PRA International (PRAI) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number:

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)

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 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” inRule 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 inRule 12b-2 of the Exchange Act).  Yes o     No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 28, 2006, 23,156,322 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

INDEX

			Page
Part I Financial Information
	Item 1.	Financial Statements		3
		Consolidated Condensed Balance Sheets as of December 31, 2005 and March 31, 2006 (unaudited)		3
		Consolidated Condensed Statements of Operations (unaudited) for the Three Months Ended March 31, 2005 and 2006 (unaudited)		4
		Consolidated Condensed Statement of Changes in Stockholders’ Equity and Other Comprehensive Income as of March 31, 2006		5
		Consolidated Condensed Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2005 and 2006		6
		Notes to Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4.	Controls and Procedures		26
Part II Other Information
	Item 1.	Legal Proceedings		27
	Item 6.	Exhibits		27

2

PART I FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

PRA INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31,			March 31,
	2005			2006
				(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	73,640		$	62,669
Accounts receivable and unbilled services, net		85,426			100,106
Prepaid expenses and other current assets		8,678			9,291
Deferred tax assets		663			841
Total current assets		168,407			172,907
Fixed assets, net		26,906			26,309
Goodwill		106,748			106,844
Other intangibles, net of accumulated amortization of $6,307 and $6,585 as of and December 31, 2005 and March 31, 2006, respectively		24,530			24,291
Other assets		2,773			2,150
Total assets	$	329,364		$	332,501
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	21,640		$	15,237
Accrued expenses		34,523			30,499
Income taxes payable		7,782			9,222
Advance billings		62,651			66,728
Other current liabilities		51			28
Total current liabilities		126,647			121,714
Deferred tax liability		7,499			7,498
Other liabilities		6,352			5,059
Total liabilities		140,498			134,271
Stockholders’ equity
Common stock $0.01 par value; 36,000,000 shares authorized as of December 31, 2005 and March 31, 2006; 22,915,896 and 23,099,695 shares issued and outstanding as of December 31, 2005 and March 31, 2006, respectively		229			231
Treasury stock		(93	)		(93	)
Additional paid-in capital — common stock		130,338			133,673
Accumulated other comprehensive income		3,515			3,436
Retained earnings		54,877			60,983
Total stockholders’ equity		188,866			198,230
Total liabilities and stockholders’ equity	$	329,364		$	332,501

The accompanying notes are an integral part of these financial statements.

3

PRA INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended
	March 31,
	2005			2006
Revenue
Service revenue	$	73,592		$	69,204
Reimbursement revenue		7,859			7,352
Total revenue		81,451			76,556
Operating expenses
Direct costs		35,277			35,175
Reimbursableout-of-pocket costs		7,859			7,352
Selling, general, and administrative		24,380			23,025
Depreciation and amortization		2,776			2,426
Income from operations		11,159			8,578
Interest expense		(160	)		(122	)
Interest income		249			456
Other expenses, net		(26	)		31
Income before income taxes		11,222			8,943
Provision for income taxes		4,264			2,837
Net income	$	6,958		$	6,106
Net income per share
Basic	$	0.31		$	0.27
Diluted	$	0.28		$	0.25
Weighted average number of common shares outstanding
Basic		22,366			22,966
Diluted		24,626			24,209

The accompanying notes are an integral part of these financial statements.

4

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’

EQUITY AND OTHER COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

										Additional
										Paid-in		Accumulated			Retained
										Capital		Other			Earnings/					Other
	Common Stock				Treasury Stock					Common		Comprehensive			(Accumulated					Comprehensive
	Shares		Amount		Shares		Amount			Stock		Income/(Loss)			Deficit)		Total			Income
Balance as of December 31, 2005		22,915,896	$	229		14,216	$	(93	)	$	130,338	$	3,515		$	54,877	$	188,866
Exercise of common stock options		169,683		2		—		—			1,352		—			—		1,354
Shares issued in connection with prior acquisition		14,116		—		—		—			175		—			—		175
Stock option tax benefit		—		—		—		—			708		—			—		708
Stock-based compensation expense		—		—		—		—			1,100		—			—		1,100
Net income		—		—		—		—			—		—			6,106		6,106		$	6,106
Other comprehensive income
Foreign currency translation adjustment, net of tax		—		—		—		—			—		(49	)		—		(49	)		(49	)
Comprehensive income													(30	)				(30	)		(30	)
Balance as of March 31, 2006 (unaudited)		23,099,695	$	231		14,216	$	(93	)	$	133,673	$	3,436		$	60,983	$	198,230		$	6,027

The accompanying notes are an integral part of these financial statements

5

PRA INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended
	March 31,
	2005			2006
Cash flow from operating activities
Net income	$	6,958		$	6,106
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,776			2,426
Stock-based compensation		—			1,100
Provision for doubtful receivables		87			3
Provision (benefit) for deferred income taxes		(580	)		378
Excess tax benefits from share-based compensation		—			708
Changes in assets and liabilities:
Accounts receivable and unbilled services		2,057			(14,707	)
Prepaid expenses and other assets		(2,400	)		(501	)
Accounts payable and accrued expenses		(7,846	)		(11,090	)
Income taxes		(2,525	)		664
Advance billings		(18,019	)		3,999
Net cash (used in) operating activities		(19,492	)		(10,914	)
Cash flow from investing activities
Purchase of fixed assets		(2,022	)		(1,478	)
Disposal of fixed assets		7			23
Purchase of marketable securities		(22,375	)		—
Proceeds from marketable securities		46,875			—
Net cash provided by (used in) investing activities		22,485			(1,455	)
Cash flow from financing activities
Repayment of debt and capital leases		(48	)		(24	)
Issuance costs related to public offerings		(50	)		—
Proceeds from stock option and warrant exercises		146			1,354
Net cash provided by financing activities		48			1,330
Effect of exchange rate on cash and cash equivalents		67			68
Increase (decrease) in cash and cash equivalents		3,108			(10,971	)
Cash and cash equivalents at beginning of period		65,888			73,640
Cash and cash equivalents at end of period	$	68,996		$	62,669
Supplemental disclosure of cash flow information
Cash paid for taxes	$	7,218		$	947
Cash paid for interest	$	74		$	11

The accompanying notes are an integral part of these financial statements.

6

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1)   Basis of Preparation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions toForm 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. You should read these consolidated financial statements together with the historical consolidated condensed financial statements of PRA International and subsidiaries for the years ended December 31, 2005, 2004, and 2003 included in our Annual Report onForm 10-K for the year ended December 31, 2005.

(2)   Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated condensed 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, are accounted for under the equity method of accounting. To date, such investments have been immaterial.

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, stock option expense, depreciation and amortization, asset impairment, certain acquisition-related assets and liabilities, income taxes, fair market value determinations, and contingencies.

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.

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.

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

7

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

estimated useful lives. The most recent annual test performed for 2005 did not identify any instances of impairment and there were no events through March 31, 2006 that warranted a reconsideration of our impairment test results.

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.

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 ReimbursableOut-of-Pocket Costs

In addition to the various contract costs previously described, the Company incursout-of-pocket costs, in excess of contract amounts, which are reimbursable by its customers. The Company includesout-of-pocket costs as reimbursement revenue and reimbursableout-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. The amounts identified for payment to investigators were $12.4 million for the three months ending March 31, 2006 and $14.1 million for the three months ending March 31, 2005.

Significant Customers

Service revenue from individual customers greater than 10% of consolidated service revenue in the respective periods was as follows:

	Quarter Ended
	March 31,
	2005			2006
Customer A		14	%		*
Customer B		12	%		*

* Less than 10% of consolidated service revenues in the respective period.

8

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

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 less significant 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 March 31, 2006, substantially all of the Company’s cash and cash equivalents were held in or invested with domestic banks. Accounts receivable include amounts due from 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:

	December 31,			March 31,
	2005			2006
Customer A		16	%		17	%
Customer C		11	%		*
Customer D		*			15	%

* 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 Condensed Statements of Operations.

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.

9

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

The primary type of share-based payment utilized by the Company is stock options. Stock options are awards which allow the employee to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to the Company stock price at the date of grant. The stock options issued in the first quarter of 2006 vest over four years and have a contractual term of seven years. Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, as described by FASB Interpretation No. 44. Accordingly, no compensation expense was required to be recognized as long as the exercise price of the Company’s stock options was equal to the market price of the underlying stock on the date of grant. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R) “Share-Based Payment” under the modified prospective method as described in SFAS No. 123(R). Under this transition method, compensation expense recognized in the three months ended March 31, 2006 includes compensation expense for all stock-based payments granted during the three months ended March 31, 2006 and for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123. Accordingly, prior period financials have not been restated. For the three months ended March 31, 2006, the amount of compensation expense recognized was $1.1 million which was recorded in selling, general, and administrative expenses in the condensed consolidated statement of operations. The net impact of adopting the new accounting guidance for the three months ended March 31, 2006 was as follows:

	For the Three Months Ended
	March 31, 2006
	Upon Adoption		If SFAS
	SFAS No.		No.123(R) Had not
	123(R)		been Adopted
	($ In thousands, except per share data)
Income from continuing operations before income taxes	$	8,578	$	9,678
Net income	$	6,106	$	6,857
Basic earnings per share	$	0.27	$	0.30
Diluted earnings per share	$	0.25	$	0.28

No compensation expense related to stock-based grants has been recorded in the consolidated statement of operations for the three months ended March 31, 2005, as all of the shares granted had an exercise price equal to the market value of the underlying stock on the date of grant. Prior period results have not been restated with the adoption of SFAS No. 123(R).

Stock Options

The stock option compensation cost calculated under the fair value approach is recognized on a pro rata basis over the vesting period of the stock options (usually four years). All stock option grants are subject to graded vesting as services are rendered. The fair value for granted options was estimated at the time of the grant using the Black-Scholes option-pricing model. Expected volatilities are based on the volatility of share prices of similar entities and the Company uses historical data to estimate option exercise behavior.

10

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

During the three months ended March 31, 2006 and 2005, the Company issued 573,750 and 215,000 options, respectively. The fair value of each option issued during these periods was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	For the Three Months Ended
	March 31,
	2005			2006
Dividend yield		0	%		0	%
Expected volatility		40.23	%		49.00	%
Risk-free interest rate		3.61	%		4.50	%
Expected terms in years		5			5

The following table summarizes information related to stock option activity for the respective periods:

	For the Three Months Ended
	March 31,
	2005		2006
	($ In thousands, except per share data)
Weighted-average fair value of options granted per share	$	9.86	$	12.53
Intrinsic value of options exercised	$	809	$	3,175
Cash received from options exercised	$	146	$	1,354
Actual tax benefit realized for tax deductions from option exercises	$	—	$	708

Aggregated information regarding the Company’s fixed stock option plans is summarized below:

						Weighted Average
						Remaining		Aggregate
				Wtd. Average		Contractual		Intrinsic
	Options			Exercise Price		Life		Value
	(000)							(Millions)
Outstanding December 31, 2005		3,149,373		$	11.60
Granted		573,750			26.10
Exercised		(169,683	)		7.88
Expired/forfeited		(12,975	)		23.33
Outstanding March 31, 2006		3,540,465		$	14.13		6.3	$	37
Exercisable at March 31, 2006		1,675,226		$	6.31		5.7	$	31

Stock-based compensation expense included in the statement of operations for the three months ended March 31, 2006, was approximately $1.1 million. As of March 31, 2006, there were approximately $15.6 million of total unrecognized stock-based compensation costs related to options granted under our plans that will be recognized over a weighted average period of 3.3 years. Awards granted prior to the Company’s implementation of SFAS 123(R) were accounted for under the recognition and measurement principles of APB Opinion 25.Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in the accompanying Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2005, because all options granted under the Company’s plans had exercise prices equal to the market value of the underlying common stock on the date of the grant. Pro forma net income and

11

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

net income per share, as if the company had applied the fair value recognition provisions of SFAS 123 to stock based compensation for periods presented prior to the Company’s adoption of SFAS 123(R), are as follows:

	Quarter Ended
	March 31, 2005
	(Dollars in thousands,
	except per share amounts)
Net income, as reported	$	6,958
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(318	)
SFAS No. 123 pro forma net income	$	6,640
Basic net income per share, as reported	$	0.31
Basic net income per share, pro forma	$	0.30
Diluted net income per share, as reported	$	0.28
Diluted net income per share, pro forma	$	0.27

Net income per share

Basic income per common share is computed by dividing reported net income by the weighted average number of common 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.

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 adopted SFAS 123(R) on January 1, 2006 using the prospective method as described in SFAS No. 148 and is using the Black-Scholes Model for valuation purposes. 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 adopted 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 inflow, and as an additional cash outflow from operations. This requirement has reduced net operating cash flows and increase net financing cash flows. The Company has recorded pre-tax stock-based compensation expense of approximately $1.1 million for the three month period ended March 31, 2006.

12

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(3)   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):

	December 31,			March 31,
	2005			2006
Accounts receivable	$	45,933		$	62,707
Unbilled services		44,189			42,099
		90,122			104,806
Less: Allowance for doubtful accounts		(4,696	)		(4,700	)
	$	85,426		$	100,106

(4)   Goodwill and Other Intangibles

The changes in the carrying amount of goodwill for the twelve months ended December 31, 2005 and the three months ended March 31, 2006 were as follows (dollars in thousands):

Carrying amount as of December 31, 2005	$	106,748
Foreign currency exchange rate changes		96
Carrying amount as of March 31, 2006	$	106,844

Other intangibles consist of the following (dollars in thousands):

			As of December 31,						As of March 31,
	Weighted		2005						2006
	Average		Gross						Gross				Net
	Amortization		Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Carrying
	Period		Amount		Amortization		Amount		Amount		Amortization		Amount
	(In Years)
Non-compete and other agreements		2	$	2,504	$	2,413	$	91	$	2,514	$	2,473	$	41
Customer relationships		10		8,492		3,420		5,072		8,500		3,638		4,862
Trade names		Indefinite		19,841		474		19,367		19,863		474		19,389
			$	30,837	$	6,307	$	24,530	$	30,877	$	6,585	$	24,292

Amortization expense related to other intangibles was approximately $0.3 million for the three months ended March 31, 2005 and March 31, 2006, respectively. Estimated amortization expense for the next five years is as follows:

	(In thousands)
2006 (remaining 9 months)	$	665
2007		863
2008		850
2009		850
2010 and thereafter		1,674
	$	4,902

(5)   Accounting for Derivative Instruments and Hedging Activities

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

13

PRA INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

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 measure 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.

(6)   Commitments and Contingencies

Legal Proceedings

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.

(7)   Related-Party Transactions

The Company currently leases operating facilities from a related- party under a lease agreement which expires in December 2009. The lease features fixed annual rent increases of approximately 2.7%. Rental expense under this lease was approximately $0.4 million and $0.1 million for the three months ended March 31, 2005 and 2006, respectively.

(8)   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):

	Three Months Ended
	March 31,
	2005		2006
Service revenue
North America	$	50,262	$	48,304
Europe		21,413		19,181
Other		1,917		1,719
	$	73,592	$	69,204

	December 31,		March 31,
	2005		2006
Long-lived assets
North America	$	133,144	$	141,663
Europe		15,863		16,673
Other		1,270		1,258
	$	150,277	$	159,594

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ITEM 2.   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 contract research organizations, or CROs with the 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 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 revenue from fixed-price contracts is 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 $294.7 million in 2005 and $69.2 million for the three months ended March 31, 2006. 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 task order or letter of intent.

Our new business awards for the three months ended March 31, 2005 and 2006 were $112.7 million and $86.7 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 March 31, 2005 and 2006 was $467.2 million and $552.9 million, respectively.

Income from operations was $11.2 million and $8.6 million for the quarters ended March 31, 2005 and 2006, respectively. We attribute the decline in productivity in part to contract delays and cancellations.

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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 ReimbursableOut-of-Pocket Costs

We incurout-of-pocket costs, which are reimbursable by our customers. We include theseout-of-pocket costs as reimbursement revenue and reimbursableout-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, reimbursableout-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.

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 ten years for computer hardware and software and seven years for furniture and equipment. Leasehold improvements are depreciated over the shorter of ten years or 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.

Income Taxes

Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pre-tax earnings among several statutory foreign jurisdictions with varying tax rates. Our effective tax rate can also vary based on changes in the tax rates of different jurisdictions. Our effective

16

tax rate is also impacted by either the generation or utilization of net operating loss carryforwards and other tax credits.

Our foreign subsidiaries are taxed separately in their respective jurisdictions. As of March 31, 2006 and December 31, 2005, we had cumulative foreign net operating loss carryforwards of approximately $7.3 million and $9.3 million, respectively. The carryforward periods for these losses vary from five years to an indefinite number of years depending on the jurisdiction. Our ability to offset future taxable income with the foreign net operating loss carryforwards may be limited in certain instances, including changes in ownership. During the first quarter of 2006, a benefit associated with approximately $1.9 million of these foreign net operating losses was recognized for financial statement purposes.

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:

	March 31,		December 31,		March 31,
	2005		2005		2006
U.S. Dollars per:
Euro		1.31		1.24		1.21
Pound Sterling		1.90		1.81		1.76
Canadian Dollar		0.81		0.83		0.87

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,									Three Months Ended March 31,
	2003			2004			2005			2005			2006
Service revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Direct costs		51.1			48.3			46.3			47.9			50.8
Selling, general, and administrative		32.5			32.5			32.5			33.1			33.3
Depreciation and amortization		3.6			3.5			3.8			3.8			3.5
Management fee		0.3			0.3			—			—			—
Option repurchase		—			1.3			—			—			—
Vested option bonus		—			0.9			—			—			—
Income from operations		12.5			13.1			17.4			15.2			12.4
Interest expense		(2.9	)		(1.4	)		(0.2	)		(0.2	)		(0.2	)
Interest income		0.1			0.1			0.6			0.3			0.7
Other income (expenses), net		(1.6	)		0.0			(0.4	)		0.0			0.0
Income before income taxes		8.1			11.8			17.4			15.2			12.9
Provision for income taxes		2.8			4.3			6.4			5.8			4.1
Net income		5.3	%		7.5	%		10.9	%		9.5	%		8.8	%

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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 incorporated by reference toForm 10-K filed on March 3, 2006. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes to the financial statements.

										Three Months Ended
	Year Ended December 31,									March 31,
	2003			2004			2005			2005			2006
										(Unaudited)			(Unaudited)
Revenue
Service revenue	$	247,888		$	277,479		$	294,739		$	73,592		$	69,204
Reimbursement revenue		42,109			30,165			31,505			7,859			7,352
Total revenue	$	289,997		$	307,644		$	326,244		$	81,451		$	76,556
Operating expenses
Direct costs		126,501			134,067			136,572			35,277			35,175
Reimbursableout-of-pocket costs		42,109			30,165			31,505			7,859			7,352
Selling, general, and administrative		80,585			90,139			95,827			24,380			23,025
Depreciation and amortization		8,967			9,691			11,156			2,776			2,426
Management fee		800			704			—			—			—
Option repurchase(1)		—			3,713			—			—			—
Vested option bonus(1)		—			2,738			—			—			—
Income from operations		31,035			36,427			51,184			11,159			8,578
Interest income (expense), net		(6,856	)		(3,643	)		1,181			89			334
Other income (expenses), net		(4,023	)		(38	)		(1,137	)		(26	)		31
Income before income taxes		20,156			32,746			51,228			11,222			8,943
Provision for income taxes		6,909			11,997			19,005			4,264			2,837
Net income	$	13,247		$	20,749		$	32,223		$	6,958		$	6,106
Net income per share
Basic	$	0.83		$	1.13		$	1.43		$	0.31		$	0.27
Diluted	$	0.71		$	1.02		$	1.32		$	0.28		$	0.25
Shares used to compute net income per share:
Basic		15,965,408			18,442,313			22,527,108			22,365,579			22,966,440
Diluted		18,666,012			20,329,852			24,389,592			24,625,539			24,209,012
Other Financial Data:
Net cash provided by (used in) operating activities	$	2,058		$	71,636		$	(1,477	)	$	(19,492	)	$	(10,914	)
Net cash provided by (used in) investing activities		(9,599	)		(32,350	)		4,016			22,485			(1,455	)
Net cash provided by (used in) financing activities		26,028			(6,430	)		5,441			48			1,330
Non-GAAP Data:
Adjusted EBITDA(2)	$	35,979		$	52,531		$	61,203		$	13,909		$	11,035
Adjusted EBITDA as a % of service revenue		14.5	%		18.9	%		20.8	%		18.9	%		15.9	%
EBITDA(2)	$	35,979		$	46,080		$	61,203		$	13,909		$	11,035
EBITDA as a % of service revenue		14.5	%		16.6	%		20.8	%		18.9	%		15.9	%

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								Three Months Ended
	Year Ended December 31,							March 31,
	2003			2004		2005		2005		2006
								(Unaudited)		(Unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	32,328		$	65,888	$	73,640	$	68,996	$	62,669
Marketable securities		—			24,500		—		—		—
Working capital		(8,449	)		11,478		41,760		19,542		51,193
Total assets		298,558			337,344		329,364		314,151		332,501
Long-term debt and capital leases, less current maturities		57,810			75		9		36		7
Stockholders’ equity		74,565			150,379		188,866		157,696		198,230

(1)

Includes a $3.7 million charge for the repurchase of options, predominantly from former employees, and a $2.7 million ($2.3 million through September 30, 2004) 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.

(2)

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.

										Three Months Ended
	Year Ended December 31,									March 31,
	2003			2004			2005			2005			2006
										(Unaudited)			(Unaudited)
Adjusted EBITDA	$	35,979		$	52,531		$	61,203		$	13,909		$	11,035
Option repurchase		—			(3,713	)		—			—			—
Vested option bonus		—			(2,738	)		—			—			—
EBITDA		35,979			46,080			61,203			13,909			11,035
Depreciation and amortization		(8,967	)		(9,691	)		(11,156	)		(2,776	)		(2,426	)
Interest expense, net		(6,856	)		(3,643	)		1,181			89			334
Provision for income taxes		(6,909	)		(11,997	)		(19,005	)		(4,264	)		(2,837	)
Net income		13,247			20,749			32,223			6,958			6,106
Depreciation and amortization		8,967			9,691			11,156			2,776			2,426
Stock-based compensation		—			—			—			—			1,100
Provision for doubtful receivables		4,851			1,914			(123	)		87			3
Amortization of debt discount		1,642			—			—			—			—
Excess tax benefits from share-based compensation		—			—			—			—			708
Provision for deferred income taxes		(3,997	)		2,606			2,354			(580	)		378
Debt issuance costs write-off		750			1,241			—			—			—
Changes in assets and liabilities:
Accounts receivable and unbilled services		(18,538	)		15,373			(3,057	)		2,057			(14,707	)
Prepaid expenses and other assets		408			1,226			(2,465	)		(2,400	)		(501	)
Accounts payable and accrued expenses		(4,873	)		7,793			11,022			(7,846	)		(11,090	)
Income taxes		(481	)		12,150			(3,677	)		(2,525	)		664
Advance billings		82			(1,107	)		(48,910	)		(18,019	)		3,999
Net cash provided by (used in) operating activities	$	2,058		$	71,636		$	(1,477	)	$	(19,492	)	$	(10,914	)

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Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Service revenue decreased by $4.4 million, or 6.0%, from $73.6 million for the first quarter of 2005 to $69.2 million for the first quarter of 2006 due to contract delays and cancellations, and an unfavorable impact from foreign currency fluctuations of approximately $0.1 million. On a geographic basis, service revenue for the first quarter of 2006 was distributed as follows: North America $48.3 million (69.8%), Europe $19.2 million (27.7%), and rest of world $1.7 million (2.5%). For the first quarter of 2005 service revenue was distributed as follows: North America $50.3 million (68.3%), Europe $21.4 million (29.1%), and rest of world $1.9 million (2.6%).

Direct costs decreased by $0.1 million, or 0.3%, from $35.3 million for the first quarter of 2005 to $35.2 million for the first quarter of 2006. This decrease was negatively impacted by foreign currency fluctuations of approximately $0.1 million. Direct costs as a percentage of service revenue increased from 47.9% for the first quarter of 2005 to 50.9% for the first quarter of 2006. The increased percentage is due to project delays, a significant cancellation and the geographic mix of work and the impact of certain project-related costs which negatively impacted the Company’s overall realizations.

Selling, general, and administrative expenses decreased by $1.4 million, or 5.7%, from $24.4 million for the first quarter of 2005 to $23.0 million for the first quarter of 2006 and were slightly offset by an unfavorable impact from foreign currency fluctuations of approximately $0.1 million. After $1.1 million of non-cash stock option expense, the difference is related to a reduction in a loss reserve for idle space, the reduction in the level of our expenses for compliance with the Sarbanes-Oxley Act of 2002, which is the typical year two decline, and the reduction of our management bonus accrual. Selling, general, and administrative expenses as a percentage of service revenue were 33.1% for the first quarter of 2005 and 33.2% for the first quarter of 2006, resulting in part from the impact of an increase in stock option expense of approximately $1.1 million.

Depreciation and amortization expense decreased by approximately $0.4 million, or 14.3%, from $2.8 million for the first quarter of 2005 to $2.4 million for the first quarter of 2006. Depreciation and amortization expense as a percentage of service revenue was 3.5% for the first quarter of 2005 and 3.5% for the first quarter of 2006.

Income from operations decreased by $2.6 million, or 23.2%, from $11.2 million for the first quarter of 2005 to $8.6 million for the first quarter of 2006. Income from operations as a percentage of service revenue increased from 15.2% for the first quarter of 2005 to 12.4% for the first quarter of 2006. The decrease in income from operations is explained by a decrease in service revenues explained mostly by the timing and execution of new projects.

Our effective tax rate for the first quarter of 2005 was 38.0% as compared to 31.7% for the same period in 2006. The decrease in our effective rate was partly due to our release of tax valuation allowances on the foreign net operating loss carry forwards in Spain and France.

Liquidity and Capital Resources

As of March 31, 2006, we had approximately $62.7 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 issuances of equity securities.

In the first three months of 2006, net cash used in operations was $10.9 million as compared to net cash used in operations of $19.5 million for the same period during the prior year. Advanced billings increased during the first three months of 2006 by $4.0 million compared to an $18.0 million decrease for the same period of 2005. The primary reason for this increase is the increased initial invoicing on new business obtained in the fourth quarter of 2005. Cash collections from accounts receivable were $84.2 million for the first three months of 2006, as compared to $81.1 million for the same period in 2005. This increase is primarily due to the timing of project milestone billings and collection of initial billings on new business. In addition, adjustments to reconcile net income of $6.1 million in 2006 to cash used in operating activities include the addback of $2.4 million for depreciation and amortization, and $21.6 million provided for by changes in assets and liabilities. Subsequent to the end of the quarter, we had cash collections of $26.8 million through April 30, 2006. Days sales outstanding, which includes

20

accounts receivable, unbilled services and advanced billings, were a positive 36 days and a negative nine days as of March 31, 2006 and 2005, respectively.

Net cash used in investing activities was $1.5 million for the first three months of 2006 as compared to net cash provided by investing activities of $22.5 million for the same period of 2005. The decrease in cash provided was due to our sale of marketable securities during the year 2005. We expect our capital expenditures to be approximately $13.0 million to $15.0 million for the full year 2006, with the majority of the spending related to information technology enhancement and expansion.

Net cash provided by financing activities in the first three months of 2006 was $1.3 million compared to net cash provided of $0.0 million in the same period of 2005. Proceeds from the exercise of stock options of $1.4 million is the primary reason for this increase.

On March 7, 2006, we filed a shelf registration statement registering the resale of common stock to satisfy certain of our obligations under our June 2001 registration rights agreement with our pre-IPO investor and other parties. The registration statement allows these parties to publicly resell up to 5,000,000 shares of common stock, subject to certain limitations and the satisfaction by selling stockholders of the prospectus delivery requirements of the Securities Act of 1933 in connection with any such resale. We will not receive any of the proceeds from the sale of common stock sold by selling stockholders. The registration statement also includes a universal shelf component that provides for the offer and sale by us, from time to time on a delayed basis, of up to $350 million aggregate amount of debt securities, common stock, preferred stock and warrants. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities.

Our current 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 our 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 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, which we have met.

To date we 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. 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.

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.

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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 our EBITDA, we use adjusted EBITDA to manage our business and assess our performance. Our management 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

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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.

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 check. 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 losses based 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 carryforwards as of December 31, 2005. In 2006, we released tax valuation allowances established for loss carryforwards in Spain and France.

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 carryforwards, 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

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors based on estimated fair values. Stock-based compensation expense recognized under SFAS 123(R) for the three months ended March 31, 2006 was $1.1 million, which consisted of stock-based compensation expense related to employee stock options. See Note 2 to the Consolidated Financial Statements for additional information.

The Company estimates the value of employee stock options on the date of grant using The Black-Scholes model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the stock price of similar entities as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The use of a Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, and expected term. Due to our limited trading history, we calculated expected volatility of our stock based on the volatility of the share price of similar entities. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. As stock-based compensation expense recognized in the Consolidated Statement of Operations for the first

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three months of fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.

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.

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.

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. On March 7, 2006, we registered to sell, on a delayed or continuous basis under Rule 415, up to

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$350,000,000 aggregate amount of debt securities, common stock, preferred stock and warrants. We also registered 5,000,000 shares of our common stock that may be sold by certain of our stockholders. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities. We cannot predict the effect, if any, that such future issuances may have on the market price of our common stock. The issuance and sale of these additional securities from time to time, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock.

Special Note Regarding Risks and Forward-Looking Statements

The discussion of our operations, cash flows and financial position includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” and similar expressions are forward-looking statements. Although these statements are based upon assumptions we consider reasonable, they are subject to risks and uncertainties that are described more fully below and in the notes accompanying our financial statements. Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements.

ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

At March 31, 2006, 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 in interest rates 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 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 translation adjustment 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,

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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 quarter ended March 31, 2006, approximately 6.3% and 17.2% 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 $1.5 million for the three months ended March 31, 2006.

Foreign Currency Hedges

In the first quarter of 2006, we entered into a number of foreign currency hedging contracts to mitigate exposure to movements between the U.S. dollar and the British pound, the U.S. dollar and the Euro, and the U.S. dollar and the Canadian dollar. We agreed to purchase a given amount of British pounds, Euros, and Canadian dollars at established dates throughout 2006. The transactions were structured as no-cost collars. These derivatives are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize derivative instruments as either assets or liabilities in the balance sheet and measure them at fair value. These derivatives are designated as cash flow hedges.

ITEM 4 — CONTROLS AND PROCEDURES

Effectiveness of Our Disclosure Controls and Procedures

As required byRule 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 March 31, 2006. 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.

Changes in 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: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are

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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 (iii) 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 financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

We have 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 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, our management has concluded that no such changes have occurred.

PART II OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

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 6.   EXHIBITS

(a) Exhibits

Exhibit
Number			Description of Exhibit
	10	.1(1)	Form of Option Agreement (Optionees other than Senior Vice Presidents, Executive Vice Presidents, President and Directors).
	10	.2(1)	Form of Option Agreement (Senior Vice Presidents, Executive Vice Presidents and President).
	10	.3(1)	Form of Option Agreement (Directors).
	10	.4(1)	Employment Agreement dated February 3, 2006 between PRA International and Patrick K. Donnelly.
	10	.5(1)	Employment Agreement dated February 3, 2006 between PRA International and David W. Dockhorn.
	10	.6(1)	Employment Agreement dated February 3, 2006 between PRA International and Monika Pietrek.
	10	.7(1)	Employment Agreement dated February 3, 2006 between PRA International and James C. Powers.
	10	.8(1)	Employment Agreement dated February 3, 2006 between PRA International and Bruce A. Teplitzky.
	21	.1(2)	Subsidiaries of PRA International.
	31	.1(2)	Certification of the Chief Executive Officer pursuant toRule 13a-14(a).
	31	.2(2)	Certification of the Chief Financial Officer pursuant toRule 13a-14(a).
	32	.1(3)	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.
	32	.2(3)	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.

(1)	Incorporated by reference toForm 8-K filed on February 9, 2006 (FileNo. 000-51029)
(2)	Filed herewith.
(3)	Furnished herewith.

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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

By:  /s/  J. Matthew Bond

Name: J. Matthew Bond

Title:  Chief Financial Officer

Dated: May 5, 2006

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Exhibit Index

Exhibit No			Description of Exhibit
	21	.1	Subsidiaries of PRA International
	31	.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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