UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number: 1-16119
PHARMANET DEVELOPMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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59-2407464
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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504 Carnegie Center
Princeton, NJ 08540
(Address of principal executive offices) (Zip Code)
(609) 951-6800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value per share
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The NASDAQ Stock Market, LLC
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Series A Junior Participating
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Preferred Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
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No
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As of June 30, 2008, the aggregate market value of the registrant’s common stock held by
non-affiliates of the registrant was approximately $300 million based on the $15.77 closing sale
price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
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Class
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Outstanding at March 16, 2009
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Common Stock, $.001 par value per share
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19,812,955 shares
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Series A Junior Participating Preferred Stock Purchase Rights
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19,812,955 rights
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PHARMANET DEVELOPMENT GROUP, INC.
2
PART I
As used in this Annual Report on Form 10-K, all references in this report to “PharmaNet
Development Group, Inc.,” “PDGI,” the “Company,” “we,” “us,” or “our” refer to PharmaNet
Development Group, Inc., and its subsidiaries as a single entity unless the context otherwise
requires. References to “PharmaNet” relate only to PharmaNet, Inc., our late stage subsidiary,
references to “Anapharm” relate to Anapharm, Inc., references to “Taylor” relate to Taylor
Technology, Inc., and references to “Keystone” relate to Keystone Analytical, Inc.
Item 1.
Business.
General
We are a leading global drug development services company providing clinical development
services, including consulting, Phase I and bioequivalency clinical studies, and Phase II, III
and IV clinical development programs to pharmaceutical, biotechnology, generic drug and medical
device companies around the world. We operate our business in two business segments, early stage
and late stage. Our early stage segment consists primarily of Phase I and bioequivalency clinical
trial services and bioanalytical laboratory services, including early clinical pharmacology. Our
late stage segment consists primarily of Phase II through Phase IV clinical trial services and a
comprehensive array of related services, including data management and biostatistics, medical and
scientific affairs, regulatory affairs and submissions, clinical information technology services
and consulting services. For additional information about our business segments, see Note M to the
consolidated financial statements.
Early Stage Segment
We have three Phase I clinical trial facilities located in Canada with a total capacity of 514
beds. We perform Phase I trials for pharmaceutical and biotechnology companies and bioequivalency
studies for generic drug companies in these clinics. We also provide bioanalytical services through
five bioanalytical laboratories located in the United States (Pennsylvania and New Jersey), Canada
and Spain. Activities at these facilities primarily consist of methods development and sample
analyses of both branded and generic drug products.
Late Stage Segment
Our late stage segment offers clinical development services through a network of 36 offices
around the world and field-based staff. This global presence facilitates investigator site
selection, timely patient recruitment and the efficient conduct of complex worldwide clinical
trials in Phases II, III and IV. We have expertise in virtually all therapeutic areas, with
specialized resources in oncology, neurosciences, cardiovascular and infectious diseases. Our
Phase IV trials are handled by a dedicated group within our organization. We have developed a full
line of proprietary software products specifically designed to support clinical development
activities. These web-based products, which use electronic signatures in the conduct of clinical
trials, facilitate the collection, management and reporting of clinical trial information.
Transaction with Affiliates of JLL Partners
On February 3, 2009, it was announced that affiliates of JLL Partners, Inc., or JLL, including
JLL PharmaNet Holdings, LLC, or Parent, and PDGI Acquisition Corp., a wholly-owned subsidiary of
Parent, or Purchaser, entered into an Agreement and Plan of Merger, or the Merger Agreement, with
us whereby Parent will acquire us. The acquisition will be carried out in two steps. The first
step is the tender offer by Purchaser to purchase all of our outstanding shares of common stock at
a price of $5.00 per share, payable net to the seller in cash, or the Tender Offer. The Tender
Offer expired on March 19, 2009 at 12:00 midnight New York City
time. On March 20, 2009, Purchaser
accepted for payment all validly tendered shares and announced that it will pay for all such shares
promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into us, with the
Company as the surviving corporation in the merger, or the Merger. We expect that the Merger will
be completed on March 30, 2009 under the short-form merger procedures provided by Delaware law.
Following the Merger, we will be a wholly-owned subsidiary of Parent and we will no longer have any
publicly traded shares. The transaction values our common stock at $100.5 million and will be
financed by a $250.0 million equity commitment from funds managed by JLL, which includes the
necessary funds to retire our 2.25% senior convertible notes. The Merger is subject to customary
conditions.
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Industry Overview
The drug development services industry provides product development services to the branded
pharmaceutical, biotechnology, medical device and generic drug industries. The drug development
services industry has evolved from providing clients with limited clinical trial services to
providing a comprehensive range of services, including discovery, pre-clinical evaluations, study
protocol design, clinical trial management, data collection, bioanalytical and statistical
analyses, regulatory affairs and submissions.
The drug development services industry constitutes a significant portion of pharmaceutical and
biotechnology drug development activity. By outsourcing drug development activities to companies
like us, pharmaceutical, biotechnology, medical device and generic drug companies can reduce their
fixed costs and investment in infrastructure and focus their resources on sales and marketing, drug
discovery and other areas in which they can best differentiate themselves. We believe that
outsourced pharmaceutical research and development activities will continue to grow over the next
several years due primarily to:
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continued research and development investments,
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the expanding breadth of clinical trials development programs,
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the increasing complexity and globalization of clinical trials,
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increased focus on and requirements for post-marketing studies, and
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new drug entities from small pharmaceutical and biotechnology companies which typically
lack infrastructure, expertise and resources to conduct their own drug development
activities.
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The product development process
Branded drugs
The branded drug research and development process primarily consists of drug discovery,
pre-clinical studies, clinical trials, regulatory submissions and marketing. We do not provide drug
discovery, pre-clinical studies or marketing services; however, we do conduct Phase IV clinical
trials that may be used to support marketing activities.
The clinical trial stage includes studies with healthy participants, as well as those with
targeted diseases, impairments or conditions. Prior to commencing most human clinical trials in the
U.S., a pharmaceutical or biotechnology company must file an investigational new drug, or IND,
application with the U.S. Food and Drug Administration, or FDA. The application includes
manufacturing data, pre-clinical data, information about the previous use of the drug in humans and
a detailed plan for the proposed clinical trials.
The effective design of these trials, referred to as study protocols, is essential to the
success of the drug development effort. The study protocol must be designed to assess the
effectiveness and safety of new drugs and to generate the data that the FDA requires to approve the
drug. Similar regulatory procedures with the respective equivalent governmental authorities must be
followed in other countries.
The human clinical trial stage is the most time-consuming and expensive part of the drug
research and development process. These trials usually start on a small scale to assess safety, and
then expand to larger trials to test both safety and efficacy. Trials generally are grouped into
four stages known as Phase I, Phase II, Phase III and Phase IV:
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Phase I involves testing a drug on a small number of healthy participants to determine
the drug’s basic safety data, including tolerability, absorption, metabolism and excretion.
This phase, which lasts an average of six months to one year, is comprised of numerous
clinical trials of short duration,
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Phase II involves testing a small number of participants to determine the drug’s safety
profile and effectiveness and how different doses work. This phase, which lasts an average
of one to two years, is comprised of several clinical trials of longer duration,
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Phase III involves testing large numbers of participants to verify drug efficacy and
safety on a large scale. These trials usually involve numerous sites. After successfully
completing Phases I, II and III, a company submits a new drug application, or NDA,
to the FDA requesting that the drug be approved for marketing. The NDA is a comprehensive
filing that includes, among other things, the results of all pre-clinical studies and clinical
trials. In other countries in which we operate, a similar filing procedure is required with the
respective equivalent governmental authorities, and
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Phase IV clinical trials, which are conducted after drug approval, may also be required
by the FDA or equivalent foreign regulatory authorities. These additional trials are
required in order to monitor long-term risks and benefits, to study different dosage levels
or to evaluate different safety and efficacy parameters.
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Generic drugs
Generic drugs are the chemical and therapeutic equivalents of branded drugs and are usually
marketed after patent expiration of the branded drug. Regulatory approval is normally required
before a generic equivalent can be marketed. Approval is sought for generic drugs through the
submission of an abbreviated new drug application, or ANDA, to the FDA. An ANDA may be submitted
for a drug on the basis that it is the equivalent of a previously approved drug. Similar regulatory
procedures must be followed with governmental authorities in other countries in which we operate.
Generic drugs must meet the same quality standards as branded drugs. An ANDA for a generic
drug generally requires only the submission of data from bioequivalency studies, which compares the
rate and extent of absorption and levels of concentration in the blood stream of the generic drug
product with that of the previously approved branded drug, along with the requisite manufacturing
information.
Bioequivalency studies are normally conducted in two stages. The first stage involves
conducting pilot trials with a limited number of human subjects to justify advancing a generic
formulation to more costly bioequivalency trials. Commonly, these pilot studies are conducted
simultaneously on several different formulations of the same drug to determine the formulation most
closely bioequivalent to the branded drug. The second stage, pivotal bioequivalency trials,
consists of studies conducted on a substantially larger group of subjects in order to demonstrate
bioequivalency of the generic drug to the approved branded drug in accordance with required
standards.
505(b)(2) approval
Another FDA approval route increasingly utilized by both generic and branded companies is
referred to as a 505(b)(2) application. This section of the Food, Drug, and Cosmetic Act permits an
applicant to rely upon the FDA’s prior finding of safety and efficacy for a drug, or upon published
literature establishing that drug’s safety and efficacy, but will also require that the applicant
perform some additional clinical safety and efficacy studies. Such 505(b)(2) applications are
generally utilized for significant variations of an approved drug, for new dosage forms of an
approved drug, for substitution of one active ingredient in a combination drug product or for other
significant changes that would make the generic drug ANDA route unavailable. The FDA has expanded
the scope of products subject to 505(b)(2) approval, and this may, in turn, expand the market for
clinical tests and other related services such as those offered by our competitors and us.
Medical devices
The FDA regulates medical devices through three regulatory classes based on the degree of
control believed to ensure that the various types of devices are safe and effective. Depending on
the type of device, pre-market approval by the FDA may be required, and, in some cases, data
derived from clinical trials regarding the safety and effectiveness of the device must be filed.
Medical devices are also generally regulated on a risk assessment basis with higher risk classes
requiring more complex submissions and disclosure.
Our Competitive Strengths
We believe that we offer clients the following valuable strengths that help us capitalize on
the trends affecting the drug development services industry and its clients.
Our ability to provide a comprehensive range of clinical development and complementary services
We are a leading provider of both early stage and late stage clinical development services,
including early clinical pharmacology. We conduct bioequivalency studies and assist clients with
integrated drug development services including project design, study design, investigator
recruitment, investigative site selection, qualified study participant recruitment, study
monitoring, data
management, biostatistics, auditing and quality assurance. In addition to providing services
in most therapeutic areas, we provide services focused on oncology, neurosciences, cardiovascular
and infectious diseases.
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Our ability to recruit
Our early stage segment maintains a clinical study volunteer database to recruit participants
for its studies in Canada. The database includes different categories of potential study
participants with specific medical conditions.
Our late stage segment provides clinical trial management and related services through a
global network of offices and field-based staff. We also have employees or contractors who perform
services in other countries where we do not maintain facilities. We believe that this global
platform enhances timely patient recruitment and gives us access to patient populations that are
difficult to find in the U.S. The physicians with whom we have relationships for the purpose of
recruiting patients for our clinical trials have access to patients worldwide, providing us with
significant capabilities in recruiting special patient populations.
Our clinical trial facilities
Our early stage clinic in Quebec City, Canada, has a 200-bed capacity. The building is
designed to accommodate anticipated future growth, and the size of the building can be increased
further or an adjacent building can be constructed on the same site. We also have a 160-bed
capacity Phase I facility in Toronto, Canada, which opened in the third quarter of 2007. We also
have a clinical facility located in Montreal, Canada with a 154-bed capacity within four
independent units. The independent units provide the flexibility to conduct different studies at
the same time and enhance our capability to serve additional specialty sectors, such as the generic
drug development market.
Our experience
We have been providing pharmaceutical, biotechnology, medical device and generic drug
companies with development services for more than 20 years. We have significant experience
providing drug development services in many therapeutic areas, such as oncology, neurosciences,
cardiovascular, infectious diseases, ophthalmology, dermatology and general medicine. Our employees
have years of experience in the clinical trial industry and have been involved in large and complex
studies across a broad range of therapeutic areas. Our late stage clinical development segment
employs several former senior-level FDA officials who offer years of first-hand agency perspective
to both pre-market and post-market development processes for drugs and medical devices. Further,
our safety and pharmacovigilance group has a team of safety professionals with vast experience in
drug safety, pharmacovigilance and pharmacoepidemiology and an understanding of the global
regulatory environment.
Our Strategy
We believe that increasing demand for outsourced drug development services will provide us
with opportunities to continue to grow our business. Our strategy is to build upon our clinical
development expertise and to further our reputation as a provider of a broad range of high-quality
drug development services to our clients. This strategy may include leveraging our existing
business and expertise by adding new services in closely aligned business segments. We are
exploring expansion of our clinics beyond North America, including Eastern Europe and South
America. We cannot assure you that our strategy will be successful or result in significant
additional revenue.
Leverage our global presence to provide a complete range of drug development services worldwide
We believe that our global presence, including infrastructure, client and regulatory
relationships and local drug development expertise, will facilitate expansion of our early stage
clinical development and bioanalytical operations in Europe. While we currently operate in 40
countries on six continents, the increasingly global drug development needs of our clients make it
beneficial for us to expand our presence in these locations and to move into new countries and new
locations in order to remain competitive.
Expand our bioanalytical laboratory business
Our bioanalytical laboratory business serves a broad spectrum of our clients’ needs. Our
scientists develop bioanalytical methods and provide bioanalytical services for global
pharmaceutical companies and biotechnology and generic drug companies. We believe that providing
bioanalytical laboratory services helps our clients focus on their core competencies and reduces
their fixed costs and clinical trial completion times.
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Our three Canadian facilities enables us to have the capacity and flexibility to meet rapid
study start-up demands. During 2008, we initiated an expansion of our Princeton laboratory capacity
and acquired certain assets of Princeton Bioanalytical Laboratory, LLC, including laboratory
equipment and procedural documentation. With the development of an immunochemistry capable
laboratory in our Princeton laboratory we will be able to leverage our existing Quebec City
ligand-binding laboratory and provide other macromolecule analyses to more fully support our
biotechnology clients and others seeking strategies for the development of biosimiliars/
biogenerics.
Augment our current range of services through strategic acquisitions, strategic alliances or joint
ventures
We have grown significantly by acquiring related businesses that have enabled us to broaden
our range of services, strengthen our management team and expand our client base.
Our industry is highly fragmented and includes large and small competitors who have expertise
in different business areas. As part of our growth strategy, we continue to monitor acquisition
opportunities and, when circumstances are appropriate, intend to make acquisitions which enhance
our array of services or otherwise strengthen our ability to service our clients.
In 2008, we focused our efforts not on acquisitions, but rather on strengthening our core
business, including streamlining the organization through cost cutting initiatives and process
improvements, in an effort to remain competitive in the industry and by resolving certain other
matters, including the securities class action and related litigation. For additional information
on these issues, see Item 3 of this report and the notes to the consolidated financial statements.
Leverage complementary early clinical and late phase development services and client relationships
We believe that opportunities exist to cross-sell between the early stage and late stage
business segments. Our clients include branded pharmaceutical, biotechnology, medical device and
generic drug companies that outsource a portion of their development activities in order to focus
their efforts on sales, marketing and other drug discovery. On occasion, we generate business from
multiple, and often independent, groups within our client companies. In addition to pursuing new
client relationships, our sales and marketing teams focus on gaining new business and developing
new relationships with groups of existing clients.
Our Services
We believe our drug development services assist our clients in managing their research and
development programs efficiently and cost effectively. We offer our clients a broad range of drug
development services, including the following:
Early stage clinical development services
Our early stage clinical development services include designing studies, recruiting and
screening study participants, conducting early stage clinical trials and collecting and reporting
to our clients the clinical data collected during the course of the clinical trials.
We may assist our clients in preparing the study protocols, designing case report forms and
conducting any necessary clinical trial audit functions. Additionally, we collect data throughout
clinical trials and enter it onto case report forms according to Good Clinical Practices, or GCP,
as prescribed by the FDA, which are practices to meet our clients’ and the FDA’s or other
regulatory agencies’ requirements identified in each study protocol. We also provide our clients
with statistical analysis, medical report writing services and assistance with regulatory
submissions.
We provide bioanalytical laboratory services primarily in support of early clinical trials.
Our bioanalytical laboratories have or develop the scientific methods, or assays, necessary to
analyze clinical trial samples. Our bioanalytical laboratories provide bioanalytical support for
preclinical studies, drug discovery, early clinical trial studies, bioequivalence studies,
bioavailability studies and drug metabolism studies. During the generic clinical trial process, we
conduct laboratory analysis on various biological specimens to determine the quantity of a drug
present in each specimen. The majority of the samples we analyze are generated from branded
clinical trials performed by the Phase I clinics of other companies. We format and present the data
resulting from this process to our clients for their use and interpretation.
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Late stage clinical development services
We provide late stage clinical development services for studies, including clinical
operations, data management and biostatistics, regulatory, medical and scientific affairs and
consulting. We provide a full array of services in support of these trials, including strategic
planning, protocol/case report form design, site selection, monitoring and project management,
software systems development and support, quality control/assurance, global safety and
pharmacovigilance and post-FDA approval development services. Our late stage clinical development
services cover most therapeutic areas with a focus in oncology, neurosciences, cardiovascular and
infectious diseases.
We operate seven data management centers, five of which feed data into a central integrated
repository in the U.S. We offer a globally integrated database management system that operates
multiple software applications from a variety of vendors, thereby providing flexibility for our
clients in conducting large-scale clinical trials in multiple international markets. We also offer
biostatistical and programming services, employing state-of-the-art software technologies and
innovative strategies, to facilitate data processing, analysis and reporting of results.
During 2008, we established PharmaNet Resource Solutions, a new business venture that will
allow us to provide contract clinical research personnel to our clients and competitors, as well as
introduce a variable cost structure for our clinical trials. With the rapid growth of the contract
staffing industry and specialized need by sponsor companies, we believe this initiative will align
our existing resources with the demand for specialized staff. We are building the business’s
infrastructure and expect to formally launch its services during the first quarter 2009.
Clients and Marketing
Our clients include some of the largest branded pharmaceutical, biotechnology, generic drug
and medical device companies in the world. We believe we have a strong reputation for client
service and have cultivated relationships with key decision makers within our clients’
organizations. We focus on meeting our clients’ expectations, and we believe that this has been a
leading factor in generating repeat business from our clients.
Our clients often represent multiple sources of business for us since there are often a number
of therapeutic specialty or other groups that contract separately for services within one company.
For the year ended December 31, 2008, 39.4% of our direct revenue was attributed to our operations
based in the U.S., 33.6% from operations in Canada, 23.9% from operations in Europe and 3.1% from
operations in the rest of the world. Direct revenue for the year ended December 31, 2008 is
generated from a diversified client base. Our largest client represented 5.5% of total direct
revenue, the top five clients represented 19.3%, and the top ten clients represented 30.5%. For the
year ended December 31, 2008, direct revenue attributable to large pharmaceutical clients
represented 31.9%; small and medium sized pharmaceutical clients represented 27.1%; generic drug
clients represented 20.0%; biotech clients represented 18.0%; and other clients, such as medical
device manufacturers, represented the remaining 3.0%.
We employ an experienced team of business development sales representatives and support staff
that market our services to branded pharmaceutical, biotechnology, generic drug and medical device
companies primarily in North and South America, Europe and the Asia Pacific region. Additionally,
members of our senior management are active in developing and managing our relationships with
existing clients and in helping to generate business from new clients.
Our Competitors
The drug development services industry is highly fragmented and is comprised of a number of
large, full-service drug development services companies as well as many smaller companies with
limited service offerings. Our major competitors include Covance, Inc., Icon PLC., Kendle
International Inc., MDS Inc., Parexel International Corporation, PPD, Inc., PRA International and
Quintiles Transnational Corp.
Drug development services companies primarily compete on the basis of the following factors:
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the quality of their staff and services,
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the range of services they provide,
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medical and scientific expertise in specific therapeutic areas,
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the cost of the services they provide,
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the ability to recruit doctors and participants for clinical trials,
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the ability to organize and manage large-scale trials, and
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Consolidation in the pharmaceutical industry has resulted in some increased competition for
clients.
We compete in the early stage and late stage portions of the business on the basis of our
reputation for high quality, our attention to client service and our broad range of therapeutic
expertise. While preferred provider relationships do not guarantee that we will be selected to
manage a particular trial, we believe that they are a competitive advantage. We believe our
reputation for quality, our global presence and integrated worldwide data management systems make
us competitive in the late stage portion of the business.
The bioanalytical laboratories compete primarily through the development of, or the capacity
to develop, validated test methods, also known as assays. We believe the capacity to develop these
test methods and, in some cases, their pre-demand availability are the best tools to sell these
services to pharmaceutical companies, especially generic drug companies conducting bioequivalence
studies. In order to better attract generic business, these test methods are often developed in a
proactive way even before our generic clients need it. In many, but not all, instances we retain
the ownership of the assay method developed.
Indemnification and Insurance
In conjunction with our product development services, we employ or contract with physicians to
serve as investigators in conducting clinical trials to test new drugs on human volunteers. Such
testing creates the risk of liability for personal injury to or death of volunteers, particularly
to volunteers with life-threatening illnesses, resulting from adverse reactions to the drugs
administered. It is possible that we could be held liable for claims and expenses arising from any
professional malpractice of the investigators with whom we contract or employ, or in the event of
personal injury to or death of persons participating in clinical trials. In addition, as a result
of our operation of clinical trial facilities, we could be liable for the general risks associated
with clinical trials including, but not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional malpractice of medical
care providers. We also could be held liable for errors or omissions in connection with the
services we perform through each of our service groups. For example, we could be held liable for
errors or omissions, or breach of contract, if one of our laboratories inaccurately reports or
fails to report laboratory results.
PharmaNet intends to continue to act as a “sponsor” on behalf of certain public company
clients in connection with certain clinical trials in Australia. Under Australian law, the
“sponsor” of a clinical trial must maintain a legal presence in Australia, and PharmaNet meets this
requirement through a wholly owned Australian affiliate. Additionally, PharmaNet intends to
continue to act as a “legal representative” under the European Union, or EU, Clinical Trials
Directive on behalf of certain public company clients, who lack a legal presence within the EU, in
connection with certain clinical trials performed within the EU. Under the Clinical Trials
Directive, a sponsor must designate a “legal representative” with the regulatory authorities prior
to the commencement of any clinical trial within the EU. This legal representative is required to
have a legal presence in one of the EU member countries and is required to be legally liable for
the conduct of the clinical trial. PharmaNet’s agreement to act in this capacity exposes it to
additional liability as a “sponsor” or “legal representative” in the event an adverse incident
occurs.
We have sought to reduce our risks by implementing the following where possible:
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indemnification provisions and provisions seeking to limit or exclude liability contained
in our contracts with clients and investigators,
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insurance maintained by clients, investigators and by us, and
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complying with various regulatory requirements, including the use of ethics committees
and the procurement of each participant’s informed consent to participate in the study.
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The contractual indemnifications we have generally do not fully protect us against certain of
our own actions, such as negligence. Contractual arrangements are subject to negotiation with
clients, and the terms and scope of any indemnification, limitation of liability or exclusion of
liability may vary from client to client and from trial to trial. Additionally, financial
performance of these indemnities
is not secured. Therefore, we bear the risk that any indemnifying party against which we have
claims may not have the financial ability to fulfill its indemnification obligations to us.
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While we maintain professional liability insurance that covers the locations in which we
currently do business and that covers drug safety issues as well as data processing and other
errors and omissions, it is possible that we could become subject to claims not covered by
insurance or that exceed our coverage limits. We could be materially and adversely affected if we
were required to pay damages or bear the costs of defending any claim that is outside the scope of,
or in excess of, a contractual indemnification provision, beyond the level of insurance coverage or
not covered by insurance, or in the event that an indemnifying party does not fulfill its
indemnification obligations.
As a result of the discontinuation of operations in Miami and Ft. Myers, we have exercised and
purchased the extended reporting period, or the tail coverage, option provided within the
professional liability insurance policy that covered these operations at policy expiration. This
extended reporting period provides the ability to report any professional liability claims that may
have arisen from our operations in Miami and Ft. Myers for a specific time frame. We could be
materially and adversely affected if we were required to pay all the damages or bear all the costs
of defending any claim that is outside the scope of, or in excess of, the level of coverage
provided during this extended reporting period, including any claims that the insurance policy does
not address.
Government Regulation
Clinical trials are governed by the FDA, state regulations, other regulatory agencies,
including the Health Products Food Branch of Health Canada, or HPFB, and provincial regulations in
Canada and national authorities throughout Europe. Sponsors of clinical trials also follow
International Conference of Harmonization E6 guidelines which affect global drug development.
Accordingly, sponsors of clinical trials or their contracted CRO’s are responsible for selecting
qualified investigators to conduct clinical trials, provide investigators with study protocols,
monitor clinical trials, report any changes or modifications of the clinical trial to the FDA or
other regulatory agencies and report any serious and unexpected adverse reactions occurring in the
clinical trial to the appropriate regulatory agency. In the course of providing our drug
development services, we too must comply with these regulatory requirements.
Our services are subject to various regulatory requirements designed to ensure the quality and
integrity of the clinical trial process. The manufacturers of investigational drugs are required to
comply with the FDA’s Good Manufacturing Practices, or GMP, regulations. The industry standard for
conducting clinical research and development studies is contained in regulations established for
GCP. The FDA requires that the results submitted to it be based on studies conducted according to
its Good Laboratory Practices, or GLP, standards for preclinical studies and laboratories and GCP
standards for clinical studies. The standards address a number of issues, including:
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selecting qualified investigators and sites,
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obtaining specific written commitments from investigators,
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obtaining approval and supervision of the clinical trials by an ethics committee,
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obtaining favorable opinion from regulatory agencies to commence a clinical trial,
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verifying that informed consents are obtained from participants,
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monitoring the validity and accuracy of data,
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verifying that we account for the drugs provided to us by our clients, and
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instructing investigators to maintain records and reports.
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Similar guidelines exist in various states and in other countries. We may be subject to
regulatory action if we fail to comply with these rules. Failure to comply with these regulations
can also result in the termination of ongoing research and disqualification of data collected
during the clinical trials.
Because we frequently deal with biohazardous specimens and medical waste material, we are
subject to licensing and regulation in the U.S. under federal, state and local laws relating to
hazard communication and employee right-to-know regulations and the handling and disposal of
medical specimens and hazardous waste and materials. Our laboratory facilities are subject to laws
and regulations relating to the storage and disposal of laboratory specimens. Transportation and
public health regulations apply to the surface and air transportation of laboratory specimens. Our
laboratories are also subject to International Air Transport Association regulations, which govern
international shipments of laboratory specimens. Furthermore, when materials are sent to another
country,
the transportation of such materials becomes subject to the laws, rules and regulations of
such other country. Laboratories outside the U.S. are subject to applicable national laws governing
matters such as licensing, the handling and disposal of medical specimens, hazardous waste and
radioactive materials and the health and safety of laboratory employees. We contract with
independent licensed companies to handle our waste disposal. Our laboratories in the U.S. are also
subject to the federal Clinical Laboratory Improvement Amendments, or CLIA, administered by the
Centers for Disease Control and the FDA, and similar state requirements. CLIA requires
certification of laboratories involved with patient samples and includes requirements concerning
laboratory facilities, personnel and quality systems.
10
In addition to its comprehensive regulation of safety in the workplace, the U.S. Occupational
Safety and Health Administration has established extensive requirements relating to workplace
safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV
and the hepatitis B virus. Furthermore, certain employees receive initial and periodic training to
ensure compliance with applicable hazardous materials regulations and health and safety guidelines.
We are subject to similar regulation in Canada and Spain.
The U.S. Department of Health and Human Services has promulgated rules under the Health
Insurance Portability and Accountability Act of 1996 that govern the use, handling and disclosure
of personally identifiable medical information. These regulations also establish procedures for the
exercise of an individual’s rights and the methods permissible for de-identification of health
information. We are also subject to privacy legislation in Canada under the federal Personal
Information and Electronic Documents Act, the Act Respecting the Protection of Personal Information
in the Private Sector and the Personal Health Information Protection Act, and privacy legislation
in the EU under the 95/46/EC Privacy Directive on the protection and free movement of personal
data.
The use of controlled substances in our trials and our accounting for drug samples that
contain controlled substances are subject to regulation in the U.S. under federal and state laws.
We are required to have a license from the U.S. Drug Enforcement Administration. We are also
required to comply with similar laws in Canada and elsewhere.
Clinical trials conducted outside the U.S. are subject to the laws and regulations of the
country where the trials are conducted. These laws and regulations may or may not be similar to the
laws and regulations administered by the FDA, and other laws and regulations regarding issues such
as the protection of patient safety and privacy and the control of study pharmaceuticals, medical
devices or other study materials. Studies conducted outside the U.S. may also be subject to
regulation by the FDA if the studies are conducted pursuant to an IND application or an
investigational device exemption. It is the responsibility of the study sponsor or the parties
conducting the studies to ensure that all applicable legal and regulatory requirements are
fulfilled.
Failure to comply with applicable laws and regulations could subject us to, among other
things, denial of the right to conduct business, disqualification of data collected during clinical
trials, liability for clean up costs, liability or the loss of revenues due to a failure to comply
with our contractual obligations, the assessment of civil fines, criminal penalties or other
enforcement actions.
Backlog
Backlog consists of anticipated direct revenue from written notification of awards, letters of
intent and contracts. The associated studies may either be in process and have not been completed
or have not started, but are anticipated to begin in the future.
We cannot assure you that we will be able to realize all or most of the direct revenue
included in backlog. Although backlog can provide meaningful information to our management, it is
not necessarily a meaningful indicator of future results. Backlog can be affected by a number of
factors, including the size and duration of contracts, many of which are performed over several
years, and the changes in labor utilization that typically occur during a study. Contracts relating
to our clinical development business may be subject to early termination by the client, and
clinical trials can be delayed or canceled for many reasons, including unexpected test results,
safety concerns or regulatory developments. If the scope of a contract changes significantly during
the course of a study and the contract is revised, the adjustment to backlog occurs when the
revised contract is approved by the client. For these and other reasons, we might not fully realize
our entire backlog as direct revenue.
The following table sets forth our backlog as of December 31, 2008 and 2007.
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Backlog
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2008
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2007
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(In thousands)
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Early stage
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$
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54,063
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$
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69,485
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Late stage
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453,602
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387,904
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Total
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$
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507,665
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$
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457,389
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Employees
As of December 31, 2008, we had approximately 2,400 full-time equivalent employees worldwide,
of which 38% were in the United States, 38% were in Canada and 24% were in other countries. None of
our employees are unionized.
Available information
We make available, free of charge, through our website at
www.pharmanet.com
, our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such material with, or furnish
to, the SEC. Our internet website and the information in or connected to our website are not
incorporated into this report.
Item 1A.
Risk Factors.
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 were to occur, individually or in the aggregate, our business, financial
condition, results of operations or cash flows could be materially adversely affected.
Risks Related to Our Merger
If our acquisition by JLL is not completed as expected, our stock price, business and results of
operations may suffer.
On February 3, 2009, it was announced that affiliates of JLL, including Parent and Purchaser,
entered into the Merger Agreement with us whereby Parent will acquire us. The acquisition will be
carried out in two steps. The first step is the tender offer by Purchaser to purchase all of our
outstanding shares of common stock at a price of $5.00 per share, payable net to the seller in
cash. The Tender Offer expired on March 19, 2009 at 12:00 midnight New York City time. On March 20,
2009, Purchaser accepted for payment all validly tendered shares and announced that it will pay for
all such shares promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into us, with the
Company as the surviving corporation in the Merger. We expect that the Merger will be completed on
March 30, 2009 under the short-form merger procedures provided by Delaware law. Following the
Merger, we will be a wholly-owned subsidiary of Parent and we will no longer have any publicly
traded shares. The transaction values our common stock at $100.5 million and will be financed by a
$250.0 million equity commitment from funds managed by JLL, which includes the necessary funds to
retire our 2.25% senior convertible notes. The Merger is subject to customary conditions.
The Merger might be delayed or prevented if a court or other governmental authority were to
block the merger or make it illegal. If the Merger is delayed or otherwise not consummated within
the contemplated time periods or at all, we could suffer a number of consequences that may
adversely affect our business, results of operations and stock price, including:
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activities related to the merger and related uncertainties may lead to a loss of
revenue and market position that we may not be able to regain if the proposed
transaction does not occur;
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the market price of our common stock could decline following an announcement that the
proposed transaction had been abandoned or delayed;
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because Purchaser would own a substantial majority of our common stock, there may not
be an active trading market for our remaining shares of common stock and we may not be
able to sustain our NASDAQ listing;
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we would remain liable for our costs related to the proposed transaction, including
substantial legal, accounting and investment banking expenses; and
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we may not be able to take advantage of alternative business opportunities or
effectively respond to competitive pressures.
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Lawsuits have been filed against us, the PDGI Board, JLL and Purchaser arising out of our proposed
acquisition by JLL, and if the proposed settlement of those lawsuits does not receive final
judicial approval, they may result in additional costs and distraction.
On February 6, 2009, Richard Mendez, a purported stockholder of PDGI, filed a putative class
action complaint in the Superior Court of New Jersey, Chancery Division, Mercer County on behalf of
himself and all other similarly situated stockholders of PDGI against the PDGI Board, PDGI, JLL and
Purchaser alleging breaches of fiduciary duty and aiding and abetting breaches of fiduciary duty in
connection with the merger. Among other things, the complaint alleges that the proposed
transactions contemplated in the Merger Agreement were the result of an unfair process, that PDGI
is being sold at an unfair price, that certain provisions of the Merger Agreement impermissibly
operate to preclude competing bidders, and the defendants engaged in self-dealing. Among other
things, the plaintiff seeks an order enjoining defendants from proceeding with the Merger
Agreement.
On February 10, 2009, Cynthia Kancler, a purported stockholder of PDGI, filed a putative
class action complaint in the Superior Court of New Jersey, Chancery Division, Mercer County on
behalf of herself and all other similarly situated stockholders of PDGI against the PDGI Board and
PDGI alleging breaches of fiduciary duty in connection with the merger. Among other things, the
complaint alleges that the proposed transactions contemplated in the Merger Agreement were the
result of a flawed process, that PDGI is being sold at an inadequate price, and that certain
provisions of the Merger Agreement are unlawful. Among other things, the plaintiff seeks an order
enjoining defendants from proceeding with the Merger Agreement, an order enjoining defendants from
consummating any business combination with a third party and an order directing the individual
defendants to exercise their fiduciary duties to obtain a transaction which is in the best
interests of PDGI’s stockholders.
On February 18, 2009, the plaintiffs in the foregoing matters filed amended complaints,
motions to expedite discovery and motions to consolidate. Both amended complaints added a claim
that the Schedule 14D-9 filed by us with the SEC on February 12, 2009 failed to provide PDGI’s
stockholders with material information and/or provided them with materially misleading information.
In addition, Kancler’s amended complaint also added a claim for aiding and abetting a breach of
fiduciary duty against JLL and Purchaser.
On March 5, 2009, the parties to the Mendez and Kancler actions entered into a Memorandum of
Understanding setting forth the terms and conditions for settlement of each of the actions. The
parties agreed that, after arm’s length discussions between and among the parties, we have provided
additional supplemental disclosures to our Schedule 14D-9. In exchange, following confirmatory
discovery, the parties will attempt in good faith to agree to a stipulation of settlement and, upon
court approval of that stipulation, the plaintiffs will dismiss each of the other above-referenced
actions with prejudice, and all defendants will be released from any claims arising out of the
merger including any claims for breach of fiduciary duty or aiding and abetting breach of fiduciary
duty. The defendants have agreed not to oppose any fee and expense application by plaintiffs’
counsel that does not exceed $180,000 in the aggregate.
Defendants are confident that plaintiffs’ claims are wholly without merit and continue to deny
that any of them has committed or aided and abetted in the commission of any violation of law of
any kind or engaged in any of the wrongful acts alleged in the above-referenced actions. Each
defendant expressly maintains that it has diligently and scrupulously complied with its legal
duties, and has entered into the Memorandum of Understanding solely to eliminate the uncertainty,
burden and expense of further litigation. If a stipulation of settlement is not received, or of it
is not approved by the court, these lawsuits could divert the attention of our management and
employees from our day-to-day business and otherwise adversely affect us financially.
Risks Related To Our Business
We may not have sufficient funds to repurchase our outstanding convertible notes that may be put to
us in August 2009, or to pay the principal due upon conversion of outstanding convertible notes or
to repurchase our outstanding notes on other repurchase dates.
Our outstanding convertible senior notes are convertible at any time at the option of the
holders based on a conversion rate of 24.3424 shares of common stock per $1,000 principal amount of
the notes. This is equivalent to an initial conversion price of $41.08 per share of common stock.
The outstanding notes provide for what is known as “net share settlement” upon conversion. This
means that upon conversion of the notes, we are required to pay up to the first $1,000 of
conversion value of a converted note in cash, with any excess conversion value over $1,000 payable
through the issuance of shares. The conversion value of the outstanding notes is based on the
volume weighted average price of our common stock for the 10 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.
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In addition, holders of the outstanding convertible notes may require us to purchase their
notes for cash in an amount equal to 100% of their principal amount, plus accrued and unpaid
interest, on August 15, 2009, 2014 and 2019, and, under certain circumstances, in the event of a
“Fundamental Change” as defined in the indenture under which the notes were issued. Such
“Fundamental Change” includes a change in control as contemplated by the Merger Agreement. Further,
if a Fundamental Change occurs prior to August 15, 2009, in certain cases we may 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 97% of the then current market price, or a
combination of both. Our potential total repurchase obligation on August 15, 2009 is $143.8 million
plus accrued and unpaid interest.
As
of December 31, 2008, we reclassified our Notes from long-term
to current liabilities, based on the August 15, 2009 put date. Accordingly,
we now have negative working capital. We believe that if we do not refinance our outstanding
convertible notes within the near future, our existing customers could consider canceling current
customer contracts, or our prospective clients may be less likely to award us new business. If the
transaction with JLL is consummated, then JLL or its affiliates, will fund our financial
obligations under the outstanding notes.
If we violate certain covenants contained in the outstanding notes, which include a covenant
to timely file certain SEC reports, such a violation may be considered an event of default, which
could lead to the acceleration of the entire principal amount of the notes outstanding.
While it is currently anticipated that JLL and its affiliates will fund our financial
obligations under the outstanding notes, there can be no assurance that they will do so. If JLL and
its affiliates do not fund our obligations under the outstanding notes, we would not have
sufficient cash to fund these obligations and would be required to seek to refinance this debt. In
addition, the significant recent decrease in our market capitalization may greatly inhibit our
ability to obtain additional financing. Due to uncertainties inherent in the capital markets (e.g.,
availability of capital, fluctuation of interest rates, etc.), we cannot be certain that existing
or additional financing will be available to us on acceptable terms, if at all. The financial
markets, including both the credit and equity markets, are experiencing substantial turbulence and
volatility, both in the U.S. and in other markets worldwide. This turbulence has resulted in
substantial reductions in the availability of loans to a broad spectrum of businesses, increased
scrutiny by lenders of the credit-worthiness of borrowers, more restrictive covenants imposed by
lenders upon borrowers under credit and similar agreements and, in some cases, increased interest
rates under commercial and other loans. Even if we are able to obtain additional debt financing, we
may incur additional interest expense, which may decrease our earnings, or we may become subject to
more stringent covenants and other contractual provisions that restrict our operations. Our failure
to pay the required amounts on conversion of any of the outstanding notes when converted or to
repurchase any of the outstanding notes when we are required to do so would result in an event of
default with respect to the outstanding notes, which could result in the entire outstanding
principal balance and accrued but unpaid interest on all of the outstanding notes being
accelerated, and could also result in an event of default under our other outstanding indebtedness.
We may be adversely affected by the current economic environment.
Our ability to attract and retain customers, invest in and grow our business and meet our
financial obligations depends on our operating and financial performance, which, in turn, is
subject to numerous factors. In addition to factors specific to our business, prevailing economic
conditions and financial, business and other factors beyond our control can also affect our
business. We cannot anticipate all the ways in which the current economic climate and financial
market conditions could adversely impact our business. Further, consolidation in the
pharmaceutical, biotechnology or medical device industries could lead to a smaller client base for
us.
We are exposed to risks associated with reduced profitability and the potential financial
instability of our customers, many of whom may be adversely affected by the volatile conditions in
the financial markets, the economy in general and disruptions to the demand for healthcare services
and pharmaceuticals. These conditions could cause customers to experience reduced profitability
and/or cash flow problems that could lead them to modify, delay or cancel contracts with us,
including contracts included in our current backlog. Most of our contracts are subject to
termination by our clients with little or no notice and 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. Additionally, if customers are not successful in generating
sufficient revenue or are precluded from securing financing, they may not be able to pay, or may
delay payment of, accounts receivable that are owed to us. Our revenues are contingent upon the
clinical trial expenditures of the pharmaceutical and biotechnology industries, and as these
industries cut costs in response to the economic downturn and possibly postpone or delay clinical
trials, our revenues may be similarly decreased and our profitability reduced. This in turn could
adversely affect our financial condition and liquidity.
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Our indebtedness may impact our financial condition or results of operations, and the terms of our
outstanding indebtedness may limit our activities.
Subject to applicable restrictions in our outstanding indebtedness and availability of
financing, we may incur additional indebtedness in the future. Our level of indebtedness will have
several important effects on our future operations, including, among others:
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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,
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our outstanding indebtedness and leverage will increase the impact of negative
changes in general economic and industry conditions, as well as competitive pressures,
and
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the level of our outstanding indebtedness may affect our ability to obtain additional
financing for working capital, capital expenditures, acquisitions or general corporate
purposes.
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Our outstanding $143.8 million of convertible notes, bear interest at a fixed rate of 2.25%
per year. While it is currently anticipated that JLL or its affiliates will fund our financial
obligations under the outstanding notes, there can be no assurance that they will do so. If JLL and
its affiliates do not fund our obligations under the outstanding notes, we would not have
sufficient cash to fund these obligations and would be required to seek to refinance this debt. A
refinancing alternative may not be available and, if available, would likely result in
significantly higher financing costs to us. General economic conditions, industry cycles and
financial, business and other factors affecting our operations 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, we have significant international operations and we may not be able to repatriate
foreign earnings in order to pay our debt service without incurring significant additional income
taxes. This may also have the impact of reducing our earnings per share and the amount of net cash
we receive. If we cannot generate sufficient cash flow from operations to service our indebtedness,
or our transaction with JLL is not consummated, we may, among other things:
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seek additional financing in the debt or equity markets,
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seek to refinance or restructure all or a portion of our indebtedness,
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sell selected assets or pursue other strategic options, or
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reduce or delay planned capital expenditures.
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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.
We currently do not have a credit facility.
We do not have a credit facility or other committed sources of capital. To the extent capital
resources are insufficient to meet future capital requirements, we will have to raise additional
funds. There can be no assurance that such funds will be available on favorable terms, or at all.
To the extent that additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to our stockholders. If
adequate funds are not available, we may be required to curtail operations significantly or to
obtain funds by entering into financing agreements on unattractive terms. Our inability to raise
capital could have a material adverse effect on our business, financial condition and results of
operations.
15
We are currently subject to an ongoing SEC investigation. Depending upon the outcome, this
investigation could result in possible litigation which may lead to civil and/ or equitable relief,
including payment of a fine and civil monetary penalties and a possible restatement of our prior
financial statements.
We are currently subject to an ongoing SEC investigation pursuant to a formal order of private
investigation issued on March 12, 2007. The investigation relates to revenue recognition, earnings,
company operations and related party transactions for periods prior to December 2005. Prior to the
commencement of the investigation, we were subject to an informal inquiry by the SEC relating to
the same subject matter. In connection with that inquiry, in late December 2005, we received an
informal request from the SEC for documents relating to the duties, qualifications, compensation
and reimbursement of former officers and employees. This request also asked for a copy of a report
delivered to Senator Grassley by independent counsel retained by us, which report related to our
former Miami facility and had been prepared in response to a request from the United States Senate
Finance Committee. In a second request for information by the SEC, sent in March 2006, the SEC
asked for information regarding related parties and transactions, duties and
compensation of various employees, internal controls, revenue recognition and other accounting
policies and procedures, and selected regulatory filings. On June 11, 2007, we received a subpoena
from the SEC for additional accounting documents. On October 22, 2008, the SEC asked us for
additional documents regarding our former Miami headquarters, several of our vendors and updated
board minutes. As part of its investigation, the SEC staff has also interviewed several former
officers and employees. We have voluntarily complied with the SEC’s requests and have provided and
expect to continue to provide documents to the SEC as requested. However, we cannot assure you that
we will be able to successfully resolve these matters with the SEC. Depending upon the outcome,
this investigation could result in possible litigation which may lead to civil monetary penalties
and/or equitable penalties, including a possible restatement of our prior financial statements.
Our recently settled securities class action litigation, unrelated to the JLL transaction, exceeded
our directors and officers, or D&O, liability insurance coverage limits, and there is limited
additional coverage for our recently settled derivative actions and associated legal fees.
We were subject to a number of class actions and derivative actions in federal court which
were recently settled. The securities class action filed in December 2005 alleged that we and
certain of our former officers and directors engaged in violations of the anti-fraud provisions of
the federal securities laws through misstatements or omissions regarding the maximum occupancy of
our Miami facility; the Miami facility’s purportedly dangerous and unsafe condition; our clinical
practices; purported conflicts of interests involving Independent Review Boards used by us; certain
related party transactions and the qualifications of some of our former executives. The derivative
suits were brought on behalf of PharmaNet against certain of our former officers and/or directors
alleging, among other things, breaches of fiduciary duty relating to our hiring of unqualified
executives whose credentials were allegedly misrepresented; our failure to establish satisfactory
internal controls; that our clinical trials violated certain applicable regulations; that our
utilization of Independent Review Boards was conflicted; that we expanded our Miami facility
without proper permitting and that we falsely inflated our revenues. The complaints in these
actions sought, among other things, unspecified damages and costs associated with the litigation.
As of December 31, 2006, our $250,000 insurance deductible was reached. On August 1, 2007, we
entered into an Agreement to Settle Class Action to settle the securities class action lawsuit.
Under the terms of the Agreement to Settle Class Action, which was approved by the court on
March 10, 2008 but later appealed on April 9, 2008 and re-appealed on February 27, 2009, our D&O
insurance coverage has been exceeded. Since the settlement of the securities class action suit has
exhausted our D&O policy limits, we have only limited coverage under our remaining insurance
policies which directly cover our directors and officers for additional legal fees or to cover any
adverse judgment on appeal.
As a public company, we face risks related to class action lawsuits, including threatened
litigation.
Although we recently settled our securities class action litigation and derivative lawsuits
discussed above (subject to expiration of appeal rights), as with any public company, there remains
the potential for us to become involved in additional legal proceedings, including additional class
action securities litigation and derivative lawsuits, which may be brought against us. Court
decisions and legislative activity may increase our exposure for any of these types of claims. In
some cases, substantial non-economic or punitive damages may be sought against us. We currently
maintain insurance coverage for some of these potential liabilities. Other potential liabilities
may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not
be enough to cover the damages awarded. In addition, certain types of damages may not be covered by
insurance, and insurance coverage for all or certain forms of liability may become unavailable or
prohibitively expensive in the future.
Specifically, on November 20, 2008, a class action lawsuit was filed in the United States
District Court for the District of New Jersey alleging that PDGI and two of its officers violated
the federal securities laws. We were served notice of this lawsuit in early December 2008. The
complaint, which is asserted on behalf of purchasers of PDGI common stock between November 1, 2007
and April 30, 2008, alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 through alleged misstatements or omissions regarding our business, backlog,
and earnings guidance.
The outcome of this litigation and other legal matters is always uncertain, and outcomes that
are not justified by the evidence can occur. We intend to defend ourselves vigorously against such
lawsuits. In addition, we believe we have adequate insurance coverage. Nevertheless, it is possible
that resolution of one or more legal matters could result in losses material to our consolidated
results of operations, liquidity or financial condition.
16
We are subject to on-going tax audits, which may exceed our tax reserves.
We are subject to on going tax audits and we remain subject to potential examinations in
federal, state and foreign jurisdictions in which we conduct operations and file tax returns. We
currently believe that the results of any recent or prospective audits will not have
a material adverse effect on our financial position or results of operations. We currently
believe that adequate reserves have been provided to cover any potential exposures related to these
recent and prospective audits. However we cannot assure you that the reserves related to these
audits are adequate and any additional tax obligations may have a material adverse effect on our
financial statements and results of operations.
If we do not continue to generate a large number of new client contracts, or if our clients cancel
or defer contracts, our profitability may be adversely affected.
On average, our late stage contracts extend over a period of approximately two and a half
years, although some may be of shorter or 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. Our inability to generate new contracts on a timely basis
could have a material adverse effect on our business, financial condition or 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 or results of operations. We
experience termination, cancellation and delay of contracts by clients from time to time in the
ordinary course of business. In addition, our clients have become increasingly concerned about our
capital position as our financial obligations under the outstanding notes grows closer, and as a
result, clients either have not awarded new business to us, or canceled or threatened to cancel
pending contracts. As a result of our financial obligation under the outstanding notes, current
economic conditions and other factors, we may experience a greater number of terminations,
cancellations and delays as compared to historical levels. Additionally, client cancellations may
increase given the prevailing economic conditions.
Our backlog may not be indicative of future results.
Our backlog of $507.7 million as of December 31, 2008, is based on anticipated service revenue
from uncompleted projects with clients. Backlog is the amount of revenue that remains to be earned
and recognized on written awards, signed contracts and letters of intent. Our backlog may, at any
given time, contain a greater or different concentration of customers compared to our revenue
customer concentrations. Contracts included in backlog, as is the case with most of our contracts,
are generally subject to termination by our clients at any time. In the event that a client cancels
a contract, we typically would be entitled to receive payment for all services performed up to the
cancellation date and subsequent client-authorized services related to terminating the cancelled
project. The duration of the projects included in our backlog range from a few weeks to many years.
Our backlog may not be indicative of our future results and we cannot assure you that we will
realize all the anticipated future revenue reflected in our backlog. A number of factors may affect
backlog, including:
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the variable size and duration of the projects,
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the loss or delay of projects,
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the change in the scope of work during the course of a project, and
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the cancellation of such contracts by our clients.
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Also, if clients delay projects, the projects will remain in backlog but will not generate
revenue at the rate originally expected. The historical relationship of backlog to revenues
actually realized by us should not be considered indicative of future results.
We may bear financial risk if we under-price our contracts or overrun cost estimates, and our
financial results can also be adversely affected by failure to receive approval for change orders
and by delays in documenting change orders.
Most of our contracts are fixed-price contracts or fee-for-service contracts. We bear the
financial risk if we initially under-price our contracts or otherwise overrun our cost estimates.
In addition, contacts with our clients are subject to change orders, which occur when the scope of
work performed by us needs to be modified from that originally contemplated by our contract with
the clients. This can occur, for example, when there is a change in a key study assumption or
parameter or a significant change in timing. Under U.S. generally accepted accounting principles,
we cannot recognize additional revenue anticipated from change orders until appropriate
documentation is received by us from the client authorizing the change made. However, if we incur
additional expense in anticipation of receipt of that documentation, we must recognize the expense
as incurred. Further, we may not be successful convincing our clients to approve change orders
which change the scope of current contracts. Such under-pricing or significant cost overruns could
have a material adverse effect on our business, results of operations, financial condition or cash
flows.
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A significant portion of our growth historically has come from acquisitions, and we may make more
acquisitions in the future as part of our growth strategy. This growth strategy subjects us to
numerous risks.
A significant portion of our growth historically has come from strategic acquisitions.
Acquisitions require significant capital resources and can 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 predating our
acquisition, 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 the
acquisition. Acquisitions may also have unanticipated tax and accounting ramifications. 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 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:
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we will identify suitable acquisition candidates,
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we can consummate acquisitions on acceptable terms,
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we can successfully integrate any acquired business into our operations or
successfully manage the operations of any acquired business, or
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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.
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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 revenues are derived from countries outside the United States and
we anticipate that revenue from foreign operations may grow. Accordingly, our business is subject
to risks associated with doing business internationally, including:
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less stable political and economic environments and changes in a specific country’s
or region’s political or economic conditions,
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potential negative consequences from changes in tax laws affecting our ability to
repatriate profits,
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unfavorable labor regulations,
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greater difficulties in managing and staffing foreign operations,
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the need to ensure compliance with the numerous regulatory and legal requirements
applicable to our business in each of these jurisdictions and to maintain an effective
compliance program to ensure compliance,
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currency fluctuations,
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changes in trade policies, regulatory requirements and other barriers,
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civil unrest or other catastrophic events, and
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longer payment cycles of foreign customers and difficulty collecting receivables in
foreign jurisdictions.
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These factors are beyond our control. 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 or financial condition.
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 clients also affect our
business and operating results. The outsourcing of drug development activities has grown
substantially during the past decade and we have benefited from this growth. If the branded
pharmaceutical, biotechnology, generic drug and medical device companies reduce the outsourcing of
their clinical research and other drug development projects, our operations could 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 and 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. In addition, consolidation in the pharmaceutical and biotechnology industries can
adversely affect us, particularly in circumstances where a client of ours is acquired by another
company that does not utilize our services.
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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, are impacted by their profitability. If these companies want to reduce
their 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 could also adversely affect our revenues and profitability. In addition,
consolidation in the pharmaceutical and biotechnology industries can adversely affect us,
particularly in circumstances where a client of ours is acquired by another company that does not
utilize our services.
Actions or inspections by regulatory authorities may cause clients not to award future contracts to
us or to cancel existing contracts, which may have a material and adverse effect on our results of
operations.
We are subject to periodic inspections of our facilities and documentation by regulatory
authorities, including the FDA and others, including, without limitation, inspections in connection
with studies we have conducted in support of marketing applications and routine inspections of our
facilities. Regulatory authorities have significant authority over the conduct of clinical trials,
and they have the power to take regulatory and legal action in response to violations of clinical
standards, clinical trial participant protection and regulatory requirements in the form of civil
and criminal fines, injunctions and other measures. If, for example, the FDA obtains an injunction,
such action could result in significant obstacles to future operations. Additionally, there is a
risk that actions by regulatory authorities, if they result in significant inspectional
observations or other measures, could cause clients not to award us future contracts or to cancel
existing contracts. Depending upon the amount of revenue lost, the results could have a material
and adverse affect on our results of operations.
We might lose business opportunities as a result of healthcare reform.
Numerous governments have undertaken efforts to control healthcare costs through legislation,
regulation and voluntary agreements with healthcare providers and drug companies. Healthcare reform
could reduce the demand for our services and, as a result, negatively impact our revenue and
earnings. In the last several years, the U.S. Congress has reviewed several comprehensive
healthcare reform proposals. The proposals are intended to expand healthcare coverage for the
uninsured and reduce the growth of total healthcare expenditures. Congress has also considered and
may adopt legislation which could have the effect of putting downward pressure on the prices that
pharmaceutical and biotechnology companies can charge for prescription drugs. Any such legislation
could cause our customers to spend less on research and development activities. If this were to
occur, we could have fewer clinical trials for our business, which could reduce our revenue and
earnings. Similarly, pending healthcare reform proposals outside the U.S. could negatively impact
revenue and earnings from foreign operations.
At any given time, one or a limited number of clients may account for a large percentage of our
revenues, which means that we could face a greater risk of loss of revenues 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 2008 and 2007, no client provided more than 10.0% of our direct
revenue but our 10 largest clients provided approximately 30.5% of our direct revenue in 2008 and
33.9% of our direct revenue in 2007. 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, or if one or more clients encounter financial difficulties or is acquired, our
business, financial condition or results of operations could be materially adversely affected.
We may incur significant taxes to repatriate funds.
We have significant international operations. If a significant amount of cash is needed in the
U.S. and we are not able to devise effective repatriation strategies or otherwise borrow such cash,
we may need to repatriate funds from foreign subsidiaries in a non-tax-efficient manner, which may
require us to pay additional taxes and could have the impact of reducing the amount of net cash
available to us and reducing earnings per share.
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Our operating results fluctuate from period to period.
Fluctuating operating results can be due to the level of new business awards in a particular
period and the timing of the initiation, progress or cancellation of significant projects or other
factors. 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 lower than those anticipated by investors or the financial community
generally.
Our substantial non-U.S. operations expose us to currency risks.
Changes in the exchange rate between the Canadian dollar, Euro, Swiss Franc or other foreign
currencies and the U.S. dollar could materially affect the translation of our subsidiaries’
financial results into U.S. dollars for purposes of reporting our consolidated financial results.
We operate in many countries and are subject to exchange rate gains and losses for multiple
currencies. We may also 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. We have adopted a foreign currency risk hedging policy in an attempt to
mitigate this risk. We have also implemented systems and processes to further mitigate this risk;
however, we cannot assure you that we will be successful in limiting our risks associated with
foreign currency transactions.
We could be adversely affected by tax law changes in Canada or in other foreign 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 provincial
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 and significant deferred tax assets in the consolidated
balance sheets. However, there is no assurance that the credits will be fully realized. Further,
any reduction in the availability or amount of these tax credits could have a material adverse
effect on profits and cash flows from our Canadian operations. Additionally, a significant portion
of our net earnings is generated outside the U.S. where tax rates are generally lower. If
applicable foreign tax rates increase, particularly in Switzerland, our consolidated net earnings
could be reduced.
Governmental authorities may question our inter-company transfer pricing policies or change their
laws in a manner that could increase our effective tax rate or otherwise harm our business.
As a U.S. 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 the parent and subsidiaries. Regulators in the U.S. 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 should 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 procedures and our
business could be adversely affected.
We may lack the resources needed to compete effectively with larger competitors.
There are a large number of drug development services companies ranging in size from very
small firms to very large full service, global drug development companies. 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, or if our
current assay methods are incorrect, 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 to 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 bioanalytical solutions for our clients. This
requires staying abreast of current regulatory requirements and identifying assay 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 current clients or not be able to compete effectively for new
clients. Moreover, if our current assay methods are incorrect, we may need to repeat our tests
which could have an adverse effect on our operations.
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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:
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adverse side effects and reactions resulting from administering these drugs to a
clinical trial participant,
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unintended consequences resulting from the procedures or changes in medical practice
to which a study participant may be subject as part of a clinical trial,
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improper administration of these drugs, or
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potential professional malpractice of our employees or contractors, including
physicians.
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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 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. For
example, we could be held liable for errors or omissions or breach of contract if our laboratories
inaccurately report or fail to report lab results. 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 agreement is not enforceable or broad enough or our client is
insolvent, any resulting award against us could result in our experiencing a material loss.
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 our business.
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 or significant fines or 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 Food and Drug Administration or other regulatory agencies that have
jurisdiction over the trials we conduct or our operations that we are not in compliance with good
laboratory practices (GLP) standards for our laboratories, current good manufacturing practices
(GMP) standards, where applicable or good clinical practices (GCP) standards for our clinical
facilities or study sites we monitor could materially and adversely affect us. Similarly, a finding
by the Therapeutic Products Directorate that we are not in compliance with Canadian GMP, Canadian
GCPs or other legislative requirements for clinical trials in Canada, could materially and
adversely affect us. In addition to the above U.S. 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, our chief executive officer, the executive
committee and certain key officers of our subsidiaries. In addition, some members of our senior
management team play a significant role in generating new business and retaining existing clients.
We also depend on our ability to attract and retain qualified management, professional and
operating staff. The 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
materially adverse effect on our business.
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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 technology to allow the concurrent conduct of studies and
work-sharing around the world. As with all information technology, our systems are 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 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.
We self-insure our employees’ healthcare costs in the U.S., which exposes us to losses.
We are self-insured for our U.S. employee medical plan. While our medical costs in recent
years have generally increased at the same level as the regional average, the mix and age of our
workforce could result in higher than anticipated medical claims, resulting in an increase in costs
beyond what we have experienced. We have stop loss coverage in place for catastrophic events, but
the aggregate impact of one or more claims resulting from a catastrophic event may have a material
adverse effect on our profitability.
If we are unable to attract suitable investigators and volunteers for our clinical trials, our
clinical development business might suffer.
The clinical research studies we operate rely upon the ready accessibility and willing
participation of physician investigators and volunteer subjects. Investigators are typically
located at hospitals, clinics or other sites and supervise administration of the study drug to
patients during the course of a clinical trial. Volunteer subjects generally include people from
the communities in which the studies are conducted. Our clinical research development business
could be adversely affected if we are unable to attract suitable and willing investigators or
clinical study volunteers on a consistent basis.
If we incur further instances of breakdowns in our internal controls, current and potential
stockholders could lose confidence in our financial reporting, which could harm our business and
the price of our common stock.
In connection with the internal control audit for the year ended December 31, 2007, our
management assessed our internal control over financial reporting and concluded that two material
weaknesses existed. As a result of the remediation efforts disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2007, management believes that the material weakness
related to revenue recognition was remediated during the three months ended June 30, 2008 and the
material weakness related to income taxes was remediated as of September 30, 2008.
While
we have taken steps to remediate the material weaknesses, we cannot assure you 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 decrease. Moreover, we believe that any
system of internal control can be circumvented by individuals who engage in improper action. In
such an 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 decrease, and we
could be required to restate our consolidated financial statements.
We remain subject to risks and uncertainties associated with our discontinued Miami operations that
could further adversely impact our company.
We made a strategic decision in 2006 to discontinue our Miami operations in order to focus on
our other businesses. This decision was prompted primarily due to a number of issues that had
resulted in a material negative impact on earnings and in response to actions by local authorities
that included an order to demolish our clinical and administrative office building in Miami. There
continue to be risks associated with discontinuing these operations. While we believe that
discontinued operations will have no further impact on continued operations, we may incur costs in
addition to those disclosed in the consolidated financial statements. In addition, if we are unable
to convince our clients that the problems principally related to our discontinued operations 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. The allegations related to our
discontinued operations and the repetition of these allegations in the media have harmed our
reputation. As a result, clients may decline to give us new contracts for studies to be performed
by us unless we can convince them that the allegations, which affected our discontinued operations,
have not impacted our ability to provide high quality clinical research in compliance with our
clients’ protocols and all regulatory requirements. Depending upon the impact of the foregoing as
well as other issues on our business, the foregoing allegations may have a material adverse affect
on our results of operations, including a reduction in our net earnings or a deviation from our
forecasted net earnings. Despite the fact that we ceased reporting discontinued operations
separately in our financial statements and have successfully completed all studies related to our
discontinued operations, we believe the negative effects on our reputation and relationships with
clients may continue to pose a risk to our business.
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Risks Related To Our Common Stock
We may issue a substantial amount of our common stock which could cause dilution to current
investors, put pressure on earnings per share 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 shares of
common stock as consideration, the equity interest of current stockholders will be diluted. Any
such issuance will also increase the number of outstanding shares of common stock that will be
eligible for resale. Persons receiving shares of our common stock in connection with these
acquisitions may be likely to sell 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 also plan to continue to issue common
stock for compensation purposes and in connection with strategic transactions.
Our stock price can be very volatile, and stockholders’ investments could suffer a decline in
value.
The trading price of our common stock has been, and is likely to continue to be, very volatile
and could be subject to wide fluctuations in price in response to various factors, many of which
are beyond our control, including without limitation:
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operating performance of our competitors,
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changes in financial estimates by securities analysts,
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loss of a major client or contract,
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new service offerings introduced or announced by our competitors,
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changes in market valuations of other similar companies,
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actual or anticipated variations in quarterly operating results, including changes in
our guidance as to forecasted earnings and our failure to meet earnings guidance
published by us,
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announcement of significant acquisitions, strategic partnerships, joint ventures or
capital commitments,
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current market conditions;
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the need of our investors to potentially sell our stock to meet their own liquidity
needs;
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additions or departures of key personnel, and
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sales of our common stock, including short sales.
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As a result, investors could lose all or part of their investment. In addition, the stock
market in general has recently experienced significant price and volume fluctuations. If any of
these risks occur, it could cause our stock price to fall and may expose us to class action
lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
Failure to satisfy NASDAQ Stock Market maintenance criteria could negatively impact the liquidity
and market price of our common stock.
Our common stock began trading on the NASDAQ Global Select Market in June 2001. There are
several requirements for continued listing on the NASDAQ Stock Market, or NASDAQ, including, but
not limited to, a minimum stock price of $1.00 per share and prescribed minimum market
capitalization. On October 16, 2008, NASDAQ suspended the enforcement of the rules requiring a
minimum stock price of $1.00 per share and prescribed minimum market capitalization for all NASDAQ
listed companies through April 20, 2009.
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Following the end of this suspension period, if our common stock price closes below $1.00 per
share for 30 consecutive days, we may receive notification from NASDAQ that our common stock will
be delisted from the NASDAQ unless the stock closes at or above $1.00 per share for at least 10
consecutive days during the 180-day period following such notification. In the future, our common
stock price or tangible net worth may fall below the NASDAQ listing requirements, or we may not
comply with other listing requirements, with the result being that our common stock might be
delisted. If our common stock is delisted from trading on the NASDAQ, our common stock may be
eligible for quotation on the OTC Bulletin Board maintained by NASDAQ, another over-the-counter
quotation system, or on the pink sheets. Delisting from the NASDAQ could adversely affect the
liquidity and price of our common stock and it could have a long-term impact on our ability to
raise future capital through a sale of our common stock. In addition, it could make it more
difficult for investors to obtain quotations or trade our stock. Delisting could also have other
negative results, including the potential loss of confidence by employees, the loss of
institutional investor interest and fewer business development opportunities.
Our common stock may not continue to qualify for exemption from the “penny stock” restrictions,
which may make it more difficult for you to sell your shares.
In the event of delisting from the NASDAQ, our common stock may be classified as a “penny
stock” by the SEC and would become subject to rules adopted by the SEC regulating broker-dealer
practices in connection with transactions in “penny stocks.” The SEC has adopted regulations which
define a “penny stock” to be any equity security that has a market price of less than $5.00 per
share, or with an exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, these rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule relating to the penny stock market.
Disclosure is also required to be made about current quotations for the securities and about
commissions payable to both the broker-dealer and the registered representative. Finally,
broker-dealers must send monthly statements to purchasers of penny stocks disclosing recent price
information for the penny stock held in the account and information on the limited market in penny
stocks. These penny stock restrictions will not apply to our shares of common stock as long as: (1)
they continue to be listed on the NASDAQ; (2) certain price and volume information is publicly
available about our shares on a current and continuing basis; and (3) we meet certain minimum net
tangible assets or average revenue criteria. Our common stock may not continue to qualify for an
exemption from the penny stock restrictions. If our shares of common stock were subject to the
rules on penny stocks, the liquidity of our common stock would be adversely affected and an
investor may find it even more difficult to dispose of or obtain accurate quotations as to the
market value of our common stock, although there can be no assurance that our common stock will be
eligible for trading or quotation on any alternative exchanges or market.
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 currently may make a change in control of us more difficult, even if a change in
control would be beneficial to stockholders. Our charter documents provide that the Board of
Directors may issue, without a vote of stockholders, one or more series of preferred stock that has
more than one vote per share. This could permit the Board to issue preferred stock to investors who
support our management and give effective control of our business to management. Additionally,
issuance of preferred stock could block an acquisition resulting in both a decrease 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
decrease 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 15% or more of their capital stock until the holder has held the stock for three years
unless, among other possibilities, the Board approves the transaction. The Board may use these
provisions to prevent changes in our management and control. Also, under applicable Delaware law,
the Board may adopt additional
anti-takeover measures in the future. In addition, provisions of certain contracts, such as
employment agreements with executive officers, may have an anti-takeover effect.
In December 2005, the Board adopted a Shareholder Rights Plan which has the effect of
deterring hostile takeovers. On February 2, 2009, we amended the Shareholder Rights Plan to make
it inapplicable to the Merger, the Merger Agreement and the transactions contemplated thereby.
Such amendment also contemplates that the Stockholder Rights Plan will terminate at the effective
time of the Merger. This plan also makes it more difficult to replace or remove our current
management team in the event our stockholders believe this would be in their best interest or ours.
24
Recent actions taken by the SEC in connection with the implementation of rules relating to
“naked” short selling may not effectively prevent security holders from engaging in short sales,
which could further contribute to downward pressure on the trading price of our common stock.
The SEC recently adopted various rules and rule amendments to address potentially manipulative
short selling activities, including adopting new anti-fraud rule, Rule 10b-21 under the Securities
Exchange Act of 1934, as amended to address naked short selling, amending Rule 203 of
Regulation SHO to eliminate an exception for certain options market makers, and adopting new
Rule 204T of Regulation SHO, which generally mandates that sales transactions for common stock be
closed out on the fourth day following the trade’s date. In particular, Rule 10b-21 implements new
short selling rules to strengthen investor protections against “naked” short selling, where the
seller does not actually borrow the stock and fails to deliver it in time for settlement.
Rule 10b-21 applies to the equity securities of all public companies and became effective on
October 17, 2008. Among other things, the new rule imposes penalties on short sellers, including
broker-dealers, acting for their own accounts, who deceive specified persons about their intention
or ability to deliver securities in time for settlement and that fail to deliver shares by the
close of business on the settlement date. As a result, a holder of new notes may have limited
ability to hedge their investment. However, the full effects of the recent SEC actions, if any, are
not clear, including whether such actions will deter short selling.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
As of December 31, 2008, we occupied 838,220 square feet of building space in 42 locations in
40 countries. We own a small parcel of land in Miami, Florida and 18,390 square feet of building
space in Toronto, Canada. We lease the remainder of our facilities under various leases that expire
between 2009 and 2027. The leases generally provide for base monthly rents with annual escalation
clauses based upon fixed amounts or cost of living increases. For further information concerning
lease obligations, see Note G to the consolidated financial statements.
Our U.S. facilities account for 361,165 square feet, the largest of which is 121,990 square
feet at our corporate and PharmaNet, Inc., headquarters in Princeton, New Jersey. Our
non-U.S. facilities account for 477,055 square feet, the largest of which is 151,700 square feet at
our early stage facility in Quebec City, Canada. Of the total square footage, 41% is attributable
to the early stage segment and 59% to the late stage segment. We believe that our current
facilities are adequate for our present purposes.
Item 3.
Legal Proceedings.
On March 12, 2007, we received notice that the SEC staff had secured a formal order of private
investigation. The formal order relates to revenue recognition, earnings, company operations and
related party transactions. We have been cooperating fully with the SEC. In late December 2005, we
received an informal request from the SEC for documents relating to the duties, qualifications,
compensation and reimbursement of former officers and employees. This request also asked for a copy
of the report to Senator Grassley by our independent counsel. In a second request, sent March 28,
2006, the SEC asked for information regarding related parties and transactions, duties and
compensation of various employees, internal controls, revenue recognition and other accounting
policies and procedures and selected regulatory filings. As part of its investigation, the SEC
staff interviewed several former employees on the topics identified in the formal order. On
June 11, 2007, we received a subpoena from the SEC for additional accounting documents. In late
2008, the SEC asked us for additional documents regarding our former Miami headquarters, several
vendors and updated board minutes. As with past requests, we will voluntarily comply with this
request and we expect to continue to provide documents to the SEC as requested.
Beginning in late December 2005, a number of class action lawsuits were filed in the United
States District Court for the Southern District of Florida and the United States District Court for
the District of New Jersey alleging that PDGI and certain of its former officers and directors
violated federal securities laws, such actions are collectively referred to herein as the Federal
Securities Actions. We were served notice of these lawsuits in early January 2006. On June 21,
2006, the Judicial Panel for Multidistrict Litigation transferred all of the Federal Securities
Actions for pre-trial proceedings in the District of New Jersey, where they were later
consolidated.
On November 1, 2006, the Arkansas Teachers’ Retirement System, the lead plaintiff in the
Federal Securities Actions, filed a consolidated amended class action complaint, also referred to
herein as the amended complaint. The amended complaint alleged that we and several of our current
and former officers and directors violated Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
25
On August 1, 2007, we issued a press release announcing that we had entered into an agreement
to settle the Federal Securities Actions on the principal terms set forth in an Agreement to Settle
Class Action, referred to herein as the Settlement Agreement. Pursuant to the terms of the
Settlement Agreement, the class will receive approximately $28.5 million (less legal fees,
administration and other costs). We accrued an estimated liability of $10.4 million during the year
ended December 31, 2007, which was not covered by our insurance, associated with the Settlement
Agreement and other related litigation. We had the option to elect to pay up to $4.0 million of
this amount in common stock, or all in cash. The common stock was to be valued according to the
volume weighted average closing price for the 10 trading days leading up to the date the district
court enters an order formally approving the Settlement Agreement. On December 3, 2007, the Court
preliminarily approved the Settlement Agreement. On December 11, 2007, we made cash payments to the
plaintiffs escrow account in the amount of $0.3 million and on January 11, 2008, we made cash
payments to the plaintiffs escrow account in the amount of $3.7 million. On March 10, 2008, the
Court formally approved the Settlement Agreement and entered Final Judgment. On March 24, 2008, we
issued 135,870 shares of common stock to the plaintiff’s settlement fund to settle the action, or
$4.0 million in common stock, the value of such common stock equal to $29.44 per share which was
calculated as set forth above. The common stock and cash have not been disbursed to the class and
will not be distributed to the class until the appeals process is fully adjudicated. On April 9,
2008, a Notice of Appeal of the Final Judgment was filed. On February 13, 2009, the United States
Court of Appeals for the Third Circuit issued an Opinion affirming the district court’s final
judgment approving the settlement of the class action. On February 27, 2009, Appellant filed a
Petition for Rehearing En Banc. In addition, on March 4, 2009, Appellant filed a Motion to Vacate
the lower court’s final judgment. It is unclear how long the appellate court will take to rule on
the Petition for Rehearing En Banc or the Motion to Vacate. It is uncertain how long the appeals
process will take.
On November 20, 2008, a class action lawsuit was filed in the United States District Court for
the District of New Jersey alleging that PDGI and two of its officers violated the federal
securities laws. We were served notice of this lawsuit in early December 2008. The complaint, which
is asserted on behalf of purchasers of PDGI common stock between November 1, 2007 and April 30,
2008, alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 through alleged misstatements or omissions regarding our business, backlog, and earnings
guidance. On December 30, 2008, the Court entered an order providing that defendants need not
answer, move against or otherwise respond to the complaint or any potential related complaints
until after the Court appoints lead plaintiff and approves the selection of lead counsel. On
January 20, 2009, the Court entered an order designating an institutional investor, the Macomb
County Employees’ Retirement System, as lead plaintiff and approving the selection of lead counsel
and liaison counsel.
On February 6, 2009, Richard Mendez, a purported stockholder of PDGI, filed a putative class
action complaint in the Superior Court of New Jersey, Chancery Division, Mercer County on behalf of
himself and all other similarly situated stockholders of the Company against the PDGI Board, PDGI,
Parent and Purchaser alleging breaches of fiduciary duty and aiding and abetting breaches of
fiduciary duty in connection with the Merger. Among other things, the complaint alleged that the
proposed transactions contemplated in the Merger Agreement were the result of an unfair process,
that PDGI is being sold at an unfair price, that certain provisions of the Merger Agreement
impermissibly operate to preclude competing bidders, and the defendants engaged in self-dealing.
Among other things, the plaintiff sought an order enjoining defendants from proceeding with the
Merger Agreement.
On February 10, 2009, Cynthia Kancler, a purported stockholder of PDGI, filed a putative class
action complaint in the Superior Court of New Jersey, Chancery Division, Mercer County on behalf of
herself and all other similarly situated stockholders of the Company against the PDGI Board and
PDGI alleging breaches of fiduciary duty in connection with the Merger. Among other things, the
complaint alleged that the proposed transactions contemplated in the Merger Agreement were the
result of a flawed process, that PDGI is being sold at an inadequate price, and that certain
provisions of the Merger Agreement are unlawful. Among other things, the plaintiff sought an order
enjoining defendants from proceeding with the Merger Agreement, an order enjoining defendants from
consummating any business combination with a third party and an order directing the individual
defendants to exercise their fiduciary duties to obtain a transaction which is in the best
interests of PDGI’s shareholders.
26
On February 18, 2009, the plaintiffs in the Mendez and Kancler actions filed amended
complaints, which, in addition to reasserting many of the allegations in their originally filed
complaints, also challenged the adequacy of PDGI’s disclosures in the Schedule 14D-9, filed on
February 12, 2009. On March 5, 2009, the parties to the Mendez and Kancler actions entered into a
Memorandum of Understanding (the “Memorandum of Understanding”), setting forth the terms and
conditions for settlement of each of the actions. The parties agreed that, after arm’s length
discussions between and among the parties, PDGI would provide additional supplemental disclosures
to its Schedule 14D-9. In exchange, following confirmatory discovery, the parties will attempt in
good faith to agree to a stipulation of settlement and, upon court approval of that stipulation,
the plaintiffs will dismiss each of the other above-referenced actions with prejudice, and all
defendants will be released from any claims arising out of the Merger including any claims for
breach of fiduciary duty or aiding and abetting breach of fiduciary duty. The defendants have
agreed not to oppose any fee and expense application by plaintiffs’ counsel that does not exceed
$180,000 in the aggregate.
Defendants are confident that plaintiffs’ claims are wholly without merit and continue to deny
that any of them has committed or aided and abetted in the commission of any violation of law of
any kind or engaged in any of the wrongful acts alleged in the above-referenced actions. Each
defendant expressly maintains that it has diligently and scrupulously complied with its legal
duties, and has entered into the Memorandum of Understanding solely to eliminate the uncertainty,
burden and expense of further litigation.
Our attempts to resolve these legal proceedings involve a significant amount of attention from
our management, additional cost and uncertainty, and these legal proceedings may result in material
damage or penalty awards or settlements, and may have a material and adverse effect on our results
of operations, including a reduction in net earnings and a deviation from forecasted net earnings.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our security holders during the fourth quarter of the
year ended December 31, 2008.
27
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol “PDGI.” The
following table sets forth the range of high and low sales prices for each quarterly period for the
years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
43.05
|
|
|
$
|
25.00
|
|
|
Second Quarter
|
|
$
|
25.96
|
|
|
$
|
13.45
|
|
|
Third Quarter
|
|
$
|
27.30
|
|
|
$
|
6.85
|
|
|
Fourth Quarter
|
|
$
|
7.54
|
|
|
$
|
0.67
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
26.49
|
|
|
$
|
18.59
|
|
|
Second Quarter
|
|
$
|
33.49
|
|
|
$
|
25.50
|
|
|
Third Quarter
|
|
$
|
32.86
|
|
|
$
|
25.07
|
|
|
Fourth Quarter
|
|
$
|
42.75
|
|
|
$
|
29.06
|
|
Holders
As of March 16, 2009, there were 356 registered holders of record of our common stock.
Dividend Policy
We have not paid cash dividends on our common stock and we do not anticipate paying dividends
as we intend to continue to retain earnings in order to finance the growth and development of our
business. Furthermore, our $45.0 million credit facility with a syndicate of banks, or the Credit
Facility, which terminated on February 13, 2009, contained certain covenants that restricted, or had
the effect of restricting, our payment of cash dividends.
28
Comparative Stock Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting
material” or to be “filed” with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by
reference into such filing.
Assumes $100 invested on December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
Period
|
|
|
Years Ending December 31
|
|
|
Company/Index
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
PharmaNet Development Group, Inc.
|
|
$
|
100
|
|
|
$
|
223.08
|
|
|
$
|
90.42
|
|
|
$
|
124.64
|
|
|
$
|
221.44
|
|
|
$
|
5.14
|
|
|
Nasdaq Composite Index
|
|
$
|
100
|
|
|
$
|
108.41
|
|
|
$
|
110.79
|
|
|
$
|
122.16
|
|
|
$
|
134.29
|
|
|
$
|
79.25
|
|
|
Nasdaq Health Services
|
|
$
|
100
|
|
|
$
|
117.00
|
|
|
$
|
159.04
|
|
|
$
|
151.34
|
|
|
$
|
199.08
|
|
|
$
|
145.73
|
|
29
Recent Sales of Unregistered Securities
We have an Employee Stock Purchase Plan, also referred to herein as the ESPP, which permits
eligible employees, excluding executive officers, to purchase up to 700,000 shares of our common
stock. As a result of the previously disclosed administrative error in recordkeeping, the amount of
shares issued under the ESPP exceeded the amount of shares registered on Form S-8. We have
determined that the offer and sale of the shares and interests in the ESPP above the amount
registered were not exempt from registration under the Securities Act, and that such sales should
have been registered under the Securities Act. Under the applicable provisions of federal
securities laws, plan participants who purchased such unregistered shares of common stock had a
right to seek to rescind the transaction within one year following the date of purchase.
Prior to June 30, 2007, we sold 157,627 unregistered shares to plan participants. From July 1,
2007, through March 31, 2008, we sold 97,387 unregistered shares to plan participants in two
separate transactions. For the offering period ended June 30, 2007, we sold 56,266 shares at $18.75
per share. For the offering period ended December 31, 2007, we sold 41,121 shares at $27.10 per
share. On April 7, 2008, we filed a registration statement on Form S-8 with the SEC to register
400,000 shares of common stock that had been authorized for issuance by the Board of Directors and
approved by our stockholders, but had never been registered.
As of December 31, 2008, the aggregate purchase price subject to rescission was $1.1 million.
On January 1, 2009, this amount has been reclassified from temporary equity into shareholders’
equity as the ESPP participants’ rescission rights expired. As of the end of the rescission period,
ESPP participants rescinded purchases of 1,277 shares of common stock from the offering period
ended December 31, 2007. We are not obligated to repay ESPP participants in connection with the
rescission of any additional shares of common stock after December 31, 2008.
Item 6.
Selected Financial Data.
The following table sets forth selected financial data as of and for the years ended
December 31, 2004 through 2008. In 2004, we effected a three-for-two stock split that was paid in
the form of a 50% stock dividend. All historical earnings per share and share amounts have been
adjusted to reflect this stock split. The consolidated balance sheet data as of December 31, 2004
through 2007, excludes assets and liabilities from discontinued operations, which are discussed in
Note K to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Total net revenue
|
|
$
|
451,453
|
|
|
$
|
470,257
|
|
|
$
|
406,956
|
|
|
$
|
361,506
|
|
|
$
|
111,894
|
|
|
Total costs and expenses
|
|
$
|
695,582
|
|
|
$
|
448,770
|
|
|
$
|
393,950
|
|
|
$
|
331,662
|
|
|
$
|
96,864
|
|
|
Net (loss) earnings from continuing operations
|
|
$
|
(251,093
|
)
|
|
$
|
12,078
|
|
|
$
|
6,052
|
|
|
$
|
17,163
|
|
|
$
|
11,002
|
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
838
|
|
|
$
|
(42,077
|
)
|
|
$
|
(12,384
|
)
|
|
$
|
8,657
|
|
|
Net (loss) earnings
|
|
$
|
(251,093
|
)
|
|
$
|
12,916
|
|
|
$
|
(36,025
|
)
|
|
$
|
4,779
|
|
|
$
|
19,659
|
|
|
(Loss) earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(12.96
|
)
|
|
$
|
0.64
|
|
|
$
|
0.33
|
|
|
$
|
0.97
|
|
|
$
|
0.73
|
|
|
Diluted
|
|
$
|
(12.96
|
)
|
|
$
|
0.63
|
|
|
$
|
0.33
|
|
|
$
|
0.94
|
|
|
$
|
0.70
|
|
|
Total assets
|
|
$
|
324,546
|
|
|
$
|
609,636
|
|
|
$
|
549,599
|
|
|
$
|
515,750
|
|
|
$
|
487,327
|
|
|
Long-term obligations and capital leases, including current portion
|
|
$
|
149,207
|
|
|
$
|
152,946
|
|
|
$
|
159,002
|
|
|
$
|
168,223
|
|
|
$
|
157,517
|
|
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read
together with the consolidated financial statements and related notes included in this report. This
discussion contains forward-looking statements that are subject to risks and uncertainties. Our
actual results may differ materially from those anticipated in the forward-looking statements as a
result of certain factors, including, but not limited to, those contained in the discussion on
forward-looking statements below and those contained elsewhere in this report.
Overview
We operate our business in two segments — early stage and late stage. Our early stage segment
consists primarily of our Phase I clinical trial services and our bioanalytical laboratory
services, including early clinical pharmacology. Our late stage segment consists primarily of
Phase II through Phase IV clinical trial services and a comprehensive array of related services,
including data management, biostatistics, medical, scientific and regulatory affairs, clinical
information technology and consulting services. For additional information about our segments, see
Note M to the consolidated financial statements.
During 2006, we discontinued operations at our Miami and Ft. Myers facilities. All financial
results for the year ended December 31, 2008, include any residual activity from discontinued
operations, such as collection of outstanding accounts receivable and
property tax payments on the vacant land. During the year ended December 31, 2008, there was
no activity related to any discontinued operation that was considered material to the consolidated
financial statements taken as a whole. In addition, we have made certain balance sheet
reclassifications, primarily related to income taxes, to the 2007 financial information to conform
to the 2008 presentation.
30
Our net revenue consists primarily of fees earned for services performed under contracts with
branded pharmaceutical, biotechnology, medical device and generic drug companies. In our
late stage segment, we recognize revenue based on the proportional performance method, generally
using a combination of input and output measures that are specific to the services performed. In
addition, a portion of our contract fee is generally due upon signing of the contract, and the
majority of the contract fee is then paid in installments upon the achievement of certain agreed
upon performance milestones. In our early stage segment, we also recognize revenue based on the
proportional performance method, generally using output measures that are specific to the services
performed.
Relative to our early stage contracts, our late stage contracts are generally larger and
longer in duration, and our late stage segment typically receives larger advance payments. Our
contracts are generally terminable immediately or after a specified period following notice by the
client. These contracts usually require payment to us of expenses to complete a study and fees
earned to date and for activities necessary to conclude the program in an orderly way consistent
with wishes of the clients, safety of participants and applicable regulatory and good medical
practices. Most of the contracts in our early stage segment are of short duration; however, our
late stage segment typically performs services under long-term contracts, which are subject to a
greater risk of delay or cancellation. As of December 31, 2008, late stage segment projects had an
average duration of approximately 26 months.
In our late stage segment, we report revenue line items consisting of direct revenue and
reimbursed out-of-pocket expenses, together with an expense line item for reimbursable
out-of-pocket expenses, which consist of travel and other expenses that are reimbursed by our
clients.
We record our recurring operating expenses in three primary categories: (i) direct costs,
(ii) selling, general and administrative expenses and (iii) reimbursable out-of-pocket expenses.
Direct costs consist primarily of participant fees and associated expenses, direct labor and
employee benefits, facility costs, depreciation associated with facilities and equipment used in
conducting trials and other costs and materials directly related to contracts. Direct costs as a
percentage of net revenue vary from period to period due primarily to the varying mix of contracts
and services performed and to the percentage of revenues arising from our early stage operations,
which generally have higher direct costs as a percentage of revenue earned. Selling, general and
administrative expenses consist primarily of administrative payroll, except for the late stage
segment, overhead, advertising, legal and accounting expenses, travel, depreciation and
amortization of intangibles. The late stage segment includes all payroll-related costs as part of
direct costs, and all office costs and depreciation as part of selling, general and administrative
expenses.
The gross profit margins on our contracts vary depending upon the nature of the services we
perform for our clients. Gross profit margins for our early stage segment generally tend to be
higher than those for our late stage segment and other services we perform. Within our early stage
segment, our gross profit margins are generally higher for trials that involve a larger number of
participants, a longer period of study time or the performance of more tests. Gross profit margins
for our services to branded drug clients generally tend to be higher than those for generic drug
clients. In addition, our gross profit margins vary based upon our mix of domestic and
international business. Gross profit margins are calculated by dividing gross profit (direct
revenue less direct costs) by direct revenue.
Recent Events
On February 3, 2009, it was announced that affiliates of JLL, including Parent and Purchaser,
entered into the Merger Agreement with us whereby Parent will acquire us. The acquisition will be
carried out in two steps. The first step is the tender offer by Purchaser to purchase all of our
outstanding shares of common stock at a price of $5.00 per share, payable net to the seller in
cash. The Tender Offer expired on March 19, 2009 at 12:00 midnight New York City time. On March 20,
2009, Purchaser accepted for payment all validly tendered shares and announced that it will pay for
all such shares promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into us, with the
Company as the surviving corporation in the Merger. We expect that the Merger will be completed on
March 30, 2009 under short-form merger procedures provided by Delaware law. Following the Merger,
we will be a wholly-owned subsidiary of Parent and we will no longer have any publicly traded
shares. The transaction values our common stock at $100.5 million and will be financed by a $250.0
million equity commitment from funds managed by JLL, which includes the necessary funds to retire
our 2.25% senior convertible notes. The Merger is subject to customary conditions.
31
Critical Accounting Estimates
We make estimates and assumptions in the preparation of our consolidated financial statements
which affect the reported amounts of assets and liabilities as of the date of the consolidated
financial statements and revenues and expenses for the applicable period ended date. Future events
and their effects cannot be determined with certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results could differ from those estimates and such
differences may be material to our consolidated financial statements. Management continually
evaluates its estimates and assumptions which are based on historical experience and other factors
we believe to be reasonable under the circumstances. These estimates and our actual results are
subject to the “Risk Factors” contained in Item 1A of this report.
Management believes that the following items involve a high degree of judgment or complexity:
Revenue and Cost Recognition.
We recognize revenue from contracts, other than
time-and-material contracts, on a proportional performance basis. To measure performance on a given
date, we compare effort expended through that date to estimated total effort to complete the
contract. Historically, a majority of our direct revenue has been earned under contracts which
range in duration from a few weeks to a few years. In the late stage segment, the current average
length of a contract is approximately 26 months, but can be much longer. Service contracts
generally take the form of fee-for-service or fixed-price arrangements. In the case of
fee-for-service contracts, revenue is recognized as services are performed based upon, for example,
hours worked or samples tested. For long-term, fixed-price service contracts, revenue is recognized
as services are performed, with performance generally assessed using output measures such as
units-of-work performed to date compared with total units-of-work contracted. Changes in the scope
of work generally result in a renegotiation of the contract price. Renegotiated amounts are not
included in revenue until earned and realization is assured. Estimates of costs to complete are
made to provide, where appropriate, for losses expected on contracts. Costs are not deferred in
anticipation of contracts being awarded, but instead are expensed as incurred. In some cases, a
portion of the contract fee is paid at the time the trial is initiated. These advances are deferred
and recognized as revenue as services are performed or products are delivered, as discussed above.
Additional payments may be made based upon the achievement of performance-based milestones over the
contract duration. Our contracts are generally terminable immediately or after a specified period
following notice by the client. These contracts usually require payment to us of expenses to
complete a study and fees earned to date and for activities necessary to conclude the program in an
orderly way consistent with wishes of the clients, safety of participants and applicable regulatory
and good medical practices.
Direct costs include all direct costs related to contract performance and, in some cases, all
payroll-related costs. Selling, general and administrative expenses are charged to expense as they
are incurred. Changes in the scope of contracts may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Due to the inherent uncertainties
in estimating costs, it is possible that the estimates used will change in the near term and that
the change could be material. The uncertainties which can affect our estimates include changes in
scope of contracts and unforeseen costs which cannot be billed to the client, such as increased
costs associated with recruiting special populations for studies. Our estimates of these
uncertainties have not materially affected our revenue or cost recognition, and we do not
anticipate making material changes to our method of estimating costs in the future. As described
above, pass-through costs are included in revenue and direct costs and are reimbursed by our
clients.
Accounts receivable include unbilled amounts which represent services performed in excess of
amounts billed.
Collectibility of Accounts Receivable.
We base our allowance for doubtful accounts on
management’s estimates of the creditworthiness of our clients, analysis of delinquent accounts, the
payment histories of the accounts and management’s judgment with respect to current economic
conditions. We maintain an allowance for doubtful accounts based on historic collectibility and
specific identification of potential problem accounts. We believe the allowances are sufficient to
respond to normal business conditions. We review our accounts receivable aging on a regular basis
for past due accounts and we write off any uncollectible amounts against the allowance. Should
business conditions deteriorate or any major client default on its obligations to us, we may need
to significantly increase this allowance, which could have a negative impact on our operations.
Income Taxes.
Developing the provision for income taxes requires significant management
judgment, including the determination of foreign tax liabilities, deferred tax assets and
liabilities and any valuation allowances that might be required against the net deferred tax
assets. On a quarterly basis, we evaluate our ability to realize net deferred tax assets and adjust
the amount of our valuation allowance if necessary. We maintain operations in many countries and we
are subject to audit in each of the taxing jurisdictions in which we operate. Due to the complex
issues involved, any claims can require an extended period of time to resolve. In management’s
opinion, adequate provisions for income taxes have been made.
32
Our consolidated balance sheets reflect certain valuation allowances related to certain
U.S. operating losses and our ability to realize foreign tax loss carryforwards and research tax
credits in Canada carried forward and earned in the current year. If the facts and circumstances
utilized in developing the estimated level of valuation allowance
changes,
resulting increases or decreases in the valuation allowance could be required. Any future changes
in valuation allowance could have a material impact on our net earnings.
We have been, and we may continue to be, a party to foreign tax proceedings. We have
established an estimated income tax reserve to provide for potential adverse outcomes in future tax
proceedings. If our estimates prove to be inadequate, any future foreign tax proceedings
could have an impact on our results of operations. It is possible that changes in our estimates
could cause us to either materially increase or decrease the amount of our income tax reserve.
With regard to earnings from foreign operations, generally it is our policy to retain such
earnings in the country in which they were generated unless they can be repatriated without
significant tax consequences. This permits us to reduce accruing or recognizing as additional tax
expense the material U.S. income tax liabilities which would arise upon repatriation of these
earnings. Refer to Note O to the consolidated financial statements for our discussion regarding the
subsequent repatriation of foreign earnings to cover certain transaction related costs.
Goodwill.
On an annual basis or more frequently if impairment indicators arise, we assess the
composition of our assets and liabilities and the events that have occurred and the circumstances
that have changed since the most recent fair value determination, which is based on discounted cash
flows and other valuation techniques. If events occur or circumstances change that would more
likely than not reduce the fair value of goodwill below its carrying amount, goodwill is tested for
impairment. We recognize an impairment charge if the carrying value of the asset exceeds the fair
value determination. Refer to Note A to the consolidated financial statement for our discussion
regarding the non-cash impairment charge related to goodwill recorded during 2008.
Impairment of Assets.
We review long-lived assets and certain identifiable intangibles for
possible impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In evaluating the fair value and future benefits of intangible
assets, we perform an analysis of the anticipated undiscounted future net cash flows of the
individual assets over the remaining amortization period. We recognize an impairment charge if the
carrying value of the asset exceeds the expected future cash flows (undiscounted and without
interest). Refer to Note A to the consolidated financial statement for our discussion regarding the
non-cash impairment charges related to indefinite-lived assets recorded during 2008.
Share-Based Compensation.
We have granted stock options to our employees at exercise prices
equal to or greater than the fair value of the shares at the date of grant. Our plans also provide
for the granting of restricted shares, restricted stock units and other forms of equity
compensation in addition to stock options. Recognition of compensation expense requires the use of
estimates related to expected employee exercise, expected post-vesting employment termination
behavior and the expected volatility of the price of the underlying stock. Actual results could
differ from our estimates.
33
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following table sets forth our results of operations both numerically and as a percentage
of direct revenue for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Direct revenue
|
|
$
|
357,746
|
|
|
|
100.0
|
%
|
|
$
|
362,471
|
|
|
|
100.0
|
%
|
|
Direct costs
|
|
|
231,488
|
|
|
|
64.7
|
|
|
|
216,173
|
|
|
|
59.6
|
|
|
Selling, general and administrative expenses
|
|
|
121,884
|
|
|
|
34.1
|
|
|
|
114,411
|
|
|
|
31.6
|
|
|
Impairment of goodwill and indefinite-lived assets
|
|
|
248,503
|
|
|
|
69.5
|
|
|
|
—
|
|
|
|
—
|
|
|
Provision for settlement of litigation
|
|
|
—
|
|
|
|
—
|
|
|
|
10,400
|
|
|
|
2.9
|
|
|
Total other expense
|
|
|
(5,146
|
)
|
|
|
(1.4
|
)
|
|
|
(6,164
|
)
|
|
|
(1.7
|
)
|
|
(Loss) earnings from continuing operations before income taxes
|
|
|
(249,275
|
)
|
|
|
(69.7
|
)
|
|
|
15,323
|
|
|
|
4.2
|
|
|
Income tax expense
|
|
|
90
|
|
|
|
—
|
|
|
|
2,340
|
|
|
|
0.6
|
|
|
(Loss) earnings from continuing operations before minority interest in joint venture
|
|
|
(249,365
|
)
|
|
|
(69.7
|
)
|
|
|
12,983
|
|
|
|
3.6
|
|
|
Minority interest in joint venture
|
|
|
1,728
|
|
|
|
0.5
|
|
|
|
905
|
|
|
|
0.2
|
|
|
Net (loss) earnings from continuing operations
|
|
|
(251,093
|
)
|
|
|
(70.2
|
)
|
|
|
12,078
|
|
|
|
3.3
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
—
|
|
|
|
|
|
|
|
838
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(251,093
|
)
|
|
|
(70.2
|
)%
|
|
$
|
12,916
|
|
|
|
3.6
|
%
|
|
(Loss) earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(12.96
|
)
|
|
|
|
|
|
$
|
0.64
|
|
|
|
|
|
|
Diluted
|
|
$
|
(12.96
|
)
|
|
|
|
|
|
$
|
0.63
|
|
|
|
|
|
Direct Revenue
Direct revenue, which does not include reimbursed out-of-pocket expenses, was $357.7 million
for the year ended December 31, 2008, a decrease of 1.3% from $362.5 million for the corresponding
2007 period. This decrease is attributable to lower revenues in the late stage segment primarily
due to previously disclosed project cancellations and postponements, partially offset by growth in
the early stage segment. Direct revenue for the year ended December 31, 2008 is generated from a
diversified client base. Our largest client represented 5.5% of total direct revenue, the top five
clients represented 19.3%, and the top ten clients represented 30.5%. For the year ended December
31, 2008, direct revenue attributable to large pharmaceutical clients represented 31.9%; small and
medium sized pharmaceutical clients represented 27.1%; generic drug clients represented 20.0%;
biotech clients represented 18.0%; and other clients, such as medical device manufacturers,
represented 3.0%.
Direct revenue in the early stage segment was $154.3 million for the year ended December 31,
2008, compared to $137.8 million for the corresponding 2007 period. This increase of 12.0% is
primarily attributable to higher clinic revenues resulting from a change in the mix of the types of
studies from low-end generics to high-end, more complex generics and innovators studies, partially
offset by lower sample volume throughput in the bioanalytical laboratories compared to the
corresponding 2007 period. For the year ended December 31, 2008, clinic revenue was $75.2 million
and laboratory revenue was $79.1 million, compared to clinic revenue of $55.3 million and
laboratory revenue of $82.5 million in the corresponding 2007 period. Direct revenue in the late
stage segment was $203.4 million for the year ended December 31, 2008, compared to $224.7 million
in the corresponding 2007 period. This decrease of 9.4% is primarily the result of previously
disclosed project cancellations and postponements. We believe that these cancellations were
primarily due to issues surrounding the efficacy of the drugs, as well as business decisions made
by the sponsor companies and not related to our performance. For the year ended December 31, 2008,
we estimate the combined cancellations and postponements negatively impacted direct revenue by
$40.0 million. As a result of the increase in project cancellations, we modified our forecasted
cancellation rate from 15% to 25% to reflect current business and macro economic conditions.
Although we have been impacted by the unusually high level of cancellations, our late stage segment
backlog increased $65.7 million compared to December 31, 2007. Further, our proposal volume for the
year ended December 31, 2008 has increased approximately 19% compared to the corresponding 2007
period.
For the year ended December 31, 2008, direct revenue was $140.8 million from U.S. operations
and $216.9 million from foreign operations compared to $165.8 million from U.S. operations and
$196.7 million from foreign operations in the corresponding 2007 period.
34
Direct Costs
Direct costs increased to $231.5 million for the year ended December 31, 2008, compared to
$216.2 million for the corresponding 2007 period. For the year ended December 31, 2008, direct
costs as a percentage of direct revenue increased to 64.7% from 59.6% in the corresponding 2007
period. This increase is attributable to higher costs in the early stage segment, partially offset
by a 1.1% decrease in direct costs in the late stage segment. Increased direct costs in the early
stage segment are due to higher expenses related to the expansion of our Princeton laboratory and
the operations of both our clinics and laboratories, including increased volunteer expenses and lab
supplies compared to the corresponding 2007 period.
Gross Profit Margins
Gross profit margins as a percentage of direct revenue was 35.3% for the year ended December
31, 2008, compared to 40.4% for the corresponding 2007 period. Since we perform a wide variety of
services which carry different gross margins, our margins will vary from quarter-to-quarter and
year-to-year based upon the mix of these contracts, our capacity levels at the time we begin the
projects and the amount of revenue generated for each type of service we perform. Even within
category types, the amount of gross margins generated might vary due to the unique nature and size
of each contract and project.
During the year ended December 31, 2008, the early stage segment had a lower gross profit
margin as compared to the corresponding 2007 period primarily due to higher direct costs, partially
offset by higher direct revenue. Gross profit margins in the late stage segment decreased as a
result of the previously mentioned project cancellations and postponements, partially offset by
lower direct costs due to certain cost savings initiatives implemented throughout the year.
In January 2008, we acquired certain assets of Princeton Bioanalytical Laboratory, LLC,
including laboratory equipment and procedural documentation. With the development of the
laboratory, we will add macromolecule analysis capabilities to our existing small molecule
services. In addition, the acquisition will facilitate a full immunochemistry laboratory and will
augment our ligand-binding laboratory in Canada.
During the third quarter 2008, we initiated an expansion of our laboratory space at Taylor
Technology, Inc., one of our subsidiaries, that specializes in bioanalytical mass spectrometry and
immunochemistry services. The additional space will accommodate the growth in our large molecule
and small molecule practice. With the expansion, we anticipate consolidating our Keystone
Analytical, Inc. laboratory during the first half 2009. As part of the consolidation, employees of
Keystone Analytical, Inc. will likely transition over to the new laboratory space to ensure a
transition of existing clients and to accommodate the anticipated new business.
During the fourth quarter 2008, we closed one of our laboratories at Anapharm, Inc. located in
Richmond Hill, Ontario, Canada. This strategic closure of space that was shared with Anapharm’s
wholly-owned subsidiary, Synfine, Inc., enables Synfine to expand its business into the vacated
space. The expansion will allow Synfine the ability to process customer requests for larger size
chemical synthesis orders on a multi-kilogram scale. We expect that the expansion will have
estimated capital requirements of approximately $3.0 million Canadian dollars. We have not
committed to a timeframe for the capital additions.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses increased to $121.9 million for the
year ended December 31, 2008, compared to $114.4 million for the corresponding 2007 period. As
a percentage of direct revenue, SG&A expenses increased to 34.1% for the year ended December 31,
2008 from 31.6% in the corresponding 2007 period. The increase in SG&A expenses is primarily
attributable to charges incurred related to one-time termination benefits and office closings.
During the year ended December 31, 2008, in connection with our first quarter 2008 workforce
reduction and other related actions in the subsequent interim periods, we incurred severance costs
of $3.1 million, of which $0.8 million impacted the early stage segment and $2.3 million impacted
the late stage segment. Further, during the year ended December 31, 2008, we incurred expenses of
$1.5 million, primarily in connection with the office closings in Washington D.C. and Australia and
the consolidation of offices in North Carolina. Of the total expenses incurred, $1.4 million
impacted the late stage segment. Our regulatory consulting staff in Washington D.C. and our
clinical research personnel in Australia will continue as full-time home-based employees. These
actions were a result of our efforts to streamline the organization to enhance our long-term
efficiency. The favorable impact of implementing these cost reduction strategies were realized
beginning in the third quarter 2008. For 2009, the total projected cost savings of these actions
are expected to be approximately $9.6 million. Additional charges may be incurred to right-size our
organization.
35
Corporate SG&A expenses for the year ended December 31, 2008 remained consistent at $24.5
million compared to the corresponding 2007 period. For the year ended December 31, 2008, non-cash
compensation costs increased $1.0 million and professional fees increased $0.4 million, which were
offset by a reduction in compensation related benefits of $1.5 million compared to the
corresponding 2007 period. In connection with our registration statement on Form S-4, filed on
November 20, 2008, we incurred $1.8 million of expenses, primarily related to professional fees.
Overall, we continue to focus on cost containment initiatives and infrastructure improvements
to gain efficiencies and improve profit margins. We believe that margins may improve as early as
2009 despite the current overall economic environment. This expectation is driven by the level and
mix of our backlog and tangible near term project start ups.
Impairment of Goodwill and Indefinite-Lived Assets
As of September 30, 2008, we performed an interim goodwill impairment test based on a
triggering event resulting from the significant decrease in the price of our outstanding common
stock and overall market capitalization during the third quarter 2008. Based on the guidance of
SFAS 142, we performed first step impairment measurements for all of our reporting units and second
step measures on two reporting units, PharmaNet and Keystone. During the process, we followed all
relevant guidance while conducting the interim goodwill impairment test; however, some estimates
and assumptions were used by management in order to reach a conclusion regarding fair value and the
related interim non-cash impairment charge. Based on the results of the interim goodwill impairment
test, it was determined that the fair value of the PharmaNet and Keystone reporting units were
significantly less than their carrying values. As a result, we made the determination to write down
the value of goodwill and indefinite-lived assets related to those reporting units. The total
amount of the estimated non-cash impairment charge during the three months ended September 30, 2008
was $210.6 million, of which $201.0 million of goodwill and $6.3 million of indefinite-lived asset
impairment charges related to the PharmaNet reporting unit, or the late stage segment, and $3.3
million of goodwill related to the Keystone reporting unit, or the early stage segment. As of
September 30, 2008, the goodwill of the Keystone reporting unit was fully impaired.
As of December 31, 2008, we performed our annual goodwill impairment test. We performed first
step impairment measurements for our remaining reporting units and second step measures on two
reporting units, PharmaNet and Anapharm. During the process, we followed all relevant guidance
while conducting the annual goodwill impairment test. Based on the results of the annual goodwill
impairment test, it was determined that the fair value of the PharmaNet and Anapharm reporting
units were less than their carrying values. As a result, we made the determination to write down
the value of goodwill and indefinite-lived assets related to those reporting units. The total
amount of the non-cash impairment charge during the three months ended December 31, 2008 was $37.9
million, of which $15.8 million of goodwill and $5.2 million of indefinite-lived asset impairment
charges related to the PharmaNet reporting unit, or the late stage segment, and $16.9 million of
goodwill related to the Anapharm reporting unit, or the early stage segment. As of December 31,
2008, the goodwill of the Anapharm reporting unit was fully impaired.
Provision for Settlement of Litigation
During the year ended December 31, 2007, we recorded a charge of $10.4 million for the
settlement of the securities class action lawsuit and other litigation. There was no charge
recorded for the year ended December 31, 2008 since we settled the securities class action lawsuit
during the first quarter 2008 and settled the derivative litigation during the fourth quarter 2008.
The securities class action lawsuit is currently being appealed. For further discussion regarding
these matters, see Item 3 of this report and Note G to the consolidated financial statements.
Interest Income and Interest Expense
Interest income decreased to $1.5 million for the year ended December 31, 2008, compared to
$2.1 million in the corresponding 2007 period. This decrease is primarily attributable to lower
average cash and cash equivalent balances on hand and lower interest rates compared to the
corresponding 2007 period. We expect interest income to decrease in the future as a result of lower
interest rates and our conservative investment approach.
Interest expense decreased to $6.1 million for the year ended December 31, 2008, compared to
$6.3 million in the corresponding 2007 period. This decrease is primarily attributable to a
reduction of interest expense on our line of credit as there were no borrowings under the line
during the year ended December 31, 2008. Depending on when we settle our 2.25% convertible senior
notes payable due 2024, or the Notes, we may incur a significant amount of non-cash interest
expense in future interim periods based upon the adoption of FSP APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement).” Refer to Note A to the consolidated financial statements for our
discussion regarding new accounting pronouncements.
36
Foreign Currency Exchange Transactions
We do not enter into currency transactions with the intent of speculating or trading. Our
hedging program is designed to minimize the foreign exchange gain or loss reported in the statement
of operations. Our consolidated financial statements are denominated in U.S. dollars. Accordingly,
changes in exchange rates between the applicable foreign currency and the U.S. dollar affect the
translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of
reporting in the consolidated financial statements. Our foreign subsidiaries translate their
financial results from local currency into U.S. dollars in the following manner: (a) income
statement accounts are translated at average exchange rates for the period; (b) balance sheet asset
and liability accounts are translated at end of period exchange rates; and (c) equity accounts are
translated at historical exchange rates. Translation in this manner affects the stockholders’
equity account referred to as accumulated other comprehensive earnings (loss). This account exists
only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep in agreement
the foreign subsidiaries’ balance sheets. If foreign exchange rates remained at the 2007 year-end
spot exchange rate for translation, early stage revenues for the year ended December 31, 2008 would
have been higher by $9.2 million when translated into U.S. dollars, and late stage revenues for the
year ended December 31, 2008 would have been lower by $2.9 million when translated into U.S.
dollars when compared to the reported results. Similarly, early stage direct costs for the year
ended December 31, 2008 would have been higher by $6.7 million and late stage direct costs would
have been higher by $0.7 million when compared to the reported results. Further, early stage SG&A
expenses for the year ended December 31, 2008 would have been higher by $2.3 million and late stage
SG&A expenses for the year ended December 31, 2008 would have been higher by $0.3 million when
compared to the reported results. The net effect on loss from operations from translation of
functional currency to reporting currency for the year ended December 31, 2008 was an increase in
earnings of $0.2 million in the early stage and a decrease in earnings of $3.9 million in the late
stage.
Foreign currency exchange transaction loss was $0.8 million for the year ended December 31,
2008, compared to a loss of $2.1 million in the corresponding 2007 period. This change was
primarily due to improved hedging and the U.S. dollar strengthening approximately 24.6% against the
Canadian dollar and 4.5% against the Euro and weakening 6.2% against the Swiss Franc during the
year ended December 31, 2008, when comparing year-end spot rates for the respective years. Within
our early stage segment operating in Canada, essentially all costs are incurred in Canadian
dollars, while a significant portion of direct revenue transactions are denominated either in U.S.
dollars or Euros. Similarly, in the late stage segment in Europe, costs are primarily incurred in
Euros and Swiss Francs, while a significant portion of direct revenue transactions are denominated
in U.S. dollars. During the year ended December 31, 2008, we entered into foreign currency forward
and swap contracts to manage exposure related to early and late stage balance sheet positions that
were denominated in currencies other than the functional currency. On November 28, 2008, due to the
collateral restrictions under our Credit Facility, we lost the ability to enter into foreign
currency forward contracts limiting our hedging program. As a result, we entered into option
contracts, at a higher premium, to continue to mitigate our foreign currency exposures during
December 2008 and subsequent. Due to the nature and short-term duration of these contracts, we did
not elect to apply hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” for these transactions.
Income Taxes
Our effective tax rate for 2008 was an expense of 0.04% compared to an expense 15.2% in 2007.
The 2007 effective tax rate included the benefit of utilizing $22.8 million of the U.S. federal
loss carryforward and the benefit associated with a $7.8 million increase in the value of the net
deferred tax asset relating to Canadian taxes. The 2008 result was primarily attributable to
certain discrete items, continued losses on domestic operations and a significant permanent
book-to-tax difference relating to the impairment charge related to goodwill and indefinite-lived
assets, which is not deductible for tax purposes.
As of December 31, 2008, we had U.S. federal net operating loss carryforwards of
$51.0 million, state net operating loss carryforwards of $68.9 million and foreign net operating
loss carryforwards of $1.7 million that are available to offset future liabilities for income
taxes. We generally maintain a valuation allowance against these carryforwards, net of available
carryback claims, based on an assessment that it is more likely than not that these benefits will
not be realized. The U.S. net operating loss carryforward is further subject to limitation under
Internal Revenue Code §382 and will begin to expire in 2026. The state net operating losses will
begin to expire in 2010.
We receive significant tax credits from the government of Canada relating to our research and
development expenses. These credits lower our tax liability in Canada. As of December 31, 2008, the
total gross balance of the research and development federal tax credits carryforward was
$35.3 million.
37
We expect the nature of our Canadian early stage business and the generation of significant
tax credits will continue; however, we cannot be assured of the future amount of these credits due
to the mix of contracts and the related amounts of research and development activity. Further, we
have provided a valuation allowance against a portion of these credits as the amount of credits
earned currently exceeds projected taxable income in Canada for which such credits can be used to
reduce taxes.
Our late stage entity, PharmaNet, generates a significant portion of its net earnings from
foreign operations. Its non-U.S. and non-Canadian operations are based in Zurich, Switzerland,
where the effective tax rate is approximately 10%. The Swiss office subcontracts work to the
non-U.S. and non-Canadian PharmaNet offices. Fees are based on a reimbursement to these offices of
their operating costs, plus a fair markup based on appropriate transfer pricing comparables. The
residual income in these non-U.S. and non-Canadian offices is taxed at statutory rates which range
from 10% to 35%. We generally have elected under APB Opinion No. 23, “Accounting for Income Taxes —
Special Areas,” to deem earnings and profits related to foreign subsidiaries as permanently
reinvested, accordingly, no provision has been recorded for U.S. income taxes that might result
from repatriation of these earnings. The undistributed earnings of foreign subsidiaries as of
December 31, 2008, were $88.3 million. On March 19, 2009, a dividend of $22.0 million was paid to
us from our Swiss affiliate. We had not established a provision for U.S. income taxes on such
dividend amounts. We do not anticipate that any significant U.S. income taxes will be due on such
dividend given the availability of the Company’s previously unbenefited net operating losses, as
well as the potential ability to utilize foreign tax credits. Subsequent to this dividend, our
undistributed earnings, for which no provision for U.S. income taxes has been established, was
$66.3 million.
We adopted the provisions of Financial Accounting Standards Board, or FASB, Interpretation
No. 48, or FIN 48, effective January 1, 2007. As of December 31, 2008, the total gross amount of
reserves for income taxes, reported in other liabilities in the consolidated balance sheets, was
$8.1 million. Any prospective adjustments to reserves for income taxes will be recorded as an
increase or decrease to the provision for income taxes and will impact our effective tax rate. In
addition, we accrue interest and penalties related to reserves for income taxes in the provision
for income taxes. The gross amount of interest accrued, reported in other liabilities, was
$1.9 million as of December 31, 2008, of which $0.9 million was recognized in 2008.
In 2008, the net increase in the reserve for unrecognized tax benefits was $0.9 million, which
principally related to an increase in certain Canadian tax liabilities. Any future changes in the
amount of unrecognized tax benefits would impact the effective rate of the Company. Over the next
twelve months, it is reasonably possible that the uncertainty surrounding a portion of the reserve
for unrecognized tax benefits would be resolved; however, we do not expect the change to have a
significant impact on our results of operations or financial position.
We remain subject to examination in federal, state and foreign jurisdictions in which we
conduct operations and file tax returns. We believe that the results of current or any prospective
audits will not have a material effect on our financial position or results of operations as
adequate reserves have been provided to cover any potential exposures related to these audits.
We operate in the U.S. and in numerous taxing jurisdictions worldwide, many with lower tax
rates than the U.S. We expect (i) the nature of Anapharm’s business to continue to generate and
benefit from Canadian tax credits (ii) PharmaNet to continue generating the majority of its profits
in taxing jurisdictions with lower effective tax rates. As discussed above, we also have valuation
allowances against certain material deferred tax assets. Hence, we cannot be certain that the
changes in the operating income of our operations, shifts in the location of the performance of
work or other expected factors such as FIN 48 will not adversely impact the effective tax rate.
Our future effective tax rate is also dependent on a number of other factors, including:
|
|
•
|
|
the relative profits generated primarily in the U.S., Canada and Europe,
|
|
|
•
|
|
our ability to utilize Canadian tax credits,
|
|
|
•
|
|
the applicable foreign tax rates in effect,
|
|
|
•
|
|
our ability to generate U.S. taxable income to utilize net operating loss carryovers and
thereby decrease the valuation allowance.
|
38
Earnings (Loss) Per Share
The weighted average number of shares outstanding used in computing earnings (loss) per share
on a diluted basis was 19.4 million shares for year ended December 31, 2008, an increase from
19.0 million shares in the corresponding 2007 period. This increase resulted primarily from stock
option exercises, the issuance of stock options and restricted stock units, the issuance of stock
under the ESPP and the issuance of common stock in connection with the settlement of the class
action litigation.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table sets forth our results of operations both numerically and as a percentage
of direct revenue for 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Direct revenue
|
|
$
|
362,471
|
|
|
|
100.0
|
%
|
|
$
|
302,385
|
|
|
|
100.0
|
%
|
|
Direct costs
|
|
|
216,173
|
|
|
|
59.6
|
|
|
|
182,679
|
|
|
|
60.4
|
|
|
Selling, general and administrative expenses
|
|
|
114,411
|
|
|
|
31.6
|
|
|
|
98,827
|
|
|
|
32.7
|
|
|
Impairment of goodwill and indefinite-lived assets
|
|
|
—
|
|
|
|
—
|
|
|
|
7,873
|
|
|
|
2.6
|
|
|
Provision for settlement of litigation
|
|
|
10,400
|
|
|
|
2.9
|
|
|
|
—
|
|
|
|
—
|
|
|
Total other expense
|
|
|
(6,164
|
)
|
|
|
(1.7
|
)
|
|
|
(9,821
|
)
|
|
|
(3.2
|
)
|
|
Earnings from continuing operations before income taxes
|
|
|
15,323
|
|
|
|
4.2
|
|
|
|
3,185
|
|
|
|
1.0
|
|
|
Income tax expense (benefit)
|
|
|
2,340
|
|
|
|
0.6
|
|
|
|
(3,558
|
)
|
|
|
(1.2
|
)
|
|
Earnings from continuing operations before minority interest in joint venture
|
|
|
12,983
|
|
|
|
3.6
|
|
|
|
6,743
|
|
|
|
2.2
|
|
|
Minority interest in joint venture
|
|
|
905
|
|
|
|
0.2
|
|
|
|
691
|
|
|
|
0.2
|
|
|
Net earnings from continuing operations
|
|
|
12,078
|
|
|
|
3.3
|
|
|
|
6,052
|
|
|
|
2.0
|
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
838
|
|
|
|
|
|
|
|
(42,077
|
)
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
12,916
|
|
|
|
3.6
|
%
|
|
$
|
(36,025
|
)
|
|
|
(11.9
|
)%
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.63
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
|
|
Direct Revenue
Direct revenue, which does not include reimbursed out-of-pocket expenses, was $362.5 million
for the year ended December 31, 2007, an increase of 19.9% from $302.4 million for the year ended
December 31, 2006. This increase is attributable to growth in both segments, with early stage
contributing 38% and late stage contributing 62% of direct revenues in 2007.
Direct revenue in the early stage segment was $137.8 million for the year ended December 31,
2007, compared to $103.3 million in 2006. This increase of 33.4% is primarily attributable to
higher direct revenue in the laboratories and clinics and a favorable foreign currency exchange, or
FX, impact of $8.4 million. The performance of our bioanalytical laboratories was strong, with
sample volumes up 17% in 2007 compared to the prior year. Direct revenue in the late stage segment
was $224.7 million for the year ended December 31, 2007, compared to $199.1 million in 2006. This
increase of 12.8% is the result of the late stage segment performing more clinical activity
compared to the prior year. In addition, the late stage segment benefited from a favorable FX
impact of $2.3 million in 2007.
For the year ended December 31, 2007, direct revenue was $165.8 million from U.S. operations
and $196.7 million from foreign operations compared to $133.7 million from U.S. operations and
$168.7 million from foreign operations in 2006.
Direct Costs
Direct costs increased to $216.2 million for the year ended December 31, 2007, compared to
$182.7 million for the prior year. For the year ended December 31, 2007, direct costs as a
percentage of revenue decreased slightly to 59.6% from 60.4% in 2006. The change in direct costs as
a percentage of revenue is attributable to slight decreases in the both the early stage and late
stage segments. Increased direct costs in the early stage segment are primarily due to new
facilities in Quebec City and Toronto. Increased costs in the late stage segment are primarily
attributable to our investments in personnel and is consistent with our worldwide strategy to be
competitive for the large global programs.
For the year ended December 31, 2007, we recorded $4.0 million of depreciation expense in
direct costs compared to $3.5 million in 2006.
39
Gross Profit
Gross profit margins as a percentage of direct revenue for the year ended December 31, 2007,
increased to 40.4% from 39.6% for the prior year. Since we perform a wide variety of services, all
of which have different gross margins, our margins vary from quarter-to-quarter and year-to-year
based upon the mix of contracts, our capacity levels at the time we begin the projects and the
amount of revenue generated for each type of service we perform. Even within category types, gross
margins generated may vary due to the unique nature and size of each contract and project we
undertake. These factors could impact our future profit margins and profit comparisons to
historical levels.
During the year ended December 31, 2007, the early stage segment had higher than expected
direct costs; however, these increased costs were offset by higher revenue which resulted in
slightly increased profit margins compared to the corresponding 2006 period. A number of clinical
projects were either rescheduled, postponed or cancelled during the latter part of the fourth
quarter of 2007. Our clinics were staffed to run these studies and when the projects were postponed
to subsequent quarters, the clinics operated at a lower than expected utilization level, which
negatively impacted the segment’s margins. Profit margins in the late stage segment remained
relatively flat at approximately 39% as utilization levels have not reached their fullest
potential.
Selling, General and Administrative Expenses
SG&A expenses increased to $114.4 million, an increase of 15.8%, for the year ended
December 31, 2007, compared to $98.8 million for the prior year. As a percentage of direct revenue,
SG&A expenses decreased to 31.6% in 2007 from 32.7% in 2006. The increase in total SG&A expenses
from 2006 to 2007 is primarily attributable to additional expenditures consistent with the
expansion of our business, including additional administrative and other personnel costs, health
and casualty insurance, increased sales, marketing and business development efforts and facility
costs related to the move in 2007 to new Quebec City and Toronto facilities. Moving costs to the
Quebec City facility were $0.5 million for the year ended December 31, 2007.
Corporate SG&A expenses for the year ended December 31, 2007, excluding $10.4 million for the
provision for the settlement of the securities and class action lawsuit and other related
litigation, were $24.5 million compared to $21.0 million in 2006. This increase of $3.5 million is
attributed to $0.9 million of executive severance, $1.2 million in compensation-related costs,
$0.6 million in professional fees and $0.5 million of facilities expenses, offset by a decrease in
legal fees related to the SEC investigation, which were $1.9 million in 2007 compared to
$2.5 million in 2006.
For the year ended December 31, 2007, depreciation expense of $8.7 million was included in
SG&A expenses compared to $7.9 million in 2006.
Provision for Settlement of Litigation
For the year ended December 31, 2007, we recorded a charge of $10.4 million for the settlement
of the securities class action lawsuit and other related litigation. On March 10, 2008, the Court
approved the securities class action settlement. The securities class action lawsuit is currently
being appealed. For further discussion regarding these matters, see Item 3 of this report and Note
G to the consolidated financial statements.
Interest Income and Interest Expense
Interest income for the year ended December 31, 2007, was $2.1 million compared to
$1.6 million in 2006. This increase is primarily attributable to higher interest rates available on
cash balances and investments and slightly higher average cash balances during 2007 compared to
2006.
Interest expense decreased to $6.3 million for the year ended December 31, 2007, compared to
$8.1 million in 2006. This decrease is primarily attributable to a reduction of interest expense on
our line of credit due to substantially lower loan balances offset by higher interest rates, and
due to a reduction in write-offs of deferred financing cost from the restructuring of the Credit
Facility and the size of the line of credit. In May 2006, we agreed to permanently reduce the size
of the Credit Facility from $90.0 million to $45.0 million. As a result of this reduction, we wrote
off $1.2 million of deferred financing costs related to the Credit Facility in the second quarter
2006.
As of December 31, 2007, the balance outstanding on our Credit Facility was zero. The current
interest rate on this variable facility is 9.5% on the revolving line of credit, excluding interest
expense related to the unused borrowing capacity on the line. The deferred financing costs relating
to the convertible notes are being amortized to interest expense over a period of three years, and
relating to the Credit Facility over a period of four years.
40
Foreign Currency Exchange Transactions
We do not enter in currency transactions with the intent of speculating or trading. Our
consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange
rates between the applicable foreign currency and the U.S. dollar affect the translation of each
foreign subsidiary’s financial results into U.S. dollars for purposes of reporting in the
consolidated financial statements. Our foreign subsidiaries translate their financial results from
local currency into U.S. dollars in the following manner: (a) income statement accounts are
translated at average exchange rates for the period; (b) balance sheet asset and liability accounts
are translated at end of period exchange rates; and (c) equity accounts are translated at
historical exchange rates. Translation in this manner affects the shareholders’ equity account
referred to as the foreign currency translation adjustment account. This account exists only in the
foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep in agreement the foreign
subsidiaries’ balance sheets. If foreign exchange rates remained at the 2006 year-end spot exchange
rate for translation, early stage 2007 revenues would have been reduced by $8.4 million when
translated into U.S. dollars, and late stage 2007 revenues would have been reduced by $2.3 million
when translated into U.S. dollars. Similarly, early stage 2007 direct costs would have been reduced
by $5.6 million and late stage 2007 direct costs would have been reduced by $1.3 million. Further,
SG&A expenses for 2007 early stage would have been reduced by $3.2 million and late stage would
have been reduced by $1.5 million. The net effect on 2007 earnings from operations from translation
of functional currency to reporting currency was a loss of $0.5 million in both the early stage and
the late stage.
Foreign currency exchange transaction losses decreased to $2.1 million for the year ended
December 31, 2007, compared to $3.3 million in 2006. These losses were due to the U.S. dollar
weakening approximately 20% against the Canadian dollar, 11% against the Euro and 8% against the
Swiss Franc during 2007. Within our early stage segment operating in Canada, essentially all costs
are in Canadian dollars, while a significant portion of direct revenue is either in U.S. dollars or
Euros. Similarly, in the late stage segment in Europe, costs are primarily in Euros and Swiss
Francs, while a significant portion of direct revenue is in U.S. dollars. During the year ended
December 31, 2007, we entered into foreign currency transactions to hedge exposure related to
receivables denominated in currencies other than the functional currency. We did not elect to apply
hedge accounting for these transactions.
Income Taxes
Our effective tax rate for 2007 was an expense of 15.2% compared to a benefit of 111.7% in
2006. The effective tax rate for 2006 included the impact of recording a valuation allowance of
$2.3 million against deferred tax assets relating to federal and state operating loss carryforwards
and an allowance of $11.1 million relating to Canadian federal tax credit carryforwards. The 2007
effective tax rate included the benefit of utilizing $22.8 million of the U.S. federal loss
carryforward and the benefit associated with a $7.8 million increase in the value of the net
deferred tax asset relating to Canadian taxes. This result was primarily attributable to certain
discrete items, a shift in the proportion of earnings from domestic and foreign operations and our
estimate of the future value of the Canadian tax credits.
As of December 31, 2007, we had U.S. federal net operating loss carryforwards of
$21.9 million, state net operating loss carryforwards of $36.3 million and foreign net operating
loss carryforwards of $2.3 million that are available to offset future liabilities for income
taxes. We maintain a valuation allowance against these carryforwards, net of available carryback
claims, based on an assessment that it is more likely than not that these benefits will not be
realized. The U.S. net operating loss carryforward is subject to limitation under Internal Revenue
Code §382 and will expire in 2026. The state net operating losses will begin to expire in 2010 and
the foreign net operating losses began to expire in 2006.
We receive significant tax credits from the government of Canada relating to our research and
development expenses. As of December 31, 2007, the total gross balance of deferred tax assets was
$36.0 million. These credits and tax assets lowered our tax liability in Canada. We have provided a
valuation allowance of $16.0 million against certain of these credits as the amount of credits
earned currently exceeds projected taxable income in Canada for which such credits can be used to
reduce taxes.
Our late stage entity, PharmaNet, generates a significant portion of its net earnings from
foreign operations. Its non-U.S. and non-Canadian operations are based in Zurich, Switzerland,
where the effective tax rate is approximately 10%. The Swiss office subcontracts work to the
non-U.S. and non-Canadian PharmaNet offices. Fees are based on a reimbursement to these offices of
their operating costs, plus a fair markup based on appropriate transfer pricing comparables. The
residual income in these non-U.S. and non-Canadian offices is taxed at statutory rates which range
from 10% to 37%. We have elected to permanently reinvest earnings and
profits related to foreign subsidiaries, accordingly, no provision has been recorded for
U.S. income taxes that might result from repatriation of these earnings. The undistributed earnings
of foreign subsidiaries as of December 31, 2007, were $83.0 million.
41
We adopted the provisions of FIN 48 effective January 1, 2007. Upon adoption, we recognized
the cumulative effect of the change in accounting as a reduction in retained earnings of
$2.9 million, which together with a previously existing income tax liability of $3.2 million
resulted in a total liability for unrecognized tax benefits in the amount of $6.1 million related
to U.S. and foreign operations. As of December 31, 2007, the total gross amount of reserves for
income taxes, reported in other liabilities in the consolidated balance sheets, was $7.2 million.
Any prospective adjustments to reserves for income taxes will be recorded as an increase or
decrease to the provision for income taxes and will impact our effective tax rate. In addition, we
accrue interest related to reserves for income taxes in the provision for income taxes and we
record any associated penalties in other income (expense). The gross amount of interest accrued,
reported in other liabilities, was $1.0 million as of December 31, 2007, of which $0.5 million was
recognized in 2007.
We remain subject to potential examination in federal, state and foreign jurisdictions in
which we conduct operations and file tax returns.
Earnings (Loss) Per Share
The weighted average number of shares outstanding used in computing earnings (loss) per share
on a diluted basis increased to 19.0 million shares for the year ended December 31, 2007, from
18.4 million shares in 2007. This increase resulted primarily from stock option exercises and the
issuance of restricted shares and restricted stock units.
Effects of Inflation
Our business and operations have not been materially affected by inflation during the periods
for which financial information is presented in this report.
Liquidity and Capital Resources
As of December 31, 2008, cash and cash equivalents totaled $63.8 million, compared to cash,
cash equivalents and marketable securities of $80.2 million as of December 31, 2007. Working
capital decreased to a negative $41.7 million as of December 31, 2008, compared to working capital,
excluding the assets and liabilities from discontinued operations of $81.9 million as of December
31, 2007. The decrease in working capital is primarily due to the change in the balance sheet
classification of our Notes, from long-term to short-term, as of December 31, 2008. For the year
ended December 31, 2008, net cash used in operating activities was $10.4 million compared to net
cash provided by operating activities from continuing operations of $44.5 million for the prior
year. This change is primarily due to decreases in net earnings from continuing operations of
$15.5 million, excluding a non-cash impairment charge related to goodwill and indefinite-lived
assets of $248.5 million and operating liabilities of $43.6 million, partially offset by decreases
in operating assets of $11.3 million. During the year ended December 31, 2008, we made cash
payments of $3.7 million and issued common stock valued at $4.0 million to the plaintiffs in the
settlement of the class action litigation. Such amounts had been recorded as accrued liabilities in
the consolidated balance sheet as of December 31, 2007.
For the year ended December 31, 2008, net cash used in investing activities was $4.3 million
compared to net cash used in investing activities from continuing operations of $7.6 million for
the corresponding 2007 period. This change was primarily due to a decrease in purchases of property
and equipment to $6.8 million for the year ended December 31, 2008, compared to $15.0 million for
the corresponding 2007 period. Proceeds from the sale of marketable securities decreased to
$2.7 million for the year ended December 31, 2008, compared to $7.4 million for the corresponding
2007 period. During the first quarter 2008, we purchased $0.1 million of intangible assets in
connection with the previously disclosed acquisition of certain assets of Princeton Bioanalytical
Laboratory, LLC.
For the year ended December 31, 2008, net cash provided by financing activities was
$1.3 million compared to net cash used in financing activities of $9.0 million for the
corresponding 2007 period. The increase is primarily due to payments on the line of credit of
$19.4 million during the corresponding 2007 period, for which there were no payments during the
year ended December 31, 2008, offset by a reduction in borrowings on the line of credit of
$10.0 million and proceeds recognized on stock issued under option plans, our employee stock
purchase plan and restricted stock unit awards which decreased $0.5 million compared to the
corresponding 2007 period. Payments on capital lease obligations and notes payable decreased to
$2.6 million for the year ended December 31, 2008, compared to $4.1 million in the corresponding
2007 period.
42
As of December 31, 2008, we had a $45.0 million Credit Facility with a syndicate of banks that
originated in 2004. The Credit Facility has a maturity date of December 22, 2009 provided that, in
the event that the aggregate principal amount of the Notes, have not been refinanced on or prior to
February 1, 2009, the revolving maturity date shall be February 15, 2009. As of December 31, 2008,
the principal balance outstanding on the Credit Facility was zero. As of February 1, 2009, the
aggregate principal amount of the Notes had not been refinanced; therefore, in accordance with the
terms and conditions of the Credit Facility, our $45.0 million dollar Credit Facility terminated as
of February 13, 2009. As of February 13, 2009, the principal balance outstanding on the Credit
Facility was zero.
Based on our financial performance during the first quarter 2008, we were unable to meet
certain financial requirements of the Credit Facility, and as a result, entered into a period of
default. On July 17, 2008, we entered into a seventh amendment to the Credit Facility, which
reinstated our ability to borrow. As a result, of this latest amendment, certain financial
covenants, including our covenants to maintain certain financial ratios, were either waived or
amended to reflect our operating performance and business needs.
The obligations under the Credit Facility were guaranteed by each of our U.S. subsidiaries,
were secured by a lien on the vacant land in Miami, Florida, a pledge of all of the assets of our
U.S. operations and U.S. subsidiaries and a pledge of 66% of the stock of certain of our foreign
subsidiaries. The U.S. assets that collateralized the Credit Facility amounted to approximately
$173.9 million, including goodwill and intangible assets and are included in the consolidated
balance sheet as of December 31, 2008. The non-cash impairment charge related to goodwill and
indefinite-lived assets did not have any impact on the availability of the Credit Facility or
financial covenants.
As one of our options regarding future liquidity, we are exploring an asset-based financing
model. Under an asset-based lending, or ABL approach, our future borrowings would be based upon
collateral and liquidity as opposed to leverage and cash flows. Borrowings under an asset-based
facility would be limited by a borrowing base, which is comprised of advance rates applied to the
liquidation value of our accounts receivables. We are currently analyzing this opportunity with a
variety of potential lenders.
We have issued and outstanding $143.8 million principal amount of Notes. The Notes are
unsecured senior obligations and are effectively structurally subordinated to all existing and
future secured indebtedness, and to all existing and future liabilities of subsidiaries, including
trade payables. We capitalized all costs related to the issuance of the Notes in 2004 and have been
amortizing these costs on a straight-line basis over the expected term, which approximates the
effective interest method. Interest is payable in arrears semi-annually on February 15 and
August 15 of each year.
The Notes are convertible prior to maturity into cash and, if applicable, shares of common
stock based upon an initial conversion rate of 24.3424 shares per $1,000 in principal amount, or an
initial conversion price of $41.08 per share. Subject to adjustment in certain circumstances, the
maximum number of shares that can be issued upon conversion is 3.1 million. Upon conversion,
holders of the Notes will be entitled to receive cash up to the principal amount and, if
applicable, shares of common stock pursuant to a formula contained in the indenture. On each of
August 15, 2009, 2014 and 2019, holders may require us to repurchase all or a portion of their
Notes at a purchase price in cash equal to 100% of the principal amount, plus accrued and unpaid
interest. On or after August 15, 2009, we may, at our option, redeem the Notes in whole or in part
for cash at a redemption price equal to 100% of the principal amount, plus accrued and unpaid
interest. If the holders of a significant amount of the principal amount of Notes outstanding
require us to repurchase their outstanding Notes, we may have to seek additional financing,
depending on the amount of the Notes to be repurchased and the amount of cash or other liquid
assets available at that time. As of December 31, 2008, we reclassified our Notes from long-term to
short-term in the consolidated balance sheets due to the fact that holders of the Notes may require
us to repurchase their outstanding Notes as early as August 15, 2009.
On August 10, 2007, we filed a universal shelf on Form S-3 with the SEC, as amended on
August 8, 2008, to sell debt securities, warrants, preferred stock, common stock, depository
shares, purchase contracts or units with an aggregate offering price up to $300 million. On
August 13, 2008, the universal shelf on Form S-3 was declared effective by the SEC. As of December
31, 2008, no securities registered under the shelf have been offered.
In May 2008, the Board of Directors authorized a repurchase of the Notes up to $30.0 million.
To date, we have not repurchased any of the Notes.
43
On November 20, 2008, we filed a Registration Statement on Form S-4 commencing an offer to
exchange the $143.8 million principal amount of the Notes for $115.0 million principal amount of
8.0% convertible senior notes due 2014. Subsequent to the commencement of the exchange offer,
certain holders of the Notes who had indicated to us their intention to tender their Notes in the
exchange offer, instead sold them in the open market. Based on discussions with the current holders
of a majority of the Notes, it was
our understanding that they did not intend to tender their Notes in accordance with the terms
of the exchange offer. As a result of not obtaining the required minimum participation, we decided
to allow the exchange offer for our Notes to expire. On December 18, 2008, we announced that we
were working with our financial advisor to pursue strategic alternatives, including a potential
sale of the Company and exploration of alternatives to retire our Notes. We subsequently withdrew
the Registration Statement on Form S-4 on December 19, 2008.
On February 3, 2009, it was announced that affiliates of JLL, including Parent and Purchaser,
entered into the Merger Agreement with us whereby Parent will acquire us. The acquisition will be
carried out in two steps. The first step is the tender offer by Purchaser to purchase all of our
outstanding shares of common stock at a price of $5.00 per share, payable net to the seller in
cash. The Tender Offer expired on March 19, 2009 at 12:00 midnight New York City time. On March 20,
2009, Purchaser accepted for payment all validly tendered shares and announced that it will pay for
all such shares promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into us, with the
Company as the surviving corporation in the Merger. We expect that the Merger will be completed on
March 30, 2009 under short-form merger procedures provided by Delaware law. Following the Merger,
we will be a wholly-owned subsidiary of Parent and we will no longer have any publicly traded
shares. The transaction values our common stock at $100.5 million and will be financed by a $250.0
million equity commitment from funds managed by JLL, which includes the necessary funds to retire
our 2.25% senior convertible notes. The Merger is subject to customary conditions.
Based upon our cash balances on-hand, future cash flows from operations and an equity
commitment from funds managed by JLL that was provided in connection with the Merger Agreement, we
believe we have adequate working capital to meet our operational and
financing needs for at least the next 12
months.
In order to provide a liquidity metric that enables investors to benchmark us against others
in the industry, we calculate days sales outstanding, or DSO, for each period. DSO is calculated by
taking the consolidated accounts receivable balance at the end of a period and subtracting both
short-term and long-term client advances at the end of the period. The resulting number is divided
by average net revenue per calendar day for the period. As of December 31, 2008, our DSO was 47
days compared to 46 days as of September 30, 2008. As compared to September 30, 2008, accounts
receivable, net of client advances, increased $3.8 million, while daily revenue increased
$0.1 million, resulting in a higher DSO as of December 31, 2008.
In the third quarter 2008, we established PharmaNet Resource Solutions, a new business venture
that will allow us to provide contract clinical research personnel to our clients and competitors,
as well as introduce a variable cost structure for our clinical trials. With the rapid growth of
the contract staffing industry and specialized need by sponsor companies, we believe this
initiative will align our existing resources with the demand for specialized staff. We are building
the business’s infrastructure and expect to formally launch its services during the first quarter
2009. We do not expect that this venture will have a material impact on our 2009 earnings.
44
Contractual Obligations
The following table sets forth our known contractual obligations as of December 31, 2008.
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Payments Due by Period
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Less than
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More Than
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In thousands)
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Convertible notes (1)
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$
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143,750
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$
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143,750
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$
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—
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$
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—
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$
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—
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Interest on convertible notes (2)
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3,234
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|
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|
3,234
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|
|
|
—
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|
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—
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|
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—
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Capital lease obligations
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5,710
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2,463
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3,061
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186
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—
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Operating lease obligations
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127,272
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20,525
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34,202
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20,874
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51,671
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Purchase obligations
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1,476
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842
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592
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42
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—
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Total
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$
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281,442
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$
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170,814
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$
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37,855
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$
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21,102
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$
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51,671
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(1)
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On each of August 15, 2009, 2014 and 2019, holders may require us to
repurchase all or a portion of their Notes at a purchase price in cash
equal to 100% of the principal amount, plus accrued and unpaid
interest. Since holders may require us to repurchase their Notes as
early as August 15, 2009, we reclassified the Notes from long-term to
short-term in our consolidated balance sheets as of December 31, 2008.
Further, as a result of the completion of the Tender offer by JLL, a
“Fundamental Change” has occurred, which requires us to repurchase all
or a portion of the Notes for cash at 100% of the principal amount,
plus accrued and unpaid interest and a make-whole premium, if
applicable. Such repurchase will be made on a date that we select but
cannot be later than 30 trading days and cannot be earlier than 20
trading days after the date on which we mail a notice of the
Fundamental Change to a holder. Such notice must be mailed within 30
days of the occurrence of the Fundamental Change.
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(2)
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Interest of $1,617 was paid on February 15, 2009. The remaining
interest payment up to a total amount of $1,617 will be paid on or
before August 15, 2009.
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Capital Expenditures and Commitments
During the year ended December 31, 2008, we invested $3.4 million for capital expenditures at
our early stage segment and $3.4 million for capital expenditures at our late stage segment. We
anticipate capital asset additions during fiscal year 2009 of $16.9 million, consisting primarily
of clinical and bioanalytical laboratory computer equipment. Of the total additions, $4.2 million
is expected to be acquired through capital leases. As of December 31, 2008, we are not
contractually committed to any of this amount.
Off Balance Sheet Commitments
In the normal course of business, we enter into contractual commitments to purchase materials
and services from suppliers in exchange for favorable pricing arrangements or more beneficial
terms. As of December 31, 2008, these non-cancelable purchase obligations were not materially
different from those disclosed in the Contractual Obligations table above.
Under our agreement with our joint venture partner in Spain, additional financing required for
operations or growth may be sought from the following sources:
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(i)
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increase share capital to be subscribed by shareholders,
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(ii)
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borrowing from non-affiliated entities that do not require guarantee from shareholders,
or
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(iii)
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if such borrowing is not available or is not sufficient, loans from shareholders, in the
proportion deemed appropriate by them.
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Since that business generates sufficient cash flow from operations, we have not had to provide
it any working capital during the year ended December 31, 2008 nor do we expect to be required to
do so in the immediate future.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards, or SFAS, No.
157, “Fair Value Measurements,” or SFAS 157. SFAS 157, which defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In addition, the statement establishes a
framework for measuring fair value and expands disclosure about fair value measurements. SFAS 157
is effective for fiscal years beginning November 15, 2007, and interim periods within those years,
except that FASB Staff Position 157-2 delayed the effective date of SFAS 157 until fiscal years
beginning after November 18, 2008, for non-financial assets and liabilities except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
Accordingly, effective January 1, 2008, we adopted this limited provision of SFAS 157. We are
currently evaluating the impact of SFAS 157 for non-financial assets and liabilities, and do not
expect the adoption to have a material effect on our consolidated financial position, results of
operations or cash flows.
45
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities,” or SFAS 159. SFAS 159 provides companies with an option to report
selected financial assets and liabilities at fair value. Furthermore, SFAS 159 establishes
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. We adopted
SFAS 159 in the interim period beginning January 1, 2008. The adoption did not have a material
effect on our consolidated financial position, results of operations or cash flows during the
twelve months ended December 31, 2008.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” or
SFAS 141R, which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after an entity’s fiscal year that
begins after December 15, 2008. We are currently assessing the impact of SFAS 141R on the 2009
financial statements.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51,” or SFAS 160. SFAS 160 establishes new
accounting and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, SFAS 160 requires the recognition of a non-controlling interest (minority interest)
as equity in the consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be included in consolidated
net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will
be measured using the fair value of the non-controlling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent
and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
We do not expect the adoption of SFAS 160 will have a material impact on our consolidated financial
position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” or SFAS 161. SFAS 161 requires enhanced disclosures about derivative and
hedging activities including (1) how and why an entity uses derivative instruments (2) how
derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” and its related interpretations, and (3) how
derivative instruments and related hedged items affect financial position, financial performance
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning on or after
November 15, 2008 .We are currently evaluating the impact, if any, of SFAS 161 on our consolidated
financial statements.
In April 2008, the FASB issued FASB Staff Position, or FSP, SFAS 142-3, “Determination of the
Useful Life of Intangible Assets,” or FSP SFAS 142-3. FSP SFAS 142-3 amends the factors that should
be considered in developing a renewal or extension assumptions used for purposes of determining the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets,” or SFAS 142. More specifically, FSP FAS 142-3 removes the requirement under paragraph 11
of SFAS 142 to consider whether an intangible asset can be renewed without substantial cost or
material modifications to the existing terms and conditions and instead requires an entity to
consider its own historical experience in renewing similar arrangements. FSP SFAS 142-3 is intended
to improve the consistency between the useful life of a recognized intangible asset under SFAS 142
and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R)
and other accounting literature. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008, including interim periods within those fiscal years. We do not expect that FSP
SFAS 142-3 will have a material impact on our financial position or results of operations.
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” or FSP APB 14-1. FSP
APB 14-1 specifies that issuers of such instruments should separately account for the liability and
equity components of the instrument in an effort to value the convertible feature of the debt. The
Company’s 2.25% Convertible Senior Notes (the “Notes”) due 2024 are within the scope of FSP APB
14-1; therefore, the Company would be required to record the debt portions of its Notes at their
fair value on the date of issuance and amortize the
resulting discount into interest expense over the life of the debt, adjusted for put or call
features. Although FSP APB 14-1 would have no impact on actual past or future cash flows, the
amortization of the discount to interest expense could have a material impact on the Company’s net
earnings (loss) and earnings (loss) per share. We are currently evaluating the amount of additional
non-cash interest expense that will be recorded when adopted. FSP APB 14-1 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008, and will be applied
retrospectively to all periods presented. Early adoption is prohibited.
46
In December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities” This FSP applies to public entities that are subject to the disclosure requirements of
Statement 140 and public enterprises that are subject to the disclosure requirements of
Interpretation 46(R) as amended by this FSP. This FSP is effective for the first reporting period
(interim or annual) ending after December 15, 2008, with earlier application encouraged. We adopted
this FSP related to FIN 46(R)-8 and the adoption did not have a material impact on the financials.
SFAS 140 deals with transfers of financial assets and hence, this FSP on SFAS 140-4 will apply only
if the event arises. We do not expect this FSP to have a material impact on our financial position
or results of operations.
Forward-Looking Statements
Certain statements made in this report are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the “Act”) and are subject to a variety of
risks and uncertainties. Additionally, words such as “seek,” “intend,” “believe,” “plan,”
“estimate,” “expect,” “anticipate” and other similar expressions are forward-looking statements
within the meaning of the Act. Such forward-looking statements include PharmaNet Development Group,
Inc.’s decision to enter into the Merger Agreement to be acquired by JLL, the ability of PharmaNet
Development Group, Inc. and JLL to complete the transaction contemplated by the Merger Agreement,
including the parties’ ability to satisfy the conditions set forth in the Merger Agreement, and the
possibility of any termination of the Merger Agreement. The forward-looking statements contained in
this report are based on our current expectations, and those made at other times will be based on
our expectations when the statements are made. Some or all of the results anticipated by these
forward-looking statements may not occur. Factors that could cause or contribute to such
differences include, but are not limited to, the expected timetable for completing the proposed
transaction, the risk and uncertainty in connection with a strategic alternative process, not
having sufficient funds to pay the principal due upon conversion of the outstanding notes or to
repurchase our outstanding Notes, which we may be required to do beginning in May 2009, the impact
of the current economic environment, the impact of our indebtedness on our financial condition or
results of operations and the terms of our outstanding indebtedness limiting our activities, the
impact of the investigation by the SEC, our limited insurance coverage in connection with the
settled securities class action lawsuit, limited additional coverage for the recently settled
derivative actions and associated future legal fees, the potential liability related to the
recently filed securities class action lawsuit, the impact of ongoing tax audits, our ability to
generate new client contracts and maintain our existing clients’ contracts, our evaluation of our
backlog and the potential cancellation of contracts, the possibility we under-price our contracts
or overrun cost estimates and the effect on our financial results by failure to receive approval
for change orders and by delays in documenting change orders, our ability to implement our business
strategy, international economic, political and other risks that could negatively affect our
results of operations or financial position, fire trucks, changes in outsourcing trends and
regulatory requirements affecting the branded pharmaceutical, biotechnology, generic drug and
medical device industries, the reduction of expenditures by branded pharmaceutical, biotechnology,
generic drug or medical device companies, actions or inspections by regulatory authorities and the
impact on our clients’ decisions to not award future contracts to us or to cancel existing
contracts, the impact of healthcare reform, the fact that one or a limited number of clients may
account for a large percentage of our revenues, the incurrence of significant taxes to repatriate
funds, the fluctuation of our operating results from period to period, our assessment of our
goodwill valuation, the impact of foreign currency fluctuations, tax law changes in Canada or in
other foreign jurisdictions, investigations by governmental authorities regarding our inter-company
transfer pricing policies or changes to their laws in a manner that could increase our effective
tax rate or otherwise harm our business, our lack of the resources needed to compete effectively
with larger competitors, our ability to continue to develop new assay methods for our analytical
applications, or if our current assay methods are incorrect, our ability to compete with other
entities offering bioanalytical laboratory services, our potential liability when conducting
clinical trials, our handling and disposal of medical wastes, failure to comply with applicable
governmental regulations, the loss of services of our key personnel and our ability to attract
qualified staff, the continued effectiveness and availability of our information technology
infrastructure, losses related to our self-insurance of our employees’ healthcare costs in the
United States, our ability to attract suitable investigators and volunteers for our clinical
trials, the material weaknesses relating to our internal controls, and risks and uncertainties
associated with discontinued operations.
The results anticipated by any or all of these forward-looking statements might not occur. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as the
result of new information, future events or otherwise. For more information regarding some of the
ongoing risks and uncertainties of our business, see the “Risk Factors” section of this report and
our other filings with the SEC.
47
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to risks associated with market rates and prices, interest rates and credit in
the ordinary course of business. We are also exposed to currency risk due to our foreign
operations. Our financial instruments consist primarily of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, convertible senior notes and notes payable. As
of December 31, 2008, the fair value of these instruments approximated their carrying amounts,
except for the convertible senior notes which were at approximately 73% of par value based on the
market trading price. We have not entered into any market risk sensitive instruments for trading
purposes.
Market Risk
We have invested in marketable securities which we classify as available-for-sale and carry at
fair value based on quoted market prices. We are exposed to adverse changes in the market value of
such securities while held by us; however, during the years ended December 31, 2006 through
December 31, 2008, unrealized holding losses were insignificant. As of December 31, 2008, we did
not have any investments in marketable securities; however as of December 31, 2007, we had such
investments in the amount of $2.7 million.
Financial instruments that potentially subject us to credit risk consist primarily of trade
receivables, cash equivalents and short-term investments. We perform services and extend credit
based on an evaluation of the client’s financial condition without requiring collateral. Exposure
to losses on receivables varies by client based on the financial condition of each client. We
monitor exposure to credit losses and maintain allowances for anticipated losses considered
necessary under the circumstances. From time to time, we maintain cash balances with financial
institutions in amounts that exceed federally insured limits. To mitigate these risks, we maintain
cash and cash equivalents with various financial institutions.
Currency Risk
We operate on a global basis which exposes us to various types of currency risks. From time to
time, contracts may be denominated in a currency different from the local currency. Two specific
transaction risks arise from the nature of the contracts we have with our customers. The first risk
occurs as revenue recognized for services rendered is denominated in a currency different from the
currency in which our expenses are incurred. As a result, our net service revenues and resulting
net earnings or loss 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 payments against such invoices. Because the contract
may be denominated in a currency other than the local currency, we recognize a receivable at the
time of invoicing in the local currency equivalent of the foreign currency invoice amount. Changes
in exchange rates from the time the invoice is prepared until the payment is received from the
customer will result in our receiving either more or less in local currency than the local currency
equivalent of the invoice amount. This difference is recognized as a foreign currency transaction
gain or loss, as applicable, and is reported in “Other income (expense)” in the consolidated
statements of operations.
Additional risk results from intercompany activity between locations. We operate in many
countries, and in the normal course of our business will incur balances for activity between
subsidiaries or different locations of the same subsidiary. This activity may generate intercompany
receivables or payables that are in a currency other than the functional currency of the entity.
Changes in exchange rates from the time the activity occurs to the time payments are made may
result in our receiving either more or less in local currency than the local currency equivalent at
the time of the original activity.
Our consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in
exchange rates between the applicable foreign currency and the U.S. dollar affect the translation
of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting in the
consolidated financial statements. Our foreign subsidiaries translate their financial results from
the local currency into U.S. dollars in the following manner: (a) income statement accounts are
translated at average exchange rates for the period; (b) balance sheet asset and liability accounts
are translated at end of period exchange rates; and (c) equity accounts are translated at
historical exchange rates. Translation in this manner affects the shareholders’ equity account
referred to as the foreign currency translation adjustment account. This account exists only in the
foreign subsidiaries’ U.S. dollar balance sheets and is necessary to keep the foreign subsidiaries’
balance sheets in agreement.
48
We have adopted a foreign currency risk management policy and we have entered into foreign
currency forward contracts to mitigate this risk. We have implemented systems and processes to
further mitigate this risk; however we continue to be affected by foreign currency exchange
volatility.
Interest Rate Risk
As of December 31, 2008, we had a $45.0 million Credit Facility with a syndicate of banks. The
interest rate on the facility is variable and is based on LIBOR and the prime rate. Changes in
interest rates, and LIBOR and the prime rate in particular, can affect our cost of funds under this
facility; however, we have had no outstanding borrowings under this facility since the third
quarter 2007. Further, the Credit Facility has a maturity date of December 22, 2009 provided that,
in the event that the aggregate principal amount of the Notes, have not been refinanced on or prior
to February 1, 2009, the revolving maturity date shall be February 15, 2009. As of February 1,
2009, the aggregate principal amount of the Notes had not been refinanced; therefore, in accordance
with the terms and conditions of the Credit Facility, our $45.0 million dollar Credit Facility
terminated as of February 13, 2008. As of February 13, 2009, the principle balance outstanding on
the Credit Facility was zero.
Item 8.
Financial Statements and Supplementary Data.
Pages F-3 to F-37.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
49
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15 under the Securities
Exchange Act of 1934, as amended, that are designed to ensure that information required to be
disclosed in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission’s
rules and forms. These controls and procedures are also designed to ensure that such information is
accumulated and communicated to our management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding the required disclosure. In
designing and evaluating disclosure controls and procedures, we recognize 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 necessarily must apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we performed an evaluation under the
supervision and with the participation of our management, including our principal executive and
principal financial officers, to assess the effectiveness of the design and operation of our
disclosure controls and procedures under Rule 13a-15. Based upon that evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and
procedures are effective as of December 31, 2008.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial
reporting as that term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. Under the
supervision and with the participation of our management, including our principal executive and
principal financial officers, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that
criteria, we believe that our internal controls over financial reporting were effective as of
December 31, 2008.
Our consolidated financial statements as of and for the year ended December 31, 2008, have
been audited by Grant Thornton LLP, our independent registered public accounting firm, in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Grant Thornton LLP has audited our internal control over financial reporting as of December 31,
2008 and has issued the following attestation report on our internal control over financial
reporting based on their audit.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PharmaNet Development Group, Inc.
We have audited PharmaNet Development Group, Inc. (a Delaware corporation) internal control
over financial reporting as of December 31, 2008, based on criteria established in
Internal
Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). PharmaNet Development Group, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Annual Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PharmaNet Development Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on criteria
established in
Internal Control-Integrated Framework
issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PharmaNet Development Group,
Inc. and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2008 and our report dated March 23, 2009 expressed an unqualified opinion on those
financial statements.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 23, 2009
51
Changes in Internal Control Over Financial Reporting
Other than the remediation steps discussed below, there have been no changes during the three
months ended December 31, 2008, in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Remediation Steps Subsequent to December 31, 2007
Income taxes
We have taken the following measures to address the material weakness related to income taxes
disclosed in our Form 10-K for the year December 31, 2007, and to enhance our internal controls
over financial reporting. Based on such remediation efforts, we believe that that the previously
disclosed material weakness related to income taxes was remediated as of September 30, 2008.
Management has:
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Re-evaluated the design of income tax accounting processes and controls and implemented
new and improved processes and controls, including the addition of tax personnel,
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Increased the level of review and discussion of tax reconciliations and supporting
documentation with our outside tax advisor and management, and
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Formalized a process for documenting decisions made based upon the review of tax packages
or any other supporting information provided.
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Item 9B.
Other Information.
None.
52
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers of the Company
The following table sets forth a list of our current directors and executive officers. All
directors serve one-year terms or until each of their successors is duly qualified and elected.
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Names
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Age
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Position(s)
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Jeffrey P. McMullen
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57
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President and Chief Executive Officer, Director
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Peter G. Tombros
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66
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Chairman of the Board, Director
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Rolf A. Classon
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63
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Director
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Lewis R. Elias, M.D.
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83
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Director
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Arnold Golieb
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74
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Director
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David M. Olivier
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65
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Director
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Per Wold-Olsen
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61
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Director
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John P. Hamill
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45
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Executive Vice President and Chief Financial Officer
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Mark Di Ianni
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58
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Executive Vice President and President, Early Stage Development
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Thomas J. Newman, M.D.
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60
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Executive Vice President and President, Late Stage Development
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Robin C. Sheldrick
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54
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Senior Vice President, Human Resources
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Jeffrey P. McMullen
has been a director of our company since June 2005 and our Chief Executive
Officer since December 2005 and our President since March 2006. In 1996, Mr. McMullen co-founded
PharmaNet, Inc., which was acquired by the Company in 2005. Prior to becoming President and Chief
Executive Officer of PharmaNet, Inc. in 2004, Mr. McMullen held the positions of President and
Chief Operating Officer since 2003, Executive Vice President and Chief Operating Officer since 2001
and Senior Vice President, Business Development since 1996. Mr. McMullen has more than 34 years of
drug development industry experience including international experience involving Europe, Japan,
South America, and Asia. His professional experience includes 13 years with major drug development
services companies as vice president of business development and director of clinical research, and
nine years at Sterling Drug (now a part of Sanofi-Aventis) in the clinical, regulatory, and drug
metabolism areas.
Peter G. Tombros
has been a director of our company since October 2006 and the Chairman of our
Board of Directors since October 2007. He currently serves as a Professor and Distinguished
Executive in Residence at the Eberly College of Science at Pennsylvania State University, a
position he has held since October 2005. Formerly, Mr. Tombros served as Chairman and Chief
Executive Officer of VivoQuest, Inc. from 2002 to 2005. From 1994 to 2001, Mr. Tombros was
President and Chief Executive Officer of Enzon, Inc. Prior to Enzon, Mr. Tombros spent 25 years
with Pfizer Inc., serving in various leadership roles, including Executive Vice President, Pfizer
Pharmaceuticals; Vice President, Corporate Strategic Planning; Senior Vice President, General
Manager, Roerig Division; and Vice President, Marketing, Pfizer Laboratories Division. Mr. Tombros
is currently non-executive Chairman of the Board of NPS Pharmaceuticals and a director of Cambrex
Corporation and Protalex, Inc. He is also a former Chairman of the New Jersey Technology Council.
Mr. Tombros holds a Bachelor of Science and Master of Science from Pennsylvania State University
and a Master of Business Administration from the University of Pennsylvania Wharton School of
Business.
Rolf A. Classon
has been a director of our company since October 2006. He has served as
Chairman of the Board of Directors of Hillenbrand Industries, Inc. since March 2006. From May 2005
until March 2006, Mr. Classon served as Interim Chief Executive Officer of Hillenbrand
Industries, Inc. Mr. Classon served as Vice Chairman of the Board of Directors of Hillenbrand
Industries, Inc. from December 2003 until May 2005 and joined the Board of Directors of Hillenbrand
Industries, Inc. in May 2002. From October 2002 until July 2004, Mr. Classon was Chairman of the
Executive Committee of Bayer HealthCare AG, a subsidiary of Bayer AG, and served as President of
Bayer’s Diagnostic Division since 1995. Mr. Classon is a director of Enzon Pharmaceuticals, Inc.,
Millipore Corporation and Eurand N.V. Mr. Classon also serves as the Chairman of the Board of
Directors of Auxilium Pharmaceuticals, a position he has held since April 2005. Mr. Classon
received his Chemical Engineering Certificate from the Gothenburg School of Engineering and a
Business Degree from the University of Gothenburg.
Lewis R. Elias, M.D.,
has been a director of our company since June 2005. He has practiced
internal medicine and cardiology in South Florida for nearly 30 years. In 1992, the South Florida
Cardiology Group was founded in Dr. Elias’s Bal Harbour, Florida office and has since grown to
nearly 20 physicians with five offices in Florida. He served on the Board of Trustees at Barry
University for 20 years, the final 12 years as a member of the Executive Committee.
53
Arnold Golieb
has been a director of our company since June 2005 and is a retired partner of
KPMG Peat Marwick (now KPMG LLP). During his career with KPMG, Mr. Golieb was the managing partner
of their Des Moines, Iowa office and the tax partner in charge of their Los Angeles, California
office. During the past six years, Mr. Golieb has served as a financial advisor to a real estate
acquisition company which manages more than 30,000 apartment units and as a business advisor and
trustee for an investment group. Mr. Golieb is a member of the American Institute of Certified
Public Accountants.
David M. Olivier
has been a director of our company since November 2006. He formerly served as
President of Wyeth International, Inc. (formerly American Home Products Corporation) from August
1988 until May 1997. Mr. Olivier served as President of Wyeth Worldwide Consumer Products from 1997
to 2002 and was a member of the Wyeth Operations Committee from 1982 to 2002. He retired from Wyeth
Corporation in May 2002. Mr. Olivier is a Director of DFW Partners.
Per Wold-Olsen
has been a director of our company since November 2006. He retired from Merck
and Co., Inc. in October 2006. From 1973 to 2006, Mr. Wold-Olsen held various leadership positions
with Merck and Co., Inc., most recently serving in the position of president, human health
intercontinental and responsible for Europe, Eastern Europe, Middle East/Africa, India, Latin
America and Canada regions from September 2005 until September 2006. From January 1997 to September
2005, he served as president, human health Europe, Middle East/Africa and worldwide human health
marketing and was a member of the Merck management committee from September 1994 to September 2006.
Mr. Wold-Olsen is also Chairman of the Board of Directors of the Lundbeck Company, Vice Chairman of
the Board of Directors of Glyconix, Chairman of the Gilead Policy Advisory Board, Chairman of the
Board of Directors of GN Store Nord, a member of the BankInvest Biomedical Venture Advisory Board,
and a member of the Exiqon A/S Board of Directors.
John P. Hamill, C.P.A.,
was appointed to Executive Vice President and Chief Financial Officer
in August 2006. Prior to his appointment, Mr. Hamill was Senior Vice President and Chief Financial
Officer of PharmaNet, Inc., since January 2006. From September 2004 until January 2006, he was Vice
President and Chief Financial Officer of PharmaNet. From January 2004 until September 2004, he was
Vice President, Finance of PharmaNet. Prior to January 2004, he was Corporate Controller of
PharmaNet.
Mark Di Ianni
was appointed to Vice President, Strategic Initiatives and President, Early
Stage Development in December 2006. He joined the Company in April 2006 as Executive Vice
President, Strategic Initiatives. From February 2005 until April 2006, Mr. Di Ianni was a
consultant to the Company and other clients. Prior to February 2005, he was Chief Operating Officer
of Synarc, Inc., a medical imaging provider to the clinical trial industry.
Thomas J. Newman, M.D.,
was appointed Executive Vice President in August 2006 and President,
Late Stage Development in February 2008. From January 2006 until August 2006, he was Executive Vice
President and Chief Operating Officer of PharmaNet, Inc. Prior to January 2006, he was Senior Vice
President of Operations of PharmaNet.
Robin C. Sheldrick
was appointed to the position of Senior Vice President, Human Resources in
January 2007 and has been employed at PharmaNet in positions of increasing responsibility since
April 1998. In September 2004, Ms. Sheldrick was promoted to Vice President, Human Resources from
Executive Director, Human Resources.
Board of Directors and Corporate Governance Matters
The Board of Directors held thirteen meetings during the Company’s last fiscal year ended
December 31, 2008. The Board currently has an Audit Committee, a Compensation Committee, a
Corporate Governance and Nominating Committee and a Strategic Alternatives Committee. During the
last fiscal year, no current director attended fewer than 75% of the total number of meetings of
the Board and the committees of which he or she was a member.
The Company operates within a comprehensive plan of corporate governance for the purpose of
defining independence, assigning responsibilities, setting high standards of professional and
personal conduct and assuring compliance with such responsibilities and standards. The Company
regularly monitors developments in the area of corporate governance.
54
Director Independence
The business of PDGI is managed under the direction of the Board of Directors. The Board of
Directors has the responsibility for establishing broad corporate policies and for reviewing the
overall performance of PDGI; however, it is not involved in the operating details on a day-to-day
basis. The Board of Directors is kept advised of our business through regular written
communications and discussions with management. The Board of Directors has concluded that of the
following Board members, which includes all non-management members, are independent: Rolf A.
Classon, Lewis R. Elias, Arnold Golieb, David M. Olivier, Peter G. Tombros and Per Wold-Olsen.
Board of Directors’ Committees
During 2008, we had an Audit Committee, a Compensation Committee, a Nominating Committee and
Corporate Governance Committee and a Strategic Alternatives Committee, each consisting of
independent directors within the meaning of SEC rules and the rules of the NASDAQ Global Select
Stock Market.
Audit Committee
The Audit Committee held seven meetings during the year ended December 31, 2008. The Audit
Committee’s primary responsibilities are to:
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review our accounting policies and issues which may arise in the course of our
audit;
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select and retain our independent registered public accounting firm;
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approve all audit and non-audit services and review the audit and non-audit fees
of our independent registered public accounting firm;
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•
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review the qualifications and independence of our independent registered public
accounting firm; and
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review the independence and the performance of our internal audit function.
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Our Audit Committee is also responsible for certain corporate governance and legal compliance
matters. As part of its compliance responsibilities, our Audit Committee must approve all
transactions between us and any executive officer or director as required by NASDAQ Global Select
Stock Market rules. In addition, our Audit Committee must approve all related party hires and all
related party transactions, subject to certain de minimis exceptions.
The Audit Committee is governed by its Audit Committee Charter, which may be found on our
website at www.pharmanet.com. The current members of the Audit Committee are Arnold Golieb,
chairman, David M. Olivier and Per Wold-Olsen. Our Audit Committee meets in executive session with
our independent registered public accounting firm without management present at each Audit
Committee meeting in which the independent auditors are present. In addition, Audit Committee
chairman meets and has discussions frequently with our Chief Executive Officer and Chief Financial
Officer, and often he meets with the independent auditors outside of and in addition to regularly
scheduled Audit Committee meetings. Occasionally, he also participates in disclosure decisions
prior to the issuance of certain press releases and filings with the SEC.
Our Board of Directors has determined that Mr. Golieb qualifies as an Audit Committee
Financial Expert, as that term is defined by the rules of the SEC and in compliance with the
Sarbanes-Oxley Act, and that all of the members of the Audit Committee are independent, as that
term is defined by the rules of the SEC and the NASDAQ Global Select Stock Market.
Compensation Committee
The Compensation Committee held seven meetings and executed two consents during the year ended
December 31, 2008. Our Compensation Committee was, and remains, active in its efforts to provide
incentives to management and our employees in their efforts to address the unique circumstances
facing us during 2008 and beyond. The Compensation Committee is governed by its Compensation
Committee Charter, which may be found on our website at www.pharmanet.com. The current members of
the Compensation Committee are David M. Olivier, chairman, Lewis R. Elias and Arnold Golieb. The
general responsibilities of our Compensation Committee include:
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approve the compensation of our President and Chief Executive Officer and all
other executive officers;
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•
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approve all equity grants under our stock plans; and
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review and discuss with management the Compensation Discussion and Analysis which
is included in our Proxy Statement.
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55
If the Offer and the Merger are consummated, we will no longer be a publicly-traded company
and will cease to file proxy statements, at which point we will cease to consider recommendations
for directors.
All of the members of the Compensation Committee are independent, as that term is defined by
the rules of the SEC and the NASDAQ Global Select Stock Market relating to Compensation Committee
members.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee was formed in January 2007. The Nominating
and Corporate Governance Committee held two meetings during the year ended December 31, 2008.
The Nominating and Corporate Governance Committee’s duties are governed by its Nominating and
Corporate Governance Committee Charter, which may be found on our website at
www.pharmanet.com
. The
Nominating and Corporate Governance Committee members must satisfy the independence requirements of
the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the rules adopted by the
SEC thereunder and the corporate governance and other listing standards of the NASDAQ Global Select
Stock Market as in effect from time to time. The members of the Nominating and Corporate Governance
Committee are Peter G. Tombros, chairman, Rolf A. Classon, Lewis R. Elias and David M. Olivier. All
of the members of the Nominating and Corporate Governance Committee are independent, as that term
is defined by the rules of the SEC and the NASDAQ Global Select Stock Market.
The duties and responsibilities of the Nominating and Corporate Governance Committee include
the following:
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develop and recommend to the Board of Directors a set of corporate governance
guidelines applicable to us and from time to time, review and reassess the adequacy of
such guidelines;
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oversee an annual self-evaluation of the Board of Directors to determine whether
it and its committees are functioning effectively;
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oversee the evaluation of senior executives from a corporate governance
perspective in conjunction with the Board’s Compensation Committee;
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identify, review and recommend to the Board of Directors individuals qualified to
become members of the Board of Directors; and
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recommend to the Board of Directors nominating policies and procedures.
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The Nominating and Corporate Governance Committee will consider nominations made by
stockholders who provide written information to the Committee within the time periods specified in
our previously filed Proxy Statement. The Nominating and Corporate Governance Committee will
consider candidates proposed by stockholders and will evaluate stockholder proposed candidates
using the same criteria as for other candidates. These criteria include, but are not limited to the
candidate’s understanding of and experience in our industry, understanding of and experience in
accounting oversight and governance, finance and marketing and leadership experience with public
companies or other significant organizations. Any stockholders who wish to propose candidates to
serve as directors to be considered at the 2009 Annual Meeting of Stockholders should provide
written notice to the Nominating and Corporate Governance Committee in care of PharmaNet
Development Group, Inc., at 504 Carnegie Center, Princeton, New Jersey 08540 Attention: Investor
Relations. If the Offer and the Merger are completed, however, we will no longer be a publicly
traded company and we will cease to file proxy statements with the SEC, at which point we will
cease to consider recommendations for directors.
56
Strategic Alternatives Committee
The Strategic Alternative Committee was formed in September 2008. The Strategic Alternatives
Committee held fourteen meetings during the year ended December 31, 2008.
The PDGI Board decided to form a Strategic Alternative Committee to review potential strategic
alternatives of the Company. The Strategic Alternative Committee consist of Mr. Tombros, Mr. Rolf
A. Classon and Mr. Arnold Golieb, each of whom is an independent director within the meaning of the
applicable rules of the NASDAQ Global Select Market. Mr. Golieb was selected to act as chairman of
the Strategic Alternative Committee. The PDGI Board chose these individuals to be members of the
Strategic Alternative Committee because they are independent directors and have experience with
strategic alternatives by virtue of their service with other public companies. The PDGI Board
reviewed and approved a charter to govern the Committee and its proceedings. The charter authorized
the Strategic Alternative Committee to, among other things:
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engage in and facilitate discussions with any third-party regarding potential
strategic alternatives involving the Company;
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advise and periodically update the PDGI Board, as necessary, regarding any
material developments in discussions regarding strategic alternatives involving the
Company;
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periodically meet and discuss with any financial advisors retained to assist the
Company regarding potential strategic alternatives; and
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negotiate and approve on behalf of the Company a transaction or arrangement
involving the Notes, which transaction could take the form of a repayment, settlement or
prepayment of, or other exchange of cash for, all or a portion of the Notes, an exchange
of new securities for all or a portion of the Notes, a modification, amendment or waiver
of certain terms of the Notes, any other restructuring of the Notes or a similar
transaction or arrangement, and any and all such other terms and conditions as might be
necessary to consummate any of the foregoing.
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Corporate Governance Guidelines
We recognize corporate governance as a key element to effective performance and the protection
of stockholders. As part of our commitment to corporate governance:
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our Board of Directors appointed Peter G. Tombros as our Chairman of the Board,
and he interfaces with our management and legal counsel on a regular basis;
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we adopted a code of ethics that applies to all our employees and directors;
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we formed a Corporate Governance Committee in January 2007, which was combined
with the Nominating Committee in October 2007 to form the Nominating and Corporate
Governance Committee;
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we formed the Strategic Alternatives Committee in September 2008;
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we adopted a policy that our independent directors meet in executive sessions at
each Board meeting; and
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we adopted a policy that our Audit Committee must approve all related party hires
and related party transactions, subject to certain de minimis exceptions.
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Code of Ethics
We have adopted a code of ethics that applies to our directors and all of our employees
including our executive officers. Our code of ethics includes a policy regarding insider
transactions. This code of ethics is posted on our website at www.pharmanet.com. A copy of our code
of ethics will be provided without charge upon request by mail to PharmaNet Development
Group, Inc., 504 Carnegie Center Princeton, New Jersey 08540 Attention: Investor Relations. We
intend to satisfy the disclosure requirements of amendments to or waivers from a provision of the
code of ethics applicable to our principal executive officer, principal financial officer and
principal
accounting officer or persons performing similar functions by posting such information on our
website. Our website and the information in or connected to our website are not incorporated into
this Information Statement.
57
Directors’ Attendance at Annual Meetings of Stockholders
It is the policy of the Board of Directors that all directors attend the annual meeting of
stockholders except where the failure to attend is due to unavoidable circumstances or conflicts
discussed in advance by such director with the Chairman of the Board of Directors. All of the
members of the Board of Directors attended the 2008 annual meeting of stockholders.
Communication with the Board of Directors
Our Board of Directors will give appropriate attention to written communications which are
submitted by stockholders, and will respond if and as appropriate. The Chairman, with the
assistance of our outside counsel, is primarily responsible for monitoring communications from
stockholders and for providing copies or summaries to the other directors as he considers
appropriate. Under procedures approved by a majority of the independent directors, communications
are forwarded to all directors if they relate to important substantive matters and include
suggestions or comments that the Chairman considers to be important for the directors to know. In
general, communications relating to corporate governance and long-term corporate strategy are more
likely to be forwarded than communications relating to ordinary business affairs, personal
grievances and matters on which we tend to receive repetitive or duplicative communications.
Stockholders who wish to send communications on any topic to the Board of Directors should
address such communications to: Board of Directors, 504 Carnegie Center, Princeton, New Jersey
08540 Attn: Investor Relations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires officers, directors and any persons who own more
than 10% of our common stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Specific due dates for these records have been established, and
we are required to report in this proxy statement any known failure in 2008 to file by these dates.
To our knowledge, based solely on a review of the copies of such reports furnished to us and
representations that no other reports were required, we believe that all reports required under
Section 16(a) were timely filed during the year ended December 31, 2008.
Item 11.
Executive Compensation.
Compensation Discussion and Analysis
This Compensation Discussion and Analysis explains the principles underlying our compensation
policies and decisions and the principal elements of compensation paid to our executive officers
during 2008. Our Chief Executive Officer, Chief Financial Officer and the other executive officers
included in the Summary Compensation Table will be referred to as the “named executive officers”
for purposes of this discussion. In general, the compensation principles for our named executive
officers are similar to those of all our other executive officers.
Compensation Objectives and Philosophy
The Compensation Committee, also referred to herein as the Committee, is responsible for the
following:
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to discharge the Board of Director’s responsibilities relating to compensation of
our directors and named executive officers;
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to approve and evaluate our director and officer compensation plans, policies and
programs;
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to produce an annual report on executive compensation for inclusion in our Proxy
Statement; and
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to review and discuss with management the Compensation Discussion and Analysis
which is included in our Proxy Statement.
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58
As part of this process, the Committee seeks to accomplish the following objectives with
respect to our executive compensation programs:
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to motivate, recruit and retain executives capable of meeting our strategic
objectives;
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to provide incentives to ensure superior executive performance and successful
financial results for us; and
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to align the interests of executives with the long-term interests of our
stockholders.
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The Committee seeks to achieve these objectives by:
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establishing a compensation structure that is market competitive, taking into
account the value of the position in the marketplace;
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linking a substantial portion of compensation to our achievement of short-term
and long-term financial objectives and the individual’s contribution to the attainment
of those objectives;
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providing risk for underachievement and upward leverage for overachievement of
goals; and
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providing long-term equity-based incentives and encouraging direct share
ownership by executives with the intention of providing incentive-based compensation to
encourage a long-term focus on company profitability and stockholder value.
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It is the Committee’s objective to target each component of compensation listed below to be
competitive with comparable positions at peer group companies, and to target the total annual
compensation of each named executive officer at the median level for comparable positions at the
competitive peer group companies. However, in determining the compensation of each named executive
officer, the Committee also considers a number of other factors, including our recent performance
and the named executive officer’s individual performance, the importance of the executive’s
position and role in relation to execution of our strategic plan, and the cost of living in the
geographic area in which the named executive officer’s office is located. There is no
pre-established policy for allocation of compensation between cash and non-cash components or
between short-term and long-term components. Instead, the Committee determines the mix of
compensation for each named executive officer based on its review of the competitive data and its
subjective analysis of that individual’s performance and contribution to our financial performance.
The Committee sets performance targets and compensation levels after receiving recommendations
based on the competitive data.
To assess the competitiveness of pay for each named executive officer, the Committee
previously engaged Ernst & Young (“E&Y”), a nationally recognized compensation consulting firm, to
provide competitive compensation data and general advice on our compensation programs and policies
for executive officers. Management also retained Watson Wyatt to provide general advice on
compensation programs and policies. Watson Wyatt subsequently performed a market analysis of the
compensation paid by peer companies and provided the Committee with recommended compensation ranges
for the named executive officers based on the competitive data. The companies constituting this
peer group are set forth below, E&Y reviewed the report as well prior to its submission to the
Committee. In addition, the Chief Executive Officer provided recommendations to the Committee with
respect to the compensation packages for the other named executive officers. The Committee reviewed
the Chief Executive Officer’s recommendations against compensation paid by peer companies.
Overview of Compensation Components and Their Purpose
The Committee seeks to align the named executive officers’ and shareholders’ interests in a
pay-for-performance environment. On average, a large portion of an executive officer’s total
compensation is at risk, with the amount actually paid tied to achievement of pre-established
objectives and individual goals.
Base Salary
In General
It is the Committee’s objective to set a competitive rate of annual base salary for
each named executive officer. The Committee believes competitive base salaries are necessary to
attract and retain top quality executives, since it is common practice for public companies to
provide their executive officers with a guaranteed annual component of compensation that is not
subject to performance risk. The Committee reviewed and discussed salary ranges for the named
executive officers, with minimum to maximum opportunities that cover the normal range of market
variability. The actual base salary for each named executive officer is then derived
from those salary ranges based on his or her responsibility, tenure, past performance and market
comparability. For 2008, each named executive officer’s salary was increased to cover cost of
living increases based on the Consumer Price Index as provided for under each named executive
officer’s employment agreement, and in certain instances to a greater amount, as a result of, among
other things, a change in the named executive officer’s position or performance review.
59
Changes for 2009
In February 2009, the Committee decided, after discussions with the Chief
Executive Officer and Chief Financial Officer, that for 2009, each named executive officer’s
salary, other than the Chief Executive Officer, would be increased by four percent (4%) as provided
for under each named executive officer’s employment agreement, as set forth in the table below. The
Chief Executive Officer’s salary remained the same. The Committee made these decisions because of
current macro-economic conditions and the Company’s projected performance for 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
2008
Salary
|
|
|
2009
Salary
|
|
|
% Increase
|
|
|
Jeffrey P. McMullen
|
|
President and Chief Executive Officer
|
|
$
|
743,312
|
|
|
$
|
743,312
|
|
|
|
—
|
|
|
John P. Hamill
|
|
Executive Vice President and Chief Financial Officer
|
|
$
|
431,796
|
|
|
$
|
449,068
|
|
|
|
4
|
%
|
|
Mark Di Ianni
|
|
Executive Vice President, Strategic Initiatives and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President, Early Stage Development
|
|
$
|
419,125
|
|
|
$
|
435,890
|
|
|
|
4
|
%
|
|
Thomas J. Newman
|
|
Executive Vice President and President, Late Stage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
$
|
535,844
|
|
|
$
|
557,278
|
|
|
|
4
|
%
|
|
Robin C. Sheldrick
|
|
Senior Vice President, Human Resources
|
|
$
|
279,807
|
|
|
$
|
291,000
|
|
|
|
4
|
%
|
Annual Short-Term Cash Incentives
In General
Effective February 2008, Ms. Boucher-Champagne, as a result of internal
restructuring, was no longer deemed an executive officer of the Company pursuant to Section 16 of
the Exchange Act, but her title and duties were not modified in any way. Accordingly, the Committee
did not consider Ms. Boucher-Champagne when discussing or determining compensation for 2008. As
part of their compensation package, our named executive officers have the opportunity to earn
annual cash incentive awards. Such cash awards are designed to reward superior executive
performance while reinforcing our short-term strategic operating goals. Each year, the Committee
establishes a target award for each named executive officer based on either a percentage of base
salary or a specific dollar amount. Annual bonus targets as a percentage of salary increase with
executive rank so that for the named executive officers, a greater proportion of their total cash
compensation is contingent upon annual performance, as compared to other officers of the Company.
2007 Performance Measures and Payouts
The target bonus awards for the named executive officers
paid in March 2008 had a potential payout of between 36% and 75% of base salary. The target bonus
awards for the Chief Executive Officer was potentially up to 150% of his base salary. Such target
bonus awards were payable based on the Committee’s review of both the Company’s performance and
individual performance during the 2007 year. The target bonus of the Chief Executive Officer was to
be comprised of 60% of company financial performance (such bonus was solely based on a comparison
of budgeted and actual GAAP EBIT) and 40% individual performance. For all other named executive
officers, the target bonus was to be comprised of 70% of company financial performance goals (with
such bonuses solely based on a comparison of budgeted and actual GAAP earnings before interest and
taxes (“EBIT”) and 30% of individual performance goals. The criteria for determining the individual
performance measures were based on the recommendation of the Chief Executive Officer and approval
by the Committee, which included increased responsibilities and change in roles within the
organization. In March 2008, the Committee, on the basis of its assessment of our financial results
for 2007 and the individual performance of each named executive officer for that year, awarded
annual bonuses at 85% of target for the Chief Executive Officer and between 98% to 126% of target
for the other named executive officers. In determining such awards, the Committee considered
certain performance goals for the respective executive officers. Mr. McMullen’s individual
performance was established based on his ability to manage the organization and the prior
historical issues effectively. Mr. Hamill’s individual performance bonus was awarded given the
accomplishment of key internal financial infrastructure improvements and his ability to manage the
Company’s prior historical issues. Mr. Di Ianni’s individual performance bonus was awarded as a
result of certain strategic initiatives and managing the early stage business. Dr. Newman’s
individual performance bonus was awarded based on his increasing role in the organization and
managing the late stage business. Dr. Newman assumed the role of President, Late Stage Development
during February 2008.
60
2008 Performance Measures and Payouts
Target bonus awards anticipated to be paid in March
2009, which were approved in March 2008 with respect to fiscal 2008, had a targeted payout of 36%
of base salary with a maximum payout of 75% for the named executive officers. The target bonus
award for the Chief Executive Officer was up to 150% of his base salary. The target bonus awards
were to be payable based on the Committee’s review of both the Company’s performance and individual
performance during the
2008 year. In February 2009, on the basis of the assessment of financial results for 2008 and the
individual performance of each named executive officer for that year, the Committee determined that
no annual bonuses were to be awarded to any of the named executive officers.
2009 Plan
As of the date of this filing, and given the proposed Merger, the Compensation
Committee has not met to establish a 2009 Plan and consequently the Company does not have a 2009
Plan in place. However, if the Merger is not consummated, the Compensation Committee will meet to
set in place a 2009 Plan.
Long-Term Incentive Equity Awards
In General
A portion of each named executive officer’s compensation is provided in the form of
long-term incentive equity awards. It is the Committee’s belief that properly structured equity
awards are an effective method of aligning the long-term interests of our named executive officers
with those of our stockholders. Named executive officers as well as non-executive officers are
eligible to receive long-term incentive awards.
Equity awards are granted in the form of stock options and Restricted Stock Units. The
Committee will follow a grant practice of tying equity awards to its annual year-end review of
individual performance, its assessment of our performance and our financial results. Accordingly,
it is expected that any equity awards to the named executive officers will be made on an annual
basis promptly after the release of our financial results. During 2008, Watson Wyatt was engaged by
management to conduct a review of the executive compensation program, with particular emphasis on
long-term incentive strategies. The Committee, after consultation with its compensation consultant,
has established long-term incentive grant guidelines for eligible named executive officers each
year based on competitive annual grant data provided by management’s compensation consultant.
It is the Committee’s belief that Restricted Stock Units are essential to the retention of the
named executive officers, crucial to our long-term financial successes and will help to advance the
share ownership guidelines, which have been established by the Committee for the executive
officers. The Restricted Stock Units have vesting schedules which provide a meaningful incentive
for the named executive officer to remain in our service. These equity awards also serve as an
important vehicle to achieve the Committee’s objective of aligning management and stockholder
interests. Equity awards in the form of Restricted Stock Units promote all of these objectives in a
manner which is less dilutive to stockholders than traditional option grants and provide a more
direct correlation between the compensation costs that we must record for financial reporting
purposes and the value delivered to the named executive officers.
2008 Awards
Equity grants to our named executive officers were granted in the form of stock
options and Restricted Stock Units. Each type of award entitles the recipient to receive one share
of our common stock upon vesting or upon a designated date or event following such vesting.
On March 4, 2008, the Compensation Committee, after consultation with our compensation
consultant and management, determined the value of awards to be granted to the Company’s executive
officers and granted long-term incentive equity awards to our executive officers. One-third of such
value was allocated to be granted in the form of options, one-third in performance based Restricted
Stock Units and one-third in time-vested Restricted Stock Units. The number of shares underlying
the options was calculated using the Black-Scholes value for such options on March 4, 2008, which
was equal to $14.77 per share. The number of shares underlying the Restricted Stock Units was
calculated using the closing price of our common stock on March 4, 2008, equal to $29.47 per share.
Such equity awards were granted pursuant to the 1999 Stock Option Plan. The Committee believes that
these equity awards are competitive with our peer group, improve employee retention and align the
goals of management with those of stockholders.
61
2008 Awards
On March 4, 2008, the Committee granted the following annual long-term incentive equity
awards to our executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Incentive Distribution (number of units)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based
|
|
|
Time-Vested
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
|
|
|
Incentive
|
|
|
Options
|
|
|
Stock Units
|
|
|
Stock Units
|
|
|
Name
|
|
Title
|
|
Value
|
|
|
(Stock-settled)
|
|
|
(Stock-settled)
|
|
|
(Stock-settled)
|
|
|
Jeffrey P. McMullen
|
|
President and Chief Executive Officer
|
|
$
|
740,000
|
|
|
|
16,696
|
|
|
|
8,370
|
|
|
|
8,370
|
|
|
John P. Hamill
|
|
Executive Vice President and Chief Financial Officer
|
|
$
|
361,840
|
|
|
|
4,840
|
|
|
|
2,426
|
|
|
|
7,426
|
(1)
|
|
Mark Di Ianni
|
|
Executive Vice President, Strategic
Initiatives and President, Early Stage Development
|
|
$
|
208,000
|
|
|
|
4,963
|
|
|
|
2,353
|
|
|
|
2,353
|
|
|
Thomas J. Newman
|
|
Executive Vice President and
President, Late Stage Development
|
|
$
|
561,460
|
|
|
|
6,019
|
|
|
|
3,017
|
|
|
|
13,017
|
(2)
|
|
Robin C. Sheldrick
|
|
Senior Vice
President, Human Resources
|
|
$
|
129,200
|
|
|
|
1,253
|
|
|
|
628
|
|
|
|
3,128
|
(3)
|
|
|
|
|
|
(1)
|
|
Mr. Hamill received additional time-vested Restricted Stock Units in connection with his past
performance and contributions to the Company.
|
|
|
|
(2)
|
|
Dr. Newman received additional time-vested Restricted Stock Units in connection with his
promotion to serve as President, Late Stage Development.
|
|
|
|
(3)
|
|
Ms. Sheldrick received additional time-vested Restricted Stock Units in connection with her
appointment as an executive officer.
|
Such equity awards were granted pursuant to the 1999 Stock Option Plan. The number of shares
underlying the options was calculated using the Black-Scholes formula for such options equal to
$14.77 per share. The number of shares underlying the Restricted Stock Units was calculated using
the closing price of our common stock on March 4, 2008, equal to $29.47 per share.
|
|
•
|
|
Except as set forth in the footnote above, the value of the amounts awarded
consisted of one-third stock options, one-third performance-based Restricted Stock Units
and one-third time-vested Restricted Stock Units.
|
|
|
•
|
|
The options expire in seven years and vest in one-third increments on each
anniversary date of the grant.
|
|
|
•
|
|
The performance-based Restricted Stock Units vest upon the achievement of certain
performance milestones if the Company meets or exceeds certain cumulative earnings
targets for 2008, 2009 and 2010.
|
|
|
•
|
|
The time-vested Restricted Stock Units vest in one-fifth increments on each
anniversary date of the grant.
|
Executive Benefits and Perquisites
In General
The named executive officers also are provided with certain market-competitive
benefits and perquisites. It is the Committee’s belief that such benefits are necessary for us to
remain competitive and to attract and retain top caliber executive officers, since such benefits
are typically provided by companies in the drug development services industry and by other
companies with which we compete for executive talent.
Retirement Benefits
The named executive officers participate in the 401(k) plan, but they do
not have any additional retirement benefits.
Other Benefits and Perquisites
All administrative employees, including the named executive
officers, are eligible to receive standard health, disability, life and travel insurance, and
professional development benefits. However, the named executive officers do not pay any premiums
toward health insurance. In addition, from time to time, we make tickets to cultural and sporting
events
available to the named executive officers for business purposes. If not utilized for business
purposes, they are made available to the named executive officers and other employees for personal
use.
62
Furthermore, we provide certain of our executive officers with a stipend to use towards
perquisites selected by the named executive officers, which can be used for any purpose, but
generally used for auto allowances, medical expenses and financial planning purposes, in the
following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Perquisites
|
|
|
Amount of
|
|
|
|
|
|
Name
|
|
Title
|
|
(2008)
|
|
|
Tax Gross-Up(1)
|
|
|
Total
|
|
|
Jeffrey P. McMullen
|
|
President and Chief Executive Officer
|
|
$
|
32,500
|
(2)
|
|
$
|
24,411
|
|
|
$
|
56,911
|
|
|
John P. Hamill
|
|
Executive Vice President and Chief Financial Officer
|
|
$
|
25,000
|
(3)
|
|
$
|
16,043
|
|
|
$
|
41,043
|
|
|
Mark Di Ianni
|
|
Executive Vice President, Strategic
Initiatives and President, Early Stage Development
|
|
$
|
12,000
|
(4)
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
Thomas J. Newman
|
|
Executive Vice President and
President, Late Stage Development
|
|
$
|
12,000
|
(4)
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
Robin C. Sheldrick
|
|
Senior Vice President Human Resources
|
|
$
|
12,000
|
(4)
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
|
|
|
|
(1)
|
|
The Committee also agreed to pay income taxes associated with such perquisites for
Messrs. McMullen and Hamill.
|
|
|
|
(2)
|
|
Mr. McMullen’s employment agreement awards him perquisites up to the amount of $32,500.
|
|
|
|
(3)
|
|
Mr. Hamill’s employment agreement awards him perquisites up to the amount of $25,000.
|
|
|
|
(4)
|
|
The executive’s employment agreement provides for a $12,000 car allowance.
|
Executive Severance Plan
Executive Severance
Certain of the amended and restated employment agreements of our named
executive officers contain severance provisions as set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Months
|
|
|
Number of Months
|
|
|
|
|
|
|
of Severance for
|
|
|
of Severance for
|
|
|
|
|
|
|
Termination Upon
|
|
|
Termination
|
|
|
Name
|
|
Title
|
|
Change in Control
|
|
|
Without Cause
|
|
|
Jeffrey P. McMullen
|
|
President and Chief Executive Officer
|
|
|
N/A
|
(1)
|
|
|
36
|
|
|
John P. Hamill
|
|
Executive Vice President and Chief Financial Officer
|
|
|
24
|
|
|
|
24
|
|
|
Mark Di Ianni
|
|
Executive Vice President, Strategic
Initiatives and President, Early Stage Development
|
|
|
N/A
|
(1)
|
|
|
24
|
|
|
Thomas J. Newman
|
|
Executive Vice President and
President, Late Stage Development
|
|
|
N/A
|
(1)
|
|
|
24
|
|
|
Robin C. Sheldrick
|
|
Senior Vice President, Human Resources
|
|
|
N/A
|
(1)
|
|
|
24
|
|
|
|
|
|
|
(1)
|
|
Mr. McMullen, Mr. Di Ianni, Dr. Newman and Ms. Sheldrick do not automatically receive
severance in the event of a change in control, unless he/she is terminated without cause in
connection with a change in control.
|
We provided certain of our named executive officers with severance benefits in the event their
employment terminates under certain defined circumstances. With the exception of our Chief
Executive Officer, whose term of severance is 36 months, the term of severance is for a 24-month
period if their employment is terminated by us without cause or they resign for good reason, as
defined in their respective employment agreements. However, in the event Mr. Hamill resigns for any
reason during the 6 month period following a change in control, as defined in his employment
agreement, Mr. Hamill shall receive 24 months of severance. The principal features of the
employment agreements of the named executives are summarized below in the section entitled
“Executive Employment Agreements, Termination and Change of Control Arrangements.”
63
It is the Committee’s understanding that the severance benefits provided under the employment
agreements are representative of the severance benefits payable to long-tenured executive officers
in the drug development services industry. The severance awarded to our named executive officers
has been designed to provide a level of financial security to the named executive officers which
will assure their continued attention and commitment to our strategic business objectives, even in
change in control situations, where applicable, where their continued employment may be at risk. It
is the Committee’s belief such financial protection for our Chief Executive Officer and Chief
Financial Officer is necessary in connection with a change in control transaction in order to
eliminate any potential financial conflicts such named executive officers may have while evaluating
the merits of a potential transaction.
For 2008, the Committee and the Company used the following companies as a basis for comparison
of its various compensation levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
|
Bioscrip, Inc.
|
|
•
|
|
Cambrex Corporation
|
|
•
|
|
Charles River Laboratories, Inc.
|
|
|
|
•
|
|
Covance, Inc.
|
|
•
|
|
Dendrite International, Inc
|
|
•
|
|
IDEXX Laboratories, Inc.
|
|
|
|
•
|
|
Kendle International, Inc.
|
|
•
|
|
Ligand Pharmaceuticals, Inc.
|
|
•
|
|
MDS, Inc.
|
|
|
|
•
|
|
Millipore Corp
|
|
•
|
|
PAREXEL International Corporation
|
|
•
|
|
Pharmaceutical Product Development, Inc.
|
|
|
|
•
|
|
PRA International
|
|
•
|
|
ThermoFisher Scientific
|
|
•
|
|
Varian, Inc.
|
|
|
|
•
|
|
Valeant Pharmaceuticals International
|
|
•
|
|
Ventiv Health, Inc.
|
|
•
|
|
Watson Pharmaceuticals
|
The Committee also periodically reviews the appropriateness of this peer group, based on
changes in the Company’s size and revenues over time. In general, although the Committee recognizes
the value in utilizing peer group and industry survey data to ensure that our compensation program
is competitive and in assessing its reasonableness, the Committee believes that the ultimate
compensation decisions must be primarily based on the unique circumstances of the Company and the
talents, merits and responsibilities of the individuals.
Share Retention Policy
On December 3, 2007, the Compensation Committee and Nominating and Corporate Governance
Committee jointly approved a share retention policy. The policy establishes ownership guidelines
which provide that each non-employee director and named executive officer shall own and retain
shares of our common stock with a market value equal to:
|
•
|
|
three times the annual base salary for the Chief Executive Officer;
|
|
|
|
•
|
|
one and a half times his or her annual base salary for each other named executive officer;
and
|
|
|
|
•
|
|
three times their respective annual retainer received by each non-employee director.
|
The value of the common stock and number of shares required were established based on the
stock price at the time of adoption of these guidelines. The named executive officers have five
years to meet such guidelines, and all of his or her equity, other than stock options and
performance based awards, will be included in the ownership guidelines. Until the named executive
officer or non-employee director has met the salary or retainer multiple requirement, 75% of all
vesting awards after taxes must be retained in shares.
Accounting and Tax Consideration
Pursuant to Statement of Financial Accounting Standards No. 123R,
Share-Based Payment
(“SFAS 123R”), we are required to expense all share-based payments, including grants of stock
options, stock appreciation rights, restricted stock, Restricted Stock Units and all other
stock-based awards under the 2008 Plan. Accordingly, stock options and stock appreciation rights
which are granted to our employees and non-employee Board members and payable in shares of our
common stock will be valued at fair value as of the grant date under an appropriate valuation
formula, and that value will then be charged as a direct compensation expense against our reported
earnings over the designated vesting period of the award. For shares issuable upon the vesting of
Restricted Stock Units awarded under the 2008 Plan, we are required to amortize over the vesting
period a compensation cost equal to the fair market value of the underlying shares on the date of
the award. If any other shares are unvested at the time of their direct issuance, then the fair
market value of those shares at that time will be charged to our reported earnings ratably over the
vesting period. Such accounting treatment for Restricted Stock Units and direct stock issuances
will be applicable whether vesting is tied to service periods or performance goals. The issuance of
a fully-vested stock bonus will result in an immediate charge to our earnings equal to the fair
market value of the bonus shares on the issuance date.
64
For performance units awarded under the 2008 Plan and payable in stock, we will be required to
amortize, over the applicable performance period and any subsequent service vesting period, a
compensation cost equal to the fair market value of the underlying shares on the date of the award.
For performance units awarded under the 2008 Plan and payable in cash, we will amortize the
potential cash expense over the applicable performance period and any subsequent service vesting
period. Dividends or dividend equivalents paid on the portion of an award that vests will be
charged against our retained earnings. If the award holder is not required to return the dividends
or dividend equivalents if they forfeit their awards, dividends or dividend equivalents paid on
instruments that do not vest will be recognized by us as additional compensation cost.
IRC Section 162(m) Compliance
As a result of Section 162(m) of the Internal Revenue Code, publicly-traded companies such as
us are not allowed a federal income tax deduction for compensation paid to the Chief Executive
Officer and the four other highest paid executive officers to the extent that such compensation
exceeds $1.0 million per officer in any one year and does not otherwise qualify as
performance-based compensation. Currently, our stock option compensation packages are structured so
that compensation deemed paid to an executive officer in connection with the exercise of a stock
option should qualify as performance-based compensation that is not subject to the $1.0 million
limitation. However, other awards, like Restricted Stock Units, made under that Plan may or may not
so qualify. In establishing the cash and equity incentive compensation programs for the executive
officers, it is the Committee’s view that the potential deductibility of the compensation payable
under those programs should be only one of a number of relevant factors taken into consideration,
and not the sole governing factor. For that reason the Committee may deem it appropriate to
continue to provide one or more executive officers with the opportunity to earn incentive
compensation, including cash bonus programs tied to our financial performance and Restricted Stock
Units, which may be in excess of the amount deductible by reason of Section 162(m) or other
provisions of the Internal Revenue Code. It is the Committee’s belief that cash and equity
incentive compensation must be maintained at the requisite level to attract and retain the
executive officers essential to our financial success, even if part of that compensation may not be
deductible by reason of the Section 162(m) limitation. For 2007, a portion of the total amount of
compensation paid by us to certain named executive officers (whether in the form of cash payments
or upon the vesting of equity awards) was not deductible and is affected by the Section 162(m)
limitation. The 2008 Incentive Compensation Plan has been designed with the intent to qualify the
compensation deemed paid to our executive officers under cash bonuses, RSUs and other equity
awarded under that plan as performance-based compensation that would not be subject to the
$1.0 million limitation.
65
Summary Compensation Table
The following summary compensation table sets forth information concerning compensation for
services rendered in all capacities during the years ended December 31, 2008, 2007 and 2006,
awarded to, earned by or paid to our Chief Executive Officer, our Chief Financial Officer, and each
of our three other most highly compensated executive officers whose compensation for 2008 was in
excess of $100,000 and who were serving as executive officers at the end of 2008. Also included in
the table is an additional individual for whose compensation for 2008 was in excess of $100,000;
however this individual was not serving as an executive officer at the end of 2008. There are no
other executive officers who would otherwise have been included in such table on the basis of total
compensation for 2008 have been excluded by reason of their termination of employment or change in
executive status during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary(1)
|
|
|
Bonus(2)
|
|
|
Awards(3)
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation(4)
|
|
|
Total
|
|
|
Jeffrey P. McMullen
|
|
|
2008
|
|
|
$
|
741,932
|
|
|
|
—
|
|
|
$
|
719,174
|
|
|
$
|
145,738
|
|
|
|
—
|
|
|
$
|
77,860
|
|
|
$
|
1,684,704
|
|
|
President and Chief
Executive
|
|
|
2007
|
|
|
$
|
695,000
|
|
|
$
|
886,125
|
|
|
$
|
553,731
|
|
|
$
|
32,175
|
|
|
|
—
|
|
|
$
|
74,001
|
|
|
$
|
2,241,032
|
|
|
Officer
|
|
|
2006
|
|
|
$
|
663,531
|
|
|
$
|
975,000
|
|
|
$
|
494,475
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
72,098
|
|
|
$
|
2,205,104
|
|
|
John P. Hamill
|
|
|
2008
|
|
|
$
|
430,631
|
|
|
|
—
|
|
|
$
|
304,093
|
|
|
$
|
41,530
|
|
|
|
—
|
|
|
$
|
50,708
|
|
|
$
|
826,962
|
|
|
Executive Vice President and
|
|
|
2007
|
|
|
$
|
390,000
|
|
|
$
|
175,587
|
|
|
$
|
259,970
|
|
|
$
|
9,028
|
|
|
|
—
|
|
|
$
|
50,830
|
|
|
$
|
885,415
|
|
|
Chief Financial Officer
|
|
|
2006
|
|
|
$
|
320,294
|
|
|
$
|
210,047
|
|
|
$
|
182,981
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
46,879
|
|
|
$
|
760,201
|
|
|
Mark Di Ianni
|
|
|
2008
|
|
|
$
|
417,823
|
|
|
|
—
|
|
|
$
|
122,203
|
|
|
$
|
41,481
|
|
|
|
—
|
|
|
$
|
25,427
|
|
|
$
|
606,934
|
|
|
Executive Vice President and
|
|
|
2007
|
|
|
$
|
400,000
|
|
|
$
|
140,046
|
|
|
$
|
108,997
|
|
|
$
|
9,259
|
|
|
|
—
|
|
|
$
|
25,223
|
|
|
$
|
683,525
|
|
|
President, Early Stage
|
|
|
2006
|
|
|
$
|
275,400
|
|
|
$
|
98,925
|
|
|
$
|
121,900
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,734
|
|
|
$
|
515,959
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Newman
|
|
|
2008
|
|
|
$
|
534,867
|
|
|
|
—
|
|
|
$
|
305,053
|
|
|
$
|
52,148
|
|
|
|
—
|
|
|
$
|
36,034
|
|
|
$
|
928,102
|
|
|
Executive Vice President and
|
|
|
2007
|
|
|
$
|
494,000
|
|
|
$
|
172,985
|
|
|
$
|
231,809
|
|
|
$
|
11,436
|
|
|
|
—
|
|
|
$
|
26,367
|
|
|
$
|
936,597
|
|
|
President, Late Stage
|
|
|
2006
|
|
|
$
|
475,000
|
|
|
$
|
214,965
|
|
|
$
|
182,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
26,081
|
|
|
$
|
898,046
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robin C. Sheldrick
|
|
|
2008
|
|
|
$
|
278,937
|
|
|
|
—
|
|
|
$
|
124,653
|
|
|
$
|
10,964
|
|
|
|
—
|
|
|
$
|
23,264
|
|
|
$
|
437,818
|
|
|
Senior Vice President, Human
|
|
|
2007
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Resources
|
|
|
2006
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Johane Boucher-Champagne
|
|
|
2008
|
|
|
$
|
389,391
|
|
|
$
|
26,089
|
|
|
$
|
157,179
|
|
|
$
|
14,708
|
|
|
|
—
|
|
|
$
|
16,197
|
|
|
$
|
603,564
|
|
|
Executive Vice President,
Early
|
|
|
2007
|
|
|
$
|
377,754
|
|
|
$
|
30,502
|
|
|
$
|
127,867
|
|
|
$
|
3,240
|
|
|
|
—
|
|
|
$
|
30,939
|
|
|
$
|
570,302
|
|
|
Clinical Development(5)(6)
|
|
|
2006
|
|
|
$
|
291,425
|
|
|
$
|
100,197
|
|
|
$
|
121,900
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,241
|
|
|
$
|
532,763
|
|
|
|
|
|
|
(1)
|
|
The amounts in this column represent actual salary paid in 2008, 2007 and 2006.
|
|
|
|
(2)
|
|
The amounts in this column were earned in 2007 and 2006 and paid in early 2008 and 2007,
respectively.
|
|
|
|
(3)
|
|
The amounts in this column are the compensation costs as defined by SFAS 123R and recognized
for financial statement purposes for the respective fiscal year. See the Company’s notes to
its consolidated financial statements for a description of assumptions used in calculating the
expense recognized.
|
|
|
|
(4)
|
|
The following table sets forth by category and amount all compensation included in the “All
Other Compensation” column. Perquisites primarily include automobile allowances, financial
planning costs and healthcare costs not otherwise covered by insurance. We incur expenses and
reimburse employees for technology devices and services to ensure that our employees,
including our executive officers, are readily accessible to us and our customers at all times
in and out of the office as necessary. We do not view these costs as perquisites for executive
officers as they are essential to the efficient performance of their duties and are comparable
to the benefits provided to a broad-based group of our employees.
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grossed-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Matching
|
|
|
Life Insurance
|
|
|
Value of a
|
|
|
|
|
|
|
|
|
Name
|
|
Year
|
|
|
Perquisites
|
|
|
Gross Ups
|
|
|
Contributions
|
|
|
Premiums
|
|
|
Watch
|
|
|
Other
|
|
|
Total
|
|
|
Mr. McMullen
|
|
|
2008
|
|
|
$
|
32,500
|
(a)
|
|
$
|
24,411
|
|
|
$
|
11,275
|
|
|
$
|
9,674
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
77,860
|
|
|
|
|
|
2007
|
|
|
$
|
32,500
|
(a)
|
|
$
|
23,684
|
|
|
$
|
10,250
|
|
|
$
|
7,567
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
74,001
|
|
|
|
|
|
2006
|
|
|
$
|
32,500
|
(a)
|
|
$
|
22,565
|
|
|
$
|
10,000
|
|
|
$
|
5,267
|
|
|
$
|
1,766
|
|
|
|
—
|
|
|
$
|
72,098
|
|
|
Mr. Hamill
|
|
|
2008
|
|
|
$
|
25,000
|
|
|
$
|
16,043
|
|
|
$
|
8,525
|
|
|
$
|
1,140
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
50,708
|
|
|
|
|
|
2007
|
|
|
$
|
25,000
|
|
|
$
|
15,966
|
|
|
$
|
7,750
|
|
|
$
|
2,114
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
50,830
|
|
|
|
|
|
2006
|
|
|
$
|
22,050
|
|
|
$
|
14,250
|
|
|
$
|
7,561
|
|
|
$
|
1,209
|
|
|
$
|
1,809
|
|
|
|
—
|
|
|
$
|
46,879
|
|
|
Mr. Di Ianni
|
|
|
2008
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
8,525
|
|
|
$
|
4,902
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
25,427
|
|
|
|
|
|
2007
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
10,000
|
|
|
$
|
3,223
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
25,223
|
|
|
|
|
|
2006
|
|
|
$
|
8,769
|
|
|
|
—
|
|
|
$
|
10,000
|
|
|
$
|
965
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,734
|
|
|
Dr. Newman
|
|
|
2008
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
11,275
|
|
|
$
|
12,759
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
36,034
|
|
|
|
|
|
2007
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
10,250
|
|
|
$
|
4,117
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
26,367
|
|
|
|
|
|
2006
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
10,000
|
|
|
$
|
2,300
|
|
|
$
|
1,781
|
|
|
|
—
|
|
|
$
|
26,081
|
|
|
Ms. Sheldrick
|
|
|
2008
|
|
|
$
|
12,000
|
|
|
|
—
|
|
|
$
|
9,108
|
|
|
$
|
2,156
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
23,264
|
|
|
|
|
|
2007
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
2006
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Ms. Boucher-Champagne
|
|
|
2008
|
|
|
$
|
10,805
|
|
|
|
—
|
|
|
$
|
5,392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
16,197
|
|
|
|
|
|
2007
|
|
|
$
|
15,420
|
|
|
|
—
|
|
|
$
|
15,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
30,939
|
|
|
|
|
|
2006
|
|
|
$
|
7,362
|
|
|
|
—
|
|
|
$
|
11,879
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,241
|
|
|
|
|
|
|
(a)
|
|
Pursuant to Mr. McMullen’s employment agreement he is entitled to receive $32,500 in
perquisites. Mr. McMullen has generally used these perquisites for auto allowances, medical
expenses and financial planning costs.
|
|
|
|
(5)
|
|
Compensation which was paid or received in Canadian dollars has been converted to U.S.
dollars based upon the annual exchange rate between the Canadian dollar and the U.S. dollar.
|
|
|
|
(6)
|
|
Effective February 2008, Ms. Boucher-Champagne, as a result of internal restructuring, was no
longer deemed an executive officer of the Company pursuant to Section 16 of the Exchange Act,
but her title and duties were not modified in any way.
|
Grants of Plan-Based Awards
The following table sets forth information about stock and option awards and equity incentive
plan awards granted to our named executive officers during the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
All Other
|
|
|
|
|
|
|
Date Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Option
|
|
|
Exercise
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Awards:
|
|
|
or Base
|
|
|
Stock
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Estimated Future Payouts
|
|
|
of Shares
|
|
|
Number of
|
|
|
Price of
|
|
|
and
|
|
|
|
|
|
|
|
|
Under Non-Equity Incentive
|
|
|
Under Equity Incentive
|
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of Stock
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Securities
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Option
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Option
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Grant
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Plan Awards
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Plan Awards
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or Units
|
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Underlying
|
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Awards
|
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Awards
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Name
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Date
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Threshold
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Target
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Maximum
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Threshold
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Target
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Maximum
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(#)
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Options (#)
|
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(per share)
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|
(2)
|
|
|
Jeffrey P. McMullen
|
|
|
3/4/2008
|
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,370
|
|
|
|
16,696
|
|
|
$
|
29.47
|
|
|
$
|
493,336
|
|
|
|
|
|
3/4/2008
|
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
|
|
—
|
|
|
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—
|
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|
8,370
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
$
|
246,664
|
|
|
John P. Hamill
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,426
|
|
|
|
4,840
|
|
|
$
|
29.47
|
|
|
$
|
290,356
|
|
|
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
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|
2,426
|
|
|
|
(1
|
)
|
|
|
|
|
|
$
|
71,494
|
|
|
Mark Di Ianni
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
|
|
—
|
|
|
|
2,353
|
|
|
|
4,693
|
|
|
$
|
29.47
|
|
|
$
|
138,657
|
|
|
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
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—
|
|
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|
2,353
|
|
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|
(1
|
)
|
|
|
—
|
|
|
$
|
69,343
|
|
|
Thomas J. Newman
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,017
|
|
|
|
6,019
|
|
|
$
|
29.47
|
|
|
$
|
472,549
|
|
|
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
|
|
3,017
|
|
|
|
(1
|
)
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|
|
|
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|
$
|
88,911
|
|
|
Robin C. Sheldrick
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
|
|
—
|
|
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|
3,128
|
|
|
|
1,253
|
|
|
$
|
29.47
|
|
|
$
|
110,693
|
|
|
|
|
|
3/4/2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
628
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
$
|
18,507
|
|
|
Johane
Boucher-Champagne(3)
|
|
|
3/4/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
847
|
|
|
|
1,689
|
|
|
$
|
29.47
|
|
|
$
|
49,939
|
|
|
|
|
|
3/4/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
847
|
|
|
|
(1
|
)
|
|
|
|
|
|
$
|
24,961
|
|
|
|
|
|
|
(1)
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|
The performance-based Restricted Stock Units vest upon the achievement of certain performance
milestones if the Company meets or exceeds certain cumulative earnings targets for 2007, 2008
and 2009.
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|
(2)
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|
Grant date fair value is calculated based upon the number of shares multiplied by the grant
date closing price and the number of options multiplied by the Black-Scholes value of $14.77
per share.
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|
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|
(3)
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|
Effective February 2008, Ms. Boucher-Champagne, as a result of internal restructuring, was no
longer deemed an executive officer of the Company pursuant to Section 16 of the Exchange Act,
but her title and duties were not modified in any way.
|
67
Outstanding Equity Awards at Year-End
The following table sets forth information about the equity awards held by our named executive
officers as of December 31, 2008.
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Option Awards
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Stock Awards
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Equity
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|
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|
Equity
|
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|
|
|
|
|
|
|
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|
|
|
|
|
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|
Equity
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
Market or
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|
|
|
|
|
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|
|
|
|
Awards:
|
|
|
|
|
|
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|
|
|
|
Number
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|
|
Market
|
|
|
Number of
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|
|
Payout Value
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Value of
|
|
|
Unearned
|
|
|
of Unearned
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Shares, Units
|
|
|
Shares, Units
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
or Other
|
|
|
or Other
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
|
|
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights That
|
|
|
Rights That
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Option
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
(#)
|
|
|
Price
|
|
|
Date
|
|
|
(#)
|
|
|
(1)
|
|
|
(#)
|
|
|
(1)
|
|
|
Jeffrey P. McMullen(6)
|
|
|
103,800
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40.39
|
|
|
|
12/22/2009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
24,593
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
38.00
|
|
|
|
5/17/2010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
5,385
|
(2)
|
|
|
10,770
|
(3)
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
6,888
|
|
|
$
|
6,268
|
|
|
|
8,609
|
(4)
|
|
$
|
7,834
|
|
|
|
|
|
—
|
|
|
|
16,696
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
8,370
|
|
|
$
|
7,617
|
|
|
|
8,370
|
(4)
|
|
$
|
7,617
|
|
|
John P. Hamill(6)
|
|
|
895
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40.39
|
|
|
|
12/22/2009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
3,571
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.86
|
|
|
|
12/19/2010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,500
|
|
|
$
|
3,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
1,511
|
(2)
|
|
|
3,022
|
(3)
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
1,932
|
|
|
$
|
1,758
|
|
|
|
2,415
|
(4)
|
|
$
|
2,198
|
|
|
|
|
|
|
|
|
|
4,840
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
7,426
|
|
|
$
|
6,758
|
|
|
|
2,426
|
(4)
|
|
$
|
2,208
|
|
|
Mark Di Ianni
|
|
|
1,550
|
(2)
|
|
|
3,099
|
(3)
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
1,982
|
|
|
$
|
1,804
|
|
|
|
2,477
|
(4)
|
|
$
|
2,254
|
|
|
|
|
|
—
|
|
|
|
4,693
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
2,353
|
|
|
$
|
2,141
|
|
|
|
2,353
|
(4)
|
|
$
|
2,141
|
|
|
Thomas J. Newman
|
|
|
14,305
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40.39
|
|
|
|
12/22/2009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
3,571
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.86
|
|
|
|
12/19/2010
|
|
|
|
1,667
|
|
|
$
|
1,517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
10,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
15.82
|
|
|
|
12/22/2010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
1,914
|
(2)
|
|
|
3,828
|
(3)
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
2,448
|
|
|
$
|
2,228
|
|
|
|
3,060
|
(4)
|
|
$
|
2,785
|
|
|
|
|
|
—
|
|
|
|
6,019
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
13,017
|
|
|
$
|
11,845
|
|
|
|
3,017
|
(4)
|
|
$
|
2,745
|
|
|
Robin C. Sheldrick
|
|
|
2,626
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40.39
|
|
|
|
12/22/2009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
3,571
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.86
|
|
|
|
12/19/2010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
406
|
(2)
|
|
|
812
|
(3)
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
520
|
|
|
$
|
473
|
|
|
|
649
|
(4)
|
|
$
|
591
|
|
|
|
|
|
—
|
|
|
|
1,253
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
3,128
|
|
|
$
|
2,846
|
|
|
|
628
|
(4)
|
|
$
|
571
|
|
|
Johane
Boucher-Champagne(5)
|
|
|
30,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
15.93
|
|
|
|
3/13/2012
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
7,500
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13.86
|
|
|
|
12/19/2010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
543
|
(2)
|
|
|
1,084
|
|
|
|
—
|
|
|
$
|
26.91
|
|
|
|
8/3/2014
|
|
|
|
694
|
|
|
$
|
632
|
|
|
|
867
|
(4)
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
1,689
|
(3)
|
|
|
—
|
|
|
$
|
29.47
|
|
|
|
3/4/2015
|
|
|
|
847
|
|
|
$
|
771
|
|
|
|
847
|
(4)
|
|
$
|
771
|
|
|
|
|
|
|
(1)
|
|
The amounts in this column are calculated by multiplying the number of shares in the previous
column by the closing price on December 31, 2008, of $0.91.
|
|
|
|
(2)
|
|
Such options are fully vested.
|
|
|
|
(3)
|
|
Such options vest in
1
/
3
increments on each anniversary from the date
of grant.
|
|
|
|
(4)
|
|
Such amounts consist of performance-based Restricted Stock Units which vest if the Company
meets or exceeds certain cumulative earnings targets for 2007, 2008 and 2009.
|
|
|
|
(5)
|
|
Effective February 2008, Ms. Boucher-Champagne, as a result of internal restructuring, was no
longer deemed an executive officer of the Company pursuant to Section 16 of the Exchange Act,
but her title and duties were not modified in any way.
|
|
|
|
(6)
|
|
Such amounts do not include 60,000 Restricted Stock Units for Mr. McMullen and 25,000
Restricted Stock Units for Mr. Hamill which were to vest only if PDGI met or exceeded the
non-GAAP earnings per share target for 2008. These Restricted Stock Units were deemed canceled
as of February 25, 2009.
|
68
Option Exercises and Stock Vested
The table below sets forth information about option exercise and stock award vesting activity
for our named executive officers during the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
Acquired on Exercise
|
|
|
Value Realized
|
|
|
Acquired on Vesting
|
|
|
Value Realized on
|
|
|
Name
|
|
(#)
|
|
|
on Exercise
|
|
|
(#)
|
|
|
Vesting(1)
|
|
|
Jeffrey P. McMullen
|
|
|
—
|
|
|
|
—
|
|
|
|
22,541
|
|
|
$
|
214,444
|
|
|
John P. Hamill
|
|
|
—
|
|
|
|
—
|
|
|
|
14,149
|
|
|
$
|
125,426
|
|
|
Mark Di Ianni
|
|
|
—
|
|
|
|
—
|
|
|
|
5,495
|
|
|
$
|
53,436
|
|
|
Thomas J. Newman
|
|
|
—
|
|
|
|
—
|
|
|
|
12,277
|
|
|
$
|
111,819
|
|
|
Robin C. Sheldrick
|
|
|
—
|
|
|
|
—
|
|
|
|
5,129
|
|
|
$
|
44,759
|
|
|
Johane Boucher-Champagne(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,173
|
|
|
$
|
45,802
|
|
|
|
|
|
|
(1)
|
|
The amounts in this column were calculated by multiplying the number of shares by the closing
price on the date of vesting.
|
|
|
|
(2)
|
|
Effective February 2008, Ms. Boucher-Champagne, as a result of internal restructuring, was no
longer deemed an executive officer of the Company pursuant to Section 16 of the Exchange Act,
but her title and duties were not modified in any way.
|
Executive Employment Agreements
We have entered into employment agreements with each of our named executive officers. All such
agreements are referred to herein as the “Employment Agreements.” Each of these Employment
Agreements is substantially similar, and the material terms of the agreements are described below.
All of the agreements are for a three-year term from the original date of the agreement, and one of
them automatically renews for successive one-year terms unless the party gives notice.
Under each Employment Agreement, the named executive officer is entitled to a base salary with
annual increases thereto. For Mr. McMullen, the Chief Executive Officer, the increase is the
greater of 4%, an amount determined by the Compensation Committee. For Mr. Hamill, Mr. Di Ianni,
Dr. Newman and Ms. Sheldrick, the increase is the greater of 4%, an amount approved by the
Compensation Committee or the Consumer Price Index.
Each named executive officer is eligible for incentive compensation, annual and/or long-term,
according to the terms of his or her agreement. Each executive officer is also eligible to
participate in any plan relating to stock options, pension, 401(k), medical, disability or life
insurance or other employee benefit plan that we have adopted, or may from time to time adopt, for
the benefit of our executive officers and for employees generally, except that executive officers
may not participate in the Employee Stock Purchase Plan. Each of the executive officers is also
entitled to such customary fringe benefits and vacation leave as are consistent with our normal
practices and established policies. For each named executive, any severance benefits are governed
by the officer’s Employment Agreement. Each Employment Agreement contains a covenant not to compete
during the term of the agreement and for a 24-month period following termination of employment.
Effective February 1, 2008, Ms. Boucher-Champagne was no longer deemed an executive officer of
the Company pursuant to Section 16 of the Exchange Act. Further, on February 1, 2008, due to an
internal reorganization of reporting responsibilities, Robin C. Sheldrick, Senior Vice President,
Human Resources became an executive officer pursuant to Section 16 of the Exchange Act.
On December 12, 2008, the Compensation Committee approved a three year extension to the terms
of the Employment Agreement of Jeffrey P. McMullen. The agreement was executed by both PDGI and
Mr. McMullen and is dated as of December 16, 2008, and was effective as of December 31, 2008.
On December 31, 2008, we entered into amended and restated Employment Agreements with each of
our named executive officers. With the exception of the agreement entered into by and between the
Company and Mr. McMullen, such agreements were entered into so as to comply with Internal Revenue
Code section 409A.
We have clawback provisions in our option agreements which cancel existing options and require
forfeiture of profits where the employee has been terminated for cause or violates non-compete or
confidentiality provisions of employment or other agreements following resignation or termination.
In addition, new employment agreements authorize the Compensation Committee, in the event it learns
that an executive or the Company is subject to any investigation involving possible violations of
the United States securities
laws, to cause the Company to withhold all payments which the Committee believes may be considered
to be subject to the provisions of Section 1103 of the Sarbanes-Oxley Act of 2002.
69
2008 Potential Payments upon Termination or Change of Control
The following table sets forth information about the potential incremental payments to our
named executive officers in the event of their termination or termination in connection with a
change in control as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey P.
|
|
|
John P.
|
|
|
Mark
|
|
|
Thomas J.
|
|
|
Robin C.
|
|
|
Johane Boucher-
|
|
|
|
|
McMullen(4)
|
|
|
Hamill(5)
|
|
|
Di Ianni(5)
|
|
|
Newman(5)
|
|
|
Sheldrick(5)
|
|
|
Champagne(5)(6)
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Without Cause:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash severance(1)
|
|
|
2,229,936
|
|
|
|
863,592
|
|
|
|
838,250
|
|
|
|
1,071,688
|
|
|
|
559,614
|
|
|
|
389,391
|
|
|
Equity(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted
Stock Units
|
|
|
29,336
|
|
|
|
38,856
|
|
|
|
8,340
|
|
|
|
21,120
|
|
|
|
4,482
|
|
|
|
2,962
|
|
|
Unvested stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Insurance benefits(3)
|
|
|
—
|
|
|
|
47,311
|
|
|
|
49,569
|
|
|
|
36,593
|
|
|
|
28,861
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,259,272
|
|
|
|
949,759
|
|
|
|
896,159
|
|
|
|
1,129,401
|
|
|
|
592,957
|
|
|
|
392,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash severance(1)
|
|
|
—
|
|
|
|
863,592
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted
Stock Units
|
|
|
29,336
|
|
|
|
38,856
|
|
|
|
8,340
|
|
|
|
21,120
|
|
|
|
4,482
|
|
|
|
2,962
|
|
|
Unvested stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Insurance benefits(3)
|
|
|
—
|
|
|
|
47,311
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,336
|
|
|
|
949,759
|
|
|
|
8,340
|
|
|
|
21,120
|
|
|
|
4,482
|
|
|
|
2,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A multiple of current base salary in the amounts of three times for Mr. McMullen, two times
for Mr. Hamill, Mr. Di Ianni, Dr. Newman and Ms. Sheldrick and one time for
Ms. Boucher-Champagne.
|
|
|
|
(2)
|
|
All values reflected in the table assume a termination date of December 31, 2008, and, where
applicable, the closing price of our common stock on that day of $0.91. All amounts reflect
the incremental value to each of the named officers in the event of a termination and do not
include the value of any equity vested and earned equity prior to December 31, 2008. The
equity value for the unvested options reflects the intrinsic value (market price less exercise
price) of such options.
|
|
|
|
(3)
|
|
Represents coverage for 24 months.
|
|
|
|
(4)
|
|
If Mr. McMullen is a “disqualified individual” (as defined in Section 280G(c) of the Internal
Revenue Code of 1986, also referred to as the “Code”) and the benefits provided for in his
employment agreement, together with any other payments and benefits which he has the right to
receive, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the
Code), then the benefits provided under his employment agreement (beginning with any benefit
to be paid in cash hereunder) shall be reduced (but not below zero) so that the present value
of such total amounts and benefits received by him will be $1.00 less than three times his
“base amount” (as defined in Section 280G of the Code) and so that no portion of such amounts
and benefits received by him shall be subject to the excise tax imposed by Section 4999 of the
Code. Accordingly, it is possible that the amount of severance benefits may be reduced.
|
|
|
|
(5)
|
|
In the event that any payments or benefits to which the executive becomes entitled to in
accordance with the provisions of his employment agreement (or any other agreement with us or
one of our affiliates) would otherwise constitute a parachute payment under Code
Section 280G(b)(2), then such payments or benefits will be subject to reduction to the extent
necessary to assure that the executive receives only the greater of or either (i) the amount
of those payments which would not constitute such a parachute payment or (ii) the amount which
yields the executive the greatest after-tax amount of benefits after taking into account any
excise tax imposed under Code Section 4999 on the payments or benefits provided the executive
under his employment agreement (or on any other payments or benefits to which the executive
may become entitled in connection with any change in control or ownership of the Company or
the subsequent termination of his employment).
|
|
|
|
(6)
|
|
Effective February 2008, Ms. Boucher-Champagne, as a result of internal restructuring, was no
longer deemed an executive officer of the Company pursuant to Section 16 of the Exchange Act,
but her title and duties were not modified in any way.
|
70
Compensation of Directors
The following table sets forth the compensation paid to non-employee directors during the year
ended December 31, 2008. A director who is our employee does not receive any additional
compensation for services as a director.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
Name
|
|
Paid in Cash
|
|
|
Stock Awards(1)
|
|
|
Total
|
|
|
Peter G. Tombros
|
|
$
|
97,000
|
|
|
$
|
173,077
|
|
|
$
|
270,077
|
|
|
Rolf A. Classon
|
|
$
|
41,000
|
|
|
$
|
136,218
|
(2)
|
|
$
|
177,218
|
|
|
Lewis R. Elias, M.D.
|
|
$
|
48,000
|
|
|
$
|
115,385
|
|
|
$
|
163,385
|
|
|
Arnold Golieb
|
|
$
|
69,333
|
|
|
$
|
115,385
|
(2)
|
|
$
|
184,718
|
|
|
David M. Olivier
|
|
$
|
64,458
|
|
|
$
|
115,385
|
|
|
$
|
179,843
|
|
|
Per Wold-Olsen
|
|
$
|
48,000
|
|
|
$
|
115,385
|
|
|
$
|
163,385
|
|
|
|
|
|
|
(1)
|
|
Represents the expense recognized in accordance with SFAS 123R for Restricted Stock Units
granted in 2007 and 2008. As of 12/31/2008 there are 24,875 Restricted Stock Units unvested
and outstanding. See the Company’s notes to its consolidated financial statements for a
description of assumptions used in calculating the expense recognized.
|
|
|
|
(2)
|
|
Mr. Classon and Mr. Golieb have elected to defer receipt of the shares underlying their
respective Restricted Stock Units for tax planning purposes.
|
Compensation for Services as a Non-Employee Director
Compensation for non-employee directors is established by the Compensation Committee based on
analysis performed by the Committee’s outside compensation consultant. On March 23, 2006, the
current compensation plan for non-employee directors was approved. Each director who is not an
employee is compensated for services as a director by an annual retainer of $30,000 and a meeting
fee of $1,000 for each board and committee meeting attended in person or by telephone. In addition,
equity grants of Restricted Stock Units are issued to each director upon election at each annual
meeting. Each Restricted Stock Unit which vests entitles the director to receive one share of
common stock upon vesting. The grants, valued at $125,000 based on the price of our common stock on
the date of grant, vest over the length of the elected service term of one year, one half on
December 31 and one half at the earlier of the next annual meeting or June 30 provided the
individual is still a member of the Board of Directors on such dates.
The Chairman of the Board is also compensated for such service by an additional annual
retainer of $60,000 and Restricted Stock Units, as the Chairman elects, valued at $62,500, based
upon our stock price on the date of grant, upon his election at each annual meeting.
The chairmen of our committees received the following annual retainers in addition to the
foregoing amounts for their service as chairmen of the respective committees:
|
|
•
|
|
Audit Committee—$15,000.
|
|
|
•
|
|
Compensation Committee—$7,500.
|
|
|
•
|
|
Nominating and Corporate Governance Committee—$5,000.
|
|
|
•
|
|
Strategic Alternatives Committee—$5,000.
|
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or has been an officer or employee of our company
or any of our subsidiaries. No member of the Compensation Committee had any relationships with us
or any other entity that requires disclosure under the proxy rules and regulations promulgated by
the SEC. In addition, none of our executive officers served on the compensation committee or board
of any company that employed any member of our Board of Directors.
71
Report of the Compensation Committee
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
with management and, based on this review and these discussions, the Compensation Committee
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in
this Form 10-K.
This report is submitted on behalf of the Compensation Committee.
David M. Olivier, Chairman
Lewis R. Elias
Arnold Golieb
|
|
|
|
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of our voting stock beneficially owned as
of March 16, 2009 by each person known by us to be the beneficial owner of at least 5% of our
common stock, each of our current directors, each of our current named executive officers and all
of our current executive officers and directors as a group.
We believe that all persons named in the table have sole voting and investment power with
respect to all securities beneficially owned by them. Beneficial ownership exists when a person
either has the power to vote or sell common stock. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the applicable date, whether
upon the exercise of options or otherwise.
The number of Shares beneficially owned by each stockholder is determined under rules issued
by the Securities and Exchange Commission. Under these rules, beneficial ownership includes any
Shares as to which the individual or entity has sole or shared voting power or investment power and
includes any Shares that an individual or entity has the right to acquire beneficial ownership of
within 60 days of March 16, 2009 through the exercise of any warrant, stock option or other right.
Each of the stockholders listed has sole voting and investment power with respect to the Shares
beneficially owned by the stockholder unless noted otherwise, subject to community property laws
where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Percentage of Shares
|
|
|
Name and Address of Beneficial Owner(1)
|
|
Beneficially Owned
|
|
|
Beneficially Owned(1)
|
|
|
Jeffrey P. McMullen (2)
|
|
|
143,651
|
|
|
|
*
|
|
|
Peter G. Tombros (3)
|
|
|
21,377
|
|
|
|
*
|
|
|
Rolf A. Classon (4)
|
|
|
16,502
|
|
|
|
*
|
|
|
Lewis R. Elias (5)
|
|
|
20,424
|
|
|
|
*
|
|
|
Arnold Golieb (6)
|
|
|
26,771
|
|
|
|
*
|
|
|
David M. Olivier (7)
|
|
|
14,998
|
|
|
|
*
|
|
|
Per Wold-Olsen (8)
|
|
|
19,998
|
|
|
|
*
|
|
|
John P. Hamill (9)
|
|
|
45,396
|
|
|
|
*
|
|
|
Mark Di Ianni (10)
|
|
|
19,315
|
|
|
|
*
|
|
|
Thomas J. Newman (11)
|
|
|
54,463
|
|
|
|
*
|
|
|
Robin C. Sheldrick (12)
|
|
|
16,612
|
|
|
|
*
|
|
|
Glazer Capital Inc (13)
|
|
|
991,840
|
|
|
|
5.0
|
%
|
|
Invesco Ltd (14)
|
|
|
1,660,687
|
|
|
|
8.3
|
%
|
|
Pzena Investment Management Group, LLC (15)
|
|
|
1,632,886
|
|
|
|
8.1
|
%
|
|
All officers and directors as a group
|
|
|
399,507
|
|
|
|
2.0
|
%
|
|
|
|
|
|
*
|
|
Less than one percent.
|
|
|
|
(1)
|
|
Except where indicated, each of the persons listed above has the address c/o PharmaNet
Development Group, Inc., 504 Carnegie Center, Princeton, New Jersey 08540. Also, please note
that this table assumes that the Offer and Merger are consummated, that the options are out of
the money and that the Restricted Stock Units are accelerated.
|
|
|
|
(2)
|
|
This amount represents 126,672 shares of common stock and 16,979 unvested Restricted Stock
Units.
|
|
|
|
(3)
|
|
Includes 15,637 shares of common stock and 5,740 shares of unvested Restricted Stock Units.
|
72
|
|
|
|
|
(4)
|
|
Mr. Classon has elected to defer receipt of the 12,675 shares underling his Restricted Stock
Units for tax planning purposes. Additionally Mr. Classon has 3,827 shares of unvested
Restricted Stock Units, which will also be deferred.
|
|
|
|
(5)
|
|
Includes 16,597 shares of common stock and 3,827 shares of unvested Restricted Stock Units.
|
|
|
|
(6)
|
|
Includes 17,139 shares of common stock and 5,805 Restricted Stock Units, which Mr. Golieb has
elected to defer the receipt of for tax planning purposes. Additionally Mr. Golieb has 3,827
shares of unvested Restricted Stock Units, which will also be deferred. Also includes 800
shares held by the Brody Children Irrevocable Trust of which Mr. Golieb is the trustee.
|
|
|
|
(7)
|
|
Includes 11,171 shares of common stock and 3,827 shares of unvested Restricted Stock Units.
|
|
|
|
(8)
|
|
Includes 16,171 shares of common stock and 3,827 shares of unvested Restricted Stock Units.
|
|
|
|
(9)
|
|
This amount represents 39,963 shares of common stock, 592 shares of common stock which were
purchased pursuant to the Employee Stock Purchase Plan prior to Mr. Hamill’s employment as an
executive officer and 4,841 unvested Restricted Stock Units.
|
|
|
|
(10)
|
|
This amount represents 14,485 shares of common stock and 4,830 unvested Restricted Stock
Units.
|
|
|
|
(11)
|
|
This amount represents 48,386 shares of common stock and 6,077 shares of unvested Restricted
Stock Units.
|
|
|
|
(12)
|
|
This amount represents 15,335 shares of common stock and 1,277 unvested Restricted Stock
Units.
|
|
|
|
(13)
|
|
Based on information from a Schedule 13G/A filed with the SEC on March 13, 2009. Their
address is 237 Park Ave, Suite 900 New York, New York 10022.
|
|
|
|
(14)
|
|
Based on information from a Schedule 13G/A filed with the SEC on February 12, 2009. Their
address is 1555 Peachtree Street NE, Atlanta, Georgia 30309.
|
|
|
|
(15)
|
|
Based on information from a Schedule 13G/A filed with the SEC on February 17, 2009. Their
address is 120 West 45
th
Street, 20
th
Floor New York, New York 10036.
|
On
March 19, 2009, the Tender Offer expired and any shares validly tendered and
not withdrawn through such date have been accepted for payment by JLL.
Equity Compensation Plans
The following table sets forth information about common stock that may be issued under our
equity compensation plans as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
|
|
|
|
|
|
|
Issued upon
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Number of
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
|
Options,
|
|
|
Options,
|
|
|
Remaining
|
|
|
|
|
Warrants and
|
|
|
Warrants and
|
|
|
Available for
|
|
|
Plan Category
|
|
Rights
|
|
|
Rights
|
|
|
Future Issuance
|
|
|
1999 Stock Option Plan approved by security
holders(1)
|
|
|
1,016,213
|
|
|
$
|
21.91
|
|
|
|
—
|
|
|
2004 Employee Stock Purchase Plan approved
by security holders
|
|
|
700,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
2008 Incentive Compensation Plan approved
by security holders
|
|
|
34,767
|
|
|
$
|
1.87
|
|
|
|
679,207
|
|
|
Stock Option Agreements not approved by
security holders
|
|
|
14,388
|
|
|
$
|
20.05
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
Shares may be issued upon the exercise of options or stock appreciation rights through direct
stock issuances or pursuant to restricted stock awards or Restricted Stock Units that vest
upon the attainment of prescribed performance milestones or the completion of designated
service periods.
|
73
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Refer to Item 10 of this report.
Item 14.
Principal Accountant Fees and Services.
Fees Paid to Grant Thornton LLP
The following table sets forth the fees paid or accrued by us for audit and other services
provided by Grant Thornton LLP for the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit Fees
|
|
$
|
2,631,923
|
|
|
$
|
2,244,416
|
|
|
Audit-Related Fees
|
|
|
69,822
|
|
|
|
71,708
|
|
|
Tax Fees
|
|
|
90,198
|
|
|
|
232,535
|
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,791,943
|
|
|
$
|
2,548,659
|
|
|
|
|
|
|
|
|
|
The Audit Committee has adopted policies and procedures that require the pre-approval by the
Audit Committee of all fees paid to and services performed by our independent registered public
accounting firm and other auditing firms. As part of the process, the Audit Committee approves the
proposed services along with the range of corresponding fees to be provided by our independent
registered public accounting firm. If any proposed service would exceed the pre-approved cost
levels, the proposed service requires specific pre-approval. In addition, specific pre-approval is
required for any proposed services that may arise during the year that are outside the scope of the
initial services pre-approved by the Audit Committee.
Report of the Audit Committee
The Audit Committee oversees PDGI’s financial reporting process on behalf of the Board of
Directors. The Audit Committee consists of three members of the Board of Directors who meet the
independence and experience requirements of the NASDAQ Stock Market.
On February 26, 2007, we adopted an Amended and Restated Audit Committee Charter. Under our
Charter, the Audit Committee is appointed to assist the Board of Directors in monitoring the
following:
|
|
•
|
|
the integrity of PDGI’s financial statements;
|
|
|
•
|
|
the qualifications and independence of our independent registered public
accounting firm;
|
|
|
•
|
|
the performance of our internal audit function and our independent registered
public accounting firm; and
|
|
|
•
|
|
our compliance with legal and regulatory requirements.
|
The Audit Committee retains our independent registered public accounting firm and approves in
advance all permissible non-audit services performed by them and other auditing firms. Although
management has the primary responsibility for the financial statements and the reporting process,
including the systems of internal control, the Audit Committee consults with management and our
independent registered public accounting firm regarding the preparation of financial statements,
the adoption and disclosure of our critical accounting estimates and generally oversees the
relationship of the independent registered public accounting firm with PDGI.
74
The Audit Committee has:
|
|
•
|
|
fulfilled its oversight responsibilities by reviewing and discussing with
management the audited financial statements in the annual report on Form 10-K;
|
|
|
•
|
|
met privately with Grant Thornton LLP and discussed matters required to be
discussed by Statement on Auditing Standards No. 61 with Grant Thornton LLP, who is
responsible for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, relating to its judgments as
to the quality, not
just the acceptability, of our accounting principles, and such other matters as are
required to be discussed with the Audit Committee under generally accepted auditing
standards;
|
|
|
•
|
|
discussed with Grant Thornton LLP its independence from management and PDGI. The
Audit Committee has received the written disclosures and the letter from Grant Thornton
LLP, which is required by Independence Standards Board Standard No. 1, and considered
whether the provision of non-audit services was consistent with maintaining Grant
Thornton LLP’s independence; and
|
|
|
•
|
|
recommended to the Board of Directors, in reliance on the reviews and discussions
with management and Grant Thornton LLP, that the audited financial statements for the
year ended December 31, 2008, be included in the Annual Report on Form 10-K for filing
with the SEC.
|
This report is submitted on behalf of the
Audit Committee.
Arnold Golieb, Chairman
David M. Olivier
Per Wold-Olsen
75
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
2.1
|
|
|
Agreement and Plan of Merger, dated February 3, 2009, among JLL PharmaNet Holdings, LLC, PDGI Acquisition Corp.
and PharmaNet Development Group, Inc. filed as an exhibit to the Company’s Form 8-K which was filed on February
3, 2009.
|
|
|
3.1
|
|
|
Certificate of Incorporation filed as an exhibit to the Company’s Form SB-2 which was filed on August 17, 1999.
|
|
|
3.2
|
|
|
First Amendment to Certificate of Incorporation filed as an exhibit to the Company’s Form SB-2 which was filed
on August 17, 1999.
|
|
|
3.3
|
|
|
Certificate of Correction to Certificate of Incorporation filed as an exhibit to the Company’s Form SB-2 filed
on October 5, 2000.
|
|
|
3.4
|
|
|
Second Amendment to Certificate of Incorporation filed as an exhibit to the Company’s Form 10-K which was filed
on March 22, 2007.
|
|
|
3.5
|
|
|
Certificate of Correction to Second Amendment to Certificate of Incorporation filed as an exhibit to the
Company’s Form 10-Q which was filed on August 4, 2004.
|
|
|
3.6
|
|
|
Certificate of Designation for Series A Junior Participating Preferred Stock filed as an exhibit to the
Company’s Form 8-A which was filed on December 28, 2005.
|
|
|
3.7
|
|
|
Third Amendment to Certificate of Incorporation filed as an exhibit to the Company’s Form 10-K which was filed
on March 22, 2007.
|
|
|
3.8
|
|
|
Second Amended and Restated Bylaws filed as an exhibit to the Company’s Form 10-Q which was filed on November
9, 2007.
|
|
|
4.1
|
|
|
Form of Common Stock Certificate filed as an exhibit to the Company’s Form 10-K which was filed on March 22,
2007.
|
|
|
4.2
|
|
|
Indenture relating to 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the Company’s
Form S-3
which was filed on November 2, 2004.
|
|
|
4.3
|
|
|
Form of 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the Company’s Form S-3 which was filed
on November 2, 2004.
|
|
|
4.4
|
|
|
Registration Rights Agreement relating to 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the
Company’s Form S-3 which was filed on November 2, 2004.
|
|
|
10.1
|
*
|
|
Jeffrey P. McMullen Employment Agreement, as amended and restated filed as an exhibit to the Company’s Form 8-K
which was filed on February 11, 2009.
|
|
|
10.2
|
*
|
|
David Natan Employment Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March 22,
2007.
|
|
|
10.3
|
*
|
|
Lisa Krinsky Severance Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March 31,
2006.
|
|
|
10.4
|
*
|
|
Arnold Hantman Severance Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March 31,
2006.
|
|
|
10.5
|
*
|
|
Marc LeBel Employment Agreement filed as an exhibit to the Company’s Form 10-KSB which was filed on April 1,
2002.
|
|
|
10.6
|
*
|
|
Marc LeBel Amendment to Employment Agreement filed as an exhibit to the Company’s Form 10-Q which was filed on
August 9, 2005.
|
|
|
10.7
|
*
|
|
Arnold Hantman Employment Agreement filed as an exhibit to the Company’s Form 10-Q which was filed on August 9,
2005.
|
|
|
10.8
|
*
|
|
Lisa Krinsky, M.D. Employment Agreement filed as an exhibit to the Company’s Form 10-Q which was filed on
August 9, 2005.
|
|
|
10.9
|
|
|
Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q which was filed on August
9, 2005.
|
|
|
10.10
|
|
|
First Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-K
which was filed on March 31, 2006.
|
|
|
10.11
|
|
|
Second Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-K
which was filed on March 31, 2006.
|
|
|
10.12
|
|
|
Amended and Restated Security Agreement filed as an exhibit to the Company’s Form 10-Q which was filed on
August 9, 2005.
|
|
|
10.13
|
|
|
Shareholder Rights Agreement filed as an exhibit to the Company’s Form 8-A which was filed on December 28, 2005.
|
76
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
10.14
|
*
|
|
2004 Acquisition Stock Option Plan filed as an exhibit to the Company’s Form 8-K which was filed on December
27, 2004.
|
|
|
10.15
|
*
|
|
Form of Stock Option Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March 8, 2005.
|
|
|
10.16
|
*
|
|
Amended and Restated Stock Option Agreement (Jeffrey P. McMullen) filed as an exhibit to the Company’s Form
10-K which was filed on March 8, 2005.
|
|
|
10.17
|
*
|
|
Arnold Golieb Restricted Stock Agreement filed as an exhibit to the Company’s Form 10-K which was filed on
March 31, 2006.
|
|
|
10.18
|
*
|
|
Jack Levine Restricted Stock Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March
31, 2006.
|
|
|
10.19
|
|
|
New Drug Services Amended Agreement filed as an exhibit to the Company’s Form 10-K which was filed on March 31,
2006.
|
|
|
10.20
|
*
|
|
Confidential Separation Agreement and General Release by and between the Company and Gregory B. Holmes filed as
an exhibit to the Company’s Form 10-Q which was filed on August 14, 2006.
|
|
|
10.21
|
|
|
Third Waiver and Third Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the
Company’s Form 10-Q which was filed on August 14, 2006.
|
|
|
10.22
|
|
|
Fourth Waiver to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q which
was filed on August 14, 2006.
|
|
|
10.23
|
*
|
|
Thomas J. Newman, MD Employment Agreement, as amended and restated filed as an exhibit to the Company’s Form
8-K which was filed on February 11, 2009.
|
|
|
10.24
|
|
|
Fifth Waiver to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q which
was filed on November 9, 2006.
|
|
|
10.25
|
(1)
|
|
Fourth Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q
which was filed on November 9, 2006.
|
|
|
10.26
|
|
|
Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and PharmaNet, Inc dated
May 1999 filed as an exhibit to the Company’s Form 10-Q which was filed on November 9, 2006.
|
|
|
10.27
|
|
|
Amendment to No. 1 Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and
PharmaNet, Inc. dated May 1999 filed as an exhibit to the Company’s Form 10-Q which was filed on November 9,
2006.
|
|
|
10.28
|
|
|
Amendment No. 2 to Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and
PharmaNet, Inc. dated March 30, 2001 filed as an exhibit to the Company’s Form 10-Q which was filed on November
9, 2006.
|
|
|
10.29
|
|
|
Amendment No. 3 to Lease and Lease Agreement by and between 504 Carnegie Associated Limited Partnership and
PharmaNet, Inc. dated October 1, 2004 filed as an exhibit to the Company’s Form 10-Q which was filed on
November 9, 2006.
|
|
|
10.30
|
*
|
|
Mark Di Ianni Employment Agreement, as amended and restated filed as an exhibit to the Company’s Form 8-K which
was filed on February 11, 2009.
|
|
|
10.31
|
|
|
Form of Director Indemnification Agreement filed as an exhibit to the Company’s Form 10-K which was filed on
March 22, 2007.
|
|
|
10.32
|
|
|
Form of Executive Officer Indemnification Agreement filed as an exhibit to the Company’s Form 10-K which was
filed on March 22, 2007.
|
|
|
10.33
|
*
|
|
Form of Director Restricted Stock Unit Agreement filed as an exhibit to the Company’s Form 10-K which was filed
on March 22, 2007.
|
|
|
10.34
|
*
|
|
Form of Employee Restricted Stock Unit Agreement filed as an exhibit to the Company’s Form 10-K which was filed
on March 22, 2007.
|
|
|
10.35
|
*
|
|
John P. Hamill Employment Agreement, as amended and restated filed as an exhibit to the Company’s Form 8-K
which was filed on February 11, 2009.
|
|
|
10.36
|
|
|
Transaction Release and Discharge by and between Marc LeBel and Anapharm, Inc. filed as an exhibit to the
Company’s Form 8-K which was filed on March 30, 2007.
|
|
|
10.37
|
|
|
Fifth Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q
which was filed on August 9, 2007.
|
|
|
10.38
|
|
|
Severance Agreement and General Release by and between the Company and David Natan filed as an exhibit to the
Company’s Form 10-K which was filed on March 31, 2008.
|
|
|
10.39
|
|
|
Robin Sheldrick Employment Agreement, as amended and restated filed as an exhibit to the Company’s Form 8-K
which was filed on February 11, 2009.
|
|
|
10.40
|
*
|
|
Amended and Restated 1999 Stock Plan filed as an exhibit to the Company’s Form 10-K which was filed on March
31, 2008.
|
|
|
10.41
|
|
|
Code of Ethics filed as an exhibit to the Company’s Form 10-K which was filed on March 31, 2008.
|
|
|
10.42
|
|
|
Form of Equity Agreements (August 2007) filed as an exhibit to the Company’s Form 10-K which was filed on March
31, 2008.
|
|
|
10.43
|
*
|
|
2004 Employee Stock Purchase Plan, as amended and restated, filed as an exhibit to the Company’s Form 10-Q
which was filed on August 6, 2008.
|
77
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
10.44
|
*
|
|
2008 International Employee Stock Purchase Plan filed as an exhibit to the Company’s Form 10-Q which was filed
on August 6, 2008.
|
|
|
10.45
|
*
|
|
2008 Incentive Compensation Plan filed as an exhibit to the Company’s Form 10-Q which was filed on August 6,
2008.
|
|
|
10.46
|
|
|
Sixth Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-K
which was filed on March 31, 2008.
|
|
|
10.47
|
(1)
|
|
Seventh Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Company’s Form 10-Q
which was filed on August 6, 2008.
|
|
|
10.48
|
|
|
Amendment No. 1 to Rights Agreement, dated as of February 3, 2009, between PharmaNet Development Group, Inc.
and American Stock Transfer & Trust Company (as successor-in-interest to Wachovia Bank, N.A.), as rights agent
filed as an exhibit to the Company’s Form 8-K which was filed on February 3, 2009.
|
|
|
21
|
|
|
Subsidiaries of PharmaNet Development Group, Inc. (filed herewith).
|
|
|
23.1
|
|
|
Consent of Grant Thornton LLP dated March 23, 2009 (filed herewith).
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer (Section 302) (filed herewith).
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer (Section 302) (filed herewith).
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer (Section 1350) (furnished herewith).
|
|
|
32.2
|
|
|
Certification of Chief Financial Officer (Section 1350) (furnished herewith).
|
|
|
|
|
|
*
|
|
Compensation plan and arrangements for current and former executive officers and directors.
|
|
|
|
(1)
|
|
Portions of the exhibit have been omitted and have been filed separately pursuant to a
confidential treatment request that was granted by the SEC.
|
78
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.
|
|
|
|
|
|
|
|
PharmaNet Development Group, Inc.
|
|
|
|
By:
|
/s/
Jeffrey P. McMullen
|
|
|
|
|
Jeffrey P. McMullen
|
|
|
|
|
President and Chief Executive Officer
|
|
Date: March 23, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
/s/
Peter G. Tombros
Peter G. Tombros
|
|
Chairman of the Board of Directors
|
|
March 23, 2009
|
|
|
|
|
|
|
/s/
Jeffrey P. McMullen
Jeffrey P. McMullen
|
|
President and Chief Executive
Officer and Director (Principal
Executive Officer)
|
|
March 23, 2009
|
|
|
|
|
|
|
/s/
John P. Hamill
John P. Hamill
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
March 23, 2009
|
|
|
|
|
|
|
/s/
Rolf A. Classon
Rolf A. Classon
|
|
Director
|
|
March 23, 2009
|
|
|
|
|
|
|
/s/
Lewis R. Elias, MD
Lewis R. Elias, MD
|
|
Director
|
|
March 23, 2009
|
|
|
|
|
|
|
/s/
Arnold Golieb
Arnold Golieb
|
|
Director
|
|
March 23, 2009
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/s/
David M. Olivier
David M. Olivier
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Director
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March 23, 2009
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/s/ Per Wold-Olsen
Per Wold-Olsen
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Director
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March 23, 2009
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79
CONTENTS
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Page
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F-2
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Consolidated Financial Statements:
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F-3
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F-4
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F-5
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F-7
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F-8
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
PharmaNet Development Group, Inc.
We have audited the accompanying consolidated balance sheets of PharmaNet Development Group,
Inc. (formerly SFBC International, Inc.) (a Delaware corporation) and subsidiaries as of December
31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2008. Our audits of the
basic financial statements included the financial statement schedule listed in the index appearing
on Item 15. These financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PharmaNet Development Group, Inc. and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company has adopted
Financial Accounting Stands Board (FASB) No. 157, Fair
Value Measurements
, in 2008. Additionally,
as discussed in Note A to the consolidated financial statements, the Company has adopted FASB
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109
in 2007.
Also, as discussed in Note F to the consolidated financial statements, at December 31, 2008,
current liabilities include the 2.25% convertible senior notes payable amounting to $143.8 million
(the Notes). On February 3, 2009, the Company entered into an Agreement and Plan of Merger (Merger
Agreement) with a private equity group. The Merger Agreement includes an equity commitment of up
to $250.0 million from investors in the funds managed by the private equity group. The $250.0
million equity commitment is intended to purchase the outstanding common stock of the Company and
repay the convertible senior notes.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 23, 2009 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 23, 2009
F-2
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
|
|
|
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|
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2008
|
|
|
2007
|
|
|
|
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(In thousands, except per
|
|
|
|
|
share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,812
|
|
|
$
|
77,548
|
|
|
Investment in marketable securities
|
|
|
—
|
|
|
|
2,650
|
|
|
Accounts receivable, net
|
|
|
125,357
|
|
|
|
132,550
|
|
|
Income taxes receivable
|
|
|
4,391
|
|
|
|
1,855
|
|
|
Deferred income taxes
|
|
|
201
|
|
|
|
298
|
|
|
Prepaid expenses
|
|
|
9,537
|
|
|
|
6,589
|
|
|
Other current assets
|
|
|
6,687
|
|
|
|
5,274
|
|
|
Assets from discontinued operations
|
|
|
—
|
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
209,985
|
|
|
|
231,963
|
|
|
Property and equipment, net
|
|
|
56,338
|
|
|
|
67,506
|
|
|
Goodwill
|
|
|
29,960
|
|
|
|
266,973
|
|
|
Other intangible assets, net
|
|
|
12,277
|
|
|
|
26,442
|
|
|
Deferred income taxes
|
|
|
11,080
|
|
|
|
14,111
|
|
|
Other assets, net
|
|
|
4,906
|
|
|
|
7,840
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
324,546
|
|
|
$
|
614,835
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,070
|
|
|
$
|
13,843
|
|
|
Accrued liabilities
|
|
|
33,013
|
|
|
|
47,978
|
|
|
Client advances, current portion
|
|
|
60,551
|
|
|
|
79,312
|
|
|
Income taxes payable
|
|
|
2,656
|
|
|
|
—
|
|
|
Capital lease obligations and notes payable, current portion
|
|
|
2,589
|
|
|
|
3,562
|
|
|
2.25% Convertible senior notes payable, current portion
|
|
|
143,750
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
28
|
|
|
|
31
|
|
|
Other current liabilities
|
|
|
—
|
|
|
|
154
|
|
|
Liabilities from discontinued operations
|
|
|
—
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
251,657
|
|
|
|
146,650
|
|
|
Client advances
|
|
|
5,966
|
|
|
|
2,602
|
|
|
Deferred income taxes
|
|
|
4,842
|
|
|
|
8,518
|
|
|
Capital lease obligations and notes payable
|
|
|
2,868
|
|
|
|
5,634
|
|
|
2.25% Convertible senior notes payable
|
|
|
—
|
|
|
|
143,750
|
|
|
Other non-current liabilities
|
|
|
17,246
|
|
|
|
15,590
|
|
|
Minority interest in joint venture
|
|
|
1,580
|
|
|
|
2,722
|
|
|
Commitments and contingencies (Note G)
|
|
|
|
|
|
|
|
|
|
Temporary
equity:
|
|
|
|
|
|
|
|
|
|
Sale of unregistered common stock, subject to rescission
|
|
|
1,092
|
|
|
|
2,058
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value, 5,000 shares authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.001 par value, 40,000 shares authorized, 19,585
shares and 19,017 shares issued and outstanding in 2008 and 2007,
respectively
|
|
|
20
|
|
|
|
19
|
|
|
Additional paid-in capital
|
|
|
259,019
|
|
|
|
244,017
|
|
|
Retained earnings (accumulated deficit)
|
|
|
(228,477
|
)
|
|
|
22,616
|
|
|
Accumulated other comprehensive income
|
|
|
8,733
|
|
|
|
20,659
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
39,295
|
|
|
|
287,311
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
324,546
|
|
|
$
|
614,835
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct revenue
|
|
$
|
357,746
|
|
|
$
|
362,471
|
|
|
$
|
302,385
|
|
|
Reimbursed out-of-pocket expenses
|
|
|
93,707
|
|
|
|
107,786
|
|
|
|
104,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
451,453
|
|
|
|
470,257
|
|
|
|
406,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
231,488
|
|
|
|
216,173
|
|
|
|
182,679
|
|
|
Reimbursable out-of-pocket expenses
|
|
|
93,707
|
|
|
|
107,786
|
|
|
|
104,571
|
|
|
Selling, general and administrative expenses
|
|
|
121,884
|
|
|
|
114,411
|
|
|
|
98,827
|
|
|
Impairment of goodwill and indefinite-lived assets
|
|
|
248,503
|
|
|
|
—
|
|
|
|
7,873
|
|
|
Provision for settlement of litigation
|
|
|
—
|
|
|
|
10,400
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
695,582
|
|
|
|
448,770
|
|
|
|
393,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
|
|
(244,129
|
)
|
|
|
21,487
|
|
|
|
13,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,494
|
|
|
|
2,128
|
|
|
|
1,636
|
|
|
Interest expense
|
|
|
(6,069
|
)
|
|
|
(6,332
|
)
|
|
|
(8,115
|
)
|
|
Foreign currency exchange transaction loss, net
|
|
|
(848
|
)
|
|
|
(2,138
|
)
|
|
|
(3,342
|
)
|
|
Other income
|
|
|
277
|
|
|
|
178
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(5,146
|
)
|
|
|
(6,164
|
)
|
|
|
(9,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations before income taxes
|
|
|
(249,275
|
)
|
|
|
15,323
|
|
|
|
3,185
|
|
|
Income tax expense (benefit)
|
|
|
90
|
|
|
|
2,340
|
|
|
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations before minority interest in joint venture
|
|
|
(249,365
|
)
|
|
|
12,983
|
|
|
|
6,743
|
|
|
Minority interest in joint venture
|
|
|
1,728
|
|
|
|
905
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from continuing operations
|
|
|
(251,093
|
)
|
|
|
12,078
|
|
|
|
6,052
|
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
—
|
|
|
|
838
|
|
|
|
(42,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(251,093
|
)
|
|
$
|
12,916
|
|
|
$
|
(36,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(12.96
|
)
|
|
$
|
0.64
|
|
|
$
|
0.33
|
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
(2.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(12.96
|
)
|
|
$
|
0.69
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(12.96
|
)
|
|
$
|
0.63
|
|
|
$
|
0.33
|
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(12.96
|
)
|
|
$
|
0.68
|
|
|
$
|
(1.95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,380
|
|
|
|
18,790
|
|
|
|
18,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,380
|
|
|
|
19,048
|
|
|
|
18,447
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(251,093
|
)
|
|
$
|
12,916
|
|
|
$
|
(36,025
|
)
|
|
(Earnings) loss from discontinued operations
|
|
|
—
|
|
|
|
(838
|
)
|
|
|
42,077
|
|
|
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,461
|
|
|
|
15,477
|
|
|
|
14,415
|
|
|
Amortization of deferred debt issuance costs
|
|
|
1,732
|
|
|
|
1,578
|
|
|
|
2,827
|
|
|
Impairment of goodwill and indefinite-lived assets
|
|
|
248,503
|
|
|
|
—
|
|
|
|
7,873
|
|
|
Provision for settlement of litigation
|
|
|
—
|
|
|
|
10,400
|
|
|
|
—
|
|
|
Loss on disposal of property and equipment
|
|
|
401
|
|
|
|
381
|
|
|
|
160
|
|
|
Minority interest
|
|
|
(1,115
|
)
|
|
|
905
|
|
|
|
691
|
|
|
Provision for doubtful accounts
|
|
|
1,977
|
|
|
|
587
|
|
|
|
2,279
|
|
|
Non cash compensation — reduction of note receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
200
|
|
|
Share-based compensation expense
|
|
|
6,095
|
|
|
|
5,119
|
|
|
|
4,275
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,358
|
|
|
|
(15,927
|
)
|
|
|
(20,020
|
)
|
|
Income taxes receivable
|
|
|
(1,676
|
)
|
|
|
(1,141
|
)
|
|
|
6,688
|
|
|
Prepaid expenses and other current assets
|
|
|
(6,148
|
)
|
|
|
(1,085
|
)
|
|
|
2,777
|
|
|
Deferred income taxes
|
|
|
(3,477
|
)
|
|
|
(2,453
|
)
|
|
|
(8,717
|
)
|
|
Other assets
|
|
|
338
|
|
|
|
(749
|
)
|
|
|
(734
|
)
|
|
Accounts payable
|
|
|
(7,783
|
)
|
|
|
(3,555
|
)
|
|
|
3,240
|
|
|
Accrued liabilities
|
|
|
(9,627
|
)
|
|
|
9,986
|
|
|
|
8,802
|
|
|
Client advances
|
|
|
(15,279
|
)
|
|
|
9,812
|
|
|
|
(597
|
)
|
|
Income taxes payable
|
|
|
2,628
|
|
|
|
—
|
|
|
|
—
|
|
|
Other current liabilities
|
|
|
(154
|
)
|
|
|
154
|
|
|
|
—
|
|
|
Other non-current liabilities
|
|
|
3,498
|
|
|
|
2,963
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
240,732
|
|
|
|
32,452
|
|
|
|
24,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities — continuing operations
|
|
|
(10,361
|
)
|
|
|
44,530
|
|
|
|
30,211
|
|
|
Net cash (used in) provided by operating activities — discontinued operations
|
|
|
—
|
|
|
|
(792
|
)
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(10,361
|
)
|
|
|
43,738
|
|
|
|
31,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(6,775
|
)
|
|
|
(15,014
|
)
|
|
|
(13,529
|
)
|
|
Purchase of property and equipment related to sale-leaseback transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,272
|
)
|
|
Proceeds from the disposal of property and equipment
|
|
|
3
|
|
|
|
28
|
|
|
|
13
|
|
|
Purchase of intangible assets
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Additional purchase price consideration paid relating to acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
Net change in investment in marketable securities
|
|
|
2,650
|
|
|
|
7,378
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities — continuing operations
|
|
|
(4,227
|
)
|
|
|
(7,608
|
)
|
|
|
(23,045
|
)
|
|
Net cash provided by investing activities — discontinued operations
|
|
|
—
|
|
|
|
1,182
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,227
|
)
|
|
|
(6,426
|
)
|
|
|
(22,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
—
|
|
|
|
10,000
|
|
|
|
8,000
|
|
|
Payments on line of credit
|
|
|
—
|
|
|
|
(19,400
|
)
|
|
|
(15,600
|
)
|
|
Payments on capital lease obligations and notes payable
|
|
|
(2,621
|
)
|
|
|
(4,063
|
)
|
|
|
(2,712
|
)
|
|
Proceeds from sale-leaseback transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
9,800
|
|
|
Debt issuance costs attributable to financing instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
(421
|
)
|
|
Net proceeds from stock issued under option plans, ESPP and restricted stock awards
|
|
|
2,849
|
|
|
|
2,358
|
|
|
|
5,238
|
|
|
Proceeds from sale of unregistered common stock, subject to rescission
|
|
|
1,092
|
|
|
|
2,058
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,320
|
|
|
|
(9,047
|
)
|
|
|
4,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of exchange rate changes on cash and cash equivalents
|
|
|
(468
|
)
|
|
|
3,952
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(13,736
|
)
|
|
|
32,217
|
|
|
|
14,663
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
77,548
|
|
|
|
45,331
|
|
|
|
30,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
63,812
|
|
|
$
|
77,548
|
|
|
$
|
45,331
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4,732
|
|
|
$
|
4,662
|
|
|
$
|
5,300
|
|
|
Income taxes paid
|
|
$
|
3,886
|
|
|
$
|
8,842
|
|
|
$
|
4,165
|
|
|
Income taxes recovered
|
|
$
|
936
|
|
|
$
|
954
|
|
|
$
|
9,478
|
|
|
Supplemental disclosures of non-cash investing and finance activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value of restricted stock units granted as long-term incentive compensation
|
|
$
|
6,776
|
|
|
$
|
4,354
|
|
|
$
|
9,326
|
|
|
Capital lease obligations incurred
|
|
$
|
437
|
|
|
$
|
5,858
|
|
|
$
|
1,467
|
|
|
Settlement of class action litigation through issuance of common stock
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common stock issued in connection with acquisition of a business or additional consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Note receivable relieved in lieu of bonus payment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Accumulated
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
|
|
|
|
Other
|
|
|
Stock
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Held in
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Treasury
|
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Balances — December 31, 2005
|
|
|
18,493
|
|
|
|
18
|
|
|
|
242,352
|
|
|
|
48,661
|
|
|
|
(531
|
)
|
|
|
4,224
|
|
|
|
(12,444
|
)
|
|
|
282,280
|
|
|
Cumulative effect adjustments under SAB No. 108
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,851
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,701
|
|
|
|
—
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2006, as adjusted
|
|
|
18,493
|
|
|
|
18
|
|
|
|
239,501
|
|
|
|
48,661
|
|
|
|
(531
|
)
|
|
|
6,925
|
|
|
|
(12,444
|
)
|
|
|
282,130
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,025
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,025
|
)
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,959
|
|
|
|
—
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock with exercise of stock options
|
|
|
322
|
|
|
|
1
|
|
|
|
3,663
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,664
|
|
|
Issuance of common stock to ESPP
|
|
|
176
|
|
|
|
—
|
|
|
|
2,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332
|
|
|
Issuance of common stock as additional purchase
consideration for earn out
|
|
|
34
|
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
|
Issuance of common stock related to vesting of
restricted stock units
|
|
|
170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase and retirement of common stock related to
vesting of restricted stock units
|
|
|
(43
|
)
|
|
|
—
|
|
|
|
(757
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(757
|
)
|
|
Share-based compensation expense recognized on
restricted stock and restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
3,168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,168
|
|
|
Share-based compensation expense recognized with
adoption of SFAS 123R
|
|
|
—
|
|
|
|
—
|
|
|
|
1,108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,108
|
|
|
Adjustment required with adoption of SFAS 123R
|
|
|
—
|
|
|
|
—
|
|
|
|
(531
|
)
|
|
|
—
|
|
|
|
531
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Retirement of common stock held in treasury
|
|
|
(606
|
)
|
|
|
—
|
|
|
|
(12,444
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,444
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances — December 31, 2006
|
|
|
18,546
|
|
|
|
19
|
|
|
|
236,540
|
|
|
|
12,636
|
|
|
|
—
|
|
|
|
8,884
|
|
|
|
—
|
|
|
|
258,079
|
|
|
Cumulative effect adjustments under FIN 48
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,936
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2007, as adjusted
|
|
|
18,546
|
|
|
|
19
|
|
|
|
236,540
|
|
|
|
9,700
|
|
|
|
—
|
|
|
|
8,884
|
|
|
|
—
|
|
|
|
255,143
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,916
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,916
|
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,775
|
|
|
|
—
|
|
|
|
11,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock with exercise of stock
options and vesting of restricted stock units
|
|
|
376
|
|
|
|
—
|
|
|
|
3,734
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,734
|
|
|
Repurchase and retirement of common stock related to
vesting of restricted stock units
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(1,376
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,376
|
)
|
|
Issuance of common stock to ESPP, subject to rescission
|
|
|
134
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation expense recognized on
restricted stock and restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
4,262
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,262
|
|
|
Share-based compensation expense recognized on ESPP
and stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
857
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances — December 31, 2007
|
|
|
19,017
|
|
|
$
|
19
|
|
|
$
|
244,017
|
|
|
$
|
22,616
|
|
|
$
|
—
|
|
|
$
|
20,659
|
|
|
$
|
—
|
|
|
$
|
287,311
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,093
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,093
|
)
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,547
|
)
|
|
|
—
|
|
|
|
(11,547
|
)
|
|
Minimum pension liability adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(263,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock with exercise of stock
options and vesting of restricted stock units
|
|
|
351
|
|
|
|
1
|
|
|
|
2,198
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,199
|
|
|
Issuance of common stock to ESPP
|
|
|
126
|
|
|
|
—
|
|
|
|
1,129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,129
|
|
|
Reclassification from temporary equity due to
expiration of ESPP rescission rights
|
|
|
—
|
|
|
|
—
|
|
|
|
2,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,058
|
|
|
Repurchase and retirement of common stock related to
vesting of restricted stock units
|
|
|
(45
|
)
|
|
|
—
|
|
|
|
(478
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(478
|
)
|
|
Issuance of common stock related to settlement of
securities class action litigation
|
|
|
136
|
|
|
|
—
|
|
|
|
4,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000
|
|
|
Share-based compensation expense recognized on
restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
4,561
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,561
|
|
|
Share-based compensation expense recognized on ESPP
and stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1,534
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances — December 31, 2008
|
|
|
19,585
|
|
|
$
|
20
|
|
|
$
|
259,019
|
|
|
$
|
(228,477
|
)
|
|
$
|
—
|
|
|
$
|
8,733
|
|
|
$
|
—
|
|
|
$
|
39,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PharmaNet Development Group, Inc. (“PDGI” or the “Company”), is a leading drug development
services company, with clients in the branded pharmaceutical, biotechnology, generic drug and
medical device industries. The Company provides a broad range of early and late stage clinical
trial and bioanalytical laboratory services, including early clinical pharmacology, data management
and biostatistics, medical and scientific affairs, regulatory affairs and clinical information
technology and consulting services. The Company has offices and facilities located in North
America, Europe, South America, Asia, Africa and Australia.
Principles of Consolidation
The consolidated financial statements include the accounts of wholly owned subsidiaries and a
49%-owned joint venture in Spain which the Company controls. All significant intercompany balances
and transactions have been eliminated in consolidation. For information on discontinued operations,
see Note K to the consolidated financial statements.
Use of Estimates
The Company makes estimates and assumptions when preparing the consolidated financial
statements in conformity with accounting principles generally accepted in the United States of
America. These estimates and assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Revenue and Cost Recognition
The Company recognizes revenue from contracts, other than time-and-material contracts, on a
proportional performance basis. To measure performance on a given date, the Company compares effort
expended through that date to estimated total effort to complete the contract. The Company believes
this is the best indicator of the performance of the contractual obligations because the costs
relate primarily to the amount of labor incurred to perform the service. Changes to the estimated
total contract direct costs result in a change in estimate adjustment to the amount of revenue
recognized at the time the change becomes known. These changes in estimate adjustments may be
material in future periods. Service contracts generally take the form of fee-for-service or
fixed-price arrangements. In the case of fee-for-service contracts, revenue is recognized as
services are performed based upon, for example, hours worked or samples tested. For fixed-price
service contracts, revenue is recognized as services are performed, with performance generally
assessed using both input and output measures such as units-of-work performed to date compared with
total units-of-work contracted. The Company’s contracts are generally terminable immediately or
after a specified period following notice by the client. These contracts usually require payment to
us of expenses to complete a study and fees earned to date and for activities necessary to conclude
the program in an orderly way consistent with wishes of the clients, safety of participants and
applicable regulatory and good medical practices.
In some cases, a portion of the contract fee is paid at the time the contract is initiated or
prior to the service being performed. These client advances are deferred as a liability in the
accompanying consolidated balance sheets and recognized as revenue as services are performed or
products are delivered. Additional payments may be made based upon the achievement of
performance-based milestones over the contract duration.
Contracts may contain provisions for renegotiation in the event of cost overruns due to
changes in the level of work or scope. Renegotiated amounts are included in revenue when the work
is performed and realization is assured. Provisions for losses to be incurred on contracts are
recognized in full in the period in which it is determined that a loss will result from performance
of the contractual arrangement.
The Company includes reimbursed out-of-pocket expenses as a separate revenue line item in the
accompanying consolidated statements of operations. These expenses consist of travel expenses and
other costs that are reimbursed by clients. The Company
includes reimbursable out-of-pocket expenses as a separate line item in costs and expenses in
the accompanying consolidated statements of operations.
F-8
Direct costs include all direct costs related to contract performance, which may include
payroll-related costs. Selling, general and administrative costs are expensed as incurred and are
not deferred in anticipation of contracts being awarded. Changes in contract performance
requirements and estimated profitability may result in revisions to revenues and costs and are
recognized in the period in which the revisions are determined.
Cash and Cash Equivalents
The Company considers instruments purchased with an original maturity at the date of purchase
of three months or less to be cash and cash equivalents. The carrying values of these assets
approximate their fair market values. The Company is potentially subject to financial instrument
concentration of credit risk through its cash investments. From time to time, the Company maintains
cash balances with financial institutions in amounts that exceed federally insured limits. To
mitigate these risks, the Company maintains cash and cash equivalents with various financial
institutions. As of December 31, 2008 and 2007, cash and cash equivalents held outside the
U.S. totaled $44.1 million and $43.1 million, respectively.
Investment in Marketable Securities
The Company has invested in marketable securities which are classified as available-for-sale
and carried at fair value based on quoted market prices. The estimated fair value of securities for
which there are no quoted market prices is based on similar types of securities that are traded in
the market. Any unrealized holding gain or loss on investment in marketable securities is reported
as a component of accumulated other comprehensive income within stockholders’ equity in the
accompanying consolidated balance sheets.
The Company periodically reviews its investments to determine whether a decline in fair value
below the cost basis is other than temporary. If so, the investment is written down to fair value
and the amount of the write-down is charged to expense in the accompanying consolidated statements
of operations.
As of December 31, 2008, the Company did not have an investment in marketable securities.
During the prior year, the Company maintained an annuity-backed note with a face value of
$2.5 million Canadian dollars and 4.26% yield, including accrued interest and foreign currency
contracts. As of December 31, 2007, the unrealized gain or loss on investments in marketable
securities was not material. As of December 31, 2007, the fair value of the Company’s investment in
marketable securities was $2.7 million.
Accounts Receivable and Allowance for Doubtful Accounts
The Company bills accounts receivable when certain milestones defined in client contracts are
achieved. Unbilled accounts receivable reflect the recognition of revenue as services are
performed. All unbilled accounts receivable are expected to be billed and collected within one
year. The following table sets forth accounts receivable, net of the allowance for doubtful
accounts, as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Accounts receivable — billed
|
|
$
|
59,179
|
|
|
$
|
63,829
|
|
|
Accounts receivable — unbilled
|
|
|
68,002
|
|
|
|
69,594
|
|
|
Less: allowance for doubtful accounts
|
|
|
(1,824
|
)
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
125,357
|
|
|
$
|
132,550
|
|
|
|
|
|
|
|
|
|
F-9
The Company bases its allowance for doubtful accounts on estimates of the creditworthiness of
clients, analysis of delinquent accounts, payment histories of its customers and judgment with
respect to the current economic conditions. The Company generally does not require collateral. The
Company believes the allowances are sufficient to respond to normal business conditions. The
Company reviews its accounts receivable aging on a regular basis for past due accounts, and writes
off any uncollectible amounts against the allowance. The following table sets forth the changes in
the allowance for doubtful accounts during the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
873
|
|
|
$
|
922
|
|
|
$
|
202
|
|
|
Provisions
|
|
|
1,977
|
|
|
|
587
|
|
|
|
2,279
|
|
|
Write-offs, net of recoveries
|
|
|
(1,026
|
)
|
|
|
(636
|
)
|
|
|
(1,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,824
|
|
|
$
|
873
|
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment and Depreciation
Property and equipment is recorded at cost less accumulated depreciation. Expenditures for
major improvements and additions are charged to asset accounts. Replacements, maintenance and
repairs which do not improve or extend the lives of the respective assets are charged to expense as
incurred. Depreciation is computed using the straight-line method based on the estimated useful
lives of the assets.
As of January 1, 2008, the Company, in connection with the release of its global fixed asset
accounting policy reviewed the estimated useful lives of its fixed assets. As a result, management
made the determination to modify the estimated useful lives for certain fixed assets. This change
increased depreciation expense by $0.3 million for the three months ended March 31, 2008. There
were no changes in the estimated useful lives of the Company’s fixed assets for the year ended
December 31, 2008. The following table sets forth the revised useful lives of property and
equipment.
|
|
|
|
|
Automobiles
|
|
5 years
|
|
Buildings
|
|
25 years
|
|
Furniture and fixtures
|
|
7 years
|
|
Machinery, equipment and software
|
|
3-10 years
|
|
Leasehold improvements
|
|
Shorter of remaining life of asset or
remaining term of the lease (average
3.25 years)
|
Goodwill and Intangible Assets
Goodwill represents cost in excess of the fair value of net tangible and identifiable net
intangible assets acquired in business combinations. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) the
Company performs an annual test for impairment of goodwill and other indefinite-lived assets during
the fourth quarter or more frequently if impairment indicators arise during the year. The Company
performs this test by comparing, at the reporting unit level, the carrying value of the reporting
unit to its fair value. For purposes of the annual goodwill impairment test, the Company’s
reporting units are Anapharm, Inc. (“Anapharm”), Keystone Analytical, Inc. (“Keystone”), PharmaNet,
Inc. (“PharmaNet”), and Taylor Technology, Inc (“Taylor”).
The impairment test for goodwill involves a two-step approach. Under the first step, the
Company determines the fair value of each reporting unit to which goodwill has been assigned and
then compares the fair value to the unit’s carrying value, including goodwill. The Company
determines the fair value of each reporting unit by estimating the present value of the reporting
unit’s future cash flows. If the fair value exceeds the carrying value, no impairment loss is
recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is
considered potentially impaired and the second step is performed to measure the impairment loss.
Under the second step, the Company calculates the implied fair value of goodwill by
deducting the fair value of all tangible and intangible net assets, including any unrecognized
intangible assets, of the reporting unit from the fair value of the unit as determined in the first
step. The Company then compares the implied fair value of goodwill to the carrying value of
goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the
Company recognizes an impairment loss equal to the difference.
F-10
As of September 30, 2008, the Company performed an interim goodwill impairment test based on a
triggering event resulting from the significant decrease in the price of its outstanding common
stock and overall market capitalization during the third quarter 2008.
Based on the guidance of SFAS 142, the Company performed first step impairment measurements for all
of its reporting units and second step measures on two of its reporting units, PharmaNet and
Keystone. During the process, the Company followed all relevant guidance while conducting the
interim goodwill impairment test; however, some estimates and assumptions were used by management
in order to reach a conclusion regarding fair value and the related interim non-cash impairment
charge. Based on the results of the interim goodwill impairment test, it was determined that the
fair value of the PharmaNet and Keystone reporting units were significantly less than their
carrying values. As a result, the Company made the determination to write down the value of
goodwill and indefinite-lived assets related to those reporting units. The total amount of the
estimated non-cash impairment charge during the three months ended September 30, 2008 was $210.6
million, of which $201.0 million of goodwill and $6.3 million of indefinite-lived asset impairment
charges related to the PharmaNet reporting unit, or the late stage segment, and $3.3 million
related to the Keystone reporting unit, or the early stage segment. As of September 30, 2008, the
goodwill of the Keystone reporting unit was fully impaired.
As of December 31, 2008, the Company performed its annual goodwill impairment test. The
Company performed first step impairment measurements for its remaining reporting units and second
step measures on two of its reporting units, PharmaNet and Anapharm. During the process, the
Company followed all relevant guidance while conducting the annual goodwill impairment test. Based
on the results of the annual goodwill impairment test, it was determined that the fair value of the
PharmaNet and Anapharm reporting units were less than their carrying values. As a result, the
Company made the determination to write down the value of goodwill and indefinite-lived assets
related to those reporting units. The total amount of the non-cash impairment charge during the
three months ended December 31, 2008 was $37.9 million, of which $15.8 million of goodwill and $5.2
million of indefinite-lived asset impairment charges related to the PharmaNet reporting unit, or
the late stage segment, and $16.9 million of goodwill related to the Anapharm reporting unit, or
the early stage segment. As of December 31, 2008, the goodwill of the Anapharm reporting unit was
fully impaired.
The following table sets forth the changes in the carrying amount of goodwill during the years
ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2006 and 2007
|
|
$
|
266,973
|
|
|
Impairment of goodwill
|
|
|
(237,013
|
)
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
29,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill by segment:
|
|
|
|
|
|
Late stage
|
|
$
|
15,709
|
|
|
Early stage
|
|
|
14,251
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,960
|
|
|
|
|
|
|
As part of the results of the interim goodwill impairment test, it was determined that the
fair value of the PharmaNet trade name was $6.3 million less than its carrying value, and as a
result, the Company made the determination to write down a portion of the value of its
indefinite-lived assets related to its PharmaNet reporting unit. As of December 31, 2008, based on
the results of the annual goodwill impairment test, the Company recorded an additional write down
related to the PharmaNet trade name in the amount of $5.2 million. The following table sets forth
the changes in the carrying amount of intangible assets during the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2007
|
|
$
|
26,442
|
|
|
Purchase of intangible assets
|
|
|
105
|
|
|
Amortization of intangible assets
|
|
|
(2,780
|
)
|
|
Impairment of indefinite-lived assets
|
|
|
(11,490
|
)
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
12,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets by segment:
|
|
|
|
|
|
Late stage
|
|
$
|
11,621
|
|
|
Early stage
|
|
|
656
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,277
|
|
|
|
|
|
|
F-11
The following table sets forth the components of intangible assets as of December 31, 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally
developed
software
|
|
|
5.0
|
|
|
$
|
479
|
|
|
$
|
(411
|
)
|
|
$
|
68
|
|
|
$
|
454
|
|
|
$
|
(312
|
)
|
|
$
|
142
|
|
|
Methodologies
|
|
|
4.1
|
|
|
|
927
|
|
|
|
(768
|
)
|
|
|
159
|
|
|
|
847
|
|
|
|
(582
|
)
|
|
|
265
|
|
|
Technology
|
|
|
5.0
|
|
|
|
3,859
|
|
|
|
(3,107
|
)
|
|
|
752
|
|
|
|
3,859
|
|
|
|
(2,335
|
)
|
|
|
1,524
|
|
|
Contracts and
customer
relationships
|
|
|
6.5
|
|
|
|
12,389
|
|
|
|
(7,651
|
)
|
|
|
4,738
|
|
|
|
12,389
|
|
|
|
(5,928
|
)
|
|
|
6,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
17,654
|
|
|
|
(11,937
|
)
|
|
|
5,717
|
|
|
|
17,549
|
|
|
|
(9,157
|
)
|
|
|
8,392
|
|
|
Intangible assets
not subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
—
|
|
|
|
6,560
|
|
|
|
—
|
|
|
|
6,560
|
|
|
|
18,050
|
|
|
|
—
|
|
|
|
18,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
24,214
|
|
|
$
|
(11,937
|
)
|
|
$
|
12,277
|
|
|
$
|
35,599
|
|
|
$
|
(9,157
|
)
|
|
$
|
26,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with finite lives are amortized on a straight-line basis over their
estimated useful lives, which range in term from 4 to 7 years. For the years ended December 31,
2008, 2007 and 2006, amortization expense related to intangible assets was $2.8 million, $2.8
million and $3.0 million, respectively. The following table sets forth estimated amortization
expense for intangible assets subject to amortization for each of the next five years ending
December 31.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
2009
|
|
$
|
2,646
|
|
|
2010
|
|
|
1,627
|
|
|
2011
|
|
|
1,428
|
|
|
2012
|
|
|
16
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,717
|
|
|
|
|
|
|
Impairment of Long-Lived Assets
The Company assesses impairment of long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company conducts assessments
of the recoverability of long-lived assets when events or changes in circumstances occur that
indicate that the carrying value of the asset may not be recoverable. The assessment of possible
impairment is based upon the ability to recover the cost of the asset from the expected future
undiscounted cash flows of related operations. In the event undiscounted cash flow projections
indicate impairment, the Company would record an impairment charge based on the fair value of the
assets at the date of the impairment.
Financial Instruments
Financial instruments consist primarily of cash and cash equivalents, marketable securities,
accounts receivable, notes receivable, accounts payable and notes payable. As of December 31, 2008
and 2007, the fair value of these instruments approximated the carrying amount due to the
short-term maturities of these instruments. As of December 31, 2008 and 2007, the fair value of the
line of credit and notes payable approximated their carrying value as the interest rates
approximated market rates. As of December 31, 2008 and 2007, the fair value of the convertible
senior notes payable were approximately 73% and 114%, respectively, of par value based on the
market trading price on that date.
F-12
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce currency exposures related to
certain foreign currency denominated accounts receivable and intercompany payables. Derivatives are
accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”). The Company recognizes derivative instruments as either assets or
liabilities in the accompanying consolidated balance sheets and measures them at fair value.
From time to time, the Company enters into foreign currency exchange contracts to hedge
foreign currency exposures. These foreign currency exchange contracts are entered into as economic
hedges, but are not designated as hedges for accounting purposes as defined under SFAS 133.
Accounts receivable transactions denominated in U.S. dollars and Euros are remeasured to the
Canadian dollar for changes in price and any changes in the fair value are reported as a component
of foreign currency exchange transaction gain or loss, net in the consolidated statement of
operations. The Company’s hedging exposure varies based upon fluctuation in foreign currencies. On
November 28, 2008, due to the collateral restrictions under Credit Facility, the Company lost its
ability to enter into foreign currency forward contracts limiting the Company’s hedging program. As
a result, the Company entered into option contracts, at a higher premium, to continue to mitigate
its foreign currency exposures during December 2008.
Fair Value Measurements
The Company adopted the provisions of SFAS No. 157 (“SFAS 157”) as modified by Financial
Accounting Standard Board (“FASB”) Staff Position (“FSP”) SFAS 157-1 and FSP SFAS 157-2, effective
January 1, 2008. SFAS 157 defined fair value, establishes a consistent framework for measuring fair
value and expands disclosure requirements about fair value measurements.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at
fair value. A financial asset or liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value measurement.
The following table sets forth the assets and liabilities carried at fair value measured on a
recurring basis as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
Significant other
|
|
|
unobservable
|
|
|
|
|
Total Carrying
|
|
|
in active markets
|
|
|
observable inputs
|
|
|
inputs
|
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
(in thousands)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
forward, option and
swap contracts
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2008 and 2007, the Company entered into foreign currency forward, option
and swap contracts to manage exposure related to balance sheet positions that were denominated in
currencies other than the functional currency. Derivative valuations are based on quoted prices
(unadjusted) in active markets for identical assets or liabilities and are classified within Level
1 of the valuation hierarchy.
Comprehensive Income (Loss)
Comprehensive income (loss) represents net earnings (loss) plus the change in the foreign
currency translation adjustment equity account for the periods presented. For the year ended
December 31, 2008, comprehensive income also includes an adjustment to record the minimum funding
requirement of a Swiss subsidiary’s postretirement plan that has characteristics of both a defined
benefit plan and a defined contribution plan. During 2008, the Company made the determination that
the substance of the Swiss plan changed, and as a result recorded a pension liability in the amount
of $0.4 million, which is recorded as a component of non-current liabilities in the accompanying
consolidated balance sheets. The following table sets forth the components of accumulated other
comprehensive income (loss) as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Foreign currency translation adjustments
|
|
$
|
9,112
|
|
|
$
|
20,659
|
|
|
Pension liability
|
|
|
(379
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,733
|
|
|
$
|
20,659
|
|
|
|
|
|
|
|
|
|
F-13
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred income
taxes are determined based on the estimated future tax effects of differences between the book and
tax basis of assets and liabilities, using tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be reversed. The Company provides a
valuation allowance to reduce the carrying amount of deferred tax assets to amounts that are more
likely than not expected to be realized. The Company evaluates the valuation allowance quarterly
and adjusts the amount if necessary.
The Company generally retains earnings from foreign operations in the country in which they
were generated. This permits the Company to defer the material U.S. income tax liabilities which
would arise upon repatriation of these earnings. The Company has made no provision for U.S. income
taxes on the undistributed earnings of foreign subsidiaries as it is anticipated that such earnings
will be permanently reinvested in their respective operations or in the Company’s foreign
operations. On March 19, 2009, a dividend of $22.0 million was paid to the Company from one of its
foreign subsidiaries in order to fund certain transaction costs. Subsequent to this dividend, the
Company had undistributed foreign earnings, for which no provision for U.S. income taxes has been
established, in the amount of $66.3 million.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). Under FIN 48, in order to recognize an
uncertain tax benefit, the taxpayer must conclude that it can more likely than not sustain the
position, and the measurement of the benefit is calculated as the largest amount that is more than
50% likely to be realized upon resolution of the benefit. The Company records interest and
penalties accrued in relation to the unrecognized tax benefits as a component of income tax
expense.
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share using the weighted average number of
shares of common stock outstanding during the period. The following table sets forth a
reconciliation of basic and diluted earnings per share from continuing operations for the years
ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Net (loss) earnings from continuing operations
|
|
$
|
(251,093
|
)
|
|
$
|
12,078
|
|
|
$
|
6,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock outstanding for basic earnings (loss) per share
|
|
|
19,380
|
|
|
|
18,790
|
|
|
|
18,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently issuable shares related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
193
|
|
|
|
212
|
|
|
Restricted stock units
|
|
|
—
|
|
|
|
65
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
|
|
|
258
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock for dilutive earnings (loss) per share
|
|
|
19,380
|
|
|
|
19,048
|
|
|
|
18,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(12.96
|
)
|
|
$
|
0.64
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
|
|
$
|
(12.96
|
)
|
|
$
|
0.63
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently issuable shares of common stock related to stock options are not included in the
computation of diluted earnings per share when the options’ exercise prices are greater than the
annual average market price of the common stock during the period as their inclusion would be
anti-dilutive. Contingently issuable shares related to the convertible senior notes are not
included when the average stock price during the period is less than the stated conversion price.
Share-Based Compensation
The Company follows the fair value recognition provisions of SFAS No. 123R, “Share-Based
Payment” (“SFAS 123R”), using the modified prospective transition method. Under the modified
prospective transition method, compensation expense is recognized in the financial statements on a
go-forward basis for (a) all share-based payments granted prior to but not vested as of January 1,
2006, based upon the grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and (b) share-based payments granted on or subsequent to January 1, 2006, based upon the
grant-date fair value estimated in accordance with the provisions of
SFAS 123R. The grant-date fair value of awards expected to vest is expensed on a straight-line
basis over the vesting period of the related awards. Under the modified prospective transition
method, results for prior periods were not restated.
F-14
Advertising Expenses
The Company records advertising expenses as incurred. Advertising expenses for the years ended
December 31, 2008, 2007 and 2006, totaled $3.4 million, $3.0 million and $3.7 million,
respectively. The Company includes volunteer recruiting costs as part of its advertising expenses.
Foreign Currency Translation
For subsidiaries outside the U.S. that operate with functional currencies other than the
U.S. dollar, income and expense items are translated to U.S. dollars at the monthly average rates
of exchange prevailing during the period, assets and liabilities are translated at period-end
exchange rates and equity accounts are translated at historical exchange rates. Translation
adjustments are accumulated in a separate component of stockholders’ equity in the accompanying
consolidated balance sheets entitled accumulated other comprehensive income and are included in the
determination of comprehensive income (loss) in the accompanying consolidated statements of
stockholders’ equity. The majority of the Company’s foreign subsidiaries’ activity occurs in the
functional currencies of the Canadian dollar, Euro and Swiss Franc. As translation is an event that
occurs only to support the consolidation of financial statements and does not impact the financial
statements of the foreign subsidiaries, we do not hedge against translation. Foreign currency
exchange transaction gains and losses are included in the determination of net earnings (loss) in
the accompanying consolidated statements of operations.
Reclassifications
The Company has made certain reclassification in the accompanying consolidated balance sheet
as of December 31, 2007, primarily related to income taxes, to conform to the 2008 presentation.
Staff Accounting Bulletin No. 108
In September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). The transition provisions of SAB 108 permitted companies to adjust for the
cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108
required the adjustment of any prior quarterly financial statements within the fiscal year of
adoption for the effects of such errors on the quarters when the information was next presented.
Such adjustments did not require previously filed reports with the SEC to be amended. In accordance
with SAB 108, we adjusted beginning balances for 2006 in the consolidated financial statements for
the items described below. We considered these adjustments to be immaterial to prior periods.
We decreased stockholders’ equity by $0.2 million on January 1, 2006, as a result of adopting
SAB 108. The transition provisions of SAB 108 permitted us to adjust for the cumulative effect on
stockholders’ equity of adjustments relating to prior years that, under our previous approach of
evaluating financial statement misstatements, were immaterial. This decrease in stockholders’
equity consisted of a decrease in additional paid-in capital of $2.9 million due to an
overstatement of deferred tax assets related to stock options exercises and an increase in
accumulated other comprehensive income of $2.7 million due to an overstatement of deferred tax
expense on accumulated other comprehensive income and related deferred tax liabilities that
commenced in 2002 with the acquisition of Anapharm, Inc., a wholly owned subsidiary. The net effect
of these adjustments was a decrease in net deferred tax assets (liabilities) of $0.2 million.
For errors that occurred in a year that preceded the initial application of SAB 108 in 2006,
the Company quantified the effects of the adjustment using the “rollover” method that was used
prior to the initial application of SAB 108. The Company evaluated the errors for materiality
individually and together with other previously identified misstatements. For errors that occurred
in a year subsequent to the initial application of SAB 108, the Company quantified the effects of
the adjustment using the dual approach, both the “rollover” and the “iron curtain” approaches,
required under SAB 108. Based on these evaluations, the Company believes that the net effects of
these adjustments are not material, either quantitatively or qualitatively, in any of the years
covered by these adjustments.
F-15
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In
addition, the statement establishes a framework for measuring fair value and expands disclosure
about fair value measurements. SFAS 157 is effective for fiscal years beginning November 15, 2007,
and interim periods within those years, except that FSP SFAS 157-2 delayed the effective date of
SFAS 157 until fiscal years beginning after November 18, 2008, for non-financial assets and
liabilities except those that are recognized or disclosed at fair value in the financial statements
on a recurring basis. Accordingly, effective January 1, 2008, the Company adopted this limited
provision of SFAS 157. The Company is currently evaluating the impact of SFAS 157 for non-financial
assets and liabilities, and does not expect the adoption to have a material effect on the Company’s
consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”), which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how
an acquirer in a business combination recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after an entity’s fiscal year that
begins after December 15, 2008. The Company is currently assessing the impact of SFAS 141R on the
consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new
accounting and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a
non-controlling interest (minority interest) as a component of stockholders’ equity in the
consolidated balance sheet and separate from the parent’s equity. The amount of net earnings (loss)
attributable to the non-controlling interest will be included in net earnings (loss) in the
consolidated statement of operations. SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will
be measured using the fair value of the non-controlling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent
and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company does not expect the adoption of SFAS 160 will have a material impact on its
consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about derivative and
hedging activities including (1) how and why an entity uses derivative instruments (2) how
derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” and its related interpretations, and (3) how
derivative instruments and related hedged items affect financial position, financial performance
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning on or after
November 15, 2008. The Company is currently evaluating the impact, if any, of SFAS 161 on its
consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered
in developing a renewal or extension assumptions used for purposes of determining the useful life
of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). More specifically, FSP FAS 142-3 removes the requirement under paragraph 11 of SFAS 142 to
consider whether an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and instead requires an entity to consider its
own historical experience in renewing similar arrangements. FSP SFAS 142-3 is intended to improve
the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and
other accounting literature. FSP SFAS 142-3 is effective for fiscal years beginning after December
15, 2008, including interim periods within those fiscal years. The Company does not expect that FSP
SFAS 142-3 will have a material impact on its financial position or results of operations.
F-16
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP
APB 14-1 specifies that issuers of such instruments should separately account for the liability and
equity components of the instrument in an effort to value the convertible feature of the debt. The
Company’s 2.25% Convertible Senior Notes (the “Notes”) due 2024 are within the scope of FSP APB
14-1; therefore, the
Company would be required to record the debt portions of its Notes at their fair value on the date
of issuance and amortize the resulting discount into interest expense over the life of the debt,
adjusted for put or call features. Although FSP APB 14-1 would have no impact on actual past or
future cash flows, the amortization of the discount to interest expense could have a material
impact on the Company’s net earnings (loss) and earnings (loss) per share. The Company is currently
evaluating the amount of additional non-cash interest expense that will be recorded when adopted.
FSP APB 14-1 will be effective for financial statements issued for fiscal years beginning after
December 15, 2008, and will be applied retrospectively to all periods presented. Early adoption is
prohibited.
In August 2008, the SEC, announced that it will issue for comment a proposed roadmap regarding
the potential use by U.S. issuers of financial statements prepared in accordance with International
Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards
published by the International Accounting Standards Board. Under the proposed roadmap, the Company
could be required in fiscal year 2014 to prepare financial statements in accordance with IFRS and
the SEC will make a determination in 2011 regarding mandatory adoption of IFRS. The Company is
currently assessing the impact that this potential change would have on its consolidated financial
statements and will continue to monitor the development of the potential implementation of IFRS.
NOTE B — MAJOR CUSTOMERS
No customer accounted for more than 10% of the Company’s consolidated accounts receivable or
client advances as of December 31, 2008 and 2007, respectively.
No customer accounted for more than 10% of consolidated net revenue during the years ended
December 31, 2008, 2007 and 2006.
NOTE C — RELATED PARTY TRANSACTIONS
During the years ended December 31, 2008 and 2007, there were no related party transactions.
Through June 2006, the Company employed four individuals who were related to individuals who
were officers at the time but who are no longer employed by the Company.
The following table sets forth amounts paid to these related parties during the year ended
December 31, 2006.
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
(in thousands)
|
|
|
Salaries and benefits
|
|
$
|
58
|
|
|
Contract labor
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
$
|
58
|
|
|
|
|
|
|
In December 2005, the Company entered into a five-year promissory note with an entity which
was 25% owned by one of the Company’s wholly owned subsidiaries. The agreement provides for a note
of $0.2 million with interest at 6% per annum payable in equal monthly installments over 59 months.
As of December 31, 2008, the unpaid portion of the note amounted to $0.1 million and is included in
other assets in the accompanying consolidated balance sheets.
F-17
NOTE D — PROPERTY AND EQUIPMENT
The following table sets forth the composition of the Company’s property and equipment from
continuing operations as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Automobiles
|
|
$
|
1,093
|
|
|
$
|
770
|
|
|
Land and buildings
|
|
|
6,348
|
|
|
|
2,247
|
|
|
Furniture and fixtures
|
|
|
11,883
|
|
|
|
13,865
|
|
|
Leasehold improvements
|
|
|
22,142
|
|
|
|
28,074
|
|
|
Machinery and equipment
|
|
|
47,263
|
|
|
|
51,654
|
|
|
Computer hardware and software
|
|
|
20,200
|
|
|
|
23,222
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,929
|
|
|
|
119,832
|
|
|
Less: accumulated depreciation
|
|
|
(52,591
|
)
|
|
|
(52,326
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,338
|
|
|
$
|
67,506
|
|
|
|
|
|
|
|
|
|
The following table sets forth the Company’s depreciation expense for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Charged to direct costs
|
|
$
|
5,273
|
|
|
$
|
4,053
|
|
|
$
|
3,511
|
|
|
Charged to selling, general and administrative expenses
|
|
|
9,408
|
|
|
|
8,669
|
|
|
|
7,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,681
|
|
|
$
|
12,722
|
|
|
$
|
11,424
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E — ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities as of December 31, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Salaries, bonuses and benefits
|
|
$
|
15,064
|
|
|
$
|
22,841
|
|
|
Out-of-pocket expenses and grants
|
|
|
6,265
|
|
|
|
3,894
|
|
|
Professional fees
|
|
|
1,888
|
|
|
|
1,994
|
|
|
Rebates
|
|
|
1,746
|
|
|
|
2,146
|
|
|
Interest
|
|
|
1,661
|
|
|
|
1,783
|
|
|
Severance
|
|
|
802
|
|
|
|
1,529
|
|
|
Deferred rent, current portion
|
|
|
580
|
|
|
|
747
|
|
|
Office closures
|
|
|
570
|
|
|
|
—
|
|
|
Payable to 401(k) plan
|
|
|
246
|
|
|
|
213
|
|
|
Provision for settlement of litigation
|
|
|
206
|
|
|
|
9,785
|
|
|
Value added tax
|
|
|
127
|
|
|
|
131
|
|
|
Other
|
|
|
3,858
|
|
|
|
2,915
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,013
|
|
|
$
|
47,978
|
|
|
|
|
|
|
|
|
|
F-18
NOTE F — DEBT
Credit Facility
As of December 31, 2008, the Company had a $45.0 million Credit Facility with a syndicate of
banks that originated in 2004 (the “Credit Facility”). The Credit Facility has a maturity date of
December 22, 2009 provided that, in the event that the aggregate principal amount of the 2.25%
Convertible Senior Notes due 2024 (the “Notes”), have not been refinanced on or prior to
February 1, 2009, the revolving maturity date shall be February 15, 2009. As of December 31, 2008,
the principal balance outstanding on the Credit Facility was zero. As of February 1, 2009, the
aggregate principal amount of the Notes had not been refinanced; therefore, in accordance with the
terms and conditions of the Credit Facility, our $45.0 million dollar Credit Facility terminated as
of February 13, 2009. As of February 13, 2009, the principal balance outstanding on the Credit
Facility was zero.
Based on our financial performance during the first quarter 2008, we were unable to meet
certain financial requirements of the Credit Facility, and as a result, entered into a period of
default. On July 17, 2008, we entered into a seventh amendment to the Credit Facility, which
reinstated our ability to borrow. As a result, of this latest amendment, certain financial
covenants, including our covenants to maintain certain financial ratios, were either waived or
amended to reflect our operating performance and business needs.
The obligations under the Credit Facility were guaranteed by each of our U.S. subsidiaries,
were secured by a lien on the vacant land in Miami, Florida, a pledge of all of the assets of our
U.S. operations and U.S. subsidiaries and a pledge of 66% of the stock of certain of our foreign
subsidiaries. The U.S. assets collateralizing the Credit Facility amounted to $173.9 million,
including goodwill and intangible assets and are included in the consolidated balance sheet as of
December 31, 2008. The non-cash impairment charge related to goodwill and indefinite-lived assets
did not have any impact on the availability of the Credit Facility or financial covenants.
Convertible Senior Notes Payable
The Company has issued and outstanding $143.8 million principal amount of Notes. The Notes are
unsecured senior obligations and are effectively structurally subordinated to all existing and
future secured indebtedness, and to all existing and future liabilities of subsidiaries, including
trade payables. The Company capitalized all costs related to the issuance of the Notes in 2004 and
has been amortizing these costs on a straight-line basis over the expected term, which approximates
the effective interest method. Interest is payable in arrears semi-annually on February 15 and
August 15 of each year.
The Notes are convertible prior to maturity into cash and, if applicable, shares of common
stock based upon an initial conversion rate of 24.3424 shares per $1,000 in principal amount, or an
initial conversion price of $41.08 per share. Subject to adjustment in certain circumstances, the
maximum number of shares that can be issued upon conversion is 3.1 million. Upon conversion,
holders of the Notes will be entitled to receive cash up to the principal amount and, if
applicable, shares of common stock pursuant to a formula contained in the indenture.
On each of August 15, 2009, 2014 and 2019, holders may require the Company to repurchase all
or a portion of their Notes at a purchase price in cash equal to 100% of the principal amount, plus
accrued and unpaid interest. On or after August 15, 2009, the Company may, at its option, redeem
the Notes in whole or in part for cash at a redemption price equal to 100% of the principal amount,
plus accrued and unpaid interest.
On August 10, 2007, the Company filed a universal shelf on Form S-3 with the SEC, as amended
on August 8, 2008, to sell debt securities, warrants, preferred stock, common stock, depository
shares, purchase contracts or units with an aggregate offering price up to $300 million. On
August 13, 2008, the universal shelf on Form S-3 was declared effective by the SEC. As of December
31, 2008, no securities registered under the shelf have been offered.
In May 2008, the Board of Directors authorized a repurchase of the Notes up to $30.0 million.
To date, we have not repurchased any of the Notes.
On November 20, 2008, the Company filed a Registration Statement on Form S-4 commencing an
offer to exchange the $143.8 million principal amount of the Notes for $115.0 million principal
amount of 8.0% convertible senior notes due 2014 and cash.
F-19
Subsequent to the commencement of the exchange offer, certain holders of the Notes who had
indicated to the Company their intention to tender their Notes in the exchange offer, instead sold
them in the open market. Based on discussions with the current holders of a majority of the Notes,
it was the Company’s understanding that they did not intend to tender their Notes in accordance
with the terms of the exchange offer. As a result of not obtaining the required minimum
participation, the Company decided to allow the exchange offer for our Notes to expire. On December
18, 2008, the Company announced that we were working with our financial advisor to pursue strategic
alternatives, including a potential sale of the Company and exploration of alternatives to retire
the Notes. The Company subsequently withdrew its Registration Statement on Form S-4 on December 19,
2008.
As of December 31, 2008, the Company reclassified the Notes on the accompanying consolidated
balance sheet from
long-term
to short-term since holders may require the Company to repurchase any
outstanding Notes as early as August 15, 2009.
On February 3, 2009, it was announced that affiliates of JLL Partners, Inc. (“JLL”), including
JLL PharmaNet Holdings, LLC (“Parent”), and PDGI Acquisition Corp., a wholly-owned subsidiary of
Parent (“Purchaser”), entered into an Agreement and Plan of Merger (“Merger Agreement”), with the
Company whereby Parent will acquire the Company. The acquisition will be carried out in two steps.
The first step is the tender offer by Purchaser to purchase all of the Company’s outstanding shares
of common stock at a price of $5.00 per share, payable net to the seller in cash (the “Tender
Offer”). The Tender Offer expired on March 19, 2009 at 12:00 midnight New York City time. On March
20, 2009, Purchaser accepted for payment all validly tendered shares and announced that it will pay
for all such shares promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into the Company,
with the Company as the surviving corporation in the merger (the “Merger”). The Company expects
that the Merger will be completed on March 30, 2009 under the short-form merger procedures provided
by Delaware law. Following the Merger, the Company will be a wholly-owned subsidiary of Parent and
we will no longer have any publicly traded shares. The transaction values the Company’s common
stock at $100.5 million and will be financed by a $250.0 million equity commitment from funds
managed by JLL, which includes the necessary funds to retire the Company’s Notes. The Merger is
subject to customary conditions.
If a “Fundamental Change,” as defined, occurs, holders may require the Company to repurchase
all or a portion of their Notes for cash at 100% of the principal amount, plus accrued and unpaid
interest. A Fundamental Change is deemed to have occurred upon a “Change of Control,” which the
indenture generally defines as when:
|
|
•
|
|
a person or entity becomes, indirectly or directly, the “beneficial owner” of 50% or more
of the Company’s common stock
|
|
|
|
|
•
|
|
certain persons on the Board of Directors cease to constitute a majority of the
directors,
|
|
|
|
|
•
|
|
the Company merges with another entity,
|
|
|
|
|
•
|
|
the Company sells substantially all of its assets, or
|
|
|
|
|
•
|
|
the Company is forced to liquidate its assets.
|
A Fundamental Change is also deemed to have occurred upon a termination of trading in the
Company’s common stock, which is when the common stock (or other common stock into which the notes
are then convertible) is neither listed for trading on a U.S. national securities exchange nor
approved for trading on an established automated over-the-counter trading market in the U.S.
The completion of the Tender Offer by JLL constitutes a Fundamental Change. Because a
Fundamental Change has occurred prior to August 15, 2009, the Company will pay, in addition to
principal and interest, a make-whole premium which is an additional amount equal to, as of
August 15, 2007, between 0% and 15.1% of the principal amount of the note. Such payment shall be
made on a date the Company selects but which cannot be later than 30 trading days nor earlier than
20 trading days after the date on which the Company mails a notice of the Fundamental Change to a
holder. Such notice must be mailed within 30 days of the occurrence of the Fundamental Change. No
make-whole premium will be required in connection with the Fundamental Change resulting from the
completion of the Tender Offer. As of December 31, 2008, a Fundamental Change had not occurred.
The make-whole premium is based on the date on which the Fundamental Change becomes effective
and the price paid per share of common stock in the transaction constituting the Fundamental
Change. If holders of common stock receive only cash, the stock price for purposes of the
calculation is the cash amount paid per share. Otherwise, the stock price is the average of the
closing sale prices of common stock on the five trading days up to, but not including, the date of
the Fundamental Change. If the Company elects to pay the make-whole premium, in whole or in part,
in shares of common stock, the number of shares will be equal to the portion of the make-whole
premium to be paid in shares divided by 97% of the current market price of the common stock. The
current market price for this purpose will be determined prior to the Fundamental Change repurchase
date. The Company will pay cash in lieu of fractional shares.
F-20
For illustration purposes, the following table sets forth the total amount due in the event of
a Fundamental Change on August 15, 2008. If the stock price is between two stock price amounts in
the table, or if the Fundamental Change date is between August 15,
2007 (percentages noted above) and 2009 (when all percentages are zero), the make-whole
premium is determined by straight-line interpolation between the amounts set forth for the higher
and lower stock price amounts and the two dates, as applicable, based on a 365-day year. If the
stock price per share is greater than $120.00 or equal to or less than $30.43, no make-whole
premium will be paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Make-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole
|
|
|
$ Amount of Make-
|
|
|
|
|
|
|
|
|
|
|
|
Stock Price**
|
|
|
|
|
Premium
|
|
|
Whole Premium
|
|
|
Accrued Interest*
|
|
|
Principal Amount
|
|
|
Total
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
30.43
|
|
|
|
|
|
0.0
|
%
|
|
$
|
—
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
146,984
|
|
|
$
|
35.00
|
|
|
|
|
|
4.4
|
%
|
|
$
|
6,325
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
153,309
|
|
|
$
|
40.00
|
|
|
|
|
|
11.5
|
%
|
|
$
|
16,531
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
163,515
|
|
|
$
|
45.00
|
|
|
|
|
|
10.3
|
%
|
|
$
|
14,806
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
161,790
|
|
|
$
|
50.00
|
|
|
|
|
|
7.6
|
%
|
|
$
|
10,925
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
157,909
|
|
|
$
|
55.00
|
|
|
|
|
|
5.6
|
%
|
|
$
|
8,050
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
155,034
|
|
|
$
|
60.00
|
|
|
|
|
|
4.2
|
%
|
|
$
|
6,038
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
153,022
|
|
|
$
|
65.00
|
|
|
|
|
|
3.2
|
%
|
|
$
|
4,600
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
151,584
|
|
|
$
|
70.00
|
|
|
|
|
|
2.5
|
%
|
|
$
|
3,594
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
150,578
|
|
|
$
|
75.00
|
|
|
|
|
|
2.0
|
%
|
|
$
|
2,875
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
149,859
|
|
|
$
|
80.00
|
|
|
|
|
|
1.7
|
%
|
|
$
|
2,444
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
149,428
|
|
|
$
|
85.00
|
|
|
|
|
|
1.4
|
%
|
|
$
|
2,013
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,997
|
|
|
$
|
90.00
|
|
|
|
|
|
1.3
|
%
|
|
$
|
1,869
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,853
|
|
|
$
|
95.00
|
|
|
|
|
|
1.1
|
%
|
|
$
|
1,581
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,565
|
|
|
$
|
100.00
|
|
|
|
|
|
1.0
|
%
|
|
$
|
1,438
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,422
|
|
|
$
|
105.00
|
|
|
|
|
|
0.9
|
%
|
|
$
|
1,294
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,278
|
|
|
$
|
110.00
|
|
|
|
|
|
0.9
|
%
|
|
$
|
1,294
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,278
|
|
|
$
|
115.00
|
|
|
|
|
|
0.8
|
%
|
|
$
|
1,150
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,134
|
|
|
$
|
120.00
|
|
|
|
|
|
0.8
|
%
|
|
$
|
1,150
|
|
|
$
|
3,234
|
|
|
$
|
143,750
|
|
|
$
|
148,134
|
|
|
|
|
|
|
*
|
|
Annual interest amount, one half of which would have been paid on February 15, 2008.
|
|
|
|
**
|
|
Based on the $5.00 per share tender offer from JLL, the make-whole premium will not
be paid.
|
Notes Payable
On August 30, 2007, Anapharm entered into a promissory note with a third-party vendor for the
purchase of certain operating software. The note is payable in 24 equal installments with interest
calculated at an imputed rate of 7.5%. As of December 31, 2008, the outstanding balance of the note
was $0.2 million and is included in capital lease obligations and notes payable, current portion in
the accompanying consolidated balance sheets.
NOTE G — COMMITMENTS AND CONTINGENCIES
Leases
The Company leases scientific equipment and automobiles under capital lease arrangements from
various lessors. As of December 31, 2008, the Company had capital leases varying in length from 36
to 60 months at annual interest rates ranging up to 8%, and requiring monthly payments ranging from
$599 to $38,933. The latest maturity date on these leases is December 2013. The following table
sets forth the amounts related to capital leases included in “Property and equipment, net” in the
accompanying consolidated balance sheets as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Automobiles
|
|
$
|
876
|
|
|
$
|
770
|
|
|
Equipment
|
|
|
23,389
|
|
|
|
28,191
|
|
|
Less: accumulated depreciation
|
|
|
(12,761
|
)
|
|
|
(11,778
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,504
|
|
|
$
|
17,183
|
|
|
|
|
|
|
|
|
|
F-21
The following table sets forth the future minimum lease payments under capital lease
obligations for each of the next five years ending December 31 and thereafter.
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
2,463
|
|
|
2010
|
|
|
1,817
|
|
|
2011
|
|
|
1,244
|
|
|
2012
|
|
|
175
|
|
|
2013
|
|
|
11
|
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
|
5,710
|
|
|
Less: amount representing interest
|
|
|
(494
|
)
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
5,216
|
|
|
Less: current portion
|
|
|
(2,348
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
2,868
|
|
|
|
|
|
|
The Company also leases facilities and certain equipment under non-cancelable operating
leases. The leases expire over the next 20 years and generally contain provisions for annual rent
escalations based on fixed amounts or cost of living increases. The difference between the rent due
under the stated periods of the leases compared to rent expense on a straight-line basis is
recorded as deferred rent. As of December 31, 2008, the current portion of deferred rent of
$0.6 million is included in accrued expenses and the long-term portion of $8.7 million is included
in other non-current liabilities in the accompanying consolidated balances sheets. For the years
ended December 31, 2008, 2007 and 2006, operating lease expense was $23.7 million, $21.9 million
and $17.3 million, respectively.
The following table sets forth the future minimum lease payments under operating lease
obligations for each of the next five years ending December 31 and thereafter.
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
20,525
|
|
|
2010
|
|
|
19,027
|
|
|
2011
|
|
|
15,175
|
|
|
2012
|
|
|
11,540
|
|
|
2013
|
|
|
9,334
|
|
|
Thereafter
|
|
|
51,671
|
|
|
|
|
|
|
|
Total
|
|
$
|
127,272
|
|
|
|
|
|
|
Sale-Leaseback Transaction
In 2005, Anapharm purchased land for $2.5 million and in 2006 commenced building a new
facility in Quebec City, Canada, to house all of its clinical, bioanalytical operations and
administrative functions. In early 2006, Anapharm negotiated a build-to-suit arrangement with a
building contractor and paid approximately $7.3 million for construction costs during the year.
Shortly thereafter, the Company determined that it was advantageous to enter into a lease
arrangement rather than own the land and building. In October 2006, Anapharm signed an agreement
with a third-party investor. Under the terms of the agreement, the investor advanced Anapharm
$9.8 million which represented substantially all of the funds that Anapharm had spent for the land
purchase and construction as of that date. Additionally, the investor agreed to pay the contractor
for the remaining building costs not to exceed $18.0 million.
Under sale-leaseback accounting rules, our contingent liability to the builder and our
involvement in ensuring the building was designed and built to properly meet operational needs
constituted “continuing involvement.” Since the sale-leaseback transaction could not be completed
until all required building documentation was completed and Anapharm no longer had legal liability
for construction costs, the Company classified the land and building in the accompanying
consolidated balance sheets as “Construction in progress and land expected to be sold in
sale-leaseback transaction” with a corresponding liability.
On September 24, 2007, Anapharm received a letter from the architect certifying that the
building was complete and operational. Accordingly, Anapharm was relieved of future obligations,
contingencies and liability related to the construction of the building. As of September 30, 2007,
the Company removed the asset and liability noted above in the amount of $23.7 million from the
accompanying consolidated balance sheets. For purposes of consistency and per SFAS No. 95,
Statement of Cash Flows (“SFAS 95”), $6.1 million of construction costs paid directly by the
third-party investor to the building contractor have been removed from both investing and financing
activities in the accompanying consolidated statement of cash flows for the year ended December 31,
2006. The gain of $0.9 million on the transaction was deferred and is being amortized as a rent
subsidy offset against rent expense over the initial 20-
year term of the lease. The rental payments, exclusive of the rent subsidy, for the first five
years of the lease term are $2.4 million per year and increase by 10.0% for each of the next three
five-year increments. The lease is being accounted for as an operating lease.
F-22
The following table sets forth the changes made to the accompanying consolidated statement of
cash flows for the year ended December 31, 2006, based on the guidance of SFAS 95.
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
Financing Activities
|
|
|
|
|
(In thousands)
|
|
|
As previously reported
|
|
$
|
(13,323
|
)
|
|
$
|
15,851
|
|
|
Non-cash adjustment
|
|
|
6,051
|
|
|
|
(6,051
|
)
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
(7,272
|
)
|
|
$
|
9,800
|
|
|
|
|
|
|
|
|
|
Litigation and Inquiries
On March 12, 2007, the Company received notice that the SEC staff had secured a formal order
of private investigation. The formal order relates to revenue recognition, earnings, company
operations and related party transactions. The Company has been cooperating fully with the SEC. In
late December 2005, the Company received an informal request from the SEC for documents relating to
the duties, qualifications, compensation and reimbursement of former officers and employees. This
request also asked for a copy of the report to Senator Grassley by the Company’s independent
counsel. In a second request, sent March 28, 2006, the SEC asked for information regarding related
parties and transactions, duties and compensation of various employees, internal controls, revenue
recognition and other accounting policies and procedures and selected regulatory filings. As part
of its investigation, the SEC staff interviewed several former employees on the topics identified
in the formal order. On June 11, 2007, the Company received a subpoena from the SEC for additional
accounting documents. In late 2008, the SEC asked the Company for additional documents regarding
its former Miami headquarters, several vendors and updated board minutes. As with past requests,
the Company will voluntarily comply with this request and expects to continue to provide documents
to the SEC as requested.
Beginning in late December 2005, a number of class action lawsuits were filed in the United
States District Court for the Southern District of Florida and the United States District Court for
the District of New Jersey alleging that the Company and certain of its former officers and
directors violated federal securities laws, such actions are collectively referred to herein as the
Federal Securities Actions. The Company was served notice of these lawsuits in early January 2006.
On June 21, 2006, the Judicial Panel for Multidistrict Litigation transferred all of the Federal
Securities Actions for pre-trial proceedings in the District of New Jersey, where they were later
consolidated.
On November 1, 2006, the Arkansas Teachers’ Retirement System, the lead plaintiff in the
Federal Securities Actions, filed a consolidated amended class action complaint, also referred to
herein as the amended complaint. The amended complaint alleges that the Company and several of its
current and former officers and directors violated Sections 11, 12 (a)(2) and 15 of the Securities
Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
On August 1, 2007, the Company issued a press release announcing that it had entered into an
agreement to settle the Federal Securities Actions on the principal terms set forth in an Agreement
to Settle Class Action, referred to herein as the Settlement Agreement. Pursuant to the terms of
the Settlement Agreement, the class will receive approximately $28.5 million (less legal fees,
administration and other costs). The Company accrued an estimated liability of $10.4 million during
the year ended December 31, 2007, which was not covered by our insurance, associated with the
Settlement Agreement and other related litigation. The Company had the option to elect to pay up to
$4.0 million of this amount in common stock, or all in cash. The common stock was to be valued
according to the volume weighted average closing price for the 10 trading days leading up to the
date the district court enters an order formally approving the Settlement Agreement. On December 3,
2007, the Court preliminarily approved the Settlement Agreement. On December 11, 2007, the Company
made cash payments to the plaintiffs escrow account in the amount of $0.3 million and on
January 11, 2008, the Company made cash payments to the plaintiffs escrow account in the amount of
$3.7 million. On March 10, 2008, the Court formally approved the Settlement Agreement and entered
Final Judgment. On March 24, 2008, the Company issued 135,870 shares of common stock to the
plaintiff’s settlement fund to settle the action, or $4.0 million in common stock, the value of
such common stock equal to $29.44 per share which was calculated as set forth above. The common
stock and cash have not been disbursed to the class and will not be distributed to the class until
the appeals process is fully adjudicated. On April 9, 2008, a Notice of Appeal of the Final
Judgment was filed. On February 13, 2009, the United States Court of Appeals for the Third Circuit
issued an Opinion affirming the district court’s final judgment approving the settlement of the
class action. On February 27, 2009, Appellant filed a Petition for Rehearing En Banc. In addition,
on March 4, 2009, Appellant filed a Motion to Vacate the lower court’s final judgment. It is
unclear how long the appellate court will take to rule on the Petition for Rehearing En Banc or the
Motion to Vacate. It is uncertain how long the appeals process will take.
F-23
On November 20, 2008, a class action lawsuit was filed in the United States District Court for
the District of New Jersey alleging that the Company and two of its officers violated the federal
securities laws. The Company was served notice of this lawsuit in early December 2008. The
complaint, which is asserted on behalf of purchasers of the Company’s common stock between November
1, 2007 and April 30, 2008, alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 through alleged misstatements or omissions regarding our
business, backlog, and earnings guidance. On December 30, 2008, the Court entered an order
providing that defendants need not answer, move against or otherwise respond to the complaint or
any potential related complaints until after the Court appoints lead plaintiff and approves the
selection of lead counsel. On January 20, 2009, the Court entered an order designating
an institutional investor, the Macomb County Employees’ Retirement System, as lead plaintiff and
approving the selection of lead counsel and liaison counsel.
On February 6, 2009, Richard Mendez, a purported stockholder of the Company, filed a putative
class action complaint in the Superior Court of New Jersey, Chancery Division, Mercer County on
behalf of himself and all other similarly situated stockholders of the Company against the
Company’s Board, the Company, Parent and Purchaser alleging breaches of fiduciary duty and aiding
and abetting breaches of fiduciary duty in connection with the Merger. Among other things, the
complaint alleged that the proposed transactions contemplated in the Merger Agreement were the
result of an unfair process, that the Company is being sold at an unfair price, that certain
provisions of the Merger Agreement impermissibly operate to preclude competing bidders, and the
defendants engaged in self-dealing. Among other things, the plaintiff sought an order enjoining
defendants from proceeding with the Merger Agreement.
On February 10, 2009, Cynthia Kancler, a purported stockholder of the Company, filed a
putative class action complaint in the Superior Court of New Jersey, Chancery Division, Mercer
County on behalf of herself and all other similarly situated stockholders of the Company against
the Company’s Board and the Company alleging breaches of fiduciary duty in connection with the
Merger. Among other things, the complaint alleged that the proposed transactions contemplated in
the Merger Agreement were the result of a flawed process, that the Company is being sold at an
inadequate price, and that certain provisions of the Merger Agreement are unlawful. Among other
things, the plaintiff sought an order enjoining defendants from proceeding with the Merger
Agreement, an order enjoining defendants from consummating any business combination with a third
party and an order directing the individual defendants to exercise their fiduciary duties to obtain
a transaction which is in the best interests of PDGI’s shareholders.
On February 18, 2009, the plaintiffs in the Mendez and Kancler actions filed amended
complaints, which, in addition to reasserting many of the allegations in their originally filed
complaints, also challenged the adequacy of the Company’s disclosures in the Schedule 14D-9, filed
on February 12, 2009. On March 5, 2009, the parties to the Mendez and Kancler actions entered into
a Memorandum of Understanding (the “Memorandum of Understanding”), setting forth the terms and
conditions for settlement of each of the actions. The parties agreed that, after arm’s length
discussions between and among the parties, the Company would provide additional supplemental
disclosures to its Schedule 14D-9. In exchange, following confirmatory discovery, the parties will
attempt in good faith to agree to a stipulation of settlement and, upon court approval of that
stipulation, the plaintiffs will dismiss each of the other above-referenced actions with prejudice,
and all defendants will be released from any claims arising out of the Merger including any claims
for breach of fiduciary duty or aiding and abetting breach of fiduciary duty. The defendants have
agreed not to oppose any fee and expense application by plaintiffs’ counsel that does not exceed
$180,000 in the aggregate.
Defendants are confident that plaintiffs’ claims are wholly without merit and continue to deny
that any of them has committed or aided and abetted in the commission of any violation of law of
any kind or engaged in any of the wrongful acts alleged in the above-referenced actions. Each
defendant expressly maintains that it has diligently and scrupulously complied with its legal
duties, and has entered into the Memorandum of Understanding solely to eliminate the uncertainty,
burden and expense of further litigation.
The Company’s attempts to resolve these legal proceedings involve a significant amount of
attention from its management, additional cost and uncertainty, and these legal proceedings may
result in material damage or penalty awards or settlements, and may have a material and adverse
effect on the Company’s results of operations, including a reduction in net earnings and a
deviation from forecasted net earnings.
Indemnification
The Company’s clients are primarily large or medium size pharmaceutical and biotechnology
companies. However, in some circumstances, the Company conducts product development services for
companies that are in the formative stage in which the sustainability of their project being
conducted by the Company may be contingent on their continued ability to raise capital. It is
possible that a client project may be terminated or suspended due to financial matters relating to
the Company’s clients. If this occurs, there may be subjects who are participating in client trials
that are dependent on receiving the tested drug and will need to transition to
other medicines. For ethical reasons, the Company may choose to continue to temporarily
provide the tested drug in accordance with the approved protocol during this transition. The costs
incurred to continue to administer the drug, however, may or may not result in cost to the Company.
The Company has indemnification clauses that it believes mitigates this risk and, historically, the
Company has not had to seek any reimbursement.
F-24
NOTE H — EQUITY
Preferred Stock
The Company’s Certificate of Incorporation authorizes the issuance of 5.0 million shares of
preferred stock, par value $0.10 per share. The Board of Directors may determine the rights,
preferences and terms of any authorized but unissued shares of preferred stock. On December 21,
2005, in connection with the Shareholder Rights Plan discussed below, the Board designated the
“Series A Junior Participating Preferred Stock” in the amount of 40,000 shares. As of December 31,
2008, no shares of this series have been issued.
Shareholder Rights Plan
In December 2005, the Company established a Shareholder Rights Plan (the “Rights Plan”) for
the purpose of deterring hostile takeovers. The Rights Plan authorizes the distribution of one
right for each share of common stock outstanding to stockholders existing at the effective date, as
defined in the Rights Plan. Generally, each right entitles the holder to purchase a unit consisting
of one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase
price of $130 per unit. In the event that a person or group of affiliated or associated persons
acquires 15% or more of the Company’s common stock, or there is a tender offer that would result in
such 15% acquisition, each holder of a right is entitled upon exercise to receive common stock
having a value of two times the exercise price of the right. However, the persons acquiring the
shares or effecting the tender offer shall have no such rights and would therefore be diluted. In
the event of a merger or a sale of a majority of the Company’s assets, similar rights are triggered
with regard to shares of the acquiring company. The Rights Plan is currently set to expire by its
terms on December 21, 2015.
On February 2, 2009, prior to the execution of the Merger Agreement, the Board of Directors
approved an amendment to the Rights Plan. The amendment, among other things, renders the Rights
Plan inapplicable to the Merger, the Merger Agreement, and the transactions contemplated thereby.
The amendment also provides that the Rights Plan will terminate at the effective time of the
Merger.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (“ESPP”) which permits eligible employees,
excluding executive officers, to purchase up to 700,000 shares of the Company’s common stock.
Employees of the Company or one of its designated subsidiaries who are employed for at least
20 hours per week and who have been employed for at least three continuous months may participate
in the ESPP. Employees must elect to participate at the beginning of each six-month offering
period. Shares of common stock are then purchased at a 15% discount from the lower of the fair
market value of such shares at the beginning or end of an offering period. During the years ended
December 31, 2008, 2007 and 2006, participants purchased 125,276, 134,271 and 176,022 shares at
average prices of $17.90, $15.35 and $13.23 per share, respectively. Share-based compensation
expense recognized under the ESPP was $0.8 million, $0.7 million and $0.5 million for the years
ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, 210,831 shares of
common stock were reserved for future issuance.
As a result of the previously disclosed administrative error in recordkeeping, the amount of
shares authorized under the ESPP has exceeded the amount of registered shares on Form S-8 by
400,000 shares. Unregistered shares are subject to rescission rights for one year after issuance.
During the year ended December 31, 2007, the Company issued 134,271 unregistered shares to ESPP
participants in two transactions, and such shares were subject to rescission as of December 31,
2007. For the offering period ended December 31, 2006, the Company issued 78,005 shares on
January 1, 2007, at $12.89 per share, and for the offering period ended June 30, 2007, the Company
issued 56,266 shares on July 1, 2007, at $18.75 per share. Accordingly, as of December 31, 2007,
the Company classified the amount of $2.1 million as temporary equity in the accompanying
consolidated balance sheets. Additionally, for the offering period ended December 31, 2007, the
Company issued 41,121 unregistered shares on January 1, 2008, at $27.10 per share. During the first
quarter 2008, the Company reclassified $1.0 million from temporary equity to shareholders’ equity
as the shares issued on January 1, 2007, no longer had rescission rights. During the third quarter
2008, the Company reclassified $1.1 million from temporary equity to shareholders’ equity as the
shares issued on July 1, 2007, no longer had rescission rights. As of December 31, 2008, the
aggregate purchase price subject to rescission was $1.1 million. On January 1, 2009, this amount
has been reclassified from temporary equity into shareholders’ equity as the ESPP participants’
rescission rights expired. As of the end of the rescission period, the Company re-
purchased 1,277 shares of common stock from the offering period ended December 31, 2007. The
Company is not obligated to purchase any additional shares of common stock after December 31, 2008.
F-25
On April 7, 2008, the Company filed a Form S-8 registration statement with the SEC to register
the 400,000 shares of common stock that had been authorized and approved, but not registered. On
June 6, 2008, the Company filed a Form S-8 registration statement with the SEC to register an
additional 150,000 shares of common stock that had been authorized and approved.
Based on the significant decrease in the market value of the Company’s outstanding common
stock during the offering period ended December 31, 2008, ESPP participants’ withholdings exceeded
the amount of shares available for purchase under the ESPP. As a result, ESPP participants were
issued pro-rated shares of the 210,831 available for issuance as of December 31, 2008. Subsequent
to that issuance, the ESPP has been suspended as there are no available shares for future issuance.
Share-Based Compensation
As of December 31, 2008, the Company had two stock incentive plans: the 1999 Stock Option Plan
and the 2008 Incentive Compensation Plan. Share-based awards are designed to induce employment with
the Company, reward employees for their long-term contributions and provide retention incentives.
The number and frequency of share-based awards are primarily based on competitive practices,
operating results and government regulations. The Company issues authorized but previously unissued
shares when options are exercised.
Share-based compensation expense is recognized on a straight-line basis over the vesting
period of the related awards. During the years ended December 31, 2008, 2007 and 2006, the Company
recognized compensation expense of $5.3 million, $4.5 million and $3.8 million, respectively, for
stock options, restricted stock and restricted stock units (“RSUs”), all of which was recorded in
selling, general and administrative expenses in the accompanying consolidated statement of
operations. During the years ended December 31, 2008, 2007 and 2006, the total income tax benefit
recognized for share-based compensation was $1.8 million, $1.2 million and $1.5 million,
respectively.
During the years ended December 31, 2008, 2007 and 2006, shared-based compensation expense
related to stock options was $0.8 million, $0.2 million and $0.6 million, respectively, and
compensation expense related to restricted stock and RSUs was $4.5 million, $4.3 million and
$3.2 million, respectively. As of December 31, 2008 and 2007, there was $5.8 million and
$6.6 million, respectively, of unrecognized compensation cost related to unvested restricted stock
and RSUs, which is being recognized over a weighted-average period of 3.7 years and 2.5 years,
respectively.
1999 Stock Option Plan
— In June 1999, the Company established the 1999 Stock Option Plan (the
“1999 Plan”). The 1999 Plan provides for the issuance of non-qualified and incentive stock options,
restricted stock, restricted stock units and stock appreciation rights (collectively, the “Awards”)
to employees, directors and consultants. The issuance and form of the Awards are at the discretion
of the Board of Directors, except that the exercise price of options or stock appreciation rights
may not be less than the fair market value at the time of grant.
2008 Incentive Compensation Plan
— On June 4, 2008, the stockholders approved the PharmaNet
Development Group 2008 Incentive Compensation Plan (the “2008 Plan”). On June 5, 2008, the Company
filed a Form S-8 registration statement with the SEC to register the 2008 Plan shares. The reserved
shares under the 2008 Plan consist of (i) a new share pool of 500,000 shares, plus (ii) 130,974
shares transferred from the unallocated share reserve remaining under the 1999 Plan, plus (iii) up
to 83,000 shares, which consist of options or RSUs which were outstanding under the 1999 Plan on
June 4, 2008 and subsequently terminate unexercised or without the issuance of shares. Stockholder
approval of the 2008 Plan did not affect any options or RSUs outstanding under the 1999 Plan at the
time of the establishment. No further awards had made under the 1999 Plan following the
establishment of the 2008 Plan. The 2008 Plan provides for the issuance of non-qualified and
incentive stock options, restricted stock, restricted stock units and stock appreciation rights
(collectively, the “Awards”) to employees, directors and consultants. The issuance and form of the
Awards are at the discretion of the Board of Directors, except that the exercise price of options
or stock appreciation rights may not be less than the fair market value at the time of grant.
As of December 31, 2008, the Company has granted awards in the form of stock options,
restricted stock and RSUs. Stock options granted under both the 1999 Plan and the 2008 Plan vest
ratably over three years and expire between seven and ten years or three months after separation of
service. Restricted stock vests ratably over five years or three months after separation of
service. RSUs vest ratably over five years. As of December 31, 2008, there were 679,207 shares of
common stock available for issuance under the 2008 Plan.
Stock Options —
As discussed in Note A to the consolidated financial statements, the Company
follows the fair value recognition provisions of SFAS 123R using the modified prospective
application method.
F-26
The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton pricing model. The following table sets forth the weighted-average assumptions
for options granted during the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006(4)
|
|
|
Risk-free rate(1)
|
|
|
2.4
|
%
|
|
|
4.9
|
%
|
|
|
—
|
|
|
Expected term(2)
|
|
|
4.5 years
|
|
|
|
4.5 years
|
|
|
|
—
|
|
|
Expected volatility(3)
|
|
|
60
|
%
|
|
|
60
|
%
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
The risk-free rate is based upon the rate on a zero coupon U.S.
Treasury bill, for periods within the contractual life of the option,
in effect at the time of grant.
|
|
|
|
(2)
|
|
The Company has significantly changed the terms of the stock options
granted to employees over the years such that historical exercise data
is not available. As a result, the expected term of the option is
determined using the simplified method provided by Staff Accounting
Bulletin No. 107, the vesting terms and a contractual life of the
respective option.
|
|
|
|
(3)
|
|
Expected volatility is based on the daily historical volatility of the
Company’s stock price, over a period equal to the expected life of the
option.
|
|
|
|
(4)
|
|
There were no awards granted during 2006.
|
The following table sets forth stock option activity and related information during the year
ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
|
|
|
(In thousands)
|
|
|
|
|
Outstanding at beginning of year
|
|
|
914
|
|
|
$
|
27.29
|
|
|
|
3.27
|
|
|
Granted
|
|
|
109
|
|
|
$
|
27.99
|
|
|
|
|
|
|
Exercised
|
|
|
(171
|
)
|
|
$
|
12.80
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(127
|
)
|
|
$
|
27.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
725
|
|
|
$
|
30.82
|
|
|
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
573
|
|
|
$
|
31.69
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value per share of options granted during the years ended
December 31, 2008, 2007 and 2006, was $13.78, $26.91 and zero, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2008, 2007 and 2006, was
$3.9 million, $2.6 million and $3.6 million, respectively. Intrinsic value is measured using the
fair market value price of the Company’s common stock less the applicable exercise price. There was
no aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2008.
The following table sets forth information for options outstanding and exercisable as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
Number
|
|
|
Life (in
|
|
|
Price Per
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Life (in
|
|
|
Price Per
|
|
|
Intrinsic
|
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Years)
|
|
|
Share
|
|
|
Value
|
|
|
Exercisable
|
|
|
Years)
|
|
|
Share
|
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
$1.76 – $5.27
|
|
|
7
|
|
|
|
5.57
|
|
|
$
|
2.52
|
|
|
$
|
—
|
|
|
|
2
|
|
|
|
0.98
|
|
|
$
|
5.27
|
|
|
$
|
—
|
|
|
$5.28 – $7.90
|
|
|
10
|
|
|
|
3.20
|
|
|
$
|
7.18
|
|
|
|
—
|
|
|
|
10
|
|
|
|
3.19
|
|
|
$
|
7.18
|
|
|
|
—
|
|
|
$7.91 – $15.93
|
|
|
143
|
|
|
|
2.35
|
|
|
$
|
14.28
|
|
|
|
—
|
|
|
|
143
|
|
|
|
2.35
|
|
|
$
|
14.28
|
|
|
|
—
|
|
|
$15.94 – $23.67
|
|
|
21
|
|
|
|
3.01
|
|
|
$
|
21.75
|
|
|
|
—
|
|
|
|
19
|
|
|
|
2.58
|
|
|
$
|
21.37
|
|
|
|
—
|
|
|
$23.68 – $38.63
|
|
|
226
|
|
|
|
4.81
|
|
|
$
|
30.55
|
|
|
|
—
|
|
|
|
81
|
|
|
|
2.80
|
|
|
$
|
34.14
|
|
|
|
—
|
|
|
$40.39
|
|
|
318
|
|
|
|
0.98
|
|
|
$
|
40.39
|
|
|
|
—
|
|
|
|
318
|
|
|
|
0.98
|
|
|
$
|
40.39
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725
|
|
|
|
2.58
|
|
|
$
|
30.82
|
|
|
$
|
—
|
|
|
|
573
|
|
|
|
1.67
|
|
|
$
|
31.69
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic
value based on the closing price of the Company’s common stock of $0.91 on December 31, 2008, which
would have been received by the option holders had all option holders exercised their options as of
that date.
F-27
As of December 31, 2008, there was $1.6 million of unrecognized compensation cost related to
stock options outstanding. That cost is expected to be recognized over a weighted-average period of
1.9 years. Under the terms of the plans, a change in control such as the currently proposed merger
with JLL would accelerate the vesting of all non-vested outstanding equity awards.
The following table sets forth cash proceeds and tax benefits related to total stock options
exercised during the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Cash proceeds from stock options exercised
|
|
$
|
2,198
|
|
|
$
|
3,733
|
|
|
$
|
3,663
|
|
|
Tax benefits realized for stock options exercised
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted Stock and Restricted Stock Units —
Restricted stock awards are granted subject to
certain restrictions including in some cases service conditions and in other cases service and
performance conditions (performance-based shares). The grant-date fair value of restricted stock
and performance-based share awards, which has been determined based upon the closing market value
of the Company’s common stock on the grant date, is expensed over the vesting period.
Restricted stock awards are granted subject to certain restrictions, including service
conditions. The grant-date fair value of restricted stock units, which has been determined based
upon the closing market value of the Company’s common stock on the grant date, is expensed over the
vesting period.
The fair value of restricted stock units granted was determined based on the closing price of
the Company’s common stock on the date of grant. The restricted stock units are granted subject to
applicable tax withholdings. For the years ended December 31, 2008, 2007 and 2006, the Company
withheld 45,197 shares (or $0.5 million), 38,545 shares (or $1.4 million) and 43,139 shares (or
$0.8 million) in satisfaction of statutory tax withholding requirements. The following table sets
forth a summary of non-vested restricted stock and restricted stock unit activity and related
information during the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Restricted Stock and
|
|
|
Grant-Date
|
|
|
|
|
Restricted Stock Units
|
|
|
Fair Value
|
|
|
|
|
(In thousands)
|
|
|
Non-vested at beginning of year
|
|
|
282
|
|
|
$
|
23.62
|
|
|
Granted
|
|
|
266
|
|
|
$
|
24.10
|
|
|
Vested
|
|
|
(180
|
)
|
|
$
|
18.08
|
|
|
Forfeited
|
|
|
(42
|
)
|
|
$
|
27.03
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at end of year
|
|
|
326
|
|
|
$
|
25.07
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock awards that vested during the years ended
December 31, 2008, 2007 and 2006, was $4.5 million, $4.3 million and $3.2 million, respectively. As
of December 31, 2008, there was $5.8 million of unrecognized compensation cost related to
restricted stock and restricted stock unit compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 3.7 years. Under the terms of the plans, a change in
control such as the currently proposed merger with JLL would accelerate the vesting of all
non-vested outstanding equity awards.
Common Stock Repurchases
In November 2005, the Board of Directors approved the repurchase of up to $30.0 million of
common stock. In November and December 2005, the Company purchased a total of 0.6 million shares
for $12.4 million. In March 2006, the Company retired these treasury shares. The purchase of future
treasury shares is restricted to a maximum of $10.0 million in a calendar year pursuant to the
terms of the Credit Facility and the attainment of certain operating covenants, which may further
restrict the amount of treasury stock that can be repurchased.
F-28
NOTE I — EMPLOYEE BENEFITS
Employment Agreements
The Company has entered into written employment agreements with certain of its executive officers.
The agreements provide for annual salaries and other benefits. The agreements also provide for
eligibility for grants of restricted stock units, options or other equity incentives and annual
bonuses, subject to the approval the Company’s Compensation Committee. Additionally, the agreements
also provide the executives with an option to terminate their agreement and receive lump sum
payments, as defined in the respective agreements, if there is a change in control of the Company
or if they are terminated without cause. On December 12, 2008, the Company’s Compensation Committee
approved a three-year extension to the terms of the employment agreement of Jeffrey P. McMullen.
The agreement was executed by both the Company and Mr. McMullen and is dated as of December 16,
2008, and was effective as of December 31, 2008. On December 31, 2008, the Company entered into
amended and restated employment agreements with certain of its executive officers. With the
exception of the agreement entered into by and between the Company and Mr. McMullen, such
agreements were entered into so as to comply with Internal Revenue Code section 409A.
On March 26, 2007, the Company’s Board of Directors approved the non-renewal of the employment
agreement of its then executive vice president of bioanalytical laboratories and former president
and chief executive officer of its wholly owned subsidiary, Anapharm. The Company will make cash
severance payments in the amount of two times the executive’s annual base salary payable over a
period of 24 months. The first payment was due on the first day of the seventh month following the
execution of the agreement. The executive forfeited the right to any unvested stock options or
restricted stock units as of the termination date, released the Company from any and all claims and
agreed that the executive would not solicit, for a period of 24 months, any employees of the
Company. Finally, the executive agreed to abide by the terms of the non-compete clause as set forth
in the executive’s employment agreement. As of December 31, 2008, the Company had a liability of
$0.3 million which is included in accrued liabilities in the accompanying consolidated balance
sheets.
On October 22, 2007, the Company entered into a mutual separation agreement with its then
chief accounting officer, whereby the executive was no longer an officer of the Company as of that
date. The Company honored the executive’s employment agreement, and as a result the Company will
make cash severance payments in the amount of two times the executive’s annual base salary payable
over a period of 24 months. The Company will continue to provide the executive with life,
disability, accident and health insurance benefits for a period of 24 months following separation.
In addition, all long-term incentive grants outstanding as of the date of separation immediately
vested. As of December 31, 2008, the Company had a liability of $0.3 million which is included in
accrued liabilities in the accompanying consolidated balance sheets.
Defined Contribution Plans
The Company maintains a 401(k) salary investment plan for employees of the Company and its
U.S. subsidiaries. Employees who are full-time employees and at least 18 years of age are eligible
to participate. Participants may defer a portion of their base salary, up to 80%, to the plan and
the Company matches 50% of the participant’s first 10% of contributions. Employee contributions
vest immediately and company contributions vest ratably over a three-year period. There are several
investment options available to enable participants to diversify their accounts. For the years
ended December 31, 2008, 2007 and 2006, the Company’s expense for matching contributions was $2.7
million, $2.0 million and $2.0 million, respectively. The Company also provides defined
contribution plans for employees of certain foreign subsidiaries with aggregate contributions for
the years ended December 31, 2008, 2007 and 2006, of $3.8 million, $3.2 million and $2.4 million,
respectively.
Effective December 31, 2005, the PharmaNet 401(k) plan that had been offered to its
U.S. employees was amended to provide that plan contributions would no longer be accepted. After
that date, PharmaNet employees were eligible to participate in the Company’s 401(k) plan. During
2005, the Company discovered the PharmaNet 401(k) plan may have sustained certain operational
defects and PharmaNet applied to the Internal Revenue Service to correct these defects. In
September 2007, the Company resolved the matter with the IRS for a nominal amount and, as a result,
reversed its accrual of $0.5 million and recorded this amount in other income in the accompanying
consolidated statements of operations for the year ended December 31, 2007.
F-29
NOTE J — INCOME TAXES
The following table sets forth the U.S. and foreign components of earnings (loss) before
income taxes for the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
(247,419
|
)
|
|
$
|
2,780
|
|
|
$
|
(24,269
|
)
|
|
Foreign
|
|
|
(1,856
|
)
|
|
|
12,543
|
|
|
|
27,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(249,275
|
)
|
|
$
|
15,323
|
|
|
$
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the components of income tax expense (benefit) for the years
ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
431
|
|
|
$
|
(743
|
)
|
|
$
|
210
|
|
|
State
|
|
|
443
|
|
|
|
2,604
|
|
|
|
152
|
|
|
Foreign
|
|
|
5,277
|
|
|
|
2,618
|
|
|
|
6,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,151
|
|
|
|
4,479
|
|
|
|
6,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,021
|
)
|
|
|
1,180
|
|
|
|
(5,971
|
)
|
|
State
|
|
|
(612
|
)
|
|
|
1,119
|
|
|
|
(286
|
)
|
|
Foreign
|
|
|
(1,428
|
)
|
|
|
(4,438
|
)
|
|
|
(3,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(6,061
|
)
|
|
|
(2,139
|
)
|
|
|
(10,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90
|
|
|
$
|
2,340
|
|
|
$
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a reconciliation of income tax expense (benefit) at the federal
statutory rate to recorded income tax expense (benefit) for the years ended December 31, 2008, 2007
and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal taxes at U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State income taxes, net of federal benefit
|
|
|
0.08
|
|
|
|
6.0
|
|
|
|
(3.0
|
)
|
|
Permanent
differences, primarily impairment of goodwill and indefinite-lived
assets
|
|
|
(29.99
|
)
|
|
|
28.7
|
|
|
|
1.3
|
|
|
Foreign rate differential
|
|
|
0.36
|
|
|
|
(10.7
|
)
|
|
|
(149.5
|
)
|
|
Cumulative effect of statutory rate change
|
|
|
(0.14
|
)
|
|
|
(7.4
|
)
|
|
|
(35.7
|
)
|
|
Foreign research and development tax credits
|
|
|
2.77
|
|
|
|
(56.7
|
)
|
|
|
(32.1
|
)
|
|
Other foreign tax credits
|
|
|
—
|
|
|
|
(6.1
|
)
|
|
|
—
|
|
|
Change in domestic valuation allowance
|
|
|
(4.99
|
)
|
|
|
(17.3
|
)
|
|
|
73.3
|
|
|
Change in foreign valuation allowance
|
|
|
(2.14
|
)
|
|
|
43.9
|
|
|
|
(1.0
|
)
|
|
Other, net
|
|
|
(0.99
|
)
|
|
|
(0.2).
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(0.04
|
)%
|
|
|
15.2
|
%
|
|
|
(111.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences in the table above for 2008 relate primarily to goodwill impairment. In
2007, permanent differences related mainly to nondeductible expenses related to executive
compensation, interest, other expenses and foreign currency gains and losses on intercompany
transactions which do not impact consolidated results of operations before taxes, but impact
taxable income reported on the Company’s filed tax returns in the U.S.
F-30
The following tables set forth the components of deferred income taxes as of December 31, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
449
|
|
|
$
|
345
|
|
|
Prepaid expenses
|
|
|
(1,131
|
)
|
|
|
(530
|
)
|
|
Accrued expenses
|
|
|
1,463
|
|
|
|
5,571
|
|
|
Other
|
|
|
36
|
|
|
|
101
|
|
|
Less: domestic valuation allowance
|
|
|
(644
|
)
|
|
|
(5,220
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred tax asset, net
|
|
$
|
173
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Foreign research and development tax carryforwards
|
|
$
|
31,015
|
|
|
$
|
33,023
|
|
|
Depreciation and amortization
|
|
|
(1,917
|
)
|
|
|
(11,783
|
)
|
|
Intangible assets
|
|
|
(2,703
|
)
|
|
|
(7,336
|
)
|
|
Net operating loss carryforwards
|
|
|
19,010
|
|
|
|
7,277
|
|
|
Deferred compensation
|
|
|
708
|
|
|
|
2,769
|
|
|
Deferred rent
|
|
|
1,959
|
|
|
|
1,825
|
|
|
Client advances
|
|
|
1,493
|
|
|
|
1,550
|
|
|
Capital lease obligations
|
|
|
472
|
|
|
|
1,424
|
|
|
Foreign tax credits
|
|
|
504
|
|
|
|
1,292
|
|
|
Alternative minimum tax
|
|
|
1,117
|
|
|
|
828
|
|
|
Deferred revenue
|
|
|
109
|
|
|
|
(32
|
)
|
|
Other
|
|
|
28
|
|
|
|
295
|
|
|
Less: valuation allowance:
|
|
|
—
|
|
|
|
—
|
|
|
Domestic
|
|
|
(25,511
|
)
|
|
|
(8,043
|
)
|
|
Foreign
|
|
|
(20,046
|
)
|
|
|
(17,496
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax asset (liability),
net
|
|
$
|
6,238
|
|
|
$
|
5,593
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset (liability), net
|
|
$
|
6,411
|
|
|
$
|
5,860
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2007, total gross deferred income tax assets were $64.0 million
and $56.3 million and total gross deferred income tax liabilities were $11.4 million and
$19.7 million, respectively. Total net deferred income tax assets as of December 31, 2008 and 2007,
net of valuation allowances, were $6.4 million and $5.9 million, respectively. As of December 31,
2008 and 2007, the total valuation allowance recorded against deferred tax assets were $46.2
million and $30.8 million, respectively. The total change in the valuation allowance during the
years ended December 31, 2008 and 2007, was $15.4 million and $3.8 million, respectively.
Carryforwards and Allowances
As of December 31, 2008, the Company had research and development tax credit carryforwards
from the government of Canada totaling $35.3 million that expires between 2014 and 2029. During
2008, the Company generated significant new research and development tax credits resulting from its
Canadian operations. While the Company’s generation of new tax credits exceeded its utilization
during 2008, the net deferred tax asset recorded in the accompanying consolidated balance sheet for
these Canadian tax credits is $16.4 million as of December 31, 2008. In determining the amount of
this deferred tax asset, the Company’s methodology includes the development of various assumptions
and estimates relating to its Canadian operations, which are subject to change during the
carryforward period. The Company has established a valuation allowance of $18.9 million of these
carryforwards based on an assessment that it is more likely than not that these benefits will not
be realized. It is at least reasonably possible that changes in these assumptions and estimates may
require changes in the level of the valuation allowance in future periods which could be material.
The Company is eligible for a special tax program for U.K. research and development
expenditures relating to its work performed at its U.K. operations. It is anticipated that for
future periods, the Company will not have a significant tax liability in the U.K. due to the
availability of these special loss rules against earnings from its U.K. operations.
As of December 31, 2008, the Company had federal, state and foreign net operating loss
carryforwards of $51.0 million, $68.9 million and $1.7 million, respectively, that are available to
offset future liabilities for income taxes. The Company has generally established a valuation
allowance against these carryforwards, net of available carryback claims, based on an assessment
that it is more likely than not that these benefits will not be realized. The U.S. net operating
loss carryforward is further subject to limitation under Internal Revenue Code §382 and will begin
to expire in 2026. The state net operating losses will begin to expire in 2010. During
the year ended December 31, 2008, the Company generated federal and state net operating loss
carryforwards of $27.3 million and $30.8 million respectively, while utilizing foreign net
operating losses of $0.6 million.
F-31
The portion of share-based awards’ tax deduction that corresponds to the compensation cost
recognized for book purposes is recorded as a deferred tax asset. For federal and state tax
purposes, an additional tax deduction may be created for awards that are settled at the time of
exercise or vesting for which the fair market value exceeds the expense originally recorded as
share-based compensation. The Company cannot recognize a tax benefit on any excess deduction
because it did not reduce its income taxes payable. As such, the net operating loss carryforward
for which a deferred tax asset is recorded will differ from the amount of net operating loss
carryforward available to the Company. As of December 31, 2008, the amount of suspended excess tax
benefits was $9.0 million. Recognition of the excess tax benefits would result in an increase to
additional paid-in-capital of the same amount.
Undistributed Foreign Earnings
The Company has generally elected under APB Opinion No. 23, “Accounting for Income Taxes —
Special Areas” (“APB 23”), to deem earnings and profits related to foreign subsidiaries as
permanently reinvested. Accordingly, the Company has made no provision for U.S. income taxes that
might result from repatriation of these earnings. As of December 31, 2008, the undistributed
earnings of foreign subsidiaries were $88.3 million. On March 19, 2009, a dividend of $22.0 million
was paid to the Company from one of its foreign subsidiaries. Subsequent to this dividend, the
Company had undistributed foreign earnings, for which no provision for U.S. income taxes has been
established, in the amount of $66.3 million.
Tax Audits
The Company remains subject to examination in federal, state and foreign jurisdictions in
which the Company conducts its operations and files tax returns. The Company believes that the
results of current or any prospective audits will not have a material effect on its financial
position or results of operations as adequate reserves have been provided to cover any potential
exposures related to these ongoing audits.
FIN 48
In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax
positions. FIN 48 requires that the Company recognize in its accompanying consolidated financial
statements the impact of a tax position if it is more likely than not that position will be
sustained on audit, based on the technical merits of the position. The Company adopted FIN 48
effective January 1, 2007. Upon adoption, the Company recognized the cumulative effect of the
change in accounting as a reduction in retained earnings of $2.9 million, which together with a
previously existing income tax liability of $3.2 million resulted in a total liability for
unrecognized tax benefits in the amount of $6.1 million related to U.S. and foreign operations.
As of December 31, 2008, the total gross amount of reserves for income taxes, reported in
other long-term liabilities in the accompanying consolidated balance sheets, was $8.1 million. Any
prospective adjustments to reserves for income taxes will be recorded as an increase or decrease to
the provision for income taxes and would impact the Company’s effective tax rate. In addition, the
Company accrues interest and penalties related to reserves for income taxes in the provision for
income taxes. The gross amount of interest accrued, reported in other long-term liabilities, was
$1.9 million as of December 31, 2008, of which $0.9 million was recognized in 2008.
The following table sets forth the changes in the Company’s reserves for income taxes for all
federal, state and foreign tax jurisdictions during the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of
year
|
|
$
|
7,212
|
|
|
$
|
6,110
|
|
|
Additions for tax positions related
to the current year
|
|
|
1,420
|
|
|
|
1,688
|
|
|
Additions for tax positions from
prior years
|
|
|
474
|
|
|
|
416
|
|
|
Reductions for tax positions from
prior years
|
|
|
690
|
|
|
|
(1,188
|
)
|
|
Statue of limitations
expiration
|
|
|
—
|
|
|
|
(649
|
)
|
|
Currency translation
adjustment
|
|
|
(1,652
|
)
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
year
|
|
$
|
8,144
|
|
|
$
|
7,212
|
|
|
|
|
|
|
|
|
|
F-32
NOTE K — DISCONTINUED OPERATIONS
In 2006, the Company decided to close its operations in Florida that were being conducted by
its Miami and Ft. Myers subsidiaries and reported in the early stage segment. The Company made this
decision primarily due to a number of issues that had resulted in a material negative impact on
earnings and in response to actions by local authorities that included an order to demolish the
Company’s clinical and administrative office building in Miami. The Company vacated and demolished
the Miami facility, terminated employees located at these subsidiaries and completed other
administrative tasks. The final contract and study was completed in January 2008, and the final
report is pending acceptance by the client.
While the Company’s wind down and closure of its operations in Miami and Ft. Myers are
substantially complete, the remnants of the assets and liabilities from those operations are
accounts receivable, land owned in Miami, and accrued liabilities. Through December 31, 2007, these
operations had been accounted for as discontinued operations. As of December 31, 2008, the assets,
liabilities and residual impact to the statement of operations were immaterial. Accordingly, at
December 31, 2008, those remaining assets and liabilities have been included with the assets and
liabilities of continuing operations. Any changes in those specific assets and liabilities in
future reporting periods will be evaluated for materiality and separate financial statement
disclosure.
The results of operations of the Miami and Ft. Myers subsidiaries for the years ended December
31, 2007 and 2006, are included in the accompanying consolidated statements of operations as
“Earnings (loss) from discontinued operations, net of tax.” The following table sets forth the
components of these earnings (losses) for the years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except per
|
|
|
|
|
share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Direct revenue
|
|
$
|
2,185
|
|
|
$
|
7,490
|
|
|
Reimbursed out-of-pocket expenses
|
|
|
19
|
|
|
|
957
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
2,204
|
|
|
|
8,447
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
2,398
|
|
|
|
8,762
|
|
|
Reimbursable out-of-pocket expenses
|
|
|
19
|
|
|
|
957
|
|
|
Selling, general and administrative
|
|
|
(26
|
)
|
|
|
18,886
|
|
|
Impairment of long-lived assets
|
|
|
—
|
|
|
|
18,963
|
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
4,051
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,391
|
|
|
|
51,619
|
|
|
Other income
|
|
|
941
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
754
|
|
|
|
(43,158
|
)
|
|
Income tax expense (benefit)
|
|
|
(84
|
)
|
|
|
(1,081
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations
|
|
$
|
838
|
|
|
$
|
(42,077
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(2.31
|
)
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
(2.28
|
)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,790
|
|
|
|
18,221
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,048
|
|
|
|
18,447
|
|
|
|
|
|
|
|
|
|
F-33
NOTE L — GEOGRAPHIC INFORMATION
The following tables set forth the composition of the Company’s direct revenue by geographic
region for the years ended December 31, 2008, 2007, and 2006, and the location of the Company’s
property and equipment as of December 31, 2008 and 2007.
Direct revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
141,302
|
|
|
$
|
166,087
|
|
|
$
|
136,047
|
|
|
Canada
|
|
|
128,668
|
|
|
|
108,070
|
|
|
|
85,697
|
|
|
Europe
|
|
|
85,703
|
|
|
|
84,825
|
|
|
|
78,616
|
|
|
Other
|
|
|
11,055
|
|
|
|
9,879
|
|
|
|
6,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
366,728
|
|
|
|
368,861
|
|
|
|
307,214
|
|
|
Less: intercompany eliminations
|
|
|
(8,982
|
)
|
|
|
(6,390
|
)
|
|
|
(4,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
357,746
|
|
|
$
|
362,471
|
|
|
$
|
302,385
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
23,013
|
|
|
$
|
21,157
|
|
|
Canada
|
|
|
23,173
|
|
|
|
33,569
|
|
|
Europe
|
|
|
9,144
|
|
|
|
11,760
|
|
|
Other
|
|
|
1,008
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,338
|
|
|
$
|
67,506
|
|
|
|
|
|
|
|
|
|
All U.S. direct revenue is derived from sales to unaffiliated clients. Geographic area of
sales is primarily based on where the subsidiary is located.
F-34
NOTE M — SEGMENT REPORTING
The Company has two reportable business segments, early stage and late stage. The early stage
segment consists of Phase I clinical trial services and bioanalytical laboratory services,
including early clinical pharmacology. The late stage segment consists of Phase II through Phase IV
clinical trial services, including a comprehensive array of services including data management,
biostatistics, medical, scientific and regulatory affairs, clinical information technology and
consulting services. The accounting policies of the reportable segments are the same as those
described in Note A to the consolidated financial statements.
The Company evaluates its segment performance based on direct revenue, operating margins and
net earnings (loss) before income taxes. Accordingly, the Company does not include the impact of
interest income (expense), foreign currency exchange transaction gain (loss), other income
(expense) and income taxes in segment profitability.
Effective January 1, 2007, the Company began reporting the business operations of Specialized
Pharmaceutical Services (“SPS”), formerly CPS, in the late stage segment. The 2006 results have
been revised to exclude discontinued operations and to reflect SPS in the late stage segment rather
than the early stage segment as previously reported.
The following table sets forth operations by segment for the years ended December 31, 2008,
2007 and 2006, and as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
Early Stage
|
|
|
Late Stage
|
|
|
Allocations
|
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Direct revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
154,298
|
|
|
$
|
203,448
|
|
|
$
|
—
|
|
|
$
|
357,746
|
|
|
2007
|
|
$
|
137,818
|
|
|
$
|
224,653
|
|
|
$
|
—
|
|
|
$
|
362,471
|
|
|
2006
|
|
$
|
103,274
|
|
|
$
|
199,111
|
|
|
$
|
—
|
|
|
$
|
302,385
|
|
|
(Loss) earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
(466
|
)
|
|
$
|
(219,139
|
)
|
|
$
|
(24,524
|
)
|
|
$
|
(244,129
|
)
|
|
2007
|
|
$
|
22,260
|
|
|
$
|
34,092
|
|
|
$
|
(34,865
|
)
|
|
$
|
21,487
|
|
|
2006
|
|
$
|
12,116
|
|
|
$
|
21,934
|
|
|
$
|
(21,044
|
)
|
|
$
|
13,006
|
|
|
(Loss) earnings from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
(7,633
|
)
|
|
$
|
(226,428
|
)
|
|
$
|
(15,214
|
)
|
|
$
|
(249,275
|
)
|
|
2007
|
|
$
|
6,675
|
|
|
$
|
29,219
|
|
|
$
|
(20,571
|
)
|
|
$
|
15,323
|
|
|
2006
|
|
$
|
12,467
|
|
|
$
|
20,213
|
|
|
$
|
(29,495
|
)
|
|
$
|
3,185
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
113,184
|
|
|
$
|
202,941
|
|
|
$
|
8,421
|
|
|
$
|
324,546
|
|
|
2007
|
|
$
|
152,625
|
|
|
$
|
436,102
|
|
|
$
|
20,909
|
|
|
$
|
609,636
|
|
The following table sets forth a reconciliation of total assets to the accompanying
consolidated balance sheets as of December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Total assets for reportable segments, including corporate allocations
|
|
$
|
324,546
|
|
|
$
|
609,636
|
|
|
Assets from discontinued operations
|
|
|
—
|
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
324,546
|
|
|
$
|
614,835
|
|
|
|
|
|
|
|
|
|
F-35
NOTE N — SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth selected quarterly financial results for the years ended
December 31, 2008 and 2007. The information reflects all normal recurring adjustments that are, in
the opinion of management, necessary for a fair statement of the results of the interim periods. In
addition, the results reflect provision for the settlement of litigation of $8.9 million and
$1.5 million in the second and third quarters of 2007, respectively and the non-cash impairment
charge related to goodwill and indefinite-lived assets of $210.6 million and $37.9 million in the
third and fourth quarters of 2008. The annual amounts for earnings (loss) per share may differ from
the total of the quarterly amounts due to changes in shares activity during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
(In thousands, except per share data)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct revenue
|
|
$
|
86,800
|
|
|
$
|
96,764
|
|
|
$
|
89,218
|
|
|
$
|
84,964
|
|
|
Gross profit(1)
|
|
$
|
25,907
|
|
|
$
|
35,265
|
|
|
$
|
32,650
|
|
|
$
|
32,436
|
|
|
Net (loss) earnings from continuing operations
|
|
$
|
(10,099
|
)
|
|
$
|
2,183
|
|
|
$
|
(209,100
|
)
|
|
$
|
(34,077
|
)
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net (loss) earnings
|
|
$
|
(10,099
|
)
|
|
$
|
2,183
|
|
|
$
|
(209,100
|
)
|
|
$
|
(34,077
|
)
|
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.53
|
)
|
|
$
|
0.11
|
|
|
$
|
(10.73
|
)
|
|
$
|
(1.75
|
)
|
|
Diluted
|
|
$
|
(0.53
|
)
|
|
$
|
0.11
|
|
|
$
|
(10.73
|
)
|
|
$
|
(1.75
|
)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct revenue
|
|
$
|
84,781
|
|
|
$
|
85,595
|
|
|
$
|
99,810
|
|
|
$
|
92,285
|
|
|
Gross profit(1)
|
|
$
|
34,303
|
|
|
$
|
32,894
|
|
|
$
|
42,736
|
|
|
$
|
36,365
|
|
|
Net earnings (loss) from continuing operations
|
|
$
|
5,992
|
|
|
$
|
(4,602
|
)
|
|
$
|
6,887
|
|
|
$
|
3,801
|
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
$
|
640
|
|
|
$
|
82
|
|
|
$
|
(93
|
)
|
|
$
|
209
|
|
|
Net earnings (loss)
|
|
$
|
6,632
|
|
|
$
|
(4,520
|
)
|
|
$
|
6,794
|
|
|
$
|
4,010
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.36
|
|
|
$
|
0.21
|
|
|
Diluted
|
|
$
|
0.35
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.36
|
|
|
$
|
0.21
|
|
|
|
|
|
|
(1)
|
|
Direct revenue less direct costs.
|
NOTE O — SUBSEQUENT EVENTS
On February 3, 2009, it was announced that affiliates of JLL, including Parent and Purchaser,
entered into the Merger Agreement with the Company whereby Parent will acquire the Company. The
acquisition will be carried out in two steps. The first step is the tender offer by Purchaser to
purchase all of the Company’s outstanding shares of common stock at a price of $5.00 per share,
payable net to the seller in cash. The Tender Offer expired on March 19, 2009 at 12:00 midnight New
York City time. On March 20, 2009, Purchaser accepted for payment all validly tendered shares and
announced that it will pay for all such shares promptly, in accordance with applicable law.
In the second step of the acquisition, Purchaser will be merged with and into the Company,
with the Company as the surviving corporation in the Merger. The Company expects that the Merger
will be completed on March 30, 2009 under short-form merger procedures provided by Delaware law.
Following the Merger, the Company will be a wholly-owned subsidiary of Parent and the Company will
no longer have any publicly traded shares. The transaction values the Company’s common stock at
$100.5 million and will be financed by a $250.0 million equity commitment from funds managed by
JLL, which includes the necessary funds to retire the Company’s Notes. The Merger is subject to
customary conditions.
As a result of transaction with JLL, the Company required additional cash proceeds in order to
facilitate the closing of the transaction. On March 19, 2009, a dividend of $22.0 million was paid
to the Company from one of its foreign subsidiaries. The Company had not established a provision
for U.S. income taxes on such dividend pursuant to its election under APB 23 to deem earnings and
profits related to foreign subsidiaries as permanently reinvested. The Company does not anticipate
that any significant U.S. income taxes will be due on such dividend given the availability of the
Company’s previously unbenefited net operating losses, as well as the ability to utilize foreign
tax credits. Subsequent to this dividend, the Company had undistributed foreign earnings, for which
no provision for U.S. income taxes has been established, in the amount of $66.3 million.
F-36
PHARMANET DEVELOPMENT GROUP, INC.
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
Beginning
|
|
|
to Costs
|
|
|
|
|
|
|
End of
|
|
|
Description
|
|
of Period
|
|
|
and Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
|
(In thousands)
|
|
|
Deferred tax valuation allowance — Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
13,263
|
|
|
|
14,757
|
|
|
|
(1,865
|
)
|
|
$
|
26,155
|
|
|
2007
|
|
$
|
15,309
|
|
|
|
—
|
|
|
|
(2,046
|
)
|
|
$
|
13,263
|
|
|
2006
|
|
$
|
—
|
|
|
|
15,309
|
|
|
|
—
|
|
|
$
|
15,309
|
|
|
Deferred tax valuation allowance — Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
17,496
|
|
|
|
6,742
|
|
|
|
(4,192
|
)
|
|
$
|
20,046
|
|
|
2007
|
|
$
|
11,617
|
|
|
|
5,930
|
|
|
|
(51
|
)
|
|
$
|
17,496
|
|
|
2006
|
|
$
|
5,161
|
|
|
|
6,503
|
|
|
|
(47
|
)
|
|
$
|
11,617
|
|
F-37
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
21
|
|
|
Subsidiaries of PharmaNet Development Group, Inc. (filed herewith).
|
|
|
23.1
|
|
|
Consent of Grant Thornton LLP dated March 23, 2009 (filed herewith).
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer (Section 302) (filed herewith).
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer (Section 302) (filed herewith).
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer (Section 1350) (furnished
herewith).
|
|
|
32.2
|
|
|
Certification of Chief Financial Officer (Section 1350) (furnished
herewith).
|
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