e10vk
UNITED STATES 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, 2009
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 o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o 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.
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Large accelerated
filer o
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Accelerated
filer þ
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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, 2009, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $290,875,796 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 19,
2010
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Common Stock, $.01 par value per share
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48,610,757 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 2010 Annual
Meeting of Stockholders, to be filed with the Commission
pursuant to Regulation 14A.
Cautionary
Statement for Forward-Looking Information
Except for historical matters, the matters discussed in this
Form 10-K
are forward-looking statements that involve risks and
uncertainties. Forward-looking statements include, but are not
limited to, 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 variability in size, scope and
duration of projects and internal issues at the sponsoring
client; our ability to successfully integrate acquisitions;
competitive factors in the market for centralized cardiac safety
services; changes in the pharmaceutical, biotechnology and
medical device industries to which we sell our solutions;
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 that 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.
3
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 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,
biotechnology and 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 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. We also offer ePRO solutions along with
proprietary clinical assessments.
On June 23, 2009, we completed the sale of certain assets
relating to our electronic data capture (EDC) operations. Under
the terms of the transaction, OmniComm Systems, Inc. issued to
us 8.1 million shares of common stock and assumed certain
liabilities including deferred revenue relating to our EDC
operations in exchange for our EDC assets which primarily
included our EDC software, applications and fixed assets and
$1.15 million in cash we paid. During the year ended
December 31, 2009, we recorded a gain on the sale of these
assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations. The
revenue and cost of revenue of our former EDC operations have
been reclassified from the licenses and services categories to
the EDC category on the consolidated statements of operations
for all periods presented. Additionally, the remaining revenues
and costs of sales in licenses, related to cardiac safety
reporting and ePRO, were reclassified to the services category
on the consolidated statements of operations for all periods
presented.
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 physicians
using a paper ECG output. Different ECG machines, which often
use different algorithms to measure the ECG, may be utilized at
the various trial sites which may create variability in the ECG
measurements. Variability may result in the inability to
identify cardiac safety signals. The use of paper based ECGs
also limits the degree of detailed 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 local site level is performed by
centralized cardiac safety laboratories. ECGs are administered
at the local site using a standard set of
4
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. It is also due to the
standardization of cardiologist review and the use of a common
operational framework, independent third 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 more highly, or in
some cases 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 interval
duration measurement data. Highly-automated readings utilize
cardiologists or other human readers to over-read a subset of
the ECGs collected. ERT offers a fully-automated reading
methodology in addition to our fully-manual and semi-automatic
methodologies. While the FDA potentially could accept highly- or
fully-automated ECG data for submittal, 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, especially in trials
populated with sick patients, to be too high to offset the
potential cost savings that could be experienced should a
fully-automated read be performed.
The anticipated cost savings of using a highly- or
fully-automated approach are subject to much professional
debate. The main savings anticipated from using a highly- or
fully-automated approach come from a reduced number of subjects
required to run the trial, due to an assumed lower variance from
using highly- or fully-automated readings. However, there are
published peer-reviewed articles that indicate that fully- or
highly-automated approaches actually lead to increases in
variance (and hence would potentially require more subjects) in
some cases. The second potential area of
cost-savings the lower amount of time that
cardiologists or other humans would be required to spend doing
over-reads of the ECGs is also subject to much
debate in that the addition of another algorithm to the entire
core lab process would result in significant additional costs
due to licensing costs of using such an algorithm. We estimate
that our costs related to cardiologist or other technical
specialist over-reads of ECGs is less than 20% of the total
costs that we incur in our processing of a cardiac safety trial.
Moreover, all other procedures and processes we provide as part
of our cardiac safety services product offering, as noted in the
Service Offerings section of this
10-K, would
continue to be required under any alternative ECG reading
methodology. Should the pharmaceuticals industry adopt a highly-
or fully-automated reading methodology as a preferred method, we
believe it would only be adopted in Thorough QTc trials, as
these trials utilize healthy patients only. In addition the
ICH E-14
guidance continues to recommend that ECGs in Thorough QTc
studies be read by a few skilled readers. As a result of the
factors above, we believe that the impact of any significant
shift to a highly- or fully-automated reading methodology would
have a limited impact on our operations or financial results.
5
Operations
We conduct our operations through offices in the United States
(U.S.) and the United Kingdom (UK). Our international net
revenues represented approximately 23%, 21% and 24% of total net
revenues for the years ended December 31, 2007, 2008 and
2009, respectively. The majority of our revenues are allocated
based upon the profit split transfer pricing methodology. The
profit split methodology equalizes gross margins for each legal
entity, based upon its respective direct revenue or direct
costs, as determined by the relevant revenue source.
Service
Offerings
Our revenues by service solution as a percentage of total
revenues are as follows:
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Year Ended December 31,
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2007
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2008
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2009
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Net revenues:
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EDC licenses and services
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6.4
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4.4
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%
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2.7
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%
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Services
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66.8
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72.5
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68.9
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Site support
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26.8
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23.1
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28.4
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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 EDC licenses and services revenues consisted of license fees
for perpetual license sales and monthly and annual term license
sales for our software products, technology consulting and
training services and software maintenance services offered
under our former EDC solutions. Our services revenues consist of
our services offered under our Cardiac Safety and to a lesser
extent,
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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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 or Internet, 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
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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 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
Portaltm
. This is a hosted solution, which provides
sponsors and investigator sites with the ability to order
supplies, gain real time reports and respond to queries via a
secure web portal in lieu of less efficient means such as faxing
and telephone calls.
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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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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 allows
subjects to easily and quickly report data for a clinical trial.
Because it can be accessed from a standard phone, our ePRO
system is cost effective while being extremely scalable and
suitable from Phase I through Phase IV. Diaries, screening,
recruitment and all clinical assessments can be completed
directly by the subject without requiring clinician involvement.
Our solution consists of the following tools and services:
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Data Collection Our ePRO
solution is an Interactive Voice Response (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
solutions 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
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, 2009, we had 26 employees engaged
in research and development. 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 our offerings.
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.
Our technology initiatives continue to focus on the dual need of
enabling unique configurations to meet the varying clinical
trial requirements of each of our customers and doing so in a
highly automated manner to enable continued strong financial
performance.
8
Technology
ERTs technology strategy centers on a corporate-wide
approach to ensuring we extend our current market leadership in
cardiac safety and capture market leadership in new areas, such
as electronic Patient Reported Outcomes and suicidality
assessments. In addition, during 2009, we have centralized all
systems and technology activities to drive further automation
and efficiencies.
2009
Research and Development Initiatives
During 2009, we undertook a series of major initiatives to
launch new customer facing products, introduce sophisticated
Customer Relationship Management capabilities, retire older and
less capable systems, and to further integrate and upgrade our
internal systems. A brief outline of these initiatives follows:
MyStudy
Portaltm
We launched a new portal product to provide our cardiac safety
and ePRO customers with a variety of self-service features
intended to shift work from manual faxing and telephone-based
processes to more efficient, automated
e-commerce
based processes. Features of MyStudy
Portaltm
include:
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Scalability, to not only support our sponsor customers, but also
to enable access for our 25,000+ investigator site locations,
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Electronic site qualification process,
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On Demand, real time reporting,
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Ordering of supplies, and
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Electronic query management.
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Cardiac
Safety
We delivered a major new release of our
EXPERT®
2 platform adding further automation across all cardiac safety
components, including:
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Protocol setup,
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Query management,
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Analysis,
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Cardiology review and
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New reporting features.
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We developed a new web service to enable
EXPERT®
2 to integrate with new generations of ECG machines that are
expected to reach the market in 2010.
Electronic
Patient Reported Outcomes (ePRO)
We launched a series of upgrades to enhance our current
voice-technology based ePRO platform, including:
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New, innovative patient enrollment feature,
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Launch of suicidality assessments,
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Integration with MyStudy
Portaltm, and
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New reports.
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9
Customer
Relationship Management (CRM)
We implemented a corporate-wide customer relationship management
system to materially increase automation and integration across
several organizations and to significantly reduce and eliminate
standalone systems. The capabilities include:
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Sales and marketing automation,
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Customer Care Functionality,
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Contracts and proposal management, and
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Forecasting.
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Our new CRM system, using Salesforce.com and tailored to our
unique needs, enabled us to retire our older, standalone systems.
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 207 customers for active or
upcoming projects. We provide our solutions to 39 of the 50
largest pharmaceutical companies globally and all of the top 10
pharmaceutical companies globally. In 2009, Novartis AG, at 18%,
was the only client that accounted for 10% or more of our
consolidated net revenues. Novartis accounted for 24% and 23% of
our consolidated net revenues in 2007 and 2008, respectively.
Sales and
Marketing
We market and sell service solutions primarily through our
global direct sales, sales support and professional services
organizations. As of December 31, 2009, our business
development team consisted of 43 sales, marketing and consulting
professionals worldwide, which included a direct sales force of
23 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 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, the service solutions being
sold, and the final
agreed-upon
solution required to support the clinical trial or program.
The acquisition of Covance Cardiac Safety Services, Inc. (CCSS),
the centralized ECG business of Covance Inc. (Covance) that we
acquired in November 2007, 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. Since the acquisition, we
have expanded our customer base and realized new bookings as a
result of this expanded relationship.
Since the latter portion of 2008, we have experienced an
increase in awards of new and expanded exclusive or
near-exclusive long-term enterprise contracts with large
pharmaceutical companies, including several with which we had
very little business in the past or that we acquired through the
Covance relationship. Partially as a result of these long-term
commitments, in 2009 we invested in our sales and marketing
functions and our internal IT infrastructure.
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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.
Backlog
Backlog represents anticipated revenue from work not yet
completed or performed under signed contracts, letters of intent
or, in some cases, other written acknowledgements from the
customer of awarded business. Once work commences, revenue is
generally recognized over the life of the contract as services
are or equipment is provided. Backlog at December 31, 2009
was $170 million, compared to $166.5 million at
December 31, 2008. Contracts included in backlog are
subject to termination by our customers at any time, and our
annualized cancellation rate over 2008 and 2009 has ranged from
15% to 21% of backlog. In the event of termination, we would be
entitled to receive payment for all services performed up to the
cancellation date, and in some instances we may be entitled to
receive a cancellation penalty. The duration of the projects
included in our backlog range from less than 3 months to
approximately 5 years.
We cannot provide assurance that we will be able to realize all
or most of the revenues included in backlog. We estimate that
approximately 40% to 45% of our backlog as of December 31,
2009 will convert into revenue during the 2010 calendar year.
Although backlog can provide meaningful information to our
management with respect to a particular project or study and is
used for operational planning, we believe that our aggregate
backlog as of any date is not necessarily a meaningful indicator
of our future results as studies may vary in duration; the scope
of studies may change, which may increase or decrease their
value; and studies may be terminated, reduced in scope or
delayed at any time by the customer or regulatory authorities.
Any of these factors, in addition to others, can affect our
ability to convert our backlog into revenue and the timing of
any such conversion.
Competition
While there has been some consolidation in our industry, the
market for our 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 could seriously harm our
business. Competitors, including centralized cardiac safety
laboratories and CROs, vary in size and in the scope and breadth
of the 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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quality and performance;
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core technology underlying our service offerings;
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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 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 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. On October 23, 2009, ICH
E14 was ratified by the Japanese Ministry of Health. 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 service solutions to be
consistent with the recommendations of the relevant regulatory
bodies as referred to above and to comply with applicable
regulatory requirements.
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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.
On February 2, 2010, we were issued U.S. Patent No.
7,654,965 by the U.S. Patent Office, which further extends our
existing patent protection for the processes embedded in our
EXPERTTM
2 technology platform. These new patent claims span a series of
innovative and automated processes furthering the science of
cardiac safety.
We have also filed patent applications in Canada, India and the
European Patent Office. We continue to pursue patent protection
of new technology advances and production.
We hold U.S. Registration No. 2.843,409 for our
EXPERT®
trademark. We use the
EXPERT®
trademark to identify our services for clinical trials of
medical and clinical diagnostic products. In addition, we hold
many other unregistered trademarks including
EXPeRT®
Directtm,
EXPeRT®
ePROtm,
ePRO
Solutionstm,
My Study
Portaltm,
EXPERT®
Technology
Platformtm,
Cardiac Safety
Solutionstm,
Clinical Research Consulting
Grouptm
and ERT
WebServicetm.
Employees
At December 31, 2009, we had a total of 353 employees,
with 266 employees (253 full-time, 13 part-time)
at our locations in the United States and 87 employees
(82 full-time, 5 part-time) at our location in the
United Kingdom. We had 230 employees performing services
directly for our clients, 26 employees in research and
development, 43 employees in sales and marketing and
54 employees in general and administrative functions.
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
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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.
In addition, we provide notifications of news or announcements
regarding our financial performance, including SEC filings,
investor events, press and earnings releases, as part of our
investor relations web site, which can be located through
www.ert.com. The contents of our web site are not intended to be
incorporated by reference into this report or in any other
report or document we file and any reference to these web sites
are intended to be inactive textual references only.
You should carefully consider the risk factors described below,
in addition to the other information contained in this report,
before making an investment decision. 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, 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 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 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 deteriorate or fail to improve, 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 to date there has only been moderate relief. Since
the fourth quarter of 2008, we have 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 continue or increase.
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
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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 deteriorate or fail to improve,
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 maintain or 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 maintain or 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.
Consolidation
among our clients could cause us to lose clients, decrease the
market for our service solutions 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 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 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 service solutions to industry
participants will become more intense and the importance of
establishing relationships with large industry participants will
become greater. These industry participants may try to use their
market power to negotiate price reductions for our 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 would be likely to rely
more significantly on the combined organizations revenues
to achieve expected future growth.
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
federal or state health care reform, 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 are contracted to provide Cardiac
Safety solutions are delayed or postponed resulting in lower
than expected revenues.
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Extensive
governmental regulation of the clinical trial process could
require costly modifications to our technology, adversely affect
prospective clients willingness to use our service
solutions and increase competition and reduce our market
share.
We may incur increased expenses or suffer a reduction in
revenues if our service solutions do not comply with applicable
government regulations or if regulations allow more competition
in the marketplace. Conforming our 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 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 service solutions if the 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 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 and thereby replace
the manual processing method. Semi-automated processing uses
software algorithm-placed measurements that are later
adjudicated by a cardiac specialist or physician with overall
interpretation by a physician. Manual processing includes
manually placed calipers to obtain interval duration
measurements interpreted by a cardiologist. Since the 2005
release of the ICH guidance, 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 remain competitive. The effect of such
actions has reduced our revenue and gross profit per transaction
in prior years 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 (i.e.
the drug has no QT effect), routine ECG safety assessments in
late phase clinical trials using fully automated readings may be
adequate. If the Thorough QTc study is positive, (i.e. the drug
has a QT effect), then intensive ECG monitoring should take
place in future clinical trials. 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.
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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 18% of our
total revenues for 2009, a decrease from 23% of our total
revenues for 2008. While no other client represented more than
10% of our 2009 revenues, our next five largest clients in the
aggregate represented approximately 25% of our total revenues
for 2009. 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.
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 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
service solutions, which could reduce our revenues,
profitability and market share.
If our 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 and CROs. Our targeted clients may
decide to choose other service solutions generated internally by
them or from another source. Some of our competitors have
substantially greater financial and other resources, greater
name recognition and more extensive client bases than we do.
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 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 service solutions. We may increase our
dependence on certain suppliers as we continue to develop and
enhance our 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 a limited number of
providers to supply ECG equipment, software applications
designed for the on-screen measurement of ECG signals and server
facilities. 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 ePRO 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 solutions
would be delayed. To qualify a new supplier and familiarize it
with our solutions, 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 customer data and harm our business.
We host some of our software 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 access
and/or our
customers access to their data from software hosted at
these facilities. Our software and customer data 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, in the event that we fail to meet
the service requirements under our agreements with our
customers, 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
18
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
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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Rapidly
changing technology may impair our ability to develop and market
our solutions and cause us to become less competitive.
Our failure to continuously offer competitive 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 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 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
19
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. On February 2,
2010, we were issued a series of new claims under the same U. S.
Patent, which further extends our existing patent protection for
the processes embedded in our
EXPERTTM
2 technology platform. These new patent claims span a series of
innovative and automated processes furthering the science of
cardiac safety. 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 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, the expense that we incur 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.
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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 condition and operating
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
20
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.
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, 2009, 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
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.
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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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21
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difficulties in staffing and managing foreign operations.
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We are subject to a variety of government regulations in the
countries where we market our 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 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.
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.
22
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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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.
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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
23
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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our corporate headquarters is located at 1818 Market Street,
Philadelphia, Pennsylvania, where we lease approximately
59,000 square feet. 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.
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LEGAL
PROCEEDINGS
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None.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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
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Age
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Position
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Michael J. McKelvey, Ph.D.
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57
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President, Chief Executive Officer and Director
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Joel Morganroth, MD
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64
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Chairman of the Board of Directors and Chief Scientific Officer
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Keith D. Schneck
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54
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Executive Vice President, Chief Financial Officer and Secretary
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Thomas P. Devine
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57
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Executive Vice President and Chief Development Officer
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Amy Furlong
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37
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Executive Vice President, Cardiac Safety Operations
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Jeffrey S. Litwin, MD
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51
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Executive Vice President and Chief Medical Officer
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John M. Blakeley
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42
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Executive Vice President, Sales and Marketing
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Robert S. Brown
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54
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Senior Vice President, Strategic Partnerships
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John B. Sory
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44
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Senior Vice President, Health Care Solutions
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George Tiger
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50
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Senior Vice President, Global Sales
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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
24
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 joining us, Mr. Devine was Chief
Technology Officer for an electronic commerce company.
Ms. Furlong has been our Executive Vice President, Cardiac
Safety Operations 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 a medical devices specialist.
Mr. Brown has been our Senior Vice President, Strategic
Partnerships since January 2010. He served as our Senior
Vice President, Marketing, Planning and Partnerships from
September 2006 to December 2009. 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. Sory has been our Senior Vice President, Health Care
Solutions since November 2009. Prior to joining ERT,
Mr. Sory served as General Manager, Vice President of
Pfizer Health Solutions from 2002 to 2009.
Mr. Tiger has been our Senior Vice President, Global Sales
since January 2009. He served as Senior Vice President, Americas
Sales from October 2006 to December 2008. 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 and as
Vice President, International Business Development from August
2002 to July 2004. Prior to joining ERT, Mr. Tiger held a
series of sales and marketing management positions with Abbott
Laboratories and Celsis, Inc.
25
PART II
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ITEM 5.
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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
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High
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Low
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2008
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First Quarter
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$
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12.73
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$
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8.94
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Second Quarter
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17.82
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|
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11.90
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Third Quarter
|
|
|
18.85
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9.81
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Fourth Quarter
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12.00
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3.86
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2009
|
|
|
|
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|
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First Quarter
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$
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7.50
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|
|
$
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4.48
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Second Quarter
|
|
|
6.68
|
|
|
|
4.90
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|
Third Quarter
|
|
|
7.56
|
|
|
|
5.32
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Fourth Quarter
|
|
|
8.50
|
|
|
|
5.74
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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 19, 2010, there were 48 record holders of
our common stock.
26
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, 2004 and
ending December 31, 2009. 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.
*$100 invested on 12/31/04 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31.
27
|
|
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. The revenue and cost of
revenue of our former EDC operations have been reclassified from
the licenses and services categories to the EDC category on the
consolidated statements of operations for all periods presented.
Additionally, the remaining revenues and costs of sales in
licenses, related to cardiac safety reporting and ePRO, were
reclassified to the services category on the consolidated
statements of operations for all periods presented.
Consolidated
Statements of Operations Data (in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services
|
|
$
|
6,063
|
|
|
$
|
3,017
|
|
|
$
|
6,331
|
|
|
$
|
5,894
|
|
|
$
|
2,501
|
|
Services
|
|
|
59,712
|
|
|
|
55,309
|
|
|
|
65,916
|
|
|
|
96,567
|
|
|
|
64,655
|
|
Site support
|
|
|
21,072
|
|
|
|
28,042
|
|
|
|
26,451
|
|
|
|
30,679
|
|
|
|
26,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
86,847
|
|
|
|
86,368
|
|
|
|
98,698
|
|
|
|
133,140
|
|
|
|
93,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of EDC licenses and services
|
|
|
436
|
|
|
|
286
|
|
|
|
2,018
|
|
|
|
1,843
|
|
|
|
863
|
|
Cost of services
|
|
|
24,337
|
|
|
|
25,431
|
|
|
|
28,808
|
|
|
|
38,609
|
|
|
|
29,886
|
|
Cost of site support
|
|
|
13,965
|
|
|
|
18,821
|
|
|
|
17,808
|
|
|
|
18,445
|
|
|
|
13,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
38,738
|
|
|
|
44,538
|
|
|
|
48,634
|
|
|
|
58,897
|
|
|
|
44,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
48,109
|
|
|
|
41,830
|
|
|
|
50,064
|
|
|
|
74,243
|
|
|
|
49,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
9,122
|
|
|
|
11,051
|
|
|
|
11,222
|
|
|
|
13,273
|
|
|
|
12,905
|
|
General and administrative
|
|
|
11,458
|
|
|
|
14,668
|
|
|
|
12,258
|
|
|
|
18,181
|
|
|
|
14,859
|
|
Research and development
|
|
|
4,093
|
|
|
|
4,146
|
|
|
|
4,333
|
|
|
|
4,394
|
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
24,673
|
|
|
|
29,865
|
|
|
|
27,813
|
|
|
|
35,848
|
|
|
|
31,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,436
|
|
|
|
11,965
|
|
|
|
22,251
|
|
|
|
38,395
|
|
|
|
17,913
|
|
Other income (expense), net
|
|
|
936
|
|
|
|
1,250
|
|
|
|
2,206
|
|
|
|
1,730
|
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,372
|
|
|
|
13,215
|
|
|
|
24,457
|
|
|
|
40,125
|
|
|
|
17,478
|
|
Income tax provision
|
|
|
9,007
|
|
|
|
4,905
|
|
|
|
9,205
|
|
|
|
15,123
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,365
|
|
|
$
|
8,310
|
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.31
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
|
$
|
0.49
|
|
|
$
|
0.22
|
|
Diluted net income per share
|
|
$
|
0.29
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
|
$
|
0.22
|
|
Consolidated
Balance Sheet Data (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
52,001
|
|
|
$
|
56,913
|
|
|
$
|
46,879
|
|
|
$
|
66,426
|
|
|
$
|
78,761
|
|
Working capital
|
|
|
45,795
|
|
|
|
61,320
|
|
|
|
45,594
|
|
|
|
75,289
|
|
|
|
82,950
|
|
Total assets
|
|
|
104,766
|
|
|
|
115,064
|
|
|
|
147,696
|
|
|
|
169,122
|
|
|
|
164,861
|
|
Treasury stock
|
|
|
(56,387
|
)
|
|
|
(62,190
|
)
|
|
|
(62,190
|
)
|
|
|
(64,763
|
)
|
|
|
(79,883
|
)
|
Total stockholders equity
|
|
|
79,973
|
|
|
|
93,622
|
|
|
|
113,512
|
|
|
|
137,428
|
|
|
|
137,672
|
|
28
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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 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 ePRO products and
solutions.
On June 23, 2009, we completed the sale of certain assets
relating to our EDC operations. Under the terms of the
transaction, OmniComm Systems, Inc. issued to us
8.1 million shares of common stock and assumed certain
liabilities including deferred revenue relating to our EDC
operations in exchange for our EDC assets which primarily
included our EDC software, applications and fixed assets and
$1.15 million in cash we paid. During the year ended
December 31, 2009, we recorded a gain on the sale of these
assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations. The
revenue and cost of revenue of our former EDC operations have
been reclassified from the licenses and services categories to
the EDC category on the consolidated statements of operations
for all periods presented. Additionally, the remaining revenues
and costs of sales in licenses, related to cardiac safety
reporting and ePRO, were reclassified to the services category
on the consolidated statements of operations for all periods
presented.
Our services revenues consist primarily of our services offered
under our Cardiac Safety and, to a lesser extent,
ePROtm
solutions. Our site support revenue consists of cardiac safety
equipment rentals and sales along with related supplies and
logistics management.
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 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 generally
required 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. We also offer
ePRO solutions along with proprietary clinical assessments.
Services revenues consist of Cardiac Safety and ePRO services
that we provide on a fee for services basis and are recognized
as the services are performed. We also provide Cardiac Safety
consulting 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. 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.
Unbilled revenue is revenue that is recognized but is currently
not billable to the customer pursuant to contractual terms. In
general, such amounts become billable in accordance with
predetermined payment schedules,
29
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.
Our former EDC business is included in EDC licenses and services
and included license revenue, technology consulting and training
services and software maintenance services. We recognized
up-front license fee revenues under the residual method when a
formal agreement existed, delivery of the software and related
documentation occurred, collectability was probable and the
license fee was fixed or determinable. We recognized monthly and
annual term license fee revenues over the term of the
arrangement. Hosting service fees were recognized evenly over
the term of the service. We recognized revenues from software
maintenance contracts on a straight-line basis over the term of
the maintenance contract, which was typically twelve months. We
provided consulting and training services on a time and
materials basis and recognized revenues as we performed the
services.
Cost of services includes the cost of Cardiac Safety and ePRO
services. Cost of 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 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 incentive compensation
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 other
direct costs associated with the development of our technology.
Costs of our former EDC operations included primarily wages,
fees paid to outside consultants and other direct operating
costs related to our software licensing, consulting and client
support functions.
We conduct our operations through offices in the United States
(U.S.) and the United Kingdom (UK). Our international net
revenues represented approximately 23%, 21% and 24% of total net
revenues for the years ended December 31, 2007, 2008 and
2009, respectively. The majority of our revenues are allocated
among our geographic segments based upon the profit split
transfer pricing methodology. The profit split methodology
equalizes gross margins for each legal entity, based upon its
respective direct revenue or direct costs, as determined by the
relevant revenue source.
Results
of Operations
Executive
Overview
Net revenues were $93.8 million for 2009, a decrease of
$39.3 million or (29.5%) from $133.1 million in 2008
due primarily to the confluence of two key factors. The first
factor was the deep recession of
2008-2009,
which significantly affected our clients, both large and small.
Large pharmaceutical, biotechnology and medical device companies
became very conservative in their funding of research and
development activities and our small to mid-sized clients were
severely impacted by the tight credit conditions from the
recession. The second factor was a very sharp decline in the
demand for Thorough QTc studies from our clients. These studies
performed by ERT are largely for small to mid-sized clients; it
was this sector of the economy that was most severely impacted
by the very tight credit conditions caused by the recession.
Both of these factors resulted in significantly reduced demand
for our cardiac safety services and a corresponding fall in our
revenue.
In addition, revenue from the acquired backlog of Covance
Cardiac Safety Services, Inc. (CCSS) totaled $10.1 million
in 2008 and declined to $4.5 million in 2009 as this
backlog nears completion. To a lesser degree, we also had lower
revenue from routine business. We also sold our EDC operation in
June 2009 which contributed $2.5 million of revenue in 2009
compared to $5.9 million in 2008.
Gross margin percentage was 52.8% in 2009 compared to 55.8% in
2008. Gross margin percentage is significantly impacted by
transaction volume which declined 32.9% in 2009 compared to
2008. We also experienced a slight decline in average
transaction pricing in 2009 as compared to 2008. In the shorter
term, costs do not necessarily change in direct relation with
changes in revenue. We also experienced a slight decline in
average transaction pricing in 2009 as compared to 2008. The
decline in the gross margin percentage compared to 2008 was
partially offset by the elimination of legacy and transition
costs incurred during 2008 associated with processing the
30
CCSS backlog during the nine-month period in 2008 during which
we integrated the CCSS operations. In addition during 2009, we
incurred lower depreciation and amortization expense as older,
more expensive equipment became fully depreciated.
Operating income for 2009 was $17.9 million or 19.1% of
total net revenues compared to $38.4 million or 28.8% of
total net revenues in 2008. Total expenses were
$75.9 million in 2009, a decrease of $18.8 million
from $94.7 million in 2008. Overall expenses decreased
primarily due to the elimination of transition costs related to
the integration of the CCSS operations, which was completed in
September 2008. We also had lower variable incentive
compensation expense in 2009 consistent with our reduced
operating results and lower depreciation as some of our EDC
equipment was fully depreciated and the amortization of CCSS
intangibles declined. Our effective income tax rate for 2009 was
38.9% compared to 37.7% in 2008.
Net income for 2009 was $10.7 million, or $0.22 per share,
compared to $25.0 million, or $0.48 per share in 2008.
Commencing in the fourth quarter of 2008 and into 2009, general
business and economic conditions deteriorated globally. During
this time, we experienced an increased focus in Phase III
opportunities, a decline in the number of Thorough QTc bookings
along with a delay in starts for certain Thorough QTc trials,
and these trends have continued through much of fiscal 2009. We
believe the increase in Phase III opportunities will
provide us with a strong base of business in the future;
however, this business will take longer to turn into revenue. We
believe that the delays in Thorough QTc trials are related to
timing as the result of the uncertain economic environment,
especially in small to mid-sized customers which have been
negatively impacted by funding limitations. Thorough QTc trials
are generally required to 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 relationships
with large pharmaceutical companies during the latter portion of
fiscal 2008 and continuing into 2009, including several with
whom we had very little business in the past. In exchange for
these long-term enterprise relationships with large
pharmaceutical companies, which are targeted to generate larger
volumes of business, we have made selective pricing concessions
which we believe will have the effect of lowering overall
average transaction pricing in the future as studies performed
under these agreements become active and generate revenue. We
have also recently implemented a series of cost reductions which
we believe will lessen the impact of any prior pricing reduction
on our gross margin percentage. Overall, we believe the
fundamental drivers of our core business remain positive. We
believe that we have sufficient operating and technology
capacity to support significant future growth in our business if
and when it should occur. However, a continued weakened global
economy could have a negative impact on future results of
operations.
31
The following table presents certain financial data as a
percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services
|
|
|
6.4
|
%
|
|
|
4.4
|
%
|
|
|
2.7
|
%
|
Services
|
|
|
66.8
|
|
|
|
72.6
|
|
|
|
68.9
|
|
Site support
|
|
|
26.8
|
|
|
|
23.0
|
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of EDC licenses and services
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
0.9
|
|
Cost of services
|
|
|
29.2
|
|
|
|
29.0
|
|
|
|
31.9
|
|
Cost of site support
|
|
|
18.1
|
|
|
|
13.8
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
49.3
|
|
|
|
44.2
|
|
|
|
47.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
50.7
|
|
|
|
55.8
|
|
|
|
52.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11.4
|
|
|
|
10.0
|
|
|
|
13.8
|
|
General and administrative
|
|
|
12.4
|
|
|
|
13.7
|
|
|
|
15.8
|
|
Research and development
|
|
|
4.4
|
|
|
|
3.3
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28.2
|
|
|
|
27.0
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22.5
|
|
|
|
28.8
|
|
|
|
19.1
|
|
Other income (expense), net
|
|
|
2.3
|
|
|
|
1.3
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24.8
|
|
|
|
30.1
|
|
|
|
18.6
|
|
Income tax provision
|
|
|
9.3
|
|
|
|
11.3
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
15.5
|
%
|
|
|
18.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Year
Ended December 31, 2008 Compared to the Year Ended
December 31, 2009
The following table presents statements of operations data with
product line detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Increase (Decrease)
|
|
|
EDC licenses and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
5,894
|
|
|
$
|
2,501
|
|
|
$
|
(3,393
|
)
|
|
|
(57.6
|
%)
|
Costs of revenues
|
|
|
1,843
|
|
|
|
863
|
|
|
|
(980
|
)
|
|
|
(53.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
4,051
|
|
|
$
|
1,638
|
|
|
$
|
(2,413
|
)
|
|
|
(59.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
96,567
|
|
|
$
|
64,655
|
|
|
$
|
(31,912
|
)
|
|
|
(33.0
|
%)
|
Costs of revenues
|
|
|
38,609
|
|
|
|
29,886
|
|
|
|
(8,723
|
)
|
|
|
(22.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
57,958
|
|
|
$
|
34,769
|
|
|
$
|
(23,189
|
)
|
|
|
(40.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
30,679
|
|
|
$
|
26,667
|
|
|
$
|
(4,012
|
)
|
|
|
(13.1
|
%)
|
Costs of revenues
|
|
|
18,445
|
|
|
|
13,544
|
|
|
|
(4,901
|
)
|
|
|
(26.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
12,234
|
|
|
$
|
13,123
|
|
|
$
|
889
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
133,140
|
|
|
$
|
93,823
|
|
|
$
|
(39,317
|
)
|
|
|
(29.5
|
%)
|
Costs of revenues
|
|
|
58,897
|
|
|
|
44,293
|
|
|
|
(14,604
|
)
|
|
|
(24.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
74,243
|
|
|
|
49,530
|
|
|
|
(24,713
|
)
|
|
|
(33.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
13,273
|
|
|
|
12,905
|
|
|
|
(368
|
)
|
|
|
(2.8
|
%)
|
General and administrative
|
|
|
18,181
|
|
|
|
14,859
|
|
|
|
(3,322
|
)
|
|
|
(18.3
|
%)
|
Research and development
|
|
|
4,394
|
|
|
|
3,853
|
|
|
|
(541
|
)
|
|
|
(12.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35,848
|
|
|
|
31,617
|
|
|
|
(4,231
|
)
|
|
|
(11.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
38,395
|
|
|
|
17,913
|
|
|
|
(20,482
|
)
|
|
|
(53.3
|
%)
|
Other income (expense), net
|
|
|
1,730
|
|
|
|
(435
|
)
|
|
|
(2,165
|
)
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
40,125
|
|
|
|
17,478
|
|
|
|
(22,647
|
)
|
|
|
(56.4
|
%)
|
Income tax provision
|
|
|
15,123
|
|
|
|
6,791
|
|
|
|
(8,332
|
)
|
|
|
(55.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
$
|
(14,315
|
)
|
|
|
(57.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M. Not meaningful
33
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
|
|
|
2008
|
|
2009
|
|
(Decrease)
|
|
Cost of EDC licenses and services
|
|
|
31.3
|
%
|
|
|
34.5
|
%
|
|
|
3.2
|
%
|
Cost of services
|
|
|
40.0
|
%
|
|
|
46.2
|
%
|
|
|
6.2
|
%
|
Cost of site support
|
|
|
60.1
|
%
|
|
|
50.8
|
%
|
|
|
(9.3
|
%)
|
Total costs of revenues
|
|
|
44.2
|
%
|
|
|
47.2
|
%
|
|
|
3.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
10.0
|
%
|
|
|
13.8
|
%
|
|
|
3.8
|
%
|
General and administrative
|
|
|
13.7
|
%
|
|
|
15.8
|
%
|
|
|
2.1
|
%
|
Research and development
|
|
|
3.3
|
%
|
|
|
4.1
|
%
|
|
|
0.8
|
%
|
Total operating expenses
|
|
|
27.0
|
%
|
|
|
33.7
|
%
|
|
|
6.7
|
%
|
EDC
On June 23, 2009, we completed the sale of certain assets
relating to our EDC operations. During the year ended
December 31, 2009, we recorded a gain on the sale of these
assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations.
Revenues
The decrease in services revenues was primarily due to a
$25.4 million reduction related to a decrease in
transactions performed in the year ended December 31, 2009
as compared to the year ended December 31, 2008 due largely
to the decline in Thorough QTc studies and, to a lesser extent,
a decline in routine studies and the decline in revenue from
acquired backlog of CCSS. There was also a decrease in average
revenue per transaction that was largely due to a heavier
weighting of semi-automatic studies which carry lower
transaction prices and a decrease in average pricing due to the
impact of newly negotiated longer-term enterprise agreements
with large clients, the total impact of which resulted in a
decrease in revenue of approximately $3.2 million. Project
management fees decreased $2.0 million, consistent with the
decreased Cardiac Safety activity. The balance of the decrease
is due to a $0.4 million decrease in Cardiac Safety
consulting revenue and a number of smaller decreases totaling
$0.9 million.
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 us. In return, Dr. Morganroths
professional corporation receives a percentage fee of 80% of the
net amounts we bill for Dr. Morganroths services to
our customers. We recorded revenues in connection with services
billed to customers under this consulting arrangement of
approximately $1.6 million and $1.3 million in the
years ended December 31, 2008 and 2009, respectively. We
incurred percentage fees under this consulting arrangement of
approximately $1.3 million and $1.0 million in the
years ended December 31, 2008 and 2009, respectively. Total
amounts payable incurred under this consulting arrangement,
including consulting fees and the percentage fees, approximated
$1.8 million and $1.3 million in the years ended
December 31, 2008 and 2009, respectively, and are included
in cost of services.
Site support revenues decreased primarily due to a
$1.5 million decrease in equipment sales as more customers
chose to rent cardiac safety equipment, a $0.8 million
decline in revenue from acquired backlog of CCSS and a
$0.6 million reduction in freight revenue due to decreased
shipping activity consistent with the decreased Cardiac Safety
activity. The balance of the decrease was primarily due to a
decrease in rental revenue from cardiac safety equipment due to
a lower average price per unit, partially offset by an increase
in units rented and an increase in supplies revenue. The lower
average price per unit was a result of planned actions that we
have recently taken to improve our competitiveness with regard
to this component of our revenue.
34
Costs of
Revenues
The decrease in the cost of services was primarily due to
$6.6 million of costs recognized in the year ended
December 31, 2008 associated with the CCSS operations as
compared to $0.8 million of such costs in the year ended
December 31, 2009, primarily consisting of depreciation and
amortization. We completed the integration of the CCSS
acquisition in the third quarter of 2008 with the complete
transfer of all operating activities from the CCSS Reno facility
into our operations in Philadelphia and Peterborough.
Additionally, variable incentive compensation expense decreased
$1.2 million due to our reduced operating results,
telephone and connectivity expenses decreased $0.7 million
due to lower rates in 2009 and cardiac safety consulting costs
decreased $0.5 million. Partially offsetting the decrease
were increases in several areas including increased depreciation
of $0.5 due to systems placed in service in 2009. The balance of
the decrease is due to a number of smaller decreases totaling
$1.0 million. The increase in the cost of services as a
percentage of service revenues reflects the fact that, in the
shorter term, some of the costs do not necessarily change in
direct relation with changes in revenue.
The decrease in the cost of site support, both in absolute terms
and as a percentage of site support revenues, was primarily due
to a $2.8 million decrease in depreciation expense as
older, more expensive ECG equipment has become fully
depreciated. Additionally there was a $0.9 million decrease
in freight, a $0.7 million decrease in the cost of
equipment sold, $0.3 million of costs associated with the
Reno operations of CCSS in 2008 for which there was no
corresponding cost in 2009 and $0.2 million decrease in
other costs.
Operating
Expenses
The decrease in selling and marketing expenses was due primarily
to a $0.5 million decrease in incentive compensation
consistent with our reduced operating results. Partially
offsetting this decrease was a $0.3 increase in consulting and
marketing costs due to corporate rebranding and other planned
initiatives. The balance of the decrease was due to a number of
smaller decreases totaling $0.2 million. The increase in
selling and marketing expenses as a percentage of total net
revenues reflected the fact that, in the shorter term, the costs
do not necessarily change in direct relation with changes in
revenue.
The decrease in general and administrative expenses was due
primarily to $2.9 million of costs recognized in the year
ended December 31, 2008 resulting from including the
administrative costs of CCSS in 2008 for which there were no
corresponding costs in the year ended December 31, 2009.
Additionally, variable incentive compensation expense decreased
$0.6 million due to our reduced operating results.
Non-income taxes decreased $0.4 million due to the decrease
in revenue. Partially offsetting these decreases were an
additional $0.5 million reserve related to the lease of our Reno
facility, severance of $0.4 million in the second quarter
of 2009 related to the relocation of our customer care team from
our New Jersey location to our Philadelphia location and an
approximately $0.2 million increase in stock option
compensation expense. The gain on sale of certain assets of the
EDC operations of $0.5 million was recorded in the second
quarter of 2009. A number of smaller increases under
$0.2 million each made up the remaining variance including
recruitment and travel and entertainment. The increase in
general and administrative expenses as a percentage of total net
revenues reflected the fact that, in the shorter term, the costs
do not necessarily change in direct relation with changes in
revenue.
The decrease in research and development expenses was primarily
due to a $0.4 million reduction in variable incentive
compensation expense due to our reduced operating results, a
$0.4 million increase in the capitalization of salaries for
internal-use software projects and a $0.3 million decrease
in other expenses including labor. These increases were
partially offset by a $0.5 million increase in expense for
third-party consultants. The increase in research and
development expenses as a percentage of total net revenues
reflected the fact that the costs do not necessarily change in
direct relation with changes in revenue.
In the year ended December 31, 2009, other income
(expense), net, consisted primarily of foreign exchanges losses
of $0.6 million partially offset by interest income of
$0.2 million. In the year ended December 31, 2008,
other income, net, consisted primarily of interest income of
$0.9 million and foreign exchange gains of
$0.8 million. Foreign exchange losses in 2009 were caused
by dollar-denominated receivables in our UK entity that were
settled at less favorable exchange rates with the British pound
sterling.
35
Our effective tax rate for the year ended December 31, 2009
was 38.9% compared to 37.7% for the year ended December 31,
2008. The effective tax rate for the year ended
December 31, 2009 reflects a change in the calculation of
transfer pricing for Cardiac Safety services. Through 2008, we
calculated our transfer pricing for Cardiac Safety services
using a profit split methodology based on cost. After reviewing
the transfer pricing methodology, management decided to modify
its application of the profit split methodology for Cardiac
Safety services to allocate costs based on revenue beginning in
2009. Had we maintained the same calculation in 2009 as we used
in 2008, the income tax provision would have been increased by
approximately $0.4 million for the year ended
December 31, 2009. The effective tax rate for the year
ended December 31, 2008 included a special 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,
a tax benefit of approximately $0.2 million related to the
reconciliation of the 2007 tax provision to the 2007
U.S. federal tax return and a $0.6 million tax benefit
related to the reversal of a tax accrual for a previously
uncertain tax position.
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)
|
|
|
EDC licenses and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
6,331
|
|
|
$
|
5,894
|
|
|
$
|
(437
|
)
|
|
|
(6.9
|
%)
|
Costs of revenues
|
|
|
2,018
|
|
|
|
1,843
|
|
|
|
(175
|
)
|
|
|
(8.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
4,313
|
|
|
$
|
4,051
|
|
|
$
|
(262
|
)
|
|
|
(6.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
65,916
|
|
|
$
|
96,567
|
|
|
$
|
30,651
|
|
|
|
46.5
|
%
|
Costs of revenues
|
|
|
28,808
|
|
|
|
38,609
|
|
|
|
9,801
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
37,108
|
|
|
$
|
57,958
|
|
|
$
|
20,850
|
|
|
|
56.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Cost of EDC licenses and services
|
|
|
31.9
|
%
|
|
|
31.3
|
%
|
|
|
(0.6
|
%)
|
Cost of services
|
|
|
43.7
|
%
|
|
|
40.0
|
%
|
|
|
(3.7
|
%)
|
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
The increase in 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 the year ended
December 31, 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 us. In return, Dr. Morganroths
professional corporation receives a percentage fee of the net
amounts we bill 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. Additionally, service
revenues increased $0.7 million for ePRO revenue that is
new in 2008.
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.
Costs of
Revenues
The increase in the cost of 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. Additionally, cost of
services increased $0.7 million for ePRO costs as this
service offering commenced operations in the latter half of
2007. 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
37
depreciated. The decrease in the cost of Cardiac Safety services
as a percentage of Cardiac Safety service revenues reflected 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 became 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 reflected the
fact that some of the costs do not necessarily change in direct
relation with changes in revenue.
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
increased in 2008 as increased signings converted 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 comprised the
balance of the increase in selling and marketing expense. The
decrease in selling and marketing expenses as a percentage of
total net revenues reflected the fact that the costs do not
necessarily change in direct relation with changes in revenue.
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 of $0.8 million for stay pay incentives. 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 made 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.
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 decrease was 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.
38
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.
Liquidity
and Capital Resources
At December 31, 2009, we had $78.8 million of cash,
cash equivalents and short-term investments. Prior to 2008, 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 financial market
conditions prevalent during the latter part of 2008 and 2009, we
had invested primarily in liquid money market funds. We resumed
investing in highly-rated securities in the other categories
noted above beginning in the fourth quarter of 2009. Of the
$78.8 million, $13.9 million is held by our UK
subsidiary. Although a portion of our UK subsidiarys
current undistributed net earnings, as well as the future net
earnings, will be permanently reinvested, we believe that this
does not have a material impact on our overall liquidity.
For the year ended December 31, 2009, our operations
provided cash of $33.9 million, a decrease of
$6.0 million compared to $39.9 million during the year
ended December 31, 2008. The decrease was primarily the
result of $14.3 million of lower net income in the year
ended December 31, 2009 as compared to the year ended
December 31, 2008, a $3.5 million decrease in accrued
expenses in the year ended December 31, 2009 as compared to
a $1.2 million increase in the year ended December 31,
2008 which was largely the result of the payment of a greater
amount in 2009 for variable incentive compensation related to
the prior years results, a $3.5 million decrease in
depreciation and amortization and a $1.6 million decrease
in net income tax liabilities in the year ended
December 31, 2009 as compared to a $0.2 million
decrease in the year ended December 31, 2008. Changes in
income taxes, including deferred income taxes, are due to the
timing and size of income tax payments and provision. The tax
provision decreased in 2009 due to lower taxable income, but at
a higher effective tax rate. Partially offsetting this negative
impact on cash flow was a decrease in accounts receivable in the
year ended December 31, 2009 of $12.7 million as
compared to an increase of $3.8 million in the year ended
December 31, 2008. The comparative decrease was related to
focused collection efforts and a decrease in revenue. Also
offsetting this negative impact on cash flow was an increase in
deferred revenue in the year ended December 31, 2009 of
$1.4 million as compared to a decrease of $1.9 million
in the year ended December 31, 2008.
For the year ended December 31, 2009, our investing
activities used cash of $17.7 million as compared to
$8.3 million during the year ended December 31, 2008.
We incurred $0.7 million and $6.0 million in the year
ended December 31, 2009 and 2008, respectively, for
contingent payments and transaction costs related to the CCSS
acquisition and $1.2 million during the year ended
December 31, 2009 related to the sale of the EDC
operations. Investment proceeds were $8.7 million during
the year ended December 31, 2008 with no activity during
the year ended December 31, 2009 while investment purchases
were $9.7 million during the year ended December 31,
2009 with no activity during the year ended December 31,
2008.
During the year ended December 31, 2009 and 2008, we
capitalized $6.2 million and $11.0 million,
respectively, of property and equipment. Included in property
and equipment is $3.0 million and $2.0 million for the
year ended December 31, 2009 and 2008, respectively, of
internal use software including 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. The balance of the change was due to a decrease in
purchases of ECG equipment commensurate with the decrease in
revenue in the year ended December 31, 2009 as compared to
the year ended December 31, 2008.
For the year ended December 31, 2009, our financing
activities used cash of $14.5 million compared to providing
$0.5 million for the year ended December 31, 2008. In
the year ended December 31, 2009 and 2008, we repurchased
$15.1 million and $2.6 million, respectively, of our
common stock under our stock buy-back program.
39
We have a line of credit arrangement with Wachovia Bank,
National Association, a Wells Fargo Company, totaling
$3.0 million which expires on June 1, 2010. To date,
we have not borrowed any amounts under our line of credit. As of
December 31, 2009, we had outstanding letters of credit of
$0.5 million, which reduced our available borrowings under
the line of credit to $2.5 million.
We have commitments to purchase approximately $2.8 million
of private label cardiac safety equipment from a manufacturer
over a twelve-month period beginning upon the completion of our
user acceptance testing, which is currently anticipated to be
completed in the first quarter of 2010. We expect to purchase
this cardiac safety equipment in the normal course of business
and thus this commitment does not represent a significant
commitment above our expected purchases of ECG equipment during
this period.
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 5.0 million
shares remain to be purchased as of December 31, 2009. 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, 2009, we purchased
2,902,735 shares of our common stock at a cost of
$15.1 million. During the year ended December 31,
2008, we purchased 439,749 shares of our common stock at a
cost of $2.6 million.
On November 28, 2007, we completed the acquisition of CCSS
from Covance Inc. Under the terms of our agreement to purchase
CCSS, the total initial purchase consideration was
$35.2 million. We have also 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, 2009, Covance earned $5.2 million
of this contingent amount, of which $3.0 million was
recognized in 2007, $2.0 million in the year ended
December 31, 2008 and $0.2 million in the year ended
December 31, 2009. At December 31, 2009, approximately
$0.2 million of the contingent amount earned remained to be
paid to Covance, which we recorded in accounts payable. These
contingent payments increased goodwill by $5.2 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.
The following table presents contractual obligations information
as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Operating leases
|
|
$
|
20,271
|
|
|
$
|
3,607
|
|
|
$
|
5,187
|
|
|
$
|
3,898
|
|
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,271
|
|
|
$
|
3,607
|
|
|
$
|
5,187
|
|
|
$
|
3,898
|
|
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
40
Recent
Accounting Pronouncements
Effective July 1, 2009, we adopted the new accounting
standard established by the Financial Accounting Standards Board
(FASB) Accounting Standards
Codificationtm
(ASC). As codified under ASC
105-10
(formerly Statement of Financial Accounting Standards (SFAS)
No. 168, The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement
No. 162), the FASB established the ASC as the single
source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative U.S. GAAP for SEC
registrants. The ASC supersedes all existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature excluded from the ASC became
non-authoritative. All references to U.S. GAAP have been
updated to conform to the ASC. The adoption of the ASC did not
have any impact on our results of operations or financial
position.
Effective January 1, 2009, we adopted a new accounting
standard regarding business combinations issued by the FASB. As
codified under ASC 805 (formerly SFAS No. 141 revised
2007, Business Combinations), this standard 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. This accounting
standard 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. The adoption of this accounting standard did not have any
impact on our consolidated financial statements.
Effective January 1, 2009, we adopted an accounting
standard regarding the determination of the useful life of
intangible assets. As codified in ASC
350-30-35
(formerly FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets), this standard amended the factors that should be
considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset
under intangibles accounting. The adoption of this accounting
standard did not have any impact on our consolidated financial
statements.
Effective April 1, 2009, we adopted a new accounting
standard regarding interim disclosure about fair value of
financial instruments. As codified under ASC
825-10-65
(formerly FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosure about Fair Value of Financial
Instruments), this standard amended disclosure
requirements about fair value of financial instruments for
interim reporting periods of publicly traded companies as well
as in annual financial statements and to require those
disclosures in summarized financial information at interim
reporting periods. The adoption of this accounting standard did
not have any impact on our consolidated financial statements.
Effective April 1, 2009, we adopted a new accounting
standard for subsequent events. As codified in
ASC 855-10
(formerly SFAS No. 165, Subsequent Events), this
standard established general standards of accounting for, and
requires disclosure of, events that occur after the balance
sheet date but before financial statements are issued or are
available to be issued. The adoption of this accounting standard
did not have a material effect on our results of operations or
financial position. Subsequent events through March 3, 2010
have been evaluated for disclosure and recognition.
Effective October 1, 2009, we adopted a new accounting
standard for measuring liabilities at fair value accounting. As
codified in ASC
820-10
(formerly Accounting Standards Update
No. 2009-5,
Measuring Liabilities at Fair Value), this standard amended
existing standards regarding fair value measurements by
providing additional guidance clarifying the measurement of
liabilities at fair value. The standard also clarifies that when
estimating the fair value of a liability, a reporting entity is
not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The
adoption of this accounting standard did not have any impact on
our consolidated financial statements.
In September 2009, the FASB issued a new accounting standard
regarding revenue arrangements with multiple deliverables. As
codified in ASC
605-25
(formerly Emerging Issues Task Force Issue
No. 08-1,
Revenue Arrangements with Multiple Deliverables), this
accounting standard sets forth requirements that must be met for
an entity to recognize revenue from the sale of a delivered item
that is part of a multiple-element arrangement when other items
have not yet been delivered. One of those current requirements
is that there be objective and
41
reliable evidence of the standalone selling price of the
undelivered items, which must be supported by either
vendor-specific objective evidence (VSOE) or third-party
evidence (TPE).
This consensus eliminates the requirement that all undelivered
elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE
or TPE of the standalone selling price for one or more delivered
or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of
those elements. The overall arrangement fee will be allocated to
each element (both delivered and undelivered items) based on
their relative selling prices, regardless of whether those
selling prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the
residual method of allocating an overall arrangement
fee between delivered and undelivered elements will no longer be
permitted. The accounting standard is effective prospectively
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. We are
evaluating the potential impact of these requirements on our
consolidated financial statements.
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
Our former electronic data capture (EDC) business is included in
EDC licenses and services and included license revenue,
technology consulting and training services and software
maintenance services. We recognized up-front license fee
revenues under the residual method when a formal agreement
existed, delivery of the software and related documentation
occurred, collectability was probable and the license fee was
fixed or determinable. We recognized monthly and annual term
license fee revenues over the term of the arrangement. Hosting
service fees were recognized evenly over the term of the
service. We recognized revenues from software maintenance
contracts on a straight-line basis over the term of the
maintenance contract, which was typically twelve months. We
provided consulting and training services on a time and
materials basis and recognized revenues as we performed the
services.
Services revenues consist of Cardiac Safety and, to a lesser
extent,
ePROtm
services that we provide on a fee for services basis and are
recognized as the services are performed. We also provide
Cardiac Safety consulting services on a time and materials basis
and recognize revenues as we perform the services. Site support
revenues consist of cardiac safety equipment rentals and sales
along with related supplies and logistics management and are
recognized at the time of sale or over the rental period.
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 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.
42
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.
We have recorded reimbursements received for
out-of-pocket
expenses incurred as revenue in the accompanying consolidated
financial statements.
Unbilled revenue is revenue that is recognized but is currently
not billable 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.
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 ASC 805, as
discussed above in Recent Accounting
Pronouncements.
Goodwill
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. No provisions for
goodwill impairment were recorded during 2008 or 2009. In
connection with the sale of certain assets of our EDC
operations, we allocated $0.1 million of goodwill to our
EDC operations which was included in the calculation of the gain
on sale.
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 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.
43
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, 2009, we had a valuation allowance of
$1.1 million related to the uncertain realization of
certain deferred tax assets. See Note 7 to our consolidated
financial statements for more information.
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 generally place our investments in money market funds,
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 financial market conditions prevalent during the latter part
of 2008 and 2009, we had invested primarily in liquid money
market funds. We resumed investing in highly-rated securities in
the other categories noted above beginning in the fourth quarter
of 2009. We actively manage our portfolio of cash equivalents
and short-term investments, but in order to ensure liquidity,
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. The impact on
interest income of future changes in investment yields will
depend largely on the gross amount of our cash, cash
equivalents, short-term investments and log-term investments.
See Liquidity and Capital Resources as part of
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
44
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 face exposure
to adverse movements in the exchange rate of the British 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, 2009 by
approximately $0.5 million.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information called for by this Item is set forth on Pages
F-1 through F-33.
|
|
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. We believe that a
controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected
Managements
annual report on internal control over financial
reporting
See Managements Report on Internal Control Over Financial
Reporting on
page F-2,
which is incorporated herein by reference.
Report of
the independent registered public accounting firm
See Report of Independent Registered Public Accounting Firm on
page F-3,
which is incorporated herein by reference.
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 2009 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 28, 2010, 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. All other
schedules have been omitted because they are not required, not
applicable, or the required information is otherwise included.
|
|
|
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
|
.13
|
|
2008 Bonus Plan.(8)*
|
|
|
|
|
|
|
10
|
.14
|
|
2009 Bonus Plan.(9)*
|
|
|
|
|
|
|
10
|
.20
|
|
1818 Market Street Office Lease between the Company and NNN 1818
Market Street, LLC and Affiliates.(10)
|
|
|
|
|
|
|
10
|
.28
|
|
Modification Number One to Promissory Note and Loan Agreement
with Wachovia Bank, National Association dated May 19,
2009.(11)
|
|
|
|
|
|
|
10
|
.29
|
|
Loan Agreement with Wachovia Bank, National Association
effective June 26, 2008.(12)
|
|
|
|
|
|
|
10
|
.30
|
|
Promissory Note to Wachovia Bank, National Association effective
June 26, 2008.(12)
|
|
|
|
|
|
|
10
|
.31
|
|
Amended and Restated 2003 Equity Incentive Plan, as amended.(13)*
|
|
|
|
|
|
|
10
|
.42
|
|
Management Employment Agreement effective January 1, 2008
between Dr. Joel Morganroth and the Company.(14)*
|
|
|
|
|
|
|
10
|
.43
|
|
Consultant Agreement effective January 1, 2007 between
Dr. Joel Morganroth and the Company.(15)*
|
47
|
|
|
|
|
|
|
|
|
|
|
10
|
.44
|
|
Management Employment Agreement effective August 20, 2004
between Dr. Jeffrey Litwin and the Company.(1)*
|
|
|
|
|
|
|
10
|
.45
|
|
Management Employment Agreement effective August 31, 2004
between Amy Furlong and the Company.(9)*
|
|
|
|
|
|
|
10
|
.46
|
|
Consultant Agreement effective January 1, 2008 between
Dr. Joel Morganroth and the Company.(14)*
|
|
|
|
|
|
|
10
|
.47
|
|
Management Employment Agreement effective September 2, 2004
between Robert Brown and the Company.(8)*
|
|
|
|
|
|
|
10
|
.48
|
|
Management Employment Agreement effective June 23, 2006
between Michael J. McKelvey and the Company.(16)*
|
|
|
|
|
|
|
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.(18)*
|
|
|
|
|
|
|
10
|
.54
|
|
Lease Agreement dated September 28, 2004 between Royal and
Sun Alliance Insurance PLC and the Companys subsidiary,
eResearchTechnology Limited.(19)
|
|
|
|
|
|
|
10
|
.55
|
|
Management Employment Agreement effective November 10, 2009
between John Sory and the Company.*
|
|
|
|
|
|
|
10
|
.57
|
|
Management Employment Agreement effective January 1, 2009
between Dr. Joel Morganroth and the Company.(9)*
|
|
|
|
|
|
|
10
|
.58
|
|
Consultant Agreement effective January 1, 2009 between
Dr. Joel Morganroth and the Company.(9)*
|
|
|
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.(14)
|
|
|
|
|
|
|
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.
|
|
|
|
|
*
|
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.
|
48
|
|
|
|
(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 8, 2008.
|
|
|
(9)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 8, 2009.
|
|
|
|
|
(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 August 7, 2009.
|
|
|
(12)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on August 7, 2008.
|
|
|
(13)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 6, 2009.
|
|
|
(14)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 7, 2008.
|
|
|
(15)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 4, 2007.
|
|
|
(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 2, 2009.
|
|
|
(19)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 11, 2005.
|
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 3rd day of March 2010.
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 3, 2010
|
|
|
|
|
|
/s/ Joel
Morganroth, MD
Joel
Morganroth, MD
|
|
Chairman of the Board of Directors
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Keith
D. Schneck
Keith
D. Schneck
|
|
Executive Vice President, Chief Financial Officer and Secretary
(Principal financial and accounting officer)
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Sheldon
M. Bonovitz
Sheldon
M. Bonovitz
|
|
Director
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Michael
DeMane
Michael
DeMane
|
|
Director
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Gerald
A. Faich, MD, MPH
Gerald
A. Faich, MD, MPH
|
|
Director
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Elam
M. Hitchner
Elam
M. Hitchner
|
|
Director
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Stephen
S. Phillips
Stephen
S. Phillips
|
|
Director
|
|
March 3, 2010
|
|
|
|
|
|
/s/ Stephen
M. Scheppmann
Stephen
M. Scheppmann
|
|
Director
|
|
March 3, 2010
|
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, 2009.
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, 2009, 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, 2009, 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, 2009 and 2008, 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, 2009, and our
report dated March 3, 2010 expressed an unqualified opinion
on those consolidated financial statements.
Philadelphia, Pennsylvania
March 3, 2010
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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, 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.
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, 2009, 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 3, 2010 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 3, 2010
F-4
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,376
|
|
|
$
|
68,979
|
|
Short-term investments
|
|
|
50
|
|
|
|
9,782
|
|
Investment in marketable securities
|
|
|
|
|
|
|
1,026
|
|
Accounts receivable, less allowance for doubtful accounts of
$695 and $548, respectively
|
|
|
29,177
|
|
|
|
16,579
|
|
Prepaid income taxes
|
|
|
1,892
|
|
|
|
2,698
|
|
Prepaid expenses and other
|
|
|
2,885
|
|
|
|
3,308
|
|
Deferred income taxes
|
|
|
1,831
|
|
|
|
1,649
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
102,211
|
|
|
|
104,021
|
|
Property and equipment, net
|
|
|
29,639
|
|
|
|
24,205
|
|
Goodwill
|
|
|
34,603
|
|
|
|
34,676
|
|
Intangible assets
|
|
|
2,149
|
|
|
|
1,607
|
|
Other assets
|
|
|
520
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
169,122
|
|
|
$
|
164,861
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,971
|
|
|
$
|
3,007
|
|
Accrued expenses
|
|
|
9,382
|
|
|
|
5,990
|
|
Income taxes payable
|
|
|
2,492
|
|
|
|
346
|
|
Current portion of capital lease obligations
|
|
|
43
|
|
|
|
|
|
Deferred revenues
|
|
|
11,034
|
|
|
|
11,728
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,922
|
|
|
|
21,071
|
|
Deferred rent
|
|
|
2,183
|
|
|
|
2,357
|
|
Deferred income taxes
|
|
|
1,332
|
|
|
|
2,502
|
|
Other liabilities
|
|
|
1,257
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,694
|
|
|
|
27,189
|
|
|
|
|
|
|
|
|
|
|
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, 59,950,257 and
60,189,235 shares issued, respectively
|
|
|
600
|
|
|
|
602
|
|
Additional paid-in capital
|
|
|
93,828
|
|
|
|
97,367
|
|
Accumulated other comprehensive income (loss)
|
|
|
(2,716
|
)
|
|
|
(1,580
|
)
|
Retained earnings
|
|
|
110,479
|
|
|
|
121,166
|
|
Treasury stock, 8,686,868 and 11,589,603 shares at cost,
respectively
|
|
|
(64,763
|
)
|
|
|
(79,883
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
137,428
|
|
|
|
137,672
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
169,122
|
|
|
$
|
164,861
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services
|
|
$
|
6,331
|
|
|
$
|
5,894
|
|
|
$
|
2,501
|
|
Services
|
|
|
65,916
|
|
|
|
96,567
|
|
|
|
64,655
|
|
Site support
|
|
|
26,451
|
|
|
|
30,679
|
|
|
|
26,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
98,698
|
|
|
|
133,140
|
|
|
|
93,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of EDC licenses and services
|
|
|
2,018
|
|
|
|
1,843
|
|
|
|
863
|
|
Cost of services
|
|
|
28,808
|
|
|
|
38,609
|
|
|
|
29,886
|
|
Cost of site support
|
|
|
17,808
|
|
|
|
18,445
|
|
|
|
13,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
48,634
|
|
|
|
58,897
|
|
|
|
44,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
50,064
|
|
|
|
74,243
|
|
|
|
49,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
11,222
|
|
|
|
13,273
|
|
|
|
12,905
|
|
General and administrative
|
|
|
12,258
|
|
|
|
18,181
|
|
|
|
14,859
|
|
Research and development
|
|
|
4,333
|
|
|
|
4,394
|
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,813
|
|
|
|
35,848
|
|
|
|
31,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22,251
|
|
|
|
38,395
|
|
|
|
17,913
|
|
Other income (expense), net
|
|
|
2,206
|
|
|
|
1,730
|
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,457
|
|
|
|
40,125
|
|
|
|
17,478
|
|
Income tax provision
|
|
|
9,205
|
|
|
|
15,123
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.30
|
|
|
$
|
0.49
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to calculate basic net income per share
|
|
|
50,476
|
|
|
|
50,870
|
|
|
|
49,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to calculate diluted net income per share
|
|
|
51,743
|
|
|
|
52,015
|
|
|
|
49,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
|
|
|
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
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,687
|
|
|
|
|
|
|
|
10,687
|
|
Change in unrealized losses on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,823
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,120
|
)
|
|
|
(15,120
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784
|
|
Capitalized share-based compensation
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
Exercise of stock options
|
|
|
238,978
|
|
|
|
2
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
60,189,235
|
|
|
$
|
602
|
|
|
$
|
97,367
|
|
|
$
|
(1,580
|
)
|
|
$
|
121,166
|
|
|
$
|
(79,883
|
)
|
|
$
|
137,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,252
|
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of EDC operations
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
Depreciation and amortization
|
|
|
15,129
|
|
|
|
16,038
|
|
|
|
12,583
|
|
Cost of sales of equipment
|
|
|
1,143
|
|
|
|
743
|
|
|
|
96
|
|
Provision for uncollectible accounts
|
|
|
30
|
|
|
|
189
|
|
|
|
210
|
|
Share-based compensation
|
|
|
2,004
|
|
|
|
2,604
|
|
|
|
2,790
|
|
Deferred income taxes
|
|
|
(521
|
)
|
|
|
1,098
|
|
|
|
1,680
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,192
|
)
|
|
|
(3,840
|
)
|
|
|
12,726
|
|
Prepaid expenses and other
|
|
|
352
|
|
|
|
41
|
|
|
|
(293
|
)
|
Accounts payable
|
|
|
(2,147
|
)
|
|
|
175
|
|
|
|
(767
|
)
|
Accrued expenses
|
|
|
2,928
|
|
|
|
1,162
|
|
|
|
(3,490
|
)
|
Income taxes
|
|
|
3,658
|
|
|
|
(1,290
|
)
|
|
|
(3,286
|
)
|
Deferred revenues
|
|
|
2,487
|
|
|
|
(1,909
|
)
|
|
|
1,379
|
|
Deferred rent
|
|
|
(122
|
)
|
|
|
(64
|
)
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
36,001
|
|
|
|
39,949
|
|
|
|
33,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,073
|
)
|
|
|
(10,969
|
)
|
|
|
(6,207
|
)
|
Purchases of investments
|
|
|
(58,008
|
)
|
|
|
|
|
|
|
(9,732
|
)
|
Proceeds from sales of investments
|
|
|
91,555
|
|
|
|
8,747
|
|
|
|
|
|
Payments related to sale of EDC operations
|
|
|
|
|
|
|
|
|
|
|
(1,150
|
)
|
Payments for acquisition
|
|
|
(35,800
|
)
|
|
|
(6,042
|
)
|
|
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,326
|
)
|
|
|
(8,264
|
)
|
|
|
(17,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(2,504
|
)
|
|
|
(1,102
|
)
|
|
|
(43
|
)
|
Proceeds from exercise of stock options
|
|
|
1,655
|
|
|
|
2,369
|
|
|
|
523
|
|
Stock option income tax benefit
|
|
|
760
|
|
|
|
849
|
|
|
|
152
|
|
Repurchase of common stock for treasury
|
|
|
|
|
|
|
(2,573
|
)
|
|
|
(15,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(89
|
)
|
|
|
(457
|
)
|
|
|
(14,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(1
|
)
|
|
|
(2,934
|
)
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
22,585
|
|
|
|
28,294
|
|
|
|
2,603
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,497
|
|
|
|
38,082
|
|
|
|
66,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
38,082
|
|
|
$
|
66,376
|
|
|
$
|
68,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-8
|
|
1.
|
Background
and Summary of Significant Accounting Policies:
|
Background
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 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,
biotechnology and 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 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. We also offer ePRO solutions along with
proprietary clinical assessments.
On June 23, 2009, we completed the sale of certain assets
relating to our EDC operations. Under the terms of the
transaction, OmniComm Systems, Inc. issued to us
8.1 million shares of common stock and assumed certain
liabilities including deferred revenue relating to our EDC
operations in exchange for our EDC assets, which primarily
included our EDC software, applications and fixed assets and
$1.15 million in cash we paid. During the year ended
December 31, 2009, we recorded a gain on the sale of these
assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations.
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. In particular, the revenue and cost of revenue of
our former EDC operations, which we sold on June 23, 2009,
have been reclassified from the licenses and services categories
to the EDC category on the consolidated statements of operations
for all periods presented. Additionally, the remaining revenues
and costs of sales in licenses, related to cardiac safety
reporting and ePRO, were reclassified to the services category
on the consolidated statements of operations for all periods
presented.
F-9
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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 services revenues consist primarily of our services offered
under our Cardiac Safety and, to a lesser extent,
ePROtm
solutions. Our site support revenue consists of cardiac safety
equipment rentals and sales along with related supplies and
logistics management.
Services revenues consist of Cardiac Safety and ePRO services
that we provide on a fee for services basis and are recognized
as the services are performed. We also provide Cardiac Safety
consulting 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.
At the time of each transaction, management assesses whether the
fee associated with the transaction 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 and 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 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 value 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.
We have recorded reimbursements received for
out-of-pocket
expenses incurred as revenue in the accompanying consolidated
statements of operations.
Unbilled revenue is revenue that is recognized but is not
currently billable 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.
Our former electronic data capture (EDC) operations are included
in EDC licenses and services revenue and include license
revenue, technology consulting and training services and
software maintenance services. We recognized up-front license
fee revenues under the residual method when a formal agreement
existed, delivery of the software and related documentation
occurred, collectability was probable and the license fee was
fixed or determinable. We recognized monthly and annual term
license fee revenues over the term of the arrangement. Hosting
service fees were recognized evenly over the term of the
service. We recognized revenues from software maintenance
contracts on a straight-line basis over the term of the
maintenance contract, which was typically twelve
F-10
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
months. We provided consulting and training services on a time
and materials basis and recognized revenues as we performed the
services.
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.
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. At December 31, 2008 and 2009, approximately
$9.2 million and $13.9 million, respectively, was
invested outside of the U.S.
Short-term
Investments and Investments in Marketable Securities
At December 31, 2009, short-term investments consisted of
investments in municipal securities, bonds of government
sponsored agencies, certificates of deposit with fixed rates and
maturities of less than one year, A1P1 rated commercial bonds
and paper and an auction rate security issued by a
government-sponsored agency while marketable securities
consisted of common stock received from the buyer of certain
assets of our EDC operations.
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 and investment in marketable securities at
December 31, 2008 and 2009 as
available-for-sale.
At December 31, 2008 and 2009, unrealized gains and losses
were immaterial. Realized gains and losses during 2007, 2008 and
2009 were immaterial. For purposes of determining realized gains
and losses, the cost of the securities sold is based upon
specific identification.
The following summarizes the short-term investments at
December 31, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal securities
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments as of December 31, 2008
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
6,764
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
6,762
|
|
Corporate debt securities
|
|
|
1,769
|
|
|
|
1
|
|
|
|
|
|
|
|
1,770
|
|
Bonds of government sponsored agencies
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments as of December 31, 2009
|
|
$
|
9,783
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
9,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Allowance
for Doubtful Accounts
We evaluate the collectability of accounts receivable based on a
combination of factors. In cases where we are aware of
circumstances that may impair a specific customers ability
to meet its financial obligations subsequent to the original
sale, we will record an allowance against amounts due, and
thereby reduce the net recognized receivable to the amount we
reasonably believe will be collected. For all other customers,
we recognize allowances for doubtful accounts based on a number
of factors, including the length of time the receivables are
past due, the current business environment and our historical
experience.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of three years for computer and other equipment,
two to four years for cardiac safety rental equipment, five
years for furniture and fixtures and three to five years for
system development costs. 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
$12.1 million, $11.9 million and $8.6 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
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 $2.8 million,
$2.5 million and $3.4 million for the years ended
December 31, 2007, 2008 and 2009, respectively. During the
years ended December 31, 2007, 2008 and 2009, we
capitalized $3.5 million, $2.0 million and
$3.0 million, respectively, of software development costs
primarily related to EXPERT, ePRO and other internal-use
software development. As of December 31, 2009,
$2.4 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.
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.
F-12
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The gross cost for cardiac safety equipment was
$35.2 million and $37.3 million at December 31,
2008 and 2009, respectively. The accumulated depreciation for
cardiac safety equipment was $25.0 million and
$30.9 million at December 31, 2008 and 2009,
respectively.
Goodwill
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. No provisions for
goodwill impairment were recorded during 2007, 2008 or 2009. In
connection with the sale of certain assets of our EDC
operations, we allocated $0.1 million of goodwill to our
EDC operations which was included in the calculation of the gain
on sale.
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 $34.6 million and
$34.7 million as of December 31, 2008 and 2009,
respectively. During fiscal 2008 and 2009, goodwill increased
approximately $3.7 million and $0.2 million,
respectively, 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
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. Significant judgments and estimates are often made to
determine fair values, and may include, among other factors, the
use of appraisals, market quotes for similar transactions,
discounted cash flow techniques or other information we believe
is relevant. The finalization of the purchase price allocation
will typically take a number of months to complete, and if final
values are materially different from initially recorded amounts
adjustments are recorded. Any excess of the cost of a business
acquisition over the fair values of the net assets and
liabilities acquired is recorded as goodwill which is not
amortized to expense.
Long-lived
Assets
When events or circumstances so indicate, we assess the
potential impairment of our long-lived assets 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 2007, 2008
or 2009.
Software
Development Costs
Research and development expenditures are charged to operations
as incurred. If significant, we capitalize 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.
F-13
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Advertising
Costs
We expense advertising costs as incurred. Advertising expense
for the years ended December 31, 2007, 2008 and 2009 was
$0.8 million, $1.0 million and $1.2 million,
respectively.
Stock-Based
Compensation
Accounting
for Stock-Based Compensation
Share-based compensation expense is measured at the grant date
based on the fair value of the award and is recognized as
expense over the vesting period. We use the Black-Scholes option
pricing model to estimate the fair value of stock options on the
date of grant. The Black-Scholes option-pricing model
incorporates various assumptions including expected volatility,
expected term and risk-free interest rates. In addition,
judgment is required in estimating the forfeiture rate on stock
awards. We calculate the expected forfeiture rate based on
average historical trends. 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,
2007, 2008 and 2009 was $2.0 million, $2.6 million and
$2.8 million, respectively.
Valuation
Assumptions for Options Granted
The fair value of each stock option granted during the years
ended December 31, 2007, 2008 and 2009 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Risk-free interest rate
|
|
|
4.68
|
%
|
|
|
2.23
|
%
|
|
|
1.39
|
%
|
Expected life
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
Expected volatility
|
|
|
55.89
|
%
|
|
|
51.50
|
%
|
|
|
63.97
|
%
|
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. Fluctuations in the
market that affect these estimates could have an impact on the
resulting compensation cost. The above assumptions were used to
determine the weighted-average per share fair value of $3.38,
$4.89 and $2.19 for stock options granted during the years ended
December 31, 2007, 2008 and 2009, respectively.
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. See Note 7 for further
discussion.
Other
Income (Expense), Net
Other income (expense), net consists primarily of earnings on
cash, cash equivalents and investments as well as foreign
exchange gains, offset by foreign exchange losses and interest
expense related to capital lease obligations.
F-14
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Supplemental
Cash Flow Information
We paid $5.7 million, $15.2 million and
$8.2 million for income taxes in the years ended
December 31, 2007, 2008 and 2009, respectively.
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 and Vendors
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, 2007, 2008 and 2009, one client accounted for
approximately 24%, 23% and 18% 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.
We depend upon a limited number of suppliers for specific
components of our 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 a limited number of
providers to supply ECG equipment, software applications
designed for the on-screen measurement of ECG signals and server
facilities. 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 ePRO 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 solutions
would be delayed and this would be a costly prospect.
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 comprehensive
income. Foreign currency transaction gains or losses are
recorded in other income (expense), net in the consolidated
statement of operations as incurred and net losses totaled
$0.2 million in 2007, net gains totaled $0.8 million
in 2008 and net losses totaled $0.6 million in 2009.
F-15
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
10,687
|
|
|
|
49,173
|
|
|
$
|
0.22
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
10,687
|
|
|
|
49,468
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In computing diluted net income per share, 1,497,000, 2,623,000
and 3,022,000 options to purchase shares of common stock were
excluded from the computations for the years ended
December 31, 2007, 2008 and 2009, 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
We 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 consolidated
balance sheet. Our comprehensive income includes net income and
unrealized gains and losses from marketable securities and
foreign currency translation.
Recent
Accounting Pronouncements
Effective July 1, 2009, we adopted the new accounting
standard established by the Financial Accounting Standards Board
(FASB), the Accounting Standards
Codificationtm
(ASC). As codified under ASC
105-10
(formerly Statement of Financial Accounting Standards (SFAS)
No. 168, The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement
No. 162), the FASB established the ASC as the single
source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative U.S. GAAP for SEC
registrants. The ASC supersedes all existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature
F-16
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
excluded from the ASC became non-authoritative. All references
to U.S. GAAP have been updated to conform to the ASC. The
adoption of the ASC did not have any impact on our results of
operations or financial position.
Effective January 1, 2009, we adopted a new accounting
standard regarding business combinations issued by the FASB. As
codified under ASC 805 (formerly SFAS No. 141 revised
2007, Business Combinations), this standard 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. This accounting
standard 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. The adoption of this accounting standard did not have any
impact on our consolidated financial statements.
Effective January 1, 2009, we adopted an accounting
standard regarding the determination of the useful life of
intangible assets. As codified in ASC
350-30-35
(formerly FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets), this standard amended the factors that should be
considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset
under intangibles accounting. The adoption of this accounting
standard did not have any impact on our consolidated financial
statements.
Effective April 1, 2009, we adopted a new accounting
standard regarding interim disclosure about fair value of
financial instruments. As codified under ASC
825-10-65
(formerly FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosure about Fair Value of Financial
Instruments), this standard amended disclosure
requirements about fair value of financial instruments for
interim reporting periods of publicly traded companies as well
as in annual financial statements and to require those
disclosures in summarized financial information at interim
reporting periods. The adoption of this accounting standard did
not have any impact on our consolidated financial statements.
Effective April 1, 2009, we adopted a new accounting
standard for subsequent events. As codified in ASC
855-10
(formerly SFAS No. 165, Subsequent
Events), this standard established general standards of
accounting for, and requires disclosure of, events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The adoption of this
accounting standard did not have a material effect on our
results of operations or financial position. Subsequent events
through March 3, 2010 have been evaluated for disclosure
and recognition.
Effective October 1, 2009, we adopted a new accounting
standard for measuring liabilities at fair value accounting. As
codified in ASC
820-10
(formerly Accounting Standards Update
No. 2009-5,
Measuring Liabilities at Fair Value), this standard amended
existing standards regarding fair value measurements by
providing additional guidance clarifying the measurement of
liabilities at fair value. The standard also clarifies that when
estimating the fair value of a liability, a reporting entity is
not required to adjust the liability to include inputs relating
to the existence of transfer restrictions on that liability. The
adoption of this accounting standard did not have any impact on
our consolidated financial statements.
In September 2009, the FASB issued a new accounting standard
regarding revenue arrangements with multiple deliverables. As
codified in ASC
605-25
(formerly Emerging Issues Task Force Issue
No. 08-1,
Revenue Arrangements with Multiple Deliverables), this
accounting standard sets forth requirements that must be met for
an entity to recognize revenue from the sale of a delivered item
that is part of a multiple-element arrangement when other items
have not yet been delivered. One of those current requirements
is that there be objective and reliable evidence of the
standalone selling price of the undelivered items, which must be
supported by either vendor-specific objective evidence (VSOE) or
third-party evidence (TPE).
This consensus eliminates the requirement that all undelivered
elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE
or TPE of the standalone selling price for one or more delivered
or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of
those elements. The overall arrangement fee will be allocated to
each element (both delivered and undelivered items) based on
their
F-17
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
relative selling prices, regardless of whether those selling
prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the
residual method of allocating an overall arrangement
fee between delivered and undelivered elements will no longer be
permitted. The accounting standard is effective prospectively
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. We are
evaluating the potential impact of these requirements on our
consolidated financial statements.
On November 28, 2007, we completed the acquisition of
Covance Cardiac Safety Services, Inc. (CCSS) from Covance Inc.
(Covance). We have included CCSSs operating results in our
Consolidated Statements of Operations from the date of the
acquisition. 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.
The period for contingent payments runs through
December 31, 2010. We also incurred approximately
$1.1 million in transaction costs. Through
December 31, 2009, Covance earned $5.2 million of this
contingent amount, of which $3.0 million was recognized in
2007, $2.0 million in the year ended December 31, 2008
and $0.2 million in the year ended December 31, 2009.
At December 31, 2009, approximately $0.2 million of
the contingent amount earned remained to be paid to Covance
which we recorded in accounts payable. These contingent amounts
increased goodwill by $5.2 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.
We fully integrated the operations of CCSS into our existing
operations in the quarter ended, September 30, 2008. We did
so by merging CCSSs Reno, Nevada based operations into our
existing operations and closing the operations in Reno. The
following table sets forth the activity and balances of our
accrued liabilities relating to severance and lease costs
associated with the closing of CCSS operations, which are
included in Accrued expenses and Other
liabilities on our Consolidated Balance Sheets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
Severance
|
|
|
Liability
|
|
|
Balance at acquisition at November 28, 2007
|
|
$
|
1,165
|
|
|
$
|
900
|
|
Adjustments to previous estimates
|
|
|
16
|
|
|
|
|
|
Cash payments
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,126
|
|
|
|
900
|
|
Additional reserve recorded
|
|
|
21
|
|
|
|
|
|
Adjustments to previous estimates
|
|
|
(255
|
)
|
|
|
1,183
|
|
Cash payments
|
|
|
(801
|
)
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
91
|
|
|
|
1,758
|
|
Adjustments to previous estimates
|
|
|
|
|
|
|
500
|
|
Cash payments
|
|
|
(91
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
|
|
|
$
|
1,758
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008 and 2009, goodwill
was increased by $3.7 million and $0.2 million,
respectively. The $3.7 million is comprised of contingent
payments to Covance of $2.0 million, $1.2 million of
net
F-18
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
adjustments to severance, lease costs and deferred taxes and
additional transaction costs of $0.5 million. The
$0.2 million is comprised of contingent payments to
Covance. 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 the period presented after giving effect
to certain adjustments including the amortization of intangible
assets. Our 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 year ended
December 31, 2007 combines our historical results for this
year with the historical results for the comparable reporting
period 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 the period 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.
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2007
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
117,243
|
|
Operating income
|
|
|
14,455
|
|
Net income
|
|
|
8,785
|
|
Basic net income per share
|
|
$
|
0.18
|
|
Diluted net income per share
|
|
$
|
0.17
|
|
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, 2008 and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
Description
|
|
Gross 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
|
Useful Life
|
|
Description
|
|
Gross Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(In Years)
|
|
|
Backlog
|
|
$
|
1,900
|
|
|
$
|
1,643
|
|
|
$
|
257
|
*
|
|
|
|
|
|
|
3
|
|
Customer Relationships
|
|
|
1,700
|
|
|
|
350
|
|
|
$
|
1,350
|
|
|
|
|
|
|
|
10
|
|
Technology
|
|
|
400
|
|
|
|
400
|
|
|
$
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
2,393
|
|
|
$
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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, 2008 and 2009 was $151, $1,700 and $542, respectively.
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
|
|
|
2010
|
|
$
|
431
|
|
2011
|
|
|
170
|
|
2012
|
|
|
170
|
|
2013
|
|
|
170
|
|
2014
|
|
|
170
|
|
Thereafter
|
|
|
496
|
|
|
|
|
|
|
Total
|
|
$
|
1,607
|
|
|
|
|
|
|
|
|
4.
|
Accounts
Receivable, Net
|
The components of accounts receivable, net were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Billed
|
|
$
|
29,660
|
|
|
$
|
15,481
|
|
Unbilled
|
|
|
212
|
|
|
|
1,646
|
|
Allowance for doubtful accounts
|
|
|
(695
|
)
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,177
|
|
|
$
|
16,579
|
|
|
|
|
|
|
|
|
|
|
F-20
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
5.
|
Property
and Equipment, Net
|
The components of property and equipment, net were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Computer and other equipment
|
|
$
|
14,933
|
|
|
$
|
15,839
|
|
Cardiac safety rental equipment
|
|
|
35,190
|
|
|
|
37,293
|
|
Furniture and fixtures
|
|
|
3,336
|
|
|
|
3,585
|
|
Leasehold improvements
|
|
|
5,841
|
|
|
|
5,974
|
|
System development costs
|
|
|
23,970
|
|
|
|
26,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,270
|
|
|
|
89,521
|
|
Less-Accumulated depreciation
|
|
|
(53,631
|
)
|
|
|
(65,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,639
|
|
|
$
|
24,205
|
|
|
|
|
|
|
|
|
|
|
We have a line of credit arrangement with Wachovia Bank,
National Association, a Wells Fargo company, totaling
$3.0 million which expires on June 1, 2010. To date,
we have not borrowed any amounts under our line of credit. As of
December 31, 2009, we had outstanding letters of credit of
$0.5 million, which reduced our available borrowings under
the line of credit to $2.5 million.
The income tax provision consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,038
|
|
|
$
|
8,249
|
|
|
$
|
3,909
|
|
State and local
|
|
|
1,212
|
|
|
|
2,822
|
|
|
|
216
|
|
Foreign
|
|
|
1,473
|
|
|
|
2,639
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,723
|
|
|
|
13,710
|
|
|
|
5,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(403
|
)
|
|
|
1,405
|
|
|
|
543
|
|
State and local
|
|
|
378
|
|
|
|
521
|
|
|
|
924
|
|
Foreign
|
|
|
(493
|
)
|
|
|
(513
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
1,413
|
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,205
|
|
|
$
|
15,123
|
|
|
$
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income before income taxes was $4.1 million,
$8.6 million and $4.5 million for the years ended
December 31, 2007, 2008 and 2009, respectively. 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 this assertion, the amount of unrecognized
deferred tax liabilities related to undistributed foreign
earnings is approximately $0.8 million as of
December 31, 2009.
F-21
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Tax at federal statutory rate
|
|
$
|
8,560
|
|
|
$
|
14,044
|
|
|
$
|
6,118
|
|
State and local taxes, net of federal
|
|
|
1,033
|
|
|
|
2,172
|
|
|
|
477
|
|
Foreign tax differential
|
|
|
|
|
|
|
(931
|
)
|
|
|
(315
|
)
|
Federal tax credits
|
|
|
(175
|
)
|
|
|
(90
|
)
|
|
|
90
|
|
Tax-free interest income
|
|
|
(551
|
)
|
|
|
(59
|
)
|
|
|
|
|
Share-based compensation expense
|
|
|
361
|
|
|
|
352
|
|
|
|
423
|
|
Decrease in unrecognized tax benefits
|
|
|
|
|
|
|
(550
|
)
|
|
|
(186
|
)
|
Other
|
|
|
(23
|
)
|
|
|
185
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,205
|
|
|
$
|
15,123
|
|
|
$
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits of $0.8 million, $0.9 million and
$0.1 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, 2007, 2008
and 2009, respectively.
The components of our net deferred tax assets (liabilities) were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Goodwill amortization
|
|
$
|
623
|
|
|
$
|
|
|
Depreciation
|
|
|
1,412
|
|
|
|
1,205
|
|
Capitalized R&D expenses
|
|
|
1,274
|
|
|
|
1,055
|
|
Net operating loss carryforwards
|
|
|
116
|
|
|
|
35
|
|
Investment impairment
|
|
|
1,049
|
|
|
|
1,112
|
|
Reserves and accruals
|
|
|
2,552
|
|
|
|
2,521
|
|
Share-based compensation expense
|
|
|
1,258
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
8,284
|
|
|
|
7,796
|
|
|
|
|
|
|
|
|
|
|
Repatriation of UK earnings
|
|
|
(703
|
)
|
|
|
(703
|
)
|
Depreciation
|
|
|
(5,112
|
)
|
|
|
(5,642
|
)
|
Amortization of intangibles
|
|
|
(921
|
)
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(6,736
|
)
|
|
|
(7,537
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets valuation allowance
|
|
|
(1,049
|
)
|
|
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
499
|
|
|
$
|
(853
|
)
|
|
|
|
|
|
|
|
|
|
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 revenue or direct costs, as
determined by the relevant revenue source. The effective tax
rate for the year ended December 31, 2009 reflects a change
in the calculation of transfer pricing for Cardiac Safety
services. Through 2008, we calculated our transfer pricing for
Cardiac Safety services using a profit split methodology based
on cost. After reviewing the transfer pricing methodology,
management decided to modify its application of the profit split
methodology for Cardiac Safety services to allocate costs based
on revenue beginning in 2009. Had we maintained the same
calculation in 2009 as we used in 2008, the income tax provision
would have been
F-22
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
increased by $0.4 million for the year ended
December 31, 2009. While we believe that the profit split
methodology is the best available methodology currently, we will
continue to assess the available options.
At December 31, 2009, we had net operating loss
carryforwards for state tax purposes of approximately
$3.0 million, which will begin to expire in 2023. At
December 31, 2007, 2008 and 2009, we had a valuation
allowance of $1.0 million, $1.0 million and
$1.1 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.
At December 31, 2008, we had $0.5 million of
unrecognized tax benefits, all of which would affect our
effective tax rate if recognized. At December 31, 2009, we
had $0.2 million of unrecognized tax benefits. We recognize
interest and penalties related to unrecognized tax benefits in
income tax expense.
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, we are no longer
subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2006. In
the fourth quarter of 2009, the Internal Revenue Service (IRS)
completed an examination of the Companys U.S. income
tax returns for 2006 through 2007. We agreed to certain
adjustments to our research credits tax positions that the IRS
proposed and paid $0.2 million as a result of the
resolution of the audit. The adjustments did not result in a
material change to our financial position. Additionally, we
recognized a $0.2 million tax benefit related to the
reversal of a tax accrual for a previously uncertain tax
position in the year months ended December 31, 2009 as a
result of a lapse of the applicable statute of limitations.
The following is a rollforward of the total gross unrecognized
tax benefit liabilities for the years ended December 31,
2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Unrecognized tax benefits at January 1
|
|
$
|
991
|
|
|
$
|
498
|
|
Increase in unrecognized tax benefits for tax positions taken in
a prior year
|
|
|
23
|
|
|
|
|
|
Increase in unrecognized tax benefits for tax positions taken in
the current year
|
|
|
34
|
|
|
|
13
|
|
IRS audit settlement
|
|
|
|
|
|
|
(146
|
)
|
Expiration of statutes of limitations
|
|
|
(550
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at December 31
|
|
$
|
498
|
|
|
$
|
179
|
|
|
|
|
|
|
|
|
|
|
The tax years 2006 through 2009 remain open to examination by
the major taxing jurisdictions to which we are subject. The
unrecognized tax benefits are not expected to change during the
next twelve months as a result of potential lapses of the
statutes of limitations in various jurisdictions in which we
operate.
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Accrued compensation
|
|
$
|
5,518
|
|
|
$
|
2,485
|
|
Due to clients
|
|
|
1,242
|
|
|
|
1,242
|
|
Accrued outside services
|
|
|
421
|
|
|
|
252
|
|
Deferred rent
|
|
|
408
|
|
|
|
394
|
|
Other accrued liabilities
|
|
|
1,793
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
9,382
|
|
|
$
|
5,990
|
|
|
|
|
|
|
|
|
|
|
F-23
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
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 2007, $0.7 million in 2008 and
$0.6 million in 2009.
|
|
10.
|
Related
Party Transactions
|
Our Chairman, Dr. Morganroth, is a cardiologist who,
through his wholly-owned professional corporation, provides
medical professional services to the Company and receives
consulting fees as an independent contractor. Additionally,
beginning in January 2007, we entered into an arrangement with
Dr. Morganroths professional corporation, relating to
Dr. Morganroths initiation of an ERT consulting
practice through the transition of his historic consulting
services to us. Our Executive Vice President and Chief Medical
Officer is responsible for assigning the consulting work to
internal and external resources based upon the requirements of
the engagement. In return, Dr. Morganroths
professional corporation receives a percentage fee of 80% of the
net amounts we bill for Dr. Morganroths services to
our customers. We recorded revenues in connection with services
billed to customers under this consulting arrangement of
approximately $1.3 million, $1.6 million and
$1.3 million in the years ended December 31, 2007,
2008 and 2009, respectively. We incurred percentage fees under
this consulting arrangement of approximately $1.1 million,
$1.3 million and $1.0 million in the years ended
December 31, 2007, 2008 and 2009, respectively. Total
amounts payable incurred under this consulting arrangement,
including consulting fees and the percentage fees, approximated
$1.5 million, $1.8 million and $1.3 million in
the years ended December 31, 2007, 2008 and 2009,
respectively. At December 31, 2008 and 2009, we owed
$0.3 million and $0.1 million, respectively, to the
professional corporation in connection with this consulting
agreement, which is included in accounts payable.
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 $0.9 million,
$0.5 million and $0.3 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
|
|
11.
|
Equity
Incentive Plans
|
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 9,450,000 shares of
the Companys common stock, as subsequently amended. 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. 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 accordance with the terms of
the 2003 Plan, there are a total of 7,318,625 shares
reserved for issuance under the 2003 Plan and there were
2,288,755 shares available for grant as of
December 31, 2009.
On April 26, 2007, the stockholders approved the adoption
of the Companys Amended and Restated 2003 Equity Incentive
Plan (the 2003 Equity Plan) which included
prohibition on repricing of any stock options
F-24
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
granted under the Plan unless the stockholders approve such
repricing and permitted awards of stock appreciation rights,
restricted stock, long term performance awards and performance
shares in addition to grants of stock options. On April 29,
2009, the Board of Directors approved a revised amendment to the
2003 Equity Plan that provides for the inclusion of restricted
stock units in addition to the other equity-based awards
authorized thereunder and eliminated the fixed option grants to
outside directors. No restricted stock or restricted stock units
have been granted as of December 31, 2009.
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, 2009
|
|
|
3,635,860
|
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,305,650
|
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(261,215
|
)
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(273,689
|
)
|
|
|
11.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
4,406,606
|
|
|
$
|
9.62
|
|
|
|
4.8
|
|
|
$
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable or expected to vest at December 31, 2009
|
|
|
4,125,446
|
|
|
$
|
9.77
|
|
|
|
4.7
|
|
|
$
|
2,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2009
|
|
|
2,532,206
|
|
|
$
|
11.26
|
|
|
|
4.1
|
|
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2009 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,
2009. 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, 2007, 2008 and 2009 was
$2.5 million, $6.1 million and $1.0 million,
respectively.
As of December 31, 2009, an aggregate of 2,532,206 options
with a weighted average exercise price of $11.26 per share were
exercisable under the 1996 Plan and the 2003 Plan.
As of December 31, 2009, there was $4.1 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.
On February 26, 2010, we granted 177,319 shares of
restricted stock and 672,658 stock options to employees.
Tax
Effect Related to Share-Based Compensation Expense
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 consolidated 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, 2007, 2008 and 2009 related to share-based
compensation expense was approximately $0.4 million,
$0.6 million and $0.7 million, respectively.
F-25
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
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 has been leased under capital leases. Rent expense,
net of sublease rentals, for all operating leases for the years
ended December 31, 2007, 2008 and 2009 was
$3.4 million, $3.3 million and $2.9 million,
respectively.
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, 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Leases
|
|
|
Income
|
|
|
2010
|
|
$
|
3,607
|
|
|
$
|
323
|
|
2011
|
|
|
2,630
|
|
|
|
323
|
|
2012
|
|
|
2,557
|
|
|
|
296
|
|
2013
|
|
|
2,316
|
|
|
|
|
|
2014
|
|
|
1,582
|
|
|
|
|
|
2015 and thereafter
|
|
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,271
|
|
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
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 (original assessments) offered by HTS along
with HTSs IVR system. We placed the system into production
in December 2007. As of December 31, 2009, we paid HTS
$1.5 million for the license and $1.0 million in
advanced payments against future royalties. As of
December 31, 2009, HTS earned royalties of
$0.2 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. Any royalties earned by HTS on the original assessments
will be applied against these advance payments. All future
payments to HTS will be solely based on royalty payments based
on revenues received from electronic patient reported outcomes
ePROtm
sales.
On November 28, 2007, we completed the acquisition of
Covance Cardiac Safety Services, Inc. (CCSS) from Covance Inc.
(Covance). We have included CCSSs operating results in our
Consolidated Statements of Operations from the date of the
acquisition. 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
F-26
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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. The period for contingent
payments runs through December 31, 2010. We also incurred
approximately $1.1 million in transaction costs. Through
December 31, 2009, Covance earned $5.2 million of this
contingent amount, of which $3.0 million was recognized in
2007, $2.0 million in the year ended December 31, 2008
and $0.2 million in the year ended December 31, 2009.
At December 31, 2009, approximately $0.2 million of
the contingent amount earned remained to be paid to Covance
which we recorded in accounts payable. These contingent amounts
increased goodwill by $5.2 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.
We fully integrated the operations of CCSS into our existing
operations in the quarter ended, September 30, 2008. We did
so by merging CCSSs Reno, Nevada based operations into our
existing operations and closing the operations in Reno.
Indemnification
In our former electronic data capture (EDC) business, we
licensed software to our customers under written agreements.
Each agreement contained the relevant terms of the contractual
arrangement with the customer, and generally included 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 limited 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.
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. We amended the consulting
agreement by entering into a new agreement with
Dr. Morganroths professional corporation effective
January 1, 2008. The agreement provided 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. We further amended the consulting
agreement by entering into a new agreement with
Dr. Morganroths professional corporation effective
January 1, 2009. The agreement provided for compensation of
$309,000 per year plus discretionary bonuses to be determined by
the Board of Directors. No discretionary bonus was awarded under
the consulting agreement for the year ended December 31,
2009.
Additionally, beginning in January 2007, we entered into an
arrangement with Dr. Morganroths professional
corporation, relating to Dr. Morganroths initiation
of an ERT consulting practice through the transition of his
historic consulting services to us. Our Executive Vice President
and Chief Medical Officer is responsible for assigning the
consulting work to internal and external resources based upon
the requirements of the engagement. In
F-27
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
return, Dr. Morganroths professional corporation
receives a percentage fee of 80% of the net amounts we bill for
Dr. Morganroths services to our customers. We
recorded revenues in connection with services billed to
customers under this consulting arrangement of approximately
$1.3 million, $1.6 million and $1.3 million in
the years ended December 31, 2007, 2008 and 2009,
respectively. We incurred percentage fees under this consulting
arrangement of approximately $1.1 million,
$1.3 million and $1.0 million in the years ended
December 31, 2007, 2008 and 2009, respectively. Total
amounts payable incurred under this consulting arrangement,
including consulting fees and the percentage fees, approximated
$1.5 million, $1.8 million and $1.3 million in
the years ended December 31, 2007, 2008 and 2009,
respectively. At December 31, 2008 and 2009, we owed
$0.3 million and $0.1 million, respectively, to the
professional corporation in connection with this consulting
agreement, which is included in accounts payable.
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
F-28
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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.
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
|
A fair value measurement assumes that the transaction to sell an
asset or transfer a liability occurs in the principal market for
the asset or liability or, in the absence of a principal market,
the most advantageous market for the asset or liability. Fair
value is based upon an exit price model.
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, 2009 consisted of an auction
rate security or ARS, issued by a municipality, short-term
investments in municipal securities, bonds of government
sponsored agencies, and A1P1 rated commercial bonds and paper,
and marketable securities received from the buyer of certain
assets of our EDC operations.
Available-for-sale
securities are included in short-term investments in our
consolidated balance sheets with the exception of the marketable
securities. The marketable securities, which are priced at a
discount due to a restriction on trading that remains in effect
until June 23, 2010, are included in investments in
marketable securities in our consolidated balance sheets. The
discount on the marketable securities is valued using an option
pricing model and takes into consideration multiple inputs
including quoted prices of the securities, volatility factors
and discount rates. The three levels of the fair value hierarchy
are described below:
|
|
|
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-29
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 and
2009 (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
|
|
|
$
|
|
|
|
$
|
|
|
Municipal securities
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,426
|
|
|
$
|
66,376
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009
|
|
|
|
|
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
|
|
$
|
68,979
|
|
|
$
|
68,979
|
|
|
$
|
|
|
|
$
|
|
|
Municipal securities
|
|
|
6,762
|
|
|
|
6,712
|
|
|
|
|
|
|
|
50
|
|
Corporate debt securities
|
|
|
1,770
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
Bonds of government sponsored agencies
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
1,026
|
|
|
|
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,787
|
|
|
$
|
78,711
|
|
|
$
|
1,026
|
|
|
$
|
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, 2007
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
EDC licenses and services revenues
|
|
$
|
6,331
|
|
|
$
|
|
|
|
$
|
6,331
|
|
Service revenues
|
|
|
51,936
|
|
|
|
13,980
|
|
|
|
65,916
|
|
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-30
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
EDC licenses and services revenues
|
|
$
|
5,894
|
|
|
$
|
|
|
|
$
|
5,894
|
|
Service revenues
|
|
|
79,123
|
|
|
|
17,444
|
|
|
|
96,567
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Total
|
|
|
EDC licenses and services revenues
|
|
$
|
2,501
|
|
|
$
|
|
|
|
$
|
2,501
|
|
Service revenues
|
|
|
49,869
|
|
|
|
14,786
|
|
|
|
64,655
|
|
Site support revenues
|
|
|
18,600
|
|
|
|
8,067
|
|
|
|
26,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
70,970
|
|
|
$
|
22,853
|
|
|
$
|
93,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
12,924
|
|
|
$
|
4,989
|
|
|
$
|
17,913
|
|
Long-lived assets
|
|
$
|
20,715
|
|
|
$
|
3,490
|
|
|
$
|
24,205
|
|
Total assets
|
|
$
|
142,685
|
|
|
$
|
22,176
|
|
|
$
|
164,861
|
|
|
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services
|
|
$
|
1,303
|
|
|
$
|
1,487
|
|
|
$
|
1,564
|
|
|
$
|
1,540
|
|
Services
|
|
|
24,595
|
|
|
|
26,763
|
|
|
|
24,184
|
|
|
|
21,025
|
|
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 EDC licenses and services
|
|
|
451
|
|
|
|
468
|
|
|
|
452
|
|
|
|
472
|
|
Cost of services
|
|
|
10,263
|
|
|
|
10,185
|
|
|
|
9,678
|
|
|
|
8,483
|
|
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
|
|
F-31
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services
|
|
$
|
1,418
|
|
|
$
|
1,083
|
|
|
$
|
|
|
|
$
|
|
|
Services
|
|
|
16,108
|
|
|
|
16,215
|
|
|
|
15,969
|
|
|
|
16,363
|
|
Site support
|
|
|
6,260
|
|
|
|
6,878
|
|
|
|
6,757
|
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
23,786
|
|
|
|
24,176
|
|
|
|
22,726
|
|
|
|
23,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of EDC licenses and services
|
|
|
466
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
7,693
|
|
|
|
7,671
|
|
|
|
7,577
|
|
|
|
6,945
|
|
Cost of site support
|
|
|
3,635
|
|
|
|
3,470
|
|
|
|
3,418
|
|
|
|
3,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
11,794
|
|
|
|
11,538
|
|
|
|
10,995
|
|
|
|
9,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,992
|
|
|
|
12,638
|
|
|
|
11,731
|
|
|
|
13,169
|
|
Operating income
|
|
|
3,340
|
|
|
|
4,844
|
|
|
|
4,709
|
|
|
|
5,020
|
|
Net income
|
|
|
2,070
|
|
|
|
2,548
|
|
|
|
2,819
|
|
|
|
3,250
|
|
Basic net income per share
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
Diluted net income per share
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
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-32