e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year ended December
31, 2008
or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File
No. 0-29100
eResearchTechnology,
Inc.
(Exact name of issuer as specified in its charter)
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Delaware
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22-3264604
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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1818 Market Street Philadelphia, PA
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19103
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(Address of Principal Executive Offices)
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(Zip Code)
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(215) 972-0420
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Each Exchange on Which
Registered
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Common Stock, $.01 par value
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The Nasdaq Stock Market LLC
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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 þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained to the best
of registrants 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. o
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 þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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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 o No þ
As of June 30, 2008, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $847,244,147 based on the closing sale price as
reported on the Nasdaq Global Select Market.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at February 20,
2009
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Common Stock, $.01 par value per share
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51,285,890 shares
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DOCUMENTS
INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11,
12, 13 and 14) is incorporated by reference from the
registrants definitive proxy statement for its 2009 Annual
Meeting of Stockholders, to be filed with the Commission
pursuant to Regulation 14A.
PART I
General
eResearchTechnology, Inc.
(ERTtm),
a Delaware corporation, was founded in 1977 to provide Cardiac
Safety solutions to evaluate the safety of new drugs. ERT and
its consolidated subsidiaries collectively are referred to as
the Company or we. We provide technology
and service solutions that enable the pharmaceutical,
biotechnology and medical device industries to collect,
interpret and distribute cardiac safety and clinical data more
efficiently. We are a market leader in providing centralized
electrocardiographic solutions (Cardiac Safety solutions) and a
provider of technology solutions that streamline the clinical
trials process by enabling our clients to evolve from
traditional, paper-based methods to electronic processing using
our EDC and electronic patient reported outcomes (ERT
ePROtm)
solutions.
Our solutions improve the accuracy, timeliness and efficiency of
trial
set-up, data
collection from sites worldwide, data interpretation, and new
drug, biologic and device application submissions. We offer
Cardiac Safety solutions, which are utilized by pharmaceutical
companies, biotechnology companies, medical device companies,
clinical trial sponsors and clinical research organizations
(CROs) during the conduct of clinical trials. Our Cardiac Safety
solutions include the collection, interpretation and
distribution of electrocardiographic (ECG) data and images and
are performed during clinical trials in all phases of the
clinical research process. The ECG provides an electronic map of
the hearts rhythm and structure, and typically is
performed in most clinical trials. Our Cardiac Safety solutions
permit assessments of the safety of therapies by documenting the
occurrence of cardiac electrical change. Specific trials, such
as Thorough QTc studies, focus on the cardiac safety profile of
a compound. Thorough QTc studies are comprehensive studies that
typically are of large volume and short duration and are
recommended by the United States Food and Drug Administration
(FDA) under guidance issued in 2005 by the International
Committee on Harmonization (ICH E14). We also offer site
support, which includes the rental and sale of cardiac safety
equipment along with related supplies and logistics management.
Additionally, under our EDC solutions, we offer the licensing
and, at the clients option, hosting of our proprietary
software products and the provision of maintenance and
consulting services in support of these products. We also offer
ePRO solutions along with proprietary clinical assessments.
Cardiac
Safety Market in Clinical Trials
Diagnostic tests are employed in clinical trials to measure the
effect of the drug on certain body organs and systems in order
to determine the products safety. Cardiac safety testing
is a critical component of diagnostic testing. The collection of
cardiac safety data (primarily ECGs) can be performed using a
decentralized collection method or in a centralized cardiac
safety laboratory environment which ERT and other centralized
cardiac safety laboratories provide.
Decentralized ECG collection is performed at investigative sites
using local ECG equipment with ECGs read by local cardiologists
using a paper ECG output. Different ECG machines may be utilized
at the various trial sites which may create variability in the
algorithms used to measure the ECG. Variability may result in
the inability to identify cardiac safety signals. The use of
paper based ECGs also limits the degree of detail analysis of
the ECG versus a digital representation of the ECG. Further, the
use of multiple physicians, many of whom may not be
cardiologists, to interpret the ECGs at individual sites may
also create variability.
Under centralized ECG collection, most of the work that would
otherwise be done at the site level is performed by centralized
cardiac safety laboratories. ECGs are administered at the local
site using a standard set of protocols and homogenous equipment.
The digital ECG data is then transmitted to the centralized
cardiac safety laboratory where it is subject to a standardized
set of operational processes.
We estimate that centralized ECG collection is used in about one
third of ECGs collected in clinical trials, and this use is
growing due to the benefits over paper based decentralized
collection. The primary benefit is the creation of a higher
quality of data, in part because resolution of digital data is
greater than that of paper based ECGs but also due to the
standardization of cardiologist review and the use of a common
operational framework, independent third
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party evaluation and repeatable project management and work flow
processes. We also believe use of centralized cardiac safety
laboratories is more efficient and provides the customer with an
overall lower cost. We are participating in the development of a
low-cost cardiac safety equipment solution to further incent
clinical trial sponsors to transition from decentralized to
centralized collection and analysis of ECGs.
The primary techniques used by core laboratories for interval
duration measurements and morphology evaluations include a fully
manual and a semi-automated methodology. The fully manual
measurement, as performed by ERT, involves human analyzers (a
cardiac safety specialist for interval duration measurements of
the intervals and a cardiologist for quality control and
interpretation) who perform on-screen measurements of the
intervals, without the use of a computer algorithm to identify
interval onsets and offsets. The advantage of this approach is
that the readers are not biased or influenced by the computer
algorithm. The semi-automated methodology (also called manual
adjudication), as performed by ERT, utilizes a computer
algorithm to generate the initial on-screen placement of
electronic calipers at the beginning and end of each interval
requiring measurement, such as the QT interval. This is followed
by the review of the caliper placement and manual adjustments,
as necessary, which are performed by human analyzers (a cardiac
safety specialist and an over-read by a cardiologist, who also
performs the interpretation). The advantage of this approach is
less measurement variability and the ability to correct
automated measurements that are believed to be inaccurate by the
analyzers. We provide both the fully manual and semi-automated
reading methodology to our customers. Over the past several
years we have experienced an increase in the use of
semi-automatic reading as compared to fully manual reading of
ECGs.
Certain providers of cardiac safety services have been
developing software algorithms which enable fully automated
reads. Fully automated readings rely entirely on computer
algorithms generated by the ECG machine to measure the QT
interval and eliminate the cardiac safety specialist and
cardiologist review of the underlying data. While the FDA
potentially could accept fully automated ECG reads for submittal
in the future, we have not been requested by our customers to
conduct a study using a fully automated reading methodology
which would be used for submission of data to the FDA. We
consider the risk of taking the human oversight of a cardiac
safety specialist or a cardiologist out of the reading process
to be too high to offset the potential cost savings that could
be experienced should a fully automated read be performed.
Operations
We conduct our operations through offices in the United States
(U.S.) and the United Kingdom (UK). Our international net
revenues represented approximately 21%, 23% and 21% of total net
revenues for the years ended December 31, 2006, 2007 and
2008, respectively. The majority of our revenues are allocated
based upon the profit split transfer pricing methodology, and
revenues are generally allocated to the geographic segment where
the work is performed. The profit split methodology equalizes
gross margins for each legal entity based upon its respective
direct costs.
Product
and Service Offerings
Our revenues by product and service solution as a percentage of
total revenues are as follows:
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Year Ended December 31,
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2006
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2007
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2008
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Net revenues:
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Licenses
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3.5
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2.7
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2.4
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Services
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64.0
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70.5
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74.6
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Site support
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32.5
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26.8
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23.0
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Total net revenues
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100.0
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100.0
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100.0
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Our license revenues consist of license fees for perpetual
license sales and monthly and annual term license sales for our
software products offered under our EDC solutions and
ePROtm
solutions. Our services revenues consist of our services offered
under our Cardiac Safety solutions, technology consulting and
training services and software maintenance services. The
technology consulting and training services and software
maintenance services
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are related to our EDC and
ePROtm
solutions. Our site support revenue consists of cardiac safety
equipment rentals and sales along with related supplies and
logistics management.
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Product and Service
Solutions
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Description
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Cardiac Safety
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ERT provides a highly scalable set of Cardiac Safety solutions
centered on our regulatory compliant (Title 21 CFR,
Part 11) EXPERT®
Technology Platform.
EXPERT®
provides for workflow enabled cardiac safety data collection,
interpretation and distribution of ECG data and images.
EXPERT®
also enables analysis and cardiologist interpretation of ECGs
performed on research subjects in connection with our
clients clinical trials.
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EXPERT®
is designed specifically to address global regulatory guidance
and technical standards for digital ECG processing to include
digital collection, waveform measurements and annotations,
review and output to the regulatory standard file format.
EXPERT®
includes the ability for ECGs to be viewed as
side-by-
side ECG images for comparison, supplemented by the ability to
review prior patient ECG tracings.
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EXPERT®
further enhances our ECG solutions by permitting cardiologists,
with training in our ECG interpretation guidelines and proper
security access, to perform telecardiology, which is the ability
to access and evaluate ECGs electronically in remote locations.
Our
EXPERT®
solution supports a wide variety of workflows and rules that in
turn provides us the flexibility to accommodate the unique needs
of individual sponsors and studies.
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We provide the following centralized ECG testing services as
part of our Cardiac Safety solutions:
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Digital ECG Services. Allows the investigator to
transmit, via modem, 12-lead ECG data directly to us for
interpretation and rapid return of results to the investigator
and the sponsor. ECGs are measured using a manual method or a
semi-automatic method. Under the manual method, ECGs are
measured by our cardiac safety specialists utilizing an on
screen, high-resolution caliper placement system, and are then
interpreted by a cardiologist. Under the semi-automatic method,
ECGs are measured by a cardiac safety specialist and
cardiologist adjudication of software algorithm placed
measurements where appropriate and as desired by our clients.
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Continuous Digital 12-lead ECG Recording. The
12-lead ECG signals are recorded onto compact flash memory cards
and submitted to us. From these recordings, 12-lead ECGs can be
evaluated at specific time points. These ECGs are measured by a
cardiac safety specialist and then interpreted by a
cardiologist. Continuous digital 12-lead ECG recordings can also
be used for studies assessing the incidence of arrhythmias,
cardiac ischemia and/or heart rate variability findings.
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Holter Recording. This is a continuous ECG
recording of the hearts rhythm on a flash card that is
reviewed by a cardiac safety specialist and then by a
cardiologist. Holter data reported by us is provided for studies
assessing the incidence of arrhythmias, cardiac ischemia and/or
heart rate variability.
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Paper ECG Services. Paper ECGs are measured by our
cardiac safety specialists utilizing a high-resolution
digitizing system, and are then interpreted by a
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cardiologist. Alternatively, paper ECGs may be scanned to a
digital format, where appropriate.
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FDA XML ECG Services. This service provides our
clients with electronic versions of each ECG processed by
EXPERT®.
The ECGs processed by
EXPERT®
are rendered in a format compliant with the FDAs XML
standard for digital ECGs.
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MyStudy
Portal/EXPERT®
Direct. This is a hosted solution, which delivers near real time
cardiac safety feedback at the program, trial, center and
patient level, along with related metrics, such as trial
enrollment, as well as the ability to organize and publish a
variety of study-specific information and the ability to link
data points in reports directly to digital ECG waveforms.
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Cardiac Safety Equipment. We provide ECG equipment
to clients to perform the ECG and Holter recordings and give
them the means to send such recordings to ERT. The service
comprises equipment rental and sales, along with related
supplies and logistics management.
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Cardiac Safety Consulting
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The centralization of electrocardiograms in clinical research
has become increasingly important to organizations involved in
the development of new drugs. Global regulators each apply their
own slightly different interpretation of the ICH E14 guidelines
and, as a result, sponsors look to their vendors to provide key
scientific input into the overall process. Our cardiac safety
consulting service aids sponsors in the development of protocol
synopses, the creation and analysis of statistical plans as well
as the provision of an expert medical report with regard to the
cardiac findings. We are involved in all phases of clinical
development from a consultancy point of view. We offer this
service both as a stand-alone service and integrated with our
full suite of Cardiac Safety solutions.
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EDC
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The process of designing, implementing and managing a clinical
trial requires a well defined process and set of supporting
products to effectively handle the variety of tasks and
information comprising a clinical trial. We provide a suite of
products to address the capture, management and dissemination of
clinical trial data. Our integrated suite is comprised of the
following:
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Portal is an easy to use portal application enabling
clinical trial researchers and staff to gain real-time access to
study dashboards, progress reports, folders and forums enabling
efficient management and communication of study progress. Portal
also includes a web-based training environment, eHealth
Educationtm
, which enables clinical research professionals to learn
about technology developments, new products, clinical protocols,
and other educational matters.
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EDC Now! uses the latest technology to
provide a comprehensive electronic data capture (EDC) system
which provides sponsors with the ability to roll out electronic
studies in short time frames. This rapid time to start combined
with a fixed price and scope approach helps sponsors realize the
benefits of EDC without the risks normally associated with the
typical EDC process.
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Data Management is a clinical data
management application for collecting, cleaning and managing
clinical trial data.
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Adverse Event Reporting is an adverse
event management system enabling the generation of key
regulatory reports, including CIOMS and Medwatch.
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Trial Management is a clinical trial
management technology that can be used to set up clinical
trials, establish standards, track study activities, plan
resources, distribute supplies, manage the financial aspects of
a trial and electronically view clinical trial data.
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Our EDC solution is available for license over a renewable term
(subscription license) in addition to a traditional perpetual
license with annual maintenance. Our EDC offerings may be hosted
by us or one of our third-party hosting partners, or they may be
installed on our clients computing infrastructure.
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ePRO
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Data is collected during clinical trials allowing sponsors to
gauge the efficacy of the compounds they are testing. Collecting
data directly from the patient can be performed in a number of
different methods, including electronically. We provide an
electronic patient reported outcome (ePRO) service that performs
this function for sponsors. Our solution consists of the
following tools and services:
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Data Collection Our ePRO solution is
an IVR system that allows subjects in a clinical trial to call
into the system via a telephone and enter their reported data
directly into the system.
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Data Management Once the data has been
entered into the ePRO system there are a number of data
management functions that can be performed depending on the
requirements of the sponsor. This includes sending call reports
to the sites, sending call reports to the sponsor, alerting the
sites if data is outside specifically set boundaries, web access
to the data by the sponsor, and cleaning of data per the specs
provided by the sponsor.
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Data Delivery At the conclusion of the
study, the data is compiled and then delivered according to the
sponsor requirements. This can include SAS exports, ASCII
exports, electronic file transfers and data delivery on digital
media.
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Project Assurance
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We provide a full spectrum of consulting services for all of our
products that augment the study management and implementation
efforts of clients in support of their clinical research
requirements. The methodology provides a consistent framework
through which we can effectively manage the delivery of all
product and service solutions and provide the standards,
guidelines and services that allow us to effectively anticipate
our clients needs and assure proactive communication and
implementation in order to meet and exceed our clients
goals. The services include study initiation, project
management, education, site qualification, configuration,
technology and regulatory review, research dashboards and
electronic reporting, data management, uniform standards and
standard operating procedures, and migration services. In
addition, we provide
on-site
research and technology advisory services, support services
including online and help desk support, and software
maintenance.
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Research
and Development
Overview
As of December 31, 2008, we had 41 employees engaged
in research and development across all our product areas. The
central approach of our research and development team is to
foster a close relationship with our customers and internal
users to ensure we continue to deliver industry leading
capabilities across all product lines. Our proprietary and
patented technology is designed to materially enhance the
abilities of our customers and internal users to efficiently and
securely capture and process clinical data, to ensure regulatory
compliance and to offer scalability to support the largest of
clinical studies in a timely manner.
Technology
Our product applications use underlying industry standard
technologies including Java for application layer
development and Oracle 10g for database services. Our
system development lifecycle process features best practices in
the areas of requirements capture, software design and
development. Our philosophy of using industry-standard tools
allows us to focus our attention on the features and functions
delivered through the client interface and the application layer
in order to meet our clients strategic business
requirements.
2008
Product Initiatives
During 2008, we delivered and launched major product initiatives
across each product line as follows:
During 2008, we extended our
EXPERT®
Technology Platform to enable the migration of studies being
performed by Covance Cardiac Safety Services, Inc. (CCSS), the
centralized ECG business of Covance, Inc. (Covance) that we
acquired in November 2007. This effort provided for the import
of previously processed ECGs, support for the CCSS MTX-2 ECG
machine and incorporation of CCSS longest QT algorithm. We
launched the
EXPERT®
version 2.0 Technology Platform in January 2007 to drive our
global cardiac safety operations. The system continues to meet
and exceed our expectations attesting to the quality of the
development process. The system is configured to enable
scalability to meet our current and future capacity needs and
performance levels to ensure we meet contracted
turn-around-times. A backup data center is also configured for
quick
start-up
should any issue arise with the primary data center facility.
EXPERT®
provides a patented and comprehensive set of enhancements that
extend our flexibility to meet customer-unique demands, enhance
our operational efficiencies and increase our global
scalability. To further embrace customer requests,
EXPERT®
provides such features as on-demand reporting, protocol-unique
clinical alerts and auto-assignment of cardiologists to
subjects. Operational efficiency is enhanced by the use of
standardized protocol templates, protocol versioning, new
management and workflow features, and enhanced query automation.
EXPERT®
Direct, now being renamed to MyStudy Portal, is our latest
generation of portal technology providing our cardiac safety
customers with an easy to use portal for dashboards, reports and
viewing of individual ECG waveforms and annotations. The portal
also features functionalities for self-service administration.
During 2008, we added electronic business features that enable
clinical sites to acquire reports, order supplies, complete site
qualifications forms and receive and respond to queries on a
self-service basis. During 2009, we expect to complete quality
and user acceptance testing of this new capability and enter
production.
Our EDC solutions feature a set of fully-integrated products
spanning portal, data capture, data management, safety reporting
and trial management functionalities and services. We designed
this suite of products for installation at customer sites or
hosting by ERT at our secure data center. During 2008, we
developed support for CDISC standards along with a new Ad Hoc
Query Reporting capability that gives end users a real time
ability to assess their study data using their own criteria for
queries.
We originally launched our ERT ePRO solution during 2007
featuring an IVR product and a set of electronic assessments.
During 2008, we extended the product to provide for recruitment
functionality, enabling potential subjects to complete an
automated assessment over the telephone. Subjects meeting the
clinical trials acceptance criteria are immediately
informed of the result during the call and then provided the
location of the nearest investigator site. We also incorporated
additional monitoring and reporting to meet customer unique
requirements.
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Our
Clients
We serve pharmaceutical, biotechnology, medical device companies
and clinical trial sponsors as well as CROs. We have agreements
that establish the overall contractual relationship between us
and our clients with approximately 235 customers for active or
upcoming projects. We provide our solutions to 41 of the 50
largest pharmaceutical companies globally and 10 of the top 10
largest pharmaceutical companies globally. In 2008, Novartis AG,
at 23%, was the only client that accounted for 10% or more of
our consolidated net revenues. Novartis accounted for 16% and
24% of our consolidated net revenues in 2006 and 2007,
respectively.
Sales and
Marketing
We market and sell product and service solutions primarily
through our global direct sales, sales support and professional
services organizations. As of December 31, 2008, our
business development team consisted of 54 sales, marketing
and consulting professionals worldwide, which included a direct
sales force of 26 sales professionals located globally.
We focus our marketing efforts on educating our target market,
generating new sales opportunities and increasing awareness of
our solutions. We conduct a variety of marketing programs
globally, including vendor days at clients offices,
business seminars, trade shows, public relations, industry
analyst programs and advisory councils.
Our sales cycle generally begins with proactive business
development within our active customer base as well as outreach
to new customers identified through prospecting and marketing
efforts. The sales process may include our response to a request
from a sponsor or CRO for a proposal to address a
client-specific research requirement. We then engage at our
expense in a series of meetings, consultations, workshops,
implementation reviews, final proposals and contract
negotiations prior to the time when the prospective client has
any obligation to purchase our product or service solutions.
During this process, we involve our sales, professional services
and senior management personnel in a collaborative approach. Our
sales cycle can vary from a few weeks to greater than one year,
depending upon the scope of the clinical trial or program, the
sponsors budgeting process, which of our product or
service solutions are being sold, and the final
agreed-upon
solution required to support the clinical trial or program.
The acquisition of CCSS included a marketing agreement under
which Covance is obligated to use us as its provider of
centralized cardiac safety solutions, and to offer these
solutions to Covances clients, on an exclusive basis, for
a 10-year
period, subject to certain exceptions.
We have experienced an increase in awards of new and expanded
exclusive or near-exclusive long-term enterprise contracts with
large pharmaceutical companies during the latter portion of
fiscal 2008, including several with which we had very little
business in the past. Partially as a result of these long-term
commitments, we have started to invest in our sales and
marketing functions and our internal IT infrastructure.
Partnerships
We have formalized agreements with clinical pharmacology units
(CPUs), CROs, imaging core laboratories and other third-party
service providers around the globe, including geographic and
cultural specialization in Asia. We structure our integrated
partnership offering to provide meaningful service enhancements
for partners and sponsors. Enhanced communications and
experienced collaboration with numerous partners promote speed,
accuracy and reliability of data collection and reporting and
quality study conduct.
Competition
While there has been some consolidation in our industry, the
market for our product and service solutions remains extremely
fragmented, with hundreds of companies providing niche solutions
to satisfy small parts of the clinical research process.
Additionally, we were the first company to utilize specifically
developed technology to address the digital regulatory
initiative in providing ECG solutions.
The market for our solutions is intensely competitive,
continuously evolving and subject to rapid technological change.
The intensity of competition has increased and is expected to
further increase in the future. This increased competition could
result in price reductions, reduced gross margins and loss of
market share, any one of which
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could seriously harm our business. Competitors, including
centralized cardiac safety laboratories and CROs, vary in size
and in the scope and breadth of the product and service
solutions offered.
We believe that the principal competitive factors affecting our
market include:
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client service;
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a significant base of reference clients;
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breadth and depth of solution, including the ability to
accommodate both electronic forms and manual, paper-based
research methods of data collection, management and analysis;
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scientific expertise;
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consulting capabilities;
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product quality and performance;
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core technology and product features;
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ability to implement solutions;
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capacity;
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price;
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financial and organizational stability; and
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ability to adapt to changing regulatory guidance.
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We believe that our solutions, particularly our Cardiac Safety
solutions, currently compete favorably with respect to these
factors, and we will continue to strive to maintain our
competitive edge in the marketplace.
Government
Regulation
Human pharmaceutical products, biological products and medical
devices are subject to rigorous government regulation. In the
United States, the principal federal regulatory agency is the
FDA and there are some similar state agencies. Foreign
governments also regulate these products when they are tested or
marketed abroad. In the United States, the FDA has
established standards for conducting clinical trials leading to
the approval for new products.
Because our product and service solutions assist the sponsor or
CRO in conducting the trial and preparing the new drug, biologic
or device application, we must comply with these requirements.
We also must comply with similar regulatory requirements in
foreign countries. These foreign regulations vary somewhat from
country to country, but generally establish requirements similar
to those of the FDA.
In March 1997, the FDA promulgated regulations related to
requirements for computer systems that support electronic
records and electronic signatures. These regulations define
requirements for system control, security, authentication,
validation and retention of electronic records. The FDA issued a
guidance document, Part 11 Electronic Records; Electronic
Signatures Scope and Applicability (August 2003),
which defines the FDAs current thinking on the
implementation of the 1997 regulation 21 CFR
Part 11, and also noted there would be enforcement
discretion of specific requirements.
The Health Insurance Portability and Accountability Act of 1996
(HIPAA) established certain requirements relating to the privacy
and security of personal health information. HIPAA directly
covers how health plans, health care clearinghouses and most
health care providers transmit, store, use and disclose
individually identifiable health information. Covered uses and
disclosures include uses and disclosures for purposes of
clinical trials or other activities regulated by the FDA.
In November 2001, the FDA held a public meeting at which it
proposed requiring sponsors of new drugs to submit ECG raw data
in digital format and annotated digital ECG waveforms. Annotated
waveforms include definition of measurement points that are used
to create ECG analysis data. A subsequent meeting held in
January 2003, which was supported by a preliminary concept paper
issued in November 2002, further discussed the trial design, ECG
acquisition, analysis and reporting for digital ECGs. Following
a meeting in June 2004, the International Conference on
Harmonization (ICH) released to the public in September 2004 the
following
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guidelines at Step 3, S7B: Safety Pharmacology Studies for
Assessing the Potential for Delayed Ventricular Repolarization
(QT Interval Prolongation) by Human Pharmaceuticals and E14: The
Clinical Evaluation of
QT/QTc
Interval Prolongation and Proarrhythmic Potential for
Non-Antiarrhythmic Drugs (ICH E14). The objective of these
guidelines is to recommend the design and timing of studies in
the clinical development process and provide general
recommendations on available non-clinical methodologies to
assess the potential risk of QT interval prolongation of a
pharmaceutical product. On May 12, 2005, the ICH ratified
and recommended for implementation the cardiac safety monitoring
guidance provided in ICH E14 (step 4). The guidance was
implemented by the FDA in October 2005 and adopted by the
European Union in November 2005. As of December 31, 2008,
ICH E14 is pending ratification in Japan. The guidance confirms
previous guidance reinforcing the need for routine cardiac
safety testing as well as Thorough QTc testing for all compounds
entering the blood stream commencing early in clinical
development to provide maximum guidance for later trials, as
well as testing for all compounds in Phase III prior to
submission for approval.
We believe that we have designed our product and service
solutions to be consistent with the recommendations of the
relevant regulatory bodies as referred to above and to comply
with applicable regulatory requirements.
Potential
Liability and Insurance
We attempt to manage our risk of liability for personal injury
or death to study subjects from administration of products under
study through contractual indemnification provisions with
clients and through insurance maintained by our clients and us.
Contractual indemnification generally does not protect us
against certain of our own actions, such as negligence. The
terms and scope of such indemnification vary from client to
client and from trial to trial. Although most of our clients are
large, well-capitalized companies, the financial viability of
these indemnification provisions cannot be assured. Therefore,
we bear the risk that the indemnifying party may not have the
financial ability to fulfill its indemnification obligations to
us. We maintain errors and omissions liability insurance in the
amount of $10 million per claim and professional liability
insurance in the amount of $1 million per claim. Our
operating results could be materially and adversely affected if
we were required to pay damages or incur defense costs in
connection with a claim that is beyond the scope of an indemnity
provision or beyond the scope or level of insurance coverage
maintained by us or the client or where the indemnifying party
does not fulfill its indemnification obligations to us.
Intellectual
Property
Our solutions have been enhanced by significant investment in
information technology. Our research and development
organization is committed to achieving operating efficiencies
through technological advances. We have developed certain
computer software and technologically derived procedures, as
well as created internal operational processes, which we seek to
protect through a combination of contract law and trade secrets,
including seeking patent protection in several jurisdictions. We
believe that our technological capabilities and operational
processes provide significant benefits to our clients.
On March 16, 2004, we were issued United States Patent
No. 6,708,057 (the 057 Patent) for various methods
and systems for processing electrocardiograms. The methods and
systems have particular utility in the collection and
interpretation of electrocardiograms developed during clinical
trials. The 057 Patent includes more than 50 claims
directed to various features of our
EXPERT®
workflow enabled data handling technology.
We have also filed patent applications in Canada, India and the
European Patent Office. We also have filed various continuation
applications pursuing alternative claim coverage as well as
claims directed to various enhancements made to the
EXPERT®
technology. We continue to pursue patent protection of new
technology advances and production.
Employees
At December 31, 2008, we had a total of 415 employees,
with 326 employees (309 full-time, 17 part-time)
at our locations in the United States and 89 employees
(85 full-time, 4 part-time) at our location in the
United Kingdom. We had 267 employees performing
services directly for our clients, 41 employees in research
and development, 54 employees in sales and marketing and
53 employees in general and administrative functions.
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During 2008, we integrated the operations of CCSS with our
operations and closed CCSS operations conducted in Reno, Nevada
and affiliated operations in Crawley, West Sussex, United
Kingdom. Approximately 25 of our new hires in 2008 were to
compensate for the loss of the 108 CCSS employees who were
terminated in connection with this integration.
We are not a party to any collective bargaining agreements
covering any of our employees, nor have we ever experienced any
material labor disruption. We are not aware of any current
efforts or plans to unionize our employees. We consider our
relationship with our employees to be good.
Available
Information
Our website address is www.ert.com. We make available on
our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. You may
access and print these forms free of charge from our website.
The risk factors identified in the cautionary statements below
could cause our actual results to differ materially from those
suggested in the forward-looking statements appearing elsewhere
in this
Form 10-K.
However, these risk factors are not exhaustive, as new risks
emerge from time to time, and it is not possible for management
to predict all such risk factors or to assess the impact of all
such risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Accordingly, forward-looking statements should not
be relied upon as a predictor of actual results.
Our
future operating results are uncertain and may fluctuate. If we
fail to meet the expectations of securities analysts and
investors, our stock price would likely decline.
If our operating results in any future period fluctuate
significantly, we may not meet the expectations of securities
analysts and investors, which would likely cause the market
price of our common stock to decline. It is difficult to predict
the timing or amount of our revenues because:
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we generate a significant percentage of our revenues from a
limited number of clients;
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our sales cycles can be lengthy and variable;
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Thorough QTc studies are typically of large volume and of short
duration; and
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sponsors and CROs may unexpectedly cancel, postpone or reduce
the size of clinical trials.
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We make decisions on operating expenses based on anticipated
revenue trends and available resources. We also incur expenses
educating and providing information to our client base, via
consultations, without any obligation by our client to purchase
our product and service solutions. Because many of our expenses
are fixed and we are committed to making a significant
investment in our organization and in marketing our product and
service solutions, delays in recognizing revenues could cause
our operating results to fluctuate from period to period. If we
fail to generate the contract signings that we expect or the
anticipated revenues from such signings, we may fail to meet
financial guidance that we have provided, or may provide in the
future, to the public. Failure to meet financial guidance could
cause the market price of our common stock to decline and affect
our ability to raise capital which could reduce our cash
reserves and limit our capital spending.
If
general economic conditions fail to improve or continue to
deteriorate, our operations may be affected and/or we may be
unable to secure future financing to make the necessary
investments to grow our business.
General business and economic conditions have deteriorated
globally and there is currently no indication of any imminent
relief. During the fourth quarter of 2008, we experienced a
significant increase in Phase III bookings, a decline in
Thorough QTc bookings, and a delay in starts for Thorough QTc
trials. Although we believe the fundamental drivers of our core
business remain positive, a continued weakened global economy
could have an impact on our future results of operations. There
is no guarantee that the amounts in our backlog will ever
convert to revenue. Should the current economic conditions
continue or deteriorate further, the cancellation rates that we
have historically experienced could increase.
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While we believe our current financial condition is very strong
and liquid, we have made in the past, and may make in the
future, acquisitions or significant investments in other
businesses. Future acquisitions or investments may reduce our
readily available capital and require us to obtain additional
financing. If we are unable to obtain any financing necessary to
make investments in our technology and workforce, we may be
unable to achieve the market growth that such investments were
intended to generate.
If
general economic conditions fail to improve or continue to
deteriorate, potential clients may be unable to get the
necessary financing to conduct business and existing clients may
fail to make timely payments for services that we have
performed, which could adversely affect our ability to increase
overall revenues and our overall financial position.
Many of our existing and potential clients, and in particular,
development stage pharmaceutical or biotechnology companies,
depend on financing to conduct clinical trials and may be
affected by poor economic conditions. If financing is
unattainable or business is otherwise affected by a troubled
economy, clinical trials may be delayed, which could affect our
ability to sign new contracts and increase revenues. In
addition, while we take reasonable precautions to avoid credit
risk, some clients may have financial difficulties as a result
of the lack of financing or the general poor economic
conditions, which could result in delayed payments to us for the
services we performed. Such delays in payments would result in
higher accounts receivable balances and lower liquidity. In
addition, this could result in us recording additional expense
to write-off the accounts receivable balances remaining if
payment is not likely.
We depend
entirely on the clinical trial market and a downturn in this
market could cause our revenues and profitability to
decrease.
Our business depends entirely on the clinical trials that
pharmaceutical, biotechnology and medical device companies
conduct. Our revenues and profitability will decline if there is
less competition in the pharmaceutical, biotechnology or medical
device industries, which could result in fewer products under
development and decreased pressure to accelerate a product
approval. Our revenues and profitability will also decline if
the FDA or similar agencies in foreign countries modify their
requirements, thereby decreasing the need for our solutions. Any
other developments that adversely affect the pharmaceutical,
biotechnology or medical device industries generally, including
product liability claims, new technologies or products or
general business conditions, could also decrease the volume of
our business. From time to time studies for which we contracted
to provide Cardiac Safety solutions are delayed or postponed
resulting in lower than expected revenues.
Extensive
governmental regulation of the clinical trial process could
require costly modifications to our products, adversely affect
prospective clients willingness to use our product and
service solutions and increase competition and reduce our market
share.
We may incur increased expenses or suffer a reduction in
revenues if our product and service solutions do not comply with
applicable government regulations or if regulations allow more
competition in the marketplace. Conforming our product and
service solutions to these guidelines or to future changes in
regulation could substantially increase our expenses. In the
United States and in foreign countries, regulatory authorities
have also established other standards for conducting clinical
trials leading to the approval of new products with which we
must comply. We are subject to these regulations because our
product and service solutions assist sponsors and CROs in
conducting trials and preparing new drug or device applications.
If a regulatory authority concludes that trials were not
conducted in accordance with established requirements, it may
take a variety of enforcement actions depending upon the nature
of the violation and the applicable country. In the United
States, these measures may range from issuing a warning letter
or seeking injunctive relief or civil penalties to recommending
criminal prosecution, which could result in a prohibition of our
continued participation in future clinical trials.
Our clients and prospective clients will be less likely to use
our product and service solutions if the product and service
solutions do not comply with regulatory requirements in all
countries where clinical trials are expected to take place or if
we are precluded from participating in clinical trials in
countries where trials will be conducted. In addition, changing
regulatory requirements could provide an advantage to our
competitors if our competitors are
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able to meet the requirements more rapidly or at lower cost. For
example, in the May 12, 2005 ICH release, it was suggested
that semi-automated processing of electrocardiograms may be
found acceptable in certain instances. Semi-automated processing
uses software algorithm-placed measurements that are later
adjudicated by a cardiac specialist or physician. Our manual
processing includes manually derived measurements, using our on
screen, high resolution caliper placement system, which are
later interpreted by a cardiologist. Drug sponsors have shifted
towards semi-automated processing allowing more competitors to
compete with us in offering this service and, as a result, we
have reduced pricing to maintain our market share. The effect of
such actions has reduced our revenue and gross profit per
transaction and could adversely affect us in the future.
The ICH E14 guidance contained in the May 2005 release
recommends either fully manual or manual adjudication (semi
automatic) approaches for clinical trials in which the
assessment of ECG safety is an important objective, such as the
Thorough QTc study. If the Thorough QTc study is negative,
routine ECG safety assessments in late phase clinical trials
using fully automated readings may be adequate. If drug sponsors
shift towards fully-automated processing for routine or Thorough
QTc studies, our future results of operations may be adversely
affected as pricing may decline and additional competitors could
enter the market.
Our failure to maintain revenue and gross profit per transaction
may affect our ability to achieve growth in cardiac safety
revenues and overall profitability from year to year. Our
failure to show growth may also prevent us from meeting the
expectations of securities analysts and investors, which would
likely cause the market price of our common stock to decline.
The FDA
may recommend a different approach to measure drug effects on
the QT interval of an ECG which could make our systems and
processes obsolete and adversely affect revenue and
profitability.
The FDA has provided guidance reinforcing the need for routine
cardiac safety testing as well as Thorough QTc testing for all
compounds entering the blood stream. This testing is
accomplished by measuring the QT/QTc interval prolongation on an
ECG. We function as an ECG core lab and have developed our
EXPERT®
system and processes to receive the ECGs and obtain and report
these measurements. It is possible that, in the future, the FDA
may recommend different approaches to measuring drug effects on
the QT interval which may diminish the need for an ECG core lab.
This would considerably reduce the value of our existing systems
and processes and would substantially decrease our revenues and
profitability.
We have
clients from whom we derive substantial revenue and therefore
the loss of even a few of our clients could significantly reduce
our revenues and profitability.
We have one client that represented approximately 23% of our
total revenues for 2008, a slight decrease from 24% of our total
revenues for 2007. While no other client represented more than
10% of our 2008 revenues, our next five largest clients in the
aggregate represented approximately 14% of our total revenues
for 2008. If we lose all or a material amount of our revenues
from any significant clients and do not replace them with
revenues from new clients, our revenues will decrease and they
may not be sufficient to cover our costs. We currently derive
and expect to continue to derive a significant portion of our
revenues and profitability from a limited number of clients.
Consolidation
among our clients could cause us to lose clients, decrease the
market for our products and result in a reduction of our
revenues and profitability.
Our client base could decline because of consolidation, and we
may not be able to expand sales of our product and service
solutions to new clients. Consolidation in the pharmaceutical,
biotechnology and medical device industries and among CROs has
accelerated in recent years, and we expect this trend to
continue. In addition, in times of a weakened economy, less
stable companies, such as smaller biotechnology companies, may
be at risk of being acquired. In addition, our profitability
will suffer if we reduce our prices in response to competitive
pressures without achieving corresponding reductions in our
expenses.
New companies or organizations that result from such
consolidation may decide that our product and service solutions
are no longer needed because of their own internal processes or
the use of alternative systems. As these industries consolidate,
competition to provide product and service solutions to industry
participants will become more intense and the importance of
establishing relationships with large industry participants will
become greater.
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These industry participants may try to use their market power to
negotiate price reductions for our product and service
solutions. Also, if consolidation of larger clients occurs, the
combined organization may represent a larger percentage of
business for us and, as a result, we are likely to rely more
significantly on the combined organizations revenues to
achieve expected future growth.
Our
failure to continue to expand our business or manage growth
successfully could disrupt our business operations, increase our
costs and delay implementation of our business
strategies.
Difficulties in managing future growth could disrupt our
business operations, increase our costs and delay achievement of
our business goals, making it more difficult for us to maintain
profitability. Our growth strategy depends on our ability to
expand and improve our field sales, marketing and services
organization and our operations organization, both in the United
States and throughout the world. In order to grow, we will need
to hire additional personnel. There are a limited number of
experienced personnel with an adequate knowledge of our
industry, and competition for their services is intense. In
addition, we may not be able to project the rate or timing of
increases, if any, in the use of our product and service
solutions accurately or to expand and upgrade our systems and
infrastructure to accommodate the increases. The expansion of
our foreign operations also will require us to assimilate
differences in foreign business practices, overcome language
barriers and hire and retain qualified personnel abroad.
We may
not be successful in competing against others providing similar
product and service solutions, which could reduce our revenues,
profitability and market share.
If our product and service solutions do not achieve widespread
acceptance by our clients, our revenues, profitability and
market share will likely decline. Our competitors include other
centralized cardiac safety laboratories, CROs, software vendors,
and clinical trial data service companies. Our targeted clients
may decide to choose other technology-based product and service
solutions generated internally by them or from another source.
Many of our competitors have substantially greater financial and
other resources, greater name recognition and more extensive
client bases than we do. In addition, many competitors focus
their efforts on providing software or services for discrete
aspects of the clinical trial process and may compare favorably
to us on those discrete aspects. Further, certain drug
development organizations may decide not to outsource all or a
significant portion of the cardiac safety activities associated
with their clinical research programs, which could reduce our
revenues, profitability and market share.
Our
failure to establish and maintain partnerships and other
strategic alliances may delay the development of our product and
service solutions, cause us to lose clients and prevent us from
growing our business, any of which could also cause our stock
price to decline.
We have relationships with providers of clinical pharmacology
services, hardware and software systems, telecommunications,
web-hosting and development services, systems integration and
website content that support our sales and marketing efforts by
satisfying other needs of our existing clients that our
solutions do not address and by providing us access to their
clients as potential sources of new business. We do not
generally have long-term contracts with our strategic partners,
so they may cease doing business with us on relatively short
notice.
We may
incur liability as a result of providing consulting and Cardiac
Safety analysis and interpretation services.
We provide consulting and centralized analysis and
interpretation of ECGs in connection with our clients
clinical trials. It is possible that liability may be asserted
against us and the physicians who interpret the ECGs for us for
failing to accurately diagnose a medical problem indicated by
the ECG or for failing to disclose a medical problem to the
investigator responsible for the subject being tested. If we are
found liable, we may be forced to pay fines and damages and to
discontinue a portion of our operations. The contractual
protections included in our client contracts and our insurance
coverage may not be sufficient to protect us against such
liability. If the protections are not adequate, our
profitability would be negatively impacted and also our stock
price would likely fall.
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Our
business could be seriously harmed by our dependence on a
limited number of suppliers.
We depend upon a limited number of suppliers for specific
components of our software products and hosted solutions. We may
increase our dependence on certain suppliers as we continue to
develop and enhance our software and service solutions. Our
dependence on a limited number of suppliers leaves us vulnerable
to having an inadequate supply of required components, reduced
services capacity, price increases, delayed supplier performance
and poor component and services quality. For instance, we rely
on Mortara Instrument, Inc. to supply ECG equipment, A.M.P.S.
LLC to provide software applications designed for the on-screen
measurement of ECG signals and Equinix, Inc. to provide server
facilities for our hosting technology solutions. If we are
unable to obtain products and services from third-party
suppliers in the quantities and of the quality that we need, on
a timely basis or at acceptable prices, we may not be able to
deliver our cardiac safety and EDC solutions on a timely or
cost-effective basis to our customers, and our business, results
of operations and financial condition could be seriously harmed.
Moreover, delays or interruptions in our service, including
without limitation delays or interruptions resulting from a
change in suppliers, may reduce our revenues, cause customers to
terminate their contracts and adversely affect our customer
renewals. If these companies were to terminate their
arrangements with us or we were otherwise required to find
alternative suppliers to provide the required capacity and
quality on a timely basis, sales of our products and services
would be delayed. To qualify a new supplier and familiarize it
with our products, quality standards and other requirements is a
costly and time-consuming process. We cannot assure you that we
would be able to establish alternative relationships on
acceptable terms.
Interruptions
or delays in service from our third-party providers could impair
the delivery of our hosted solutions and harm our
business.
We host some of our software solutions at third-party
facilities. Consequently, the occurrence of a natural disaster,
technical or service lapses or other unanticipated problems at
the facilities of our third-party providers could result in
unanticipated interruptions in our customers access to our
hosted solutions. Our hosted services may also be subject to
sabotage, intentional acts of malfeasance and similar misconduct
due to the nature of the Internet. In the past, Internet users
have occasionally experienced difficulties with Internet and
online services due to system or security failures. We cannot
assure you that our business interruption insurance will
adequately compensate our customers or us for losses that may
occur. Even if covered by insurance, any failure or breach of
security of our systems could damage our reputation and cause us
to lose customers. Further, certain of our hosted solutions are
subject to service level agreements that guarantee server
availability. In the event that we fail to meet those levels,
whether resulting from an interruption in service caused by our
technology or that of a third-party provider, we could be
subject to customer credits or termination of these customer
contracts.
The
cardiac safety equipment that we own and lease could become
obsolete due to technological advance. We may not be able to
provide the quantity of equipment needed to service our clients.
We may fail to obtain the necessary certifications for use of
the equipment. Any such development would reduce our revenues
and profitability.
We own and lease equipment, which we provide to our clients to
perform cardiac safety procedures. This equipment may become
obsolete due to advances in technology and the introduction of
newer equipment models prior to the time that we have fully
depreciated the asset or fulfilled our lease obligations. This
could result in us recording additional expense to write-off the
book value of the equipment. In addition, certifications are
required for the use of certain ECG equipment. We have been able
to maintain such certifications in the past, but if the
requirements for these certifications change or other factors
lead to our failure to be compliant, we will lose the
certifications and may not be able to satisfy the equipment
needs of our clients, which may jeopardize our business
relationship and our ability to continue providing services. As
a result, we may lose clinical clients if adequate equipment is
not available, resulting in reduced revenues and profitability.
Capacity
constraint or system failures could result in the loss of or
liability to clients, which could reduce our revenues, increase
our expenses and reduce profitability.
In the past, we have been able to staff for increasing workload
demands in an expeditious manner. However, there may not be a
sufficient and suitable group of potential employees available
if rapid growth occurs in a short
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period of time. If we are unable to hire suitable employees to
adequately meet market demand for our solutions, it could affect
our ability to bid on this business or to meet existing
contractual turnaround times.
If our clients experience any significant level of problems with
our technology, we may become liable to those clients, we may be
unable to persuade our clients to change from a manual,
paper-based process and we may lose clients. The success of our
product and service solutions depends on the ability to protect
against:
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software or hardware malfunctions that interrupt operation of
our applications or cause loss of data integrity;
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power loss or telecommunications failures;
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overloaded systems;
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human error; and
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natural disasters.
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In addition, when we offer our software products as an
application service provider, our network infrastructure may be
vulnerable to computer viruses, break-ins and similar disruptive
problems caused by our clients or other Internet users. This
could also lead to delays, loss of data, interruptions or
cessation of service to our clients for which we may be liable.
There is no current technology that provides absolute protection
against these events. In addition, we may find that the cost to
develop or incorporate technology into our products that
provides the maximum protection against these problems outweighs
the incremental benefits of providing such enhanced protection.
Our
software products are complex and may contain undetected
software errors, which could lead to an increase in our costs or
a reduction in our revenues and profitability.
The occurrence of hardware and software errors, whether caused
by our solutions or another vendors products, could:
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cause sales of our solutions to decrease and our revenues and
profitability to decline;
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cause us to incur significant warranty and repair costs;
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divert the attention of our technical personnel away from
product development efforts; and
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cause significant client relations problems.
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Complex software products such as those included in our
technology solutions frequently contain undetected errors when
first introduced or as new versions are released. In addition,
we combine our solutions with software and hardware products
from other vendors. As a result, we may experience difficulty in
identifying the source of an error.
Rapidly
changing technology may impair our ability to develop and market
our solutions and cause us to become less competitive.
The marketplace for our software products is increasingly driven
by demands for ease of use and effective performance for
end-users of the system. We depend on continued focus on product
improvements in this area in order to remain competitive.
Our failure to continuously offer competitive product and
service solutions could cause us to lose clients and prevent us
from successfully marketing our solutions to prospective
clients. As a result, our revenues and profitability would
likely decline. Because our business relies on technology, we
are susceptible to:
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rapid technological change;
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changing client needs;
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frequent new product introductions; and
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evolving industry standards.
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As the Internet, computer and software industries continue to
experience rapid technological change, we must quickly modify
our solutions to adapt to such changes. We must develop and
introduce new or enhanced product and service solutions that
continually meet changing market demands and that keep pace with
evolving industry standards. We have experienced development
delays in the past and may experience similar or more
significant delays in the future. In addition, competitors may
develop products superior to our solutions, which could make our
products obsolete.
If
clinical trial sponsors and CROs do not shift from their
existing paper-based methods of collecting and managing clinical
trial data at investigator sites to an electronic system with
centralization, we may not achieve the market penetration
necessary to grow the business at expected levels.
If participants conducting clinical trials are unwilling to
adopt our technology solutions and new ways of conducting
business, our revenues may not be sufficient to achieve our
expected growth rate. Our efforts to establish a standardized,
electronic process to collect, manage and analyze clinical trial
and cardiac safety data are a significant departure from the
traditional clinical research process. We estimate that the
majority of clinical trials today use manual, paper-based data
entry, management and analysis tools. Each clinical trial can
involve a multitude of participants, including the sponsor, a
CRO, regional site managers, investigators and patients. With so
many participants involved in a clinical trial, it may be
difficult to convince a sponsor or CRO to accept new methods of
conducting a clinical trial. We may not be successful in
persuading these participants to change the manner in which they
have traditionally operated and to use our product and service
solutions.
We depend
on certain key executives. If we lose the services of any of
these executives, our operations could be disrupted, we could
incur additional expenses and our ability to expand our
operations could be impeded, particularly if we are not able to
recruit a suitable replacement in a timely manner.
The loss of the services of one or more of our key executives
could negatively affect our ability to achieve our business
goals. Our future performance will depend significantly on the
continued service and performance of all of our executives,
particularly Dr. Joel Morganroth, our Chairman of the Board
of Directors and Chief Scientific Officer, and Dr. Michael
McKelvey, our President and Chief Executive Officer. We also
depend on our key technical, client support, sales and other
managerial employees. We believe that it would be costly and
time consuming to find suitable replacements for our key
employees.
If we are
unable to protect our proprietary technology or maintain our
technological advantages, we may lose our intellectual property
rights and become less competitive.
If we fail to protect our intellectual property from
infringement, other companies may use our intellectual property
to offer competitive products at lower prices. If we fail to
compete effectively against these companies, we could lose
clients and experience a decline in sales of our solutions. To
protect our intellectual property rights, we rely on a
combination of copyright and trade secret laws and restrictions
on disclosure. In addition, in 2004 we were issued a
U.S. Patent on over 50 claims directed to various features
of our
EXPERT®
workflow enabled data handling technology. We also have filed
continuation-in-part
applications in the United States Patent and Trademark Office
pursuing alternative claim coverage and pursuing claim coverage
specific to enhancements in our
EXPERT®
workflow enabled handling technology that is imbedded in our
EXPERT®
Technology Platform. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy or otherwise
obtain and use our products and technology. In addition, our
U.S. Patent could be successfully challenged as invalid.
Monitoring unauthorized use of our solutions is difficult and
the steps we have taken may not prevent unauthorized use of our
technology, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the
United States.
We may
acquire or make investments in companies or technologies that
could cause disruption of our business and loss of value or
dilution to our stockholders.
From time to time, we evaluate potential investments in, and
acquisitions of, complementary technologies, services and
businesses. We have made in the past, and may make in the
future, acquisitions or significant investments in other
businesses. For example, we acquired CCSS and entered into a
long-term strategic relationship
18
with Healthcare Technology Systems, Inc. (HTS) in 2007. Entering
into an acquisition entails many risks, any of which could harm
our business, including:
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managing the risks and challenges of entering markets or types
of businesses in which we have limited or no direct experience;
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|
|
difficulties in integrating the operations, technologies,
products, existing contracts and personnel of the target company
and realizing the anticipated synergies of the combined
businesses;
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|
|
|
the price we pay or other resources that we devote may exceed
the value we eventually realize or the value we could have
realized if we had allocated the purchase price or other
resources to another opportunity;
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|
potential loss of key employees, customers and strategic
alliances from either our current business or the target
companys business;
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|
failure of a party to perform ancillary contractual obligations
related to the acquisition;
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|
the diversion of managements attention from other business
concerns; and
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|
assumption of unanticipated problems or latent liabilities, such
as problems with the quality of the target companys
products.
|
In addition, we could discover deficiencies withheld from us in
an acquisition due to fraud or otherwise not uncovered in our
due diligence prior to the acquisition. These deficiencies could
include problems in internal controls, data adequacy and
integrity, product quality and regulatory compliance, any of
which could result in us becoming subject to penalties or other
liabilities. Acquisitions also frequently result in the
recording of goodwill, as in the case of CCSS, and other
intangible assets which are subject to potential impairments in
the future that could harm our financial results. If any of the
foregoing were to occur, our financial condition and results of
operations could be materially adversely impacted. In addition,
if we finance any future acquisitions by issuing equity
securities or convertible debt, our existing stockholders may be
diluted or the market price of our stock may be adversely
affected. The failure to successfully evaluate and execute
acquisitions or investments or otherwise adequately address
these risks could materially harm our business and financial
results.
Specifically, if the market does not embrace the IVR clinical
assessments and system we licensed from HTS, we will not be able
to achieve the higher revenues and profitability that we had
anticipated that this transaction would allow us to generate. We
cannot assure you that the former customers of CCSS will remain
as our customers in the future. Additionally, we expect to
achieve a certain level of revenue from the marketing agreement
with Covance. If we lose any material portion of the former
customers of CCSS or if Covance does not perform to our
expectations under the marketing agreement, our revenues could
be significantly reduced and we could suffer an adverse affect
on our business, financial condition and results of operations.
Goodwill
is subject to impairment which could result in a significant
expense.
As a result of the CCSS acquisition, we carry a significant
amount of goodwill. Goodwill is not amortized but is subject to
an impairment test at least annually. We perform the impairment
test annually as of December 31 or more frequently if events or
circumstances indicate that the value of goodwill might be
impaired. Although we made no adjustments as a result of the
impairment test as of December 31, 2008, if we determine in
connection with future tests that the carrying value of goodwill
may not be recoverable, we will base the measurement of any
impairment on a projected discounted cash flow method using a
discount rate commensurate with the risk inherent in our current
business model. An impairment could result in a write-off of
goodwill which would reduce our profitability in the period of
the write-off.
Third
parties may claim that we infringe upon their intellectual
property rights, which could result in the loss of our rights,
subject us to liability and divert management
attention.
Although we are not currently involved in any intellectual
property litigation, we may be a party to litigation in the
future either to protect our intellectual property or as a
result of an alleged infringement by us of the intellectual
property of others. These claims and any resulting litigation
could subject us to significant liability or invalidate our
19
ownership rights in the technology used in our solutions. As a
result, we may have to stop selling our solutions. Litigation,
regardless of the merits of the claim or outcome, could consume
a great deal of our time and money and would divert management
time and attention away from our core business.
Any potential intellectual property litigation also could force
us to do one or more of the following:
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stop using the challenged intellectual property or selling our
product or service solutions that incorporate it;
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obtain a license to use the challenged intellectual property or
to sell product or service solutions that incorporate it, which
could be costly or unavailable; and
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redesign those product or service solutions that are based on or
incorporate the challenged intellectual property, which could be
costly and time consuming or could adversely affect the
functionality and market acceptance of our products.
|
If we must take any of the foregoing actions, we may be unable
to sell our solutions, which would substantially reduce our
revenues and profitability.
Our
international operations expose us to additional
risks.
A key element of our business strategy is to expand our
international operations. We face a number of risks and expenses
that are inherent in operating in foreign countries and,
accordingly, our international operations may not achieve
profitability consistently each year. The risks to us from our
international operations include:
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government regulations;
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trade restrictions;
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burdensome foreign taxes;
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|
exchange rate controls and currency exchange rate fluctuations;
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|
political and economic instability;
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varying technology standards; and
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difficulties in staffing and managing foreign operations.
|
We are subject to a variety of government regulations in the
countries where we market our product and service solutions. We
currently operate in the United Kingdom through a foreign
subsidiary and may operate in the future in other countries
through additional foreign subsidiaries. If we form foreign
subsidiaries outside of the United Kingdom, we may need to
withhold taxes on earnings or other payments they distribute to
us. Generally, we can claim a foreign tax credit against our
federal income tax expense for these taxes. However, the United
States tax laws have a number of limitations on our ability to
claim that credit or to use any foreign tax losses, which could
result in higher payment by us of taxes in the United States. We
may also need to include our share of our foreign
subsidiaries earnings in our income even if the
subsidiaries do not distribute money to us. As a result, less
cash would be available to us in the United States.
Our global operations may involve transactions in a variety of
currencies. Fluctuations in currency exchange rates could reduce
our reported revenues or increase our reported expenses. We
currently do not utilize hedging instruments.
The agreements that we sign with clients outside the United
States may be governed by the laws of the countries where we
provide our product and service solutions. We may also need to
resolve any disputes under these agreements in the courts or
other dispute resolution forums in those countries. This could
be expensive or could distract managements attention away
from our core business.
20
In the
event we are unable to satisfy regulatory requirements relating
to internal control over financial reporting, or if these
internal controls are not effective, our business and financial
results may suffer.
Effective internal controls are necessary for us to provide
reasonable assurance with respect to our financial reports and
to effectively prevent fraud. If we cannot provide reasonable
assurance with respect to our financial reports and effectively
prevent fraud, our brand and operating results could be harmed.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to
furnish a report by management on internal control over
financial reporting, including managements assessment of
the effectiveness of such control. Internal control over
financial reporting may not prevent or detect misstatements
because of its inherent limitations, including the possibility
of human error, the circumvention or overriding of controls, or
fraud. Therefore, even effective internal controls can provide
only reasonable assurance with respect to the preparation and
fair presentation of financial statements. In addition,
projections of any evaluation of the effectiveness of internal
control over financial reporting to future periods are subject
to the risk that the control may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. If we fail to maintain
the adequacy of our internal controls, including any failure to
implement required new or improved controls, or if we experience
difficulties in their implementation, our business and operating
results could be harmed, we could fail to meet our reporting
obligations, and there could also be a material adverse effect
on our stock price.
In the
course of conducting our business, we possess or could be deemed
to possess personal medical information in connection with the
conduct of clinical trials. If we fail to keep this information
properly protected we could be subject to significant
liability.
Our software solutions are used to collect, manage and report
information in connection with the conduct of clinical trial and
safety evaluation and monitoring activities. This information is
or could be considered to be personal medical information of the
clinical trial participants or patients. Regulation of the use
and disclosure of personal medical information is complex and
growing. Increased focus on individuals rights to
confidentiality of their personal information, including
personal medical information, could lead to an increase of
existing and future legislative or regulatory initiatives giving
direct legal remedies to individuals, including rights to
damages, against entities deemed responsible for not adequately
securing such personal information. In addition, courts may look
to regulatory standards in identifying or applying a common law
theory of liability, whether or not that law affords a private
right of action. Since we receive and process personal
information of clinical trial participants and patients from
customers utilizing our hosted solutions, there is a risk that
we could be liable if there were a breach of any obligation to a
protected person under contract, standard of practice or
regulatory requirement. If we fail to properly protect this
personal information that is in our possession or deemed to be
in our possession, we could be subjected to significant
liability.
The
market price and trading volume of our common stock may be
volatile, which could result in substantial losses for investors
purchasing shares in the public markets and subject us to
securities class action litigation. The current market price of
our common stock may not be indicative of future market prices
and we may be unable to sustain or increase the value of an
investment in our common stock.
Market prices for securities of software, technology and health
care companies have been volatile. The trading price of our
common stock has fluctuated significantly and may continue to do
so. Accordingly, the trading price for our common stock at any
particular time may not be indicative of future trading prices
and we may be unable to sustain or increase the value of an
investment in our common stock. Some of the factors that may
cause the market price of our common stock to fluctuate include:
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changes in estimates of our financial results or recommendations
by securities analysts;
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financial results that are below estimate of such results;
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changes in general economic, industry and market conditions;
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sales or transfers of large blocks of stock by existing
investors;
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investors general perception of us;
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21
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period-to-period
fluctuations in our financial results or those of companies that
are perceived to be similar to us;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant products,
contracts, acquisitions or strategic alliances;
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|
future issuances of securities or the incurrence of debt by us,
or other changes in our capital structure;
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success of competitive products and technologies;
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the failure of any of our software products, services and hosted
solutions to achieve or maintain commercial success;
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regulatory developments in the United States and foreign
countries;
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changes in industry analyst recommendations;
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additions or departures of key personnel; and
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|
litigation involving our company or our general industry or both.
|
In addition, if the market for software, technology or health
care stocks or the stock market in general experiences a loss of
investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, operating results
or financial condition. If any of the foregoing occurs, 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.
Sales of
large blocks of our common stock could cause the market price of
our common stock to drop significantly, even if our business is
doing well.
Some stockholders may acquire or own large blocks of shares of
our outstanding common stock. We cannot predict the effect that
public sales of these shares or the availability of these shares
for sale will have on the market price of our common stock, if
any. If our stockholders, and particularly our directors and
officers, sell substantial amounts of our common stock in the
public market, or if the public perceives that such sales could
occur, this could have an adverse impact on the market price of
our common stock, even if there is no relationship between such
sales and the performance of our business.
In the future, we may also issue additional shares to our
employees, directors or consultants, in connection with
corporate alliances or acquisitions, and issue additional shares
in follow-on offerings to raise additional capital. Due to these
factors, sales of a substantial number of shares of our common
stock in the public market could occur at any time. Such sales
could reduce the market price of our common stock.
Third
parties have made claims for damages against the Company and may
continue to do so, which could result in an unfavorable
settlement or judgment against us.
Litigation, regardless of the merits of the claim or outcome,
can consume a great deal of our time and money and divert
management time and attention away from our core business. In
addition, litigation against us could result in economic harm
which could reduce our cash reserves and cause the market price
of our common stock to decline.
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ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
In November 2008, we relocated our corporate headquarters to
1818 Market Street, Philadelphia, Pennsylvania, where we lease
approximately 59,000 square feet, an increase of
approximately 20,000 square feet over our
22
prior headquarters facility. Our lease expires in October 2019.
We also lease approximately 31,000 square feet of office
space in Bridgewater, New Jersey, which expires in January 2011
and we lease approximately 18,000 square feet of office
space in Peterborough, United Kingdom, which expires in June
2013. We believe that these facilities are adequate for our
current and reasonably foreseeable operations and that we will
be able to locate comparable space in these markets on terms
acceptable to us if our business grows more rapidly than we
currently anticipate.
We also lease approximately 51,000 square feet in Reno,
Nevada, which expires in November 2013. We vacated the Reno
location in September 2008 and we are seeking to sublease the
property. We were responsible for all payment obligations on the
Reno lease until November 28, 2008. From November 28,
2008 through November 28, 2012, we will equally share the
payment obligations on the Reno lease with Covance, to the
extent such obligations are not covered by a new tenant.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
None.
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|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
SPECIAL
ITEM. EXECUTIVE OFFICERS OF REGISTRANT
Officers are elected by the Board of Directors and serve at the
pleasure of the Board. Our executive officers are as follows:
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Name
|
|
Age
|
|
Position
|
|
Michael J. McKelvey, Ph.D.
|
|
|
56
|
|
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President, Chief Executive Officer and Director
|
Joel Morganroth, MD
|
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|
63
|
|
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Chairman of the Board of Directors and Chief Scientific Officer
|
Keith D. Schneck
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|
53
|
|
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Executive Vice President, Chief Financial Officer and Secretary
|
Thomas P. Devine
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|
56
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|
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Executive Vice President and Chief Development Officer
|
Amy Furlong
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36
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|
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Executive Vice President, Cardiac Safety
|
Jeffrey S. Litwin, MD
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|
|
51
|
|
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Executive Vice President and Chief Medical Officer
|
John M. Blakeley
|
|
|
41
|
|
|
Executive Vice President, Sales and Marketing
|
Robert S. Brown
|
|
|
53
|
|
|
Senior Vice President, Strategic Marketing, Planning &
Partnerships
|
George Tiger
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|
|
49
|
|
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Senior Vice President, Americas Sales
|
Dr. McKelvey has served as our President and Chief
Executive Officer since June 2006 and has served on our Board of
Directors since July 2006. Prior to joining us,
Dr. McKelvey was employed for five years by PAREXEL
International, one of the largest biopharmaceutical outsourcing
organizations in the world, where he served as Corporate Senior
Vice President, Clinical Research Services.
Dr. Morganroth has served as the Chairman of our Board of
Directors since 1999 and a member of our Board of Directors
since 1997. He has served as our Chief Scientific Officer since
April 2006. Prior to that, he served as our Chief Scientist from
March 2001 to December 2005 and our Chief Executive Officer from
1993 to March 2001. In addition, Dr. Morganroth has
consulted for us since 1977. Dr. Morganroth is a globally
recognized cardiologist and clinical researcher.
Dr. Morganroth served for over ten years as a Medical
Review Officer/Expert for the U.S. Food and Drug
Administration.
Mr. Schneck has been our Executive Vice President, Chief
Financial Officer and Secretary since July 2008. Prior to
joining us, Mr. Schneck worked as a financial and
operational consultant for various firms from December 2007 to
July 2008. From April 2003 until December 2007, Mr. Schneck
served as the Executive Vice President and Chief Financial
Officer of Neoware, Inc. Mr. Schneck is a certified public
accountant.
Mr. Devine has been our Executive Vice President and Chief
Development Officer since December 2005. Previously, he served
as our Senior Vice President and Chief Development Officer from
April 2003 until December 2005. From August 2002 to April 2003,
Mr. Devine was our Vice President of Research and
Development. Prior to
23
joining us, Mr. Devine was Chief Technology Officer for
ecHUB, Inc., an electronic commerce company, from January 2000
to July 2002.
Ms. Furlong has been our Executive Vice President, Cardiac
Safety since December 2005. She served as our Senior Vice
President, Regulatory Compliance from January 2004 until
December 2005. From February 2001 to January 2004,
Ms. Furlong served as our Vice President, Regulatory
Compliance.
Dr. Litwin is a cardiologist and has been our Executive
Vice President and Chief Medical Officer since December 2005. He
served as our Senior Vice President and Chief Medical Officer
from July 2000 until December 2005.
Mr. Blakeley has been our Executive Vice President, Sales
and Marketing since February 2008. He served as our Senior Vice
President, International Operations and Sales from September
2006 to February 2008. He served as our Group Vice President,
International Business Development from January 2005 to August
2006 and as our Director of Business Development from May 2002
to December 2004. Prior to joining ERT, Mr. Blakeley was
Managing Director of MediServe Medical UK Limited, a medical
devices specialist.
Mr. Brown has been our Senior Vice President, Strategic
Marketing, Planning & Partnerships since September
2006. He served as our Senior Vice President, Outsourcing
Partnerships from July 2002 to August 2006. From January 2000 to
June 2002, Mr. Brown was our Senior Vice President, Cardiac
Safety.
Mr. Tiger has been our Senior Vice President, Americas
Sales since October 2006. He served as our Senior Vice
President, International Sales and Operations from October 2005
to September 2006, Senior Vice President, International
Operations from July 2004 to October 2005, Vice President,
International Business Development from August 2002 to July 2004
and as Director of Business Development from January 2001 to
August 2002.
24
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the Nasdaq Global Select Market
under the symbol ERES. Below is the range of high
and low sales prices for the common stock for the following
quarters as quoted on the Nasdaq Global Select Market.
|
|
|
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|
|
|
|
|
Calendar Period
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8.21
|
|
|
$
|
6.12
|
|
Second Quarter
|
|
|
9.72
|
|
|
|
7.66
|
|
Third Quarter
|
|
|
12.00
|
|
|
|
9.36
|
|
Fourth Quarter
|
|
|
12.34
|
|
|
|
8.53
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
12.73
|
|
|
$
|
8.94
|
|
Second Quarter
|
|
|
17.82
|
|
|
|
11.90
|
|
Third Quarter
|
|
|
18.85
|
|
|
|
9.81
|
|
Fourth Quarter
|
|
|
12.00
|
|
|
|
3.86
|
|
We have never declared or paid any cash dividend on our common
stock. We do not anticipate paying any cash dividends in the
foreseeable future because we intend to retain our current cash
and future earnings for the development and expansion of our
business and for the repurchase of common stock under our stock
buy-back program.
As of February 20, 2009, there were 49 record holders of
our common stock.
We announced on May 3, 2005 that our Board of Directors had
authorized the purchase of up to an additional 10 million
shares of our common stock, which extended the stock buy-back
program previously announced to authorize the repurchase of a
total of 12.5 million shares. The current stock buy-back
program was originally announced in April 2004 and extended to
2.5 million shares in October 2004. Through
December 31, 2008, we have repurchased 4.6 million
shares of the 12.5 million shares approved for repurchase.
The following table provides information regarding the stock
buy-back activity during the fiscal quarter ended
December 31, 2008:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of
|
|
|
(d) Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares that may
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
yet be Purchased
|
|
|
|
(a) Total Number of
|
|
|
(b) Average Price
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
8,315,400
|
|
November 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
8,315,400
|
|
December 2008
|
|
|
439,749
|
|
|
$
|
5.80
|
|
|
|
439,749
|
|
|
|
7,875,651
|
|
Total
|
|
|
439,749
|
|
|
|
|
|
|
|
439,749
|
|
|
|
|
|
25
Stockholder
Return Performance Graph
The following graph compares the cumulative total stockholder
return on our common stock against the cumulative total return
on the Nasdaq Composite Index and the Nasdaq Health Services
Index for the period commencing December 31, 2003 and
ending December 31, 2008. The graph assumes that at the
beginning of the period indicated, $100 was invested in our
common stock and the stock of the companies comprising the
Nasdaq Composite Index and the Nasdaq Health Services Index, and
that all dividends, if any, were reinvested.
This stockholder return performance graph shall not be deemed
filed with the Securities and Exchange Commission (SEC) as part
of this
Form 10-K
or incorporated by reference into any filing by us under the
Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent we specifically incorporate the performance
graph by reference therein.
26
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data is qualified
by reference to, and should be read in conjunction with, the
consolidated financial statements, including the notes thereto,
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this
Form 10-K.
We have included CCSSs operating results in our
Consolidated Statements of Operations from the date of the
acquisition, November 28, 2007.
Consolidated
Statements of Operations Data (in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
9,803
|
|
|
$
|
6,063
|
|
|
$
|
3,017
|
|
|
$
|
2,700
|
|
|
$
|
3,203
|
|
Services
|
|
|
76,340
|
|
|
|
59,712
|
|
|
|
55,309
|
|
|
|
69,547
|
|
|
|
99,258
|
|
Site support
|
|
|
23,250
|
|
|
|
21,072
|
|
|
|
28,042
|
|
|
|
26,451
|
|
|
|
30,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
109,393
|
|
|
|
86,847
|
|
|
|
86,368
|
|
|
|
98,698
|
|
|
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of licenses
|
|
|
664
|
|
|
|
436
|
|
|
|
286
|
|
|
|
304
|
|
|
|
755
|
|
Cost of services
|
|
|
24,124
|
|
|
|
24,337
|
|
|
|
25,431
|
|
|
|
30,522
|
|
|
|
39,697
|
|
Cost of site support
|
|
|
11,486
|
|
|
|
13,965
|
|
|
|
18,821
|
|
|
|
17,808
|
|
|
|
18,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
36,274
|
|
|
|
38,738
|
|
|
|
44,538
|
|
|
|
48,634
|
|
|
|
58,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
73,119
|
|
|
|
48,109
|
|
|
|
41,830
|
|
|
|
50,064
|
|
|
|
74,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
9,391
|
|
|
|
9,122
|
|
|
|
11,051
|
|
|
|
11,222
|
|
|
|
13,273
|
|
General and administrative
|
|
|
10,276
|
|
|
|
11,458
|
|
|
|
14,668
|
|
|
|
12,258
|
|
|
|
18,181
|
|
Research and development
|
|
|
4,090
|
|
|
|
4,093
|
|
|
|
4,146
|
|
|
|
4,333
|
|
|
|
4,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,757
|
|
|
|
24,673
|
|
|
|
29,865
|
|
|
|
27,813
|
|
|
|
35,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
49,362
|
|
|
|
23,436
|
|
|
|
11,965
|
|
|
|
22,251
|
|
|
|
38,395
|
|
Other income, net
|
|
|
863
|
|
|
|
936
|
|
|
|
1,250
|
|
|
|
2,206
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
50,225
|
|
|
|
24,372
|
|
|
|
13,215
|
|
|
|
24,457
|
|
|
|
40,125
|
|
Income tax provision
|
|
|
20,501
|
|
|
|
9,007
|
|
|
|
4,905
|
|
|
|
9,205
|
|
|
|
15,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,724
|
|
|
$
|
15,365
|
|
|
$
|
8,310
|
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.58
|
|
|
$
|
0.31
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
|
$
|
0.49
|
|
Diluted net income per share
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
Consolidated
Balance Sheet Data (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
64,964
|
|
|
$
|
52,001
|
|
|
$
|
56,913
|
|
|
$
|
46,879
|
|
|
$
|
66,426
|
|
Working capital
|
|
|
53,492
|
|
|
|
45,795
|
|
|
|
61,320
|
|
|
|
45,594
|
|
|
|
75,289
|
|
Total assets
|
|
|
116,895
|
|
|
|
104,766
|
|
|
|
115,064
|
|
|
|
147,696
|
|
|
|
169,122
|
|
Treasury stock
|
|
|
(31,555
|
)
|
|
|
(56,387
|
)
|
|
|
(62,190
|
)
|
|
|
(62,190
|
)
|
|
|
(64,763
|
)
|
Total stockholders equity
|
|
|
86,854
|
|
|
|
79,973
|
|
|
|
93,622
|
|
|
|
113,512
|
|
|
|
137,428
|
|
27
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Cautionary
Statement for Forward-Looking Information
The following discussion and analysis should be read in
conjunction with our consolidated financial statements and the
related notes to the consolidated financial statements appearing
elsewhere in this
Form 10-K.
The following discussion and analysis includes forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that reflect our current views as
to future events and financial performance with respect to our
operations. These statements can be identified by the fact that
they do not relate strictly to historical or current facts. They
use words such as aim, anticipate,
are confident, estimate,
expect, will be, will
continue, will likely result,
project, intend, plan,
believe, look to and other words and
terms of similar meaning in conjunction with a discussion of
future operating or financial performance.
These statements are subject to risks and uncertainties that
could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. Factors
that might cause such a difference include: unfavorable economic
conditions; our ability to obtain new contracts and accurately
estimate net revenues due to uncertain regulatory guidance,
variability in size, scope and duration of projects and internal
issues at the sponsoring client; integration of acquisitions;
competitive factors; technological development; and market
demand. There is no guarantee that the amounts in our backlog
will ever convert to revenue. Should the current economic
conditions continue or deteriorate further, the cancellation
rates we have historically experienced could increase. Further
information on potential factors that could affect the
Companys financial results can be found in
Item 1A Risk Factors and in the
reports we file with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date made. We
undertake no obligation to update any forward-looking
statements, including prior forward-looking statements, to
reflect the events or circumstances arising after the date as of
which they were made. As a result of these risks and
uncertainties, readers are cautioned not to place undue reliance
on any forward-looking statements included in this discussion or
that may be made in our filings with the Securities and Exchange
Commission or elsewhere from time to time by, or on behalf of,
us.
Overview
We were founded in 1977 to provide Cardiac Safety solutions to
evaluate the safety of new drugs. We provide technology and
service solutions that enable the pharmaceutical, biotechnology
and medical device industries to collect, interpret and
distribute cardiac safety and clinical data more efficiently. We
are a market leader in providing centralized
electrocardiographic solutions (Cardiac Safety solutions) and a
provider of technology solutions that streamline the clinical
trials process by enabling our clients to evolve from
traditional, paper-based methods to electronic processing using
our EDC and ePRO products and solutions.
Our solutions improve the accuracy, timeliness and efficiency of
trial
set-up, data
collection from sites worldwide, data interpretation, and new
drug, biologic and device application submissions. We offer
Cardiac Safety solutions, which are utilized by pharmaceutical
companies, biotechnology companies, medical device companies,
clinical trial sponsors and clinical research organizations
(CROs) during the conduct of clinical trials. Our Cardiac Safety
solutions include the collection, interpretation and
distribution of electrocardiographic (ECG) data and images and
are performed during clinical trials in all phases of the
clinical research process. The ECG provides an electronic map of
the hearts rhythm and structure, and typically is
performed in most clinical trials. Our Cardiac Safety solutions
permit assessments of the safety of therapies by documenting the
occurrence of cardiac electrical change. Specific trials, such
as a Thorough QTc study, focus on the cardiac safety profile of
a compound. Thorough QTc studies are comprehensive studies that
typically are of large volume and short duration and are
recommended by the United States Food and Drug Administration
(FDA) under guidance issued in 2005 by the International
Committee on Harmonization (ICH E14). We also offer site
support, which includes the rental and sale of cardiac safety
equipment along with related supplies and logistics management.
Additionally, under our EDC solutions, we offer the licensing
and, at the clients option, hosting of our proprietary
software products and the provision of maintenance and
consulting services in support of these products. We also offer
electronic patient reported outcomes (ePRO) solutions along with
proprietary clinical assessments.
28
Our license revenues consist of license fees for perpetual
license sales and monthly and annual term license sales. Our
services revenues consist of Cardiac Safety services and
consulting, technology consulting and training services and
software maintenance services. Our site support revenue consists
of cardiac safety equipment rentals and sales along with related
supplies and freight.
We enter into contracts to sell our products and services and,
while the majority of our sales agreements contain standard
terms and conditions, there are agreements that contain multiple
elements or non-standard terms and conditions. As a result,
significant contract interpretation is sometimes required to
determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should
be treated as separate units of accounting for revenue
recognition purposes and, if so, how the contract value should
be allocated among the deliverable elements and when to
recognize revenue for each element. We recognize revenue for
delivered elements only when the fair values of undelivered
elements are known, uncertainties regarding client acceptance
are resolved and there are no client-negotiated refund or return
rights affecting the revenue recognized for delivered elements.
Cost of licenses consists primarily of application service
provider (ASP) fees for those clients that choose hosting, the
cost of producing compact disks and related documentation and
royalties paid to third parties in connection with their
contributions to our product development. Cost of services
includes the cost of Cardiac Safety services and the cost of
technology consulting, training and maintenance services. Cost
of Cardiac Safety services consists primarily of direct costs
related to our centralized Cardiac Safety services and includes
wages, depreciation, amortization, fees paid to consultants and
other direct operating costs. Cost of technology consulting,
training and maintenance services consists primarily of wages,
fees paid to outside consultants and other direct operating
costs related to our consulting and client support functions.
Cost of site support consists primarily of wages, cardiac safety
equipment rent and depreciation, related supplies, cost of
equipment sold, shipping expenses and other direct operating
costs. Selling and marketing expenses consist primarily of wages
and commissions paid to sales personnel, travel expenses and
advertising and promotional expenditures. General and
administrative expenses consist primarily of wages and direct
costs for our finance, administrative, corporate information
technology, legal and executive management functions, in
addition to professional service fees and corporate insurance.
Research and development expenses consist primarily of wages
paid to our product development staff, costs paid to outside
consultants and direct costs associated with the development of
our technology products.
We conduct our operations through offices in the United States
(U.S.) and the United Kingdom (UK). Our international net
revenues represented approximately 21%, 23% and 21% of total net
revenues for the years ended December 31, 2006, 2007 and
2008, respectively. The majority of our revenues are allocated
among our geographic segments based upon the profit split
transfer pricing methodology, and revenues are generally
allocated to the geographic segment where the work is performed.
The profit split methodology equalizes gross margins for each
legal entity based upon its respective direct costs.
Results
of Operations
Executive
Overview
Fiscal 2008 was a very positive year for ERT with record revenue
growth and profitability. During the year we fully integrated
the acquisition of Covance Cardiac Safety Services, Inc. (CCSS),
the Covance ECG core lab, which we acquired in November 2007. We
also experienced record bookings of $187.2 million driven
primarily by our increased presence and competitive positioning
of our cardiac safety business. We continued to enhance our
operations with staff additions and operational improvements in
systems and processes which further contributed to our success.
For fiscal 2008, we reported revenues of $133.1 million, an
increase of $34.4 million or 34.9% from $98.7 million
in fiscal 2007. The revenue for fiscal 2008 included
$10.1 million in revenue from CCSS, which we acquired in
November 2007, compared to $1.5 million recorded in fiscal
2007. The CCSS revenues relate only to the acquired backlog as
new studies booked since the acquisition have largely been
initiated as ERT studies. Total services revenue, which consists
predominantly of cardiac safety revenue, increased during 2008
by $29.7 million to $99.3 million.
29
Gross margin percentage for 2008 was 55.8% compared to 50.7% in
2007. The gross margin percentage included the impact of CCSS,
which generated net revenue of $10.1 million while
incurring costs of revenue of $8.4 million. Operating
expenses were $35.8 million or 27.0% as a percentage of
total revenue in 2008 as compared to $27.8 million or 28.2%
as a percentage of total revenue in 2007. Operating expenses
included costs related to CCSS and the integration of CCSS into
ERT of $3.2 million and $0.6 million in 2008 and 2007,
respectively. Operating income for 2008 was $38.4 million
or 28.8% of total net revenues as compared to $22.3 million
or 22.5% of total net revenues in 2007. Overall in 2008, we were
able to leverage our expense structure to produce improved
bottom-line results. Our tax rate 2008 was 37.7% as compared to
37.6% in 2007. Net income for 2008 was $25.0 million as
compared to $15.3 million in 2007 and net income per
diluted share was $0.48 in 2008 as compared to $0.29 in 2007.
General business and economic conditions have deteriorated
globally during the fourth quarter of 2008 and to date in 2009
and there is currently no indication of any imminent relief.
During the fourth quarter of 2008, we have experienced an
increase in the number and dollar amount of Phase III
bookings, a decline in the number of Thorough QTc bookings, and
a delay in starts for certain Thorough QTc trials and we believe
these trends will continue into fiscal 2009. We believe the
increase in Phase III bookings will provide us with a base
of business into the future, however this business will take
longer to turn into revenue as compared to Thorough QTc studies.
This is reflected in the sequential decrease in quarterly
revenue from $33.9 million in the three months ended
September 30, 2008 to $30.1 million in the three
months ended December 31, 2008. We believe that the decline
and delays in Thorough QTc trials are related to timing as the
result of the uncertain economic environment, especially in
small to mid-sized customers. Thorough QTc trials must be
performed due to regulatory guidance, however the timing of when
these trials are done is discretionary. We also experienced an
increase in awards of new and expanded exclusive or
near-exclusive long-term enterprise contracts with large
pharmaceutical companies during the latter portion of fiscal
2008, including several with which we had very little business
in the past. Partially as a result of these long-term
commitments, we have started to invest in our sales and
marketing functions and our internal IT infrastructure. We view
the fundamental drivers of our business to include the level of
research and development spending by pharmaceutical and
biotechnology companies, the move from decentralized to
centralized ECG analysis, our potential opportunity to increase
our market share and the FDAs continued focus on the
importance of cardiac safety. Overall, we believe these
fundamental drivers remain positive. However, a continued
weakened global economy could have a negative impact on future
results of operations.
30
The following table presents certain financial data as a
percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
3.5
|
%
|
|
|
2.7
|
%
|
|
|
2.4
|
%
|
Services
|
|
|
64.0
|
|
|
|
70.5
|
|
|
|
74.6
|
|
Site support
|
|
|
32.5
|
|
|
|
26.8
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of licenses
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.6
|
|
Cost of services
|
|
|
29.5
|
|
|
|
30.9
|
|
|
|
29.8
|
|
Cost of site support
|
|
|
21.8
|
|
|
|
18.1
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
51.6
|
|
|
|
49.3
|
|
|
|
44.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
48.4
|
|
|
|
50.7
|
|
|
|
55.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
12.7
|
|
|
|
11.4
|
|
|
|
10.0
|
|
General and administrative
|
|
|
17.0
|
|
|
|
12.4
|
|
|
|
13.7
|
|
Research and development
|
|
|
4.8
|
|
|
|
4.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34.5
|
|
|
|
28.2
|
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13.9
|
|
|
|
22.5
|
|
|
|
28.8
|
|
Other income, net
|
|
|
1.4
|
|
|
|
2.3
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15.3
|
|
|
|
24.8
|
|
|
|
30.1
|
|
Income tax provision
|
|
|
5.7
|
|
|
|
9.3
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9.6
|
%
|
|
|
15.5
|
%
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Year
Ended December 31, 2007 Compared to the Year Ended
December 31, 2008
The following table presents statements of operations data with
product line detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Increase (Decrease)
|
|
|
Licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,700
|
|
|
$
|
3,203
|
|
|
$
|
503
|
|
|
|
18.6
|
%
|
Costs of revenues
|
|
|
304
|
|
|
|
755
|
|
|
|
451
|
|
|
|
148.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
2,396
|
|
|
$
|
2,448
|
|
|
$
|
52
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Safety
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
63,508
|
|
|
$
|
92,861
|
|
|
$
|
29,353
|
|
|
|
46.2
|
%
|
Costs of revenues
|
|
|
27,929
|
|
|
|
36,976
|
|
|
|
9,047
|
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
35,579
|
|
|
$
|
55,885
|
|
|
$
|
20,306
|
|
|
|
57.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology consulting and training
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,630
|
|
|
$
|
3,220
|
|
|
$
|
590
|
|
|
|
22.4
|
%
|
Costs of revenues
|
|
|
1,753
|
|
|
|
1,839
|
|
|
|
86
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
877
|
|
|
$
|
1,381
|
|
|
$
|
504
|
|
|
|
57.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,409
|
|
|
$
|
3,177
|
|
|
$
|
(232
|
)
|
|
|
(6.8
|
%)
|
Costs of revenues
|
|
|
840
|
|
|
|
882
|
|
|
|
42
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
2,569
|
|
|
$
|
2,295
|
|
|
$
|
(274
|
)
|
|
|
(10.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
69,547
|
|
|
$
|
99,258
|
|
|
$
|
29,711
|
|
|
|
42.7
|
%
|
Costs of revenues
|
|
|
30,522
|
|
|
|
39,697
|
|
|
|
9,175
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
39,025
|
|
|
$
|
59,561
|
|
|
$
|
20,536
|
|
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
26,451
|
|
|
$
|
30,679
|
|
|
$
|
4,228
|
|
|
|
16.0
|
%
|
Costs of revenues
|
|
|
17,808
|
|
|
|
18,445
|
|
|
|
637
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
8,643
|
|
|
$
|
12,234
|
|
|
$
|
3,591
|
|
|
|
41.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
98,698
|
|
|
$
|
133,140
|
|
|
$
|
34,442
|
|
|
|
34.9
|
%
|
Costs of revenues
|
|
|
48,634
|
|
|
|
58,897
|
|
|
|
10,263
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
50,064
|
|
|
|
74,243
|
|
|
|
24,179
|
|
|
|
48.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11,222
|
|
|
|
13,273
|
|
|
|
2,051
|
|
|
|
18.3
|
%
|
General and administrative
|
|
|
12,258
|
|
|
|
18,181
|
|
|
|
5,923
|
|
|
|
48.3
|
%
|
Research and development
|
|
|
4,333
|
|
|
|
4,394
|
|
|
|
61
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,813
|
|
|
|
35,848
|
|
|
|
8,035
|
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22,251
|
|
|
|
38,395
|
|
|
|
16,144
|
|
|
|
72.6
|
%
|
Other income, net
|
|
|
2,206
|
|
|
|
1,730
|
|
|
|
(476
|
)
|
|
|
(21.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,457
|
|
|
|
40,125
|
|
|
|
15,668
|
|
|
|
64.1
|
%
|
Income tax provision
|
|
|
9,205
|
|
|
|
15,123
|
|
|
|
5,918
|
|
|
|
64.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
$
|
9,750
|
|
|
|
63.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
The following table presents costs of revenues as a percentage
of related net revenues and operating expenses as a
percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Cost of licenses
|
|
|
11.3
|
%
|
|
|
23.6
|
%
|
|
|
12.3
|
%
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Safety
|
|
|
44.0
|
%
|
|
|
39.8
|
%
|
|
|
(4.2
|
%)
|
Technology consulting and training
|
|
|
66.7
|
%
|
|
|
57.1
|
%
|
|
|
(9.6
|
%)
|
Software maintenance
|
|
|
24.6
|
%
|
|
|
27.8
|
%
|
|
|
3.2
|
%
|
Total cost of services
|
|
|
43.9
|
%
|
|
|
40.0
|
%
|
|
|
(3.9
|
%)
|
Cost of site support
|
|
|
67.3
|
%
|
|
|
60.1
|
%
|
|
|
(7.2
|
%)
|
Total costs of revenues
|
|
|
49.3
|
%
|
|
|
44.2
|
%
|
|
|
(5.1
|
%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11.4
|
%
|
|
|
10.0
|
%
|
|
|
(1.4
|
%)
|
General and administrative
|
|
|
12.4
|
%
|
|
|
13.7
|
%
|
|
|
1.3
|
%
|
Research and development
|
|
|
4.4
|
%
|
|
|
3.3
|
%
|
|
|
(1.1
|
%)
|
Total operating expenses
|
|
|
28.2
|
%
|
|
|
27.0
|
%
|
|
|
(1.2
|
%)
|
Revenues
License revenues increased due to the sale of several small
perpetual licenses in the year ended December 31, 2008 as
compared to fewer small sales in the same period in 2007 and
$0.3 million of ePRO subscription revenue that is new in
2008.
The increase in Cardiac Safety services revenues was primarily
due to $16.6 million resulting from a 32% increase in
transactions performed in the year ended December 31, 2008
as compared to the year ended December 31, 2007 and to an
increase of $6.5 million of revenue resulting from
including the operating results of CCSS recognized in the year
ended December 31, 2008 as compared to 2007. There was also
an increase in average revenue per transaction that was largely
due to slightly higher prices. Project management fees increased
$2.4 million, consistent with the increased Cardiac Safety
activity. Cardiac Safety services revenue in the year ended
December 31, 2008 included $2.7 million of cardiac
safety consulting services revenue as compared to
$1.7 million in the year ended December 31, 2007.
Beginning in January 2007, we entered into an arrangement with a
consulting company owned by our Chairman, Dr. Morganroth,
relating to Dr. Morganroths initiation of a company
consulting practice through the transition of his historic
consulting services to ERT. In return,
Dr. Morganroths company receives a percentage of the
net amounts billed by ERT for Dr. Morganroths
services to our customers. That percentage ranged between 80% to
90% in 2007 and was 80% in 2008. Revenues recorded in connection
with this consulting arrangement approximated $1.6 million
and $1.3 million in the years ended December 31, 2008
and 2007, respectively. Fees incurred under this consulting
arrangement approximated $1.3 million and $1.1 million
in the years ended December 31, 2008 and 2007, respectively
and are included in cost of services.
Technology consulting and training revenues increased due to an
increase in reporting configuration revenue related to cardiac
safety clients of $0.6 million as well as $0.4 million
of ePRO revenue that did not exist in the third quarter of 2007,
partially offset by a $0.4 million decrease in consulting
on EDC products.
Software maintenance revenues decreased due to the cancellation
and non-renewals of maintenance agreements and a reduction in
the number of users. Our current sales focus is on monthly and
annual term license sales rather than perpetual license sales,
which will lead to the erosion of maintenance revenue over time.
Monthly and annual term license sales do not generate
maintenance revenue as the license fee includes product upgrades
and customer support.
33
Site support revenues increased primarily due to an increase of
$2.1 million of revenue resulting from including the
operating results of CCSS recognized in the year ended
December 31, 2008 as compared to the year ended
December 13, 2007, a $1.8 million increase in rental
revenue from cardiac safety equipment due to additional units
rented, but at a lower average price as well as a
$0.4 million one-time billing in the third quarter of 2008
on units rented in prior periods, an increase in freight revenue
of $0.7 million related to additional units rented and
improvements in identifying recoverable freight costs and a
$0.4 million increase in supplies revenue. These increases
were partially offset by a decrease in equipment sales of
$0.7 million as more customers choose to rent cardiac
safety equipment.
Overall, due to the impact of the present economic conditions,
we expect that revenue for 2009 may decline from the 2008 levels.
Costs of
Revenues
The increase in the cost of licenses, both in absolute terms and
as a percentage of license revenues, related primarily to the
amortization of the ePRO license, which we began amortizing in
December 2007.
The increase in the cost of Cardiac Safety services was
primarily due to an increase of $5.4 million in costs
resulting from including the operating results of CCSS
recognized in the year ended December 31, 2008 as compared
to the year ended December 31, 2007, a $2.4 million
increase in labor costs related to additional staff and salary
increases, a $0.8 million increase in bonus expense,
$0.6 million in consulting costs related to cardiac safety
consulting revenue discussed above and a $0.6 million
increase in telecommunication connectivity expenses. Partially
offsetting the increase was a $0.7 million decrease in
depreciation due to certain software development costs and
computer equipment associated with the
EXPERT®
Technology Platform becoming fully depreciated. The decrease in
the cost of Cardiac Safety services as a percentage of Cardiac
Safety service revenues reflects the fact that some of the costs
do not necessarily change in direct relation with changes in
revenue.
The increase in the cost of site support was primarily due to an
increase of $1.2 million of costs resulting from including
the operating results of CCSS recognized in the year ended
December 31, 2008 as compared to the year ended
December 31, 2007, a $1.0 million increase in freight
associated with additional shipments of equipment,
$0.3 million increase in the cost of supplies and a
$0.2 million increase in labor. Partially offsetting this
increase was a $1.0 million decrease in depreciation
expense as older, more expensive ECG equipment has become fully
depreciated, a $0.7 million decrease in equipment rent
which was the result of our March 2007 agreement to purchase our
leased cardiac safety equipment and a $0.4 million decrease
in the cost of equipment sold. The decrease in the cost of site
support as a percentage of site support revenues reflects the
fact that some of the costs do not necessarily change in direct
relation with changes in revenue.
Overall, we expect that cost of revenue may decline in 2009 due
to lower expected revenues and a decrease in the costs
associated with CCSS. The integration of CCSS was completed in
2008 and the 2009 recurring costs related to the CCSS activity
are depreciation and amortization. Amortization of intangible
assets associated with the CCSS acquisition will decline from
$1.7 million in the year ended December 31, 2008 to
approximately $0.5 million in the year ended
December 31, 2009. Partially offsetting this decrease will
be the full year effect of the staff added during 2008 at our
other offices to handle the additional workflow related to the
CCSS acquisition.
Operating
Expenses
The increase in selling and marketing expenses was due primarily
to an increase in labor costs of $0.7 million related to
additional staff and salary increases and $0.6 million of
additional commissions. In 2007, we implemented a commission
plan under which payments are based upon a percentage of revenue
earned and bookings. Payments under the commission plan have
increased as increased signings convert into revenue.
Additionally, consultant costs increased $0.4 million
related to rebranding and other marketing efforts. Smaller
increases in a number of expense categories such as advertising
and marketing, royalties and stock option expense comprise the
balance of the increase in selling and marketing expense. The
decrease in selling and marketing expenses as a percentage of
total net revenues reflects the fact that the costs do not
necessarily change in direct relation with changes in revenue.
34
We expect that sales and marketing expenses may increase in 2009
as we are planning to make additional investments in sales and
marketing including staff additions and spending on marketing
programs.
The increase in general and administrative expenses, both in
absolute terms and as a percentage of total net revenues, was
due primarily to an increase of $2.5 million of costs
resulting from the November 2007 acquisition of CCSS recognized
in the year ended December 31, 2008 as compared to the year
ended December 31, 2007, including an increase in the
provision for stay pay incentives of $0.8 million. Other
increases include a $1.1 million increase in labor related
to additional staff and salary increases and a $0.6 million
increase in bonus expense. During 2008 as compared to 2007, the
cost of consultants increased $0.4 million, stock option
compensation expense increased $0.3 million, and recruiting
costs increased $0.2 million. A number of smaller increases
ranging from $0.2 million to $0.4 million make up the
remaining variance including non-income taxes, professional fees
and office expenses which included the cost of moving our
corporate offices in Philadelphia. These increases were
partially offset by a reduction due to $0.7 million in
severance-related costs for employees terminated in February
2007. General and administrative costs directly resulting from
the acquisition of CCSS decreased significantly in the fourth
quarter of 2008 as a result of the closure of the Reno office
and will become insignificant in the future.
Other income, net, consisted primarily of interest income
realized from our cash, cash equivalents and investments and
foreign exchange gains, offset by interest expense related to
capital lease obligations. Other income, net decreased primarily
due to lower average cash balances in the year ended
December 31, 2008 as compared to the year ended
December 31, 2007, as a result of our use of cash in
November 2007 for the CCSS acquisition, as well as significantly
lower average interest rates during 2008. Partially offsetting
this is an increase in foreign exchange gains as a result of
lower exchange rates for the British pound as compared to the
U.S. dollar.
Our effective tax rate was 37.7% and 37.6% for the years ended
December 31, 2008 and 2007, respectively. The effective tax
rate for the year ended December 31, 2008 included a
benefit of $0.3 million related to our determination that a
portion of our UK subsidiarys current undistributed net
earnings, as well as the future net earnings, will be
permanently reinvested and a $0.6 million tax benefit
related to the reversal of a tax accrual for a previously
uncertain tax position. The effective tax rate for the year
ended December 31, 2007 included approximately
$0.1 million of items that benefited the 2006 U.S. federal
tax return that were not reflected in the 2006 tax provision.
The effective tax rate for the year ended December 31, 2007
also included a benefit from tax-free interest income which
declined significantly in the year ended December 31, 2008.
We expect the effective tax rate may increase in 2009 due to the
impact of the 2008 tax benefit items which reduced the 2008
effective tax rate from approximately 39.8% to 37.7%.
We had historically provided deferred taxes under APB 23 for the
presumed ultimate repatriation to the United States of
earnings from our UK subsidiary. The indefinite reversal
criterion of APB 23 allows us to overcome that presumption to
the extent the earnings are indefinitely reinvested outside the
United States. As of January 1, 2008, we determined that a
portion of our UK subsidiarys current undistributed net
earnings, as well as the future net earnings, will be
permanently reinvested. As a result of the APB 23 change in
assertion, we reduced our deferred tax liabilities related to
undistributed foreign earnings by $0.3 million during the
first quarter of 2008.
35
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2007
The following table presents statements of operations data with
product line detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Increase (Decrease)
|
|
|
Licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,017
|
|
|
$
|
2,700
|
|
|
$
|
(317
|
)
|
|
|
(10.5
|
%)
|
Costs of revenues
|
|
|
286
|
|
|
|
304
|
|
|
|
18
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
2,731
|
|
|
$
|
2,396
|
|
|
$
|
(335
|
)
|
|
|
(12.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Safety
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
48,139
|
|
|
$
|
63,508
|
|
|
$
|
15,369
|
|
|
|
31.9
|
%
|
Costs of revenues
|
|
|
22,478
|
|
|
|
27,929
|
|
|
|
5,451
|
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
25,661
|
|
|
$
|
35,579
|
|
|
$
|
9,918
|
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology consulting and training
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,184
|
|
|
$
|
2,630
|
|
|
$
|
(554
|
)
|
|
|
(17.4
|
%)
|
Costs of revenues
|
|
|
1,939
|
|
|
|
1,753
|
|
|
|
(186
|
)
|
|
|
(9.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
1,245
|
|
|
$
|
877
|
|
|
$
|
(368
|
)
|
|
|
(29.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,986
|
|
|
$
|
3,409
|
|
|
$
|
(577
|
)
|
|
|
(14.5
|
%)
|
Costs of revenues
|
|
|
1,014
|
|
|
|
840
|
|
|
|
(174
|
)
|
|
|
(17.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
2,972
|
|
|
$
|
2,569
|
|
|
$
|
(403
|
)
|
|
|
(13.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
55,309
|
|
|
$
|
69,547
|
|
|
$
|
14,238
|
|
|
|
25.7
|
%
|
Costs of revenues
|
|
|
25,431
|
|
|
|
30,522
|
|
|
|
5,091
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
29,878
|
|
|
$
|
39,025
|
|
|
$
|
9,147
|
|
|
|
30.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
28,042
|
|
|
$
|
26,451
|
|
|
$
|
(1,591
|
)
|
|
|
(5.7
|
%)
|
Costs of revenues
|
|
|
18,821
|
|
|
|
17,808
|
|
|
|
(1,013
|
)
|
|
|
(5.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
9,221
|
|
|
$
|
8,643
|
|
|
$
|
(578
|
)
|
|
|
(6.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
86,368
|
|
|
$
|
98,698
|
|
|
$
|
12,330
|
|
|
|
14.3
|
%
|
Costs of revenues
|
|
|
44,538
|
|
|
|
48,634
|
|
|
|
4,096
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
41,830
|
|
|
|
50,064
|
|
|
|
8,234
|
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11,051
|
|
|
|
11,222
|
|
|
|
171
|
|
|
|
1.5
|
%
|
General and administrative
|
|
|
14,668
|
|
|
|
12,258
|
|
|
|
(2,410
|
)
|
|
|
(16.4
|
%)
|
Research and development
|
|
|
4,146
|
|
|
|
4,333
|
|
|
|
187
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,865
|
|
|
|
27,813
|
|
|
|
(2,052
|
)
|
|
|
(6.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,965
|
|
|
|
22,251
|
|
|
|
10,286
|
|
|
|
86.0
|
%
|
Other income, net
|
|
|
1,250
|
|
|
|
2,206
|
|
|
|
956
|
|
|
|
76.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13,215
|
|
|
|
24,457
|
|
|
|
11,242
|
|
|
|
85.1
|
%
|
Income tax provision
|
|
|
4,905
|
|
|
|
9,205
|
|
|
|
4,300
|
|
|
|
87.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,310
|
|
|
$
|
15,252
|
|
|
$
|
6,942
|
|
|
|
83.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The following table presents costs of revenues as a percentage
of related net revenues and operating expenses as a percentage
of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Cost of licenses
|
|
|
9.5
|
%
|
|
|
11.3
|
%
|
|
|
1.8
|
%
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Safety
|
|
|
46.7
|
%
|
|
|
44.0
|
%
|
|
|
(2.7
|
%)
|
Technology consulting and training
|
|
|
60.9
|
%
|
|
|
66.7
|
%
|
|
|
5.8
|
%
|
Software maintenance
|
|
|
25.4
|
%
|
|
|
24.6
|
%
|
|
|
(0.8
|
%)
|
Total cost of services
|
|
|
46.0
|
%
|
|
|
43.9
|
%
|
|
|
(2.1
|
%)
|
Cost of site support
|
|
|
67.1
|
%
|
|
|
67.3
|
%
|
|
|
0.2
|
%
|
Total costs of revenues
|
|
|
51.6
|
%
|
|
|
49.3
|
%
|
|
|
(2.3
|
%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
12.7
|
%
|
|
|
11.4
|
%
|
|
|
(1.3
|
%)
|
General and administrative
|
|
|
17.0
|
%
|
|
|
12.4
|
%
|
|
|
(4.6
|
%)
|
Research and development
|
|
|
4.8
|
%
|
|
|
4.4
|
%
|
|
|
(0.4
|
%)
|
Total operating expenses
|
|
|
34.5
|
%
|
|
|
28.2
|
%
|
|
|
(6.3
|
%)
|
License revenues decreased due to the sale of one significant
license in 2006 with no comparable sale in 2007.
The increase in Cardiac Safety service revenues was primarily
due to additional transactions performed in 2007 as compared to
2006 partially offset by a decrease in average revenues per
transaction. The decrease in average revenue per transaction was
largely due to the impact of increased activity in
semi-automated processing, which generally includes lower fees
per transaction than other studies, as well as competitive
pricing pressure. This decrease in average revenue per
transaction primarily occurred in the first two quarters of
2007. The average revenue per transaction rose slightly in the
third and fourth quarters of 2007. Additionally, Cardiac Safety
service revenue in the year ended December 31, 2007
included $1.7 million of cardiac safety consulting services
revenue, which was a new revenue source to ERT beginning in
2007. There was also a $1.1 million increase in project
assurance fees and a $0.4 million increase in miscellaneous
revenue, commensurate with the increase in ECG transaction
revenue. The acquisition of CCSS added approximately
$1.2 million in revenue in 2007, which effectively offset
the impact of the $1.2 million of revenue we recognized in
2006 upon the termination of a Digital ECG Franchise at the end
of August 2006 for which there was no corresponding revenue
recognized in 2007.
The decrease in technology consulting and training revenues was
primarily related to a decrease in consulting revenue from
EXPERT®
eClinical clients related to protocol
set-up work.
Software maintenance revenues decreased due to the cancellation
and non-renewals of maintenance agreements and a reduction in
the number of users. These declines were partially offset by
maintenance on several software licenses sold during 2006 and
2007. Our current sales focus is on monthly and annual term
license sales rather than perpetual license sales, which will
lead to the erosion of maintenance revenue over time. Monthly
and annual term license sales do not generate maintenance
revenue as the license fee includes product upgrades and
customer support.
Site support revenues decreased primarily due to a
$4.5 million decrease in the sale of cardiac safety
equipment for the year ended December 31, 2007 as compared
to the year ended December 31, 2006. While average monthly
equipment rental revenue per unit has fallen by over 10% from
2006 to 2007, an increase in units rented more than compensated
for the revenue impact. Additionally offsetting this decrease
was an increase in freight revenues of $1.2 million and
supplies revenue of $0.2 million, both of which were
related to the additional units rented. The acquisition of CCSS
added approximately $0.3 million in revenue in 2007.
The increase in the cost of Cardiac Safety services was
primarily due to a $1.7 million increase in depreciation
expense related to our
EXPERT®
2 which was placed into production in January 2007,
$1.3 million in consulting costs related to cardiac safety
consulting revenue discussed above, $0.8 million increase
in bonus expense as certain
37
bonus targets were met in 2007 while there was no bonus in 2006,
$0.9 million increase in labor, and $0.2 million
increase in software license and maintenance. Additionally,
there were $1.2 million in costs relating to the CCSS
operation in 2007, primarily related to labor costs. Partially
offsetting the increase were reductions of $0.1 million
each in telecommunications, depreciation expense excluding
EXPERT®
2, stock option compensation expense, pass-through costs and
allocated expenses. The decrease in the cost of Cardiac Safety
services as a percentage of Cardiac Safety service revenues
reflects the fact that some of the costs do not necessarily
change in direct relation with changes in revenue.
The decrease in the cost of technology consulting and training
revenues was the result of a number of small decreases in
expenses such as consultants and travel expenses. The increase
in the cost of technology consulting and training revenues as a
percentage of technology consulting and training revenues
reflects the fact that some of the costs do not necessarily
change in direct relation with changes in revenue.
The decrease in the cost of software maintenance revenues, both
in absolute terms and as a percentage of software maintenance
revenues, was the result of lower labor costs due to reduced
headcount.
The decrease in the cost of site support was primarily due to a
$2.6 million decrease in the cost of equipment sales
commensurate with the decrease in revenue from equipment sales.
Partially offsetting this decrease was a $1.1 million
increase in freight and $0.2 million increase in supplies
due to an increase in the number of units of equipment utilized
by our clients. An increase in depreciation expense of
$2.4 million was largely offset by a reduction in equipment
rental expense. The shift of expense between these categories
resulted from our agreement to purchase our leased cardiac
safety equipment. The increase in the cost of site support as a
percentage of site support revenues reflects the fact that some
of the costs do not necessarily change in direct relation with
changes in revenue.
The decrease in general and administrative expenses, both in
absolute terms and as a percentage of total net revenues, was
due primarily to $1.8 million of costs associated with
management changes in the second quarter of 2006 and
$0.6 million of costs in 2006 associated with the
settlement of a contract dispute, for which there were no
corresponding expenses in 2007. Additionally, there were
decreases of $0.5 million in stock option compensation
expense, $0.6 million in professional fees related to
project and legal matters, $0.2 million in charitable
contributions made in 2006 and not repeated in 2007 and
$0.2 million each in depreciation and consulting costs.
Partially offsetting the decrease was $0.7 million in
severance-related costs for employees terminated in February
2007, an increase of $0.3 million each in bonus expense and
non-income taxes and $0.2 million in software license and
maintenance expense. Additionally, we accrued $0.2 million
for retention bonuses for employees of CCSS to remain until
their termination date.
The increase in research and development expenses, both in
absolute terms and as a percentage of total net revenues, was
primarily due to a $0.9 million reduction in the
capitalization of salaries for internal-use software projects
and a $0.2 million increase in bonus expense. Partially
offsetting the increase was a $0.3 million decrease in
expense for third-party consultants and a $0.3 million
decrease in software license and maintenance expense. Smaller
decreases occurred in expenses such as depreciation and labor.
Other income, net, consisted primarily of interest income
realized from our cash, cash equivalents and investments,
interest expense related to capital lease obligations and
foreign exchange losses. Other income, net, increased primarily
due to higher interest income in 2007 as a result of higher
average interest rates and cash balances.
Our effective tax rate was 37.1% and 37.6% for the year ended
December 31, 2006 and 2007, respectively.
Liquidity
and Capital Resources
At December 31, 2008, we had $66.4 million of cash,
cash equivalents and short-term investments. We had historically
placed our investments in municipal securities, bonds of
government sponsored agencies, certificates of deposit with
fixed rates and maturities of less than one year, and A1P1 rated
commercial bonds and paper. Due to the current financial market
conditions, we have invested primarily in liquid money market
funds. We will continue to monitor conditions and look for
prudent investment opportunities.
38
For the year ended December 31, 2008, our operations
provided cash of $39.9 million compared to
$36.0 million during the year ended December 31, 2007.
The change was primarily the result of an increase of
$9.8 million in net income and a $0.9 million increase
in depreciation and amortization expense for assets associated
with the CCSS acquisition in November 2007. Partially offsetting
these positive impacts on cash flow was the change in deferred
revenues which moved from a $2.5 million positive cash flow
in the year ended December 31, 2007 to a $0.7 million
use of cash in the year ended December 31, 2008 related to
our increased revenue. Changes in income taxes, including
deferred income taxes, which moved from a $3.1 million
positive cash flow in the year ended December 31, 2007 to a
$0.2 million use of cash in the year ended
December 31, 2008, are due to the timing and size of income
tax payments and provision.
For the year ended December 31, 2008, our investing
activities used cash of $8.3 million as compared to
$13.3 million during the year ended December 31, 2007.
A total of $35.8 million was used in the year ended
December 31, 2007 for the acquisition of CCSS while an
additional $6.0 million was used in the year ended
December 31, 2008 for contingent payments, transaction
costs and severance and lease liabilities related to the CCSS
acquisition. Net proceeds from the sales of investments
increased cash by $33.5 million during the year ended
December 31, 2007 and $8.7 million in the year ended
December 31, 2008. Investments were sold in 2007 to provide
funds to pay for the acquisition of CCSS and to eliminate
positions in auction rate securities and variable rate demand
notes.
During the years ended December 31, 2008 and 2007, we
purchased $11.0 million and $11.1 million,
respectively, of property and equipment which includes purchases
of cardiac safety equipment, computers, other systems and
equipment and certain capitalized development costs. Purchases
in 2008 included $2.5 million related to leasehold
improvements and other costs associated with the preparation of
our new offices in Philadelphia. Included in property and
equipment is internal use software associated with the
development of a data and communications management services
software product
(EXPERT®)
used in connection with our centralized core cardiac safety ECG
services. We capitalize certain internal use software costs in
accordance with Statement of Position (SOP)
98-1,
Accounting for Costs of Computer Software for Internal
Use. The amortization is charged to the cost of Cardiac
Safety services beginning at the time the software is ready for
its intended use. A total of $10.6 million of initial
development costs were incurred and capitalized for
EXPERT®
for the basic functionality required for this product and were
placed into production in January 2007. These costs are being
amortized over the estimated useful life of five years which
results in monthly amortization of approximately
$0.2 million. In 2007 and 2008, additional development
costs of
EXPERT®
of $3.4 million have been incurred and capitalized through
December 31, 2008 to develop new functionalities and
enhancements while $0.4 million have been incurred for
other internal-use software projects. We placed
$0.6 million of these assets into service in 2008 and
$3.0 million of the remaining assets were placed in service
in January 2009. Accordingly, we have commenced amortization of
the assets that have been placed in service.
In the second quarter of 2007, we announced that we were
launching a new line of business focused on electronic patient
reported outcomes
(EXPERT®
ePROtm)
and entered into a long-term strategic relationship with
Healthcare Technology Systems, Inc. (HTS), a leading authority
in the research, development and validation of computer
administered clinical rating instruments. The strategic
relationship includes the exclusive licensing (subject to one
pre-existing license agreement) of 57 IVR clinical assessments
offered by HTS along with HTSs IVR system. We placed the
system into production in December 2007. As of December 31,
2008, we paid HTS $1.5 million for the license in 2007 and
$0.5 million in advanced payments against future royalties,
of which $0.25 million was paid in each of 2007 and 2008.
As of December 31, 2008, HTS earned royalties of
$0.1 million, which were offset against these advanced
payments. The total cost of the purchase and initial development
costs to get
EXPERT®
ePROtm
ready for its intended use totaled $1.8 million and are
being amortized over five years. We will pay royalties to HTS
based on the level of revenues we receive from the assessments
and the IVR system. An additional $0.5 million royalty
payment is guaranteed, and will be made in May 2009. Any
royalties earned by HTS will be applied against these payments.
After this payment is made, all future payments we make to HTS
will be royalty payments based solely on revenues we receive
from
EXPERT®
ePROtm
sales.
Other less significant internal use software have been developed
and capitalized and will continue to be developed in the future
in accordance with managements assessment of our needs.
39
For the year ended December 31, 2008, our financing
activities used cash of $0.5 million as compared to
$0.1 million for the year ended December 31, 2008. In
2008, we repurchased $2.6 million of our common stock under
our stock buy-back program. This use of cash in financing
activities during 2008 was partially offset by lower repayments
of capital lease obligations as leases expired and were not
replaced and higher proceeds from the exercise of stock options.
We have a line of credit arrangement with Wachovia Bank,
National Association totaling $3.0 million which expires on
June 1, 2009. To date, we have not borrowed any amounts
under our line of credit. As of December 31, 2008, we had
outstanding letters of credit of $0.5 million, which
reduced our available borrowings under the line of credit to
$2.5 million.
On July 14, 2008, we entered into a lease with NNN 1818
Market Street, LLC and affiliates for new office space at 1818
Market Street, Philadelphia, Pennsylvania. The lease commenced
in November 2008 and provides for the rental of approximately
59,400 rentable square feet compared to approximately
40,000 square feet in our prior offices. The initial term
of the lease is eleven years, and we have two successive
five-year renewal options. For the first month of the lease,
there was no minimum rent. For the next eight months of the
lease, the minimum rent is $54,464 per month. Beginning with the
tenth month of the lease, the minimum rent increases to
$1,307,127 on an annualized basis and thereafter increases
beginning on the second anniversary of the lease commencement by
$29,697 annually for the remainder of the initial term of the
lease. In addition to the minimum rent, we will be obligated,
beginning in 2010, to pay our proportionate share of any
increases in the operating expenses and real estate taxes for
the building in which the leased premises are located over the
amounts payable for calendar year 2009. Our proportionate share
is calculated by measuring the rentable square feet included in
the leased premises as a percentage of the total rentable square
feet for the building. For each renewal term we exercise, the
minimum rent will be the then-applicable fair market rental
value as determined by the landlord or, if we do not agree with
the landlords determination, by arbitration. We are
accounting for this lease in accordance with the requirements of
Statement of Financial Accounting Standards No. 13,
Accounting For Leases.
We paid a security deposit of $0.2 million in cash upon
execution of the lease to secure our obligations under the
lease, of which 50% will be returned to us three years after
commencement of the lease provided that we are not in default
under the lease. We also incurred approximately
$2.5 million in tenant improvements in addition to the
allowance the landlord agreed to provide.
We expect that existing cash and cash equivalents and cash flows
from operations will be sufficient to meet our foreseeable cash
needs for at least the next year. However, there may be
acquisition and other growth opportunities that require
additional external financing and we may from time to time seek
to obtain additional funds from the public or private issuances
of equity or debt securities. There can be no assurance that any
such acquisitions will occur or that such financing will be
available or available on terms acceptable to us, particularly
in view of current capital market uncertainty.
Our board of directors has authorized the repurchase of up to an
aggregate of 12.5 million shares, of which 7.9 million
shares remain to be purchased as of December 31, 2008. The
stock buy-back authorization allows us, but does not require us,
to purchase the authorized shares. The purchase of the remaining
shares authorized could require us to use a significant portion
of our cash, cash equivalents and investments and could also
require us to seek additional external financing. During the
year ended December 31, 2008, we purchased
439,749 shares of our common stock at a cost of
$2.6 million. No shares were purchased during the year
ended December 31, 2007.
On November 28, 2007, we completed the acquisition of CCSS.
Under the terms of our agreement to purchase CCSS, the total
initial purchase consideration was $35.2 million. We have
additionally incurred approximately $1.1 million in
transaction costs. We may also pay contingent consideration of
up to approximately $14.0 million based upon our potential
realization of revenue from the backlog transferred and from new
contracts secured through Covances marketing activities.
The period for contingent payments runs through
December 31, 2010. Through December 31, 2008, Covance
earned $5.0 million of this contingent amount, of which
$3.0 million was recognized in 2007 and $2.0 million
in the year ended December 31, 2008. At December 31,
2008, approximately $0.7 million of the contingent amount
earned remained to be paid to Covance, which we recorded in
accounts payable. These contingent payments increased goodwill
by $5.0 million. Under the terms of the marketing
40
agreement, Covance agreed to exclusively use us as its provider
of centralized cardiac safety solutions for a ten-year period,
subject to certain exceptions, and we agreed to pay referral
fees on certain revenues.
We fully integrated the operations of CCSS into our existing
operations in the third quarter of 2008. We did so by merging
CCSSs Reno, Nevada based operations into our existing
operations and closing the operations in Reno. Costs identified
at the date of the acquisition as part of this closing were
estimated to be $1.2 million for severance and
$0.9 million for lease costs. The actual final severance
amount was $0.9 million. The estimated lease costs have
been adjusted to $2.1 million based on further analysis in
2008. In accordance with Emerging Issues Task Force (EITF)
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, these amounts have been recognized
as a liability as of the date of the acquisition and included in
the cost of the acquisition. Other costs such as stay pay
incentive arrangements and other related period costs associated
with the closing of the Reno location were expensed in the
period when such costs were incurred. The stay pay incentive
arrangements of $1.2 million were recognized as expense
over the required service period of the employees. The expense
recognized for the stay pay incentive for the year ended
December 31, 2008 was $1.0 million.
The following table presents contractual obligations information
as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Capital lease obligations
|
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
22,638
|
|
|
|
3,073
|
|
|
|
5,907
|
|
|
|
4,652
|
|
|
|
9,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,687
|
|
|
$
|
3,122
|
|
|
$
|
5,907
|
|
|
$
|
4,652
|
|
|
$
|
9,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term portion of other liabilities is comprised of the
present value of estimated lease costs for the Reno location.
The gross amount of the payments associated with these
liabilities is included in operating leases in the contractual
obligations table above.
Inflation
We believe the effects of inflation and changing prices
generally do not have a material adverse effect on our results
of operations or financial condition.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which establishes a
framework for reporting fair value and expands disclosures about
fair value measurements. SFAS No. 157 was to have
become effective beginning with our first quarter 2008 fiscal
period. In January 2008, FASB issued FASB Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay
was intended to allow additional time for FASB to consider the
effect of various implementation issues that have arisen, or
that may arise, from the application of SFAS No. 157.
Effective January 1, 2008, we adopted SFAS 157 for
financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for
financial assets and liabilities did not have a material impact
on our consolidated financial position, results of operations or
cash flows. See Note 2 for information and related
disclosures regarding our fair value measurements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 allows companies to
elect to measure certain assets and liabilities at fair value
and is effective for fiscal years beginning after
November 15, 2007. We adopted SFAS No. 159 on
January 1, 2008. The adoption of SFAS No. 159 did
not have an effect on our consolidated financial condition or
results of operations.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations. SFAS 141R requires the
acquiring entity in a business combination to recognize all the
assets acquired and liabilities assumed in the transaction at
fair value as of the acquisition date. SFAS 141R is
effective for business combinations for which the
41
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We were required to adopt SFAS No. 141R in the
first quarter of 2009 prospectively. The impact of adopting
SFAS 141R will depend on the nature and terms of future
acquisitions.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets.
FSP 142-3
was effective for fiscal years beginning after December 15,
2008. We are currently assessing the impact of
FSP 142-3
on our consolidated financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements.
SFAS No. 162 was effective November 15, 2008. The
implementation of this standard did not have a material impact
on our consolidated financial position and results of operations.
Critical
Accounting Policies
The SEC defines critical accounting policies as
those that require application of managements most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 1
in the Notes to Consolidated Financial Statements. Not all of
these significant accounting policies require management to make
difficult, subjective or complex judgments or estimates.
However, the following are our critical accounting policies.
Revenue
Recognition
We recognize revenues primarily from three sources: license
fees, services and site support. Our license revenues consist of
license fees for perpetual license sales and monthly and annual
term license sales. Our services revenues consist of Cardiac
Safety services, technology consulting and training services and
software maintenance services. Our site support revenues consist
of cardiac safety equipment rentals and sales along with related
supplies and freight.
We recognize software revenues in accordance with
SOP 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to
Certain Transactions. Accordingly, we recognize up-front
license fee revenues under the residual method when a formal
agreement exists, delivery of the software and related
documentation has occurred, collectability is probable and the
license fee is fixed or determinable. We recognize monthly and
annual term license fee revenues over the term of the
arrangement. Hosting service fees are recognized evenly over the
term of the service. Cardiac Safety services revenues consist of
services that we provide on a fee for services basis and are
recognized as the services are performed. Site support revenues
are recognized at the time of sale or over the rental period. We
recognize revenues from software maintenance contracts on a
straight-line basis over the term of the maintenance contract,
which is typically twelve months. We provide consulting and
training services on a time and materials basis and recognize
revenues as we perform the services.
At the time of the transaction, management assesses whether the
fee associated with our revenue transactions is fixed or
determinable and whether or not collection is reasonably
assured. The assessment of whether the fee is fixed or
determinable is based upon the payment terms of the transaction.
If a significant portion of a fee is due after our normal
payment terms or upon implementation or client acceptance, the
fee is accounted for as not being fixed or determinable. In
these cases, revenue is recognized as the fees become due or
after implementation or client acceptance has occurred.
Collectability is assessed based on a number of factors,
including past transaction history with the client and the
creditworthiness of the client. If it is determined that
collection of a fee is not reasonably assured, the fee is
deferred and revenue is recognized at the time collection
becomes reasonably assured, which is generally upon receipt of
cash. Under a typical contract for Cardiac Safety services,
clients pay us a portion of our fee for these
42
services upon contract execution as an upfront deposit, some of
which is typically nonrefundable upon contract termination.
Revenues are then recognized under Cardiac Safety service
contracts as the services are performed.
For arrangements with multiple deliverables where the fair value
of each element is known, the revenue is allocated to each
component based on the relative fair values of each element. For
arrangements with multiple deliverables where the fair value of
one or more delivered elements is not known, revenue is
allocated to each component of the arrangement using the
residual method provided that the fair value of all undelivered
elements is known. Fair values for undelivered elements are
based primarily upon stated renewal rates for future products or
services.
Business
Combinations
In November 2007, we completed the acquisition of CCSS, and we
may pursue additional acquisitions in the future. We are
required to allocate the purchase price of acquired companies to
the tangible and intangible assets we acquired and liabilities
we assumed based on their estimated fair values. This valuation
requires management to make significant estimates and
assumptions, especially with respect to long-lived and
intangible assets.
Critical estimates in valuing certain of the intangible assets
include but are not limited to: future expected cash flows from
customer contracts, customer relationships, proprietary
technology and discount rates. Our estimates of fair value are
based upon assumptions we believe to be reasonable, but which
are inherently uncertain and unpredictable. Assumptions may be
incomplete or inaccurate, and unanticipated events and
circumstances may occur.
Other estimates associated with the accounting for acquisitions
may change as additional information becomes available regarding
the assets we acquired and liabilities we assumed.
For a discussion of how we allocated the purchase price of CCSS,
see Note 2 to our consolidated financial statements
included elsewhere herein. Future business combinations will be
accounted for in accordance with the provisions of
SFAS No. 141R, as discussed above in
Recent Accounting Pronouncements.
Goodwill
As a result of the CCSS acquisition, we carry a significant
amount of goodwill. In accordance with the provisions of
SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is not amortized but is subject to an
impairment test at least annually. We perform the impairment
test annually as of December 31 or more frequently if events or
circumstances indicate that the value of goodwill might be
impaired. No provisions for goodwill impairment were recorded
during 2007 or 2008.
If we determine that the carrying value of goodwill may not be
recoverable, we will base the measurement of any impairment on a
projected discounted cash flow method using a discount rate
commensurate with the risk inherent in our current business
model.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
management having to estimate our current tax exposure together
with assessing temporary differences resulting from the
differing treatment of certain items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance
sheets. Management must then assess the likelihood that our net
deferred tax assets will be recovered from future taxable
income, and, to the extent that management believes that
recovery is not likely, a valuation allowance must be
established. To the extent management establishes or increases a
valuation allowance in a period, the consolidated statement of
operations will reflect additional income tax expense.
Significant management judgment is required in determining our
provision for income taxes, deferred taxes and any valuation
allowance recorded against deferred tax assets. As of
December 31, 2008, we had a valuation allowance of
$0.5 million related to the uncertain realization of
certain deferred tax assets. See Note 7 to our consolidated
financial statements for more information.
43
Depreciation
and Amortization of Long-lived Assets
We compute depreciation on our property, plant and equipment on
a straight-line basis over their estimated useful lives, which
generally range from two to five years. Leasehold improvements
are amortized using the straight-line method over the shorter of
the estimated useful life of the asset or the remaining lease
term. System development costs are amortized on a straight-line
basis over four or five years or, in the case of enhancements
which have no stand-alone use, the remaining life of the initial
project.
We compute amortization on our intangible assets, other than
goodwill, over their estimated useful lives, which generally
range from one to ten years. Amortization of backlog from the
CCSS acquisition is recognized on an accelerated basis while
other intangibles are amortized using the straight-line method.
Changes in the estimated useful lives of long-lived assets could
have a material effect on our results of operations.
Stock-Based
Compensation
We follow the fair value method of accounting for stock-based
compensation. We estimate the fair value of options using the
Black-Scholes option-pricing model with assumptions based
primarily on historical data. The assumptions used in the
Black-Scholes option-pricing model require estimates of the
expected term the stock-based awards are held until exercised,
the estimated volatility of our stock price over the expected
term and the number of options that will be forfeited prior to
the completion of their vesting requirements. Changes in our
assumptions may impact the expenses related to our stock options.
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by generally accepted accounting principles. There are also
areas in which managements judgment in selecting any
available alternatives would not produce a materially different
result. See our audited Consolidated Financial Statements and
Notes thereto, which begin on
page F-1
of this
Form 10-K,
for a description of our accounting policies and other
disclosures required by generally accepted accounting principles.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our primary financial market risks include fluctuations in
interest rates and currency exchange rates.
Interest
Rate Risk
We had historically placed our investments in municipal
securities, bonds of government sponsored agencies, certificates
of deposit with fixed rates with maturities of less than one
year, and A1P1 rated commercial bonds and paper. Due to the
current financial market conditions, we have invested primarily
in liquid money market funds. We will continue to monitor
conditions and look for prudent investment opportunities. We
actively manage our portfolio of cash equivalents and short-term
investments, but in order to ensure liquidity, we will only
invest in instruments with high credit quality where a secondary
market exists. We have not held and do not hold any derivatives
related to our interest rate exposure. Due to the average
maturity and conservative nature of our investment portfolio, a
sudden change in interest rates would not have a material effect
on the value of the portfolio. Management estimates that had the
average yield of our investments decreased by 100 basis
points, our interest income for the year ended December 31,
2008 would have decreased by approximately $0.6 million.
This estimate assumes that the decrease occurred on the first
day of 2008 and reduced the yield of each investment by
100 basis points. The impact on our future interest income
of future changes in investment yields will depend largely on
the gross amount of our cash, cash equivalents, short-term
investments and long-term investments. See Liquidity and
Capital Resources as part of Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Foreign
Currency Risk
We operate on a global basis from locations in the United States
(U.S.) and the United Kingdom (UK). All international net
revenues and expenses are billed or incurred in either
U.S. dollars or pounds sterling. As such, we
44
face exposure to adverse movements in the exchange rate of the
pound sterling. As the currency rate changes, translation of the
statement of operations of our UK subsidiary from the local
currency to U.S. dollars affects year-to-year comparability
of operating results. We do not currently hedge translation
risks because any cash flows from UK operations are reinvested
in the UK.
Management estimates that a 10% change in the exchange rate of
the pound sterling would have impacted the reported operating
income for the year ended December 31, 2008 by
approximately $0.8 million.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information called for by this Item is set forth on Pages
F-1 through F-31.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusions
regarding disclosure controls and procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures pursuant to
Rule 13a-15
under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report were designed
and functioning effectively to provide reasonable assurance that
information required to be disclosed by the Company (including
our consolidated subsidiaries) in the reports we file with or
submit to the SEC is (i) recorded, processed, summarized
and reported within the time periods specified in the SECs
rules and forms and (ii) accumulated and communicated to
our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Managements
annual report on internal control over financial
reporting
See Managements Report on Internal Control Over Financial
Reporting on
page F-2.
Report of
the independent registered public accounting firm
See Report of Independent Registered Public Accounting Firm on
page F-3.
Changes
in internal control over financial reporting
There were no changes in our internal control over financial
reporting identified in connection with the evaluation required
by paragraph (d) of Exchange Act
Rule 13a-15
that occurred during our fourth fiscal quarter of 2008 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
45
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information with respect to this item is set forth in our
definitive Proxy Statement (the Proxy Statement) to
be filed with the SEC for our Annual Meeting of Stockholders to
be held on April 29, 2009, under the headings
Election of Directors, Section 16(a)
Beneficial Ownership Reporting Compliance and Code
of Ethics and Business Conduct, and is incorporated herein
by reference. Information regarding our executive officers is
included at the end of Part I of this
Form 10-K.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information with respect to this item is incorporated by
reference to the information set forth in Executive
Compensation in the Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information with respect to this item is incorporated by
reference to the information set forth in Stock
Ownership The Stock Ownership of Our Principal
Stockholders, Directors and Executive Officers and
Executive Compensation Compensation Discussion
and Analysis Elements of Our Compensation
Program Existing Equity Compensation Plan in
the Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information with respect to this item is incorporated by
reference to the information set forth in Related Party
Transactions and Corporate Governance
Matters Director Independence in the Proxy
Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information with respect to this item is incorporated by
reference to the information set forth in Ratification of
Independent Registered Public Accountants and Audit
and Non-Audit Fees in the Proxy Statement.
46
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this
Form 10-K:
|
|
|
|
1.
|
The consolidated financial statements of eResearchTechnology,
Inc. (the Company) filed as a part of this
Form 10-K
are listed on the attached Index to Consolidated Financial
Statements and Financial Statement Schedule at F-1.
|
|
|
2.
|
The financial statement schedule of the Company filed as a part
of this
Form 10-K
is listed in the attached Index to Consolidated Financial
Statements and Financial Statement Schedule at F-1.
|
3. Exhibits.
|
|
|
|
|
|
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended.(1)
|
|
|
|
|
|
|
3
|
.2
|
|
Bylaws.(2)
|
|
|
|
|
|
|
3
|
.3
|
|
Amendment to Bylaws.(3)
|
|
|
|
|
|
|
3
|
.4
|
|
Certificate of Merger between the Company and ERT Operating
Company.(4)
|
|
|
|
|
|
|
4
|
.1
|
|
Form of Stock Certificate.(4)
|
|
|
|
|
|
|
10
|
.1
|
|
Registration Rights Agreement dated August 27, 1999.(5)
|
|
|
|
|
|
|
10
|
.2
|
|
Share Purchase Agreement dated November 27, 2007 by and
among the Company, Covance Central Laboratory Services Limited
Partnership, Covance Cardiac Safety Services Inc. and Covance
Inc.(6)
|
|
|
|
|
|
|
10
|
.4
|
|
Exclusive Marketing Agreement dated November 27, 2007 by
and between the Company and Covance Inc.(7)
|
|
|
|
|
|
|
10
|
.7
|
|
1996 Stock Option Plan, as amended.(4)*
|
|
|
|
|
|
|
10
|
.12
|
|
2007 Bonus Plan.(8)*
|
|
|
|
|
|
|
10
|
.13
|
|
2008 Bonus Plan.(9)*
|
|
|
|
|
|
|
10
|
.20
|
|
1818 Market Street Office Lease between the Company and NNN 1818
Market Street, LLC and Affiliates.(10)
|
|
|
|
|
|
|
10
|
.23
|
|
Sublease Agreement between the Company and Raytheon
Engineers & Constructors, Inc.(3)
|
|
|
|
|
|
|
10
|
.25
|
|
Amendment to the Sublease Agreement between the Company and
17th Ludlow Property, L.L.C.(11)
|
|
|
|
|
|
|
10
|
.26
|
|
Amendment to the Sublease Agreement between the Company and
17th Ludlow Property, L.L.C.(12)
|
|
|
|
|
|
|
10
|
.29
|
|
Promissory Note to Wachovia Bank, National Association effective
June 26, 2008.(13)
|
|
|
|
|
|
|
10
|
.30
|
|
Loan Agreement with Wachovia Bank, National Association
effective June 26, 2008.(13)
|
|
|
|
|
|
|
10
|
.31
|
|
Amended and Restated 2003 Equity Incentive Plan, as amended.(8)*
|
|
|
|
|
|
|
10
|
.40
|
|
Management Employment Agreement effective February 7, 2006
between Joseph Esposito and the Company.(14)*
|
47
|
|
|
|
|
|
|
|
|
|
|
10
|
.41
|
|
Amendment to Management Employment Agreement effective
August 16, 2004 between Dr. Joel Morganroth and the
Company.(1)*
|
|
|
|
|
|
|
10
|
.42
|
|
Management Employment Agreement effective January 1, 2008
between Dr. Joel Morganroth and the Company.(15)*
|
|
|
|
|
|
|
10
|
.43
|
|
Consultant Agreement effective January 1, 2007 between
Dr. Joel Morganroth and the Company.(8)*
|
|
|
|
|
|
|
10
|
.44
|
|
Management Employment Agreement effective August 20, 2004
between Dr. Jeffrey Litwin and the Company.(1)*
|
|
|
|
|
|
|
10
|
.46
|
|
Consultant Agreement effective January 1, 2008 between
Dr. Joel Morganroth and the Company.(15)*
|
|
|
|
|
|
|
10
|
.47
|
|
Management Employment Agreement effective September 2, 2004
between Robert Brown and the Company.(9)*
|
|
|
|
|
|
|
10
|
.48
|
|
Management Employment Agreement effective June 23, 2006
between Michael J. McKelvey and the Company.(16)*
|
|
|
|
|
|
|
10
|
.49
|
|
Management Employment Agreement effective May 17, 2006
between Richard A. Baron and the Company.(16)*
|
|
|
|
|
|
|
10
|
.50
|
|
Amendment to Management Employment Agreement effective
June 12, 2006 between Richard A. Baron and the Company.(16)*
|
|
|
|
|
|
|
10
|
.51
|
|
Amended and Restated Management Employment Agreement effective
June 17, 2008 between Steven M. Eisenstein and the
Company(13)*
|
|
|
|
|
|
|
10
|
.52
|
|
Lease Agreement dated August 18, 2000 between Advance/GLD 2
L.L.C. and the Company.(17)
|
|
|
|
|
|
|
10
|
.53
|
|
Management Employment Agreement effective July 28, 2008
between Keith D. Schneck and the Company.*
|
|
|
|
|
|
|
10
|
.54
|
|
Lease Agreement dated September 28, 2004 between Royal and
Sun Alliance Insurance PLC and the Companys subsidiary,
eResearchTechnology Limited.(18)
|
|
|
|
|
|
|
10
|
.56
|
|
Management Employment Agreement effective May 21, 2001
between Dr. Joel Morganroth and the Company.(19)*
|
|
|
|
|
|
|
10
|
.59
|
|
Attornment Agreement between 17th Ludlow Property, L.L.C.
and the Company.(4)
|
|
|
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.(15)
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of KPMG LLP.
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer.
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer.
|
|
|
|
|
|
|
32
|
.1
|
|
Statement of Chief Executive Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
|
|
|
|
|
|
|
32
|
.2
|
|
Statement of Chief Financial Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
|
48
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 4, 2004. |
|
(2) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys Registration
Statement on
Form S-1,
File
No. 333-17001,
declared effective by the Securities and Exchange Commission on
February 3, 1997. |
|
(3) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 31, 1999. |
|
(4) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 12, 2002. |
|
(5) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 8-K
on September 9, 1999. |
|
(6) |
|
Incorporated by reference to Exhibit 2.1, filed with the
Companys
Form 8-K
on December 4, 2007. |
|
(7) |
|
Incorporated by reference to Exhibit 10.1, filed with the
Companys
Form 8-K
on December 4, 2007. Confidential treatment has been
requested with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the SEC. |
|
(8) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 4, 2007. |
|
(9) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 8, 2008. |
|
(10) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 7, 2008. |
|
(11) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 7, 2003. |
|
(12) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 3, 2004. |
|
(13) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on August 7, 2008. |
|
(14) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 10, 2006. |
|
(15) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 7, 2008. |
|
(16) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on August 4, 2006. |
|
(17) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 13, 2000. |
|
(18) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 11, 2005. |
|
(19) |
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on August 10, 2001. |
49
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, on this 2nd day of March, 2009.
eResearchTechnology, Inc.
|
|
|
|
By:
|
/s/ Michael
J. McKelvey
|
Michael J. McKelvey
President and Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Michael
J. McKelvey
Michael
J. McKelvey
|
|
President and Chief Executive Officer, Director (Principal
executive officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Joel
Morganroth, MD
Joel
Morganroth, MD
|
|
Chairman of the Board of Directors
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Keith
D. Schneck
Keith
D. Schneck
|
|
Executive Vice President, Chief Financial Officer and Secretary
(Principal financial and accounting officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Sheldon
M. Bonovitz
Sheldon
M. Bonovitz
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Michael
DeMane
Michael
DeMane
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Gerald
A. Faich, MD, MPH
Gerald
A. Faich, MD, MPH
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ David
D. Gathman
David
D. Gathman
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Elam
M. Hitchner
Elam
M. Hitchner
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Stephen
S. Phillips
Stephen
S. Phillips
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Stephen
M. Scheppmann
Stephen
M. Scheppmann
|
|
Director
|
|
March 2, 2009
|
50
Report of
Management
Managements
Report on Financial Statements
Our management is responsible for the preparation, integrity and
fair presentation of information in our consolidated financial
statements, including estimates and judgments. The consolidated
financial statements presented in this report have been prepared
in accordance with accounting principles generally accepted in
the United States of America. Our management believes the
consolidated financial statements and other financial
information included in this report fairly present, in all
material respects, our financial condition, results of
operations and cash flows as of and for the periods presented in
this report. The consolidated financial statements have been
audited by KPMG LLP, an independent registered public accounting
firm, as stated in their report, which is included herein.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
an adequate system of internal control over financial reporting.
Our system of internal control over financial reporting is
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.
Our internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and
dispositions of our assets;
|
|
|
|
provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of our consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that our receipts
and expenditures are being made only in accordance with
authorizations of our management and our directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on the consolidated
financial statements.
|
Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Further,
because of changes in conditions, effectiveness of internal
control over financial reporting may vary over time. Our system
contains self monitoring mechanisms, and actions are taken to
correct deficiencies as they are identified.
Our management conducted an evaluation of the effectiveness of
the system of 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 this
evaluation, our management concluded that our system of internal
control over financial reporting was effective as of
December 31, 2008.
Audit
Committee Oversight
The Audit Committee of the Board of Directors, which is
comprised solely of independent directors, has oversight
responsibility for our financial reporting process and the
audits of our consolidated financial statements and internal
control over financial reporting. The Audit Committee meets
regularly with management and with our independent registered
public accounting firm (auditors) to review matters
related to the quality and integrity of our financial reporting,
internal control over financial reporting (including compliance
matters related to our Code of Ethics and Business Conduct), and
the nature, extent, and results of the auditors audit of
our consolidated financial statements. Our auditors have full
and free access and report directly to the Audit Committee. The
Audit Committee recommended, and the Board of Directors
approved, that the audited consolidated financial statements be
included in this
Form 10-K.
F-2
Report of
Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
The Board of Directors and Stockholders
eResearchTechnology, Inc.:
We have audited eResearchTechnology, Incs (the Company)
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). The Companys 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 Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express
an opinion on the Companys 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
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
companys 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, eResearchTechnology, 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 COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of eResearchTechnology, Inc. as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2008, and our
report dated March 2, 2009 expressed an unqualified opinion
on those consolidated financial statements.
Philadelphia, Pennsylvania
March 2, 2009
F-3
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
eResearchTechnology, Inc.:
We have audited the accompanying consolidated balance sheets of
eResearchTechnology, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2008. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated 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 eResearchTechnology, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Notes 1 and 7 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
eResearchTechnology Inc. and subsidiaries 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 2, 2009 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 2, 2009
F-4
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,082
|
|
|
$
|
66,376
|
|
Short-term investments
|
|
|
8,797
|
|
|
|
50
|
|
Accounts receivable, net
|
|
|
26,718
|
|
|
|
29,177
|
|
Prepaid income taxes
|
|
|
743
|
|
|
|
1,892
|
|
Prepaid expenses and other
|
|
|
3,087
|
|
|
|
2,885
|
|
Deferred income taxes
|
|
|
901
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
78,328
|
|
|
|
102,211
|
|
Property and equipment, net
|
|
|
33,347
|
|
|
|
29,639
|
|
Goodwill
|
|
|
30,908
|
|
|
|
34,603
|
|
Intangible assets
|
|
|
3,849
|
|
|
|
2,149
|
|
Deferred income taxes
|
|
|
1,011
|
|
|
|
|
|
Other assets
|
|
|
253
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
147,696
|
|
|
$
|
169,122
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,505
|
|
|
$
|
3,971
|
|
Accrued expenses
|
|
|
11,875
|
|
|
|
8,140
|
|
Income taxes payable
|
|
|
2,352
|
|
|
|
2,492
|
|
Current portion of capital lease obligations
|
|
|
1,097
|
|
|
|
43
|
|
Deferred revenues
|
|
|
13,905
|
|
|
|
12,276
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,734
|
|
|
|
26,922
|
|
Capital lease obligations, excluding current portion
|
|
|
48
|
|
|
|
|
|
Deferred rent
|
|
|
228
|
|
|
|
2,183
|
|
Deferred income taxes
|
|
|
|
|
|
|
1,332
|
|
Other liabilities
|
|
|
1,174
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,184
|
|
|
|
31,694
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock $10.00 par value,
500,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock $.01 par value,
175,000,000 shares authorized, 58,870,291 and
59,950,257 shares issued, respectively
|
|
|
589
|
|
|
|
600
|
|
Additional paid-in capital
|
|
|
87,957
|
|
|
|
93,828
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,679
|
|
|
|
(2,716
|
)
|
Retained earnings
|
|
|
85,477
|
|
|
|
110,479
|
|
Treasury stock, 8,247,119 and 8,686,868 shares at cost,
respectively
|
|
|
(62,190
|
)
|
|
|
(64,763
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
113,512
|
|
|
|
137,428
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
147,696
|
|
|
$
|
169,122
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
3,017
|
|
|
$
|
2,700
|
|
|
$
|
3,203
|
|
Services
|
|
|
55,309
|
|
|
|
69,547
|
|
|
|
99,258
|
|
Site support
|
|
|
28,042
|
|
|
|
26,451
|
|
|
|
30,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
86,368
|
|
|
|
98,698
|
|
|
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of licenses
|
|
|
286
|
|
|
|
304
|
|
|
|
755
|
|
Cost of services
|
|
|
25,431
|
|
|
|
30,522
|
|
|
|
39,697
|
|
Cost of site support
|
|
|
18,821
|
|
|
|
17,808
|
|
|
|
18,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
44,538
|
|
|
|
48,634
|
|
|
|
58,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
41,830
|
|
|
|
50,064
|
|
|
|
74,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11,051
|
|
|
|
11,222
|
|
|
|
13,273
|
|
General and administrative
|
|
|
14,668
|
|
|
|
12,258
|
|
|
|
18,181
|
|
Research and development
|
|
|
4,146
|
|
|
|
4,333
|
|
|
|
4,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,865
|
|
|
|
27,813
|
|
|
|
35,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,965
|
|
|
|
22,251
|
|
|
|
38,395
|
|
Other income, net
|
|
|
1,250
|
|
|
|
2,206
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13,215
|
|
|
|
24,457
|
|
|
|
40,125
|
|
Income tax provision
|
|
|
4,905
|
|
|
|
9,205
|
|
|
|
15,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,310
|
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to calculate basic net income per share
|
|
|
49,474
|
|
|
|
50,476
|
|
|
|
50,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to calculate diluted net income per share
|
|
|
51,485
|
|
|
|
51,743
|
|
|
|
52,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
|
56,871,010
|
|
|
|
569
|
|
|
|
73,290
|
|
|
|
586
|
|
|
|
61,915
|
|
|
|
(56,387
|
)
|
|
|
79,973
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,310
|
|
|
|
|
|
|
|
8,310
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,234
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,803
|
)
|
|
|
(5,803
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,970
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397
|
|
Exercise of stock options
|
|
|
1,485,536
|
|
|
|
15
|
|
|
|
3,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
58,356,546
|
|
|
|
584
|
|
|
|
83,493
|
|
|
|
1,510
|
|
|
|
70,225
|
|
|
|
(62,190
|
)
|
|
|
93,622
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,252
|
|
|
|
|
|
|
|
15,252
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,421
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
Capitalized share-based compensation
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
759
|
|
Exercise of stock options
|
|
|
513,745
|
|
|
|
5
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
58,870,291
|
|
|
|
589
|
|
|
|
87,957
|
|
|
|
1,679
|
|
|
|
85,477
|
|
|
|
(62,190
|
)
|
|
|
113,512
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,002
|
|
|
|
|
|
|
|
25,002
|
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,395
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,607
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,573
|
)
|
|
|
(2,573
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600
|
|
Capitalized share-based compensation
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855
|
|
Exercise of stock options
|
|
|
1,079,966
|
|
|
|
11
|
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
59,950,257
|
|
|
$
|
600
|
|
|
$
|
93,828
|
|
|
$
|
(2,716
|
)
|
|
$
|
110,479
|
|
|
$
|
(64,763
|
)
|
|
$
|
137,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,310
|
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,253
|
|
|
|
15,129
|
|
|
|
16,038
|
|
Cost of sales of equipment
|
|
|
3,722
|
|
|
|
1,143
|
|
|
|
743
|
|
Provision for uncollectible accounts
|
|
|
111
|
|
|
|
30
|
|
|
|
189
|
|
Share-based compensation
|
|
|
2,975
|
|
|
|
2,004
|
|
|
|
2,604
|
|
Deferred income taxes
|
|
|
(1,753
|
)
|
|
|
(521
|
)
|
|
|
1,098
|
|
Investment impairment charge
|
|
|
226
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities exclusive of CCSS
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,567
|
)
|
|
|
(4,192
|
)
|
|
|
(3,840
|
)
|
Prepaid expenses and other
|
|
|
132
|
|
|
|
352
|
|
|
|
41
|
|
Accounts payable
|
|
|
950
|
|
|
|
(2,147
|
)
|
|
|
175
|
|
Accrued expenses
|
|
|
(1,634
|
)
|
|
|
2,928
|
|
|
|
(80
|
)
|
Income taxes
|
|
|
(351
|
)
|
|
|
3,658
|
|
|
|
(1,290
|
)
|
Deferred revenues
|
|
|
(4,897
|
)
|
|
|
2,487
|
|
|
|
(667
|
)
|
Deferred rent
|
|
|
(145
|
)
|
|
|
(122
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,332
|
|
|
|
36,001
|
|
|
|
39,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(15,181
|
)
|
|
|
(11,073
|
)
|
|
|
(10,969
|
)
|
Purchases of investments
|
|
|
(46,425
|
)
|
|
|
(58,008
|
)
|
|
|
|
|
Proceeds from sales of investments
|
|
|
40,658
|
|
|
|
91,555
|
|
|
|
8,747
|
|
Payments for acquisition
|
|
|
|
|
|
|
(35,800
|
)
|
|
|
(6,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(20,948
|
)
|
|
|
(13,326
|
)
|
|
|
(8,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(153
|
)
|
|
|
(2,504
|
)
|
|
|
(1,102
|
)
|
Proceeds from exercise of stock options
|
|
|
3,851
|
|
|
|
1,655
|
|
|
|
2,369
|
|
Stock option income tax benefit
|
|
|
3,400
|
|
|
|
760
|
|
|
|
849
|
|
Repurchase of common stock for treasury
|
|
|
(5,803
|
)
|
|
|
|
|
|
|
(2,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
1,295
|
|
|
|
(89
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
386
|
|
|
|
(1
|
)
|
|
|
(2,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,935
|
)
|
|
|
22,585
|
|
|
|
28,294
|
|
Cash and cash equivalents, beginning of period
|
|
|
18,432
|
|
|
|
15,497
|
|
|
|
38,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
15,497
|
|
|
$
|
38,082
|
|
|
$
|
66,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-8
|
|
1.
|
Background
and Summary of Significant Accounting Policies:
|
Background
eResearchTechnology, Inc. (ERT), a Delaware corporation, was
founded in 1977 to provide Cardiac safety solutions to evaluate
the safety of new drugs. ERT and its consolidated subsidiaries
collectively are referred to as the Company or
we. We provide technology and service solutions that
enable the pharmaceutical, biotechnology and medical device
industries to collect, interpret and distribute cardiac safety
and clinical data more efficiently. We are a market leader in
providing centralized electrocardiographic services (Cardiac
Safety solutions) and a leading provider of technology solutions
that streamline the clinical trials process by enabling our
clients to evolve from traditional, paper-based methods to
electronic processing using our EDC and ePRO products and
solutions.
Our solutions improve the accuracy, timeliness and efficiency of
trial
set-up, data
collection from sites worldwide, data interpretation, and new
drug, biologic and device application submissions. We offer
Cardiac Safety solutions, which are utilized by pharmaceutical
companies, biotechnology companies, medical device companies,
clinical trial sponsors and clinical research organizations
(CROs) during the conduct of clinical trials. Our Cardiac Safety
solutions include the collection, interpretation and
distribution of electrocardiographic (ECG) data and images and
are performed during clinical trials in all phases of the
clinical research process. The ECG provides an electronic map of
the hearts rhythm and structure, and typically is
performed in most clinical trials. Our Cardiac Safety solutions
permit assessments of the safety of therapies by documenting the
occurrence of cardiac electrical change. Specific trials, such
as a Thorough QTc study, focus on the cardiac safety profile of
a compound. Thorough QTc studies are comprehensive studies that
typically are of large volume and short duration and are
recommended by the United States Food and Drug Administration
(FDA) under guidance issued in 2005 by the International
Committee on Harmonization (ICH E14). We also offer site
support, which includes the rental and sale of cardiac safety
equipment along with related supplies and logistics management.
Additionally, under our EDC solutions, we offer the licensing
and, at the clients option, hosting of our proprietary
software products and the provision of maintenance and
consulting services in support of these products. We also offer
electronic patient reported outcomes (ePRO) solutions along with
proprietary clinical assessments.
On November 28, 2007, we acquired Covance Cardiac Safety
Services, Inc. (CCSS), the centralized ECG business of Covance
Inc. (Covance). See Note 2 for a summary of the terms of
this acquisition.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of ERT and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. We consider our business to consist of one segment
as this represents managements view of our operations.
Reclassifications
The consolidated financial statements for prior periods have
been reclassified to conform to the current periods
presentation.
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Revenues
Our license revenues consist of license fees for perpetual
licenses and monthly and annual term licenses. Our services
revenues consist of Cardiac Safety services and consulting,
technology consulting and training services and
F-9
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
software maintenance services. Our site support revenues consist
of cardiac safety equipment rentals and sales along with related
supplies and freight.
We recognize software revenues in accordance with Statement of
Position (SOP)
97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to
Certain Transactions. Accordingly, we recognize up-front
license fee revenues under the residual method when a formal
agreement exists, delivery of the software and related
documentation has occurred, collectability is probable and the
license fee is fixed or determinable. We recognize monthly and
annual term license fee revenues over the term of the
arrangement. Hosting service fees are recognized evenly over the
term of the service. Cardiac Safety services revenues consist of
services that we provide on a fee for services basis and are
recognized as the services are performed. We recognize revenues
from software maintenance contracts on a straight-line basis
over the term of the maintenance contract, which is typically
twelve months. We provide consulting and training services on a
time and materials basis and recognize revenues as we perform
the services. Site support revenues are recognized at the time
of sale or over the rental period.
For arrangements with multiple deliverables where the fair value
of each element is known, the revenue is allocated to each
component based on the relative fair values of each element in
accordance with Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. For
arrangements with multiple deliverables where the fair value of
one or more delivered elements is not known, revenue is
allocated to each component of the arrangement using the
residual method provided that the fair value of all undelivered
elements is known. Fair values for undelivered elements are
based primarily upon stated renewal rates for future products or
services.
We have recorded reimbursements received for out-of-pocket
expenses incurred as revenue in the accompanying consolidated
financial statements in accordance with EITF Issue
No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses.
Revenue is recognized on unbilled services and relates to
amounts that are currently unbillable to the customer pursuant
to contractual terms. In general, such amounts become billable
in accordance with predetermined payment schedules, but
recognized as revenue as services are performed. Amounts
included in unbilled revenue are expected to be collected within
one year and are included within current assets. See Note 4
for further detail regarding our accounts receivable.
Business
Combinations
In November 2007, we completed the acquisition of CCSS. We were
required to allocate the purchase price of acquired companies to
the tangible and intangible assets we acquired and liabilities
we assumed based on their estimated fair values. This valuation
required management to make significant estimates and
assumptions, especially with respect to long-lived and
intangible assets.
Critical estimates in valuing certain of the intangible assets
included but were not limited to: future expected cash flows
from customer contracts, customer relationships, proprietary
technology and discount rates. Our estimates of fair value were
based upon assumptions we believe to be reasonable, but which
are inherently uncertain and unpredictable. Assumptions may be
incomplete or inaccurate, and unanticipated events and
circumstances may occur.
For a discussion of how we allocated the purchase price of CCSS,
see Note 2.
We may pursue additional acquisitions in the future.
F-10
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Cash and
Cash Equivalents
We consider cash on deposit and in overnight investments and
investments in money market funds with financial institutions to
be cash equivalents. At the balance sheet dates, cash
equivalents consisted primarily of investments in money market
funds.
Short-term
Investments
At December 31, 2008, short-term investments consisted of
an auction rate security issued by a government-sponsored
agency. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities, available-for-sale securities
are carried at fair value, based on quoted market prices, with
unrealized gains and losses reported as a separate component of
stockholders equity. We classified our short-term
investment at December 31, 2007 and 2008 as
available-for-sale. At December 31, 2007 and 2008,
unrealized gains and losses were immaterial. Realized gains and
losses during 2006, 2007 and 2008 were immaterial. For purposes
of determining realized gains and losses, the cost of the
securities sold is based upon specific identification.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets ranging from two to five years.
Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful life of the
asset or the remaining lease term. Repair and maintenance costs
are expensed as incurred. Improvements and betterments are
capitalized. Depreciation expense was $10.1 million,
$12.1 million and $11.9 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
Pursuant to
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, we capitalize costs associated
with internally developed
and/or
purchased software systems for new products and enhancements to
existing products that have reached the application development
stage and meet recoverability tests. These costs are included in
property and equipment. Capitalized costs include external
direct costs of materials and services utilized in developing or
obtaining internal-use software, and payroll and payroll-related
expenses for employees who are directly associated with and
devote time to the internal-use software project.
Amortization of capitalized software development costs is
charged to costs of revenues. Amortization of capitalized
software development costs was $1.1 million,
$2.8 million and $2.5 million for the years ended
December 31, 2006, 2007 and 2008, respectively. During the
years ended December 31, 2006, 2007 and 2008, we
capitalized $4.6 million, $3.5 million and
$2.0 million, respectively, of software development costs
primarily related to EXPERT and ePRO. As of December 31,
2008, $3.2 million of capitalized costs have not yet been
placed in service and are therefore not being amortized.
The largest component of property and equipment is cardiac
safety equipment. Our clients use the cardiac safety equipment
to perform the ECG and Holter recordings, and it also provides
the means to send such recordings to ERT. We provide this
equipment to clients primarily through rentals via cancellable
agreements and, in some cases, through non-recourse equipment
sales. The equipment rentals and sales are included in, or
associated with, our Cardiac Safety services agreements with our
clients and the decision to rent or buy equipment is made by our
clients prior to the start of the cardiac safety study. The
decision to buy rather than rent is usually predicated upon the
economics to the client based upon the length of the study and
the number of ECGs to be performed each month. The longer the
study and the fewer the number of ECGs performed, the more
likely it is that the client may request to purchase cardiac
safety equipment rather than rent. Regardless of whether the
client rents or buys the cardiac safety equipment, we consider
the resulting cash flow to be part of our operations and reflect
it as such in our consolidated statements of cash flows.
F-11
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Our Cardiac Safety services agreements contain multiple
elements. As a result, significant contract interpretation is
sometimes required to determine the appropriate accounting. In
doing so, we consider factors such as whether the deliverables
specified in a multiple element arrangement should be treated as
separate units of accounting for revenue recognition purposes
and, if so, how the contract value should be allocated among the
deliverable elements and when to recognize revenue for each
element. We recognize revenue for delivered elements only when
the fair values of undelivered elements are known, uncertainties
regarding client acceptance are resolved and there are no
client-negotiated refund or return rights affecting the revenue
recognized for delivered elements.
The gross cost for cardiac safety equipment was
$36.8 million and $35.2 million at December 31,
2007 and 2008, respectively. The accumulated depreciation for
cardiac safety equipment was $20.0 million and
$25.0 million at December 31, 2007 and 2008,
respectively.
Prior to 2007, a portion of our cardiac safety equipment was
obtained under operating leases. During the first quarter of
2007, we entered into an agreement to purchase all of our leased
cardiac safety equipment at an established price at the end of
each lease schedules term, rather than return the
equipment at that time. As a result, in accordance with
SFAS No. 13, Accounting for Leases, we
re-evaluated the classification of the leases and determined
that the classification should be converted from operating
leases to capital leases. As a result, we recorded a non-cash
addition to property and equipment of $3.6 million and
$3.6 million of capital lease obligations. The final
payment under these capital lease obligations is in March 2009.
Goodwill
As a result of the CCSS acquisition, we carry a significant
amount of goodwill. In accordance with the provisions of
SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is not amortized but is subject to an
impairment test at least annually. We perform the impairment
test annually as of December 31 or more frequently if events or
circumstances indicate that the value of goodwill might be
impaired. No provisions for goodwill impairment were recorded
during 2006, 2007 or 2008.
When it is determined that the carrying value of goodwill may
not be recoverable, measurement of any impairment will be based
on a projected discounted cash flow method using a discount rate
commensurate with the risk inherent in the current business
model.
The carrying value of goodwill was $30.9 million and
$34.6 million as of December 31, 2007 and 2008,
respectively. During fiscal 2007, goodwill increased
approximately $29.7 million due to the acquisition of the
centralized ECG business of Covance Inc. During fiscal 2008,
goodwill increased approximately $3.7 million due to
contingent payments, transaction fees and other adjustments
related to the CCSS acquisition. See Note 2 for additional
disclosure regarding the CCSS acquisition.
Business
Combinations and Valuation of Intangible Assets
We account for business combinations in accordance with
SFAS No. 141, Business Combinations
(SFAS 141). SFAS 141 requires business
combinations to be accounted for using the purchase method of
accounting and includes specific criteria for recording
intangible assets separate from goodwill. Results of operations
of acquired businesses are included in the financial statements
of the acquiring company from the date of acquisition. Net
assets of the acquired company are recorded at their fair value
at the date of acquisition and we expense amounts allocated to
in-process research and development in the period of
acquisition. Identifiable intangibles, such as the acquired
customer base, are amortized over their expected economic lives
in proportion to their expected future cash flows.
Long-lived
Assets
In accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, when events or circumstances so indicate, we
assess the potential impairment of our long-lived assets
F-12
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
based on anticipated undiscounted cash flows from the assets.
Such events and circumstances include a sale of all or a
significant part of the operations associated with the
long-lived asset, or a significant decline in the operating
performance of the asset. If an impairment is indicated, the
amount of the impairment charge would be calculated by comparing
the anticipated discounted future cash flows to the carrying
value of the long-lived asset. No impairment was indicated
during 2006, 2007 or 2008.
Software
Development Costs
Research and development expenditures are charged to operations
as incurred. SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Since software development costs have
not been significant after the establishment of technological
feasibility, all such costs have been charged to expense as
incurred.
Advertising
Costs
We expense advertising costs as incurred. Advertising expense
for the years ended December 31, 2006, 2007 and 2008 was
$0.7 million, $0.8 million and $1.0 million,
respectively.
Stock-Based
Compensation
Accounting
for Stock-Based Compensation
On January 1, 2006, we adopted the provisions of
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R), which requires that the
costs resulting from all share-based payment transactions be
recognized in the financial statements at their fair values. We
adopted SFAS No. 123R using the modified prospective
application method under which the provisions of
SFAS No. 123R apply to new awards and to awards
modified, repurchased or cancelled after the adoption date.
Additionally, compensation cost for the portion of the awards
for which the requisite service had not been rendered that were
outstanding as of January 1, 2006 is recognized in the
Consolidated Statements of Operations over the remaining service
period after such date based on the awards original
estimate of fair value. The aggregate share-based compensation
expense recorded in the Consolidated Statements of Operations
for the years ended December 31, 2006, 2007 and 2008 under
SFAS No. 123R was $2.8 million, $2.0 million
and $2.6 million, respectively.
Valuation
Assumptions for Options Granted
The fair value of each stock option granted during the years
ended December 31, 2006, 2007 and 2008 was estimated at the
date of grant using Black-Scholes, assuming no dividends and
using the weighted-average valuation assumptions noted in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Risk-free interest rate
|
|
|
4.82
|
%
|
|
|
4.68
|
%
|
|
|
2.23
|
%
|
Expected life
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
Expected volatility
|
|
|
59.68
|
%
|
|
|
55.89
|
%
|
|
|
51.50
|
%
|
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant. The expected life
(estimated period of time outstanding) of the stock options
granted was estimated using the historical exercise behavior of
employees. Expected volatility was based on historical
volatility for a period equal to the stock options
expected life, calculated on a daily basis. The above
assumptions were used to determine the weighted-average per
share fair value of $6.15, $3.38 and $4.89 for stock options
granted during the years ended December 31, 2006, 2007 and
2008, respectively.
F-13
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences and carryforwards are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. We adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes effective
January 1, 2007. See Note 7 for further discussion.
Other
Income, Net
Other income, net consists primarily of earnings on cash, cash
equivalents and short-term and long-term investments as well as
foreign exchange gains, partially offset by interest expense
related to capital lease obligations, foreign exchange losses
and, in 2006, impairment charges related to a cost basis
investment.
Supplemental
Cash Flow Information
We paid $3.8 million, $5.7 million and
$15.2 million for income taxes in the years ended
December 31, 2006, 2007 and 2008, respectively.
During the year ended December 31, 2006, we acquired
$1.0 million of property and equipment which was financed
through accounts payable at December 31, 2007. During the
year ended December 31, 2007, we acquired $3.6 million
of property and equipment through the conversion of operating
leases into capital leases due to an agreement to purchase all
of our leased cardiac safety equipment at an established price
at the end of each lease schedules term, rather than
return the equipment at that time.
In connection with our lease for our new office in Philadelphia,
Pennsylvania, that commenced in November 2008, the landlord
provided approximately $2.1 million of tenant improvements.
Concentration
of Credit Risk and Significant Clients
Our business depends entirely on the clinical trials that
pharmaceutical, biotechnology and medical device companies
conduct. Our revenues and profitability will decline if there is
less competition in the pharmaceutical, biotechnology or medical
device industries, which could result in fewer products under
development and decreased pressure to accelerate a product
approval. Our revenues and profitability will also decline if
the FDA or similar agencies in foreign countries modify their
requirements, thereby decreasing the need for our solutions.
Financial instruments that potentially subject us to
concentration of credit risk consist primarily of trade accounts
receivable from companies operating in the pharmaceutical,
biotechnology and medical device industries. For the years ended
December 31, 2006, 2007 and 2008, one client accounted for
approximately 16%, 24% and 23% of net revenues, respectively.
The loss of this client could have a material adverse effect on
our operations. We maintain reserves for potential credit
losses. Such losses, in the aggregate, have not historically
exceeded managements estimates.
Translation
of Foreign Financial Statements
Assets and liabilities of our UK subsidiary, whose functional
currency is the British pound, are translated into
U.S. dollars at the exchange rate as of the end of each
reporting period. The consolidated statement of operations is
translated at the average exchange rate for the period. Net
exchange gains or losses resulting from the translation of
foreign financial statements are accumulated and credited or
charged directly to a separate component of other
F-14
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
comprehensive income. Foreign currency transaction gains or
losses are recorded in other income, net in the consolidated
statement of operations as incurred and net gains totaled
$0.8 million in 2008.
Net
Income per Common Share
Basic net income per share is computed by dividing net income by
the weighted average number of shares of common stock
outstanding during the year. Diluted net income per share is
computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year, adjusted
for the dilutive effect of common stock equivalents, which
consist of stock options. The dilutive effect of stock options
is computed using the treasury stock method.
The table below sets forth the reconciliation of the numerators
and denominators of the basic and diluted net income per share
computations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Per Share
|
|
Year Ended December 31,
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
8,310
|
|
|
|
49,474
|
|
|
$
|
0.17
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
2,011
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
8,310
|
|
|
|
51,485
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
15,252
|
|
|
|
50,476
|
|
|
$
|
0.30
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
1,267
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
15,252
|
|
|
|
51,743
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
25,002
|
|
|
|
50,870
|
|
|
$
|
0.49
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
1,145
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
25,002
|
|
|
|
52,015
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In computing diluted net income per share, 1,523,000, 1,497,000
and 2,623,000 options to purchase shares of common stock were
excluded from the computations for the years ended
December 31, 2006, 2007 and 2008, respectively. These
options were excluded from the computations because the exercise
prices of such options were greater than the average market
price of our common stock during the respective periods.
Comprehensive
Income
SFAS No. 130, Reporting Comprehensive
Income, requires companies to classify items of other
comprehensive income by their nature in the financial statements
and display the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in-capital
in the stockholders equity section of the balance sheet.
Our comprehensive income includes net income and unrealized
gains and losses from foreign currency translation.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which establishes a
framework for reporting fair value and expands disclosures about
fair value measurements. SFAS No. 157 was to have
become effective beginning with our first quarter 2008 fiscal
period. In January 2008, FASB issued FASB Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities, except for
F-15
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
The delay was intended to allow additional time for FASB to
consider the effect of various implementation issues that have
arisen, or that may arise, from the application of
SFAS No. 157. Effective January 1, 2008, we
adopted SFAS 157 for financial assets and liabilities
recognized at fair value on a recurring basis. The partial
adoption of SFAS 157 for financial assets and liabilities
did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 13
for information and related disclosures regarding our fair value
measurements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 allows companies to
elect to measure certain assets and liabilities at fair value
and is effective for fiscal years beginning after
November 15, 2007. We adopted SFAS No. 159 on
January 1, 2008. The adoption of SFAS No. 159 did
not have an effect on our consolidated financial condition or
results of operations.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations. SFAS 141R requires the
acquiring entity in a business combination to recognize all the
assets acquired and liabilities assumed in the transaction at
fair value as of the acquisition date. SFAS 141R is
effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We were
required to adopt SFAS No. 141R in the first quarter
of 2009 prospectively. The impact of adopting SFAS 141R
will depend on the nature and terms of future acquisitions.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets.
FSP 142-3
was effective for fiscal years beginning after December 15,
2008. We are currently assessing the impact of
FSP 142-3
on our consolidated financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements.
SFAS No. 162 was effective November 15, 2008. The
implementation of this standard did not have a material impact
on our consolidated financial position and results of operations.
On November 28, 2007, we completed the acquisition of CCSS.
We have included CCSSs operating results in our
Consolidated Statements of Operations from the date of the
acquisition. CCSS is engaged primarily in the business of
processing electrocardiograms in a digital environment as part
of clinical trials of pharmaceutical candidates to permit
assessments of the safety of therapies by documenting the
occurrence of cardiac electrical change. Under the terms of the
Purchase Agreement, we purchased all of the outstanding shares
of capital stock of CCSS in consideration of an upfront cash
payment of $35.2 million plus additional cash payments of
up to approximately $14.0 million, based upon our potential
realization of revenue from the backlog transferred and from new
contracts secured through Covances marketing activities.
We have additionally incurred approximately $1.1 million in
transaction costs. Through December 31, 2008, Covance
earned $5.0 million of this contingent amount, of which
$3.0 million was recognized in 2007 and $2.0 million
in the year ended December 31, 2008. At December 31,
2008, approximately $0.7 million of the contingent amount
earned remained to be paid to Covance which we recorded in
accounts payable. These contingent amounts increased goodwill by
$5.0 million. The acquisition included a marketing
agreement under which Covance is obligated to use us as its
provider of centralized cardiac safety solutions, and to offer
these solutions to Covances clients, on an exclusive
basis, for a
10-year
period, subject to certain exceptions. We expense payments to
Covance based upon a portion of the revenues we receive during
each calendar year of the
10-year term
that are based primarily on referrals made by Covance under the
agreement. The agreement does not restrict our continuing
collaboration with our other key CRO, Phase I units, Academic
Research Centers and other strategic partners.
F-16
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
We fully integrated the operations of CCSS into our existing
operations in the third quarter of 2008. We did so by merging
CCSSs Reno, Nevada based operations into our existing
operations and closing the operations in Reno. Costs identified
at the date of the acquisition as part of this closing were
estimated to be $1.2 million for severance and
$0.9 million for lease costs. The actual final severance
amount was $0.9 million. The estimated lease costs have
been adjusted to $2.1 million based on further analysis in
2008. In accordance with Emerging Issues Task Force (EITF)
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, these amounts have been recognized
as a liability as of the date of the acquisition and included in
the cost of the acquisition. Other costs such as stay pay
incentive arrangements and other related period costs associated
with the closing of the Reno location were expensed in the
period when such costs were incurred. The stay pay incentive
arrangements of $1.2 million were recognized as expense
over the required service period of the employees. The expense
recognized for the stay pay incentive for the year ended
December 31, 2007 was $0.2 million and
$1.0 million for the year ended December 31, 2008.
The acquisition costs of CCSS have been allocated to assets
acquired and liabilities assumed based on estimated fair values
at the date of acquisition, as revised, as follows (in
thousands):
|
|
|
|
|
Property and equipment
|
|
$
|
2,447
|
|
Backlog
|
|
|
1,900
|
|
Customer relationships
|
|
|
1,700
|
|
Technology
|
|
|
400
|
|
Deferred tax assets
|
|
|
1,740
|
|
Goodwill, including workforce
|
|
|
33,392
|
|
Accrued liabilities relating to severance and lease costs
|
|
|
(3,034
|
)
|
Other net assets acquired
|
|
|
2,743
|
|
|
|
|
|
|
Purchase price
|
|
$
|
41,288
|
|
|
|
|
|
|
During the year ended December 31, 2007, goodwill was
increased by $26.7 million due to the purchase of CCSS and
$3.0 million of contingent payments to Covance. During the
year ended December 31, 2008, goodwill was increased by
$3.7 million. The $3.7 million is comprised of
contingent payments to Covance of $2.0 million,
$1.2 million of net adjustments to severance, lease costs
and deferred taxes and additional transaction costs of
$0.5 million. Backlog is being amortized over three years
on an accelerated basis. Customer relationships are being
amortized over ten years using the straight-line method and
technology was amortized over one year using the straight-line
method.
Pro Forma
Results
The unaudited financial information in the table below
summarizes the combined results of operations for ERT and CCSS
on a pro forma basis as though the companies had been combined
as of the beginning of each of the periods presented after
giving effect to certain adjustments including the amortization
of intangible assets. ERTs historical results of
operations for the year ended December 31, 2007, included
the results of CCSS since November 28, 2007, the date of
acquisition. The unaudited pro forma financial information for
the years ended December 31, 2006 and 2007, combines
ERTs historical results for these years with the
historical results for the comparable reporting periods for
CCSS. The unaudited pro forma financial information below is for
informational purposes only and is not indicative of the results
of operations or financial condition that would have been
achieved if the acquisition would have taken place at the
beginning of each of the periods presented and should not be
taken as indicative of our future consolidated results of
operations or financial condition. Pro forma adjustments are
tax-effected at our effective tax rate.
F-17
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
117,243
|
|
|
$
|
120,163
|
|
Operating income
|
|
|
14,455
|
|
|
|
21,176
|
|
Net income
|
|
|
8,785
|
|
|
|
13,439
|
|
Basic net income per share
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
Diluted net income per share
|
|
$
|
0.17
|
|
|
$
|
0.26
|
|
Amortization of intangible assets represents the amortization of
the intangible assets from the CCSS acquisition. The gross and
net carrying amounts of the acquired intangible assets as of
December 31, 2007 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
Description
|
|
Gross Value
|
|
|
Amortization
|
|
|
Value
|
|
|
(In Years)
|
|
|
Backlog
|
|
$
|
1,900
|
|
|
$
|
104
|
|
|
$
|
1,796
|
*
|
|
|
3
|
|
Customer Relationships
|
|
|
1,700
|
|
|
|
14
|
|
|
|
1,686
|
|
|
|
10
|
|
Technology
|
|
|
400
|
|
|
|
33
|
|
|
|
367
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
151
|
|
|
$
|
3,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Fair
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
Description
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
(In Years)
|
|
|
Backlog
|
|
$
|
1,900
|
|
|
$
|
1,269
|
|
|
$
|
631
|
*
|
|
|
3
|
|
Customer Relationships
|
|
|
1,700
|
|
|
|
182
|
|
|
$
|
1,518
|
|
|
|
10
|
|
Technology
|
|
|
400
|
|
|
|
400
|
|
|
$
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
1,851
|
|
|
$
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The backlog is being amortized over three years on an
accelerated basis. |
The related amortization expense reflected in our consolidated
statements of operations for the years ended December 31,
2007 and 2008 was $151 and $1,700, respectively.
F-18
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Estimated amortization expense for the remaining estimated
useful life of the acquired intangible assets is as follows for
the years ending December 31:
|
|
|
|
|
|
|
Amortization
|
|
|
|
of Intangible
|
|
Years Ending December 31,
|
|
Assets
|
|
|
2009
|
|
|
542
|
|
2010
|
|
|
431
|
|
2011
|
|
|
170
|
|
2012
|
|
|
170
|
|
2013
|
|
|
170
|
|
Thereafter
|
|
|
666
|
|
|
|
|
|
|
Total
|
|
$
|
2,149
|
|
|
|
|
|
|
|
|
4.
|
Accounts
Receivable, Net
|
The components of accounts receivable, net were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Billed
|
|
$
|
24,996
|
|
|
$
|
29,660
|
|
Unbilled
|
|
|
2,275
|
|
|
|
212
|
|
Allowance for doubtful accounts
|
|
|
(553
|
)
|
|
|
(695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,718
|
|
|
$
|
29,177
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment, Net
|
The components of property and equipment, net were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Computer and other equipment
|
|
$
|
13,380
|
|
|
$
|
14,933
|
|
Cardiac safety rental equipment
|
|
|
36,797
|
|
|
|
35,190
|
|
Furniture and fixtures
|
|
|
3,171
|
|
|
|
3,336
|
|
Leasehold improvements
|
|
|
4,052
|
|
|
|
5,841
|
|
System development costs
|
|
|
21,931
|
|
|
|
23,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,331
|
|
|
|
83,270
|
|
Less-Accumulated depreciation
|
|
|
(45,984
|
)
|
|
|
(53,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,347
|
|
|
$
|
29,639
|
|
|
|
|
|
|
|
|
|
|
We have a line of credit arrangement with Wachovia Bank,
National Association totaling $3.0 million which expires on
June 1, 2009. To date, we have not borrowed any amounts
under our line of credit. As of December 31, 2008, we had
outstanding letters of credit of $0.5 million, which
reduced our available borrowings under the line of credit to
$2.5 million.
F-19
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The income tax provision consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,023
|
|
|
$
|
7,038
|
|
|
$
|
8,249
|
|
State and local
|
|
|
102
|
|
|
|
1,212
|
|
|
|
2,822
|
|
Foreign
|
|
|
835
|
|
|
|
1,473
|
|
|
|
2,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,960
|
|
|
|
9,723
|
|
|
|
13,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
847
|
|
|
|
(403
|
)
|
|
|
1,405
|
|
State and local
|
|
|
500
|
|
|
|
378
|
|
|
|
521
|
|
Foreign
|
|
|
(402
|
)
|
|
|
(493
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
|
(518
|
)
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,905
|
|
|
$
|
9,205
|
|
|
$
|
15,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income before income taxes was $1.4 million,
$4.1 million and $8.6 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
The reconciliation between income taxes at the federal statutory
rate and the amount recorded in the accompanying consolidated
financial statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Tax at federal statutory rate
|
|
$
|
4,625
|
|
|
$
|
8,560
|
|
|
$
|
14,044
|
|
State and local taxes, net of federal
|
|
|
391
|
|
|
|
1,033
|
|
|
|
2,172
|
|
Foreign tax differential
|
|
|
|
|
|
|
|
|
|
|
(931
|
)
|
Federal tax credits
|
|
|
(115
|
)
|
|
|
(175
|
)
|
|
|
(90
|
)
|
Tax-free interest income
|
|
|
(425
|
)
|
|
|
(551
|
)
|
|
|
(59
|
)
|
Share-based compensation expense
|
|
|
483
|
|
|
|
361
|
|
|
|
352
|
|
Decrease in unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
|
(550
|
)
|
Other
|
|
|
(54
|
)
|
|
|
(23
|
)
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,905
|
|
|
$
|
9,205
|
|
|
$
|
15,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits of $3.4 million, $0.8 million and
$0.9 million associated with the exercise of employee stock
options were allocated to equity and recorded in additional
paid-in capital in the years ended December 31, 2006, 2007
and 2008, respectively.
F-20
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The components of our net deferred tax assets (liabilities) were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Goodwill amortization
|
|
$
|
902
|
|
|
$
|
623
|
|
Depreciation
|
|
|
|
|
|
|
1,412
|
|
Capitalized R&D expenses
|
|
|
1,522
|
|
|
|
1,274
|
|
Tax credit carryforwards
|
|
|
147
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
311
|
|
|
|
116
|
|
Investment impairment
|
|
|
1,029
|
|
|
|
1,049
|
|
Reserves and accruals
|
|
|
1,941
|
|
|
|
2,552
|
|
Share-based compensation expense
|
|
|
698
|
|
|
|
1,258
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
6,550
|
|
|
|
8,284
|
|
|
|
|
|
|
|
|
|
|
Repatriation of UK earnings
|
|
|
(1,301
|
)
|
|
|
(703
|
)
|
Depreciation
|
|
|
(761
|
)
|
|
|
(5,112
|
)
|
Amortization of intangibles
|
|
|
(1,547
|
)
|
|
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(3,609
|
)
|
|
|
(6,736
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets valuation allowance
|
|
|
(1,029
|
)
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,912
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
Our transfer pricing methodology for the majority of our revenue
categories is the profit split methodology due to our global
approach to the management of operations. The profit split
methodology equalizes gross margins for each legal entity based
upon its respective direct costs. While we believe that the
profit split methodology is the best available methodology
currently, we will continue to assess the available options. In
addition, we determined that all license revenue should be
recognized by our operations based in the United States.
At December 31, 2008, we had net operating loss
carryforwards for state tax purposes of approximately
$1.8 million, which will begin to expire in 2018. At
December 31, 2006, 2007 and 2008, we had a valuation
allowance of $2.4 million, $1.0 million and
$1.0 million, respectively, related to the capital loss on
the investment impairment. During the year ended
December 31, 2007, the gross deferred tax asset and
valuation allowance were each reduced by $1.4 million due
to the expiration of the capital loss carryforward period.
Based on our current and future estimates of pretax earnings,
management believes the amount of gross deferred tax assets will
more likely than not be realized through future taxable income,
after consideration of the valuation allowance.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) an interpretation of SFAS 109, on
January 1, 2007. We did not recognize any adjustment in the
liability for unrecognized income tax benefits as a result of
the implementation of FIN 48. At the adoption date, we had
$0.8 million of unrecognized tax benefits, all of which
would affect our effective tax rate if recognized. At
December 31, 2008, we had $0.5 million of unrecognized
tax benefits under the provisions of FIN 48. In 2008, we
recognized a $0.6 million tax benefit related to the
reversal of a tax accrual for a previously uncertain tax
position. We recognize interest and penalties related to
unrecognized tax benefits in income tax expense.
F-21
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The following is a rollforward of the total gross unrecognized
tax benefit liabilities for the years ended December 31,
2007 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Unrecognized tax benefits at January 1, 2008
|
|
$
|
781
|
|
|
$
|
991
|
|
Increase in unrecognized tax benefits for tax positions taken in
a prior year
|
|
|
54
|
|
|
|
23
|
|
Increase in unrecognized tax benefits for tax positions taken in
the current year
|
|
|
156
|
|
|
|
34
|
|
Settlements
|
|
|
|
|
|
|
|
|
Expiration of statutes of limitations
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at December 31, 2008
|
|
$
|
991
|
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
|
The tax years 2005 through 2008 remain open to examination by
the major taxing jurisdictions to which we are subject. Due to
potential lapses of the statutes of limitations in various
jurisdictions in which we operate, it is reasonably possible
that the unrecognized tax benefits may decrease by up to
$0.2 million during the next twelve months.
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Accrued compensation
|
|
$
|
5,886
|
|
|
$
|
5,518
|
|
Accrued CCSS contingent purchase price payment
|
|
|
3,010
|
|
|
|
|
|
Accrued outside services
|
|
|
688
|
|
|
|
421
|
|
Deferred rent
|
|
|
591
|
|
|
|
408
|
|
Other accrued liabilities
|
|
|
1,700
|
|
|
|
1,793
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
11,875
|
|
|
$
|
8,140
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Employee
Retirement Plan
|
We sponsor a 401(k) savings plan for all of our eligible
employees. Generally, participants in this plan may contribute a
portion of their compensation on either a before-tax basis, or
on both a before-tax and after-tax basis. The plan also provides
for mandatory and discretionary employer matching contributions
at various rates. The cost of benefits under the savings plan
totaled $0.5 million in 2006, $0.5 million in 2007 and
$0.7 million in 2008.
|
|
10.
|
Related
Party Transactions
|
Our Chairman is a cardiologist who provides medical professional
services to the Company as an independent contractor through his
wholly-owned professional corporation (see Note 12).
Beginning in January 2007, we entered into an arrangement with a
consulting company owned by our Chairman, Dr. Morganroth,
relating to Dr. Morganroths initiation of a company
consulting practice through the transition of his historic
consulting services to ERT. In return,
Dr. Morganroths company receives a percentage of the
net amounts billed by ERT for Dr. Morganroths
services to our customers. That percentage ranged between 80% to
90% in 2007 and was 80% in 2008. Revenues recorded in connection
with this consulting arrangement approximated $1.6 million
and $1.3 million in the years ended December 31, 2008
and 2007, respectively. Fees incurred under this consulting
arrangement approximated $1.3 million and $1.1 million in the
years ended December 31, 2008 and 2007, respectively. Total
fees incurred under this consulting arrangement approximated
$0.3 million, $1.5 million and $1.8 million in
the years ended December 31, 2006, 2007 and 2008,
respectively. At December 31, 2007 and 2008,
$0.3 million and $0.3 million, respectively, was owed
to the professional corporation in connection with the
consulting agreement.
F-22
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
One of our directors is of counsel to the law firm of Duane
Morris LLP, which performs legal services for us. We paid fees
for such services in the amount of $0.4 million,
$0.9 million and $0.5 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
In 1996, we adopted a stock option plan (the 1996
Plan) that authorized the grant of both incentive and
non-qualified options to acquire up to 3,375,000 shares of
the Companys common stock. Our Board of Directors
determined the exercise price of the options under the 1996
Plan. The exercise price of incentive stock options was not
below the fair value of the common stock on the grant date.
Incentive stock options under the 1996 Plan expire ten years
from the grant date and are exercisable in accordance with
vesting provisions set by the Board, which generally are over
three to five years. In May 1999, the stockholders approved an
amendment to the 1996 Plan that increased the number of shares
which could be acquired through option grants under the 1996
Plan by 4,050,000 to 7,425,000 and provided for an annual option
grant of 5,000 shares to each outside director. In April
2001, the stockholders approved an amendment to the 1996 Plan
that increased the number of shares which could be acquired
through option grants under the 1996 Plan by 2,025,000 to
9,450,000. No additional options have been granted under this
plan, as amended, since December 31, 2003 and no additional
options may be granted thereunder in accordance with the terms
of the 1996 Plan.
In May 2003, the stockholders approved a new stock option plan
(the 2003 Plan) that authorized the grant of both
incentive and non-qualified options to acquire shares of our
common stock and provided for an annual option grant of
10,000 shares to each outside director. The Compensation
Committee of our Board of Directors determines or makes
recommendations to our Board of Directors regarding the
recipients of option grants, the exercise price and other terms
of the options under the 2003 Plan. The exercise price of
incentive stock options may not be set below the fair value of
the common stock on the grant date. Incentive stock options
under the 2003 Plan expire ten years from the grant date, or at
the end of such shorter period as may be designated by the
Compensation Committee, and are exercisable in accordance with
vesting provisions set by the Compensation Committee, which
generally are over four years. In April 2006, the stockholders
approved an amendment to the 2003 Plan that increased the number
of shares which could be acquired through option grants under
the 2003 Plan by 3,500,000. In accordance with the terms of the
2003 Plan, there are a total of 7,318,625 shares reserved
for issuance under the 2003 Plan. The Company normally issues
new shares to satisfy option exercises under these plans. On
February 15, 2007, the Board of Directors of the Company,
based on the recommendation of the Compensation Committee,
adopted, subject to stockholder approval at the Annual Meeting,
the Companys Amended and Restated 2003 Equity Incentive
Plan (the 2003 Equity Plan). On April 26, 2007,
the stockholders approved the adoption of the Plan. The 2003
Equity Plan amended the Companys existing 2003 Plan in two
material respects. First, it prohibits repricing of any stock
options granted under the Plan unless the stockholders approve
such repricing. Second, it permits awards of stock appreciation
rights, restricted stock, long term performance awards and
performance shares in addition to grants of stock options.
On February 7, 2006, we entered into a new employment
agreement with our former President and Chief Executive Officer
in connection with the announcement of his retirement from his
position as President and Chief Executive Officer and Director
of the Company. His employment terminated on September 11,
2006 and any options not then exercisable became exercisable in
full. As a result of this modification to his option terms, we
revalued his options as of February 7, 2006 and amortized
the resulting expense through September 11, 2006. This
change resulted in additional pre-tax compensation expense of
$0.3 million in the year ended December 31, 2006.
F-23
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Information with respect to outstanding options under our plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In Years)
|
|
|
(In thousands)
|
|
|
Outstanding as of January 1, 2008
|
|
|
4,109,611
|
|
|
$
|
8.44
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
909,200
|
|
|
|
12.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,079,966
|
)
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(302,985
|
)
|
|
|
11.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
3,635,860
|
|
|
$
|
11.03
|
|
|
|
4.8
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable or expected to vest at December 31, 2008
|
|
|
3,433,544
|
|
|
$
|
11.01
|
|
|
|
4.8
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2008
|
|
|
2,287,085
|
|
|
$
|
10.82
|
|
|
|
4.2
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between the
closing price of our common stock on the last trading day of
2008 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the
option holders had all option holders exercised their options on
December 31, 2008. This amount changes based on the fair
market value of our common stock. The total intrinsic value of
options exercised for the years ended December 31, 2006,
2007 and 2008 was $11.9 million, $2.5 million and
$6.1 million, respectively.
As of December 31, 2008, 2,287,085 options with a weighted
average exercise price of $10.82 per share were exercisable
under the 1996 Plan and the 2003 Plan and 3,321,729 shares
were available for future awards under the 2003 Plan.
As of December 31, 2008, there was $4.5 million of
total unrecognized compensation cost related to non-vested stock
options granted under the plans. That cost is expected to be
recognized over a weighted-average period of 2.2 years.
Tax
Effect Related to Share-Based Compensation Expense
SFAS No. 123R provides that income tax effects of
share-based payments are recognized in the financial statements
for those awards that will normally result in tax deductions
under existing tax law. Under current U.S. federal tax law,
we receive a compensation expense deduction related to
non-qualified stock options only when those options are
exercised. Accordingly, the consolidated financial statement
recognition of compensation cost for non-qualified stock options
creates a deductible temporary difference which results in a
deferred tax asset and a corresponding deferred tax benefit in
the statement of operations. We do not recognize a tax benefit
for compensation expense related to incentive stock options
(ISOs) unless the underlying shares are disposed of in a
disqualifying disposition. Accordingly, compensation expense
related to ISOs is treated as a permanent difference for income
tax purposes. The tax benefit recognized in our Consolidated
Statement of Operations for the years ended December 31,
2006, 2007 and 2008 related to share-based compensation expense
was approximately $0.5 million, $0.4 million and
$0.6 million, respectively.
|
|
12.
|
Commitments
and Contingencies
|
Leases
We lease office space and certain equipment. While the majority
of the leases are operating leases, certain Cardiac Safety
equipment is leased under capital leases. Rent expense, net of
sublease rentals, for all operating leases for the years ended
December 31, 2006, 2007 and 2008 was $5.5 million,
$3.4 million and $3.3 million, respectively.
F-24
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
We lease approximately 59,000 square feet of office space
in Philadelphia, Pennsylvania, which expires in October 2019. We
also lease approximately 31,000 square feet of office space
in Bridgewater, New Jersey, which expires in January 2011 and we
lease approximately 18,000 square feet of office space in
Peterborough, United Kingdom, which expires in June 2013.
We also lease approximately 51,000 square feet in Reno,
Nevada, which expires in November 2013. We vacated the Reno
location in August 2008 and we are seeking a lessee or sublessee
for the property, and both we and Covance are obligated to use
our commercially reasonable efforts to locate an appropriate
tenant. We were responsible for all payment obligations on the
Reno lease through November 28, 2008. From
November 28, 2008 through November 28, 2012, we will
split the payment obligations on the Reno lease with Covance, to
the extent such obligations are not covered by a new tenant.
Covances share of the lease obligation is reflected in
sublease income in the future minimum lease payments schedule
below. Certain of our leases contain an allowance for tenant
improvements as well as lease incentives and rent escalations.
We recognize rent expense on a straight-line basis over the
expected lease term.
Future minimum lease payments as of December 31, 2008 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
2009
|
|
$
|
49
|
|
|
$
|
3,073
|
|
|
$
|
308
|
|
2010
|
|
|
|
|
|
|
3,414
|
|
|
|
323
|
|
2011
|
|
|
|
|
|
|
2,493
|
|
|
|
323
|
|
2012
|
|
|
|
|
|
|
2,439
|
|
|
|
296
|
|
2013
|
|
|
|
|
|
|
2,213
|
|
|
|
|
|
2014 and thereafter
|
|
|
|
|
|
|
9,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49
|
|
|
$
|
22,638
|
|
|
$
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less imputed interest
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of capital lease obligations
|
|
|
48
|
|
|
|
|
|
|
|
|
|
Less current installments
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations, excluding current
installments
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
commitments and contingencies
In the second quarter of 2007, we entered into a long-term
strategic relationship with Healthcare Technology Systems, Inc.
(HTS), a leading authority in the research, development and
validation of computer administered clinical rating instruments.
The strategic relationship includes the exclusive licensing
(subject to one pre-existing license agreement) of 57 IVR
clinical assessments offered by HTS along with HTSs IVR
system. We placed the system into production in December 2007.
As of December 31, 2008, we paid HTS $1.5 million for
the license and $0.5 million in advanced payments against
future royalties. As of December 31, 2008, HTS earned
royalties of $0.1 million, which were offset against these
advanced payments. Royalty payments will be made to HTS based on
the level of revenues received from the assessments and the IVR
system. An additional $0.5 million royalty payment is
guaranteed, and will be made in May 2009. Any royalties earned
by HTS will be applied against these payments. After this
payment is made, all future payments to HTS will be solely based
on royalty payments based on revenues received from
EXPERT®
ePROtm
sales.
On November 28, 2007, we completed the acquisition of CCSS.
Under the terms of our agreement to purchase CCSS, the total
initial purchase consideration was $35.2 million. We may
also pay contingent consideration of up to approximately
$14.0 million based upon our potential realization of
revenue from the backlog transferred and from new contracts
secured through Covances marketing activities. The period
for contingent payments runs through December 31, 2010.
Through December 31, 2008, Covance earned $5.0 million
of this contingent amount, of which $3.0 million was
recognized in 2007 and $2.0 million in the year ended
December 31, 2008. At December 31, 2008,
F-25
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
approximately $0.7 million of the contingent amount earned
remained to be paid to Covance, which we recorded in accounts
payable. These contingent payments increased goodwill by
$5.0 million. Under the terms of the marketing agreement,
Covance agreed to exclusively use us as its provider of
centralized cardiac safety solutions for a ten-year period,
subject to certain exceptions, and we agreed to pay referral
fees on certain revenues.
We fully integrated the operations of CCSS into our existing
operations in the third quarter of 2008. We did so by merging
CCSSs Reno, Nevada based operations into our existing
operations and closing the operations in Reno. Costs identified
at the date of the acquisition as part of this closing were
estimated to be $1.2 million for severance and
$0.9 million for lease costs. The actual final severance
amount was $0.9 million. The estimated lease costs have
been adjusted to $2.1 million based on further analysis in
2008. In accordance with Emerging Issues Task Force (EITF)
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, these amounts have been recognized
as a liability as of the date of the acquisition and included in
the cost of the acquisition. Other costs such as stay pay
incentive arrangements and other related period costs associated
with the closing of the Reno location were expensed in the
period when such costs were incurred. The stay pay incentive
arrangements of $1.2 million were recognized as expense
over the required service period of the employees. The expense
recognized for the stay pay incentive for the year ended
December 31, 2008 was $1.0 million.
Indemnification
We license software to our customers under written agreements.
Each agreement contains the relevant terms of the contractual
arrangement with the customer, and generally includes provisions
for indemnifying the customer against losses, expenses, and
liabilities from damages that may be awarded against the
customer in the event the software is found to infringe upon
certain intellectual property rights of a third party. The
agreement generally limits the scope of remedies for such
indemnification obligations in a variety of industry-standard
respects. We have not identified any losses that are probable
under these provisions and, accordingly, no liability related to
these indemnification provisions has been recorded.
Agreements
with the Companys Management
In addition to an employment agreement with the Companys
Chairman, we entered into a consulting agreement with his
wholly-owned professional corporation commencing May 21,
2001. Either party may terminate the agreement at any time, with
or without cause. The consulting agreement relates to the
Chairmans capacity as a medical doctor and cardiologist
and, among other things, requires him to advise the Company on
matters related to the successful operation, marketing and
business development of its Cardiac Safety services operations.
The consulting agreement was amended effective January 1,
2006 to provide for compensation of $282,000 per year plus
discretionary bonuses to be determined by the Compensation
Committee. No bonuses were awarded under the consulting
agreement for the year ended December 31, 2006. We entered
into a new consulting agreement with Dr. Morganroths
professional corporation effective January 1, 2007. The
consulting agreement provided for compensation of $294,000 per
year plus discretionary bonuses to be determined by the Board of
Directors. A discretionary bonus of $70,256 was awarded under
the consulting agreement for the year ended December 31,
2007. Additionally, as part of the January 2007 agreement, we
entered into an arrangement relating to
Dr. Morganroths initiation of a company consulting
practice through the transition of his historic consulting
services to ERT. In return, Dr. Morganroths company
receives a percentage of the net amounts billed by ERT for
Dr. Morganroths services to our customers. That
percentage ranged between 80% to 90% in 2007.
Dr. Morganroth was compensated $1,115,000 for fees
generated in the consulting product line for 2007.
We amended the consulting agreement by entering into a new
agreement with Dr. Morganroths professional
corporation effective January 1, 2008. The agreement
provides for compensation of $300,000 per year plus
discretionary bonuses to be determined by the Board of
Directors. A discretionary bonus of approximately $110,000 was
awarded under the consulting agreement for the year ended
December 31, 2008. Additionally, the fees associated with
the consulting product line that Dr. Morganroth created
have been adjusted to a constant 80% of
F-26
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
the net amounts billed by ERT for Dr. Morganroths
services to our customers. Dr. Morganroth was compensated
$1,343,000 for fees generated in the consulting product line for
2008.
We entered into an employment agreement with Dr. McKelvey,
our President and Chief Executive Officer, on June 19,
2006. Under the agreement, we may terminate
Dr. McKelveys employment with or without cause (as
defined therein) at any time. In the event that we terminate
Dr. McKelveys employment other than for cause, death
or disability, we are obligated to pay Dr. McKelvey, in
lump sum, one year in salary and prorated bonus and to continue
his benefits (as defined therein) for one year or until such
time he receives benefits that are substantially comparable from
another employer, whichever is sooner, subject to benefit plan
restrictions; and, in the event of a change in control (as
defined therein) of the Company, we are further obligated to
accelerate the vesting of all of Dr. McKelveys stock
options, not otherwise vested, to purchase our common stock and
continue his benefits for an additional year. The agreement
further provides that, upon such change of control,
Dr. McKelvey shall be entitled to receive the benefits
described in the foregoing sentence only if (i) he is
terminated other than for cause, or (ii) he resigns his
employment within 60 days after the change of control
because neither the Company nor the other party to the change of
control (the Buyer) offers him a position with
comparable responsibilities, authority, location and
compensation, provided, however, that upon a change in control,
one-third of the options that Dr. McKelvey was granted on
the date of this agreement shall automatically vest, to the
extent not already vested, regardless of whether the foregoing
conditions are satisfied. Pursuant to the agreement,
Dr. McKelvey has agreed, for a period of no less than one
year after termination of employment, to refrain from
(i) working with a company that directly competes with us
and (ii) interfering with our business by soliciting
customers or employees.
We entered into an employment agreement with Mr. Schneck,
our Executive Vice President and Chief Financial Officer, on
July 28, 2008. Under the agreement, we may terminate
Mr. Schnecks employment with or without cause (as
defined therein) at any time. In the event that we terminate
Mr. Schnecks employment other than for cause, death
or disability, we are obligated to pay Mr. Schneck, in lump
sum, one year in salary and prorated bonus and to continue his
benefits (as defined therein) for one year, subject to benefit
plan restrictions; and, in the event of a change in control (as
defined therein) of the Company, we are further obligated to
accelerate the vesting of all of Mr. Schnecks stock
options, not otherwise vested, to purchase our common stock. The
agreement further provides that, upon such change of control,
Mr. Schneck shall be entitled to receive the benefits
described in the foregoing sentence only if (i) he is
terminated other than for cause, (ii) he resigns his
employment within 60 days after the change of control
because neither the Company nor the Buyer offers him a position
with comparable responsibilities, authority, location and
compensation or (iii) he is employed by the Company or the
Buyer, or a division or subsidiary thereof, for one year after
the date of the change in control. Pursuant to the agreement,
Mr. Schneck has agreed, for a period of no less than one
year after termination of employment, to refrain from
(i) working with a company that directly competes with us
and (ii) interfering with our business by soliciting
customers or employees.
We entered into employment agreements with each of our other
executive officers. Under these agreements, we may terminate
their employment with or without cause (as defined therein) at
any time. In the event that we terminate an officers
employment other than for cause, death or disability, we are
obligated to pay the officer, in lump sum, six months in salary
and prorated bonus and to continue the officers benefits
(as defined therein) for six months, subject to benefit plan
restrictions; and, in the event of a change in control (as
defined therein) of the Company, we are further obligated to
accelerate the vesting of all of the officers stock
options, not otherwise vested, to purchase our common stock. The
agreement further provides that, upon such change of control,
the officer shall be entitled to receive the benefits described
in the foregoing sentence only if (i) the officer is
terminated other than for cause, (ii) the officer resigns
his/her
employment within 60 days after the change of control
because neither the Company nor the Buyer offers the officer a
position with comparable responsibilities, authority, location
and compensation or (iii) the officer is employed by the
Company or the Buyer, or a division or subsidiary thereof, for
one year after the date of the change in control. Pursuant to
the agreement, each officer has agreed, for a period of no less
than one year after termination of employment, to refrain from
(i) working with a company that directly competes with us
and (ii) interfering with our business by soliciting
customers or employees.
F-27
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
During 2006, we made payments to our former President and Chief
Executive Officer, Joseph Esposito, in the amount of $1,296,000
and recorded a payable to our former Executive Vice President
and Chief Financial Officer, Bruce Johnson, in the amount of
$200,000, in accordance with the terms of their employment
agreements with the Company. In addition, we continued to
provide Mr. Esposito with benefits until September 2008. We
are not obligated to make any additional payments under these
employment agreements.
Contingencies
We are involved in legal proceedings from time to time in the
ordinary course of our business. We believe that none of these
legal proceedings will have a material adverse effect on our
financial condition or results of our operations.
Potential
Liability and Insurance
We attempt to manage our risk of liability for personal injury
or death to study subjects from administration of products under
study through contractual indemnification provisions with
clients and through insurance maintained by our clients and us.
Contractual indemnification generally does not protect us
against certain of our own actions, such as negligence. The
terms and scope of such indemnification vary from client to
client and from trial to trial. Although most of our clients are
large, well-capitalized companies, the financial viability of
these indemnification provisions cannot be assured. Therefore,
we bear the risk that the indemnifying party may not have the
financial ability to fulfill its indemnification obligations to
us. We maintain errors and omissions liability insurance in the
amount of $10.0 million per claim and professional
liability insurance in the amount of $1.0 million per
claim. Our operating results could be materially and adversely
affected if we were required to pay damages or incur defense
costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance
coverage maintained by us or the client or where the
indemnifying party does not fulfill its indemnification
obligations to us.
|
|
13.
|
Fair
Value of Financial Instruments
|
We measure certain financial assets and liabilities at fair
value on a recurring basis, including available-for-sale
securities. Available-for-sale securities as of
December 31, 2008 consisted of an auction rate security or
ARS, issued by a municipality. This security is included in
short-term investments in our consolidated balance sheets. The
implementation of SFAS No. 157 for financial assets
and financial liabilities, effective January 1, 2008, did
not have a material impact on our consolidated financial
position and results of operations. We are currently assessing
the impact of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities on our consolidated financial position
and results of operations which we adopted effective
January 1, 2009. SFAS No. 157 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 (exit price).
SFAS No. 157 classifies the inputs used to measure
fair value into the following hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets
or liabilities
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or
liabilities, or
|
|
|
Unadjusted quoted prices for identical or similar assets or
liabilities in markets that are not active, or
|
|
|
Inputs other than quoted prices that are observable for the
asset or liability
|
Level 3
|
|
Unobservable inputs for the asset or liability
|
F-28
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The following table represents our fair value hierarchy for
financial assets (cash equivalents and investments) measured at
fair value on a recurring basis as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Money market funds
|
|
$
|
66,376
|
|
|
$
|
66,376
|
|
|
$
|
|
|
|
$
|
|
|
Auction rate securities
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,426
|
|
|
$
|
66,376
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Operating
Segments and Geographic Information
|
We consider our business to consist of one segment as this
represents managements view of our operations. We operate
on a worldwide basis with two locations in the United States and
one location in the United Kingdom, which are categorized below
as North America and Europe, respectively. The majority of our
revenues are allocated among our geographic segments based upon
the profit split methodology as discussed in Note 7, and
revenues are generally allocated to the geographic segment where
the work is performed.
Geographic information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
License revenues
|
|
$
|
3,017
|
|
|
$
|
|
|
|
$
|
3,017
|
|
Service revenues
|
|
|
44,377
|
|
|
|
10,932
|
|
|
|
55,309
|
|
Site support revenues
|
|
|
20,438
|
|
|
|
7,604
|
|
|
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
67,832
|
|
|
$
|
18,536
|
|
|
$
|
86,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
10,497
|
|
|
$
|
1,468
|
|
|
$
|
11,965
|
|
Long-lived assets
|
|
$
|
22,340
|
|
|
$
|
8,789
|
|
|
$
|
31,129
|
|
Total assets
|
|
$
|
97,716
|
|
|
$
|
17,348
|
|
|
$
|
115,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
License revenues
|
|
$
|
2,700
|
|
|
$
|
|
|
|
$
|
2,700
|
|
Service revenues
|
|
|
55,567
|
|
|
|
13,980
|
|
|
|
69,547
|
|
Site support revenues
|
|
|
17,430
|
|
|
|
9,021
|
|
|
|
26,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
75,697
|
|
|
$
|
23,001
|
|
|
$
|
98,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
18,305
|
|
|
$
|
3,946
|
|
|
$
|
22,251
|
|
Long-lived assets
|
|
$
|
25,919
|
|
|
$
|
7,428
|
|
|
$
|
33,347
|
|
Total assets
|
|
$
|
132,886
|
|
|
$
|
14,810
|
|
|
$
|
147,696
|
|
F-29
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
License revenues
|
|
$
|
3,203
|
|
|
$
|
|
|
|
$
|
3,203
|
|
Service revenues
|
|
|
81,814
|
|
|
|
17,444
|
|
|
|
99,258
|
|
Site support revenues
|
|
|
20,644
|
|
|
|
10,035
|
|
|
|
30,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
105,661
|
|
|
$
|
27,479
|
|
|
$
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
30,641
|
|
|
$
|
7,754
|
|
|
$
|
38,395
|
|
Long-lived assets
|
|
$
|
25,816
|
|
|
$
|
3,823
|
|
|
$
|
29,639
|
|
Total assets
|
|
$
|
152,073
|
|
|
$
|
17,049
|
|
|
$
|
169,122
|
|
|
|
15.
|
Quarterly
Financial Data (Unaudited)
|
The quarterly data below includes all adjustments (consisting
only of normal recurring adjustments) that we consider necessary
for a fair presentation (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
782
|
|
|
$
|
580
|
|
|
$
|
651
|
|
|
$
|
687
|
|
Services
|
|
|
13,968
|
|
|
|
17,561
|
|
|
|
16,453
|
|
|
|
21,565
|
|
Site support
|
|
|
6,334
|
|
|
|
6,593
|
|
|
|
6,867
|
|
|
|
6,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
21,084
|
|
|
|
24,734
|
|
|
|
23,971
|
|
|
|
28,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of licenses
|
|
|
66
|
|
|
|
63
|
|
|
|
70
|
|
|
|
105
|
|
Cost of services
|
|
|
6,790
|
|
|
|
7,233
|
|
|
|
7,567
|
|
|
|
8,932
|
|
Cost of site support
|
|
|
4,195
|
|
|
|
4,117
|
|
|
|
4,831
|
|
|
|
4,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
11,051
|
|
|
|
11,413
|
|
|
|
12,468
|
|
|
|
13,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,033
|
|
|
|
13,321
|
|
|
|
11,503
|
|
|
|
15,207
|
|
Operating income
|
|
|
3,101
|
|
|
|
6,246
|
|
|
|
5,361
|
|
|
|
7,543
|
|
Net income
|
|
|
2,248
|
|
|
|
4,139
|
|
|
|
3,706
|
|
|
|
5,159
|
|
Basic net income per share
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
Diluted net income per share
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
F-30
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
625
|
|
|
$
|
870
|
|
|
$
|
891
|
|
|
$
|
817
|
|
Services
|
|
|
25,273
|
|
|
|
27,380
|
|
|
|
24,857
|
|
|
|
21,748
|
|
Site support
|
|
|
7,775
|
|
|
|
7,222
|
|
|
|
8,182
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
33,673
|
|
|
|
35,472
|
|
|
|
33,930
|
|
|
|
30,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of licenses
|
|
|
200
|
|
|
|
170
|
|
|
|
179
|
|
|
|
206
|
|
Cost of services
|
|
|
10,514
|
|
|
|
10,483
|
|
|
|
9,951
|
|
|
|
8,749
|
|
Cost of site support
|
|
|
5,268
|
|
|
|
4,599
|
|
|
|
4,698
|
|
|
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
15,982
|
|
|
|
15,252
|
|
|
|
14,828
|
|
|
|
12,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
17,691
|
|
|
|
20,220
|
|
|
|
19,102
|
|
|
|
17,230
|
|
Operating income
|
|
|
8,496
|
|
|
|
10,758
|
|
|
|
10,549
|
|
|
|
8,592
|
|
Net income
|
|
|
5,746
|
|
|
|
6,660
|
|
|
|
6,930
|
|
|
|
5,666
|
|
Basic net income per share
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
Diluted net income per share
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
Basic and diluted net income per share are computed
independently for each quarter presented. Accordingly, the sum
of the quarterly net income per share may not agree with the
calculated full year net income per share.
F-31
SCHEDULE II
eResearchTechnology,
Inc. and Subsidiaries
Allowance for Doubtful Accounts
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Charges to
|
|
|
Deductions
|
|
|
End
|
|
|
|
Period
|
|
|
Expense
|
|
|
from Reserve
|
|
|
of Period
|
|
|
December 31, 2006
|
|
$
|
466
|
|
|
$
|
111
|
|
|
$
|
24
|
(a)
|
|
$
|
553
|
|
December 31, 2007
|
|
$
|
553
|
|
|
$
|
30
|
|
|
$
|
30
|
(a)
|
|
$
|
553
|
|
December 31, 2008
|
|
$
|
553
|
|
|
$
|
169
|
|
|
$
|
27
|
(a)
|
|
$
|
695
|
|
|
|
|
(a) |
|
Write-off of individual accounts receivable. |
F-32