsoever under this Agreement or otherwise to the Company, or to anyone who may claim any right due to AMP&A's relationship with the Company, except for damages determined in a final judgment by a court of competent jurisdiction to have resulted from actions taken or omitted due to AMP&A's willful misconduct, gross negligence or knowing violation of law. Notwithstanding the foregoing, AMP&A shall not have any liability for any special, incidental or consequential damages, including without limitation damages for any loss of opportunity, revenue or profit, for or in connection with the engagement contemplated hereby or the existence, furnishing, functioning, use or application of any information, data, documentation, work product, conclusion, recommendation or report provided pursuant to this Agreement, regardless of whether AMP&A shall have been advised or should have known of the possibility of such damages. ************ Section 2.04 Indemnification. (a) The Company shall indemnify and hold AMP&A (which term shall include its affiliates and its and their employees, agents and consultants in this Section 2.04) free and harmless to the full extent permitted by law or in equity, for and from any and all losses, obligations, liabilities, damages, costs, expenses, claims, actions, judgments, attorneys' fees and attachments, joint or several, arising from or in connection with third-party claims under this Agreement or any third-party claim, matter or transaction occurring prior to the date hereof related to AMP&A's services hereunder, except to the extent the same shall be determined in a final judgment by a court of competent jurisdiction to have resulted from actions taken or omitted due to AMP&A's willful misconduct, gross negligence or knowing violation of law. (b) Subject to Section 2.03, AMP&A shall indemnify and hold the Company (which term shall include its affiliates and its and their employees, agents and consultants in this Section 2.04) free and harmless to the full extent permitted by law or in equity, for and from any and all losses, obligations, liabilities, damages, costs, expenses, claims, actions, judgments, attorneys' fees and attachments, joint or several, arising from or in connection with third-party claims under this Agreement or any third-party claim, matter or transaction occurring prior to the date hereof related to AMP&A's services hereunder, but only to the extent the same shall be determined in a final judgment by a court of competent jurisdiction to have resulted from actions taken or omitted due to AMP&A's willful misconduct, gross negligence or knowing violation of law. -4- (c) At its option, the Company shall defend AMP&A against any such claim or action or obtain separate counsel for AMP&A. If AMP&A is provided separate counsel, the fees and expenses of such counsel shall be indemnified expenses hereunder. The Company further agrees that it will not, without the prior written consent of AMP&A, settle, compromise, or consent to entry of judgment in respect of any matter for which AMP&A may seek indemnification hereunder unless AMP&A is the beneficiary of a general release from any and all liability in connection therewith. (d) At its option, AMP&A shall defend the Company against any such claim or action or obtain separate counsel for the Company. If the Company is provided separate counsel, the fees and expenses of such counsel shall be indemnified expenses hereunder. AMP&A further agrees that it will not, without the prior written consent of the Company, settle, compromise, or consent to entry of judgment in respect of any matter for which the Company may seek indemnification hereunder unless the Company is the beneficiary of a general release from any and all liability in connection therewith. Section 2.05 ************ Section 2.06 Force Majeure. AMP&A shall not be liable to the Company nor be deemed to have defaulted under or breached this Agreement for any failures, errors, delays or other conditions or consequences arising from or caused by events beyond AMP&A's control, including, without limitation, sabotage, failures or delays in transportation, equipment or communication, labor disputes, accidents or acts of nature. ARTICLE III DISCLOSURE; BUSINESS OPPORTUNITIES Section 3.01 Non-Disclosure of Confidential Information. (a) In the course of AMP&A's engagement hereunder, AMP&A may have access to confidential information and trade secrets relating to the Company's business. During the term of this Agreement and thereafter for a period of five (5) years, AMP&A shall not directly or indirectly disclose to any third person any such confidential information or trade secrets without the Company's prior consent, except as required by law or in the course of AMP&A's engagement hereunder. (b) The following information shall not be considered confidential or secret: (i) Information which is already or hereafter becomes generally available to the public, except as a result of the breach of AMP&A's duty of confidentiality hereunder. -5- (ii) Information which the Company agrees may be disclosed. (iii) Information which was known to AMP&A prior to the transmittal thereof from the Company. (iv) Information which AMP&A received from a third party which had the right to possess and to disclose the information. (v) The existence of this Agreement and the consulting relationship between AMP&A and the Company. Section 3.02 Disclosure of Consulting Relationship. AMP&A shall have the right to disclose the existence of this consulting relationship with the Company pursuant to this Agreement; provided, however, that AMP&A shall not disclose any confidential information or trade secrets of the Company covered by Section 3.01 hereof, and that any disclosures to the media shall be made only with the consent of the Company. Section 3.03 Other Business Opportunities. Neither this Agreement nor any policy of the Company shall prevent or restrict AMP&A from engaging in any other business activities for its own account or on behalf of others including, without limitation, business activities of the type conducted by the Company, or from investing in or performing any consultation services for any other individual or entity including, without limitation, investing in or performing the type of consultation provided under or contemplated by this Agreement for any individual or entity engaged in business activities of the type conducted by the Company. AMP&A shall inform the Company of all other individuals and entities engaged in business activities of the type conducted by the Company for whom AMP&A provides or intends to provide consultation services, or with whom AMP&A holds a directorate. The Company acknowledges and agrees that (a) AMP&A may obtain information about other companies and persons in the course of AMP&A's activities therewith; (b) except with such companies' or persons' consent, AMP&A will not make such information available to the Company, nor will AMP&A make any such information about the Company available to such companies or persons except as permitted by this Agreement; and (c) the Company shall not assert any claim or defense against AMP&A for AMP&A's failure to furnish any such information to the Company or by reason of AMP&A's activities with such other companies and persons. ARTICLE IV MISCELLANEOUS Section 4.01 Termination. Either party hereto may terminate this Agreement or any Project Statement, with or without cause, upon written notice delivered sixty (60) days in advance to the other party. This Agreement shall remain in effect until so terminated. Termination of this Agreement will constitute termination (on the same basis) of all Project Statements then in effect. AMP&A shall render a final invoice upon termination as provided -6- in Section 2.01 above. Upon delivery of written notice of termination to AMP&A by the Company, AMP&A shall immediately cease to perform work for or on behalf of the Company, unless authorized in writing by the Company. Section 4.02 Severability. If any provision or portion of this Agreement is judicially or administratively interpreted or construed as being in violation of controlling law in any jurisdiction, such provision or portion shall be inoperative in such jurisdiction and the remainder of this Agreement shall remain binding upon the parties hereto in such jurisdiction with the Agreement as a whole unaffected elsewhere. Section 4.03 Notices and Other Communications. Every notice required under or contemplated by this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or one (1) day after deposit with any nationally recognized overnight carrier or three (3) days after deposit with the U.S. Post Office by registered or certified mail, postage prepaid and addressed to the party to be notified as follows: To AMP&A: A. M. Pappas & Associates, LLC 2222 Chapel Hill-Nelson Highway Beta Building, Suite 420 Durham, NC 27713 Attention: Mr. Ford S. Worthy Senior Vice President To the Company: Quintiles Transnational Corp. 4709 Creekstone Drive Riverbirch Building, Suite 300 Morrisville, NC 27560 Attention: Ron Wooten Senior Vice President, Finance or at such other address as the intended recipient previously shall have designated by written notice to the other party in like manner. It is the responsibility of the party giving notice to obtain a receipt for delivery of the notice, if that party considers such a receipt advisable. Section 4.04 Counterparts. This Agreement may be executed in any number of counterparts and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument. Section 4.05 Law to Govern. The validity, construction and enforceability of this Agreement shall be governed in all respects by the law of the State of North Carolina, without regard to its conflicts of laws rules, and the parties hereby irrevocably consent to the -7- non-exclusive jurisdiction and venue of the State and Federal courts located within North Carolina. Section 4.06 Written Agreement to Govern. This Agreement, together with all Project Statements, sets forth the entire understanding and supersedes all prior and contemporaneous agreements between the parties relating to the subject matter contained herein and merges all prior and contemporaneous discussions between them, and no party shall be bound by any definition, condition, representation, warranty, covenant or provision other than as expressly stated in or contemplated by this Agreement or as subsequently shall be set forth in writing and executed by a duly authorized representative of the party to be bound thereby. Section 4.07 Assignability. Neither this Agreement nor any right or obligation hereunder is assignable in whole or in part, whether by operation of law or otherwise, by either party hereto without the express written consent of the other party, and any such attempted assignment shall be void and unenforceable. Notwithstanding the above, AMP&A may assign all of its rights hereunder to or cause services required of AMP&A hereunder to be performed by any entity or association owned or controlled by AMP&A without the Company's prior written consent. This Agreement and the rights and obligations hereunder shall be binding upon, and shall inure to the benefit of any proper successor or assignee. Section 4.08 No Waiver of Rights. All waivers hereunder must be made in writing, and failure of any party at any time to require another party's performance of any obligation under this Agreement shall not affect the right subsequently to require performance of that obligation. Any waiver of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision or a waiver or modification of the provision. Section 4.09 Attorneys' Fees. If any obligation to compensate AMP&A arising out of this Agreement shall not be paid when due and AMP&A shall engage an attorney to collect that indebtedness, the Company shall be liable to pay AMP&A its reasonable attorneys' fees as well as all other costs and expenses incurred with respect to the collection of that indebtedness. Section 4.10 Subject Headings. The subject headings of the Articles and Sections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of the provisions of this Agreement. Section 4.11 Survival. Notwithstanding any provision in this Agreement to the contrary, the provisions of Sections 2.01 (Consulting Fee), 2.02 (Expenses), 2.03 (Limited Liability), 2.04 (Indemnification), 3.01 (Disclosure of Confidential Information), 3.03 (Other Business Opportunities), 4.09 (Attorneys' Fees), and 4.12 (Non-Solicitation) hereof shall survive any termination of this Agreement and AMP&A's engagement hereunder. -8- Section 4.12 Non-Solicitation. During the term of this Agreement and for six (6) months after the termination hereof, the Company shall not, without the payment to AMP&A of a separation fee in an amount equal to fifty percent (50%) of such person's total compensation package being offered, but not less than $1,000,000, directly or indirectly employ or otherwise engage any officer, director, employee or agent of AMP&A or any of its affiliates. Section 4.13 Dispute Resolution. Each party shall use its respective best, good faith efforts to resolve amicably any dispute arising out of or in any way relating to this Agreement or AMP&A's engagement by the Company. The parties shall submit any such dispute not so resolved and concerning the determination of AMP&A's fees hereunder to the accounting firm of Arthur Andersen (or any other "Big Five" accounting firm upon which the parties shall agree) for resolution, and such firm's determination shall be final and binding upon the parties. The parties shall submit any other such dispute not so resolved to mediation and, if necessary, binding arbitration administered in Raleigh, North Carolina by the American Arbitration Association in accordance with its then-current commercial rules. Subject to Section 4.05 above, any court of competent jurisdiction may enter judgment upon any accounting determination or arbitration award so made. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. QUINTILES TRANSNATIONAL CORPORATION A. M. PAPPAS & ASSOCIATES, LLC By: /s/ Ron Wooten By: /s/ Ford S. Worthy ------------------------------ -------------------------- Its: SVP - Finance Its: Senior Vice President -9- EXHIBIT A A. M. PAPPAS & ASSOCIATES, LLC/QUINTILES TRANSNATIONAL CORPORATION PROJECT STATEMENT NO. __ --------------------------------------------------------------------- This document constitutes a "Project Statement" made under the Master Services Agreement dated as of January 1, 2001 between A. M. Pappas & Associates, LLC and Quintiles Transnational Corporation (the "Company"). --------------------------------------------------------------------- Project Name: Project Date: Project Term: Services to be Provided: Compensation: The parties have agreed to and executed this Project Statement as of the Project Date set forth above. Quintiles Transnational Corporation A. M. Pappas & Associates, LLC By:_________________________ By:_________________________ Its:_________________________ Its:_________________________ -10- EX-21 8 g74742ex21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES SUBSIDIARY JURISDICTION - -------------------------------------------------------------------------- Action International Marketing Services Limited England AR-MED Limited England Benefit Canada Medico-Economic Studies, Inc. Canada Benefit Holding, Inc. North Carolina Benefit Research Italia S.r.l. Italy Benefit Transnational Holding Corp. North Carolina BRI International Holdings N.V. Belgium BRI International Limited England BRI International SARL France Clin Data International (PTY) Limited South Africa G.D.R.U. Limited England Health Science Academy (Pty) Ltd South Africa Histological Services Limited England Innovex (Australia) Holdings Pty Ltd. Australia Innovex (Australia) Pty Limited Australia Innovex (India) Private Limited India Innovex (North America) Inc. Delaware Innovex (UK) Limited England Innovex America Holding Company Delaware Innovex Belgium NV Belgium Innovex Brasil Limitada Brazil Innovex BV Holland Innovex GmbH Germany Innovex Holdings Limited England Innovex Limited England Innovex, L.P. New Jersey Innovex Medcom Marketing Group New Jersey Innovex Merger Corp. North Carolina Innovex Nevada Limited Partnership Nevada Innovex Overseas Holdings, Ltd./Limited England Innovex SA France Innovex S.r.l. Italy Innovex South Africa Pty Limited [f/k/a PPMS] South Africa Innovex Staff Services. S.r.l. Italy Innovex Support Services Limited Partnership North Carolina Innovex Turkey S.A. Turkey Laboratorie Novex Pharma Sarl France McPharma (Pty) Limited South Africa Mazebonus Limited England Medical Action Communications Limited England Medical Informatics KK Japan Medical Technology Consultants Limited England Medicines Control Consultants Pty Limited South Africa MedLab (Pty) Limited South Africa Minerva Ireland Limited Ireland Minerva Medical Limited United Kingdom MSM Group Limited Partnership North Carolina Nexan PLC England Novex Pharma Ltd. England OEC SA Switzerland 1 EXHIBIT 21 SUBSIDIARIES Penderwood Limited England PharmaBio Development, Inc. North Carolina Pharma Informatics, Inc. Delaware Phytotherapy Pty. Ltd. South Africa PMSI Database Services, Inc. Delaware PMSI Finance Limited Delaware PMSI Holdings Limited Delaware PMSI Limited England PMSI Scott-Levin, Inc. Delaware QED Communications, Inc. New York QFinance, Inc. Delaware Quintiles (Israel) Ltd. Israel Quintiles (UK) Limited England Quintiles AB Sweden Quintiles Argentina S.A. Argentina Quintiles Asia, Inc. North Carolina Quintiles Benefit France SNC France Quintiles Australia Pty. Limited Australia Quintiles Brasil Ltda. Brazil Quintiles BV The Netherlands Quintiles Canada, Inc. Canada Quintiles Cardiac Alert Limited England Quintiles Clindepharm (Pty.) Limited South Africa Quintiles Clinical Supplies Americas, Inc. New Jersey Quintiles East Asia Pte. Limited Singapore Quintiles Estonia OU Estonia Quintiles European Holdings Limited England Quintiles Finance Limited BV The Netherlands Quintiles Finance Uruguay SRL Uruguay Quintiles GesmbH Ltd. Austria Quintiles GmbH Germany Quintiles Holdings Limited England Quintiles Holdings SNC France Quintiles Hong Kong Limited Hong Kong Quintiles Hungary Kft. Hungary Quintiles, Inc. North Carolina Quintiles Informatics, Inc. Delaware Quintiles Ireland (Finance) Limited Ireland Quintiles Ireland Limited Ireland Quintiles Laboratories Limited North Carolina Quintiles Latin America, Inc. North Carolina Quintiles Limited England Quintiles Malaysia Sdn. Bnd. Malaysia Quintiles Medical Development (Shanghai) Company Limited China Quintiles Mexico, S. de R.L. de C.V. Mexico Quintiles Mauritius Holdings, Inc. Mauritius Quintiles NV/SA Belgium Quintiles Oy Finland Quintiles Pacific, Inc. North Carolina Quintiles Phase One Services, Inc. Kansas Quintiles Philippines, Inc. Philippines 2 EXHIBIT 21 SUBSIDIARIES Quintiles Poland Sp. Zoo Poland Quintiles s.l. Spain Quintiles, S.r.l. Italy Quintiles Scott-Levin, Inc. Delaware Quintiles Services AB Sweden Quintiles South Africa (Pty.) Limited South Africa Quintiles Spectral (India) Limited. India Quintiles Taiwan Limited Taiwan Quintiles Technologies, Inc. North Carolina Quintiles Thailand Ltd. Thailand Quintiles Transnational Corp. North Carolina Quintiles Transnational Japan KK Japan Quintiles Transnational Korea Co. Ltd. Korea Quintiles Trustees Ltd. England Quintiles Uruguay S.A. Uruguay Royce Recruitment Limited England Servicios Clinicos, S.A. de C.V. Mexico Source Informatics European Finance, Inc. Delaware Source Informatics European Holdings LLC Delaware Source Informatics European Holdings, Inc. Delaware Spectral Laboratories Limited India Strategic Medical Communications Limited England The Clinical Research Foundation (UK) Ltd. England The Lewin Group, Inc. North Carolina The Royce Consultancy Limited Scotland Transforce, S.A. de C.V. Mexico 3 EX-23.01 9 g74742ex23-01.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Quintiles Transnational Corp.: As independent public accountants, we hereby consent to the incorporation of our report dated January 23, 2002 (except with respect to the matters discussed in Note 23, as to which the date is March 22, 2002) included in this Form 10-K, into the Company's previously filed Registration Statements 33-91026 on Form S-8, 333-03603 on Form S-8, 333-16553 on Form S-8, 333-40493 on Form S-8, 333-60797 on Form S-8, 333-75183 on Form S-8, 333-92987 on Form S-8, and 333-51272 on Form S-8. /s/ ARTHUR ANDERSEN LLP Raleigh, North Carolina, March 22, 2002. EX-99.01 10 g74742ex99-01.txt LETTER RE REPRESENTATIONS BY ARTHUR ANDERSEN LLP EXHIBIT 99.01 [letterhead for Quintiles Transnational Corp.] March 22, 2002 U.S. Securities & Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Representations by Arthur Andersen LLP Ladies and Gentlemen: Pursuant to Temporary Note 3T to Article 3 of Regulation S-X of the Securities Exchange Act of 1934, as amended, I acknowledge on behalf of Quintiles Transnational Corp. (the "Company") that Arthur Andersen LLP ("Andersen"), the Company's independent public accountants, has represented to the Company that its audit of the financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 was subject to Andersen's quality control system for U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on audits, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Sincerely, /s/ James L. Bierman James L. Bierman Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----