| SFBC INTERNATIONAL INC Item 1A Risk Factors |
| You should carefully consider the following risks and all of the other information set forth in this Form 10-K before deciding to invest in shares of our common stock |
| The risks described below are not the only ones facing us |
| Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations |
| If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer |
| In such case, the market price of our common stock would likely decline due to the occurrence of any of these risks, and you may lose all or part of your investment |
| Risks Associated with Recent Actions, Inquiries and Lawsuits If we are unable to convince our clients that the problems principally related to our Miami facility were either not accurately reported or have been rectified, we may lose future revenue and our future results of operations may be materially and adversely affected |
| Although the report of the Independent Counsel which our Board of Directors retained to review the allegations contained in the Bloomberg Reports largely concluded that the Reports’ allegations were unfounded, the repetition of these allegations in the media has harmed our reputation and cost us business in our Miami facility |
| These problems have been compounded by the structural and other local regulatory issues affecting the real estate and related improvements of the Miami facility |
| Clients may decline to give us contracts for studies to be performed by our Miami facility unless we can convince them that the operational allegations and structural and other allegations affecting the physical property are not impacting our ability to provide first rate clinical research in compliance with our client’s protocols and all regulatory requirements |
| Depending upon the amount of revenue lost, the results may have a material and adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings |
| Moreover, while the loss of business seems to have been largely confined to our Miami operation, we cannot predict if clients may withhold business elsewhere |
| 22 _________________________________________________________________ [83]Table of Contents If we are unable to deal with all of the issues affecting the property upon which our Miami facility operates, we may lose future revenue and our future results of operations may be materially and adversely affected |
| We are presently facing a number of serious issues with regard to our property located in Miami including: • Our principal Miami facility is required to obtain a building permit by late April 2006 and to make structural repairs within 180 days thereafter that are necessary to operate the facility in compliance with applicable regulations |
| • We very recently learned that the County Building Department believes the Miami facility should be classified as a generic I-2 or institutional classification |
| This will increase our remediation costs unless we appeal the ruling and are successful |
| Additionally, we need to comply with all Fire Department requirements in connection with our remediation plan |
| We are uncertain whether the Fire Department will approve our remediation plan, whether additional revisions will be required and what, if any, costs we will incur |
| • The owner of the land lease covering the South building and a small part of the central annex has instituted a lawsuit to have the Court declare that we defaulted under the land lease, which if adversely determined, would cause us to move from the South building and a portion of an annex to the North building which would involve a material cash capital expenditure and reduce the bed capacity to approximately 250 beds |
| • Regardless, if we successfully resolve the above problems, we may not have sufficient parking to operate either the current facility or simply the North building and the majority of the annex |
| Construction of a parking structure not only requires zoning approval which is a lengthy process, but also involves a material cost |
| • While we own an empty building in the City of Miami which was operated by Clinical Pharmacology Associates before our purchase of it in 2003, we estimate that it would take six months to obtain the necessary regulatory approvals and make structural improvements to operate that property as a Phase I clinical trials facility |
| Presently, we have no intent to re-open that property |
| • The issues affecting our Miami facility and adverse publicity may also cause employees to leave us and subjects who participate in our Phase I trials in Miami may decline to do so in the future |
| Our attempts to resolve these issues involve a material amount of attention from our management, additional cost and uncertainty and may have a material and adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings |
| Moreover, we have been approached by a number of parties about purchasing the Miami property we own |
| Our ability to sell this property for its actual value will be impacted by the uncertainty created by the land lease and the pending litigation as well as the perception that any sale may be required by our future failure to comply with local regulatory requirements |
| In the event we were required to close the Miami facility, we may not have the time or resources to complete the construction of a new building before losing all of the Miami business to competitors or attrition |
| While we are cooperating with the requests of the Senate Finance Committee for documents and will produce current employees if their presence before the Committee or its staff is requested, we are concerned that continued public disclosure could cause clients to withhold future work from us |
| The United States Senate Finance Committee has twice requested documents and/or information from us and we have complied fully with its requests |
| Additionally, two of our former employees including our former president and chairman have voluntarily met with the Committee’s staff |
| The public disclosure of the Committee’s requests has negatively affected our common stock price |
| Future activities by the Committee and the public disclosure of such activities can again affect our common stock price and may cause clients to not 23 _________________________________________________________________ [84]Table of Contents award us contracts or cancel existing contracts |
| Moreover, future requests may involve substantial additional costs including legal fees and diversion of management time |
| Depending upon the outcome, the inquiry by the SEC can result in our being sued by the SEC and being subject to equitable relief including payment of a fine and civil monetary penalties |
| In July 2005, the NASD advised us that it had referred the review of trading in our common stock and options prior to the announcement of our acquisition of PharmaNet to the SEC In late December 2005, the SEC staff wrote to us requesting various documents principally relating to compensation payable to our former president and chairman, to compensation payable to our former vice president of legal affairs relating to his compensation and that of his family, to other information relating to the former officer’s duties and to the Independent Counsel’s report |
| In addition, on March 28, 2006, the SEC staff wrote to us requesting various documents principally relating to related party transactions, compensation of, and other arrangements with, family members of certain of our employees, internal control and other accounting policies, our initial public offering, our Form 8-K filed on June 8, 2005, transcripts of all analyst and investor conference calls and all minutes of all board meetings, including committee meetings, since January 1, 2000 |
| Presently, the SEC’s review is an informal inquiry which is less serious than a formal investigation in which the SEC authorizes its staff to issue subpoenas and investigate certain activity |
| In addition to the documents above, we do know that an investor whose name was submitted to us by the NASD received a telephone call in January 2006 from the SEC staff inquiring about his purchases of SFBC securities and whether he had advance knowledge of the PharmaNet acquisition |
| That investor has never been our employee or our contractor |
| We are uncertain whether the SEC staff will seek to elevate its informal inquiries to a formal investigation or if it does, whether the SEC will bring an action against us |
| Among its remedies are the filing of a lawsuit seeking injunctive relief requiring us to comply with the law and the imposition of fines and civil monetary penalties |
| A lesser remedy would be to issue a report of investigation outlining activity considered to violate the law |
| Depending upon the outcome of the SEC inquiry, we may sustain significant legal expenses and the costs and negative publicity related to a formal SEC investigation could have a material adverse effect on our future results of operations |
| The pending FDA open item and other FDA inspections may cause clients not to award future contracts to us or cancel existing contracts, which may have a material and adverse affect on our future results of operations |
| We presently are subject to one matter where the FDA inspectional staff concluded that we have adequately addressed its Form 483 observations following its inspection of a study and no further action was required, whereas the Division of Scientific Investigations recommended that the data generated from this study at our Miami facility be disallowed in connection with an abbreviated new drug application |
| Additionally, we can expect continuing inspections of our facilities in connection with studies we have conducted in support of marketing applications or routine inspections of our offices/facilities that have yet to be inspected by the FDA The FDA has significant authority over the conduct of clinical trials, and it has the power to take regulatory and legal action in response to violations of clinical standards and subject protection in the form of clinical holds on studies, civil and criminal fines, injunctions, and other measures |
| If the FDA issues clinical holds, or obtains injunctions, such actions could result in significant obstacles to future operations |
| Additionally, there is a risk that these FDA actions, if they result in significant Form 483 observations, could cause clients to not award us future contracts or cancel existing contracts |
| Depending upon the amount of revenue lost, the results may have a material and adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings |
| While we have insurance coverage in connection with the pending class actions, the potential adverse outcome may exceed our insurance coverage |
| We are subject to a number of class actions in federal court which we expect will be consolidated into one case before a single judge |
| Subject to a dlra250cmam000 deductible, we expect our insurance carrier will pay all legal and other costs, any settlement amount and any adverse judgment, subject to the limits of the policies |
| If the amount of defense costs and any agreed upon settlement or adverse judgment exceeds the insurance limits 24 _________________________________________________________________ [85]Table of Contents or if coverage were otherwise unavailable, our future earnings and financial condition could be materially and adversely affected |
| Additionally, litigation is generally time-consuming, and can divert the attention of our management and other personnel |
| If there is an adverse outcome in the securities class action lawsuits that have been filed against us, our business may be materially harmed |
| Further, defending against these and other lawsuits may be expensive and could divert the attention of our management |
| A large number of securities class actions and derivative actions have been filed against us |
| The securities class actions allege that we and certain of our former and current officers engaged in violations of the anti-fraud provisions of the federal securities laws |
| The derivative suits are brought on behalf of SFBC against certain of its former and current officers and/or directors alleging, among other things, breaches of fiduciary duty |
| The complaints in these actions seek, among other things, unspecified damages and costs associated with the litigation |
| As with any litigation proceeding, we cannot predict with certainty the eventual outcome of these pending lawsuits |
| Furthermore, we will have to incur expenses in connection with these lawsuits, which may be substantial |
| In the event of an adverse outcome, our business could be materially harmed |
| Moreover, responding to and defending the pending litigation could result in a significant diversion of management’s attention and resources and an increase in professional fees |
| If we are unable to stabilize our operations in Miami, we may be unable to compete effectively in that area |
| We understand that a competitor has opened a 125 bed facility in the Miami, Florida area |
| This represents the first significant local early stage competition since we purchased Clinical Pharmacology Associates two and one-half years ago |
| If clients are concerned about the issues referred to in many of the above risk factors or if our employees and subjects are attracted to this new competitor, we may not be able to compete effectively, in which case our future net earnings may be reduced and our common stock price will fall |
| Additionally, this new competition may adversely affect our ability to recruit subjects |
| The risks set forth immediately above as well as those in the balance of these risk factors may cause us not to meet our 2006 or future earnings guidance, which could cause our stock price to fall substantially |
| We regularly provide earnings guidance in press releases and in public conference calls |
| This guidance is not incorporated by reference into this Report |
| The guidance is made in a good faith belief that we will achieve the range of net revenue and earnings per share we forecast |
| We very recently revised our guidance which was based upon, among other things, a review of the business at the Miami and other facilities |
| That guidance was based upon a consideration of the relevant risks and a full review of our business units as well as our anticipated outside legal and other expenses as of the date of the review |
| Depending upon future events including the status of our Miami facility and property as well as clients’ perceptions about doing business with us, we may not achieve the forecasted results |
| If we fail to do so, our revisions of our guidance or our announcement of our earnings may cause our common stock price to fall, which decline may be material |
| Our forecasts reflect numerous assumptions concerning our expected performance, as well as other factors, which are beyond our control, and which might not turn out to be correct |
| Although we believe that the assumptions underlying our projections are reasonable, actual results could be materially different |
| Our financial results are subject to numerous risks and uncertainties, including those identified throughout these risk factors and elsewhere in this Report |
| Risks Related to Our Business We have grown rapidly over the last few years, and our growth has placed, and is expected to continue to place, significant demands on us |
| We have grown rapidly over the last six years, including through acquisitions |
| Businesses that grow rapidly often have difficulty managing their growth |
| Our rapid growth has placed and is expected to continue 25 _________________________________________________________________ [86]Table of Contents to place significant demands on our management, on our accounting, financial, information and other systems and on our business |
| Although we have expanded our management, we need to continue recruiting and employing experienced executives and key employees capable of providing the necessary support |
| In addition, we will need to continue to improve our financial, accounting, information and other systems in order to effectively manage our growth |
| In particular, our late stage clinical trial management business faces stiff competition for clinical trial monitors and other experienced personnel |
| Historically, when making acquisitions, we have targeted operations that we believe can be operated as autonomous business units |
| As the result of the 2005 problems in Miami and our change in senior management, we have reorganized and are now managing our operations on a more centralized basis from our Princeton, New Jersey headquarters |
| This prior decentralization of our operations and systems may create difficulties for us in the future |
| All of our North American subsidiaries, with the exception of PharmaNet and Anapharm, have a common accounting software platform |
| We cannot assure you that our management will be able to manage our growth and integrate acquired businesses effectively or successfully, or that our financial, accounting, information or other systems will be able to successfully accommodate our external and internal growth |
| Our failure to meet these challenges could materially impair our business |
| A significant portion of our growth has come from acquisitions, and we may make more acquisitions in the future as part of our continuing growth strategy |
| This growth strategy subjects us to numerous risks |
| A very important aspect of our growth strategy has been and continues to be pursuing strategic acquisitions of related businesses that we believe can expand or complement our business |
| Since March 2000, we have substantially grown our business through the completion of 11 acquisitions |
| We did not complete any acquisitions in 2005, but we are continuing to explore future acquisitions |
| Acquisitions require significant capital resources and divert management’s attention from our existing business |
| Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct pre-dating our acquisition of a business that were not known to us at the time of acquisition |
| We may also incur significantly greater expenditures in integrating an acquired business than we had anticipated at the time of its purchase |
| In addition, acquisitions may create unanticipated tax and accounting problems, including the possibility that we might be required to write-off goodwill which we have paid for in connection with an acquisition |
| A key element of our acquisition strategy has been to retain management of acquired businesses to operate the acquired business for us |
| Many of these individuals maintain important contacts with clients of the acquired business |
| Our inability to retain these individuals could materially impair the value of an acquired business |
| Our failure to successfully identify and consummate future acquisitions or to manage and integrate the acquisitions we make could have a material adverse effect on our business, financial condition or results of operations |
| We cannot assure you that: • we will identify suitable acquisition candidates; • we will receive the required consent under our outstanding credit facility; • we can consummate acquisitions on acceptable terms; • we can successfully integrate any acquired business into our operations or successfully manage the operations of any acquired business; or • we will be able to retain an acquired company’s significant client relationships, goodwill and key personnel or otherwise realize the intended benefits of any acquisition |
| Our credit facility contains certain restrictive covenants that, absent the consent of the administrative agent on behalf of the lenders under the credit facility, limit our ability to enter into acquisitions by setting limits on the maximum aggregate amounts of cash we can pay in acquisition consideration in any fiscal year and the maximum aggregate amount of all acquisition consideration paid during the term of the credit facility, as well as restricting the terms of equity consideration paid in acquisitions |
| 26 _________________________________________________________________ [87]Table of Contents We are subject to changes in outsourcing trends and regulatory requirements affecting the branded pharmaceutical, biotechnology, generic drug and medical device industries which could adversely affect our operating results |
| Economic factors and industry and regulatory trends that affect our primary clients, branded pharmaceutical, biotechnology, generic drug and medical device companies, also affect our business and operating results |
| The outsourcing of drug development activities grew substantially during the past decade and we benefited from this trend |
| If these industries reduce the outsourcing of their clinical research and other drug development projects, our operations will be adversely affected |
| A continuing negative trend could have an ongoing adverse effect on our business, results of operations or financial condition |
| Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies |
| Potential regulatory changes under consideration include the mandatory substitution of generic drugs for innovator drugs, relaxation in the scope of regulatory requirements or the introduction of simplified drug approval procedures |
| If future regulatory cost containment efforts limit the profits which can be derived from new and generic drugs or if regulatory approval standards are relaxed, our clients may reduce the business they outsource to us |
| We cannot predict the likelihood of any of these events |
| If branded pharmaceutical, biotechnology, generic drug or medical device companies reduce their expenditures, our future revenue and profitability may be reduced |
| Our business and continued expansion depend on the research and development expenditures of our clients which in turn is impacted by their profitability |
| If these companies want to reduce costs, they may proceed with fewer clinical trials and other drug development |
| An economic downturn or other factors may cause our clients to decrease their research and development expenditures which would adversely affect our future revenue and profitability |
| If we do not continue to generate a large number of new client contracts, or if our clients cancel or defer contracts, our future profitability may be adversely affected |
| Our early stage contracts are short term and our late stage contracts generally extend over a period of one to two years, although some may be of longer duration |
| However, all of our contracts are generally cancelable by our clients with little or no notice |
| A client may cancel or delay existing contracts with us at its discretion and is likely to do so for a variety of reasons, including: • manufacturing problems resulting in a shortage or unavailability of the drug we are testing; • a decision by a client to de-emphasize or cancel the development of a drug; • unexpected clinical trial results; • adverse participant reaction to a drug; • an action by regulatory authorities (for example, in the United States, the FDA, and in Canada, the TPD); • continued publicity relating to the Senate Finance Committee’s interest in our Miami facility; • inadequate participant enrollment; and • any of the factors discussed in the other risk factors relating to issues regarding our Miami facility |
| All of these factors are beyond our control and we must continually replace our existing contracts with new contracts to sustain our revenue |
| Our inability to generate new contracts on a timely basis would have a material adverse effect on our business, financial condition, and results of operations |
| In addition, since a large portion of our operating costs are relatively fixed, variations in the timing and progress of contracts can materially affect our financial results |
| The loss or delay of a large project or contract or the loss or delay of multiple smaller contracts could have a material adverse effect on our business, financial condition and results of operations |
| We have experienced termination, cancellation and delay of contracts by clients from time to 27 _________________________________________________________________ [88]Table of Contents time in the past in the ordinary course of our business |
| Moreover, our Miami facility has recently lost business and clients as described in Item 1 “Issues Relating to our Miami Facility” of this Report |
| At any given time, one or a limited number of clients may account for a large percentage of our revenue, which means that we could face a greater risk of loss of revenue if we lose a major client |
| Historically, a small number of clients have generated a large percentage of our net revenue in any given period |
| In each of 2005, 2004 and 2003, no client provided more than 10prca of our direct revenue, but our 10 largest clients provided approximately 40prca, 31prca and 38prca, respectively, of our direct revenue |
| PharmaNet also relies on a limited number of clients which generate a significant percentage of its direct revenue |
| During 2005, 2004 and 2003 direct revenue from four of PharmaNet’s clients, provided approximately 38dtta8prca, 41dtta4prca and 34dtta7prca of PharmaNet’s direct revenue, respectively |
| Companies that constitute our largest clients vary from year to year, and our direct revenue from individual clients fluctuates each year |
| If we lose one or more major clients in the future or if one or more clients encounter financial difficulties, our business, financial condition and results of operations could be materially and adversely affected |
| We may bear financial risk if we under-price our contracts or overrun cost estimates |
| We bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates |
| Such under-pricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition and cash flows |
| If we are not able to remediate the material weaknesses relating to our internal controls or if we incur further instances of breakdowns in our internal controls, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the price of our common stock |
| In connection with the internal control audit for the year ended December 31, 2005, our management assessed our internal control over financial reporting and concluded that two material weaknesses existed |
| We have taken two steps to remediate both material weaknesses, which related to too many adjusting entries and the failure to identity and evaluate as well as disclose certain related party information to our Audit Committee and our independent registered public accounting firm |
| In 2006, we have hired additional accounting personnel to address the first material weakness |
| In late December 2005, our Board of Directors adopted a resolution requiring all related party transactions be first approved by our Audit Committee and then by the full Board of Directors |
| Recently we amended our Code of Ethics to require our human resources department to approve in writing the hiring of all employees |
| Human resources will make the appropriate related party inquiries and forward the information when appropriate to the Audit Committee |
| We believe these remediation efforts will enhance our ability to identity and evaluate and disclose related party transactions to our Audit Committee and our independent registered public accounting firm and thereby remediate the second material weakness |
| While remediating these material weaknesses is a very high priority for our management and our Audit Committee, we cannot assure you that our independent registered public accounting firm will agree with our management’s assessment that we have remediated them or that we will not encounter further instances of breakdowns in our internal control over financial reporting |
| Public disclosure of these material weaknesses or a failure to promptly complete our remediation effort could cause our common stock price to fall |
| Moreover, no matter how good a system of internal control is, it can be circumvented by people who engage in improper action |
| In such event, our results of operations could be distorted |
| If the improper activity is material, once discovered and publicly disclosed, our common stock price could materially decline |
| Our indebtedness may impact our financial condition and results of operations and the terms of our outstanding indebtedness may limit our activities |
| On December 31, 2005, we had approximately dlra168dtta2 million of consolidated indebtedness |
| Subject to applicable restrictions in our outstanding indebtedness, we may incur additional indebtedness in the future |
| 28 _________________________________________________________________ [89]Table of Contents Our level of indebtedness will have several important effects on our future operations, including, without limitation: • we may be required to use a portion of our cash flow from operations for the payment of principal and interest due on our outstanding indebtedness; • our outstanding indebtedness and leverage will increase the impact of negative changes in general economic and industry conditions, as well as competitive pressures; and • the level of our outstanding indebtedness may affect our ability to obtain additional financing for working capital, capital expenditures or general corporate purposes |
| dlra17dtta0 million of our current outstanding indebtedness bears interest at a floating rate tied to LIBOR and dlra143dtta75 million of our outstanding indebtedness bears interest at a fixed rate of 2dtta25prca per year |
| Accordingly, if interest rates increase, whether generally or as the result of our lender’s requirement in connection with a proposed amendment, then the amount of the interest payments on our floating rate indebtedness will also increase |
| General economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, may affect our future performance |
| As a result, these and other factors may affect our ability to make principal and interest payments on our indebtedness |
| Our business might not continue to generate cash flow at or above current levels |
| Moreover, if we are required to repatriate foreign earnings in order to pay our debt service, we may incur additional income taxes |
| If we cannot generate sufficient cash flow from operations in the future to service our indebtedness, we may, among other things: • seek additional financing in the debt or equity markets; • seek to refinance or restructure all or a portion of our indebtedness; • sell selected assets; or • reduce or delay planned capital expenditures |
| These measures might not be sufficient to enable us to service our indebtedness |
| In addition, any financing, refinancing or sale of assets might not be available on economically favorable terms, if at all |
| Furthermore, our credit facility contains certain restrictive covenants which will affect, and in many respects significantly limit or prohibit, among other things, our ability to: • incur indebtedness; • create liens; • make investments or loans; • engage in transactions with affiliates; • pay dividends or make other distributions on, or redeem or repurchase, capital stock; • issue capital stock; • make capital expenditures; • sell assets; and • pursue mergers or acquisitions |
| As of the date of this Report, we cannot borrow further on the revolving line of credit which is part of our credit facility |
| We recently received a waiver of certain violations under the credit facility as of December 31, 2005 |
| We are seeking to amend the credit facility to permit us to re-borrow under it, but cannot assure you we will be successful |
| Additionally, we are in violation of certain credit facility covenants at March 31, 2006 for the reasons expressed under “Liquidity” in Item 7 of this Report |
| 29 _________________________________________________________________ [90]Table of Contents We may not have sufficient funds to pay the principal return upon conversion or to repurchase our outstanding convertible senior notes under circumstances when we are required to do so |
| We have outstanding dlra143dtta75 million in aggregate principal amount of our 2dtta25prca convertible senior notes due 2024 |
| The notes are convertible at the option of the holders at any time |
| The initial conversion rate of the notes is 24dtta3424 shares of common stock per dlra1cmam000 principal amount of the notes |
| This is equivalent to an initial conversion price of approximately dlra41dtta08 per share of common stock |
| However, the notes provide for what is known as “net share settlement” upon conversion |
| This means that upon conversion of the notes, we will be required to pay up to dlra1cmam000 in cash, per dlra1cmam000 principal amount of notes, and, if applicable, issue a number of shares of our common stock based upon the conversion value in excess of the principal amount |
| The conversion value of the notes is based on the volume weighted average price of our common stock for the ten trading day period commencing the second trading day after we receive notice of conversion |
| The conversion value must be paid as soon as practicable after it is determined |
| In addition, holders of the notes may require us to purchase their notes for cash on August 15, 2009, August 15, 2014 and August 15, 2019 and, under certain circumstances, in the event of a “fundamental change”, as defined in the indenture under which the notes were issued |
| Further, if a fundamental change occurs prior to August 15, 2009, we will be required to pay a “make-whole premium” in addition to the repurchase price which may be payable at our election in cash or shares of our common stock, valued at 97prca of the then current market price, or a combination of both |
| We may not have sufficient funds at any such time to make the required payment upon conversion or to purchase the notes and we may not be able to raise sufficient funds to satisfy our obligations |
| Furthermore, the terms of our existing credit facility contains, and the terms of other indebtedness that we may incur in the future may contain, financial covenants or other provisions that could be violated by payment of the required amounts upon conversion or the repurchase of the notes |
| Our failure to pay the required amounts on conversion of any of the notes when converted or to repurchase any of the notes when we are required to do so would result in an event of default with respect to the notes, which could result in the entire outstanding principal balance and accrued but unpaid interest on all of the notes being accelerated and could also result in an event of default under our other outstanding indebtedness |
| Our operating results can be expected to fluctuate from period to period |
| These fluctuations are usually due to the level of new business awards in a particular period and the timing of the initiation, progress, or cancellation of significant projects |
| Even a short acceleration or delay in such projects could have a material effect on our results in a given reporting period |
| Varying periodic results could adversely affect the price of our common stock if investors react to our reporting operating results which are less favorable than in a prior period or than those anticipated by investors or the financial community generally |
| If we are required to write off goodwill or other intangible assets, our financial position and results of operations would be adversely affected |
| For the year ended December 31, 2005, we incurred a non-cash goodwill impairment charge of dlra20dtta3 million relating to our Miami operations |
| This had a material adverse effect on our results of operations for the year |
| We had goodwill and other intangible assets of approximately dlra331dtta1 million and dlra311dtta2 million (after deducting the impairment charge) as of December 31, 2004 and December 31, 2005, respectively, which constituted approximately 59dtta3prca and 54dtta4prca, respectively, of our total assets |
| We periodically evaluate goodwill and other intangible assets for impairment |
| Any future determination requiring the write off of a significant portion of our goodwill or other intangible assets could adversely affect our results of operations and financial condition |
| 30 _________________________________________________________________ [91]Table of Contents Our business is subject to international economic, political and other risks that could negatively affect our results of operations or financial position |
| A significant portion of our revenue is derived from countries outside the United States |
| Further, we anticipate that revenue from international operations may grow in the future |
| Accordingly, our business is subject to risks associated with doing business internationally, including: • Less stable political and economic environments and changes in a specific country’s or region’s political or economic conditions; • Potential negative consequences from changes in tax laws affecting our ability to repatriate profits; • Unfavorable labor regulations; • Greater difficulties in managing and staffing foreign operations; • Currency fluctuations; • Changes in trade policies, regulatory requirements and other barriers; • Civil unrest or other catastrophic events; and • Longer payment cycles of foreign customers and difficulty collecting receivables in foreign jurisdictions |
| The realization of any of these or other risks associated with operating in foreign countries could have a material adverse effect on our business, results of operations and financial condition |
| Our substantial non-United States operations expose us to currency risks |
| Our financial statements are denominated in US dollars, and accordingly, changes in the exchange rate between the Canadian dollar, Euros or other foreign currencies and the US dollar could materially affect the translation of our subsidiaries’ financial results into US dollars for purposes of reporting our consolidated financial results |
| Due to the acquisition of PharmaNet, which has locations worldwide, we are subject to exchange rate gains and losses for multiple currencies |
| We also may be subject to foreign currency transaction risk when our service contracts are denominated in a currency other than the currency in which we incur expenses or earn fees related to such contracts |
| For example, our Canadian operations often perform services for a fixed price denominated in US dollars or in Euros while their payroll and other expenses are primarily Canadian dollar expenses |
| In 2005, we adopted a formal foreign currency risk hedging policy to attempt to mitigate this risk in the future |
| We cannot assure you that we will be successful in limiting risks associated with foreign currency transactions |
| Although we initiated hedging transactions in 2005 to seek to mitigate our foreign currency risks, none of the individual transactions were material |
| We incurred a pre-tax loss from foreign currency transactions relating to our foreign operations for the year of approximately dlra0dtta7 million or dlra0dtta02 per diluted share after taxes |
| We could be adversely affected by tax law changes in Canada or in other jurisdictions |
| Our operations in Canada currently benefit from favorable corporate tax arrangements |
| We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments |
| Our Canadian operations employ a large number of research and development employees which results in significant expenses related to these services |
| Due to the nature of these services, the Canadian government subsidizes a portion of these expenses through tax credits that result in a reduced effective tax rate as well as a significant deferred tax asset on our balance sheet |
| Further, any reduction in the availability or amount of these tax credits could have a material adverse effect on our profits and cash flow from our Canadian operations |
| Additionally, a large part of our net earnings is generated outside of the United States, where tax rates are generally lower |
| If applicable foreign tax rates, particularly in Canada and Switzerland, increase, it will reduce our consolidated net earnings |
| 31 _________________________________________________________________ [92]Table of Contents Governmental authorities may question our inter-company transfer pricing policies or change their laws in a manner that could increase our effective tax or otherwise harm our business |
| As a United States company doing business in international markets through subsidiaries, we are subject to foreign tax and inter-company pricing laws, including those relating to the flow of funds between our company and our subsidiaries |
| Regulators in the United States and in foreign markets closely monitor our corporate structure and how we effect inter-company fund transfers |
| If regulators challenge our corporate structure, transfer pricing mechanisms or inter-company transfers, our operations may be negatively impacted and our effective tax rate may increase |
| Tax rates vary from country to country and if regulators determine that our profits in one jurisdiction may need to be increased, we may not be able to fully utilize all foreign tax credits that are generated, which would increase our effective tax rate |
| We cannot assure you that we will be in compliance with all applicable customs, exchange control and transfer pricing laws despite our efforts to be aware of and to comply with such laws |
| Further, if these laws change, we may need to adjust our operating procedure and our business could be adversely affected |
| Because we are smaller than our largest competitors, we may lack the resources needed to compete effectively |
| There are a large number of drug development services companies ranging in size from one person firms to full service, global drug development corporations |
| Intense competition may lead to price pressure or other conditions that could adversely affect our business |
| Some of our competitors are substantially larger than us and have greater financial, human and other resources |
| We may lack the operating and financial resources needed to compete effectively |
| If we do not continue to develop new assay methods for our analytical applications, we may be unable to compete with other entities offering bioanalytical laboratory services |
| We must continuously develop assay methods to test drug products in order to meet the needs of our clients and attract new clients |
| In order to substantially increase the business of our bioanalytical laboratories, which provide services for branded pharmaceutical, biotechnology and generic drug companies, we must be able to provide solutions for our clients |
| This requires staying abreast of current regulatory requirements and identifying methods and applications that will assist our clients in obtaining approval for their products |
| If we are not successful in developing new methods and applications, we may lose our clients |
| We risk potential liability when conducting clinical trials, which could cost us large amounts of money |
| Our clinical trials involve administering drugs to humans in order to determine the effects of the drugs |
| By doing so, we are subject to the general risks of liability to these persons, which include those relating to: • adverse side effects and reactions resulting from administering these drugs to a clinical trial participant; • unintended consequences resulting from the procedures and/or changes in medical practice to which a study participant may be subject as part of a clinical trial; • improper administration of these drugs; or • potential professional malpractice of our employees or contractors, including physicians |
| Our contracts may not have adequate indemnification agreements requiring our clients to indemnify us in the event of adverse consequences to our participants caused by their drugs or participation in their trials |
| We also carry liability insurance but there is no certainty as to the adequacy, or the continued availability at rates acceptable to us, of such liability insurance |
| We could also be held liable for other errors or omissions in connection with our services |
| If we do not perform our services to contractual or regulatory standards, the clinical trial process could be adversely affected |
| Additionally, if clinical trial services such as laboratory analysis do not conform to contractual or regulatory standards, trial participants could be affected |
| If there is a damage claim not covered by insurance, the indemnification 32 _________________________________________________________________ [93]Table of Contents agreement is not enforceable or broad enough, or our client is insolvent, any resulting award against us could result in our experiencing large losses |
| We face a risk of liability from our handling and disposal of medical wastes, which could cause us to incur significant costs or otherwise adversely affect us |
| Our clinical trial activities and laboratory services involve the controlled disposal of medical wastes, which are considered hazardous materials |
| Although we may use reputable third parties to dispose of medical waste, we cannot completely eliminate the risk of accidental contamination or injury from these materials |
| If this occurs, we could be held liable for clean-up costs, damages, face significant fines, and face the temporary or permanent shutdown of our operations |
| Failure to comply with applicable governmental regulations could harm our operating results and reputation |
| We may be subject to regulatory action, which in some jurisdictions includes criminal sanctions, if we fail to comply with applicable laws and regulations |
| Failure to comply can also result in the termination of ongoing research and disqualification of data collected during the clinical trials |
| This could harm our reputation, our prospects for future work and our operating results |
| A finding by the FDA that we are not in compliance with GLP standards for our laboratories, current GMP standards, and/or GCP standards for our clinical facilities could materially and adversely affect us |
| Similarly, a finding by the TPD that we are not in compliance with Canadian Good Manufacturing Practices, or Canadian GMP, standards, and/or Canadian Good Clinical Practices, or Canadian GCPs, and/or other legislative requirements for clinical trials in Canada, could materially and adversely affect us |
| In addition to the above United States and Canadian laws and regulations, we must comply with the laws of all countries where we do business, including laws governing clinical trials in the jurisdiction where the trials are performed |
| Failure to comply with applicable requirements could subject us to regulatory risk, liability and potential costs associated with redoing the trials which could damage our reputation and adversely affect our operating results |
| If we lose the services of our key personnel or are unable to attract qualified staff, our business could be adversely affected |
| Our success is substantially dependent upon the performance, contributions and expertise of our senior management team, including, among others, Mr |
| Jeffrey P McMullen, SFBC’s chief executive officer, the executive committee comprised of 20 members, and our divisional presidents and key vice presidents companywide |
| In addition, some members of our senior management team play a very significant role in the generation of new business and retention of existing clients |
| We also depend on our ability to attract and retain qualified management, professional and operating staff |
| Our loss of the services of any of the members of senior management, or any other key executive, or our inability to continue to attract and retain qualified personnel, could have a material adverse effect on our business |
| Our business depends on the continued effectiveness and availability of our information technology infrastructure, and failures of this infrastructure 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 |
| 33 _________________________________________________________________ [94]Table of Contents Risks Related to Our Common Stock We may issue a substantial amount of our common stock in the future which could cause dilution to new investors and otherwise adversely affect our stock price |
| An element of our growth strategy is to make acquisitions |
| As part of our acquisition strategy, we may issue additional shares of common stock as consideration for such acquisitions |
| These issuances could be significant |
| To the extent that we make acquisitions and issue our shares of common stock as consideration, your equity interest in us will be diluted |
| Any such issuance will also increase the number of outstanding shares of common stock that will be eligible for sale in the future |
| Persons receiving shares of our common stock in connection with these acquisitions may be likely to sell off their common stock rather than hold their shares for investment, which may impact the price of our common stock |
| In addition, the potential issuance of additional shares in connection with anticipated acquisitions could lessen demand for our common stock and result in a lower price than might otherwise be obtained |
| We plan to issue common stock, for compensation purposes and in connection with strategic transactions or for other purposes |
| Recent changes in accounting standards could limit the desirability of granting stock options, which could harm our ability to attract and retain employees, and could also negatively impact our results of operations |
| The Financial Accounting Standards Board is requiring all companies to treat the fair value of stock options granted to employees as an expense effective for the first interim reporting period that begins after June 15, 2005 |
| This change became effective for us on January 1, 2006 |
| We and other companies are required to record a compensation expense equal to the fair value of each stock option granted over its vesting period |
| Previously, we were generally not required to record compensation expense in connection with employee stock option grants |
| We believe this change may reduce the attractiveness of granting stock options because of the additional expense associated with these grants, which would negatively impact our results of operations |
| For example, had we been required to expense stock option grants by applying the measurement provisions of Statement 123(R), our recorded net earnings for the years ended December 31, 2004 and 2005 of approximately dlra19dtta7 million and dlra4dtta8 million, respectively, would have been reduced to approximately dlra15dtta7 million and a loss of dlra3dtta1 million, respectively |
| Stock options are an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel |
| Because Statement 123(R) did not apply to vested options as of December 31, 2005, in 2005 we accelerated the vesting of 462cmam059 out-of-the-money options held by PharmaNet executives and issued 263cmam544 vested options to 119 employees, none of whom are executive officers and directors |
| Beginning in 2006, we plan to eliminate or reduce issuance of stock options and issue lesser amounts of restricted stock or restricted stock units which involve less dilution, but generally result in income taxation to employees who receive grants, unless delivery is deferred into the future |
| Regardless of whether we issue options or restricted stock, our future results of operations will be negatively impacted |
| Our stock price can be extremely volatile, and your investment could suffer a decline in value |
| The trading price of our common stock has been, and is likely to be, volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: • actual or anticipated variations in quarterly operating results, including changes in our guidance as to forecasted earnings; • changes in financial estimates by securities analysts; • media articles such as the Bloomberg Reports; • adverse events arising in connection with our Miami facility including events related to the property; • loss of a major client or contract; • new service offerings introduced or announced by our competitors; 34 _________________________________________________________________ [95]Table of Contents • changes in market valuations of other similar companies; • our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments; • additions or departures of key personnel; and • sales of our common stock, including short sales |
| As a result, investors could lose all or part of their investment |
| In addition, the stock market in general experiences extreme price and volume fluctuations that are often unrelated and disproportionate to the operating performance of companies |
| Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult, which could depress our stock price |
| We are incorporated in Delaware |
| Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to the stockholders |
| Our charter documents provide that our board of directors may issue, without a vote of our stockholders, one or more series of preferred stock that has more than one vote per share |
| This could permit our board of directors to issue preferred stock to investors who support our management and give effective control of our business to our management |
| Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in the price of our common stock and a decline in interest in the stock, which could make it more difficult for stockholders to sell their shares |
| This could cause the market price of our common stock to drop significantly, even if our business is performing well |
| Our bylaws also limit who may call a special meeting of stockholders and establish advance notice requirements for nomination for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings |
| Delaware law also prohibits corporations from engaging in a business combination with any holders of 15prca or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction |
| Our board of directors may use these provisions to prevent changes in the management and control of our company |
| Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future |
| In addition, provisions of certain contracts, such as employment agreements with our executive officers, may have an anti-takeover effect |
| In December 2005, our board of directors adopted a Shareholder Rights Plan, which has the effect of deterring hostile takeovers |
| Additionally, we adopted an amendment to our Bylaws, which temporarily requires holders who own 20prca or more of our common stock to call a special meeting of stockholders |
| On January 1, 2007, the required percentage drops back to 10prca |