-----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, Hk9eSJ6mpQXmDEO4xwEfzp6HRy9zu8t7uPqM0yCFcdgFQ6fbpbp4P5TElc/+8I5V gwNaAxvW5YpLKjra+xLEkw== 0000950133-06-001017.txt : 20060303 0000950133-06-001017.hdr.sgml : 20060303 20060303171247 ACCESSION NUMBER: 0000950133-06-001017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060303 DATE AS OF CHANGE: 20060303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRA International CENTRAL INDEX KEY: 0001293243 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 542040171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51029 FILM NUMBER: 06664937 BUSINESS ADDRESS: STREET 1: 12120 SUNSET HILLS ROAD STREET 2: SUITE 600 CITY: RESTON STATE: VA ZIP: 20190 BUSINESS PHONE: (703) 464-6300 MAIL ADDRESS: STREET 1: 12120 SUNSET HILLS ROAD STREET 2: SUITE 600 CITY: RESTON STATE: VA ZIP: 20190 10-K 1 w18061e10vk.htm FORM 10-K FOR PRA INTERNATIONAL e10vk
 

 
UNITED STATES 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, 2005
 
Commission file number:  000-51029
 
 
 
 
PRA INTERNATIONAL
(Exact name of Registrant as Specified in Its Charter)
 
     
Delaware
  54-2040171
(State or Other Jurisdiction of
Incorporation) 		  (I.R.S. Employer
Identification No.)
 
12120 Sunset Hills Road
Suite 600
Reston, Virginia 20190
(Address of principal executive offices)
 
(703) 464-6300
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o     No þ
 
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 þ     No  o
 
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 to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes o     No þ
 
As of January 31, 2006, 22,934,871 shares of the registrant’s common stock, par value $0.01 per share, were outstanding. As of June 30, 2005, the aggregate market value of the common stock held by non-affiliates of the registrant was $475,509,269 based on a closing price of $26.78 on The Nasdaq National Market on such date. Directors, executive officers and 10% or greater shareholders are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose.
 

 

 
PRA INTERNATIONAL
 
FORM 10-K ANNUAL REPORT
 
FOR THE YEAR ENDED DECEMBER 31, 2005
 
TABLE OF CONTENTS
 
             
        Page
 
  Business   3
  Unresolved Staff Comments   25
  Description of Properties   26
  Legal Proceedings   26
  Submission of Matters to a Vote of Security Holders   26
 
  Market for Registrant’s Common Equity and Related Stockholder Matters   26
  Selected Consolidated Financial Data   29
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   31
  Quantitative and Qualitative Disclosures About Market Risk   43
  Index to Consolidated Financial Statements   45
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   46
  Controls and Procedures   46
 
  Directors and Executive Officers of the Registrant   48
  Executive Compensation   51
  Security Ownership of Certain Beneficial Owners and Management   60
  Certain Relationships and Related Transactions   62
  Principal Accountant Fees and Services   63
 
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K   64
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future results and events. You can identify these forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will,” and similar expressions to identify forward-looking statements, whether in the negative or the affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements.
 
A description of these risks, uncertainties and other factors can be found in this report under the heading “Risk Factors.”
 
You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update these statements or publicly release the result of any revisions to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.


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PART I
 
ITEM 1.   BUSINESS
 
Overview
 
We are a leading global contract research organization, or CRO, with approximately 2,400 employees working from 24 offices located in North America, Europe, Africa, South America, Australia, and Asia. CROs assist pharmaceutical and biotechnology companies in developing and taking drug compounds, biologics, and drug delivery devices through appropriate regulatory approval processes. The conduct of clinical trials, in which a product candidate is tested for safety and efficacy, forms a major part of the regulatory approval process. Completing the approval process as efficiently and quickly as possible is a priority for sponsoring pharmaceutical and biotechnology companies because they must receive regulatory approval prior to marketing their products anywhere in the world. Revenue for CROs is typically generated on a fee for service basis on either a time and materials or a fixed-price contract arrangement with the client organization.
 
We conduct clinical trials globally and are one of a few CROs in the world with the capability to serve the growing need of pharmaceutical and biotechnology companies to conduct complex clinical trials in multiple geographies concurrently. We incorporated in Delaware in April 2001, with predecessors dating back to 1976. Our qualified and experienced clinical and scientific staff has been delivering clinical drug development services to our customers for over 30 years, and our service offerings now encompass all points of the clinical drug development process. We provide our expertise in several therapeutic areas of strategic interest to our customers.
 
We perform a broad array of services across the spectrum of clinical development programs, from the filing of Investigational New Drug applications, or INDs, and similar foreign regulatory applications, to the conduct of all phases of clinical trials, to product registration and post-marketing studies. Our core global clinical development services include the following:
 
  •  creating drug development and regulatory strategy plans;
 
  •  executing Phase I clinical trials;
 
  •  performing Phase II through IV multi-center, international clinical trials;
 
  •  developing and analyzing integrated global clinical databases;
 
  •  preparing and submitting regulatory filings around the world; and
 
  •  managing long-term drug safety programs.
 
Since 1999, we have conducted over 2,300 clinical trial projects for over 295 clients. We have collaborated with nine of the ten largest pharmaceutical companies and seven of the ten largest biotechnology companies over the last two years in many therapeutic areas. Moreover, we have preferred vendor relationships with seven of the world’s leading pharmaceutical and biotechnology companies. These preferred vendor relationships allow us to be one of a limited number of CROs that have been pre-qualified by these clients to compete for their outsourced projects. In 2005, we derived approximately 20% of our service revenue from major biotechnology companies, 29% from emerging biotechnology companies, 38% from large pharmaceutical companies, and 13% from Japanese pharmaceutical companies. We generated service revenue of $294.7 million and operating income of $51.2 million in 2005, representing a compounded annual growth rate since 2000 of 24.3% and 47.4%, respectively.
 
CRO Industry
 
Overview
 
Companies in the global pharmaceutical and biotechnology industries outsource product development services to CROs in order to manage the drug development process more efficiently and cost-effectively and to speed time to market. PRA and other CROs provide clinical drug development services, including protocoldesign and management of Phase I through IV clinical trials, data management, laboratory testing, medical and safety reviews, and statistical analysis. CROs provide services that will generate high quality and timely data in support of applications


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for regulatory approval of new drugs or reformulations of existing drugs as well as to support new and existing marketing claims. To remain competitive, CROs leverage selected information technologies and procedures to efficiently capture, manage, and analyze the large streams of data generated during a clinical trial.
 
CROs derive substantially all of their revenue from pharmaceutical and biotechnology companies’ research and development expenditures, which have increased substantially in recent years. Specifically, Frost and Sullivan, an international consulting firm, estimates that research and development expenditures by such companies totaled $58.5 billion in 2003, an increase from $41.1 billion in 2000, representing a compounded annual growth rate of 12.5%. Excluding spending related to administrative functions to support the research and development process, which are not typically outsourced to CROs, estimated research and development expenditures totaled $47.2 billion in 2003, up from $32.6 billion in 2000, representing a 13.2% compounded annual growth rate. Of this amount, approximately $27.4 billion in 2003 was directly related to Phase I through Phase IV clinical trials. Such spending, which excludes expenditures related to pre-clinical activities, increased between 2000 and 2003 at a compounded annual growth rate of 12.5%, and represents the total amount of research and development spending that could potentially be outsourced to PRA or its competitors offering similar services. According to Frost and Sullivan, in 2003 pharmaceutical and biotechnology companies outsourced to CROs approximately $8.4 billion, or 30.7% of their total research and development spending devoted to Phase I through Phase IV clinical trials, and outsourcing of such spending is expected to increase to $18.5 billion by 2010, representing a compounded annual growth rate of 12.1%. We anticipate that the rate of outsourcing will increase due to growing acceptance among drug companies of the benefits of outsourcing and the growing proportion of research and development spending accounted for by biotechnology companies, which tend to outsource a larger portion of their research and development activities to CROs.
 
Global Drug Approval Process
 
Discovering and developing new drugs is an expensive and time-consuming process and is highly regulated and monitored. In May 2003, The Tufts Center for the Study of Drug Development estimated that the total cost to develop a new prescription drug increased from approximately $231 million in 1987 to approximately $897 million in 2000. In addition, it typically takes between 10 and 15 years to develop a new prescription drug and obtain approval to market it in the United States. Regulatory requirements are a significant driver of the costs and time involved in drug development, and are a contributing factor in limiting the number of approved products that reach the market to approximately one in 250 molecules that enter the pre-clinical testing process. Specifically, before a new prescription drug reaches commercialization, it must undergo extensive clinical testing, and eventually regulatory review, in order to verify that the drug is safe and efficacious for its intended use. CROs offer regulatory and scientific support, clinical trials management and expertise, and infrastructure and staffing support, providing the flexibility either to supplement an organization’s in-house research and development capabilities or to deliver a fully outsourced solution throughout the product development cycle. Another recent study by the Tufts Center for the Study of Drug Development found that projects that relied heavily on CRO participation submitted their data to regulators more than thirty days closer to the projected submission date than projects with less CRO participation.
 
U.S. Approval Process.  In the United States, applications to market new drug products are submitted to and reviewed by the FDA. The FDA reviews all aspects of the drug development process, including drug toxicity levels and efficacy, protocol design, product labeling and manufacturing, and marketing claims. If and when the FDA has approved a New Drug Application, or NDA, or, in the case of biologics, a Biologic License Application, or BLA, the applicant will be permitted to market and sell the drug. In some instances, post-approval trials are requested to monitor safety and to review efficacy issues.
 
EU Approval Process.  In the European Union, there are two approval processes, the Centralized Procedure and the Mutual Recognition Procedure. Any application filed under the Centralized Procedure is made with the European Agency for the Evaluation of Medicinal Products, or EMEA, for a marketing authorization that is valid across all EU Member States. This procedure is available to all new or so-called “innovative” medicinal products. It is mandatory for all medicinal products developed by means of certain biotechnological processes, medicinal products containing a new active substance for the treatment of acquired immune deficiency syndrome, cancer, neurodegenerative disorder or diabetes and certain medicinal products for veterinary use. Themarketing authorization must be renewed after five years on the basis of a re-evaluation by the EMEA of the risk-benefit assessment.


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Under the Mutual Recognition Procedure, the applicant must first obtain a marketing authorization by one EU Member State. The authorization procedure is governed by that EU Member State’s laws and regulations. After the authorization by a Member State, this Member State may serve as the so-called Reference Member State for subsequent submissions to other EU Member States. The other concerned Member States take into consideration the assessment of the Reference Member State and must decide upon the marketing authorization within 90 days. Each EU Member State may either issue objections to the application, or request additional data. By the 90th day, all Member States must approve or reject the drug. If the drug is approved, each Member State grants the applicant independent marketing agreements, which must be renewed every five years. Periodically, the applicant must submit safety reports to the national health authorities of each Member State.
 
In addition to the Centralized and the Mutual Recognition Procedures, a single national marketing authorization within the EU authorization is applicable, if the applicant chooses to restrict a marketing authorization to one EU Member State
 
Japan Approval Process.  In Japan, applications are filed with the Pharmaceutical and Medical Devices Evaluation Center, or PMDEC. An inspection is done in conjunction with a data reliability survey by a team from the Organization for Pharmaceutical Safety and Research. Afterwards, the evaluation process is passed on to the Central Pharmaceuticals Affairs Council, or CPAC, whose executive committee members issue a report to the PMDEC. After further evaluation a final report is distributed to the Ministry of Health, Labor and Welfare, or MHLW, which makes the final decision on the drug’s outcome. Once the MHLW has approved the application, the applicant may market and sell the drug.
 
Drug Development Cycle
 
Regardless of the region in which approval is being sought, before a new clinical product candidate is ready for submission for approval by regulatory authorities, it must undergo a rigorous clinical trial process. The clinical trial process must be conducted in accordance with regulations promulgated by the FDA or appropriate foreign regulatory body, which require the drug to be tested and studied in certain ways. Human clinical trials seek to establish the safety and efficacy of the drug in humans. In some situations, clients may outsource the entire clinical program, all phases or a combination of phases, to a single CRO to gain efficiencies. The clinical trial process generally consists of the following interrelated phases, which may overlap:
 
  •  Phase I.  Phase I trials are conducted in healthy individuals and usually involve 20 to 80 subjects and typically range from six to 12 months. These trials are designed to establish the basic safety, dose tolerance, and metabolism of the clinical product candidate. If the trial establishes basic safety and metabolism of the clinical product candidate, Phase II trials begin.
 
  •  Phase II.  Phase II trials are conducted in patients who have the disorder a molecule is designed to treat, typically test 100 to 300 patients, and last on average for 12 to 18 months. Phase II trials are typically designed to identify possible adverse effects and safety risks, to determine the efficacy of the clinical product candidate, and to determine dose tolerance. If the molecule appears safe and effective, Phase III trials begin.
 
  •  Phase III.  Phase III trials involve significantly larger and more diverse populations than Phase I and II trials and are conducted at multiple sites. On average, this phase lasts from one to three years. Depending on the size and complexity, Phase III CRO contracts can exceed $10 million in some cases. During this phase, the drug’s safety and effectiveness are further examined and evaluated.
 
If the drug passes through Phase III, then an NDA is submitted for approval by the FDA or other appropriate country regulatory agencies. The NDA includes, among other things, the clinical trial data generated and analyzed during the clinical development process.
 
  •  Post-Approval/Phase IV.  During the course of the review process, various regulatory authorities may approve a drug for marketing and sale, provided that additional clinical trials be conducted. Usually referred to as post-approval or Phase IV trials, these trials may either be for submission of additional data to regulatory authorities or for non-registration purposes, such as additional marketing information. These trials are intended to monitor the drug’s long-term risks and benefits, to analyze different dosage levels, to


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  evaluate different safety and efficacy parameters in target populations, or to substantiate marketing claims. Phase IV trials typically enroll thousands of patients and last from six to 24 months.
 
CRO Industry Trends
 
We believe that the following factors have contributed, and will continue to contribute, to the growth of the CRO industry:
 
Globalization of Drug Development.  Given their desire to maximize speed and global market penetration to achieve higher potential returns on their research and development expenditures, pharmaceutical and biotechnology companies are increasingly pursuing simultaneous regulatory new drug submissions and approvals in multiple countries, rather than sequentially, as in the past. However, many drug companies do not possess the capability or capacity to simultaneously conduct large-scale clinical trials in more than one country. In addition, building and maintaining internal global infrastructures to pursue multiple drug approvals in different therapeutic categories and locations may not be cost-effective for many pharmaceutical and biotechnology companies. In response to the growing demand for global clinical trials, a few CROs have built a global presence and are able to quickly and efficiently initiate and conduct global clinical studies, and then integrate the information generated.
 
Increased Number of Products Entering Development.  We believe that pharmaceutical and biotechnology companies will have a burgeoning number of clinical product candidates and combination therapies entering clinical trials, resulting in an increased need to quickly determine the most promising ones. According to the FDA, the number of active commercial INDs has increased from 3,611 in 1999 to 4,827 in 2004, representing an increase of over 33%. We believe that this trend will continue in the future. New research and development in tandem with genomic and proteomic capabilities will see many of these clinical product candidates being tested for multiple indications and in combination with existing treatments. In response, many pharmaceutical and biotechnology companies are enlisting the expertise and flexibility of CROs to expedite and coordinate clinical trials.
 
Biotechnology Industry Growth.  The biotechnology industry has experienced significant growth over the last few years, primarily driven by technological innovations, product development successes, and recent capital raises. According to Frost and Sullivan, global biotechnology research and development expenditures grew from $7.0 billion in 2000 to $13.3 billion in 2003. We believe that this growth trend in biotechnology research and development expenditures will continue. Many biotechnology companies generally seek to avoid the fixed costs of maintaining an internal drug development infrastructure and lack the resources and clinical development expertise to effectively coordinate large-scale clinical trials. As a result, biotechnology companies tend to outsource significant portions of their research and development spending and we believe this will continue to drive the growth of the CRO industry.
 
Many biotechnology companies have raised funds in recent years, and we believe biotechnology companies will devote a large percentage of these funds to drug development. Biotechnology companies have historically tended to seek a large pharmaceutical company partner relatively early in the product development process for additional capital, assistance with late-stage development, and the selling and marketing of the product. Increasingly, however, with greater financial resources, biotechnology companies are better-positioned to advance their drug candidates further in the development process before seeking a partner, thus preserving more or all of the economic returns for themselves.
 
Increased Regulatory Scrutiny.  Global drug regulators are requiring greater amounts of clinical trial data to support the approval of new drugs.As an effort to minimize risks potentially associated with the use of drugs, regulatory agencies are requiring a greater amount of safety and post-approval information and monitoring of drugs. The greater complexity in clinical research, regulatory oversight, and the level of specialization required to conduct tests have contributed to an increase in the average number of clinical trials required per new drug, increasing the uncertainty and costs of bringing a new drug to market and maintaining the marketing authorization. We believe that global pharmaceutical and biotechnology companies that hire CROs to conduct or augment their resources for these complex trials will continue to drive the demand for CRO services.
 
Need for Quick, Efficient, and Cost-Effective Drug Development.  CROs have the therapeutic expertise and manpower to help drug companies improve and potentially shorten the drug development process by up to


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six months, thereby lengthening the product’s marketing life within its patent exclusivity period. Furthermore, outsourcing eliminates the pharmaceutical company’s need to invest in information systems, infrastructure, hire development researchers, or ramp up operations, thereby avoiding unnecessary fixed costs. Drug companies are facing pricing pressures due to the increased use of generic drugs, governmental pressures and greater overall price competition for branded drugs. As a result, pharmaceutical companies wish to introduce new drugs as quickly and efficiently as possible, since new drugs typically generate the highest return. For example, a blockbuster pharmaceutical product ($1 billion or more in annual revenues) can produce $2.7 million or more per day in revenues. Since these products enjoy market exclusivity from the date of patent, not the date of first sale, accelerating time to market is critical, as each additional day of sales results in incremental revenue to the pharmaceutical company.
 
Our Competitive Strengths
 
Therapeutic Expertise and Scientific Depth.  Our breadth of experience allows us to offer drug development services, vendor management, and patient recruitment access across a broad spectrum of therapeutic indications. We have particularly strong development expertise in therapeutic areas that are key priorities for research and development investment among biotechnology and pharmaceutical companies. In addition, we have significant relationships with therapeutic experts, key opinion leaders, and proven investigators to facilitate timely access to patients in the most important research and development markets worldwide. We believe that we are a world leader in oncology, CNS, cardiovascular, and respiratory/ allergy product development, which are all therapeutic areas requiring significant scientific expertise and which collectively accounted for 72.8% of all global research and development spending by pharmaceutical and biotechnology companies in 2004, according to Frost and Sullivan. We have an experienced team of clinical and scientific experts who work with our clients to deliver expertise at all points of the clinical drug development process.
 
Global Leadership Position.  We are a leading clinical research organization. We have significant global reach with resources and knowledge that enable us to seamlessly conduct complex trials on six continents concurrently. Our global scale enables us to select locations that produce more cost-effective and efficient clinical drug development. In addition, our global platform facilitates access to strategic locations and timely patient recruitment for complex clinical trials, which tends to be one of the most significant challenges for our clients during the clinical trials process. We have grown our business outside the United States into regions with significant patient availability for clinical trials, which has contributed to an increase in the number of global projects, or projects where services are rendered on two or more continents, awarded to us from 14 projects in 2001 to 47 in 2005.
 
Attractive Customer Base.  Our service offerings appeal to both biotechnology and pharmaceutical companies. We have collaborated with nine of the ten largest pharmaceutical companies and seven of the ten largest biotechnology companies over the last two years in all major therapeutic areas. We have a particular strength in the expanding biotechnology industry, which constituted over 49% of our service revenue in 2005. Advances in proteomics and genomics and access to capital have driven growth in the biotechnology industry generally. We believe that biotechnology industry research and development spending is growing at a faster rate than research and development spending by the pharmaceutical industry. We currently provide services to an active customer base of over 295 clients, and no single project accounted for more than 5% of service revenue in 2005. We have established preferred vendor relationships with seven of the world’s leading pharmaceutical and biotechnology companies, giving us the ability to compete for a significant portion of the universe of available global clinical development projects.
 
Proven and Incentivized Management Team and Workforce.  We are led by our experienced executive management team with an average tenure of approximately 12 years with us or our acquired companies. This team has been responsible for building our global platform and maintaining strong client relationships, leading to service revenue of $294.7 million and operating income of $51.2 million in 2005, representing compounded annual growth rates of approximately 24.3% and 47.4%, respectively, since 2000.
 
We have assembled an experienced and qualified staff. Approximately 28% of our workforce has at least a master’s degree. We believe our employees are well-regarded in the drug development industry for scientific expertise and their experience managing many complex drug studies, and are therefore sought out by clients seeking


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to benefit from our drug development experience. We are dedicated to strengthening our workforce by offering comprehensive training and an attractive work environment, with the goal of being known as the employer of choice within the CRO industry. We have broad employee ownership, with over 200 employees owning equity in the Company.
 
Our Strategy
 
We intend to continue building PRA into the best clinical development organization in the world by expanding our therapeutic expertise, leveraging our global infrastructure, strengthening our service offerings and geographic reach, and pursuing a disciplined acquisition strategy. The key components of our strategy are to:
 
Continue to Leverage and Build Our Expertise in Key Therapeutic Areas.  We believe that our extensive therapeutic expertise is critical to our customers and for the proper design and management of all clinical phases of drug development. We intend to continue capitalizing on our market positions in our existing therapeutic categories. We have established a therapeutic business development initiative that is focused on identifying early clinical product candidates in our core therapeutic competencies. We believe that oncology, CNS, cardiovascular, and respiratory/allergy, which according to a report in R&D Directions (October 2003) together represented approximately 58% of all drug candidates being developed by pharmaceutical and biotechnology companies, will be significant drivers of our growth. We expect these expanded therapeutic capabilities to enhance our future growth.
 
Expand the Breadth and Depth of Our Service Offering.  We plan to build upon our expertise in Phase II and Phase III clinical trials to further grow market share and geographic reach. We intend to expand our global regulatory and drug safety capabilities, which are particularly important to our current and potential pharmaceutical and biotechnology clients. In addition, we intend to enhance our existing service offering in Phase I and Phase IV clinical trials, which are among the fastest growing segments of the CRO industry, according to Frost and Sullivan. Strategic initiatives we are considering include a first-in-man intensive care Phase I unit and an expansion of our current safety and medical affairs offerings with the development of patient registries and expanded post approval monitoring. Over the longer term, our initiatives may include clinical laboratory and small run manufacturing services. We expect electronic data capture, or EDC, capabilities to be of increasing importance to our customers, and we have augmented our EDC capabilities through our alliance with DataLabs which we believe will position us at the forefront of this emerging service area.
 
Leverage Our Infrastructure to Improve Operational Efficiencies.  We have made significant investments and corporate acquisitions over the past eight years to enhance our global infrastructure and product offerings. Past investments include recruiting and training qualified professionals, developing a worldwide network of offices, and building an integrated information technology platform. We also made additional investments and staff training commitments in our proprietary quality management system, called PRA Management System, or PRAMS, and obtained International Standards Organization 9001:2000 registration certification in the first half of 2005. We believe ISO 9001:2000 certification will assist us in obtaining more global projects and measuring output and customer satisfaction. PRAMS reinforces Project Assurance®, our company-wide commitment to consistently achieving customer requirements every time, at every location. We believe that these investments will enable the company to improve patient recruitment, improve efficiency of global clinical trial data collection, and speed regulatory submissions for customers, resulting in improved project margins and overall profits. We plan to continue to enhance our information technology platform to maintain our competitiveness and our adaptable and flexible business support environment.
 
Augment Our Geographic Reach in Latin America and Asia.  We intend to replicate the success we have achieved in North America, Europe, and existing Southern Hemisphere locations to further expand in South America and in Asia. We have expanded into Argentina to complement our existing office in Brazil, and have an office in Asia. Both South America and Asia represent significant growth opportunities for us due to their large population bases and developing clinical scientific infrastructures. We plan to continue expanding our capabilities in these regions to bolster our global development service offerings. We believe this will enhance the attractiveness of our service offerings to our existing clients and potential new clients. It also positions us to continue to meet the growing demand for simultaneous global clinical trial services.


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Continue to Pursue a Disciplined Acquisition Strategy.  We have demonstrated skill in identifying, acquiring, and integrating high quality strategic acquisitions. Since 1997, we have successfully integrated nine acquisitions, including two purchased out of bankruptcy, which have expanded or augmented our geographic reach and therapeutic capabilities. We have developed a well-refined integration process to ensure a consistent and streamlined assimilation of the staff and expertise of the acquired company. We formulate a detailedintegration plan during the diligence process so that we may promptly migrate the acquired operations onto our management system and operating environment to rapidly capture efficiencies and other synergies. This approach allows us to rapidly capture synergies and other efficiencies related to the acquisition. We expect to opportunistically pursue acquisitions that broaden our drug development platform, geographic reach, and therapeutic capabilities, which will further differentiate us from our competition.
 
Description of Service Offerings
 
In connection with clinical trials management services, we offer a broad array of services that encompass the entire spectrum of clinical development, from filing of INDs and similar regulatory applications to the conduct of all phases of clinical trials, to product registrations, medical and safety reviews, and post-marketing studies on a global basis. We provide many back office services to clients as well, including processing the payments of investigators and patients. We also collaborate with third-party vendors for services such as imaging and analytical lab services. Our core services include:
 
Clinical Trials Management Services
 
Clinical trials management services encompass the design, management, and implementation of study protocols, which are the critical building blocks of product development programs. We have extensive resources and expertise to design and conduct studies on a global basis, develop integrated global product databases, collect and analyze the data, and prepare and submit regulatory submissions in the United States, Europe, and the rest of the world. A typical full-scale program or project may involve the following components:
 
  •  clinical program review and consultation;
 
  •  protocol and case report form, or CRF, design;
 
  •  feasibility studies for investigator interest and patient availability;
 
  •  project management;
 
  •  investigator site selection and qualification;
 
  •  investigational site support and clinical monitoring;
 
  •  data management;
 
  •  analysis and reporting;
 
  •  investigator handbook and meetings;
 
  •  medical and scientific publications; and
 
  •  regulatory filings.
 
Clinical trials management services, used by our pharmaceutical and biotechnology customers, may be performed exclusively by us or in collaboration with the client’s internal staff or other CROs. With our broad clinical trial management capabilities, we conduct single site studies (Phase I), multi-site domestic and international studies, and global studies on multiple continents. Through our electronic trial master file, we can create, collect, store, edit, and retrieve any electronic document in any of our office locations worldwide, enabling our global project teams to work together efficiently regardless of where they are and allowing seamless transfer of work to a more efficient locale.


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We have significant clinical trials experience in the following therapeutic areas:
 
     
Therapeutic Areas:
 
Specific Areas of Expertise:
 
Analgesics
  Acute and chronic pain (including headaches, osteoarthritis)
Cardiovascular disease
  Atrial fibrillation, hypertension, coronary artery disease, heart failure, hyperlipidemia, peripheral arterial disease, pulmonary arterial hypertension, stroke, venous thromboembolism
Central nervous system
  Alzheimer’s and other dementias, attention deficit hyperactivity disorder, Parkinson’s disease and other movement disorders, schizophrenia, depression, epilepsy, anxiety, obsessive-compulsive disorders, panic disorders, insomnia, multiple sclerosis
Critical care
  ARDS (acute respiratory distress syndrome), sepsis
Dermatology
  Wound healing, acne, hair loss, psoriasis
Gastroenterology
  Duodenal and gastric ulcer, gastroesophogeal reflux disease, H.pylori eradication, inflammatory bowel disease (Crohn’s disease, ulcerative colitis), irritable bowel syndrome
Genitourinary
  Incontinence, sexual dysfunction, overactive bladder, benign prostate hyperplasia
HIV/AIDS
  Primary disease and treatment/prophylaxis of opportunistic infections
Infectious disease/virology
  Pneumonia, sinusitis, chronic bronchitis, childhood and adult vaccines, herpes simplex, hepatitis B and C, genital herpes, respiratory syncytial virus, influenza, fungal infections
Metabolic/Endocrine disease
  Diabetes mellitus, growth retardation
Oncology
  Pancreatic, prostate, colorectal, breast, renal cell, lung, other solid cancers, all hematologic malignancies
Respiratory/Allergy/Pulmonary
  Asthma, allergic rhinitis, COPD (chronic obstructive pulmonary disease), cystic fibrosis
Rheumatology
  Rheumatoid arthritis, osteoarthritis, lupus erythematodes
Women’s health
  Osteoporosis, hormone replacement therapy
 
Global Scientific and Medical Affairs
 
Our Global Scientific and Medical Affairs group provides three sets of related services: Global Product Development Services, which focus on the design and implementation of clinical development programs; Global Medical and Safety Services, which deal with all medical and safety-related aspects during the development and marketing processes; and Global Regulatory Affairs, which assist clients in dealing with regulatory requirements during the entire product life-cycle around the world. Global Scientific and Medical Affairs Services are typically provided in concert with our clinical trials management services and are also provided as stand-alone services.
 
Global Product Development Services.  Our Global Product Development Services team assists our customers with the design and implementation of entire clinical development programs. Our current and potential customers increasingly seek partners who can provide these capabilities. Our drug development group provides both external and internal customers with opinion-leader level therapeutic expertise in the design and implementation of high-quality product development programs and helps clients achieve key development milestones in a cost- and time- effective manner. Our Global Product Development Services are generally used by emerging biotechnology companies that lack clinical development infrastructure, Japanese pharmaceutical companies pursuing registration in Europe and the United States and larger pharmaceutical companies exploring new therapeutic areas. Senior scientific, clinical, and marketing experts from our Global Product Development Services team join our project teams to perform the following services:
 
  •  assess pre-clinical and clinical data, products, and programs
 
  •  analyze markets and competition
 
  •  prepare clinical and regulatory approval strategy plans


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  •  design clinical studies or programs
 
  •  identify and form scientific advisory boards
 
  •  provide high-level consultation on specific scientific and clinical issues
 
  •  provide program planning, management, and oversight from IND application submission to product registration and launch.
 
Global Medical and Safety Services.  The Global Medical and Safety Services group provides medical, epidemiological, statistical, and safety expertise in four major functional areas. The Medical Affairs group supports the planning, conduct, and evaluation of clinical studies worldwide. The Drug Safety Centers are responsible for the management of individual and cumulative safety data, set-up and maintenance of the safety database as well as safety reporting to regulatory authorities, ethics committees, IRB’s and investigators. The Data Pooling and Analyses Centers integrate data from multiple studies and prepare pooled analyses for efficacy and safety, they also support Independent Data Monitoring Committees and pharmaco-epidemiological studies. The multidisciplinary Consultants team is focusing on managing risks potentially associated with the use of products during clinical development or after market launch. These experts facilitate and support client interactions with regulatory authorities and ethics committees worldwide. The Global Medical and Safety Services group includes physicians, epidemiologists, pharmacists, statisticians, clinical programmers, safety specialists, and research nurses with many years of experience in clinical development and safety management.
 
Our Global Medical and Safety Services capabilities include:
 
  •  design and evaluation of feasibility studies
 
  •  responding to investigator questions regarding a study protocol
 
  •  review of clinical study data and reports
 
  •  processing and reporting of serious adverse events in clinical trials;
 
  •  processing and reporting of adverse drug reactions for marketed products;
 
  •  set-up and maintenance of the safety databases
 
  •  annual and other periodic safety update reports for drugs in development and marketed products;
 
  •  coding of clinical data (diseases, medication, adverse events and procedures)
 
  •  design, conduct and analyses of safety and pharmaco-epidemiological studies;
 
  •  integration of multiple clinical studies
 
  •  generation of integrated summaries of efficacy and safety
 
  •  set-up and support of Independent Data Monitoring Committees
 
  •  investigations of safety issues and benefit risk assessments
 
  •  generation of risk management plans
 
  •  implementation and evaluation of risk management programs
 
  •  system analysis and design of safety departments including SOPs
 
  •  audits and preparations of regulatory inspections.
 
Global Regulatory Affairs.  Our Global Regulatory Affairs group provides skilled interpretation and consultation on the complex and evolving regulatory requirements affecting drug development around the world. Though there has been a greater amount of harmonization of global regulatory requirements, many countries still have specific requirements and restrictions, and many regulatory authorities are requesting greater amounts of information. Our Global Regulatory Affairs staff greatly enhances our clients’ ability to submit regulatory


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documents in a time-efficient manner in multiple locations and markets. Our Global Regulatory Affairs team provides the following services:
 
  •  strategic regulatory consultation
 
  •  support of clinical trials applications and application maintenance
 
  •  preparation and support for agency interactions
 
  •  comprehensive support for marketing authorizations
 
  •  electronic document management in support of global regulatory submissions.
 
Regulatory agencies are rapidly moving toward requiring submissions in an electronic format and are currently requesting at least partial electronic submissions. Electronic submissions allow regulatory agencies to rapidly and efficiently search and navigate through submissions, thus facilitating and potentially shortening the time of approval. We have substantial experience with CoreDossier, the industry standard electronic system that enables the assembly, management, and publication of the complex documents that comprise the regulatory submission, which we believe provides us with a strategic advantage.
 
Although guidelines for electronic submissions have not yet been finalized for regulatory agencies in Europe, the EMEA does accept and strongly encourages the Market Authorization Application in electronic format in addition to the submission of printed copies of Part I of the dossier.
 
Our technical publishing group has the regulatory expertise to provide our clients with electronic regulatory submissions that are fully compliant with current FDA or other regulatory agency guidelines. This group oversees the compilation of submission components, publishes the submission, and reviews the final product for content and formatting accuracy and consistency.
 
Clinical Pharmacology Center (Phase I)
 
Our clinical pharmacology center, which was completely renovated in the fourth quarter of 2004, is a fully integrated 50-bed facility in Lenexa, Kansas. We conduct a wide range of Phase I and early Phase II trials including first-in-man, rising dose tolerance, metabolic rate, dose response, bioequivalence, bioavailability, and drug-drug interaction. We have conducted over 250 studies to date and have a database of over 30,000 subjects. Our clinical pharmacology center maintains a dedicated professional staff of PharmDs, physicians, RNs, LPNs, medical assistants, and paramedics. We have a Quality Assurance, or QA, group and a dedicated participant recruiting department that supports the clinical pharmacology center.
 
Project Assurance
 
We have a differentiated approach to service delivery termed “Project Assurance,” our company-wide commitment to consistently achieving customer requirements every time, at every location. Every aspect of our business is dedicated to the reliability and successful delivery of each customer project and timetable. The key component of this approach is called the PRA Management System, or PRAMS, our quality management system. PRAMS promotes the reliable delivery of services to customers through a uniform project management methodology which utilizes standardized global processes that are monitored by a defined set of performance metrics.
 
We have made significant investments in information technology resulting in a platform that facilitates seamless global communication and project coordination. This single information technology platform serves our entire organization. This, combined with our standardized procedures, allows our project teams across the world to provide our clients with a consistent approach and results, no matter which team or location performsthe work. In addition, our standardized information technology platform assists us in rapidly integrating acquisitions. As technology is an increasingly important selection criterion for our clients, we have invested in and integrated both proprietary and commercially-available information technologies that allow us to expedite and improve our bidding for client projects, capture and share clinical trials data electronically, and make electronic regulatory submissions. We continually review the system development life cycle of every major technology component of our internal and external business services in an effort to maintain our efficiencies and competitive advantage.


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Examples of these technology investments include:
 
  •  Clinical Trial Management System, or CTMS.  CTMS is a company-wide system used to track and report on the information associated with managing a clinical trial, from initiation through closeout. The system is based upon Siebel’s eClinical product, and allows any authorized user to access data about any clinical trial from anywhere in the world. We believe that this system is critical to our ability to successfully conduct global clinical programs.
 
  •  PRA Estimator.  PRA Estimator is our proprietary comprehensive bid development tool which analyzes every customer specification and request along with therapeutic and patient recruitment requirements, using a set of complex algorithms to develop a number of comprehensive bid response scenarios.
 
  •  Electronic Trial Master File, or e-TMF®.  e-TMF is a company-wide document management system that enables all documents to be scanned, indexed, and warehoused electronically. The system, which is built on a Documentum platform, allows access to documents by any authorized user in any of our offices. We believe the benefits of this system include enhanced global project coordination, work-sharing across locations, increased document accountability and tracking ability, increased security of documents, return of all clinical trial study documents to clients in electronic form, and facilitation of electronic regulatory submissions.
 
  •  Electronic Regulatory Submissions.  Our electronic regulatory submissions capability is based on CoreDossier, an industry-accepted software system. This system allows documents to be created, indexed, and cross-referenced electronically for ease of editing while in production and for ease of review by the appropriate regulatory authorities. Electronic submissions can be used at the IND and the NDA submission stages.
 
  •  PRA Clinical Data Manager® and Oracle Clinical.  We offer these state-of-the-art data management systems which we believe provide added flexibility and ease of data transfer for our clients and ultimately timely submissions to the appropriate regulatory authority.
 
  •  Electronic Data Capture, or EDC.  We believe electronic data capture, which involves direct entry of clinical trials data by investigational sites, is gaining acceptance by clients worldwide. EDC permits more rapid data acquisition and locking of final databases. We believe that many pharmaceutical and biotechnology companies will use EDC for their trials at some point in the near future. EDC technology continues to advance and standards are constantly being upgraded. Therefore, we are developing, in conjunction with DataLabs, a hybrid data management system. This EDC based system includes a paper double data entry module and a data clarification form management module. We will be able to support both EDC studies and paper-CRF studies as well as EDC/paper hybrid studies. Nevertheless, we continue to have seemless integration software for electronic data transfer to our two data management systems previously mentioned. To date, we have completed 49 EDC studies involving nearly 21,000 patients.
 
  •  Customer Relationship Management, or CRM.  This is a company-wide system based on the system suite from Siebel designed to manage customer relationships and new business activities. This system allows customer contacts and new business opportunities to be tracked and shared worldwide to ensure consistent customer interactions.
 
  •  Oracle AERS.  Our web-based safety system provides progressive and complete safety database functionality allowing us to provide a comprehensive suite of safety management services to our clients. This provides one global platform to track all safety activities and clinical trial and post marketing case management processing for our clients.
 
Customers and Suppliers
 
Our customers include international pharmaceutical and biotechnology companies in the United States, Europe, and Japan. We have collaborated with nine of the ten largest pharmaceutical companies and seven of the ten largest biotechnology companies over the last two years in all major therapeutic areas. We have established preferred vendor relationships with seven of the world’s leading pharmaceutical companies. In 2005, we derived


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approximately 20% of our service revenue from major biotechnology companies, 29% from emerging biotechnology companies, 38% from large pharmaceutical companies, and 13% from Japanese pharmaceutical companies. In 2005, we had two individually significant customers. Customer A represented 15% and customer B represented 10% of our service revenues. While these percentages represent our revenue generated from each company, both customers consist of multiple operating groups that conduct business with us. No single project accounted for more than 5% of our service revenue in 2005.
 
We utilize a number of suppliers in our business. In 2005, no individual supplier was paid more than $3.4 million. In addition, our top 10 suppliers together received payments during 2005 of approximately $18.1 million. We believe that we will continue to be able to meet our current and future supply needs.
 
Sales and Marketing
 
Our sales process is team-oriented and involves operations and Global Scientific and Medical Affairs teams who contribute their knowledge to project implementation strategies presented in customer proposals. We have a dedicated global sales force consisting of more than 45 individuals organized into 14 customer engagement teams. Our engagement teams work closely with sponsors to build long-term relationships with pharmaceutical and biotechnology companies. Members of senior management are actively involved with every client in order to facilitate resource allocation, project delivery fulfillment, and scientific regulatory review to ensure customer retention and to encourage repeat business. We rely heavily on our past project performance and therapeutic expertise in winning new business.
 
Our proposals are bid centrally, either in North America or Europe, using our most seasoned managers from operations to spearhead proposal development on a full-time basis. Our practice of not bidding on projects that we are unprepared to deliver on schedule has helped us earn a reputation among pharmaceutical and biotechnology companies for honesty and integrity. Our approach to proposal development, led by our seasoned proposal developers and our knowledgeable drug development experts, allows us to submit value-added proposals that address customer requirements in a creative and tailored manner. Proposal teams often conduct research on competing drugs and our Global Medical and Safety Services group performs feasibility studies among potential investigators to assess their interest and patient availability for realistic proposals and presentations. PRA Estimator, our proprietary, comprehensive bid-development tool, allows for rapid and accurate budget creation, which forms the initial basis upon which we manage project budgets subsequent to the award of work. In 2005, we had $479.3 million in new business awards, which included 47 global contracts. In 2005, we received and responded to $1.53 billion in proposal requests.
 
Competition
 
The CRO industry consists of a number of small, limited-service providers, several dozen medium-sized firms, and several full-service CROs with international capabilities. The industry continues to experience consolidation and, in recent years, a group of large, full-service competitors has emerged. This trend of industry consolidation appears to have created greater competition for clients and acquisition candidates among the larger CROs.
 
We compete primarily with traditional CROs and in-house research and development departments of pharmaceutical companies. Our principal traditional CRO competitors are Charles River Laboratories International, Inc., Covance Inc., ICON plc, INC Research, Inc., Kendle International Inc., MDS Pharma Services, PAREXEL International Corporation, Pharmaceutical Product Development, Inc., SFBC International, Inc., Quintiles Transnational Corp., United BioSource Corporation, and United HealthCare Corporation. The industry has few barriers to entry. Newer, smaller entities with specialty focuses, such as those aligned to a specific disease or therapeutic area, compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that could harm our operating results.
 
CROs compete on the basis of a number of factors, including reliability, past performance, expertise and experience in specific therapeutic areas, scope of service offerings, strengths in various geographic markets, technological capabilities, ability to manage large-scale clinical trials both domestically and internationally, and price. Although there can be no assurance that we will continue to do so, we believe that we compete favorably in


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these areas. If in the future we are unable to effectively compete in these areas, we could lose business to our competitors which could harm our operating results.
 
Despite the recent consolidation, the CRO industry remains fragmented, with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few barriers to entry for smaller, limited-service providers, we believe there are significant barriers to becoming a global provider offering a broad range of services and products. These barriers include:
 
  •  the cost and experience necessary to develop broad therapeutic expertise;
 
  •  the ability to manage large, complex international clinical programs;
 
  •  the ability to deliver high-quality services consistently for large drug development projects;
 
  •  the experience to prepare regulatory submissions throughout the world; and
 
  •  the infrastructure and knowledge to respond to the global needs of clients.
 
We believe that many clients tend to develop preferred vendor relationships with full-service CROs, which could have the effect of excluding other CROs from the bidding process. We may experience reduced access to certain potential clients due to these arrangements. In addition, some of our competitors are able to offer greater pricing flexibility, which could cause us to lose business to those competitors and could harm our operating results.
 
Backlog
 
Our studies and projects are performed over varying durations, ranging from several months to several years. We maintain a contract backlog to track anticipated service revenue from projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We recognize a new business award in backlog only when we receive written or electronic correspondence from the client evidencing a firm commitment. Cancelled contracts and scope reductions are removed from backlog. Based upon the foregoing, our backlog at December 31, 2005 and 2004 was approximately $552.9 and $448.8 million, respectively. Cancellations totaled $83.4 million and $61.1 million at December 31, 2005 and 2004, respectively.
 
We believe our backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, studies vary in duration. For instance, some studies that are included in 2005 backlog may be completed in 2006, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease the amount of backlog. Third, studies included in backlog may be subject to bonus or penalty payments, although such studies do not constitute a material portion of our business. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made.
 
Intellectual Property
 
We do not own any patent registrations, applications, or licenses. We maintain and protect trade secrets, know-how and other proprietary information regarding many of our business processes and related systems. We also hold various federal trademark registrations and pending applications, including:
 
  •  PRA® (including a design);
 
  •  PRA International®;
 
  •  PRA Clinical Data Manager®;
 
  •  PRA e-TMF®; and
 
  •  Project Assurance®
 
Government Regulation
 
In the United States, the FDA governs the conduct of clinical trials of drug products in human subjects, the form and content of regulatory applications, including, but not limited to, IND applications for human clinical


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testing and the development, approval, manufacture, safety, labeling, storage, record keeping, and marketing of drug products. The FDA has similar authority and similar requirements with respect to the clinical testing of biological products. In the European Union, similar laws and regulations apply, which may vary slightly from one member state to another and are enforced by the EMEA or respective national member states’ authorities, depending on the case.
 
Governmental regulation directly affects our business. Increased regulation leads to more complex clinical trials and an increase in potential business for us. Conversely, a relaxation in the scope of regulatory requirements, such as the introduction of simplified marketing applications for pharmaceutical and biological products, could decrease the business opportunities available to us.
 
In the United States, we must perform our clinical drug and biologic services in compliance with applicable laws, rules and regulations, including the FDA’s good clinical practice, or GCP, regulations, which govern, among other things, the design, conduct, performance, monitoring, auditing, recording, analysis, and reporting of clinical trials. Before a human clinical trial may begin, the manufacturer or sponsor of the clinical product candidate must file an IND with the FDA, which contains, among other things, the results of preclinical tests, manufacturer information, and other analytical data. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Each clinical trial must be conducted pursuant to, and in accordance with, an effective IND. In addition, under GCP, each human clinical trial we conduct is subject to the oversight of an institutional review board, or IRB, which is an independent committee that has the regulatory authority to review, approve and monitor a clinical trial for which the IRB has responsibility. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the study subjects are being exposed to an unacceptable health risk. In the European Union, we must perform our clinical drug services in compliance with essentially similar laws and regulations.
 
In order to comply with GCP regulations, we must, among other things:
 
  •  comply with specific requirements governing the selection of qualified investigators;
 
  •  obtain specific written commitments from the investigators;
 
  •  obtain IRB review and approval of the clinical trial;
 
  •  verify that appropriate patient informed consent is obtained before the patient participates in a clinical trial;
 
  •  ensure adverse drug reactions resulting from the administration of a drug or biologic during a clinical trial are medically evaluated and reported in a timely manner;
 
  •  monitor the validity and accuracy of data;
 
  •  verify drug or device accountability;
 
  •  instruct investigators and studies staff to maintain records and reports; and
 
  •  permit appropriate governmental authorities access to data for their review.
 
We must also maintain reports in compliance with applicable regulatory requirements for each study for specified periods for auditing by the client and by the FDA or similar regulatory authorities in other parts of the world.
 
A failure to comply with applicable regulations relating to the conduct of clinical trials or the preparation of marketing applications could lead to a variety of sanctions. For example, violations of the GCP regulations could result, depending on the nature of the violation and the type of product involved, in the issuance of a warning letter, suspension or termination of a clinical study, refusal of the FDA to approve clinical trial or marketing applications or withdrawal of such applications, injunction, seizure of investigational products, civil penalties, criminal prosecutions, or debarment from assisting in the submission of new drug applications.
 
We monitor our clinical trials to test for compliance with applicable laws and regulations in the United States and the foreign jurisdictions in which we operate. We have adopted standard operating procedures that are designed to satisfy regulatory requirements and serve as a mechanism for controlling and enhancing the quality of our clinical


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trials. In the United States, our procedures were developed to ensure compliance with the FDA’s GCP regulations and associated guidelines. Within Europe, all work is carried out in accordance with the European Community Note for Guidance, “Good Clinical Practice for Trials on Medicinal Products in the European Community.” In order to facilitate international clinical trials, we have implemented common standard operating procedures across all of our regions to assure consistency whenever it is feasible and appropriate to do so.
 
The Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, issued under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, restrict the use and disclosure of certain protected health information, or PHI. Under the Privacy Rule, “covered entities” may not use or disclose PHI without the authorization of the individual who is the subject of the PHI, unless such use or disclosure is specifically permitted by the Privacy Rule or required by law.
 
We are not a covered entity under the HIPAA Privacy Rule. However, in connection with our research activities, we do receive PHI from covered entities subject to HIPAA. In order for those covered entities to disclose PHI to us, the covered entity must obtain an authorization meeting Privacy Rule requirements from the research subject, or make such disclosure pursuant to an exception to the Privacy Rule’s authorization requirement. As part of our research activities, we require covered entities that perform research activities on our behalf to comply with HIPAA, including the Privacy Rule’s authorization requirement.
 
In Europe, EC Directive 95/46, or the Directive, is intended to protect the personal data of individuals by, among other things, imposing restrictions on the manner in which personal data can be collected, transferred, processed, and disclosed and the purposes for which personal data can be used. National laws and regulations implementing the Directive or dealing with personal data include provisions which, in certain EU member states, are more stringent than the Directive’s mandates and/or cover areas that do not fall within the scope of the Directive. While we strive to comply with all privacy laws potentially applicable to our operations in Europe, we cannot guarantee that our business complies with all these laws, which vary in scope and complexity, in the multiple jurisdictions in which we operate.
 
We maintain a registration with the Drug Enforcement Agency, or DEA, that enables us to use controlled substances in connection with our research services. Controlled substances are those drugs and drug products that appear on one of five schedules promulgated and administered by the DEA under the Controlled Substances Act, or CSA. The CSA governs, among other things, the distribution, recordkeeping, handling, security, and disposal of controlled substances. Our DEA license authorizes us to receive, conduct testing on, and distribute controlled substances in Schedules II through V. A failure to comply with the DEA’s regulations governing these activities could lead to a variety of sanctions, including the revocation or the denial of a renewal of our DEA registration, injunctions, or civil or criminal penalties.
 
Employees
 
As of December 31, 2005, we had approximately 2,400 employees, of which 56% were in the United States, 30% were in Europe, 10% were in Canada, and 4% were in Australia, Africa, South America, and Asia. Approximately 28% of our workforce has at least a master’s degree. None of our employees is represented by a labor union. We believe that our employee relations are satisfactory. We have entered into employmentagreements with each of our named executive officers. See Item 11 “Management — Employment Agreements.”
 
Liability and Insurance
 
We may be liable to our clients for any failure to conduct their studies properly according to the agreed-upon protocol and contract. If we fail to conduct a study properly in accordance with the agreed-upon procedures, we may have to repeat a study or a particular portion of the services at our expense, reimburse the client for the cost of the services and pay additional damages.
 
At our Phase I clinic, we study the effects of drugs on healthy volunteers. In addition, in our clinical business we, on behalf of our clients, contract with physicians who render professional services, including the administration of the substance being tested, to participants in clinical trials, many of whom are seriously ill and are at great risk of further illness or death as a result of factors other than their participation in a trial. As a result, we could be held


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liable for bodily injury, death, pain and suffering, loss of consortium, or other personal injury claims and medical expenses arising from a clinical trial. In addition, we sometimes engage the services of vendors necessary for the conduct of a clinical trial, such as laboratories or medical diagnostic specialists. Because these vendors are engaged as subcontractors, we are responsible for their performance, and may be held liable for damages if the subcontractors fail to perform in the manner specified in their contract.
 
To reduce our potential liability, informed consent is required from each volunteer and we obtain indemnity provisions in our contracts with clients. These indemnities generally do not, however, protect us against certain of our own actions such as those involving negligence or misconduct. Our business, financial condition and operating results could be harmed if we were required to pay damages or incur defense costs in connection with a claim that is not indemnified, that is outside the scope of an indemnity or where the indemnity, although applicable, is not honored in accordance with its terms.
 
We maintain errors, omissions, and professional liability insurance in amounts we believe to be appropriate. This insurance provides coverage for vicarious liability due to negligence of the investigators who contract with us, as well as claims by our clients that a clinical trial was compromised due to an error or omission by us. If our insurance coverage is not adequate, or if insurance coverage does not continue to be available on terms acceptable to us, our business, financial condition, and operating results could be materially harmed.
 
Environmental Regulation and Liability
 
We are subject to various laws and regulations relating to the protection of the environment and human health and safety in all of the countries in which we do business, including laws and regulations governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. Our operations include the use, generation, and disposal of hazardous materials and highly regulated medical wastes. We may, in the future, incur liability under environmental statutes and regulations for contamination of sites we own or operate (including contamination caused by prior owners or operators of such sites), the off-site disposal of hazardous substances, and for personal injuries or property damage arising from exposure to hazardous materials from our operations. We believe that we have been and are in substantial compliance with all applicable environmental laws and regulations and that we currently have no liabilities under such environmental requirements that could reasonably be expected to harm our business, results of operations, or financial condition.
 
ITEM 1A.  RISK FACTORS
 
If any of the following risks materialize, our business, financial condition, or results of operations could be materially harmed. In that case, the market price of our common stock could decline.
 
Risks Related to Our Business
 
Our contracts are generally terminable on little or no notice. Termination of a large contract for services or multiple contracts for services could adversely affect our revenue and profitability.
 
Most of our contracts are terminable without cause upon 30 to 60 days’ notice by the client. Clients terminate or delay contracts for various reasons. We have experienced termination or cancellation by certain customers in the ordinary course of business.
 
The reasons more frequently given for termination include:
 
  •  the failure of the product being tested to satisfy safety or efficacy requirements;
 
  •  unexpected or undesired clinical results of the product; and
 
  •  the client’s decision to forego a particular study.
 
Less frequently, terminations occur because of:
 
  •  insufficient patient enrollment or investigator recruitment;
 
  •  the client’s decision to downsize its product development portfolios;


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  •  the client’s dissatisfaction with our performance, including the quality of data provided and our ability to meet agreed upon schedules; and
 
  •  production problems resulting in shortages of the drug or required clinical supplies.
 
The loss or delay of a program or large contract or the loss or delay of multiple smaller contracts could harm our business because such terminations could lower our level of staff utilization, which would reduce our profitability. In addition, the terminability of our contracts puts increased pressure on our quality control efforts, since not only can our contracts be terminated by clients as a result of poor performance, but any such termination also may affect our ability to obtain future contracts from the client involved and, possibly, others among the companies that sponsor trials. Because the contracts included in our backlog are generally terminable without cause, we do not believe that our backlog as of any date is necessarily a meaningful predictor of future results.
 
Our quarterly operating results may vary, which could negatively affect the market price of our common stock.
 
Our quarterly operating results have been and will continue to be subject to variation, depending on factors such as the commencement, completion, or cancellation of significant contracts, the timing of acquisitions, the mix of contracted services, foreign exchange rate fluctuations, the timing of start-up expenses for new offices and services, and the costs associated with integrating acquisitions. We have experienced, and expect to continue experiencing, some variations in our revenue due to our customers’ budgetary cycles. As a result, we believe that quarterly comparisons of our financial results should not be relied upon as an indication of our future performance. In addition, quarterly volatility in our operating results could cause declines in the market price of our common stock.
 
We depend on a limited number of clients and a loss of or significant decrease in business from them could affect our business.
 
We have in the past and may in the future derive a significant portion of our service revenue from a relatively limited number of clients that vary from year to year. Our relationships with these customers involve a substantial number of individual arrangements detailing the particulars of a given clinical development project and often implicate different entities, departments, or companies under common control. Nevertheless, the loss of, or a significant decrease in business from, one or more of these clients could harm our business.
 
Because most of our clinical development service revenue is from long-term fixed-fee contracts, we would lose money in performing these contracts if our costs of performing them were to exceed the fixed fees payable to us.
 
Because most of our clinical development service revenue is from long-term fixed price contracts, we bear the risk of cost overruns under these contracts. If the costs of completing these projects exceed the fixed fees for these projects, our business, financial condition, and operating results could be adversely affected.
 
Our business depends on our senior management team, and the loss of any member of the team may harm our business.
 
We believe our success will depend on the continued employment of our senior management team. See Item 10. “Directors and Executive Officers of the Registrant — Executive Officers.” This management team has significant experience in the administration of a CRO. If one or more members of our senior management team were unable or unwilling to continue in their present positions, those persons could be difficult to replace and our business could be harmed. We do not currently maintain key person life insurance policies on any of our employees. If any of our key employees were to join a competitor or to form a competing company, some of our clients might choose to use the services of that competitor or new company instead of our own. Furthermore, clients or other companies seeking to develop in-house capabilities may hire away some of our senior management or key employees. In addition, although we have amended our senior management team’s employment agreements in response to a prior challenge of our non-competition provisions we cannot assure you that a court would enforce the non-competition provisions in the amended employment agreements.


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If we are unable to recruit and retain qualified personnel, we may not be able to expand our business or remain competitive.
 
Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical and managerial personnel. At the present time, approximately 28% of our workforce holds at least a master’s degree. There is intense competition for qualified personnel in the pharmaceutical and biotechnology fields. In the future, we may not be able to attract and retain the qualified personnel necessary for the conduct and further development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical, and managerial personnel in a timely manner, could harm our ability to expand our business and to remain competitive in the CRO industry.
 
Our business could be harmed if we are unable to manage our growth effectively.
 
We have experienced rapid growth throughout our operations. We believe that sustained growth places a strain on operational, human, and financial resources. To manage our growth, we must continue to improve our operating and administrative systems and to attract and retain qualified management, professional, scientific, and technical operating personnel. We believe that maintaining and enhancing both our systems and personnel at reasonable cost are instrumental to our success in the CRO industry. We cannot assure you that we will be able to enhance our current technology or obtain new technology that will enable our systems to keep pace with developments and the sophisticated needs of our clients. The nature and pace of our growth introduces risks associated with quality control and client dissatisfaction due to delays in performance or other problems. In addition, foreign operations involve the additional risks of assimilating differences in foreign business practices, hiring and retaining qualified personnel, and overcoming language barriers. It is also possible that with any future acquisitions, we will assume the problems of the acquired entity. Although past acquisitions have not resulted in any significant integration problems, we anticipate additional growth in the future and we may face these types of issues. Failure to manage growth effectively could have an adverse effect on us.
 
Our exposure to exchange rate fluctuations could negatively impact our results of operations.
 
We derived approximately 42% of our consolidated service revenue in 2005 from our operations outside of the United States, primarily from our operations in Europe and Canada, where significant amounts of our revenues and expenses are recorded in local currency. Our financial statements are presented in U.S. dollars. Accordingly, changes in currency exchange rates, particularly among the Euro, British pound, and the Canadian dollar, and the U.S. dollar, may cause fluctuations in our reported financial results that could be material.
 
In addition, a portion of our contracts with our clients are denominated in currencies other than the currency in which we incur expenses related to those contracts. In Canada, our contracts generally provide for invoicing clients in U.S. dollars, but our expenses are generally incurred in Canadian dollars. Where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could harm our results of operations.
 
In January, 2006, we entered into multiple foreign currency hedging transactions to mitigate exposure to movements between the U.S. dollar and the British pound and the U.S. dollar and Euro. These will expire in 2006.
 
We are subject to certain risks associated with our foreign operations.
 
We have offices and conduct business on six continents. Certain risks are inherent in these international operations.
 
The risks related to our foreign operations that we more often face in the normal course of business include:
 
  •  tax rates in certain foreign countries may exceed those in the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls, or other restrictions, including restrictions on repatriation; and
 
  •  general economic and political conditions in countries where we operate may have an adverse effect on our operations in those countries.


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Less frequently, we encounter the following risks:
 
  •  foreign customers may have longer payment cycles than customers in the United States;
 
  •  we may have difficulty complying with a variety of foreign laws and regulations, some of which may conflict with United States law;
 
  •  the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems; and
 
  •  the difficulties associated with managing a large organization spread throughout various countries.
 
While we have not experienced any major problems to date with the acquisition or operation of our foreign entities, we may in the future encounter certain limitations inherent in the carrying out of clinical development trials internationally, including establishing effective communications, operating in various time zones, and dealing with incompatible technology.
 
As we continue to expand our business globally, our success will be dependent, in part, on our ability to anticipate and effectively manage these and other risks associated with foreign operations. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or our business, financial condition, or results of operations as a whole.
 
We provide services to emerging companies which may be unable to pay us.
 
We incur costs in providing drug development services to our clients before we are paid. We provide drug development services to biotechnology companies, many of which are early-stage companies with relatively limited financial resources. If any of these companies were to cease operations before paying us for our services, or are otherwise unable to pay, our results of operations could suffer.
 
We have a significant amount of goodwill on our balance sheet, and a downturn in our business or industry could require us to take a charge to earnings, which may negatively affect the market price of our common stock.
 
Our balance sheet reflects a significant amount of goodwill, which represents $106.7 million, or approximately 32.4% of our total assets as of December 31, 2005. We review the amount of our goodwill whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be fully recoverable. To determine recoverability, we annually compare the fair value of our reporting unit (which is our company) to its carrying value. Although no event has occurred to date impairing our goodwill, there is a possibility that the carrying amount of the goodwill could be impaired if there is a downturn in our business or our industry or other factors affect the fair value of our business, in which case a charge to earnings would become necessary.
 
Our business depends significantly on the continued effectiveness of our information technology infrastructure, and failures of such technology could harm our operations.
 
To remain competitive in our industry, we must employ information technologies that capture, manage, and analyze the large streams of data generated during our clinical trials in compliance with applicable regulatory requirements. In addition, because we provide services on a global basis, we rely extensively on our technology to allow the concurrent conduct of studies and work sharing around the world. As with all information technology, our system is vulnerable to potential damage or interruptions from fires, blackouts, telecommunications failures, and other unexpected events, as well as to break-ins, sabotage, or intentional acts of vandalism. Given the extensive reliance of our business on this technology, any substantial disruption or resulting loss of data that is not avoided or corrected by our backup measures could harm our business and operations.
 
Our business could be harmed if we cannot successfully integrate future acquisitions.
 
We review acquisition candidates in the ordinary course of our business. Acquisitions involve numerous risks, including the expenses incurred in connection with the acquisition, the difficulties in assimilating operations, the diversion of management’s attention from other business concerns, and the potential loss of key employees of the acquired company. Acquisitions of foreign companies involve the additional risks of assimilating differences in


21

 

foreign business practices, hiring and retaining qualified personnel, and overcoming language barriers. We cannot assure you that we will successfully integrate future acquisitions into our operations.
 
We compete in a highly competitive market and if we do not compete successfully our business could be harmed.
 
We compete against other CROs, in-house development at large pharmaceutical companies, and, to a lesser extent, universities and teaching hospitals. Our principal competitors are traditional CROs, including Charles River Laboratories International, Inc., Covance Inc., ICON plc, INC Research, Inc., Kendle International Inc., MDS Pharma Services, PAREXEL International Corporation, Pharmaceutical Product Development, Inc., SFBC International, Inc., Quintiles Transnational Corp., United BioSource Corporation, and United HealthCare Corporation. Some of these competitors have greater capital and other resources than we do at the present time. As a result of competitive pressures and the potential for economies of scale, the industry continues to experience consolidation. This trend, as well as a trend by pharmaceutical companies and other clients to limit outsourcing to fewer organizations, in some cases through preferred vendor relationships, is likely to result in increased worldwide competition among the larger CROs for clients and acquisition candidates. We believe that major pharmaceutical and biotechnology companies have been developing preferred vendor relationships with full-service CROs, effectively excluding other CROs from the bidding process. Our preferred vendor relationships are not contractual and are subject to change at any time. We may find reduced access to certain potential clients due to preferred vendor arrangements with other competitors. In addition, the CRO industry has attracted the attention of the investment community, and increased potential financial resources are likely to lead to increased competition among CROs. There are few barriers to entry for small, limited-service entities entering the CRO industry, and these entities also may compete with established CROs for clients. We address the competition in our industry by continuing to focus on the quality of our services, maintaining our therapeutic expertise, and investing in our quality management system. Nevertheless, increased competition may lead to price and other forms of competition that could harm our business.
 
Risks Related to Our Industry
 
Our business could be harmed if the companies in the pharmaceutical and biotechnology industries to whom we offer our services reduce their research and development activities or reduce the extent to which they outsource clinical development.
 
Our business depends upon the ability and willingness of companies in the pharmaceutical and biotechnology industries to continue to spend on research and development at rates close to or at historical levels and to outsource the services we provide. We are therefore subject to risks, uncertainties, and trends thataffect companies in these industries. For example, we have benefited to date from the increasing tendency of pharmaceutical and biotechnology companies to outsource both small and large clinical development projects. Conversely, mergers and acquisitions in the pharmaceutical and biotechnology industries could have an impact on a company’s continued ability to outsource such projects to CROs. Any general downturn in the pharmaceutical or biotechnology industries, any reduction in research and development spending by companies in these industries, or any expansion of their in-house development capabilities could materially harm our business, financial condition, and operating results.
 
Our business and the businesses of our customers are subject to extensive regulation, and our results of operations could be harmed if regulatory standards change significantly or if we fail to maintain compliance with evolving, complex regulations.
 
Laws and regulations regarding the development and approval of drug and biological products have become increasingly stringent in both the United States and foreign jurisdictions, resulting in a need for more complex and often larger clinical studies. We believe that these trends have created an increased demand for CRO services from which our business benefits. Human pharmaceutical products and biological products are subject to rigorous regulation by the U.S. government (principally by the Food and Drug Administration, or FDA), and by foreign governments if products are tested or marketed abroad. A relaxation of the scope of regulatory requirements, such as


22

 

the introduction of simplified marketing applications for pharmaceuticals and biologics, could decrease the business opportunities available to us.
 
In addition, because we offer services relating to the conduct of clinical trials and the preparation of marketing applications, we are required to comply with applicable regulatory requirements governing, among other things, the design, conduct, performance, monitoring, auditing, recording, analysis, and reporting of these trials. In the United States, the FDA governs these activities pursuant to the agency’s Good Clinical Practice, or GCP, regulations. A failure to maintain compliance with the GCP or other applicable regulations could lead to a variety of sanctions, including, among other things, and depending on the nature of the violation and the type of product involved, the suspension or termination of a clinical study, civil penalties, criminal prosecutions, or debarment from assisting in the submission of new drug applications, or NDAs. While we monitor our clinical trials to test for compliance with applicable laws and regulations in the United States and foreign jurisdictions in which we operate, and have adopted standard operating procedures that are designed to satisfy regulatory requirements, our business spans multiple regulatory jurisdictions with varying, complex regulatory frameworks, and therefore we cannot assure you that our systems will ensure compliance in every instance in the future.
 
Circumstances beyond our control could cause the CRO industry to suffer reputational or other harm that could result in an industry-wide reduction in demand for CRO services, which could harm our business.
 
Demand for our services may be affected by perceptions of our customers regarding the CRO industry as a whole. For example, other CROs could engage in conduct that could render our customers less willing to do business with us or any CRO. Although to date no event has occurred causing industry-wide reputational harm, one or more CROs could engage in or fail to detect malfeasance, such as inadequately monitoring sites, producing inaccurate databases or analysis, falsifying patient records, and performing incomplete lab work, or take other actions that would reduce the confidence of our customers in the CRO industry. As a result, the willingness of pharmaceutical and biotechnology companies to outsource research and development services to CROs could diminish and our business could thus be harmed materially by events outside our control.
 
If we incur liability for hazardous material contamination, our business would be harmed.
 
Our clinical pharmacology unit conducts activities that have involved, and may continue to involve, the controlled use of hazardous materials and the creation of hazardous substances, including medical waste and other highly regulated substances. Although we believe that our safety procedures for handling the disposal of such materials comply with the standards prescribed by state and federal laws and regulations, our operations nevertheless pose the risk of accidental contamination or injury from these materials and the creation of hazardous substances, including medical waste and other highly regulated substances. In the event of such an accident, we could be held liable for damages and cleanup costs which, to the extent not covered by existing insurance or indemnification, could harm our business. In addition, other adverse effects could result from suchliability, including reputational damage resulting in the loss of additional business from certain clients. Our business could be materially harmed if we were required to pay damages beyond the level of any insurance coverage that may be in effect. To date, we have not been the subject of any investigations or claims related to the controlled use of hazardous materials and the creation of hazardous substances.
 
Our services are subject to evolving industry standards and rapid technological changes.
 
The markets for our services are characterized by rapidly changing technology, evolving industry standards and frequent introduction of new and enhanced services. To succeed, we must continue to introduce new services on a timely and cost-effective basis to meet evolving customer requirements, while achieving market acceptance for these new services. Additionally, we must continue to enhance our existing services and to successfully integrate new services with those already being offered. It is imperative that we respond to emerging industry standards and other technological changes. If we fail to make the necessary enhancements to our business, systems and products to keep pace with evolving industry standards, our competitive position and results of operations may suffer.


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Our clinical research services create a risk of liability and, if we are required to pay damages or to bear the costs of defending any claim not covered by contractual indemnity or insurance, this could cause material harm to our business.
 
Clinical research services involve the testing of new drugs, biologics, and devices on human volunteers. This testing creates risks of liability for personal injury, sickness or death of patients resulting from their participation in the study. These risks include, among other things, unforeseen adverse side effects, improper application or administration of a new drug, biologic, or device, and the professional malpractice of medical care providers. Many volunteer patients already are seriously ill and are at heightened risk of future illness or death. In connection with our provision of contract research services, we contract with physicians to serve as investigators in conducting clinical trials on human volunteers. 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 in the event of personal injury to or death of persons participating in clinical trials. We also could be held liable for errors or omissions in connection with the services we perform or for the general risks associated with our Phase I facility including, but not limited to, adverse reactions to the administration of drugs. Our business could be materially harmed if we were required to pay damages or bear the costs of defending any claim outside the scope of, or in excess of, the contractual indemnification provided by our customer that is beyond the level of any insurance coverage that may be in effect, or if an indemnifying party does not fulfill its indemnification obligations.
 
Health care industry reform could reduce or eliminate our business opportunities.
 
The health care industry is subject to changing political, economic, and regulatory influences that may affect the pharmaceutical and biotechnology industries. In recent years, several comprehensive health care reform proposals were introduced in the United States Congress. The intent of the proposals was, generally, to expand health care coverage for the uninsured and reduce the growth of total health care expenditures. In addition, foreign governments may also undertake health care reforms in their respective countries. These reforms, if adopted, would make the development of new drugs less profitable for our customers, and could reduce their research and development budgets. Business opportunities available to us could decrease materially if the implementation of government health care reform adversely affects research and development expenditures by pharmaceutical and biotechnology companies.
 
Risks Related to Our Common Stock
 
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
 
The trading price of our common stock is likely to be volatile, and such volatility could prevent you from being able to sell your shares at or above the price you paid for your shares. The stock market, and the stock of companies in our industry in particular, has experienced volatility, and this volatility has often been unrelated to the operating performance of particular companies. Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our business or to investor perception of our business (including changes in financial estimates and recommendations by financial analysts who follow us), but also factors relating to (or relating to investor perception of) the drug development services industry, the pharmaceutical and biotechnology industries, or the economy in general. Thus, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and the fluctuations could result in a material reduction in our stock price.
 
The sale of a substantial number of our shares of common stock in the public market could reduce the market price of our shares, which in turn could negatively impact your investment in us.
 
Future sales of a substantial number of shares of our common stock in the public market (or the perception that such sales may occur) could reduce our stock price and could impair our ability to raise capital through future sales of our equity securities. As of January 31, 2006, we have 22,934,871 shares of common stock issued and outstanding, of which 14,071,373 shares of our common stock are available for sale in the public market and an


24

 

additional 8,863,498 are available for sale in the public market at various times (subject, in some cases, to volume limitations under Rule 144). In addition, stockholders that collectively own 3,591,718 shares of our common stock have registration rights with respect to their shares that may be exercised at any time, subject to certain limitations.
 
We and our stockholders are able to sell our shares in the public market, subject to restrictions on shares held by affiliates. Sales of a substantial number of such shares (or the perception that such sales may occur) could cause our share price to fall. Our principal stockholders hold shares of our common stock in which they have a very large unrealized gain, and these stockholders may wish, to the extent they may permissibly do so, to realize some or all of that gain relatively quickly by selling some or all of their shares. We may also issue shares of our common stock from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition, we may grant registration rights covering those shares in connection with any such acquisitions and investments.
 
In addition, we may sell, or register to sell on a delayed or continuous basis under Rule 415, additional shares of our common stock or other securities to raise capital. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price of our common stock. The issuance and sales of substantial amounts of common stock or other securities, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock.
 
We have implemented certain provisions that could make any change in our board of directors or in control of our company more difficult.
 
Our certificate of incorporation, our bylaws and Delaware law contain provisions, such as provisions authorizing, without a vote of stockholders, the issuance of one or more series of preferred stock, that could make it difficult or expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors even if such a transaction would be beneficial to our stockholders. We also have a staggered board of directors that could make it more difficult for stockholders to change the composition of our board of directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to change our management and board of directors.
 
Our largest stockholders continue to have significant influence over us, and they may make decisions with which you disagree.
 
Genstar Capital Partners III, L.P., Baron Capital Group, Inc., Wasatch Advisors, Inc., FMR Corporation, Artisan Investment Corporation, and Waddell & Reed Financial beneficially own approximately 45.1% of the outstanding shares of common stock (or approximately 43.1% of the shares of common stock on a diluted basis). If these stockholders choose to act in concert on any action requiring stockholder approval, they could have a significant influence on the outcome of such action. The interests of these current stockholders may conflict with your interests, and we cannot assure you that they will resolve any such conflict in a manner with which you agree. In addition, this concentration of ownership could have the effect of discouraging potential takeover attempts and may make attempts by stockholders to change our management more difficult.
 
Because we typically have not paid dividends and do not anticipate paying dividends on our common stock for the indefinite future, you should not expect to receive dividends on shares of our common stock.
 
We have no present plans to pay cash dividends to our stockholders and, for the indefinite future, intend to retain all of our earnings for use in our business. The declaration of any future dividends by us is within the discretion of our board of directors and will be dependent on our earnings, financial condition, and capital requirements, as well as any other factors deemed relevant by our board of directors. Although we paid a special dividend to our stockholders in January 2004, the dividend was an unusual event that we do not expect to recur. Accordingly, you should not expect to receive dividends on shares of our common stock.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.


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ITEM 2.   DESCRIPTION OF PROPERTIES
 
We lease a facility for our corporate headquarters in Northern Virginia, just outside of Washington, D.C. We also lease other offices in North America, Europe, Africa, South America, Australia, and Asia. In 2005, our total rental expense for our facilities and offices was approximately $12.6 million. We do not own any real estate. We believe that our properties, taken as a whole, are in good operating condition and are suitable for our business operations.
 
ITEM 3.   LEGAL PROCEEDINGS
 
In September 2005, the International Chamber of Commerce, International Court of Arbitration (the “Court”) decided an arbitration proceeding with Cell Therapeutics, Inc. (formerly Novuspharma S.p.A) related to a dispute over the performance of clinical trial services. The Court awarded 317,156 Euros plus interest to the Company for unpaid services and expenses. The Court awarded 892,080 Euros plus interest to Cell Therapeutics, Inc. for damages and refunds of prior payments. As a net amount, we paid Novuspharma a total amount of approximately 560,000 Euros (inclusive of interest) as the final award.
 
We are also currently involved, as we are from time to time, in legal proceedings that arise in the ordinary course of our business. We believe that we have adequately reserved for these liabilities and that there is no other litigation pending that could materially harm our results of operations and financial condition.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II
 
ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Our common stock is currently traded on The Nasdaq National Market under the symbol “PRAI.” Prior to November 18, 2004 no established public trading market for the common stock existed.
 
As of January 31, 2006, there were approximately 73 holders of record of shares of our common stock.
 
The table below shows, for the quarters indicated, the reported high and low trading prices of our common stock on The Nasdaq National Market.
 
                 
    High     Low  
 
Calendar Year 2004
               
First Quarter
    N/A       N/A  
Second Quarter
    N/A       N/A  
Third Quarter
    N/A       N/A  
Fourth Quarter
  $ 24.95     $ 19.00  
 
                 
    High     Low  
 
Calendar Year 2005
               
First Quarter
  $ 28.30     $ 22.26  
Second Quarter
  $ 27.43     $ 23.15  
Third Quarter
  $ 31.25     $ 25.38  
Fourth Quarter
  $ 30.43     $ 25.48  
 
As of February 28, 2006, the closing price of our common stock was $26.35.


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Dividend Policy
 
We intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends for the foreseeable future. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions, and covenants under any applicable contractual arrangements. In addition, our revolving credit facility restricts our ability to pay dividends under certain circumstances. See Item 7 “Management’s Discussion and Analysis — Liquidity and Capital Resources.”
 
In January 2004, our board of directors declared a $0.94 per share dividend payable to all stockholders and a $0.94 per option bonus to all current employee option holders, or a total of approximately $19.6 million. The dividend and option bonuses were paid during 2004.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
All of our stock option plans under which shares of our common stock are reserved for issuance have previously been approved by our stockholders. As of December 31, 2005, 3,149,373 shares of our common stock are issuable upon exercise of outstanding options at a weighted average exercise price of $11.60 per share, and options exercisable into 1,735,275 shares of our common stock remain available for future issuance (excluding shares issuable upon exercise of outstanding options).
 
                         
                Number of
 		 
                Securities
 		 
                Remaining Available
 		 
    Number of
 		          for Future Issuance
 		 
    Securities to be
 		          Under Equity
 		 
    Issued Upon
 		    Weighted-Average
 		    Compensation Plans
 		 
    Exercise of
 		    Exercise Price of
 		    (Excluding
 		 
    Outstanding
 		    Outstanding
 		    Securities
 		 
    Options, Warrants
 		    Options, Warrants
 		    Reflected In Column
 		 
Plan Category
  and Rights     and Rights     (a))  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    3,149,373     $ 11.60       1,735,275  
Equity compensation plans not approved by security holders
    0       0       0  
Total
    3,149,373     $ 11.60       1,735,275  
 
Recent Sales of Unregistered Securities
 
(1) In December 2003, in connection with our acquisition of ClinCare Consulting BVBA, we issued to certain holders of shares of capital stock of ClinCare an aggregate of 156,824 shares of our common stock as partial consideration for shares of ClinCare held by these holders pursuant to that certain Agreement for the Sale and Purchase of the Entire Issued Share Capital of ClinCare Consulting BVBA dated December 1, 2003.
 
(2) In March 2004, in connection with our acquisition of PerinClinical Ltd., we issued an aggregate of 28,232 shares of our common stock to PerinClinical Ltd. as partial consideration for assets of PerinClinical Ltd.pursuant to that certain Asset Purchase Agreement between PerinClinical Ltd., Pharm. Research Associates (UK) Ltd., and Nermeen Y. Varawalla, dated March 25, 2004. Half of these shares (14,116 shares) are held in escrow for two years from the date of the agreement based on the occurrence of certain conditions.
 
(3) From May 2002 through November 2004, we granted options to purchase shares of our common stock to employees, directors and consultants at exercise prices ranging from $6.56 to $19.00 per share. Of the options granted, options representing 2,042,602 shares remain outstanding, 60,398 shares of common stock have been issued pursuant to exercises of stock options and options representing 253,500 shares have been cancelled and returned to the stock option plan pool.
 
(4) In addition to the foregoing option grants, since January 1, 2003, we issued options to purchase 165,648 shares of our common stock at an exercise price of $0.19 per share in connection with our


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acquisition of CroMedica in June 2002 in exchange for options to acquire shares of the capital stock of CroMedica, of which 37,354 remain outstanding.
 
The offers, sales and issuances of securities described in paragraph (2) of this Item 15 were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering. The recipients of securities in that transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates, notes and warrants issued in such transactions. Each of the recipients of securities in the transactions described in paragraph (2) represented they were accredited investors as defined under the Securities Act.
 
The offers, sales and issuances of common stock described in paragraph (1) of this Item 15 were deemed exempt from registration in reliance on Regulation S under the Securities Act as transactions made outside of the United States. Each of the recipients of securities in the transaction described in paragraph (1) represented, among other things,that they were not a U.S. person and were not purchasing for the benefit of a U.S. person. Appropriate legends were affixed to the share certificates issued in such transactions. The offers, sales and issuances of the options and common stock described in paragraphs (3) and (4) of this Item 15 were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under such rule and/or Regulation D. The recipients of such options and common stock were our employees, directors or bona fide consultants. Appropriate legends were affixed to the share certificates issued in such transactions. Each of these recipients had adequate access, through employment or other relationships, to information about us.
 
Use of Proceeds from Initial Public Offering
 
On November 17, 2004, we commenced the initial public offering of our common stock, $.01 par value per share. The registration statement relating to this offering (File No. 333-116424) was declared effective on November 17, 2004. Credit Suisse First Boston Corporation LLC and Bear, Stearns & Co. Inc. were the representatives and joint book running managers for the various underwriters. We consummated the offering on November 23, 2004.
 
The number of shares registered, the aggregate price of the offering amount registered, the number of shares sold and the aggregate offering price of the amount sold by us and by the selling stockholders in the offering, were as follows:
 
                                 
          Aggregate Price
 		             
    Number of
 		    of Offering
 		          Aggregate
 		 
    Shares
 		    Amount
 		    Number of
 		    Offering Price
 		 
    Registered     Registered     Shares Sold     of Shares Sold  
 
Common stock sold by us
    3,872,834     $ 73,583,846       3,872,834     $ 73,583,846  
Common stock sold by selling stockholders
    3,027,166     $ 57,516,154       3,027,166     $ 57,516,154  
                                 
      6,900,000     $ 131,100,000       6,900,000     $ 131,100,000  
                                 
 
As of December 31, 2004, we incurred the following expenses with respect to the offering. None of the following expenses were direct or indirect payments to our directors or officers, or their affiliates or to persons owning 10% or more of any class of our equity securities or to our affiliates:
 
                         
Underwriting Discounts
 		      Underwriters’
 		        Total Company
 		 
and Commissions
  Finders’ Fees   Expenses   Other Expenses     Expenses  
 
$5,150,869.22
  $—   $—   $ 1,413,056     $ 6,563,925  
 
The net proceeds to us from the offering after deducting the foregoing discounts, commissions, fees and expenses were $67.0 million. Since the offering we have used $28.7 million of the net proceeds to extinguish all outstanding principal and accrued interest under our credit facilities and have applied the balance of the net proceeds to general corporate purposes.


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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA
 
The following table represents selected historical consolidated financial data. The statement of operations data for the years ended December 31, 2003, 2004 and 2005 and balance sheet data at December 31, 2004 and 2005 are derived from our audited consolidated financial statements included elsewhere in this report. The statement of operations data for the years ended December 31, 2001 and 2002, and the balance sheet data at December 31, 2001, 2002 and 2003 are derived from audited consolidated financial statements not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes to the financial statements.
 
                                                   
     Predecessor       Successor  
    Period from
 		      Period from
 		                         
    January 1, 2001 to
 		      June 28, 2001
 		                         
    June 27,
 		      to December 31,
 		    Year Ended December 31,  
    2001       2001     2002     2003     2004     2005  
Revenue
                                                 
Service revenue
  $ 55,477       $ 59,600     $ 176,365     $ 247,888     $ 277,479       294,739  
Reimbursement revenue
    7,491         8,316       24,648       42,109       30,165       31,505  
                                                   
Total revenue
  $ 62,968       $ 67,916     $ 201,013     $ 289,997     $ 307,644       326,244  
Operating expenses
                                                 
Direct costs
    29,078         31,008       94,761       126,501       134,067       136,572  
Reimbursable out-of-pocket costs
    7,491         8,316       24,648       42,109       30,165       31,505  
Selling, general, and administrative
    19,548         19,903       57,897       80,585       90,139       95,827  
Depreciation and amortization
    2,244         5,016       6,956       8,967       9,691       11,156  
Merger costs(1)
    1,000         —       —       —       —       —  
Management fee
    —         396       800       800       704       —  
Option repurchase(2)
    —         —       —       —       3,713       —  
Vested option bonus(2)
    —         —       —       —       2,738       —  
                                                   
Income from operations
    3,607         3,277       15,951       31,035       36,427       51,184  
Interest (expense) income, net
    (158 )       (2,279 )     (4,100 )     (6,856 )     (3,643 )     1,181  
Other income (expenses), net
    53         13       (721 )     (4,023 )     (38 )     (1,137 )
                                                   
Income before income taxes
    3,502         1,011       11,130       20,156       32,746       51,228  
Provision for income taxes
    1,751         1,139       5,493       6,909       11,997       19,005  
                                                   
Net income (loss)
  $ 1,751       $ (128 )   $ 5,637     $ 13,247     $ 20,749     $ 32,223  
                                                   
Net income (loss) per share
                                                 
Basic
  $ 0.25       $ (0.01 )   $ 0.37     $ 0.83     $ 1.13     $ 1.43  
Diluted
  $ 0.21       $ (0.01 )   $ 0.32     $ 0.71     $ 1.02     $ 1.32  
Shares used to compute net income (loss) per share(3)(4):
                                                 
Basic
    3,301,574         13,965,364       15,204,232       15,965,408       18,442,313       22,527,108  
Diluted
    3,968,335         13,965,364       17,557,632       18,666,012       20,329,852       24,389,592  
Other Financial Data:
                                                 
Net cash provided (used in) by operating activities
  $ 5,394       $ 21,332     $ 28,442     $ 2,058     $ 71,636     $ (1,477 )
Net cash (used in) provided by investing activities
    (3,238 )       (2,721 )     (24,625 )     (9,599 )     (32,350 )     4,016  
Net cash (used in) provided by financing activities
    128         (995 )     (14,581 )     26,028       (6,430 )     5,441  
Non-GAAP Data:
                                                 
Adjusted EBITDA(5)
  $ 5,904       $ 8,306     $ 22,186     $ 35,979     $ 52,531     $ 61,203  
Adjusted EBITDA as a % of service revenue
    10.6 %       13.9 %     12.6 %     14.5 %     18.9 %     20.8 %
EBITDA(5)
  $ 5,904       $ 8,306     $ 22,186     $ 35,979     $ 46,080     $ 61,203  
EBITDA as a % of service revenue
    10.6 %       13.9 %     12.6 %     14.5 %     16.6 %     20.8 %
 
                                                 
 


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    As of December 31,  
    2001     2002     2003     2004     2005  
    (Dollars in thousands)  
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 23,712     $ 13,798     $ 32,328     $ 65,888     $ 73,640  
Marketable securities
    —       —       —       24,500       —  
Working capital
    (5,279 )     (43,429 )     (8,449 )     11,478       41,760  
Total assets
    180,261       254,547       298,558       337,344       329,364  
Long — term debt and capital leases, less current maturities
    44,437       32,509       57,810       75       9  
Stockholders’ equity
    43,253       59,088       74,565       150,379       188,866  
 
 
(1) Comprises payments to management in connection with our June 2001 recapitalization.
 
(2) Includes a $3.7 million charge for the repurchase of options, predominantly from former employees, and a $2.7 million charge for a per-vested-option bonus paid to all employee option holders, both of which were executed in connection with the culmination of the January 2004 tender process.
 
(3) Net income (loss) per share and shares used to compute net income (loss) per share amounts for 2001 is presented on an unaudited basis. Net income (loss) per share includes $0.9 million for the period from January 1, 2001 to June 27, 2001 for dividends and accretion on preferred stock, which reduces net income available to common stockholders.
 
(4) Net income (loss) per share and shares used to compute net income (loss) per share for all periods following the predecessor period gives effect to a four-for-one stock split of our common stock effected prior to completion of the offering.
 
(5) Adjusted EBITDA and EBITDA are not substitutes for operating income, net income, or cash flow from operating activities as determined in accordance with GAAP as measures of performance or liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.” For each of the periods indicated, the following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net cash provided by (used in) operating activities and to net income (loss).
 

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    Predecessor       Successor  
    Period from
 		       Period from
 		                         
    January 1, 2001
 		      June 28, 2001
 		                         
    to June 27,
 		      to December 31,
 		    Year Ended December 31,  
    2001       2001     2002     2003     2004     2005  
    (Dollars in thousands)  
Adjusted EBITDA
  $ 5,904       $ 8,306     $ 22,186     $ 35,979     $ 52,531     $ 61,203  
Option repurchase
    —         —       —       —       (3,713 )     —  
Vested option bonus
    —         —       —       —       (2,738 )     —  
                                                   
EBITDA
    5,904         8,306       22,186       35,979       46,080       61,203  
Depreciation and amortization
    (2,244 )       (5,016 )     (6,956 )     (8,967 )     (9,691 )     (11,156 )
Interest expense, net
    (158 )       (2,279 )     (4,100 )     (6,856 )     (3,643 )     1,181  
Provision for income taxes
    (1,751 )       (1,139 )     (5,493 )     (6,909 )     (11,997 )     (19,005 )
                                                   
Net income (loss)
    1,751         (128 )     5,637       13,247       20,749       32,223  
Depreciation and amortization
    2,244         5,016       6,956       8,967       9,691       11,156  
Provision for doubtful receivables
    250         76       1,888       4,851       1,914       (123 )
Amortization of debt discount
    —         126       379       1,642       —       —  
Stock-based compensation
    —         —       —       —       —       —  
Provision for deferred income taxes
    612         (2,672 )     (1,228 )     (3,997 )     2,606       2,354  
Debt issuance costs write-off
    —         —       —       750       1,241       —  
Changes in assets and liabilities:
                                                 
Accounts receivable and unbilled services
    5,794         (8,711 )     (29,251 )     (18,538 )     15,373       (3,057 )
Prepaid expenses and other assets
    (5,187 )       2,934       1,444       408       1,226       (2,465 )
Accounts payable and accrued expenses
    4,330         452       3,481       (4,873 )     7,793       11,022  
Income taxes
    (1,605 )       434       989       (481 )     12,150       (3,677 )
Advance billings
    (2,795 )       23,805       38,147       82       (1,107 )     (48,910 )
                                                   
Net cash provided by operating activities
  $ 5,394       $ 21,332     $ 28,442     $ 2,058     $ 71,636     $ (1,477 )  
                                                   
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information included elsewhere in this report. This discussion contains forward-looking statements about our business and operations. Our actual results could differ materially from those anticipated in such forward-looking statements.
 
Overview
 
We provide clinical drug development services on a contract basis to biotechnology and pharmaceutical companies worldwide. We conduct clinical trials globally and are one of a limited number of CROs with the

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capability to serve the growing need of pharmaceutical and biotechnology companies to conduct complex clinical trials in multiple geographies concurrently. We offer our clients high-quality services designed to provide data to clients as rapidly as possible and reduce product development time. We believe our ISO 9001:2000 certified services enable our clients to introduce their products into the marketplace faster and, as a result, maximize the period of market exclusivity and monetary return on their research and development investments. Additionally, our comprehensive services and broad experience provide our clients with a variable cost alternative to fixed cost internal development capabilities.
 
Contracts determine our relationships with clients in the pharmaceutical and biotechnology industries and establish the way we are to earn revenue. Two types of relationships are most common: a fixed-price contract or a time and materials contract. The duration of our contracts ranges from a few months to several years. A fixed-price contract typically requires a portion of the contract fee to be paid at the time the contract is entered into and the balance is received in installments over the contract’s duration, in most cases when certain performance targets or milestones are reached. Service revenues from fixed-price contracts are generally recognized on a proportional performance basis, measured principally by the total costs incurred as a percentage of estimated total costs for each contract. We also perform work under time and materials contracts, recognizing service revenue as hours are incurred, which is then multiplied by the contractual billing rate. Our costs consist of expenses necessary to carry out the clinical development project undertaken by us on behalf of the client. These costs primarily include the expense of obtaining appropriately qualified labor to administer the project, which we refer to as direct cost headcount. Other costs we incur are attributable to the expense of operating our business generally, such as leases and maintenance of information technology and equipment.
 
We review various financial and operational metrics, including service revenue, margins, earnings, new business awards, and backlog to evaluate our financial performance. Our service revenue was $247.9 million in 2003, $277.5 million in 2004 and $294.7 million in 2005. Once contracted work begins, service revenue is recognized over the life of the contract as services are performed. We commence service revenue recognition when a contract is signed or when we receive a signed letter of intent.
 
Our new business awards during the years ended December 31, 2003, 2004 and 2005 were $317.4 million, $427.4 million and $479.3 million, respectively. New business awards arise when a client selects us to execute its trial and so indicates by written or electronic correspondence. The number of new business awards can vary significantly from quarter to quarter, and awards can have terms ranging from several months to several years. The value of a new award is the anticipated service revenue over the life of the contract, which does not include reimbursement activity or investigator fees.
 
Our backlog consists of anticipated service revenue from new business awards that either have not started but are anticipated to begin in the near future or are contracts in process that have not been completed. Backlog varies from period to period depending upon new business awards and contract increases, cancellations, and the amount of service revenue recognized under existing contracts. Our backlog at December 31, 2003, 2004 and 2005 was $360.6 million, $448.8 million and $552.9 million, respectively.
 
From 2001 to 2005, our service revenue grew 156.1%, and our backlog grew 174.5%. This growth resulted primarily from an increase in our global projects. Global projects are typically larger in scope and increased from 11 projects in 2001 to 47 in 2005.
 
Income from operations was $31.0 million in 2003, $36.4 million in 2004, which includes a one-time $3.7 million charge for the repurchase of options and a $2.7 million charge for a per-vested-option bonus paid to all employee option holders, and $51.2 million in 2005. This growth reflects improved productivity and organic growth. We attribute the improvement in productivity to rapid integration of our acquisitions, initiatives focused on rigorous clinical trial execution, and management of employee turnover.
 
During the three-year period ended December 31, 2005, we expanded our operations in part by organic growth and through four strategic acquisitions, which were funded from cash generated from operating activities and the limited issuance of equity securities.
 
During the second quarter of 2005, we acquired all of the outstanding equity of GMG BioBusiness Ltd (GMG) and Regulatory/Clinical Consultants, Inc. (RxCCI). GMG and RxCCI enhanced our existing service offerings in our


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global regulatory affairs group, including our electronic publishing capabilities. We paid approximately $7.3 million in aggregate cash for these acquisitions.
 
On October 8, 2003, we acquired all of the assets of Valid-Trio GmbH. These assets mainly comprised Valid-Trio’s business operated through its branch in Moscow, Russia. Valid-Trio expanded our capabilities to conduct clinical trials in Russia, Ukraine, Romania, and bordering countries. We paid $0.2 million in cash.
 
On December 1, 2003, we acquired all of the outstanding equity of ClinCare Consulting BVBA, based in Brussels, Belgium. ClinCare strengthened our capabilities in cardiovascular, CNS, oncology, and rheumatology clinical development and expanded our operations in Belgium. We paid approximately $2.8 million in cash and equity securities, net of cash acquired.
 
Based on detailed pre-closing integration plans, each of these acquisitions was fully integrated within 100 days of the closing. These plans facilitated the immediate and seamless integration of each acquisition into our operating systems and procedures from the effective date of the acquisition.
 
During the years ended December 31, 2003 and 2004, we paid a management fee to Genstar Capital, L.P., an affiliate of our principal stockholder, totaling $0.8 million and $0.7 million, respectively. Subsequent to ourinitial public offering, we ceased paying this management fee, which has been more than offset by the costs of being a public company, in particular the Sarbanes-Oxley compliance costs.
 
Service Revenue
 
We recognize service revenue from fixed-price contracts on a proportional performance basis as services are provided. To measure performance on a given date, we compare each contract’s direct cost incurred to such contract’s total estimated direct cost through completion. We believe this is the best indicator of the performance of the contractual obligations because the costs relate to the amount of labor incurred to perform the service revenues. For time and materials contracts, revenue is recognized as hours are incurred, multiplied by contractual billing rates. Our contracts often undergo modifications, which can change the amount of and the period of time in which to perform services. Our contracts provide for such modifications.
 
Most of our contracts can be terminated by our clients after a specified period, typically 30 to 60 days, following notice by the client. In the case of early termination, these contracts typically require payment to us of expenses to wind down a study, payment to us of fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Based on ethical, regulatory, and health considerations, this wind-down activity may continue for several quarters or years.
 
Reimbursement Revenue and Reimbursable Out-of-Pocket Costs
 
We incur out-of-pocket costs, which are reimbursable by our customers. We include these out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket expenses in our consolidated statement of operations. In addition, we routinely enter into separate agreements on behalf of our clients with independent physician investigators, to whom we pay fees, in connection with clinical trials. These investigator fees are not reflected in our service revenue, reimbursement revenue, reimbursable out-of-pocket costs, and/or direct costs, since such fees are reimbursed by our clients, on a “pass-through” basis, without risk or reward to us, and we are not otherwise obligated to either perform the service or to pay the investigator in the event of default by the client. Reimbursement costs and investigator fees are not included in our backlog.
 
Direct Costs
 
Direct costs consist of amounts necessary to carry out the revenue and earnings process, and include direct labor and related benefit charges and other costs primarily related to the execution of our contracts. Direct costs as a percentage of service revenue fluctuate from one period to another as a result of changes in labor utilization in the multitude of studies conducted during any period of time.


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Selling, General, and Administrative Expenses
 
Selling, general, and administrative expenses consist of administration payroll and benefits, marketing expenditures, and overhead costs such as information technology and facilities costs. These expenses also include central overhead costs that are not directly attributable to our operating business and include certain costs related to insurance, professional fees, and property.
 
Depreciation and Amortization
 
Depreciation represents the depreciation charged on our fixed assets. The charge is recorded on a straight-line method, based on estimated useful lives of three to seven years for computer hardware and software and five to seven years for furniture, fixtures, and equipment. Leasehold improvements are depreciated over ten years or the life of the lease term. Amortization expenses consist of amortization costs recorded on identified finite-lived intangible assets on a straight-line method over their estimated useful lives. Goodwill and indefinite-lived intangible assets were being amortized prior to January 1, 2002. Pursuant to SFAS No. 142 “Goodwill and Other Intangible Assets” we do not amortize goodwill and indefinite-lived intangible assets.
 
Exchange Rate Fluctuations
 
The majority of our foreign operations transact in the euro, pound sterling, or Canadian dollar. As a result, our revenue is subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies into U.S. dollars using the following average exchange rates:
 
                         
    Year  
    2003     2004     2005  
 
U.S. Dollars per:
                       
Euro
    1.1378       1.2466       1.2371  
Pound Sterling
    1.6431       1.8362       1.8126  
Canadian Dollar
    0.7181       0.7716       0.8279  


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Results of Operations
 
Many of our current contracts include clinical trials covering multiple geographic locations. We utilize the same management systems and reporting tools to monitor and manage these activities on the same basis worldwide. For this reason, we consider our operations to be a single business unit, and we present our results of operations as a single reportable segment.
 
The following table summarizes certain statement of operations data as a percentage of service revenue for the periods shown. We monitor and measure costs as a percentage of service revenue rather than total revenue as this is a more meaningful comparison and better reflects the operations of our business.
 
                         
    Year Ended December 31,  
    2003     2004     2005  
 
Service revenue
    100.0 %     100.0 %     100.0 %
Direct costs
    51.0       48.3       46.3  
Selling, general, and administrative
    32.5       32.5       32.5  
Depreciation and amortization
    3.6       3.5       3.8  
Management fee
    0.3       0.3       —  
Option repurchase
    —       1.3       —  
Vested option bonus
    —       0.9       —  
Income from operations
    12.5       13.1       17.4  
Interest expense
    (2.9 )     (1.4 )     (0.2 )
Interest income
    0.1       0.1       0.6  
Other income (expenses), net
    (1.6 )     —       (0.4 )
Income before income taxes
    8.1       11.8       17.4  
Provision for income taxes
    2.8       4.3       6.4  
Net income (loss)
    5.3 %     7.5 %     10.9 %
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
Service revenue increased by $17.2 million, or 6.2%, from $277.5 million in 2004 to $294.7 million in 2005 due to the expansion of our services to both existing and new clients and a favorable impact from foreign currency fluctuations of approximately $2.6 million. On a geographic basis, service revenue for 2005 was distributed as follows: North America $199.3 million (67.6%), Europe $86.5 million (29.3%), and rest of world $8.9 million (3.1%). During 2004 service revenue was distributed as follows: North America $200.4 million (72.2%), Europe $70.7 million (25.5%), and rest of world $6.4 million (2.3%). We continue to experience a shifting of work from North America into Europe and the rest of the world, as we execute more complex global trials which necessitated the expansion of work into these locales.
 
Direct costs increased by $2.5 million, or 1.9%, from $134.1 million in 2004 to $136.6 million for 2005, due to increased personnel costs needed to support increased project related activity and were affected by an unfavorable impact from foreign currency fluctuations of approximately $1.0 million. Direct costs as a percentage of service revenue decreased from 48.3% in 2004 to 46.3% for 2005. The improvement was a function of our attention to the efficient execution of project work. Of note was an improvement in 2005 in our gross margin for project work executed in certain European and Southern Hemisphere locations. We are experiencing a growth in the level of global work and the related execution of work outside of North America, which has positively impacted our overall gross margins. Additionally, there were certain significant projects,where we achieved operational milestones in 2005, which resulted in marginal efficiencies being realized from those projects.
 
Selling, general, and administrative expenses increased by $5.7 million, or 6.3%, from $90.1 million in 2004 to $95.8 million for 2005 and were affected by an unfavorable impact from foreign currency fluctuations of approximately $0.6 million. Approximately $4.2 million of this increase is related to labor costs incurred to support increased operational activity. Selling, general, and administrative expenses as a percentage of service revenue were 32.5% for both 2004 and 2005. The 2004 period had one-time lease termination charges of


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approximately $1.3 million which were partially offset by incremental, first time costs for our Sarbanes-oxley compliance program and the charge for the resolution of the Cell Therapeutics arbitration in 2005. The 2005 fourth quarter sequential decline in selling, general, and administrative expense is due in part to the timing of Sarbanes-Oxley expenses, the timing of our accruals for incentive compensation, and adjustments made to our bad debt reserve.
 
Depreciation and amortization expense increased by approximately $1.5 million, or 15.5%, from $9.7 million for 2004 to $11.2 million for 2005. This increase is due to continued investment in facilities and information technology to support our growth. Depreciation and amortization expense as a percentage of service revenue was 3.5% for 2004 and 3.8% for 2005.
 
Income from operations increased by $14.8 million, or 40.7%, from $36.4 million in 2004 to $51.2 million for 2005. Income from operations as a percentage of service revenue increased from 13.1% in 2004 to 17.4% in 2005. In January 2004, we closed our $25.0 million tender offer and special dividend/employee option bonus program. We repurchased $3.7 million of options and paid $2.7 million to employee holders of vested options. Approximately $6.5 million was expensed related to these items in 2004. The increase in income from operations resulted from improved operating leverage across the company and the 2004 expenses incurred related to the option repurchase and bonus program which did not occur in 2005.
 
Interest income, net increased by $4.8 million, or 133.3%, from expense of $3.6 million in 2004 to income of $1.2 million in 2005. This increase is due to the interest earned from the cash proceeds from our initial public offering and the extinguishment of debt during the fourth quarter of 2004.
 
Other expenses, net increased by $1.1 million from $0.0 million in 2004 to $1.1 million for the same period of 2005. The increase is attributable to net realized and unrealized loss from transactions in multiple currencies.
 
Our effective tax rate for 2005 was 37.1% as compared to 36.6% for the prior year. This increase is due in part to the realization of acquisition related net operating loss carryforwards which were reflected as reductions in the related goodwill balance rather than as a reduction in the tax rate.
 
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
 
Service revenue increased by $29.6 million, or 11.9%, from $247.9 million in 2003 to $277.5 million in 2004 due to the expansion of our services to both existing and new clients and a favorable impact from foreign currency fluctuations of approximately $8.7 million. On a geographic basis, service revenue for 2004 was distributed as follows: North America $200.4 million (72.2%), Europe $70.7 million (25.5%), and rest of world $6.4 million (2.3%). For 2003 service revenue was distributed as follows: North America $192.0 million (77.5%), Europe$52.1 million (21.0%), and rest of world $3.8 million (1.5%). Our European service revenue for 2004 increased due to our execution of more global trials, the opening of new locations, and recent acquisitions.
 
Direct costs increased by $7.6 million, or 6.0%, from $126.5 million in 2003 to $134.1 million in 2004 due to increased personnel needed to support increased project related activity. Direct costs as a percentage of service revenue decreased from 51.0% in 2003 to 48.3% in 2004, due to the achievement of improved operating efficiencies, as evidenced by a 9.2% increase in direct labor costs compared to an 11.9% increase in service revenue. This was achieved as previously trained employees attained higher efficiency and productivity levels and as the percentage of our new employees to total employees declined.
 
Selling, general, and administrative expenses increased by $9.5 million, or 11.8%, from $80.6 million in 2003 to $90.1 million in 2004. Selling, general, and administrative expenses as a percentage of service revenue was 32.5% in 2003 and 2004. In July 2004, we signed a lease for our new corporate office and moved fromMcLean, Virginia, to our new location in Reston, Virginia, in November 2004. Included in SG&A is $1.3 million of estimated lease termination charges related to this relocation. During the second quarter of 2003 we closed our Cambridge, England office to eliminate excess internal capacity. We recorded an expense of $2.6 million related to this action, which is recorded in selling, general and administrative expenses and consists primarily of lease termination costs.


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Depreciation and amortization expense increased by approximately $0.7 million, or 7.8%, from $9.0 million in 2003 to $9.7 million in 2004. Depreciation and amortization expense as a percentage of service revenue was 3.6% in 2003 and 3.5% in 2004.
 
Income from operations increased by $5.4 million, or 17.4%, from $31.0 million in 2003 to $36.4 million in 2004. Income from operations as a percentage of service revenue increased from 12.5% in 2003 to 13.1% in 2004. In January 2004, we closed our $25.0 million tender offer and special dividend/employee option bonus program. In connection with this program, we repurchased $3.7 million of options and paid $2.7 million to employee holders of vested options. Both of these items were expensed in 2004. The increase in income from operations resulted from improved operating leverage from increased utilization across the company, partially offset by the $6.5 million aggregate charge incurred in connection with the option repurchase and bonus program.
 
Interest expense, net decreased by $3.3 million, or 47.8%, from $6.9 million in 2003 to $3.6 million in 2004. The decrease was primarily due to both the lower effective borrowing rate achieved through the repayment of our subordinated debt with the proceeds from the amended credit facilities in December 2003 and the lower average outstanding debt balance during 2004 than in the prior year. All outstanding long-term debt was prepaid in November, 2004, resulting in an expense of $1.2 million representing the remaining capitalized deferred financing costs.
 
Other expenses, net decreased by $4.0 million from an expense of $4.0 million in 2003 to $0.0 million in 2004. The decrease is attributable to a weakening of the U.S. dollar against other currencies during 2004 as compared to 2003 and represents the transaction and revaluation impact of foreign exchange.
 
Our effective tax rate for 2004 was 36.6% as compared to 34.3% for the prior year. The increase in our effective rate was primarily due to the geographic distribution of pre-tax earnings and the utilization in the prior period of net operating loss carry forwards in the United Kingdom, Canada, and Switzerland.
 
Variation in Quarterly Operating Results
 
Although our business is not generally seasonal, we typically experience a slight decrease in revenue during the fourth quarter due to holiday vacations and a similar decrease in new business awards in the first quarter due to our customers’ budgetary cycles and vacations during the year-end holiday period.
 
Liquidity and Capital Resources
 
As of December 31, 2005, we had approximately $73.6 million of cash and cash equivalents. Our expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible acquisitions, geographic expansion, working capital, and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, borrowings, and limited issuances of equity securities.
 
In 2005, cash used in operations was $1.5 million as compared to cash provided by operations of $71.6 million for 2004. Advanced billings decreased during 2005 by $48.9 million compared to a $1.1 million decrease for 2004. The primary reasons for this decrease are the reduced percentage of advanced funds that are received from new contracts due to the competitive forces in the market. Cash collections from accounts receivable were $342.5 million in 2005, as compared to $402.2 million in 2004. This decrease is primarily due to the timing of project milestone billings. In addition, adjustments to reconcile net income of $32.2 million in 2005 to cash used in operating activities include the addback of $11.2 million for depreciation and amortization, $2.2 million for accounts receivable and deferred tax provisions, and a usage of $47.1 million provided for by changes in assets and liabilities. Days sales outstanding, which includes accounts receivable, unbilled services and advanced billings, were a positive 26 days and a negative twenty-five days as of December 31, 2005 and 2004, respectively. We expect to continue to experience competitive pressures that could increase this operational metric.
 
In 2004, we generated operating cash flow of $71.6 million as compared to $2.1 million during the prior year. The primary driver of the difference was the increase in unbilled services during 2003 of $16.2 million compared to a decrease in unbilled services in 2004 of $18.5 million. Cash collections from accounts receivable were $402.2 million in 2004, as compared to $358.9 million in 2003. The improvement in cash collections is due to


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improved billing and collection procedures. In addition, adjustments to reconcile net income of $20.7 million to cash generated from operating activities include addbacks of $9.7 million for depreciation and amortization and changes of $16.9 million in assets and liabilities.
 
In 2003, we generated operating cash flow of $2.1 million as compared to $28.4 million in 2002, despite an increase in net income of $7.6 million, or 135%. The change resulted from higher net income that was more than offset by changes in working capital. The decrease in cash flow from operations was primarily due to an $18.5 million increase in accounts receivable and unbilled services due to increased service revenue and project activities, partially offset by a $4.9 million decrease in accounts payable due to our improved focus on vendor relations and related payment terms.
 
Net cash provided by investing activities was $4.0 million for 2005 compared to net cash used in investing activities of $32.4 million during the year 2004. This increase of $36.4 million is primarily attributable to our sale of marketable securities during the year 2005, resulting in approximate proceeds of $46.9 million. This increase is partially offset by an increase in capital expenditures incurred in connection with the purchase of fixed assets ($16.0 million during 2005 as compared to $8.8 million in 2004). Of the $16.0 million of purchased fixed assets $2.7 million was financed by deferred payments over thirty-seven months. We expect our capital expenditures to be approximately $13.0 million to $15.0 million in 2006, with the majority of the spending related to continued information technology enhancement and expansion.
 
Net cash used in investing activities was $32.4 million and $9.6 million for 2004 and 2003, respectively. In December, 2004, we purchased approximately $24.5 million of short term marketable securities. The remaining net cash amounts were primarily related to ongoing information technology projects. In 2003 the net cash used for acquisitions of $2.0 million and capital expenditures of $8.1 million were partially offset by cash provided by asset disposals of $0.5 million.
 
Net cash provided by financing activities in 2005 was $5.4 million compared to $6.4 million of cash used in financing activities in 2004. In 2005, cash of $3.0 million was provided by tax benefits resulting from the exercise of certain stock options. Additionally, cash was provided by stock option exercises of $3.2 million.
 
Net cash used in financing activities in 2004 was $6.4 million compared to $26.0 million of cash provided from financing activities in 2003. In 2004, cash of $67.0 million was provided by our initial public offering. Additionally, cash was provided by debt issuance of $5.0 million, stock option and warrant exercises of $3.4 million and stockholder receivable payments of $2.2 million. In 2004, cash of $65.3 million was used to repay debt. Additionally, $16.9 million was paid in dividends.
 
Net cash generated from financing activities in 2003 was $26.0 million. The net cash generated was primarily due to the amendment and restatement of our credit facilities on December 23, 2003, which provided a $20.0 million term loan A and a $40.0 million term loan B. The proceeds from this amendment process were used to repay $20.0 million of subordinated debt and $0.6 million of related prepayment premiums. In addition, $25.0 million was reserved for the tender process, which closed in January 2004. We also obtained a $25.0 million revolving line of credit.
 
On November 18, 2004, our common stock began trading on The Nasdaq National Market under the symbol “PRAI.” The initial public offering, including the underwriters over-allotment, consisted of 3.9 million shares of common stock sold by us and an additional 3.0 million shares sold by the selling shareholders at an initial offering price of $19.00 per share. We received from the offering net proceeds of approximately $67.0 million, after offering expenses, of which we used $28.7 million to extinguish all outstanding principal and accrued interest under our credit facilities and the balance of the net proceeds has been applied to general corporate purposes. We received no proceeds from the sale of common stock by the selling stockholders.
 
In June 2005 the Company completed a secondary offering, selling approximately 8.3 million shares of existing shareholders’ shares which increased the public float from approximately 3.6 million shares to approximately 11.9 million shares. The Company did not receive any cash for this transaction and incurred approximately $0.6 million in expense.


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In January 2004, we closed our $25.0 million tender offer and special dividend/employee option bonus transaction. We repurchased $0.1 million of shares and $3.7 million of our outstanding vested stock options, paid a $16.9 million special dividend to our stockholders, and paid a $2.7 million special bonus to employee holders of vested stock options. The remainder of the $25.0 million was used to pay fees associated with the transaction. The funds for this transaction were provided by the December 23, 2003 refinancing of our credit facilities.
 
In 2005, we entered into foreign currency derivatives to mitigate exposure to movements between the US dollar and the British pound and the US dollar and Euro. We agreed to purchase a given amount of British pounds and Euros at established dates through 2005. The transactions were structured as no-cost collars whereby we neither paid more than an established ceiling exchange rate nor less than an established floor exchange rate on the notional amounts hedged. These derivatives were accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize derivatives as instruments as either assets or liabilities in the balance sheet and measures them at fair value. These derivatives are designated as cash flow hedges and accordingly the changes in fair value have been recorded in stockholders equity (as a component of comprehensive income/expense). These agreements expired throughout 2005. There were no currency derivatives held by the Company at December 31, 2005. We entered into similar derivative agreements in 2006 and we expect to continue to use similar derivatives to mitigate our foreign currency exposure.
 
On December 23, 2004, we entered into a new unsecured revolving facility (the “credit facility”) of $75 million led by Wachovia Bank, N.A and Wells Fargo Bank, N.A. The following description of our revolving credit facility briefly summarizes the facility’s terms and conditions that are material to us and is qualified in its entirety by reference to the full text of the facility, which is incorporated by reference to Form 8-K filed on December 29, 2004.
 
The credit facility provides for a $75.0 million revolving line of credit that terminates on December 23, 2008. At any time within three years after December 23, 2004 and so long as no event of default is continuing, we have the right, in consultation with the administrative agent, to request increases in the aggregate principal amount of the facility in minimum increments of $5.0 million up to an aggregate increase of $50.0 million (and which would make the total amount available under the facility $125.0 million). The revolving credit facility is available for general corporate purposes (including working capital expenses, capital expenditures, and permitted acquisitions), the issuance of letters of credit and swingline loans for account, for the refinancing of certain existing indebtedness, and to pay fees and expenses related to the facility. All borrowings are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. A portion of the facility is also available for alternative currency loans.
 
The interest rates applicable to loans under the revolving credit facility are floating interest rates that, at our option, equal a base rate or a LIBOR rate plus, in each case, an applicable margin. The base rate is a fluctuating interest rate equal to the higher of (a) the prime rate of interest per annum publicly announced from time to time by Wachovia as its prime rate, and (b) the overnight federal funds rate plus 0.50%. The LIBOR rate is, with certain exceptions, the rate set forth on Telerate Page 3750 (or any replacement pages on that service) as the interbank offering rate for dollar deposits with maturities comparable to the interest period (1, 2, 3 or 6 months) we have chosen. In addition, we are required to pay to the lenders under the facility a commitment fee for unused commitments at a per annum rate that fluctuates depending on our leverage ratio. Voluntary prepayments of loans and voluntary reductions in the unused commitments under the revolving credit facility are permitted in whole or in part, in minimum amounts and subject to certain other limitations. The facility is unsecured, but we have granted a negative pledge on our assets and those of our subsidiaries that guarantee the facility for the benefit of the lenders under the facility.
 
The revolving credit facility requires us to comply with certain financial covenants, including a maximum total leverage ratio, a minimum fixed charge coverage ratio, and a minimum net worth. As of December 31, 2005, the Company was in compliance with its financial covenants.
 
We currently have not drawn any amount of indebtedness under our revolving credit facility.
 
We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities or issuances of equity securities.


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We believe that our existing capital resources, together with cash flows from operations and our borrowing capacity under the $75 million credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next eighteen months. Our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, and personal injury, environmental or other material litigation claims.
 
Contractual Obligations and Commercial Commitments
 
The following table summarizes our future minimum payments for all contractual obligations for years subsequent to the year ended December 31, 2005:
 
                                         
    Payments Due by Period  
    Less Than
 		                More Than
 		       
    One Year     1-3 Years     3-5 Years     5 Years     Total  
    (Dollars in thousands)  
 
Long-term debt, including interest payments
  $ —     $ —     $ —     $ —     $ —  
Service purchase commitments
    4,483       2,754       1,000       —       8,237  
Capital lease, including interest payments
    9       51       —       —       60  
Operating leases
    16,965       29,371       27,644       56,294       130,274  
Less: sublease income
    (1,501 )     (1,181 )     (1,106 )     —       (3,788 )
                                         
Total
  $ 19,956     $ 30,995     $ 27,538     $ 56,294     $ 134,783  
                                         
 
The increase in amounts attributable to operating leases after five years is due to long-term leases for several of our facilities. In April 2004, we executed a lease for a new office in our Lenexa, Kansas location to replace certain existing space which expired in July, 2006. The operating lease commitment is $23.5 million over the 15-year term of the lease. In July 2004, we entered into a lease for a new office in Reston, Virginia to replace our current offices in McLean, Virginia. The lease commitment is approximately $5.9 million over the ten-year term of the lease. There are no contingent cash payment obligations related to our acquisitions.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
 
Non-GAAP Financial Measures
 
We use certain measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles (GAAP). These non-GAAP financial measures are “EBITDA” and “adjusted EBITDA.” These measures should not be considered as an alternative to income from operations, net income, net income per share, or any other performance measures derived in accordance with GAAP.
 
EBITDA represents net income before interest, taxes, depreciation, and amortization. We use EBITDA to facilitate operating performance comparisons from period to period. In addition, we believe EBITDA facilitates company to company comparisons by backing out potential differences caused by variations in capital structures (affecting interest expense), taxation, and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. We also use EBITDA, and we believe that others in our industry use EBITDA, to evaluate and price potential acquisition candidates. We further believe that EBITDA is frequently used by securities analysts, investors, and other interested parties in the evaluation of issuers, many of which present EBITDA when reporting their results.
 
In addition to EBITDA, we use a measure that we call adjusted EBITDA, which we define as EBITDA excluding the effects of a one-time $25.0 million tender offer specifically relating to our repurchase in 2004 of stock options and the payment of a special bonus to certain employee option holders. In addition to our GAAP results and


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our EBITDA, we use adjusted EBITDA to manage our business and assess our performance. Ourmanagement does not view the tender offer and option repurchase costs as indicative of the status of our ongoing operating performance because such costs related to a special non-recurring restructuring transaction.
 
These non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, EBITDA and adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; our significant interest expense, or the cash requirements necessary to service interest and principal payments on our debts; and any cash requirements for the replacement of assets being depreciated and amortized, which will often have to be replaced in the future, even though depreciation and amortization are non-cash charges. Neither EBITDA nor adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business.
 
In addition, adjusted EBITDA is not uniformly defined and varies among companies that use such a measure. Accordingly, EBITDA and adjusted EBITDA have limited usefulness as comparative measures. We compensate for these limitations by relying primarily on our GAAP results and by using non-GAAP financial measures only supplementally.
 
Critical Accounting Policies and Estimates
 
In preparing our financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our audit committee.
 
Revenue Recognition
 
The majority of our service revenue is recorded from fixed-price contracts on a proportional performance basis. To measure performance, we compare direct costs incurred to estimated total contract direct costs through completion. We believe this is the best indicator of the performance of the contract obligations because the costs relate to the amount of labor hours incurred to perform the service. Direct costs are primarily comprised of labor overhead related to the delivery of services. Each month we accumulate costs on each project and compare them to the total current estimated costs to determine the proportional performance. We then multiply the proportion completed by the contract value to determine the amount of revenue that can be recognized. Each month we review the total current estimated costs on each project to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each project. During our monthly contract review process, we review each contract’s performance to date, current cost trends, and circumstances specific to each study. The original or current cost estimates are reviewed and if necessary the estimates are adjusted and refined to reflect any changes in the anticipated performance under the study. In the normal course of business, we conduct this review each month in all service delivery locations. As the work progresses, original estimates might be deemed incorrect due to, among other things, revisions in the scope of work or patient enrollment rate, and a contract modification might be negotiated with the customer to cover additional costs. If not, we bear the risk of costs exceeding our original estimates. Management assumes that actual costs incurred to date under the contract are a valid basis for estimating future costs. Should management’s assumption of future cost trends fluctuate significantly, future margins could be reduced. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower margins on those projects. Should our actual costs exceed our estimates on fixed price contracts, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future.


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Allowance for Doubtful Accounts
 
Included in “Accounts receivable and unbilled services, net” on our consolidated balance sheets is an allowance for doubtful accounts. Generally, before we do business with a new client, we perform a credit analysis. We also review our accounts receivable aging on a monthly basis to determine if any receivables will potentially be uncollectible. The reserve includes the specific uncollectible accounts and an estimate of lossesbased on historical loss experience. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts is adequate to cover uncollectible balances. However, actual write-offs might exceed the recorded reserve.
 
Tax Valuation Allowance
 
Based on estimates of future taxable profits and losses in certain foreign tax jurisdictions, we determined that a valuation allowance was required for specific foreign loss carry forwards as of December 31, 2005. If these estimates prove inaccurate, a change in the valuation allowance, up or down, could be required in the future.
 
Our quarterly and annual effective income tax rate could vary substantially. We operate in several foreign jurisdictions and in each jurisdiction where we estimate pre-tax income, we must also estimate the local effective tax rate. In each jurisdiction where we estimate pre-tax losses, we must evaluate local tax attributes and the likelihood of recovery for foreign loss carry forwards, if any. Changes in currency exchange rates and the factors discussed above result in the consolidated tax rate being subject to significant variations and adjustments during interim and annual periods.
 
Stock-Based Compensation
 
We have a stock-based employee compensation plan. We account for this plan under the recognition and measurement principles of the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees and related Interpretations.” Under the intrinsic value method, compensation cost is the excess, if any, of the fair market value of the underlying common stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. We have determined that all options granted under our plan had an exercise price equal to or more than the estimated fair market value of the underlying common stock on the date of grant.
 
Historically, as a private company the fair market value of our common stock was determined by our board of directors contemporaneously with the grant of a stock option. At the time of option grants and other stock issuances, our board of directors considered the status of private and public financial markets, valuations of comparable private and public companies, the liquidity of our stock, our existing financial resources, our anticipated capital needs, dilution to common stockholders from anticipated future financings and a general assessment of future business risks, as such conditions existed at the time of the grant. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, different amounts of stock-based compensation could have been reported. Since our initial public offering on November 18, 2004, the value of our common stock for purposes of evaluating stock compensation costs is based on the quoted market prices.
 
We measure compensation expense for our employee stock-based compensation in accordance with the intrinsic value method under Accounting Principles Board Opinion No. 25. Under this method, when the exercise price of options granted to employees is less than the fair value of the underlying stock on the grant date, compensation expense is recognized over the applicable vesting period. As the exercise price of the stock option has equaled or exceeded the fair market value of the underlying common stock at the date of grant, no compensation expense has been recorded. We have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148. Footnote 2 to our consolidated condensed financial statements included in this report sets forth the calculation of our net income had compensation cost been determined based on the stock’s fair market value at the grant dates for awards under our stock option plan in accordance with SFAS No. 123.
 
As discussed in the “Recent Accounting Pronouncements” section, as of January 1, 2006 we will be required to record as compensation expense the fair value of granted stock options that vest in accordance with the revised


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SFAS No. 123(R), “Share-Based Payment.” Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Based upon review of the applicable literature and the Company’s limited trading history, we have estimated the impact of pre-tax, stock-based compensation expense in fiscal year 2006 to be approximately $4.0 — $4.5 million (unaudited).
 
Long-Lived Assets
 
We review long-lived asset groups for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable. If indicators of impairment are present, we would evaluate the carrying value of property and equipment in relation to estimates of future undiscounted cash flows. These undiscounted cash flows and fair values are based on judgments and assumptions.
 
Goodwill and Indefinite-Lived Intangible Assets
 
As a result of our acquisitions we have recorded goodwill and other identifiable finite and indefinite-lived acquired intangibles. The identification and valuation of these intangible assets at the time of acquisition require significant management judgment and estimates.
 
We test goodwill for impairment on at least an annual basis by comparing the carrying value to the estimated fair value of our reporting unit. We test indefinite-lived intangible assets, principally trade names, on at least an annual basis by comparing the fair value of the trade name to our carrying value. The measure of goodwill impairment, if any, would include additional fair market value measurements, as if the reporting unit was newly acquired. This process is inherently subjective. The use of alternative estimates and assumptions could increase or decrease the estimates of fair value and potentially could result in an impact to our results of operations.
 
Inflation
 
Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition.
 
Potential Liability and Insurance
 
We obtain contractual indemnification for all of our contracts. In addition, we attempt to manage our risk of liability for personal injury or death to patients from administration of products under study through measures such as stringent operating procedures and insurance. We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and serve as a tool for controlling and enhancing the quality of our clinical trials. We currently maintain professional liability insurance coverage with limits we believe are adequate and appropriate. If our insurance coverage is not adequate to cover actual claims, or if insurance coverage does not continue to be available on terms acceptable to us, our business, financial condition, and operating results could be materially harmed.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
At December 31, 2005, we had no amounts outstanding under our revolving credit facility. Future drawings under the facility will bear interest at various rates. Historically, we have mitigated our exposure to fluctuations or interest rate by entering into interest rate hedge agreements.
 
Foreign Exchange Risk
 
Since we operate on a global basis, we are exposed to various foreign currency risks. First, our consolidated financial statements are denominated in U.S. dollars, but a significant portion of our revenue is generated in the


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local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting consolidated financial results. The process by which each foreign subsidiary’s financial results are translated into U.S. dollars is as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the stockholders’ equity account, referred to as the cumulative translationadjustment account. This account exists only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet stated in U.S. dollars in balance. To date such cumulative translation adjustments have not been material to our consolidated financial position.
 
In addition, two specific risks arise from the nature of the contracts we enter into with our customers, which from time to time are denominated in currencies different than the particular subsidiary’s local currency. These risks are generally applicable only to a portion of the contracts executed by our foreign subsidiaries providing clinical services. The first risk occurs as revenue recognized for services rendered is denominated in a currency different from the currency in which the subsidiary’s expenses are incurred. As a result, the subsidiary’s earnings can be affected by fluctuations in exchange rates.
 
The second risk results from the passage of time between the invoicing of customers under these contracts and the ultimate collection of customer payments against such invoices. Because the contract is denominated in a currency other than the subsidiary’s local currency, we recognize a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared until payment from the customer is received will result in our receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. This difference is recognized by us as a foreign currency transaction gain or loss, as applicable, and is reported in other expense or income in our consolidated statements of operations. Historically, fluctuations in exchange rates from those in effect at the time contracts were executed have not had a material effect on our consolidated financial results.
 
For the year ended December 31, 2005, approximately 8.8% and 17.9% of total service revenue was denominated in British pounds and Euros, respectively. The Company periodically enters into foreign currency derivatives to mitigate exposure to movements between the US dollar and the British pound and the US dollar and Euro. These derivatives are designated as cash flow hedges and accordingly the changes in fair value have been recorded in stockholders equity (as a component of comprehensive income). These derivatives were accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The potential decrease in net income resulting from a hypothetical weakening of the U.S. dollar relative to the British pound and Euro of 10% would have been approximately $1.1 million for the year ended December 31, 2005.
 
Foreign Currency Hedges
 
In 2005, we entered into a number of foreign currency hedging transactions to mitigate exposure to movements between the U.S. dollar and the British pound and the U.S. dollar and the Euro. We agreed to purchase a given amount of British pounds and Euros at established dates through 2005. These derivatives are accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize derivatives as instruments as either assets or liabilities in the balance sheet and measure them at fair value. These derivatives are designated as cash flow hedges. These agreements terminated in December, 2005. There were no currency derivatives outstanding at December 31, 2005. We entered into similar derivative agreements in January, 2006.


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ITEM 8.   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
Report of Independent Registered Public Accounting Firm
  66
Consolidated Balance Sheets as of December 31, 2004 and 2005
  68
Consolidated Statements of Operations for the years ended December 31, 2003, December 31, 2004 and December 31, 2005
  69
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, December 31, 2004 and December 31, 2005
  70
Consolidated Statements of Cash Flows for the years ended December 31, 2003, December 31, 2004 and December 31, 2005
  71
Notes to Consolidated Financial Statements
  72


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ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A —  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
 
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2005. Based on the evaluation we conducted, our management has concluded that our disclosure controls and procedures are effectively designed to ensure that we record, process, summarize, and report information required to be disclosed by us within the time periods specified by the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
 
Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
 
Internal control over financial reporting refers to a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the


46

 

financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
 
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2005 using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO), “Internal Control — Integrated Framework.” Management has concluded that our internal control over financial reporting was effective as of December 31, 2005. Additionally, based on our assessment, we determined that there were no material weaknesses in our internal control over financial reporting as of December 31, 2005.
 
Changes in Internal Control over Financial Reporting
 
Management has evaluated, with the participation of our chief executive officer and chief financial officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes have occurred.


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PART III
 
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
The following table lists our directors and the classes in which they will serve as of January 31, 2006:
 
         
Class I
 		  Class II
 		  Class III
(Term Expiring 2008)
 
(Term Expiring 2006)
 
(Term Expiring 2007)
 
Patrick K. Donnelly   Jean-Pierre L. Conte   Melvin D. Booth
Judith A. Hemberger   Armin Kessler   Robert E. Conway
Robert J. Weltman        
 
Set forth below are the names and other information pertaining to the Board of Directors whose terms of office will continue after the annual meeting:
 
                     
        First Year
 		   
        Elected
 		   
Name
 
Age
 
Director
 
Position
 
CLASS I
           
Patrick K. Donnelly
  47   1994   President, Chief Executive Officer, and Director
Judith A. Hemberger
  58   2005   Director
Robert J. Weltman
  40   2001   Director
CLASS II
           
Jean-Pierre L. Conte
  42   2001   Chairman
Armin Kessler
  67   2005   Director
CLASS III
           
Melvin D. Booth
  60   2004   Director
Robert E. Conway
  52   2004   Director
 
Melvin D. Booth, Director.  Melvin D. Booth is currently on the investment committee of MedImmune Ventures, Inc. He was a director of MedImmune, Inc. from November 1998 until March 2005 and served as its president and chief operating officer from October 1998 through December 2003. Prior to joining MedImmune, Inc., Mr. Booth was president, chief operating officer, and a member of the board of directors of Human Genome Sciences, Inc. Mr. Booth is currently a board member of Focus Diagnostics, Inc., Millipore Corporation, Prestwick Pharmaceuticals, Inc. and Ventria Bioscience. Mr. Booth graduated with honors and holds an honorary Doctor of Science degree from Northwest Missouri State University. He is a Certified Public Accountant. Mr. Booth currently serves as chairman of our audit committee.
 
Jean-Pierre L. Conte, Chairman.  Jean-Pierre L. Conte is currently chairman, managing director, and limited partner of Genstar Capital, L.P., the manager of Genstar Capital Partners III, L.P., a private equity limited partnership. Mr. Conte joined Genstar in 1995. Prior to joining Genstar, Mr. Conte was a principal for six years at the NTC Group, Inc., a private equity investment firm. He has served as a director and chairman of the board of PRA since 2001. Mr. Conte has also served as a director of American Pacific Enterprises, LLC since May 2004. He has served as the chairman of the board of directors of Altra Industrial Motion, Inc. and as a director of Propex Fabrics, Inc. since December 2004. He has also served as a director of Panolam Industries International, Inc. since September 2005 and Harlan Sprague Dawley, Inc. since December 2005. Mr. Conte holds an M.B.A. from Harvard University and a B.A. from Colgate University.
 
Robert E. Conway, Director.  Robert E. Conway is currently the chief executive officer of Array BioPharma Inc., which he joined in November 1999. Prior to joining Array BioPharma, Mr. Conway was the chief operating officer and executive vice president of the Clinical Trials Division of Hill Top Research, Inc., which he joined in 1996. Mr. Conway serves on the boards of directors of Array BioPharma and DEMCO, Inc. Mr. Conway received a B.S. in accounting from Marquette University and an M.B.A. from the University of Cincinnati, and is a Certified Public Accountant. Mr. Conway currently serves as chairman of our compensation committee and is on both the audit and nominating and corporate governance committees.


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Patrick K. Donnelly, President, Chief Executive Officer, and Director.  Patrick K. Donnelly joined us in 1994, serving first as an outside board member and then as executive vice president and chief financial officer in 1996. In 2001, Mr. Donnelly was named PRA’s president and chief operating officer, and subsequently, chief executive officer in 2002. Before joining PRA, Mr. Donnelly was president of Virginia Capital L.P. and Vedcorp, LLC, two affiliated venture capital firms located in Richmond, Virginia. Mr. Donnelly also spent eight years with BancBoston Capital. Mr. Donnelly received his M.B.A. from Pennsylvania State University in 1984 and received his B.A. from the University of Missouri in 1980.
 
Judith A. Hemberger, Ph.D., is a founder of Pharmion Corporation and has served as Pharmion’s Executive Vice President and Chief Operating Officer and a member of its board of directors since its inception in 2000. From 1997 to 1999, she worked as a consultant to various healthcare companies. During this period she also served as a Senior Vice President of Business Development at AVAX Technologies, Inc., a vaccine technology company. From 1979 to 1997, Dr. Hemberger worked at Marion Laboratories and successor companies Marion Merrell Dow and Hoechst Marion Roussel. She led a number of strategic functions, including Professional Education, Global Regulatory Affairs, Global Medical Affairs and Commercial Development. Her final role in the company was Senior Vice President of Global Drug Regulatory Affairs. Ms. Hemberger currently serves on the board of directors of Perrigo Company, Myogen, Inc. and Renovis. Ms. Hemberger received a B.S. from Mount Scholastica College, a PhD from the University of Missouri, and an MBA from Rockhurst College. Ms. Hemberger currently serves on our compensation and nominating and corporate governance committees.
 
Armin Kessler, Director.  Armin Kessler is an experienced global pharmaceutical and biotech industry executive. Prior to his retirement in 1995, Mr. Kessler held many executive positions at Hoffman-LaRoche AG, including chief operating officer and head of the pharmaceutical division. Mr. Kessler also held executive positions at Sandoz, and has been a member of the board of directors of Genentech and Syntex, as well as the president of the European Federation of Pharmaceutical Industry Associations. He became a director of PRA in January 2005 and currently is also a director of Actelion, Gen-Probe Incorporated, MedGenisis, and The Medicines Company. Mr. Kessler received a B.S. from the University of Pretoria, South Africa, a B.S. from the University of Cape Town, a J.D. from Seton Hall University, and an Honorary Doctorate of Business Administration from University of Pretoria, South Africa. Mr. Kessler qualified as a U.S. patent attorney in 1972. Mr. Kessler currently serves on our audit and compensation committees, and is chairman of our nominating and corporate governance committee.
 
Robert J. Weltman, Director.  Robert J. Weltman is currently a managing director of Genstar Capital, L.P., the manager of Genstar Capital Partners III, L.P., a private equity limited partnership. Mr. Weltman joined Genstar in 1995. Prior to joining Genstar, from 1993 to 1995, he was an associate with Robertson, Stephens & Company, an investment banking firm. From 1991 to 1993, he worked for Salomon Brothers Inc. as a financial analyst. He has served as a director of PRA since 2001 and of BioSource International, Inc. since 2000. Mr. Weltman has also served as a director of American Pacific Enterprises, LLC since May 2004, Woods Equipment Company, LLC since June 2004, and AXIA Health Management, LLC since December 2004, and Harlan Sprague Dawley, Inc., since December 2005. Mr. Weltman holds an A.B. in chemistry from Princeton University.
 
Executive Officers
 
Set forth below is certain information with respect to the persons who are currently serving as executive officers of the Company. Biographical information on Mr. Donnelly is included under “Directors.”
 
J. Matthew Bond, Executive Vice President, Chief Financial Officer, Assistant Treasurer, and Assistant Secretary
 
J. Matthew Bond was named executive vice president and chief financial officer in February, 2006. Mr. Bond joined PRA as vice president-finance and accounting in 2001, and was appointed senior vice president and chief financial officer of PRA in 2002. Before joining PRA, Mr. Bond worked as vice president for a division of Marriott International, Inc. since 1997. He also spent 11 years with a major public accounting firm. Mr. Bond is a Certified Public Accountant and holds a B.S. in business from Wake Forest University. He is a board member of Concept Interiors, Inc.


49

 

David W. Dockhorn, Ph.D., Executive Vice President of Global Clinical Operations
 
David W. Dockhorn, Ph.D., was named executive vice president of global clinical operations in 2004. He joined PRA in 1997 as the vice president of operations and regional director of the Lenexa, Kansas operations and in 2001 was named senior vice president of clinical trials services of North American clinical operations for PRA. Prior to that, he served as senior vice president for the Lenexa, Kansas regional office and San Diego, California operations. Previously, he worked for International Medical Technical Consultants, Inc., or IMTCI, a CRO which was acquired by PRA in 1997. Dr. Dockhorn received his Ph.D. in neuroscience from Texas Tech University.
 
Monika Pietrek, M.D., Ph.D., Executive Vice President of Global Scientific and Medical Affairs
 
Monika Pietrek, M.D., Ph.D., was named executive vice president of global scientific and medical affairs in September 2005. Dr. Pietrek joined PRA in 1996 as the director of safety management services and in 2004 was named senior vice president of global medical and safety services. Since 1999, she served as vice president for the Mannheim, Germany operations. Dr. Pietrek received her M.D. and Ph.D. from University of Frankfurt, Germany and her M.Sc. in epidemiology from the London School for Hygiene & Tropical Medicine, London, United Kingdom.
 
James C. Powers, Executive Vice President of Business Development and Secretary
 
James C. Powers is executive vice president of worldwide business development and secretary of PRA. Mr. Powers joined PRA in 1988 as vice president and general manager. He became president of North American operations in 1992 and was named executive vice president of worldwide business development in 1996. Prior to joining us, Mr. Powers was vice president at University Technology Corporation from 1985 to 1988. From 1973 to 1985, Mr. Powers worked at Clairol, Inc. Mr. Powers received a B.S. in Administration and Management Science from Carnegie Mellon University in 1973.
 
Bruce A. Teplitzky, Executive Vice President of Business Development
 
Bruce A. Teplitzky was named executive vice president of strategic business development in September, 2005. Mr. Teplitzky was named senior vice president of strategic business development in 2003. He joined PRA in early 1996 as vice president of operations and regional director. In 2000, he was promoted to senior vice president of clinical operations. In 2002, he became senior vice president of global business development. Prior to joining PRA, Mr. Teplitzky worked for Stuart Pharmaceuticals (now AstraZeneca), and at Corning Besselaar. Mr. Teplitzky earned his M.M.S. in clinical microbiology at the Emory University School of Medicine. He received his B.S. from Emory University in biologic sciences.
 
William (Bucky) Walsh, III, Executive Vice President of Corporate Development
 
William (Bucky) Walsh, III, was named executive vice president of corporate development in February, 2006. Mr. Walsh joined PRA in 1985, and was named senior vice president of business services in 2003. Mr. Walsh has been with PRA for more than 20 years, and has held numerous positions, including program analyst, director of systems and information technology, and vice president of systems management. While at PRA in 1991, Mr. Walsh earned an M.B.A. from James Madison University. In 1980, Mr. Walsh graduated with a B.A. from the University of Virginia.
 
Gail O’Mullan, Senior Vice President of Talent Management
 
Gail O’Mullan was named senior vice president of talent management in February, 2006. Ms. O’Mullan joined PRA in 2003. Prior to joining PRA, Ms. O’Mullan worked at Aventis Pharmaceuticals where she served as director of business operations and director of human resources and administrative services. Ms. O’Mullan earned a B.A. from the University of California, San Diego. She received a JD and MBA from Texas Tech University.


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Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16 of the Securities Exchange Act of 1934, as amended, requires directors and executive officers and persons, if any, owning more than ten percent of a class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity and equity derivative securities. We assist our directors and officers in monitoring transactions and filing the appropriate Section 16 reports on their behalf. Based solely upon a review of the copies of such reports and written representations from reporting persons, we believe that all Section 16(a) filing requirements applicable to our officers, directors, and greater than ten percent stockholders were complied with on a timely basis for the year ended December 31, 2005.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
Board of Directors Compensation
 
Effective January 1, 2006, under our director compensation policy, non-employee directors who are not affiliated with Genstar receive in cash:
 
 
Annual retainer — $35,000
Meeting attendance fee (board or audit committee)
attendance in person — $2,000
attendance by telephone — $1,000
Meeting attendance fee (compensation or nominating and corporate governance committee)
attendance in person — $1,500
attendance by telephone — $750
Audit committee chairman fee — $20,000
Other committee chairman fee — $10,000
 
In addition, non-employee directors who are not affiliated with Genstar will receive an initial award of options exercisable for 40,000 shares of common stock and an additional award of options exercisable for 10,000 shares after each year of service. We also reimburse directors for their reasonable expenses incurred in connection with attending board and committee meetings.
 
Our board of directors has determined that Messrs. Booth, Conway, and Kessler as well as Ms. Hemberger are independent directors within the meaning of applicable Nasdaq listing requirements. Messrs. Booth, Conway, and Kessler currently serve on the audit committee. Messrs. Conway and Kessler and Ms. Hemberger currently serve on the compensation committee as well as the nominating and corporate governance committee. Mr. Donnelly is employed by PRA and is not separately compensated for his service as a director. Our Board of Directors determined that Mr. Booth qualifies as and has been designated as an “audit committee financial expert” as such term is defined under Item 401 of Regulation S-K.
 
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our chief executive officer, chief financial officer and controller. The Code of Ethics is publicly available on our website at http://www.prainternational.com and will also be made available without charge to any person, upon request, in writing to our Vice President, Legal Affairs at PRA International, 12120 Sunset Hills Road, Suite 600, Reston, Virginia 20190. We intend to satisfy the disclosure requirements under the Securities and Exchange Act of 1934, as amended, regarding an amendment to or waiver from our Code of Ethics by disclosing the nature of such amendment or waiver on our web site or in a Report on Form 8-K.


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Executive Compensation
 
Summary Compensation
 
For the year ended December 31, 2005, the following table sets forth information concerning the compensation of our chief executive officer and our four other most highly compensated officers, the five of whom are considered our named executive officers for reporting purposes.
 
SUMMARY COMPENSATION TABLE
 
                                         
            Long Term
            Compensation
        Annual Compensation   Awards
                Other Annual
 		  Securities
        Salary
 		  Bonus
 		  Compensation
 		  Underlying
Name and Principal Position
  Year   ($)   ($)   ($)   Options (#)
 
Patrick K. Donnelly
    2005       355,125       56,250 (1)     19,520 (6)     —  
President, Chief Executive Officer,
    2004       315,000       217,757       472,261 (5)(7)     90,000  
and Director
    2003       243,333       181,250       16,893 (8)     —  
David W. Dockhorn
    2005       255,625       31,250 (2)     20,791 (9)     —  
Executive Vice President of Global
    2004       222,500       84,870       195,967 (5)(10)     50,000  
Clinical Operations
    2003       204,375       75,000       20,173 (11)        
Erich Mohr(12)
    2005       321,151       —       20,707 (13)     —  
Executive Vice President and Chief
    2004       284,266       118,291       78,442 (5)(14)     50,000  
Scientific Officer
    2003       240,539       109,776       16,911 (15)     —  
James C. Powers
    2005       221,875       36,000 (3)     32,511 (16)     —  
Executive Vice President of
    2004       199,375       128,421       283,345 (5)(17)     50,000  
Business Development and Secretary
    2003       194,458       75,000       32,348 (18)     —  
Bruce A. Teplitzky
    2005       200,972       55,000 (4)     25,489 (19)     25,000  
Senior Vice President of
    2004       194,375       178,673       172,227 (5)(20)     25,000  
Business Development
    2003       189,166       56,250       26,348 (21)     —  
 
 
(1) Includes $18,563 of deferred bonus.
 
(2) Includes $3,125 of deferred bonus.
 
(3) Includes $11,881 of deferred bonus.
 
(4) Includes $0 of deferred bonus.
 
(5) Includes payments, in the amounts specified below, made to all of our employee option holders at the rate of $0.94 per option in connection with a tender offer transaction in January 2004. We refer to these as option payments.
 
(6) Represents car allowance of $10,800, company contributions to health insurance of $4,344, company contributions to 401(k) of $2,194, and other benefits of $4,982.
 
(7) Represents option payment of $445,554, car allowance of $10,800, company contributions to health insurance of $9,022, company contributions to 401(k) of $5,001, and other benefits of $1,884.
 
(8) Represents car allowance of $10,800, company contributions to health insurance of $1,780, company contributions to 401(k) of $2,369, and other benefits of $1,944.
 
(9) Represents car allowance of $10,800, company contributions to health insurance of $7,905 and other benefits of $2,086.
 
(10) Represents option payment of $177,190, car allowance of $10,800, company contributions to health insurance of $6,093, and other benefits of $1,884.
 
(11) Represents car allowance of $10,800, company contributions to health insurance of $6,363,company contributions to 401(k) of $1,066, and other benefits of $1,944.


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(12) Erich Mohr was compensated in Canadian dollars. All amounts related to his compensation have been converted from Canadian dollars to U.S. dollars using the average exchange rate for fiscal year 2005 of Cdn $1.2078 per US$1.00 and Cdn $1.3015 for fiscal year 2004. Dr. Mohr resigned from the Company effective December 31, 2005.
 
(13) Represents car allowance of $10,557, company contributions to health insurance of $1,178, and other benefits of $8,972.
 
(14) Represents option payment of $60,320, car allowance of $9,797, and other benefits of $8,325.
 
(15) Represents car allowance of $9,155 and other benefits of $7,756.
 
(16) Represents car allowance of $10,800, company contributions to health insurance of $12,659, company contributions to 401(k) of $7,000, and other benefits of $2,052.
 
(17) Represents option payment of $248,820, car allowance of $10,800, company contributions to health insurance of $15,341, company contributions to 401(k) of $6,500, and other benefits of $1,884.
 
(18) Represents car allowance of $10,800, company contributions to health insurance of $13,604, company contributions to 401(k) of $6,000, and other benefits of $1,944.
 
(19) Represents car allowance of $10,800, company contributions to health insurance of $12,659 and other benefits of $2,030.
 
(20) Represents option payment of $144,202, car allowance of $10,800, company contributions to health insurance of $15,341, and other benefits of $1,884.
 
(21) Represents car allowance of $10,800, company contributions to health insurance of $13,604, and other benefits $1,944.
 
Stock Option Grants
 
The following table reflects the stock options granted during the past fiscal year to the named executive officers pursuant to our 2004 Incentive Award Plan. No stock appreciation rights were granted to the named executive officers during 2005. Unless otherwise noted, all options granted during the past fiscal year expire seven years from the date of grant. If the optionee’s employment is terminated for cause, any vested or unvested portion of the option will terminate. Under the option agreement, “cause” is defined as the optionee’s failure to perform duties; material harm of PRA; conviction of a felony or crime involving moral turpitude, fraud or misrepresentation; or misappropriation or embezzlement of PRA funds or assets. In addition, if the optionee’s employment is terminated for any reason other than death, disability or cause, the unvested portion of the option will terminate and the optionee will have thirty days to exercise any vested portion of the option. Upon the optionee’s death or disability, a pro rata portion of the option will vest, based on the amount that would vest on the next anniversary of the grant date, and be exercisable by the optionee’s beneficiary or estate for eighteen months or, if earlier, until the seventh anniversary of the grant date.
 
OPTION GRANTS IN 2005
 
                                                 
    Individual Grants                          
          Percent of
 		                Potential Realizable
 		 
    Number of
 		    Total
 		                Value at Assumed
 		 
    Securities
 		    Options
 		                Annual Rates of Stock
 		 
    Underlying
 		    Granted to
 		    Exercise of
 		          Price Appreciation for
 		 
    Options
 		    Employees in
 		    Base Price
 		          Option Term  
Name
  Granted (#)     Fiscal Year(1)     ($/Sh)     Expiration Date     5% ($)     10% ( $)  
 
Bruce A. Teplitzky
    50,000       12.9 %     30.31       9/30/2012       515,415       1,169,301  
 
 
(1) The figures representing percentages of total options granted to employees in 2005 are based on a total, net of options granted and forfeited within 2005, of 387,500 common shares underlying stock options granted to our employees during 2005.


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(2) The amounts shown in the table above as potential realizable value represent hypothetical gains that could be achieved for the respective stock options if exercised at the end of the option term. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Potential realizable values in the table above are calculated by:
 
  •  multiplying the number of shares of common stock subject to the stock option by the price of $30.31 per share;
 
  •  assuming that the aggregate share value derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the balance of the term of the option; and
 
  •  subtracting from that result the total option exercise price.
 
The 5% and 10% assumed rates of appreciation are suggested by the rules of the SEC and do not represent our estimate or projection of the future common share price. Actual gains, if any, on stock option exercises will depend upon the future performance of our common stock.
 
Aggregated Option/ SAR Exercises In 2005 and FY-End Option/ SAR Values
 
The following table sets forth, for our named executive officers, certain information concerning options exercised during fiscal 2005 and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 2005. For purposes of computing value realized from the exercise of options in 2005, the fair market value for periods prior to the public offering was determined by reference to the exercise price of options granted closest to the date that a named executive officer exercised options. For those options exercised in association with the public offering, the public offering price was used. The values for “in-the-money” options are calculated by determining the difference between the fair market value of the securities underlying the options as of December 31, 2005 ($28.15 per share) and the exercise price of the officer’s options. The Company has never issued stock appreciation rights.
 
                                                 
                Number of Securities
 		             
                Underlying Unexercised
 		    Value of Unexercised
 		 
    Shares
 		    Value
 		    Options at
 		    In-the-Money Options at
 		 
    Acquired on
 		    Realized
 		    December 31, 2005 (#)     December 31, 2005 ($)  
    Exercise (#)     ($)     Exercisable     Unexercisable     Exercisable     Unexercisable  
 
Patrick K. Donnelly
    56,736       1,450,740       426,500       79,500       9,977,441       876,675  
David W. Dockhorn
    0       0       185,026       73,500       4,193,712       998,400  
Erich Mohr
    68,500       1,292,055       0       0       0       0  
James C. Powers
    0       0       268,500       41,500       6,297,160       515,825  
Bruce A. Teplitzky
    0       0       120,221       74,750       2,753,781       301,088  
 
Employment Agreements
 
On February 6, 2006, we entered into an employment agreement with Patrick K. Donnelly, our president and chief executive officer. Under this agreement, Mr. Donnelly will receive an annual salary of $425,000, will be eligible for salary increases which may be based on performance and competitive market factors, and will participate in our executive bonus plan with an annual bonus target of $250,000. This agreement will expire on February 28, 2009. If we terminate his employment without good cause or by reason of disability, if the agreement terminates by reason of death, or if Mr. Donnelly terminates his employment for good reason, Mr. Donnelly will be entitled to severance payments equal to fifteen months base salary and benefits. If, within twelve months after a change of control of PRA International, Mr. Donnelly is terminated without cause, is terminated by reason of disability, or terminates his employment for good reason, then Mr. Donnelly will be entitled to severance payments equal to thirty months base salary and benefits. Mr. Donnelly is also entitled to a tax gross up in the event that any amounts payable to him in connection with the employment agreement are subject to the 20% excise tax applicable


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to excess parachute payments under Section 4999 of the Internal Revenue Code. This tax gross up is designed to put Mr. Donnelly in the position he would have occupied if such excise tax did not apply. Mr. Donnelly is subject to a non-compete with named competitors for the duration of his employment and, following his termination, for a period of fifteen months (thirty months in the event he is terminated without cause, is terminated by reason of disability, or terminates the agreement for good reason within twelve months after a change in control and is not limited to named competitors). The agreement defines good reason to mean a material breach by the Company, a diminution of his title, authority, duties or responsibilities, the requirement to relocate more than 35 miles from his then current location, or not being elected as a member of the Board by PRA International’s shareholders or being removed from the Board without cause in accordance with PRA International’s bylaws.
 
On February 6, 2006, we entered into an employment agreement with David W. Dockhorn, our executive vice president of global clinical operations. Under this agreement, Dr. Dockhorn will receive an annual salary of $297,000, will be eligible for salary increases which may be based on performance and competitive market factors, and will participate in our executive bonus plan with an annual bonus target of $125,000. This agreement will expire on February 28, 2009. If we terminate his employment without good cause or by reason of disability, if the agreement terminates by reason of death, or if Dr. Dockhorn terminates his employment for good reason, Dr. Dockhorn will be entitled to severance payments equal to twelve months base salary and benefits. If, within twelve months after a change of control of PRA International, Dr. Dockhorn is terminated without cause, is terminated by reason of disability, or terminates his employment for good reason, then Dr. Dockhorn will be entitled to severance payments equal to twenty-four months base salary and benefits. Dr. Dockhorn is also entitled to a tax gross up in the event that any amounts payable to him in connection with the employment agreement are subject to the 20% excise tax applicable to excess parachute payments under Section 4999 of the Internal Revenue Code. This tax gross up is designed to put Dr. Dockhorn in the position he would have occupied if such excise tax did not apply. Dr. Dockhorn is subject to a non-compete with named competitors for the duration of his employment and, following his termination, for a period of twelve months (twenty-four months in the event he is terminated without cause, is terminated by reason of disability, or terminates the agreement for good reason within twelve months after a change in control and is not limited to named competitors). The agreement defines good reason to mean a material breach by the Company, a diminution of his title, authority, duties or responsibilities, or the requirement to relocate more than 35 miles from his then current location.
 
On February 6, 2006, we entered into an employment agreement with James C. Powers, our executive vice president of business development. Under this agreement, Mr. Powers will receive an annual salary of $242,000, will be eligible for salary increases which may be based on performance and competitive market factors, and will participate in our executive bonus plan with an annual bonus target of $175,000. This agreement will expire on February 28, 2009. If we terminate his employment without good cause or by reason of disability, if the agreement terminates by reason of death, or if Mr. Powers terminates his employment for good reason, Mr. Powers will be entitled to severance payments equal to twelve months base salary and benefits. If, within twelve months after a change of control of PRA International, Mr. Powers is terminated without cause, is terminated by reason of disability, or terminates his employment for good reason, then Mr. Powers will be entitled to severance payments equal to twenty-four months base salary and benefits. Mr. Powers is also entitled to a tax gross up in the event that any amounts payable to him in connection with the employment agreement are subject to the 20% excise tax applicable to excess parachute payments under Section 4999 of the Internal Revenue Code. This tax gross up is designed to put Mr. Powers in the position he would have occupied if such excise tax did not apply. Mr. Powers is subject to a non-compete with named competitors for the duration of his employment and, following his termination, for a period of twelve months (twenty-four months in the event he is terminated without cause, is terminated by reason of disability, or terminates the agreement for good reason within twelve months after a change in control and is not limited to named competitors). The agreement defines good reason to mean a material breach by the Company, a diminution of his title, authority, duties or responsibilities, or the requirement to relocate more than 35 miles from his then current location.
 
On February 6, 2006, we entered into an employment agreement with Bruce A. Teplitzky, our executive vice president of business development. Under this agreement, Mr. Teplitzky will receive an annual salary of $240,500, will be eligible for salary increases which may be based on performance and competitive market factors, and will


55

 

participate in our executive bonus plan with an annual bonus target of $175,000. This agreement will expire on February 28, 2009. If we terminate his employment without good cause or by reason of disability, if the agreement terminates by reason of death, or if Mr. Teplitzky terminates his employment for good reason, Mr. Teplitzky will be entitled to severance payments equal to twelve months base salary and benefits. If, within twelve months after a change of control of PRA International, Mr. Teplitzky is terminated without cause, is terminated by reason of disability, or terminates his employment for good reason, then Mr. Teplitzky will be entitled to severance payments equal to twenty-four months base salary and benefits. Mr. Teplitzky is also entitled to a tax gross up in the event that any amounts payable to him in connection with the employment agreement are subject to the 20% excise tax applicable to excess parachute payments under Section 4999 of the Internal Revenue Code. This tax gross up is designed to put Mr. Teplitzky in the position he would have occupied if such excise tax did not apply. Mr. Teplitzky is subject to a non-compete with named competitors for the duration of his employment and, following his termination, for a period of twelve months (twenty-four months in the event he is terminated without cause, is terminated by reason of disability, or terminates the agreement for good reason within twelve months after a change in control and is not limited to named competitors). The agreement defines good reason to mean a material breach by the Company, a diminution of his title, authority, duties or responsibilities, or the requirement to relocate more than 35 miles from his then current location.


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Performance Graph
 
Below is a graph that compares the cumulative total shareholder return on the Company’s common stock from the initial public offering date of November  18, 2004 through December 30, 2005, against the cumulative total return for the same period on the NASDAQ Stock Market (U.S.) Index and the NASDAQ Health Services Index (US). The results are based on an assumed $100 invested at our initial offering price and December 30, 2005 closing prices for both indices including reinvestment of any dividends.
 
Comparison of Five-Year Cumulative Total Returns
Performance Graph for
P R A INTERNATIONAL
 
Produced on 02/22/2006 including data to 12/30/2005
 
 
                                         
Symbol
      CRSP Total Returns Index:   11/17/2004   12/31/2004   6/30/2005   12/31/2005
  n   PRA International   100.0   130.4   140.9   148.2
   – – – – – – – – – – – – – – – –
  «   Nasdaq Stock Market (US Companies)   100.0   103.7   98.5   105.9
.........................
  5   Nasdaq Stocks (SIC 8000-8099 US Companies)   100.0   107.5   129.2   149.9
        Health services                
Notes:
                       
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 11/17/2004.
E. IPO price of $19.00 on 11/17/2004 was used for the base value.
 
The stock price performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Acts, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under the Acts.
 
Compensation Committee Report
 
The compensation committee currently comprises Mr. Conway, who serves as chairman, Mr. Kessler, and Ms. Hemberger. From January 2005 until November 2005, our compensation committee comprised Messrs. Conway, Kessler, and Conte. During 2005, the compensation committee met on five occasions to examine our


57

 

compensation structure and to determine the proper levels and components of our senior management’s compensation.
 
Committee Meetings and Deliberations
 
The committee’s customary practice is to review information regarding the components of existing executive compensation and, after addressing any issues related to such compensation, reach consensus on and approve our senior management’s compensation. During 2005, the committee reviewed each of our senior management’s proposed compensation and analyzed all components of the individual’s total compensation both on an individual basis as well as compared to the other senior management within PRA. Members then had additional time to ask for further information, to raise and address questions, to make any appropriate adjustments and to discuss such compensation before voting to approve the compensation for each member of senior management. In reviewing our executives’ compensation for 2005 and prior to making grants of stock options in connection with our initial public offering in November 2004, the committee sought the advice of an outside compensation consultant regarding the appropriateness of such grants, amount of grants and compensation of our executives following the initial public offering.
 
Our executives’ compensation comprises four components, base salary, long-term incentive compensation, bonus and various benefits and perquisites. The committee designed PRA’s compensation program, based on a combination of these components, to enable PRA to attract and retain senior executives, reward performance, and achieve long-term stockholder value.
 
The base salaries for Mr. Donnelly, Dr. Dockhorn, Dr. Mohr, Mr. Powers, and Mr. Teplitzky during fiscal 2005 were set in accordance with employment contracts that were approved by the compensation committee. The committee believes that the base salaries of the executives are reasonable and competitive with other companies of similar size in the same industry as PRA.
 
The compensation committee believes that long-term incentive compensation aligns the interests of our executive officers with PRA’s long-term goals, motivating and rewarding executives for maximizing stockholder value and encouraging the long-term employment of our senior management.
 
In addition to long-term incentives relating to equity compensation, we provide short-term annual bonus compensation to executives. Annual bonuses are linked to objective individual performance goals that relate to those activities that are most directly under an executive’s control and for which they should be held accountable. Bonuses are also based on company-wide goals relating to revenues and earnings. If the company-wide goals are not obtained, no bonus is payable, even if individual performance goals are satisfied. Executives had an opportunity to receive a bonus generally between 38% and 71% of their base salary in 2005, contingent on the achievement of the individual and company performance objectives.
 
Our executives are entitled to participate in various employee benefit plans that are generally made available to all of our employees, such as health, life, disability insurance, tax qualified retirement plans, and vacation pay. In 2005, our executives were also entitled to car and club allowances. Effective February 1, 2006, our executives will not be entitled to club allowances. The committee believes that such benefits and perquisites are comparable to those offered by other companies of similar size.
 
Internal Pay Equity
 
In the process of reviewing each executive’s compensation both separately and in the aggregate, the committee directs our human resources department to prepare a spreadsheet showing “internal pay equity” within PRA. This spreadsheet shows the relationship between each management level of compensation. The comparison includes all components of compensation, both individually and in the aggregate.
 
The committee believes that the relative difference between the compensation of our chief executive officer and the compensation of our other executives has not increased significantly over the years. The comparisons in the Company’s internal pay equity study go back approximately three years and the percentage differences are not significantly different today from then. Over the period reviewed, Mr. Donnelly’s total compensation has been in the range of 1.2 to 1.6 times the compensation of the next highest paid executive officer.


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Review of CEO Compensation Components
 
The compensation committee has reviewed all components of Mr. Donnelly’s compensation, including salary, bonus, equity and long-term incentive compensation, accumulated realized and unrealized stock option gains, the dollar value to Mr. Donnelly and cost to PRA of all perquisites and other benefits, and the actual projected payout obligations under several potential severance and change-in-control scenarios. In considering the components of Mr. Donnelly’s total compensation, the committee reviewed the aggregate amounts and mix of all components, including accumulated (realized and unrealized) option gains. In 2005, Mr. Donnelly was paid a bonus of $56,250, net of deferred bonus of $18,563.
 
The Committee’s Conclusion
 
Based on the committee’s review and deliberations, the committee finds Mr. Donnelly’s total compensation, including potential payouts in severance and change-in-control scenarios, to be reasonable and not excessive in the aggregate.
 
Policy Regarding 162(m)
 
Section 162(m) of the Internal Revenue Code precludes a public corporation from taking a deduction for compensation in excess of $1 million for its chief executive officer or any of its four other highest paid executive officers, unless such compensation is performance based and certain specific and detailed criteria are satisfied. The committee considers the anticipated tax treatment to PRA and the executive officers in its review and establishment of compensation programs and payments. The deductibility of some types of compensation payments can depend upon the timing of an executive’s vesting or exercise of previously granted rights. Interpretations of and changes in applicable tax laws and regulations as well as other factors beyond the committee’s control also can affect deductibility of compensation. Accordingly, the committee may determine that it is appropriate to structure compensation packages in a manner that may not be deductible under Section 162(m).
 
Members of the Compensation Committee
 
Robert E. Conway, Chairman
Armin Kessler
Judith A. Hemberger
 
The foregoing report shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under the Securities Act or the Exchange Act.
 
Compensation Committee Interlocks and Insider Participation
 
During 2005, none of our executive officers served as a director or member of the board of directors or compensation committee of any entity that has one or more officers serving as a director or member of our compensation committee.


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ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
Security Ownership of Directors and Executive Officers
 
The following table sets forth as of January 31, 2006, certain information with respect to the beneficial ownership of the Company’s common stock by each beneficial owner of more than 5% of the Company’s voting securities, each director and each named executive officer, and all directors and executive officers of the Company as a group, except as qualified by the information set forth in the notes to this table. Unless otherwise specified in the table below, such information, other than information with respect to the directors and officers of the Company, is based on a review of statements filed, with the Securities and Exchange commission (the “Commission”) pursuant to Sections 13 (d), 13 (f), and 13 (g) of the Exchange Act with respect to the Company’s Common Stock. As of January 31, 2006, there were 22,934,871 shares of the Company’s common stock outstanding.
 
                 
    Shares
 		       
    Beneficially
 		       
    Owned(1)     Percent(2)  
 
Named Executive Officers
               
Patrick K. Donnelly(3)
    680,262       2.75%  
David W. Dockhorn(4)
    317,626       1.28%  
Erich Mohr(5)
    489,623       1.98%  
James C. Powers(6)
    501,899       2.02%  
Bruce A. Teplitzky(7)
    197,353       0.80%  
Directors
               
Jean-Pierre L. Conte(8)
    3,139,361       12.67%  
Melvin D. Booth(9)
    10,000       0.04%  
Robert E. Conway(10)
    10,000       0.04%  
Judith A. Hemberger
    0       0.00%  
Armin Kessler(11)
    10,000       0.04%  
Robert J. Weltman(12)
    0       0.00%  
All Directors and Executive Officers as a Group (15 persons)
    5,724,137       23.10%  
Beneficial Owners of 5% or More of the Outstanding Common Stock of PRA International
               
Genstar Capital III, L.P.(13)
    3,139,361       12.70%  
Baron Capital Group, Inc.(14)
    2,104,600       9.20%  
Wasatch Advisors, Inc.(15)
    1,431,160       6.30%  
FMR Corporation(16)
    1,431,030       6.28%  
Artisan Investment Corporation (17)
    1,227,600       5.40%  
Waddell & Reed Financial (18)
    1,181,700       5.20%  
 
 
(1) Beneficial ownership of shares is determined in accordance with the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, to our knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by the stockholder. The number of shares beneficially owned by a person includes shares of common stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of January 31, 2006, and not subject to repurchase as of that date. Shares issuable pursuant to options and warrants are deemed outstanding for calculating the percentage ownership of the person holding the options and warrants but are not deemed outstanding for the purposes of calculating the percentage ownership of any other person.
 
(2) For purposes of this table, the number of shares of common stock outstanding as of January 31, 2006, is deemed to be 22,934,871.


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(3) Includes options exercisable for 426,500 shares.
 
(4) Includes options exercisable for 195,026 shares.
 
(5) Includes 144,713 shares owned by Shelley Mohr, Dr. Mohr’s spouse. Dr. Mohr resigned from the Company effective December 31, 2005.
 
(6) Includes options exercisable for 268,500 shares.
 
(7) Includes options exercisable for 120,221 shares.
 
(8) Includes 3,030,526 shares owned by Genstar Capital Partners III, L.P. and 108,835 shares owned by Stargen III, L.P. Mr. Conte is the chairman, a managing director, and a limited partner of Genstar. Capital, L.P., the manager of Genstar Capital Partners III, L.P. Mr. Conte is a limited partner of Stargen III, L.P. Mr. Conte is a managing member of Genstar III GP LLC, which is the sole general partner of Genstar Capital III, L.P., which is the sole general partner of each of Genstar Capital Partners III, L.P. and Stargen III, L.P. In such capacity, Mr. Conte may be deemed to beneficially own shares beneficially held by Genstar Capital Partners III, L.P. and Stargen III, L.P., but disclaims such beneficial ownership.
 
(9) Includes options exercisable for 10,000 shares.
 
(10) Includes options exercisable for 10,000 shares.
 
(11) Includes options exercisable for 10,000 shares.
 
(12) Mr. Weltman is a limited partner of Genstar Capital III, L.P., which is the sole general partner of each of Genstar Capital Partners III, L.P. and Stargen III, L.P. Mr. Weltman is a limited partner of Stargen III, L.P. Mr. Weltman does not directly or indirectly have or share voting or investment power over the shares beneficially held by Genstar Capital Partners III, L.P. or Stargen III, L.P.
 
(13) Includes 3,030,526 shares owned by Genstar Capital Partners III, L.P., of which Genstar Capital III, L.P. is the sole general partner, and 108,835 shares owned by Stargen III, L.P., of which Genstar Capital III, L.P. is the sole general partner. The address of these stockholders is c/o Genstar Capital, L.P., Four Embarcadero Center, 19th Floor, San Francisco, CA. The natural persons who have investment or voting power for the shares owned by Genstar Capital III, L.P. are Jean-Pierre L. Conte, Richard D. Paterson, and Richard F. Hoskins.
 
(14) Includes 2,026,000 shares owned by BAMCO, Inc. and 78,600 owned by Baron Capital Management, Inc. Each are subsidiaries Of Baron Capital Group, Inc. The address of these stockholders is 767 Fifth Avenue , New York, NY10153. Ronald Baron holds a controlling interest in Baron Capital Group, Inc.
 
(15) The address of this stockholder is 150 Social Hall Avenue, Salt Lake City, UT 84111.
 
(16) Includes 1,175,719 shares owned by Fidelity Management & Research Company and 75,100 shares owned by Fidelity Management Trust Company, each of which is a wholly-owned subsidiary of FMR Corporation. Also includes 180,211 shares held by Fidelity International Limited. Pursuant to a Schedule 13G filed on February 14, 2006, the signatories to such Schedule 13G state that although they believe that FMR Corporation and Fidelity International limited are not acting as a “group” for purposes of Section 13(d) of the Securities and Exchange Act of 1934, they have reported their beneficial ownership on a voluntary basis. The address for these stockholders is 82 Devonshire Street, Boston, MA 02109. Edward C. Johnson 3d controls the voting power of FMR Corporation by holding 49% of its common stock and pursuant to a voting agreement. A partnership controlled by Mr. Johnson controls 38% of the total voting stock of Fidelity International Limited.
 
(17) Includes 1,227,600 shares owned by Artisan Partners Limited Partnership, of which Artisan Investment Corporation is the general partner. Andrew and Caroline Ziegler are principal shareholders of Artisan Investment Corporation. The address of this stockholder is 875 E. Wisconsin Street, Milwaukee, WI 53202.
 
(18) Includes 1,067,000 shares owned by Waddell & Reed Investment Management Company and 114,000 shares owned by Ivy Investment Management Company. Each are indirect subsidiaries wholly-owned by Waddell & Reed Financial. The address of these stockholders is 6300 Lamar Avenue, Overland Park, KS 66202.


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Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table sets forth certain information with respect to our compensation plans, all of which have been approved by our stockholders, under which equity securities of the Company are authorized for issuance.
 
         
        Number of Securities
Number of Securities
 		  Weighted-Average
 		  Remaining Available for Future Issuance
to be Issued Upon
 		  Exercise Price of
 		  Under Equity Compensation Plans
Exercise of Outstanding Options,
 		  Outstanding Options,
 		  (Excluding Securities
Warrants and Rights(a)
 
Warrants and Rights(b)
 
Reflected in Column(a))(c)
 
3,149,373   $11.60 per share   1,735,275
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Pharma market, LLC
 
We own 20% of the membership interests of Pharma market, LLC, a provider of staffing services. Patrick K. Donnelly is a director of Pharma market. David W. Dockhorn owns 4.8% of the membership interests in Pharma market. In addition, The Robert J. Dockhorn Revocable Trust owns 4.8% of the membership interests of Pharma market. Robert J. Dockhorn is the father of David W. Dockhorn. We paid approximately $165,900 to Pharma eMarket for staffing services rendered to us in 2005.
 
Leased Facilities from Dockhorn Properties, LLC
 
Since 1997, we have leased three buildings from Dockhorn Properties, L.L.C. David W. Dockhorn holds a 5% membership interest in Dockhorn Properties, L.L.C. For one building, the lease term expires on December 31, 2009, with a five year renewal option. For the other two buildings, the lease expired on June 30, 2005. The lease features fixed annual rent increases of approximately 2.7%. From 1997 until September 30, 2004, we leased certain facilities from the Beverly W. Dockhorn Revocable Trust. Beverly W. Dockhorn is Dr. Dockhorn’s mother. We paid rents under the leases of approximately $1.1 million in 2005 and $1.6 million in 2004.
 
Registration Rights Agreement
 
Certain of our stockholders have entered into a registration rights agreement with us, under which they may require us at any time to file a registration statement under the Securities Act to register the sale of shares of our common stock, subject to certain limitations. We are required to pay all registration expenses in connection with the first six of these demand registrations under the registration rights agreement. The exercise of a demand registration right, when made, entitles the other existing stockholders to notice of the registration and allows them to include their shares of common stock in the registration. Our registration rights agreement also grants “piggyback” registration rights in connection with registered offerings of common stock that we initiate, for which we must pay all expenses. See Item 1A. “Risk Factors — Risks Related to Our Common Stock — The sale of a substantial number of our shares of common stock in the public market could reduce the market price of our shares, which in turn could negatively impact your investment in us.”
 
Stockholders Agreements
 
We have entered into agreements with certain stockholders that contain provisions requiring certain of our stockholders to submit to a sale of PRA upon the satisfaction of stated conditions; allow all stockholders to participate in certain transfers proposed by the majority stockholders; provide a right of first refusal in our favor and in favor of certain of our stockholders with respect to sales by certain of our stockholders; grant preemptive rights to certain stockholders should we undertake to issue new securities upon certain conditions being met; and in some instances grant “piggyback” registration rights under the registration rights agreement described above.
 
Nomination of Directors
 
Under an agreement we entered into with Genstar Capital Partners III, L.P., and Stargen III, L.P., each of Genstar and Stargen has the right to elect one of our directors so long as it holds any shares of our common stock.


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Employment Agreements
 
We have employment agreements with certain of our named executive officers, as described above in “Employment Agreements.”
 
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Fees Paid to the Independent Auditors
 
The following table presents fees for professional audit services rendered by PricewaterhouseCoopers LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2004 and 2005, and fees billed for other services rendered by PricewaterhouseCoopers LLP during those periods.
 
                 
    2004     2005  
 
Audit Fees
  $ 393,845     $ 839,503  
Audit-Related Fees
  $ 575,000     $ 94,573  
Tax Fees
  $ 13,900     $ —  
All Other Fees
    —       —  
                 
Total
  $ 982,745     $ 934,076  
 
All of the fees listed above were approved under the approval provisions of paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees listed above under “Audit Fees” relate to the integrated audit of our annual financial statement and internal control over financial reporting for the year ended December 31, 2005, including services for the reviews of the financial statements included in our quarterly reports filed on Form 10-Q for the 2005 period, and for services in connection with the audit of our annual financial statements for the fiscal year ended December 31, 2004. The fees listed above under “Audit-Related Fees” relate to services in connection with our Form S-1 filing for our initial public offering dated November 17, 2004, services in connection with our follow on offering and other transaction support in 2005 and the audit of our employee benefit plan for 2004 and 2005. There were no other fees billed by PricewaterhouseCoopers LLP relating to any other services. The audit committee has concluded the provision of the non-audit services listed above is compatible with maintaining the independence of PricewaterhouseCoopers LLP.
 
The audit committee is responsible for appointing our independent registered public accounting firm and overseeing the services it provides to us. The audit committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by our independent registered public accounting firm. Under this policy, the audit committee has specified categories of audit services, audit-related services and tax services that are pre-approved, subject to appropriate documentation and other requirements. In addition, the audit committee has specified categories of other services that our independent registered public accounting firm is precluded from providing to us.


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PART IV
 
ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
         
Allowance for Doubtful Accounts
       
Balance at December 31, 2002
  $ 2,948  
Provisions
    4,851  
Write-offs/Recoveries
    (3,219 )
         
Balance at December 31, 2003
    4,580  
Provisions
    1,914  
Write-offs/Recoveries
    (1,597 )
         
Balance at December 31, 2004
    4,897  
Provisions
    (123 )
Write-offs/Recoveries
    (78 )
         
Balance at December 31, 2005
  $ 4,696  
         
Income Tax Valuation Allowance
       
Balance at December 31, 2002
    3,496  
Provisions
    7,117  
Releases
    (2,344 )
         
Balance at December 31, 2003
    8,269  
Provisions
    569  
Releases
    (2,539 )
         
Balance at December 31, 2004
    6,299  
Provisions
    —  
Releases
    (5,458 )
         
Balance at December 31, 2005
  $ 841  
         


64

 

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of PRA International:
 
We have completed an integrated audit of PRA International’s 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
 
Consolidated financial statements and financial statement schedules
 
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of PRA International and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
Internal control over financial reporting
 
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable


66

 

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
 
McLean, Virginia
March 3, 2006


67

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
 
                 
    As of December 31,  
    2004     2005  
    (Dollars in thousands, except per share amounts)  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 65,888     $ 73,640  
Marketable securities
    24,500       —  
Accounts receivable and unbilled services, net
    84,480       85,426  
Prepaid expenses and other current assets
    5,844       8,678  
Deferred tax assets
    5,069       663  
                 
Total current assets
    185,781       168,407  
Fixed assets, net
    21,661       26,906  
Goodwill
    101,340       106,748  
Other intangibles, net of accumulated amortization of $5,234 and $6,307 as of December 31, 2004, and 2005, respectively
    25,409       24,530  
Other assets
    3,153       2,773  
                 
Total assets
  $ 337,344     $ 329,364  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
               
Accounts payable
  $ 15,040     $ 21,640  
Accrued expenses
    32,437       34,523  
Income taxes payable
    11,875       7,782  
Advance billings
    114,801       62,651  
Capital leases, current portion
    150       51  
                 
Total current liabilities
    174,303       126,647  
Deferred tax liability
    9,349       7,499  
Other liabilities
    3,238       6,343  
Capital leases
    75       9  
                 
Total liabilities
    186,965       140,498  
                 
Commitments and contingencies (Note 12)
               
Stockholders’ equity
               
Common stock $0.01 par value; 36,000,000 shares authorized as of December 31, 2004 and 2005; 22,337,822 and 22,915,896 shares issued and outstanding as of December 31, 2004 and 2005, respectively
    223       229  
Treasury stock
    (93 )     (93 )
Additional paid-in capital — common stock
    124,737       130,338  
Accumulated other comprehensive income
    2,858       3,515  
Retained earnings
    22,654       54,877  
                 
Total stockholders’ equity
    150,379       188,866  
                 
Total liabilities and stockholders’ equity
  $ 337,344     $ 329,364  
                 
 
The accompanying notes are an integral part of these financial statements.


68

 

PRA INTERNATIONAL AND SUBSIDIARIES
 
 
                         
    Year Ended December 31,  
    2003     2004     2005  
    (Dollars in thousands, except per share amounts)  
 
Revenue
                       
Service revenue
  $ 247,888     $ 277,479     $ 294,739  
Reimbursement revenue
    42,109       30,165       31,505  
                         
Total revenue
    289,997       307,644       326,244  
Operating expenses
                       
Direct costs
    126,501       134,067       136,572  
Reimbursable out-of-pocket costs
    42,109       30,165       31,505  
Selling, general, and administrative
    80,585       90,139       95,827  
Option purchase
    —       3,713       —  
Employee per option bonus related to tender
    —       2,738       —  
Depreciation and amortization
    8,967       9,691       11,156  
Management fee
    800       704       —  
                         
Income from operations
    31,035       36,427       51,184  
Interest expense
    (7,190 )     (4,023 )     (467 )
Interest income
    334       380       1,648  
Other expenses, net
    (4,023 )     (38 )     (1,137 )
                         
Income before income taxes
    20,156       32,746       51,228  
Provision for income taxes
    6,909       11,997       19,005  
                         
Net income
  $ 13,247     $ 20,749     $ 32,223  
                         
Net income per share
                       
Basic
  $ 0.83     $ 1.13     $ 1.43  
Diluted
  $ 0.71     $ 1.02     $ 1.32  
 
The accompanying notes are an integral part of these financial statements.


69

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY AND OTHER COMPREHENSIVE INCOME
 
 
                                                                                                         
                                        Additional
 		    Additional
 		                               
                                        Paid-In
 		    Paid-In
 		    Notes
 		    Accumulated
 		    Retained
 		          Other
 		 
                                        Capital —
 		    Capital —
 		    Receivable
 		    Other
 		    Earnings/
 		          Comprehensive
 		 
    Common Stock     Exchangeable Shares     Treasury Stock     Common
 		    Exchangeable
 		    from
 		    Comprehensive
 		    (Accumulated
 		          Income/
 		 
    Shares     Amount     Shares     Amount     Shares     Amount     Stock     Shares     Stockholders     Income/(Loss)     Deficit)     Total     (Loss)  
 
Balance as of December 31, 2002
    14,757,932       148       1,115,796       11       —       —       46,096       7,102       (401 )     623       5,509       59,088          
Issuance of common stock in connection with purchase business combination
    156,824       2       —       —       —       —       1,174       —       —       —       —       1,176          
Exercise of common stock options
    115,088       1       —       —       —       —       36       —       —       —       —       37          
Exercise of warrants
    243,200       2       —       —       —       —       —       —       —       —       —       2          
Net income
    —       —       —       —       —       —       —       —       —       —       13,247       13,247     $ 13,247  
Other comprehensive income
                                                                                                       
Foreign currency translation adjustment, net of tax
    —       —       —       —       —       —       —       —       —       908       —       908       908  
Fair market value adjustments on interest rate agreement, net of tax
    —       —       —       —       —       —       —       —       —       107       —       107       107  
                                                                                                         
Comprehensive income
                                                                                                  $ 14,262  
                                                                                                         
Balance as of December 31, 2003
    15,273,044     $ 153       1,115,796     $ 11       —     $ —     $ 47,306     $ 7,102     $ (401 )   $ 1,638     $ 18,756     $ 74,565          
Issuance of common stock for cash and stock
    14,116       —       —       —       —       —       150       —       —       —       —       150          
Exercise of common stock options
    1,212,174       12       —       —       —       —       2,766       —       (1,777 )     —       —       1,001          
Exercise of warrants
    729,596       7       —       —       —       —       (6 )     —       —       —       —       1          
Purchase of treasury stock
    (14,216 )     —       —       —       14,216       (93 )     —       —       —       —       —       (93 )        
Declaration of dividends
    —       —       —       —       —       —       —       —       —       —       (16,851 )     (16,851 )        
Net income
    —       —       —       —       —       —       —       —       —       —       20,749       20,749     $ 20,749  
Interest on notes receivable from stockholders
    —       —       —       —       —       —       —       —       (113 )     —       —       (113 )        
Payment on notes receivable from stockholders
    —       —       —       —       —       —       —       —       2,291       —       —       2,291          
Issuance of common stock in connection with initial public offering, net of $6,564 in fees
    4,007,312       40       —       —       —       —       67,419       —       —       —       —       67,459          
Transfer of exchangeable shares
    1,115,796       11       (1,115,796 )     (11 )     —       —       7,102       (7,102 )     —       —       —       —          
Other comprehensive income
                                                                                                       
Foreign currency translation adjustment, net of tax
    —       —       —       —       —       —       —       —       —       1,175       —       1,175       1,175  
Fair market value adjustments on interest rate agreement, net of tax
    —       —       —       —       —       —       —       —       —       45       —       45       45  
                                                                                                         
Comprehensive income
                                                                                                  $ 21,969  
                                                                                                         
Balance as of December 31, 2004
    22,337,822     $ 223       —     $ —       14,216     $ (93 )   $ 124,737     $ —     $ —     $ 2,858     $ 22,654     $ 150,379          
                                                                                                         
Exercise of common stock options
    578,074       6       —       —       —       —       3,215       —       —       —       —       3,221          
Net income
    —       —       —       —       —       —       —       —       —       —       32,223       32,223     $ 32,223  
Issuance costs related to public offerings
    —       —       —       —       —       —       (600 )     —       —       —       —       (600 )        
Stock option tax benefit
    —       —       —       —       —       —       2,986       —       —       —       —       2,986          
Other comprehensive income
                                                                                                       
Foreign currency translation adjustment, net of tax
    —       —       —       —       —       —       —       —       —       687       —       687       687  
Fair market value adjustments on interest rate agreement, net of tax
    —       —       —       —       —       —       —       —       —       (30 )     —       (30 )     (30 )
                                                                                                         
Comprehensive income
                                                                                                  $ 32,880  
                                                                                                         
Balance as of December 31, 2005
    22,915,896     $ 229     $ —     $ —       14,216     $ (93 )   $ 130,338     $ —     $ —     $ 3,515     $ 54,877     $ 188,866          
                                                                                                         
 
The accompanying notes are an integral part of these financial statements.


70

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
 
                         
    Year Ended December 31,  
    2003     2004     2005  
    (Dollars in thousands)  
 
Cash flow from operating activities
                       
Net income
  $ 13,247     $ 20,749     $ 32,223  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    8,967       9,691       11,156  
Provision for doubtful receivables
    4,851       1,914       (123 )
Amortization of debt discount
    1,642       —       —  
Provision for deferred income taxes
    (3,997 )     2,606       2,354  
Debt issuance costs write-off
    750       1,241       —  
Changes in assets and liabilities:
                       
Accounts receivable and unbilled services
    (18,538 )     15,373       (3,057 )
Prepaid expenses and other assets
    408       1,226       (2,465 )
Accounts payable and accrued expenses
    (4,873 )     7,793       11,022  
Income taxes
    (481 )     12,150       (3,677 )
Advance billings
    82       (1,107 )     (48,910 )
                         
Net cash provided by (used in) operating activities
    2,058       71,636       (1,477 )
                         
Cash flow from investing activities
                       
Purchase of fixed assets
    (8,140 )     (8,781 )     (13,349 )
Disposal of fixed assets
    540       1,131       196  
Purchase of marketable securities
    —       (24,500 )     (22,375 )
Proceeds from sale of marketable securities
    —       —       46,875  
Cash paid for acquisitions, net of cash acquired
    (1,999 )     (200 )     (7,331 )
                         
Net cash (used in) provided by investing activities
    (9,599 )     (32,350 )     4,016  
                         
Cash flow from financing activities
                       
Proceeds from issuance of debt
    69,700       5,000       —  
Repayment of debt and capital leases
    (43,710 )     (65,275 )     (166 )
Proceeds from initial public offering, net of issuance costs
    —       67,020       —  
Issuance costs related to public offerings
    —       —       (600 )
Issuance of stockholder notes receivable
    —       (1,777 )     —  
Stockholder receivable payment
    —       2,178       —  
Payment of dividends
    —       (16,852 )     —  
Purchase of treasury stock
    —       (93 )     —  
Stock option tax benefit
    —       —       2,986  
Proceeds from stock option and warrant exercises
    38       3,369       3,221  
                         
Net cash provided by (used in) financing activities
    26,028       (6,430 )     5,441  
Effect of exchange rate on cash and cash equivalents
    43       704       (228 )
                         
Increase in cash and cash equivalents
    18,530       33,560       7,752  
Cash and cash equivalents at beginning of period
    13,798       32,328       65,888  
                         
Cash and cash equivalents at end of period
  $ 32,328     $ 65,888     $ 73,640  
                         
 
The accompanying notes are an integral part of these financial statements.


71

 

PRA INTERNATIONAL AND SUBSIDIARIES
 
 
(1)   Summary of Operations and Significant Accounting Policies
 
Nature of Operations
 
PRA International (formerly PRA Holdings, Inc.) and its subsidiaries (collectively, the “Company”) is a full-service global contract research organization providing a broad range of product development services for pharmaceutical and biotechnology companies around the world. The Company’s integrated services includes data management, statistical analysis, clinical trials management, and regulatory and drug development consulting.
 
On October 20, 2004, the Board of Directors approved an amendment and restatement of the Company’s Amended and Restated Certificate of Incorporation to be filed prior to the closing of the initial public offering to effect a four-for-one stock split of the outstanding common stock. The accompanying financial statements give retroactive effect to the four-for-one stock split for all periods presented.
 
On November 18, 2004, the Company and certain selling shareholders raised gross proceeds of $131.1 million through an initial public offering of the company’s stock. Of that raise, the Company received net proceeds of approximately $67.0 million. See note 10 for further detail of the initial public offering.
 
In June, 2005, the Company completed a secondary offering selling approximately 8.3 million shares of existing shareholders’ shares. The Company did not receive cash for this transaction and incurred approximately $0.6 million of costs.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts and results of operations of the Company. All significant intercompany balances and transactions have been eliminated. Investments in which the Company exercises significant influence, but which do not control (generally 20% to 50% ownership interest), are accounted for under the equity method of accounting. To date, such investments have been immaterial.
 
Risks and Other Factors
 
The Company’s revenues are dependent on research and development expenditures of the pharmaceutical and biotechnology industries. Any significant reduction in research and development expenditures by the pharmaceutical and biotechnology industries could have a material adverse effect on the Company and its results of operations.
 
Clients of the Company generally may terminate contracts without cause upon 30 to 60 days notice. While the Company generally negotiates deposit payments and early termination fees up front, such terminations could significantly impact the future level of staff utilization and have a material adverse effect on the Company and the results of future operations.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, the Company’s method of revenue recognition requires estimates of costs to be incurred to fulfill existing long-term contract obligations. Actual results could differ from those estimates. Estimates are also used when accounting for certain items such as provision for doubtful receivables, depreciation and amortization, asset impairment, certain acquisition-related assets and liabilities, income taxes, fair market value determinations, and contingencies.


72

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Cash Equivalents
 
The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. Included in cash and cash equivalents is approximately $0.5 million of restricted cash which is reserved for a contingent payment to certain shareholders of a recent acquisition provided certain predetermined operating targets are achieved over the next 18 months.
 
Unbilled Services
 
Unbilled services represent amounts earned for services that have been rendered but for which clients have not been billed and include reimbursement revenue. Unbilled services are generally billable upon submission of appropriate billing information, achievement of contract milestones or contract completion.
 
Fixed Assets
 
Fixed assets and software purchased or developed for internal use are recorded at cost and are depreciated on a straight-line basis over the following estimated useful lives:
 
         
Furniture, fixtures, and equipment
    5-7 years  
Computer hardware and software
    3-7 years  
Leasehold improvements
    Ten years or the life of the lease  
 
Fair Value of Financial Instruments
 
The carrying amount of financial instruments, including cash and cash equivalents, trade receivables, contracts receivable, other current assets, accounts payable, and accrued expenses, approximate fair value due to the short maturities of these instruments. The Company’s long-term debt bears interest at a variable market rate, and the Company believes that the carrying amount of the long-term debt approximates fair value.
 
Impairment of Long-Lived Assets
 
The Company reviews the recoverability of its long-lived asset groups, including furniture and equipment, computer hardware and software, leasehold improvements, and other finite-lived intangibles, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The Company’s primary measure of fair value is based on discounted cash flows. The measurement of impairment requires the Company to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.
 
Goodwill and Other Intangibles
 
The Company follows Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), whereby goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Separate intangible assets that have finite useful lives continue to be amortized over their estimated useful lives. No impairments were identified during the years ended December 31, 2003, 2004, and 2005.
 
Advance Billings
 
Advance billings represent amounts associated with services, reimbursement revenue and investigator fees that have been received but have not yet been earned or paid.


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PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Revenue Recognition
 
Revenue from fixed-price contracts are recorded on a proportional performance basis. To measure performance, the Company compares the direct costs incurred to estimated total direct contract costs through completion. The estimated total direct costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Direct costs consist primarily of direct labor and other related costs. Revenue from time and materials contracts are recognized as hours are incurred, multiplied by contractual billing rates. Revenue from unit-based contracts are generally recognized as units are completed.
 
A majority of the Company’s contracts undergo modifications over the contract period and the Company’s contracts provide for these modifications. During the modification process, the Company recognizes revenue to the extent it incurs costs, provided client acceptance and payment is deemed reasonably assured.
 
If it is determined that a loss will result from performance under a contract, the entire amount of the loss is charged against income in the period in which the determination is made.
 
Reimbursement Revenue and Reimbursable Out-of-Pocket Costs
 
In addition to the various contract costs previously described, the Company incurs out-of-pocket costs, in excess of contract amounts, which are reimbursable by its customers. Pursuant to EITF 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” the Company includes out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket costs in the consolidated statements of operations.
 
As is customary in the industry, the Company routinely enters into separate agreements on behalf of its clients with independent physician investigators in connection with clinical trials. The reimbursements received for investigator fees are netted against the related cost, since such fees are the primary obligation of the Company’s clients, on a “pass-through basis,” without risk or reward to the Company. The Company is not obligated either to perform the service or to pay the investigator in the event of default by the client.
 
Significant Customers
 
Service revenue from individual customers greater than 10% of consolidated service revenue; in the respective periods were as follows:
 
                         
    Year Ended
 		 
    December 31,  
    2003     2004     2005  
 
Customer A
    11%       16%       15%  
Customer B
    10%       12%       10%  
 
Due to the nature of the Company’s business and the relative size of certain contracts, it is not unusual for a significant customer in one year to be insignificant in the next. However, it is possible that the loss of any single significant customer could have a material adverse effect on the Company’s results from operations.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services. As of December 31, 2005 substantially all of the Company’s cash and cash equivalents were held in or invested with domestic banks. Accounts receivable include amounts due from


74

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pharmaceutical and biotechnology companies. Accounts receivable from individual customers that are equal to or greater than 10% of consolidated accounts receivable in the respective periods were as follows:
 
                 
    As of
 		 
    December 31,  
    2004     2005  
 
Customer A
    14%       16%  
Customer B
    13%       *  
Customer C
    *       11%  
 
 
* Less than 10% of consolidated accounts receivable and unbilled services as of the end of each period.
 
The Company establishes an allowance for potentially uncollectible receivables. In management’s opinion, there is no additional material credit risk beyond amounts provided for such losses.
 
Foreign Currency Translation
 
The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of the period. Equity activities are translated at the spot rate effective at the date of the transaction. Revenue and expense accounts and cash flows of these operations are translated at average exchange rates prevailing during the period the transactions occurred. Translation gains and losses are included as an adjustment to the accumulated other comprehensive income account in stockholders’ equity. Transaction gains and losses are included in other income (expenses), net, in the accompanying Consolidated Statements of Operations. The Company recorded net transaction losses of $4.1 million, net transaction gains of $0.5 million, and net transaction losses of $1.2 million during the years ended December 31, 2003, 2004, and 2005, respectively.
 
Comprehensive Income (Loss)
 
The components of comprehensive income (loss) include the foreign currency translation adjustment and an adjustment resulting from a change in the fair value of an interest rate agreement.
 
Income Taxes
 
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not. Future reversals of valuation allowance on acquired deferred tax assets will first be applied against goodwill and other intangibles before recognition of a benefit in the consolidated statement of operations. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities, exclusive of amounts related to the exercise of stock options which benefit is recognized directly as an increase in stockholders’ equity.
 
Stock-Based Compensation
 
The Company measures compensation expense for its employee stock-based compensation in accordance with the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under this method, when the exercise price of options granted to employees is less than the fair value of the underlying stock on the grant date, compensation expense is recognized over the applicable vesting period. As the exercise price of the stock option has equaled or exceeded the fair market value of the underlying common stock at the date of grant, no compensation expense has been recorded. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as


75

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amended by SFAS No. 148. Had compensation cost been determined based on the stock’s fair market value at the grant dates for awards under the Company’s stock option plan in accordance with FAS No. 123, the Company’s net income would have been as follows:
 
                         
    Year Ended December 31,  
    2003     2004     2005  
    (Dollars in thousands, except per share amounts)  
 
Net income, as reported
  $ 13,247     $ 20,749     $ 32,223  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax
    (470 )     (637 )     (1,909 )
                         
FAS No. 123 pro forma net income
  $ 12,777     $ 20,112     $ 30,314  
                         
Basic net income per share, as reported
  $ 0.83     $ 1.13     $ 1.43  
Basic net income per share, pro forma
  $ 0.80     $ 1.09     $ 1.35  
Diluted net income per share, as reported
  $ 0.71     $ 1.02     $ 1.32  
Diluted net income per share, pro forma
  $ 0.68     $ 0.99     $ 1.24  
 
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
 
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of the options granted and assumptions used to derive the fair values are set forth in the following table:
 
                         
    Year Ended December 31,  
    2003     2004     2005  
 
Weighted-average fair value of options granted
  $ 0.75     $ 5.29     $ 10.91  
Risk-free rate
    2.54       3.25 %     3.96 %
Expected life, in years
    4.0       4.6       5.0  
Dividend yield
    0 %     0 %     0 %
Volatility
    0 %     25.23 %     39.6 %
 
Debt Issuance Costs
 
Debt issuance costs relating to the Company’s credit facilities are deferred and amortized to interest expense using the straight-line method, which approximates the interest method, over the respective terms of the debt concerned.
 
Net income per share
 
Basic income per common share is computed by dividing reported net income by the weighted average number of common shares and common shares obtainable upon the exchange of exchangeable shares outstanding during each period.
 
Diluted income per common share is computed by dividing reported net income by the weighted average number of common shares, common shares obtainable upon the exchange of exchangeable shares, and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of stock options and warrants.


76

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Supplemental Cash Flow Information
 
Supplemental cash flow information for the years ended December 31, 2003, 2004, and 2005 are summarized as follows:
 
                         
    2003     2004     2005  
    (Dollars in thousands)  
 
Cash paid for taxes
  $ 11,666     $ 3,890     $ 17,989  
                         
Cash paid for interest
  $ 4,980     $ 2,630     $ 213  
                         
 
In 2005 there was a payment deferral of $2.7 million stemming from the purchase of certain software. This amount will be paid over the next 37 months.
 
Derivatives
 
The Company utilizes derivative financial instruments to reduce interest rate risks and does not hold derivative instruments for trading purposes. Derivatives are accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company recognizes derivative instruments as either assets or liabilities in the balance sheet and measures them at fair value. If designated as a cash flow hedge, the corresponding changes in fair value are recorded in stockholders equity (as a component of comprehensive income/expense).
 
Recent Accounting Pronouncements
 
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), which is a revision of SFAS Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company will adopt SFAS 123(R) on January 1, 2006 using the prospective method as described in SFAS No. 148 and is currently in the process of evaluating an acceptable option valuation model. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company will adopt Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation costs for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to the consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company expects pre-tax stock-based compensation in fiscal year 2006 to be approximately $4.0 — $4.5 million (unaudited).
 
In June of 2005, the FASB issued Statement of Financial Accounting Standards No. 154, (“SFAS 154”), “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the


77

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cumulative effect of changing to the new accounting principle. The Company does not believe that the adoption of SFAS 154 will have a material effect on its financial position, results of operations or cash flows.
 
Reclassification
 
Certain prior year amounts have been reclassified to conform with current year’s presentation.
 
(2)   Acquisitions
 
During the second quarter of 2005, we acquired all of the outstanding equity of GMG BioBusiness Ltd (GMG) and Regulatory/Clinical Consultants, Inc. (RxCCI). GMG and RxCCI enhanced our existing multinational service offerings in our Global Regulatory Affairs group. We paid approximately $7.3 million in aggregate cash for both operations. There were no material acquisitions during 2004.
 
(3)   Marketable securities
 
The Company had short-term investments in Auction Rate Securities, (ARS), at December 31, 2004. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. The Company’s short-term investments were classified as available-for-sale securities due to management’s intent regarding these securities. As of December 31, 2004, there were no unrealized gains or losses associated with these investments and the adjusted fair market value equaled the adjusted cost. There were no remaining outstanding marketable securities at December 31, 2005.
 
(4)   Accounts receivable and unbilled services
 
Accounts receivable and unbilled services include service revenue, reimbursement revenue, and amounts associated with work performed by investigators (dollars in thousands):
 
                 
    As of December 31,  
    2004     2005  
 
Accounts receivable
  $ 59,384     $ 45,933  
Unbilled services
    29,993       44,189  
                 
      89,377       90,122  
Less: Allowance for doubtful accounts
    (4,897 )     (4,696 )
                 
    $ 84,480     $ 85,426  
                 
 
(5)   Fixed assets
 
Fixed assets consisted of the following (dollars in thousands):
 
                 
    As of December 31,  
    2004     2005  
 
Leasehold improvements
  $ 4,714     $ 4,449  
Computer hardware and software
    30,473       37,080  
Furniture and equipment
    9,856       10,308  
Less: Accumulated depreciation and amortization
    (23,382 )     (24,931 )
                 
    $ 21,661     $ 26,906  
                 


78

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Depreciation expense for the years ended December 31, 2003, 2004 and 2005 were $7.2 million, $8.8 million and $10.1 million, respectively.
 
(6)   Goodwill and Other Intangibles
 
The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2005 were as follows (dollars in thousands):
 
         
Carrying amount as of December 31, 2003
  $ 100,937  
Foreign currency exchange rate changes
    403  
         
Carrying amount as of December 31, 2004
    101,340  
Acquisitions
    5,866  
Foreign currency exchange rate changes
    (458 )
         
Carrying amount as of December 31, 2005
  $ 106,748  
         
 
Other intangibles consist of the following (dollars in thousands):
 
                                                         
    Weighted
 		                                     
    Average
 		    As of December 31, 2004     As of December 31, 2005  
    Amortization
 		    Gross
 		          Net
 		    Gross
 		          Net
 		 
    Period
 		    Carrying
 		    Accumulated
 		    Carrying
 		    Carrying
 		    Accumulated
 		    Carrying
 		 
    (In Years)     Amount     Amortization     Amount     Amount     Amortization     Amount  
 
Non-compete and other agreements
    2     $ 2,776     $ 2,442     $ 334     $ 2,504     $ 2,413     $ 91  
Customer relationships
    10       7,897       2,319       5,578       8,492       3,420       5,072  
Trade names
    Indefinite       19,970       473       19,497       19,841       474       19,367  
                                                         
            $ 30,643     $ 5,234     $ 25,409     $ 30,837     $ 6,307     $ 24,530  
                                                         
 
Amortization expense related to other intangibles was approximately $1.4 million, $0.9 million and $1.1 million for 2003, 2004 and 2005, respectively. For each of the next five years, amortization expense relating to the identified intangibles is expected to be $0.9 million for 2006 and $3.4 million for the four year period from 2007 through 2010.
 
(7)   Accrued expenses
 
Accrued expenses consisted of the following (dollars in thousands):
 
                 
    As of December 31,  
    2004     2005  
 
Accrued payroll and related expenses
  $ 20,503     $ 20,909  
Accrued expenses
    15,172       19,957  
                 
      35,675       40,866  
Less current portion of accrued expenses
    (32,437 )     (34,523 )
                 
    $ 3,238     $ 6,343  
                 


79

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(8)   Capital Leases
 
Capital leases consisted of the following (dollars in thousands):
 
                 
    As of December 31,  
    2004     2005  
 
Obligations under capital leases
  $ 225     $ 60  
Less current portion
    (150 )     (51 )
                 
    $ 75     $ 9  
                 
 
Credit Agreement
 
On December 23, 2004, the Company entered into a new revolving credit facility with a syndicate of banks (the “Credit Facility”) and terminated its credit facility dated December 23, 2003, as amended May 17, 2004. The Credit Facility provides for a $75.0 million revolving line of credit that terminates on December 23, 2008 or earlier in certain circumstances. At any time within three years after December 23, 2004 and so long as no event of default is continuing, the Company has the right, in consultation with the administrative agent, to request increases in the aggregate principal amount of the facility in minimum increments of $5.0 million up to an aggregate increase of $50.0 million (and which would make the total amount available under the facility $125.0 million). The Credit Facility is available for general corporate purposes (including working capital expenses, capital expenditures, and permitted acquisitions), the issuance of letters of credit and swingline loans. A portion of the facility is available for alternative currency loans.
 
The interest rates applicable to loans under the Credit Facility are floating interest rates that, at the Company’s option, equal a base rate or a LIBOR rate plus, in each case, an applicable margin. The base rate is a fluctuating interest rate equal to the higher of (a) the prime rate and (b) the overnight federal funds rate plus 0.50%. The Company may choose interest periods of 1, 2, 3 or 6 months. In addition, the Company is required to pay to the lenders under the facility a commitment fee of 0.25% or 0.375% per annum for unused commitments depending on the Company’s leverage ratio. Voluntary prepayments of loans and voluntary reductions in the unused commitments under the Credit Facility are permitted in whole or in part, in minimum amounts and subject to certain other limitations. The facility is unsecured, but the Company has granted a pledge on its assets and those of its subsidiaries that guarantees the facility for the benefit of the lenders under the facility. The Credit Facility requires the Company to comply with certain financial covenants, including a maximum total leverage ratio, a minimum fixed charge coverage ratio, and a minimum net worth. As of December 31, 2005, the Company was in compliance with all of the covenants of the revolving credit agreement. Approximately $1.2 million and $0.2 million of deferred financing costs were expensed as of December 31, 2004 and 2005, respectively, as a result of the refinancing.


80

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(9)   Income Taxes
 
The provision for income taxes was as follows (dollars in thousands):
 
                         
    Year Ended December 31,  
    2003     2004     2005  
 
Current:
                       
Federal
  $ 6,201     $ 6,303     $ 8,885  
State
    1,390       2,086       1,325  
Foreign
    3,315       1,215       7,472  
                         
Total current
    10,906       9,604       17,682  
                         
Deferred:
                       
Federal
    (3,344 )     5,973       1,231  
State
    (554 )     68       181  
Foreign
    255       (1,678 )     1,144  
Valuation allowance
    (354 )     (1,970 )     (1,233 )
                         
Total deferred
    (3,997 )     2,393       1,323  
                         
    $ 6,909     $ 11,997     $ 19,005  
                         
 
The foreign subsidiaries are taxed separately in their respective jurisdictions. As of December 31, 2005, the Company had cumulative foreign net operating loss carry forwards of approximately $9.3 million of which approximately $5.6 million was generated by Canadian subsidiaries. During 2005 approximately $2.2 million of net operating loss carry forwards were realized. Included in this amount was $0.8 million in net operating loss carry forwards derived from acquisitions which were recognized and recorded as reductions in the related goodwill balance. During 2006, certain Canadian subsidiaries were amalgamated and the potential realization of the net operating loss carry forwards were enhanced.
 
The carry forward periods for the Company’s net operating loss carry forwards vary from five years to an indefinite number of years depending on the jurisdiction. The Company’s ability to offset future taxable income with the foreign net operating loss carry forwards may be limited in certain instances, including changes in ownership.
 
The cumulative amount of undistributed earnings of foreign subsidiaries for which the Company has not provided U.S. income taxes at December 31, 2005 was approximately $35.4 million. No provision has been made for the additional taxes that would result from the distribution of earnings of foreign subsidiaries since such earnings are deemed to have been permanently invested in the foreign operations.


81

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The provision for income taxes results in effective tax rates that differ from the expected tax provision or benefit at the U.S. federal statutory rate as follows:
 
                         
    Year Ended
 		 
    December 31,  
    2003     2004     2005  
 
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
State income taxes
    4.2       4.4       2.0  
Nondeductible expenses
    1.9       1.0       1.0  
Changes in valuation allowance for foreign net operating losses, net
    (3.1 )     (4.2 )     (2.7 )
Other
    (3.7 )     0.4       1.8  
                         
Effective income tax rate
    34.3 %     36.6 %     37.1 %
                         
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Significant components of the Company’s deferred taxes were as follows (dollars in thousands):
 
                 
    December 31,  
    2004     2005  
 
Foreign operating loss carry forwards
  $ 6,299     $ 1,137  
Prepaid items
    (557 )     (960 )
Accruals and reserves
    5,957       6,263  
Identified intangibles
    (8,328 )     (8,617 )
Depreciation
    (2,869 )     (505 )
Deferred revenue
    1,600       (3,313 )
Valuation allowance
    (6,299 )     (841 )
                 
Net deferred tax liability
  $ (4,197 )   $ (6,836 )
                 
 
In determining the extent to which a valuation allowance for net deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry back opportunities, and other tax planning strategies. The valuation allowance at December 31, 2004 and December 31, 2005, relates to foreign net operating losses. Due in part to the inconsistent earnings and profits of certain foreign subsidiaries over the last three years, the Company believes that it is more likely than not that the deferred tax asset related to these foreign net operating losses will not be realized. If in the future, the Company determines that utilization of these deferred tax assets related to the foreign net operating losses becomes more likely than not, the Company will reduce the valuation allowance at that time.
 
(10)   Stockholders’ Equity
 
Authorized Shares
 
The Company is authorized to issue up to forty million shares of stock, of which thirty-six million have been designated as common stock and four million have been designated as preferred stock.
 
Common Stock Warrants
 
The Company issued a warrant to each holder of subordinated notes payable. The warrants were immediately exercisable upon issuance into 972,796 shares of common stock of the Company, and had an exercise price of $0.01 per share. The fair value of these warrants were $2.0 million and were recorded as additional debt discount which was amortized as additional interest expense. The unamortized debt discount of $1.3 million was charged to


82

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

interest expense upon the repayment of the subordinated notes payable in 2003. In 2003 and 2004 the warrants were exercised and shares of common stock were issued.
 
Initial Public Offering
 
On November 18, 2004, the Company’s common stock began trading on The Nasdaq National Market under the symbol “PRAI.” The initial public offering including the underwriters allotment consisted of 3.9 million shares of common stock sold by the Company and an additional 3.0 million shares sold by the selling shareholders at an initial offering price of $19.00 per share. The Company received from the offering net proceeds of approximately $67.0 million, after offering expenses, of which it used $28.7 million to extinguish all outstanding principal and accrued interest under the credit facilities. The remaining net proceeds of approximately $38.3 million will be used for the execution of the Company’s strategy of expanding its therapeutic expertise, service offerings and geographic reach, including possible future acquisitions. The Company received no proceeds from the sale of common stock by the selling stockholders.
 
Secondary Offering
 
In June, 2005, the Company completed a secondary offering selling approximately 8.3 million shares of existing shareholders’ shares. The Company did not receive cash for this transaction and incurred approximately $0.6 million of costs.
 
Stockholders’ Agreement
 
The Company and its stockholders are party to an agreement which, among other provisions, provides the Company with the right, in certain instances, to repurchase shares owned by stockholders and affords certain stockholders with security registration rights.
 
Employee Stock Purchase Plan
 
In June 2005, the Company established an Employee Stock Purchase Plan (ESPP) which became effective on October 1, 2005. The Company has reserved 250,000 shares of the Company’s common stock for issuance under the ESPP. As of December 31, 2005, there were 244,594 shares of common stock available for issuance. The ESPP has four three-month offering periods (each an “Offering Period”) annually, which begin on the first day of each calendar quarter, beginning October 1, 2005. Eligible employees can elect to contribute, on an after-tax basis, 1% to 10% of their pre-tax compensation during each payroll period of an Offering Period. At the end of an Offering Period, the contributions made by an eligible employee for that Offering Period will be used to purchase common stock of the Company at a price equal to 90% of the reported closing price of the Company’s common stock on the last day of the offering period.
 
During 2005, 5,406 shares were issued under the ESPP and the Company’s contribution and expenses incurred in administering the ESPP totaled approximately $11,000. The ESPP will be submitted to the stockholders for approval in 2006.
 
Management Stock Purchase Plan
 
In November 2004, the Company established, under its 2004 Incentive Award Plan, a Management Stock Purchase Plan (the “MSPP”) which became effective on January 1, 2005. Under the MSPP, eligible employees can elect to receive up to 50% of their annual incentive compensation in the form of Restricted Stock Units (Units). These Units represent the right to receive one share of common stock after vesting. The number of Units received by a participant is based on the per share closing price of the Company’s common stock on the annual bonus payment date, which is divided into the amount of bonus forgone by the participant to determine the number of Units. The Company will issue additional Units to match those received by the employee. All Units vest 100% after 3 years of


83

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

continuous employment, and vested shares of our common stock are issued to participants upon vesting. During 2005, no Units were issued under the plan.
 
Stock and Option Repurchase and Dividend and Bonus Payment
 
In January 2004, the Company closed its tender offer to repurchase shares and vested options. The Company repurchased 14,216 shares of common stock and recorded treasury stock for $0.1 million. The Company also repurchased 843,260 vested stock options, primarily from a former employee, which resulted in an operating compensation expense of $3.7 million.
 
Subsequent to the closure of the tender offer, the board of directors declared a $0.94 per share dividend payable to all stockholders and a $0.94 per option bonus to all current employee option holders. The total dividend amount of $16.9 million was recorded as a reduction of retained earnings. For the portion of the bonus relating to vested options, the Company recorded bonus expense of $2.7 million. The total compensation expense recognized during 2004 as a result of the option repurchase and per option bonus payment was $6.5 million.
 
(11)   Stock Options
 
The Company generally grants stock options with exercise prices at least equal to the then fair market value of the Company’s common stock, as determined by the board of directors.
 
Options generally vest over a four-year period and expire not more than ten years from the date of grant. As of December 31, 2005, there were 1,735,275 authorized and unissued options available for issuance.
 
The following table summarizes the Company’s stock option activity:
 
                 
    Number of
 		    Weighted Average
 		 
    Shares     Exercise Price  
 
Outstanding at December 31, 2003
    5,106,024     $ 3.69  
Granted
    1,102,500       16.50  
Exercised
    (1,346,647 )     2.40  
Repurchased
    (843,260 )     2.25  
Expired/forfeited
    (619,636 )     4.24  
                 
Outstanding at December 31, 2004
    3,398,981       8.46  
Granted
    537,500       26.85  
Exercised
    (578,074 )     5.57  
Expired/forfeited
    (209,034 )     16.19  
                 
Outstanding at December 31, 2005
    3,149,373     $ 11.60  
                 


84

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The following table summarizes information regarding options outstanding and exercisable as of December 31, 2005:
 
                                         
    Options Outstanding              
          Weighted-
 		          Options Exercisable  
    Number
 		    Average
 		    Weighted-
 		    Number
 		    Weighted-
 		 
    Outstanding as
 		    Remaining
 		    Average
 		    Exercisable as
 		    Average
 		 
    of December 31,
 		    Contractual
 		    Exercise
 		    of December 31,
 		    Exercise
 		 
Range of Exercise Price
  2005     Life in Years     Price     2005     Price  
 
$ 0.19 - $ 3.03
    114,211       2.06     $ 1.85       114,211     $ 1.85  
  3.04 -  6.06
    885,592       2.41       3.30       877,592       3.29  
  6.07 -  9.09
    769,419       3.89       7.02       542,419       6.83  
  9.10 - 12.12
    148,900       5.10       10.63       28,900       10.63  
 12.13 - 15.16
    155,000       5.38       13.13       20,000       13.06  
 15.17 - 21.22
    588,751       5.88       19.00       142,482       19.00  
 21.23 - 24.25
    177,500       6.09       24.21       —       —  
 24.26 - 27.28
    97,500       6.69       25.78       —       —  
 27.29 - 30.31
    212,500       6.78       30.09       —       —  
                                         
      3,149,373       4.32     $ 11.60       1,725,604     $ 5.84  
                                         
 
The following table sets forth the weighted-average shares used to compute the basic and diluted earnings per share.
 
                         
    Year Ended December 31,  
    2003     2004     2005  
 
Weighted-average common shares outstanding — basic
    15,965,408       18,442,313       22,527,108  
Effect of stock options and warrants
    2,700,604       1,887,539       1,862,484  
                         
Weighted-average common shares outstanding — diluted
    18,666,012       20,329,852       24,389,592  
                         
 
Excluded from the calculation of earnings per diluted share were 0, 0, and 212,500 shares during 2003, 2004, and 2005, respectively.
 
(12)   Commitments and Contingencies
 
Operating Leases
 
The Company leases office space under operating lease agreements expiring in various years through 2020. The Company has sublease agreements for certain facilities to reduce rent expense and accommodate expansion needs. The subleases expire in various years through 2010. Sublease rental income of $0.8 million, $1.5 million, and $1.3 million was recorded as a reduction of rent expense during each of the years ended December 31, 2003, 2004, and 2005, respectively. The Company also leases certain office equipment under operating leases expiring in various years through 2012.
 
Rent expense under non-related party operating leases, net of sublease rental income, for the years ended December 31, 2003, 2004, and 2005 was approximately $9.8 million, $12.7 million, and $11.5 million respectively.
 
The Company leased operating facilities from a related party under three leases which expired in July 2005. The Company vacated two of the three buildings under these leases. During 2005, the Company entered into a new lease agreement for one of the buildings with the same related party and that lease expires in December 2009. The leases feature fixed annual rent increases of approximately 2.7%. Rental expense under these leases was approximately $1.4 million, $1.6 million, and $1.1 million for the years ended December 31, 2003, 2004, and 2005 respectively.


85

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Future minimum lease commitments on non-cancelable operating leases are as follows (dollars in thousands):
 
                                 
                Sublease
 		       
    Related
 		          Rental
 		       
Year Ending December 31,
  Party     Other     Income     Net Total  
 
2006
  $ 434     $ 16,531     $ (1,501 )   $ 15,464  
2007
    446       14,534       (628 )     14,352  
2008
    458       13,933       (553 )     13,838  
2009
    470       13,424       (553 )     13,341  
2010
    —       13,750       (553 )     13,197  
Thereafter
    —       56,294       —       56,294  
                                 
    $ 1,808     $ 128,466     $ (3,788 )   $ 126,486  
                                 
 
Employment Agreements
 
The Company has entered into employment and non-compete agreements with certain management employees. In the event of termination of employment for certain instances, employees will receive severance payments for base salary and benefits for a specified period (six months for vice presidents, nine months for senior vice presidents, twelve months for executive vice presidents and fifteen months for the president and chief executive officer). Each employment agreement also contains provisions that restrict the employees’ ability to compete directly with the Company for a comparable period after employment terminates. In addition, stock option grant agreements for these employees provide the Company with the right to repurchase from the employee, or the employee with the right to sell to the Company, stock owned by the employee in certain limited instances of termination.
 
Legal Proceedings
 
In September 2005, the International Chamber of Commerce, International Court of Arbitration (the “Court”) decided an arbitration proceeding with Cell Therapeutics, Inc. (formerly Novuspharma S.p.A related to a dispute over the performance of clinical trial services. The Court awarded 317,156 Euros plus interest to the Company for unpaid services and expenses. The Court awarded 892,080 Euros plus interest to Cell Therapeutics, Inc. for damages and refunds of prior payments. As a net amount, we paid Novuspharma a total amount of approximately 560,000 Euros (inclusive of interest) as the final award.
 
The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. Although the outcome of such claims is uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.
 
Insurance
 
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services, and ownership of property. These policies provide coverage for a variety of potential losses, including, without limitation, loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range from $5,000 to $250,000.
 
Employee Health Insurance
 
The Company is self-insured for health insurance for employees within the United States. The Company maintains stop-loss insurance on a “claims made” basis for expenses in excess of $0.15 million per member per


86

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

year. As of December 31, 2004 and 2005, the Company maintained a reserve of approximately $1.25 million and $1.5 million, respectively, included in other accrued expense on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.
 
(13)   Employee Benefit Plan
 
The Company maintains a 401(k) Plan (the “Plan”) in the United States, which covers substantially all employees of its U.S. subsidiary. Eligible employees may contribute up to 20% of their pre-tax salary, and the Company will match a maximum of 50% of employee contributions up to 6% of base salary. The employer contributions to the Plan were approximately $1.5 million and $1.7 million for the years ended December 31, 2004 and 2005, respectively.
 
(14)   Lease Termination
 
In November 2004, the Company relocated its corporate headquarters to Reston, Virginia and vacated its leased building in McLean, Virginia and recorded a $1.3 million charge for the remaining lease payments net of estimated sublease which was increased by $0.2 million in 2005.
 
In 2003, the Company closed its Cambridge, England office and recorded an expense of $2.6 million. In 2005, the Company terminated this lease and paid $1.7 million.
 
(15)   Related-Party Transactions
 
As described in Note 12, the Company leases one operating facility from a related party as of December 2005.
 
Prior to the initial public offering in November 2004, the Company paid management fees to its majority stockholder. The fees were $0.8 million and $0.7 million for the years ended December 31, 2003 and 2004, respectively. The management fee arrangement was terminated.
 
During 2004, the Company received secured promissory notes from six officers of the Company totaling approximately $1.8 million. These were recourse notes that were secured by the common stock of the Company. Prior to the Company’s initial public offering these amounts were paid in full.
 
(16)   Segment Reporting — Operations by Geographic Area
 
The Company’s operations consist of one reportable segment, which represents management’s view of the Company’s operations based on its management and internal reporting structure. The following table presents certain enterprise-wide information about the Company’s operations by geographic area (dollars in thousands):
 
                         
    Year Ended December 31,  
    2003     2004     2005  
 
Service revenue
                       
North America
  $ 191,977     $ 200,409     $ 199,323  
Europe
    52,101       70,715       86,487  
Other
    3,810       6,355       8,929  
                         
    $ 247,888     $ 277,479     $ 294,739  
                         
Long-lived assets
                       
North America
  $ 135,140     $ 133,738     $ 143,298  
Europe
    16,280       16,512       16,448  
Other
    1,222       1,313       1,211  
                         
    $ 152,642     $ 151,563     $ 160,957  
                         


87

 

 
PRA INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(17)   Quarterly Financial Data
 
The following table sets forth certain unaudited quarterly consolidated financial data for each quarter in our last completed fiscal year and the two subsequent quarters. In the opinion of the Company’s management, this unaudited information has been prepared on the same basis as the audited consolidated financial statements contained herein and includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the information set forth therein when read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
 
                                 
    Three Months Ended  
    March 31,
 		    June 30,
 		    September 30,
 		    December 31,
 		 
    2004     2004     2004     2004  
 
Service revenue
  $ 66,830     $ 69,130     $ 70,311     $ 71,208  
Direct costs
    32,771       33,304       32,814       35,178  
Selling, general, and administrative
    21,993       21,811       23,576       22,759  
Depreciation and amortization
    2,337       2,358       2,355       2,641  
Income from operations
    4,265       11,136       10,964       10,062  
Net income (loss)
    2,357       7,534       5,967       4,891  
Net income (loss) per share:
                               
Basic
  $ 0.13     $ 0.42     $ 0.33     $ .25  
Diluted
  $ 0.12     $ 0.37     $ 0.29     $ .22  
FTE’s(1)
    2,211       2,229       2,274       2,299  
 
                                 
    March 31,
 		    June 30,
 		    September 30,
 		    December 31,
 		 
    2005     2005     2005     2005  
 
Service revenue
  $ 73,592     $ 76,031     $ 75,567     $ 69,548  
Direct costs
    35,277       34,159       34,537       32,599  
Selling, general, and administrative
    24,380       25,290       24,654       21,503  
Depreciation and amortization
    2,776       2,847       2,856       2,677  
Income from operations
    11,159       13,735       13,520       12,770  
Net income
    6,958       8,555       9,209       7,501  
Net income per share:
                               
Basic
  $ 0.31     $ 0.38     $ 0.41     $ .33  
Diluted
  $ 0.28     $ 0.35     $ 0.38     $ .31  
FTE’s(1)
    2,309       2,286       2,281       2,314  
 
 
(1) Represents the average or mathematical number of full time equivalent employees for the stated period.


88

 

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.
 
PRA INTERNATIONAL
 
  By:  /s/  Patrick K. Donnelly
Name: Patrick K. Donnelly
Title: Chief Executive Officer
 
Dated: March 3, 2006
 
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 and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
/s/  Patrick K. Donnelly
Patrick K. Donnelly 		  President and Chief Executive Officer   March 3, 2006
         
/s/  J. Matthew Bond
J. Matthew Bond 		  Executive Vice President and Chief Financial Officer, Assistant
Treasurer and Assistant Secretary 		  March 3, 2006
         
/s/  David G. Mathews, III
David G. Mathews, III 		  Vice President and Controller   March 3, 2006
         
/s/  Jean-Pierre L. Conte
Jean-Pierre L. Conte 		  Director   March 3, 2006
         
/s/  Melvin D. Booth
Melvin D. Booth 		  Director   March 3, 2006
         
/s/  Robert E. Conway
Robert E. Conway 		  Director   March 3, 2006
         
/s/  Judith A. Hemberger
Judith A. Hemberger 		  Director   March 3, 2006
         
/s/  Armin Kessler
Armin Kessler 		  Director   March 3, 2006
         
/s/  Robert J. Weltman
Robert J. Weltman 		  Director   March 3, 2006


89

 

 
Exhibit Index
 
         
Exhibit No
 
Description of Exhibit
 
  3 .1(1)   Second Amended and Restated Certificate of Incorporation of PRA International
         
     
  3 .2(1)   Amended and Restated Bylaws of PRA International
         
     
  4 .1(1)   2001 Stock Option Plan
         
     
  4 .2(1)   1997 Stock Option Plan
         
     
  4 .3(1)   1993 Stock Option Plan, as amended and restated
         
     
  4 .4(2)   PRA International 2005 Employee Stock Purchase Plan
         
     
  4 .5(3)   2004 Incentive Award Plan
         
     
  10 .1(4)   Credit Agreement by and among PRA International, its affiliates and the lenders party thereto
         
     
  10 .2(1)   Registration Rights Agreement by and among PRA International and the parties identified therein
         
     
  10 .3(1)   Stockholders Agreement by and among PRA International and the parties identified therein
         
     
  10 .4(1)   Form of Stockholder Agreement
         
     
  10 .5(5)   Employment Agreement dated February 3, 2006 between PRA International and Patrick K. Donnelly*
         
     
  10 .6(5)   Employment Agreement dated February 3, 2006 between PRA International and David W. Dockhorn*
         
     
  10 .7(5)   Employment Agreement dated February 3, 2006 between PRA Internationl and Monika Pietrek*
         
     
  10 .8(5)   Employment Agreement dated February 3, 2006 between PRA International and James C. Powers*
         
     
  10 .9(5)   Employment Agreement dated February 3, 2006 between PRA Interational and Bruce A. Teplitzky*
         
     
  10 .10(1)   Securities Purchase Agreement by and among Genstar Capital Partners III, L.P., Sta rgen III, L.P. and PRA International
         
     
  10 .11(6)   Form of Option Agreement
         
     
  21 .1   Subsidiaries of PRA International
         
     
  23 .1   Consent of PricewaterhouseCoopers LLP
         
     
  31 .1   Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
         
     
  31 .2   Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
         
     
  32 .1   Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         
     
  32 .2   Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
(1) Incorporated by reference to Registration Statement on Form S-1 filed on June 14, 2004 (File No. 333-116424), as amended by Amendment No. 1 filed on July 29, 2004, by Amendment No. 2 filed on September 21, 2004, by Amendment No. 3 filed on October 22, 2004, by Amendment No. 4 filed on October 28, 2004 and by Amendment No. 5 filed on November 16, 2004
 
(2) Incorporated by reference to Registration Statement on Form S-8 filed on August 23, 2005 (File No. 333-127782)
 
(3) Incorporated by reference to Form 10-K filed on March 18, 2005 (File No. 000-51029)
 
(4) Incorporated by reference to Form 8-K filed on December 29, 2004 (File No. 000-51029)
 
(5) Incorporated by reference to Form 8-K filed on February 3, 2006 (File No. 000-51029)
 
(6) Incorporated by reference to Form 8-K filed on February 2, 2005 (File No. 000-51029)
 
* Indicates a management contract or compensatory plan or arrangement


90

EX-21.1 2 w18061exv21w1.htm EX-21.1 exv21w1
 

Exhibit 21.1
PRA International
Subsidiaries
4079558 Canada Inc. (Canada)
“Buyer” 4063988 (Canada)
“Call Co” 3065613 (Canada)
GMG BioBusiness Ltd.
International Medical Technical Consultants, Inc. (Delaware, United States)
MFH, Inc. (Delaware, United States)
Pharmaceutical Research Associates AG (Switzerland)
Pharmaceutical Research Associates Belgium, BVBA (Belgium)
Pharmaceutical Research Associates Benelux, BVBA (Belgium)
Pharmaceutical Research Associates Espana, SA (Spain)
Pharmaceutical Research Associates Global, Inc. (Canada)
Pharmaceutical Research Associates GmbH (Germany)
Pharmaceutical Research Associates (HK) Ltd. (Hong Kong)
Parmaceutical Research Associates, Hungary Research and Development Ltd. (Hungary)
Pharmaceutical Research Associates Inc. (Canada)
Pharmaceutical Research Associates, Inc. (Virginia, United States)
Pharmaceutical Research Associates International, Inc. (Canada)
Pharmaceutical Research Associates Italia s.r.l. (Italy)
Pharmaceutical Research Associates Ltda. (Brazil)
Pharmaceutical Research Associates Mexico S.R.L. de C.V. (Mexico)
Pharmaceutical Research Associates PTY Limited (Australia)
Pharmaceutical Research Associates SARL (France)
Pharmaceutical Research Associates Singapore Pte. Ltd. (Singapore)
Pharmaceutical Research Associates Sp.Zoo. (Poland)
Pharmaceutical Research Associates Taiwan, Inc. (Taiwan)
Pharm Research Associates Russia Ltd. (England and Wales)
Pharm Research Associates RX, Inc. (Canada)
Pharm Research Associates (UK) Ltd. (England and Wales)
Pharm Research Limited (England and Wales)
PRA International Operations, Inc. (Delaware, United States)
PRA Pharmaceutical India Private Limited (India)
PRA Pharmaceutical (Pty) Ltd. (South Africa)
PRA Sub, Inc. (Delaware, United States)
Regulatory/Clinical Consultants, Inc. (Missouri, United States)
Trilass Inc. (Canada)

 

EX-23.1 3 w18061exv23w1.htm EX-23.1 exv23w1
 

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-120933) of PRA International of our report dated March 3, 2006 relating to the financial statements, financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
McLean, Virginia
March 3, 2006

 

EX-31.1 4 w18061exv31w1.htm EX-31.1 exv31w1
 

Exhibit 31.1
CERTIFICATION
I, Patrick K. Donnelly, certify that:
     1. I have reviewed this annual report on Form 10-K of PRA International;
     2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
     3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
          (a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
          (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide for reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
          (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
          (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
          (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
          (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Signature:
/s/ Patrick K. Donnelly
Name: Patrick K. Donnelly
Title: Chief Executive Officer
Date: March 3, 2006

 

EX-31.2 5 w18061exv31w2.htm EX-31.2 exv31w2
 

Exhibit 31.2
CERTIFICATION
I, J. Matthew Bond, certify that:
     1. I have reviewed this annual report on Form 10-K of PRA International;
     2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
     3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
          (a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
          (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide for reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
          (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
          (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
          (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
          (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Signature:
/s/ J. Matthew Bond
Name: J. Matthew Bond
Title: Chief Financial Officer
Date: March 3, 2006

 

EX-32.1 6 w18061exv32w1.htm EX-32.1 exv32w1
 

Exhibit 32.1
Section 906 Certification
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of PRA International (the “Company”) hereby certify, to such officers’ knowledge, that:
(i) the accompanying Annual Report of Form 10-K of the Company for the period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;
and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 3, 2006
/s/ Patrick K. Donnelly
 
Patrick K. Donnelly
Chief Executive Officer

 

EX-32.2 7 w18061exv32w2.htm EX-32.2 exv32w2
 

Exhibit 32.2
Section 906 Certification
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of PRA International (the “Company”) hereby certify, to such officers’ knowledge, that:
(i) the accompanying Annual Report of Form 10-K of the Company for the period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;
and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 3, 2006
/s/ J. Matthew Bond
 
J. Matthew Bond
Chief Financial Officer

 

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