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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, 2010
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
(State of Incorporation)
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22-3264604
(I.R.S. Employer Identification No.)
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1818 Market Street Philadelphia, PA
(Address of Principal Executive Offices)
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19103
(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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer 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, 2010, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $370,226,190 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 18,
2011
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Common Stock, $.01 par value per share
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48,875,255 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 2011 Annual
Meeting of Stockholders, to be filed with the Commission
pursuant to Regulation 14A.
TABLE OF
CONTENTS
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Item
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Number
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3
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Business
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4
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5
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9
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10
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10
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11
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11
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12
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15
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16
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16
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16
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Risk Factors
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17
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Unresolved Staff Comments
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29
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Properties
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29
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Legal Proceedings
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29
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Executive Officers of Registrant
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30
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PART II
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Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
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32
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Selected Financial Data
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34
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Managements Discussion and Analysis of Financial
Condition and Results of Operations
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35
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35
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36
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36
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39
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42
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44
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46
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46
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47
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Quantitative and Qualitative Disclosures About Market
Risk
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50
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50
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50
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Financial Statements and Supplementary Data
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51
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Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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51
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Controls and Procedures
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51
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Other Information
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51
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PART III
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Directors, Executive Officers and Corporate Governance
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52
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Executive Compensation
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52
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Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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52
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Certain Relationships and Related Transactions, and Director
Independence
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52
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Principal Accountant Fees and Services
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52
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PART IV
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Exhibits and Financial Statement Schedules
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53
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57
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F-1
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EX-10.59 |
EXHIBIT 12.1 |
EXHIBIT 21.1 |
EXHIBIT 23.1 |
EXHIBIT 31.1 |
EXHIBIT 31.2 |
EXHIBIT 32.1 |
EXHIBIT 32.2 |
2
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
customer; our ability to successfully integrate acquisitions;
competitive factors in the market for centralized cardiac safety
and respiratory services; changes in the biopharmaceutical and
healthcare organizations 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.
(ERT®),
a Delaware corporation, was founded in 1977. ERT and its
consolidated subsidiaries collectively are referred to as the
Company or we. We are a global
technology-driven provider of services and customizable medical
devices primarily to biopharmaceutical organizations and, to a
lesser extent, healthcare organizations. We are the market
leader for centralized cardiac safety (Cardiac Safety solutions)
and respiratory efficacy services (Respiratory solutions) in
drug development and also collect, analyze and distribute
electronic patient reported outcomes
(ePROtm)
in multiple modalities across all phases of clinical research.
Clinical trials employ diagnostic tests to measure the effect of
the drug on certain body organs and systems to determine the
products safety and efficacy. Our technology-based
services 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. 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. Our centralized Respiratory solutions
are utilized by biopharmaceutical and healthcare organizations
and CROs that are developing new compounds for the treatment of
asthma, emphysema, cystic fibrosis and Chronic Obstructive
Pulmonary Disease (COPD) to assess the efficacy of a drug or to
evaluate compounds that have an effect on pulmonary function. In
addition, we also offer site support, which includes the rental
and sale of devices to support cardiac and respiratory services
along with related supplies and logistics management. We also
offer ePRO devices and solutions along with proprietary clinical
assessments.
On May 28, 2010, we acquired Research Services Germany 234
GmbH (Research Services or RS), a leading provider of
respiratory diagnostics services and a manufacturer of
diagnostic devices that also offers cardiac safety and ePRO
services. RS was formed as a result of a demerger of CareFusion
Germany 234 GmbH under German law, which effectively divided
CareFusion Germany 234 GmbH into RS and another entity. RS is
comprised of the research services division of CareFusion
Germany 234 GmbH and certain research operations of CareFusion
Corporation (CareFusion). We paid $82.7 million for RS. The
acquisition and related transaction costs were financed from our
existing cash and a portion of the $23.0 million drawn from
our $40.0 million revolving credit facility.
Our acquisition of RS offers multiple strategic benefits
including:
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Establishes us as one of the market leaders in respiratory core
lab services in the clinical trials market. The transaction
provides us with a leadership position in an attractive clinical
end market and serves to diversify our revenue base.
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Provides us with a leading diagnostic device capability. RS is a
leader in diagnostic device manufacturing, having developed over
20 proprietary devices and supporting software platforms for use
in the clinical trials industry. This device manufacturing
expertise has expanded our technological capabilities, enables
us to provide greater breadth of services and technologies for
clinical research, and will serve as a basis for development of
other healthcare solutions.
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Expands our revenue base in cardiac safety. RS has a
significant, and growing, business in cardiac safety services
that will add to our current position in this market.
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Provides scale for our ePRO business, as well as expands the
depth and breadth of our ePRO services. We believe that this
transaction established us as one of the five largest providers
in the ePRO market. RSs offering is based on innovative
hand-held devices. When combined with our interactive voice
response technology and our planned web-based technology, we
will be able to offer our customers a multi-modality approach
for their ePRO solutions.
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Significantly expands our global footprint. RS employs more than
260 people, most of whom are in Germany. This increased
local European presence will enable us to bolster our already
strong international presence, better serve our continental
European customers, and expand our relationships with other
customers in Europe.
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Accelerates our movement into the Phase IV safety market
and healthcare solutions. RS device manufacturing and
services capabilities provides us with a platform and experience
for future growth into these adjacent markets.
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Service
Offerings
Our revenues by service solution as a percentage of total
revenues were as follows:
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Year Ended December 31,
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2008
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2009
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2010
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Net revenues:
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Services
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72.5
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68.9
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60.8
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Site support
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23.0
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28.4
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39.2
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EDC licenses and services
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4.5
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2.7
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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 services revenues consist primarily of our services offered
under our Cardiac Safety, Respiratory and, to a lesser extent,
our electronic patient reported outcomes
(ePROtm)
solutions that we provide on a fee for services basis and are
recognized as the services are performed. We also provide
Cardiac Safety and Respiratory consulting services on a time and
materials basis and recognize revenues as we perform the
services. Our site support revenue, consisting of equipment
rentals and sales along with related supplies and logistics
management, are recognized at the time of sale or over the
rental period. Our former electronic data capture (EDC)
operations, which we sold in June 2009, are included in EDC
licenses and services revenue and included license revenue,
technology consulting and training services and software
maintenance services.
We offer the following products and services on a global basis:
Centralized
Cardiac Safety Solutions
We provide centralized cardiac safety testing which is a
critical component of diagnostic testing in clinical trials. Our
Cardiac Safety solutions include the collection, interpretation
and distribution of 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).
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 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.
5
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 that the use of centralized cardiac safety laboratories
is more efficient and provides the customer with an overall
lower cost. We have introduced a low-cost cardiac safety
equipment solution to further incent clinical trial sponsors to
transition from decentralized to centralized collection and
analysis of ECGs.
Our Cardiac Safety solutions, including our proprietary
EXPERT®
technology platform, provide for workflow-enabled cardiac safety
data collection, interpretation and distribution of ECG data and
images as well as for analysis and cardiologist interpretation
of ECGs performed on research subjects in connection with our
customers clinical trials.
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.
As part of our Cardiac Safety solutions, we offer continuous
digital 12-lead ECG recording and longer-term Holter recording.
For 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, we can evaluate 12-lead
ECGs 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 presence of arrhythmias,
cardiac ischemia
and/or heart
rate variability findings. Holter recording 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 primarily the incidence of arrhythmias, but also
cardiac ischemia
and/or heart
rate variability.
Our Cardiac Safety solutions also include FDA XML delivery,
which provides for the delivery of ECGs in a format compliant
with the United States Food and Drug Administrations XML
standard for digital ECGs for submission to the FDA ECG
Warehouse. We also provide ECG equipment through rental and
sales to customers to perform the ECG recordings and give them
means to send such recordings to us. Our portal product, MyStudy
Portaltm,
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.
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. The primary
techniques core laboratories use for interval duration
measurements and morphology evaluations include a fully manual
and a semi-automated methodology. The fully manual measurement,
as we perform it, 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
we perform it, 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.
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 may utilize
cardiologists or other human readers to over-read a subset of
the ECGs collected. We also offer 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, none of our customers
have requested us to
6
conduct a study using a fully- automated reading methodology for
Thorough QTc trials 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 small 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 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 debate in
that the addition of another algorithm to the entire core lab
process would result in significant additional costs due to its
licensing costs. 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 and the
smaller Phase I 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.
Respiratory
Solutions
Spirometry is the most commonly performed pulmonary function
test (PFT) today and measures the volume
and/or flow
of air that can be inhaled and exhaled. Sponsors developing new
compounds for the treatment of asthma, emphysema, cystic
fibrosis and COPD use this non-invasive, cost effective test to
assess the efficacy of a drug. Lung diseases such as asthma,
COPD, and emphysema decrease a patients air flow by
narrowing or blocking the airways during exhalation. The most
important parameters of spirometry are forced vital capacity
(FVC) and the forced expiratory volume (FEV). The FVC is the
volume delivered during maximal expiration (or Peak
Flow) starting from a deep inspiration. The FEV is the
volume delivered in the first second of the FVC maneuver. Peak
flow is a simple, non-invasive and inexpensive method to measure
the function of the airway and we provide a unique electronic
peak flow meter with integrated diary for clinical trials
capturing peak flow data at home.
The diffusing capacity of the lung related to carbon monoxide,
which is known as DLCO, measures the extent to which oxygen
passes from the air sacs of the lungs into the blood and
involves measuring the partial pressure difference between
inspired and expired carbon monoxide. Our centralized DLCO
testing offers sponsors the advantage of being able to diagnose
and treat lung disorders not found by either spirometry or chest
x-ray. DLCO testing is also described as single-breath
determination of carbon monoxide uptake in the lung or
Lung Safety in clinical research and is used to
determine if new drugs being inhaled for pain, diabetes or
multiple sclerosis may have an effect on the lung, e.g. if the
diffusion of oxygen into the bloodstream is affected or not.
In the study of respiratory drugs, the validity of spirometry
values is highly dependent on the cooperation of the subject,
the interaction of the subject with the study coordinator and
the influences of the surrounding environment. The analysis of
any parameter without considering these factors could result in
faulty or erroneous conclusions. ERT offers centralized and
standardized respiratory services which enables each site to
receive the exact same equipment with the same protocol specific
software for the clinical trial and the electronic transfer of
the data to a centralized database, where spirometry overread is
performed and feedback to the sites regarding the quality of the
spirometry is given.
In 1979, the American Thoracic Society (ATS) issued its first
statement on the standardization of spirometry. The standards
were updated in 1987 and again in 1994. In parallel a similar
initiative by the European Community for Steel and Coal,
resulted in the first European standardization document in 1983.
These standards were then updated in 1993 as the official
statement of the European Respiratory Society (ERS). The new
ATS/ERS
7
Standardization of Spirometry 2005 document aligns the views of
the ATS and ERS in an attempt to publish standards that can be
applied more globally. Our medical devices pertaining to
spirometry meet these standards.
ERT provides biopharmaceutical and healthcare organizations a
one-stop-shop clinical evaluation for respiratory
data which may also include additional testing for cardiac
safety and related ePRO analysis in a fully integrated system.
We have established a preferred centralized respiratory vendor
status with several of the top 20 pharmaceutical companies.
Our staff of medical doctors, exercise physiologists and
respiratory therapists are trained and certified to over-read
data from pulmonary function and cardio-pulmonary stress tests.
Electronic
Patient Reported Outcomes (ePRO)
We offer electronic patient report outcomes (ePRO) solutions
which refer to the electronic capture of patient self-reported
data pertaining to their quality of life. ePRO solutions offer
our customers higher quality data with accurate timestamps and
real-time data access compared to existing practice of using
paper based diaries and assessments. ePRO provides less variable
and more reliable data enabling smaller trials and better
scientific conclusions.
Our ePRO solutions include both products and services for
clinical trials. We manufacture devices which include handheld
electronic diaries that are designed exclusively for clinical
research including our
VIAPadtm
eDiary handheld device which enables high resolution, remote
collection, memory and automatic data transmission and our
electronic digital
VIAPentm.
We also provide an Interactive Voice Response (IVR) system
accessible through standard telephone lines and offer device
customization, worldwide logistics and our in-house global and
local support to ensure comprehensive and efficient trial
management. Diaries, screening, recruitment and all clinical
assessments can be completed directly by the subject without
requiring clinician involvement.
In December 2009 the FDA finalized PRO Guidance for Label
Claims, which outlines the steps required to develop a PRO
instrument from hypothesis of a concept or claim through data
item evaluation, collection, cognitive debriefing,
interpretation, revision and finalization. We believe that our
devices conform to this guidance.
Increased suicidality risk with novel compounds is a growing
concern. Suicidality monitoring is now a requirement in an
increasing number of drug-development efforts to ensure
effective drug-profiling and patient-safety monitoring.
Recently, the FDA released Draft Guidance on Prospective
Assessment of Suicidality in Clinical Trials. The guidance
contains recommendations for prospectively querying for
suicidality to identify patients at risk and collect complete,
timely data to be completed at baseline and all subsequent
visits in all psychiatric indications and neurological compounds.
We offer an electronic self-rated version of the FDA accepted
Columbia Suicide Severity Rating Scale
(C-SSRS) to
facilitate compliance with regulatory requirements for
prospective monitoring of suicidal ideation and behaviors. The
validated eC-SSRS solution, developed in collaboration with the
scale author and Columbia University, is a cost-effective method
of prospectively monitoring for suicidality. We believe the
eC-SSRS conforms to the FDA guidance.
Consulting
We have industry-leading experts who are readily available for
the benefit of our customers. Our Clinical Consulting Group
offers the scientific and regulatory expertise that
biopharmaceutical and healthcare organizations and Contract
Research Organizations (CROs) need to successfully run their
clinical trials. We understand the importance of regulatory
compliance and data accuracy, and we work directly with our
customers to ensure quality outcomes right from the start. We
are committed to transforming the way clinical trials are run
and empowering our customers expert decisions that help
bring safe drugs and devices to market.
The centralization of diagnostic services 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 regulatory guidelines
and, as a result, sponsors look to their vendors to provide key
scientific input into the overall process. Our consulting
service aids sponsors in the design of protocols, the creation
and analysis of statistical plans as well as providing an expert
medical report which interprets the clinical findings. We are
involved
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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 solutions.
Project
Assurance
We provide a full spectrum of project assurance services that
augment the study management and implementation efforts of
customers in support of their clinical research requirements.
Our project assurance methodology is a consistent framework
through which we can efficiently manage the delivery of all
data, from study initiation to completion. It also provides our
customers with the standards, guidelines and services that allow
us to effectively anticipate their needs and ensure proactive
communication to meet and exceed their goals.
Integrated
Product Offering
With the acquisition of RS, we now offer a fully integrated set
of products and services for centralized cardiac safety,
respiratory, and ePRO and a single point of contact for all
aspects of the electronic data collection process in clinical
trials. Our technology platform also supports the integration of
other devices to integrate additional key safety data to support
cardiac and respiratory trials.
The protocols of many of the respiratory trials in which we
participate often also require ECGs
and/or
Holter monitoring and ePRO solutions. Our flagship investigator
site device,
MasterScope®
CT, is a comprehensive solution for standardized and centralized
spirometry, full PFT, ECG and ePRO in clinical trials. Using
customized software, this innovative system combines
protocol-driven workflows (with many diagnostic applications)
into a single easy-to-use clinical trial workstation. These
workflows can be specially tailored for multicentre studies. Our
customers and their users consider the availability of a fully
integrated platform for respiratory, cardiac safety and ePRO a
major advantage.
Operations
We conduct our operations through offices in the United States
(U.S.), Germany and the United Kingdom (UK). Our international
net revenues represented approximately 21%, 24% and 57% of total
net revenues for the years ended December 31, 2008, 2009
and 2010, 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. See Note 15 to our consolidated financial
statements for additional information about geographic
operations.
During the latter half of 2010, we recognized the need to modify
the RS operations work flow processes and infrastructure to
expand capacity to support customer requirements for active and
new studies. This did impact our ability to contract for new
business with certain clients who required faster commencement
of studies than our standard delivery time would allow and still
maintain our desired level of quality. We added new staff in
Germany during the fourth quarter and into our first quarter of
2011 and continue the development of our new integrated data
handling platform, EXPERT 3. The EXPERT 3 platform
will further expand the RS capacity by improving the efficiency
and reducing the complexity of our processes. In 2011, we will
be making investments to complete the integration of the RS
business and to strengthen our infrastructure and pilot
expansion projects of our products and services into adjacent
markets. While these investments will impact our 2011 earnings,
we continue to believe our strategy will better position us for
improved growth and profitability in 2012 and beyond.
Research
and Development
Overview
As of December 31, 2010, we had 102 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 our entire suite of
services. For the years ended December 31, 2008, 2009 and
2010, our research and development expenses were
$4.4 million, $3.9 million and $5.1 million,
respectively. 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
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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. Our technology strategy centers on a corporate-wide
approach to ensuring we extend our current market leadership in
cardiac safety and respiratory services and capture market
leadership in new areas, such as ePRO and suicidality
assessments. Following the RS acquisition, we began to integrate
the technology assets we acquired throughout our operations.
2010
Research and Development Initiatives
During 2010, we undertook a series of major initiatives to
launch the following new customer facing services and new
capabilities related to our internal systems:
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We launched the first set of studies using our ePRO VIAPad
device along with our VIAConnect device for establishing
connectivity to a new backend Customer Data Management System
(CDMS);
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We launched EXPERT Logistics, a fully integrated logistics
module that is part of our
EXPERT®
system, and allowed us to retire a much less efficient third
party system;
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We continued the development of the next release of our Master
Scope, which is scheduled for completion in 2011, and will
enable support for our entire suite of medical devices;
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We completed the development phase of EXPERT ePRO, the next
generation of our ePRO platform that will integrate voice and
web based ePRO on our EXPERT platform, and we expect to complete
testing and gain operational status during 2011;
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We released a new version of EXPERT providing enhancements
across all modules Data Coordination, Analysis,
Review, and Reporting and upgrades to MyStudy Portal
consisting of new versions of our supporting IT infrastructure;
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We completed the automation of our financial reporting and the
integration of this reporting across our internal corporate
systems; and
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After our acquisition of RS, we began integrating our legacy
technology team and technology assets with those we acquired
from RS, focusing primarily on the integration of our medical
devices and Master Scope with our EXPERT platform, and we
started a number of system integration activities spanning the
needs of all corporate organizations from customer care to sales
and marketing to quality assurance that we expect to achieve
full operational status in 2012.
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Our
Customers
We serve primarily biopharmaceutical organizations and CROs and,
to a lesser extent, healthcare organizations. We have agreements
that establish the overall contractual relationship between us
and our customers with approximately 247 customers for active or
upcoming projects. We provide our solutions to 39 of the 50
largest biopharmaceutical companies globally including all of
the top 10. Novartis accounted for 28%, 18% and 23% of our
consolidated net revenues in 2010, 2009 and 2008, respectively.
No other customer accounted for 10% or more of our consolidated
net revenues during these periods.
Sales and
Marketing
We market and sell solutions primarily through our global direct
sales, sales support and professional services organizations. As
of December 31, 2010, our business development team
consisted of 62 sales, marketing and consulting professionals
worldwide, which included a direct sales force of 37 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 customers 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
customer-specific research requirement.
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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 customer 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.
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, 2010,
which included RS, was $302.9 million, compared to
$170.4 million at December 31, 2009. Contracts
included in backlog are subject to termination by our customers
at any time, and our annualized cancellation rate over 2009 and
2010 has ranged from 9.7% to 22.4% 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 50% of our backlog as of December 31,
2010 will convert into revenue during the 2011 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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customer service;
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a significant base of reference customers;
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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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cost of services and products;
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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
and Respiratory function 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.
The FDA has 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 FDA has 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.
In December 2009, the FDA issued guidance related to ePRO. The
guidance covered a number of concepts from instrument use and
modification, content validity and reliability, clinical trial
design and data analysis. In addition, the FDA has issued
guidance specifically related to clinical trials regarding
pulmonary disease and
12
suicidality assessment testing for certain neurological drugs
under development. We must continue to adapt our processes in
accordance with FDA guidance to meet our growth expectations.
Our medical devices are subject to regulation by numerous
government agencies, including the FDA and comparable foreign
agencies, including agencies in Germany where our manufacturing
operations are located. To varying degrees, each of these
agencies requires us to comply with laws and regulations
governing the development, testing, manufacturing, labeling,
marketing and distribution of our medical devices. In
particular, the International Electrotechnical Commission (IEC)
60601-1:2005
(3rd
edition) was published in December 2005. In this publication,
standards are listed as general requirements concerning basic
safety and the essential performance of equipment. These new
standards must be in place by June 1, 2012 in Europe and
June 1, 2013 in the United States. Other countries such as
Japan, China and Brazil continue to accept the
2nd
edition of IEC
60601-1
without defining transition dates for the
3rd
edition. The IEC
60601-2-27
standard for ECG equipment has not yet been adapted to the
structure of the third edition. The second edition of the
general standard continues to be binding.
Authorization to commercially distribute a new medical device in
the U.S. is generally received in one of two ways. The
first, known as pre-market notification or the 510(k) process,
requires us to demonstrate that our new medical device is
substantially equivalent to a legally marketed medical device.
In this process, we must submit data that supports our
equivalence claim. If human clinical data is required, it must
be gathered in compliance with FDA investigational device
exemption regulations. We must receive an order from the FDA
finding substantial equivalence to another legally marketed
medical device before we can commercially distribute the new
medical device. Modifications to cleared medical devices can be
made without using the 510(k) process if the changes do not
significantly affect safety or effectiveness. The second, more
rigorous process, known as pre-market approval (PMA), requires
us to independently demonstrate that the new medical device is
safe and effective. We do this by collecting data regarding
design, materials, bench and animal testing and human clinical
data for the medical device. The FDA will authorize commercial
release if it determines there is reasonable assurance that the
medical device is safe and effective. This determination is
based on the benefit outweighing the risk for the population
intended to be treated with the device. This process is much
more detailed, time-consuming and expensive than the 510(k)
process.
Both before and after a product is commercially released, we
have ongoing responsibilities under FDA regulations. The FDA
reviews design and manufacturing practices, labeling and record
keeping and manufacturers required reports of adverse
experiences and other information to identify potential problems
with marketed medical devices. We are also subject to periodic
inspection by the FDA for compliance with the FDAs quality
system regulations among other FDA requirements, such as
restrictions on advertising and promotion. The quality system
regulations govern the methods used in, and the facilities and
controls used for, the design, manufacture, packaging and
servicing of all finished medical devices intended for human
use. If the FDA were to conclude that we are not in compliance
with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable health risk, the
FDA could require us to notify health professionals and others
that the devices present unreasonable risks of substantial harm
to the public health, order a recall, repair, replacement or
refund of such devices, detain or seize adulterated or
misbranded medical devices or ban such medical devices. The FDA
may also impose operating restrictions, enjoin and restrain
certain conduct resulting in violations of applicable law
pertaining to medical devices and assess civil or criminal
penalties against our officers, employees or us. The FDA may
also recommend prosecution to the Department of Justice.
The FDA, in cooperation with U.S. Customs and Border
Protection (CBP), administers controls over the import of
medical devices into the U.S. The CBP imposes its own
regulatory requirements on the import of our products, including
inspection and possible sanctions for noncompliance. We are also
subject to foreign trade controls administered by several
U.S. government agencies, including the Bureau of Industry
and Security within the Commerce Department and the Office of
Foreign Assets Control within the Treasury Department.
In the European Union, a single regulatory approval process
exists, and conformity with the legal requirements is
represented by the CE Mark. To obtain a CE Mark, defined
products must meet minimum standards of performance, safety and
quality (i.e., the essential requirements) and then, according
to their classification, comply with one or more of a selection
of conformity assessment routes. A notified body assesses the
quality management systems of the manufacturer and the product
conformity to the essential and other requirements within the
medical
13
device directive. We are subject to inspection by notified
bodies for compliance. The competent authorities of the European
Union countries, generally in the form of their ministries or
departments of health, oversee the clinical research for medical
devices and are responsible for market surveillance of products
once they are placed on the market. We are required to report
device failures and injuries potentially related to product use
to these authorities in a timely manner. Various penalties exist
for non-compliance with the laws transcribing the medical device
directives.
To be sold in Japan, most medical devices must undergo thorough
safety examinations and demonstrate medical efficacy before they
are granted approval, or shonin. The Japanese
government, through the Ministry of Health, Labour and Welfare
(MHLW), regulates medical devices under the Pharmaceutical
Affairs Law (PAL). Oversight for medical devices is conducted
with participation by the Pharmaceutical and Medical Devices
Agency (PMDA), a quasi government organization performing many
of the review functions for MHLW. Penalties for a companys
noncompliance with PAL could be severe, including revocation or
suspension of a companys business license and criminal
sanctions. MHLW and PMDA also assess the quality management
systems of the manufacturer and the product conformity to the
requirements of the PAL. ERT is subject to inspection for
compliance by these agencies.
Foreign governmental regulations have become increasingly
stringent and more common, and we may become subject to more
rigorous regulation by foreign governmental authorities in the
future. We believe that we have designed our service and product
solutions to be consistent with the recommendations of the
relevant regulatory bodies as referred to above and to comply
with applicable regulatory requirements.
Federal and state laws protect the confidentiality of certain
patient health information, including patient medical records,
and restrict the use and disclosure of patient health
information by healthcare providers. In particular, in April
2003, the U.S. Department of Health and Human Services
(HHS) published patient privacy rules under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA privacy rule)
and, in April 2005, published security rules for protected
health information. The HIPAA privacy and security rules govern
the use, disclosure and security of protected health information
by covered entities, which are healthcare providers
that submit electronic claims, health plans and healthcare
clearinghouses. In 2009, Congress passed the HITECH Act, which
modified certain provisions of the HIPAA privacy and security
rules for covered entities and their business associates (which
is anyone that performs a service on behalf of a covered entity
involving the use or disclosure of protected health information
and is not a member of the covered entitys
workforce).These included directing HHS to publish more specific
security standards, and increasing breach notification
requirements, as well as tightening certain aspects of the
privacy rules. In addition, the HITECH Act provided that
business associates will now be subject to the same security
requirements as covered entities, and that with regard to both
the security and privacy rule, business associates will be
subject to direct enforcement by HHS, including civil and
criminal liability, just as covered entities are.
We are generally not a covered entity. However, we operate as a
business associate to covered entities in some instances as a
provider of clinical research services. In those cases, the
patient data that we receive and analyze may include protected
health information. We are committed to maintaining the security
and privacy of patients health information and believe
that we meet the expectations of the HIPAA rules. Some
modifications to our systems and policies may be necessary, but
the framework is already in place. However, the potential for
enforcement action against us is now greater, as HHS can take
action directly against business associates. Thus, while we
believe we are and will be in compliance with all HIPAA
standards, there is no guarantee that the government will not
disagree. Enforcement actions can be costly and interrupt
regular operations of our business.
The European Union Data Protection Directive regulates the
processing and dissemination of personal data of individuals in
the European Union. The U.S. Department of Commerce, in
consultation with the European Commission, has developed a
safe-harbor framework to provide a streamlined means for
U.S. entities to comply with the directive. In order to
rely upon the safe-harbor framework, an entity must certify (and
periodically recertify) to the Department of Commerce that its
data privacy policy satisfies the requirements of the
safe-harbor framework regarding notice, choice regarding
disclosure of personal data, restrictions on transfers of such
data to third parties, rights of access to the data by affected
individuals, security controls, data integrity and the adequacy
of mechanisms to enforce the policy. Although it is not clear
that the clinical trial data we process in providing our
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services to our customers is regulated by the directive, many of
our customers have requested assurances that our privacy policy
complies with the directive. To be responsive to these concerns,
we elected to become a signatory to the safe-harbor framework,
as a result of which our privacy policy is deemed to be in
compliance with the requirements of the directive.
The delivery of our devices is subject to regulation by HHS and
comparable state and foreign agencies responsible for
reimbursement and regulation of healthcare items and services.
U.S. laws and regulations are imposed primarily in
connection with the Medicare and Medicaid programs, as well as
the governments interest in regulating the quality and
cost of healthcare. Foreign governments also impose regulations
in connection with their healthcare reimbursement programs and
the delivery of healthcare items and services.
Federal healthcare laws apply when we or customers submit claims
for items or services that are reimbursed under Medicare,
Medicaid or other federally-funded healthcare programs. The
principal federal laws include: (1) the False Claims Act
which prohibits the submission of false or otherwise improper
claims for payment to a federally-funded health care program;
(2) the Anti-Kickback Statute which prohibits offers to pay
or receive remuneration of any kind for the purpose of inducing
or rewarding referrals of items or services reimbursable by a
Federal healthcare program; (3) the Stark law which
prohibits physicians from referring Medicare or Medicaid
patients to a provider that bills these programs for the
provision of certain designated health services if the physician
(or a member of the physicians immediate family) has a
financial relationship with that provider; and
(4) healthcare fraud statutes that prohibit false
statements and improper claims to any third-party payor. There
are often similar state false claims, anti-kickback and
anti-self referral and insurance laws that apply to state-funded
Medicaid and other healthcare programs and private third-party
payors. In addition, the U.S. Foreign Corrupt Practices Act
can be used to prosecute companies in the U.S. for
arrangements with physicians, or other parties outside the
U.S. if the physician or party is a government official of
another country and the arrangement violates the law of that
country.
The laws applicable to us are subject to change, and to evolving
interpretations. If a governmental authority were to conclude
that we are not in compliance with applicable laws and
regulations, ERT and its officers and employees could be subject
to severe criminal and civil penalties including substantial
penalties, fines and damages and exclusion from participation as
a supplier of product to beneficiaries covered by Medicare or
Medicaid.
We are also subject to various environmental laws and
regulations both within and outside the U.S. Like other
medical device companies, our operations involve the use of
substances regulated under environmental laws, primarily
manufacturing and sterilization processes. To the best of our
knowledge at this time, we do not expect that compliance with
environmental protection laws will have a material impact on our
consolidated results of operations, financial position or cash
flows.
Potential
Liability and Insurance
We operate in an industry characterized by extensive patent
litigation, product liability and personal injury claims. Patent
litigation can result in significant damage awards and
injunctions that could prevent the manufacture and sale of
affected products or result in significant royalty payments in
order to continue selling the products. Product liability claims
may be brought by individuals seeking relief on their own behalf
or purporting to represent a class. In addition, product
liability claims may be asserted against us in the future based
on events we are not aware of at the present time. Personal
liability claims may be asserted for personal injury or death to
study subjects from the administration of products in clinical
studies in which we provide services. While it is not possible
to predict the outcome of patent litigation, product liability
or personal injury claims incident to our business, we believe
the costs associated with this type of litigation could have a
material adverse impact on our consolidated results of
operations, financial position or cash flows.
We attempt to manage our risk of potential liability through
contractual indemnification provisions with customers and
through insurance maintained by our customers and us.
Contractual indemnification generally does not protect us
against certain of our own actions, such as patent infringement
or negligence. The terms and scope of such indemnification vary
from customer to customer and from trial to trial. Although most
of our customers 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
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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
customer or where the indemnifying party does not fulfill its
indemnification obligations to us.
Intellectual
Property
Our solutions have been enhanced by significant investments in
research and development and strategic acquisitions and
licensing arrangements, which have allowed us to develop an
intellectual property portfolio consisting of computer software
and technologically derived procedures, internal operating
processes and proprietary medical devices. While we rely upon
confidentiality agreements to protect trade secrets,
manufacturing know-how and similar proprietary rights, we also
hold numerous patents and have numerous patent applications
pending in the United States, the European Union and various
other jurisdictions to protect our intellectual property.
We hold United States patents for various methods and systems
for processing electrocardiograms directed to various features
of our
EXPERT®
workflow enabled data handling technology and processes embedded
in our
EXPERT®
2 technology platform. We also hold a United States patent and
two Japanese patents related to interactive annotation and
measurement of time series data, such as electrocardiograms,
with automatic marker sequencing. Finally, we hold a United
States patent and a German patent for the maximum expiratory
flow measuring device used in our Respiratory solutions.
We file patent applications in the United States and other
jurisdictions when we consider it commercially beneficial to do
so. While we believe our patents help provide a competitive
benefit for us, we do not believe that the success of our
business is dependent upon any particular patent.
We also hold a number of trademarks that we use in conducting
our operations, some of which are registered in the United
States and other jurisdictions and others of which unregistered
common law trademarks. The more significant trademarks we use
include
ERT®,
EXPERT®,
our corporate logo, Getting it Done.
Right.®,
CorScreen®,
SpiroPro®,
VIApen®,
VIAphonetm,
VIAPadtm,
FlowScreen®,
AsthmaMonitortm,
ePROtm
and My Study
Portaltm.
Employees
At December 31, 2010, we had a total of 647 employees,
with 295 employees (287 full-time, 8 part-time)
at our locations in the United States, 261 employees
(248 full-time, 13 part-time) at our location in
Germany and 88 employees (80 full-time,
8 part-time) at our location in the United Kingdom. We also
had 2 full-time employees in Sweden and 1 full-time
employee in Japan. We had 396 employees performing services
directly for our customers, 102 employees in research and
development, 62 employees in sales and marketing and
87 employees in general and administrative functions. We
supplement our work force with contract employees as necessary.
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. In Germany, our
employees are represented by work councils. We consider our
relationship with our employees to be good.
Available
Information
Our website address is www.ert.com. We make available on
our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. You may
access and print these forms free of charge from our website.
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.
16
You should carefully consider the risk factors described below,
in addition to the other information contained in this report,
before making an investment decision. Our business, financial
condition, cash flows
and/or
results of operations could be materially adversely affected by
any of these risks. The trading price of our common stock could
decline due to any of these risks. 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 customers;
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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
researching and manufacturing certain diagnostic devices and
educating and providing information to our customer base, via
consultations, without any obligation by our customer to
purchase our product and service solutions. Because many of our
expenses are fixed and we are committed to making a significant
investment in our organization and in marketing our product and
service solutions, delays in recognizing revenues could cause
our operating results to fluctuate from period to period. If we
fail to generate the contract signings that we expect or the
anticipated revenues from such signings, we may fail to meet
financial guidance that we have provided, or may provide in the
future, to the public. Failure to meet financial guidance could
cause the market price of our common stock to decline and affect
our ability to raise capital which could reduce our cash
reserves and limit our capital spending.
If
general economic conditions 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.
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. On May 28, 2010, we acquired RS for
$82.7 million in cash. The acquisition and related
transaction costs were financed from our existing cash and a
portion of the $23.0 million drawn from our
$40.0 million revolving credit facility. Future
acquisitions or investments may reduce our readily available
capital and require us to obtain additional financing. If we are
unable to obtain any financing necessary to make investments in
our technology and workforce, we may be unable to achieve the
market growth that such investments were intended to generate.
17
If
general economic conditions deteriorate or fail to improve,
potential customers may be unable to get the necessary financing
to conduct business and existing customers may fail to make
timely payments for products we have sold or 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 customers, and in particular,
development stage biopharmaceutical 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 customers 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 products we have sold or services
we performed. Such delays in payments would result in higher
accounts receivable balances and lower liquidity. In addition,
this could result in us recording additional expense to
write-off the accounts receivable balances remaining if payment
is not likely.
We 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 and acquired RS in 2010. 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,
such as the respiratory services and device manufacturing
markets we entered as a result of the RS acquisition;
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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 RS, 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 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.
18
Consolidation
among our customers could cause us to lose customers, decrease
the market for our product and service solutions and result in a
reduction of our revenues and profitability.
Our customer base could decline because of consolidation, and we
may not be able to expand sales of our product and service
solutions to new customers. Consolidation among
biopharmaceutical and healthcare organizations 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. Our profitability will also suffer
if we reduce our prices in response to competitive pressures
without achieving corresponding reductions in our expenses.
New companies or organizations that result from such
consolidation may decide that our product and service solutions
are no longer needed because of their own internal processes or
the use of alternative systems. As these industries consolidate,
competition to provide product and service solutions to industry
participants will become more intense and the importance of
establishing relationships with large industry participants will
become greater. These industry participants may try to use their
market power to negotiate price reductions for our product and
service solutions. Also, if consolidation of larger customers
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
biopharmaceutical and healthcare organizations conduct. Our
revenues and profitability will decline if there is less
competition among biopharmaceutical and healthcare
organizations, 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 biopharmaceutical
and healthcare 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 our product and services solutions
are delayed or postponed resulting in lower than expected
revenues.
We depend
on the need for clinical trials in the area of pulmonary disease
to continue and a downturn in this specific therapeutic area
could cause our revenues and profitability to
decrease.
We provide biopharmaceutical and healthcare organizations an
integrated set of products and services for the clinical
evaluation of respiratory data. We have a preferred centralized
spirometry vendor status with several of the top 20
biopharmaceutical companies where we provide respiratory,
cardiac safety and ePRO products and services primarily in the
therapeutic area for respiratory drugs. If there were
significant developments in pharmacology or government
regulation that significantly reduced or eliminated the need for
further clinical trials for pulmonary disease, our revenue, net
income and workforce would be adversely affected.
Extensive
governmental regulation of the clinical trial or device
manufacturing processes could require costly modifications to
our technology, adversely affect prospective customers
willingness to use our product and service solutions and
increase competition and reduce our market share.
We may incur increased expenses or suffer a reduction in
revenues if our product and service solutions do not comply with
applicable government regulations or if regulations allow more
competition in the marketplace. Conforming our product and
service solutions to these guidelines or to future changes in
regulation could substantially increase our expenses. In the
United States and in foreign countries, regulatory authorities
have also established other standards for conducting clinical
trials leading to the approval of new products with which we
must comply. We are subject to these regulations because our
product and service solutions assist sponsors and CROs in
conducting trials and preparing new drug or device applications.
If a regulatory authority concludes that trials were not
conducted in accordance with established requirements, it may
take a variety of enforcement actions depending upon the nature
of the violation and the applicable country. In the United
States, these measures may
19
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 customers and prospective customers will be less likely to
use our product and service solutions if the product and service
solutions do not comply with regulatory requirements in all
countries where clinical trials are expected to take place or if
we are precluded from participating in clinical trials in
countries where trials will be conducted. In addition, changing
regulatory requirements could provide an advantage to our
competitors if our competitors are 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. Our
failure to maintain revenue and gross profit per transaction may
affect our ability to achieve growth in services 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 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.
In December 2009, the FDA issued guidance related to ePRO. The
guidance covered a number of concepts from instrument use and
modification, content validity and reliability, clinical trial
design and data analysis. In addition, the FDA has issued
guidance specifically related to clinical trials regarding
pulmonary disease. We must continue to adapt our processes in
accordance with FDA guidance to meet our growth expectations. If
we are unable to adapt our processes in accordance with FDA
guidance, our service offerings will become obsolete, which
would adversely affect our revenue and net income growth. In
addition, if the FDA finds we are not operating in accordance
with its guidance, the FDA may impose operating restrictions,
enjoin and restrain certain violations of applicable law
pertaining to our clinical research services and assess civil or
criminal penalties against our officers, employees or us. The
FDA may also recommend prosecution to the Department of Justice.
Any adverse regulatory action, depending on its magnitude, may
restrict us from effectively marketing and selling our products
and services.
Our medical devices are subject to regulation by numerous
government agencies, including the FDA and comparable foreign
agencies, including agencies in Germany where our manufacturing
operations are located. To varying degrees, each of these
agencies requires us to comply with laws and regulations
governing the development, testing, manufacturing, labeling,
marketing and distribution of our medical devices. We cannot
guarantee that we will be able to obtain marketing clearance for
our new products, or enhancements or modifications to existing
products, and if we do, such approval may:
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take a significant amount of time,
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require the expenditure of substantial resources,
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involve stringent clinical and pre-clinical testing,
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involve modifications, repairs or replacements of our
products; and
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result in limitations on the proposed uses of our products.
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Both before and after a product is commercially released, we
have ongoing responsibilities under FDA regulations. We are also
subject to periodic inspections by the FDA to determine
compliance with the FDAs requirements, including primarily
the quality system regulations and medical device reporting
regulations. The results of these inspections can include
inspectional observations on FDAs Form-483, warning
letters or other forms of enforcement. Since 2009, the FDA has
significantly increased its oversight of companies subject to
its regulations, including medical device companies, by hiring
new investigators and stepping up inspections of manufacturing
facilities. The FDA has recently also significantly increased
the number of warning letters issued to companies. If the FDA
were to conclude that we are not in compliance with applicable
laws or regulations, or that any of our medical devices are
ineffective or pose an unreasonable health risk, the FDA could
ban such medical devices, detain or seize adulterated or
misbranded medical devices, order a recall, repair, replacement,
or refund of such devices, refuse to grant pending premarket
approval applications or require certificates of foreign
governments for exports
and/or
require us to notify health professionals and others that the
devices present unreasonable risks of substantial harm to the
public health. The FDA may also impose operating restrictions,
enjoin and restrain certain violations of applicable law
pertaining to medical devices and assess civil or criminal
penalties against our officers, employees or us. The FDA may
also recommend prosecution to the Department of Justice. Any
adverse regulatory action, depending on its magnitude, may
restrict us from effectively marketing and selling our products
and may affect our ability to offer our clinical research
services related to such products.
Foreign governmental regulations have become increasingly
stringent and more common, and we may become subject to more
rigorous regulation by foreign governmental authorities in the
future. Penalties for a companys noncompliance with
foreign governmental regulation could be severe, including
revocation or suspension of a companys business license
and criminal sanctions. Any domestic or foreign governmental law
or regulation imposed in the future may have a material adverse
effect on us.
The FDA
may recommend a different approach to measuring 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 may recommend different approaches to
pulmonary function testing which may make our current devices
and processes obsolete and considerably decrease our revenues
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. In addition, it is possible that, in the future,
the FDA may recommend different approaches to pulmonary function
testing which may make our current devices and processes
obsolete and considerably decrease our revenues and
profitability.
We have
customers from whom we derive substantial revenue and therefore
the loss of even a few of our customers could significantly
reduce our revenues and profitability.
We have one customer that represented approximately 28% of our
total revenues for the year ended December 31, 2010, an
increase from 18% of our total revenues for the year ended
December 31, 2009. While no other customer represented more
than 10% of our revenues during the year ended December 31,
2010, our next five largest customers in the aggregate
represented approximately 31% of our total revenues for this
same period. Based on RS historic customer base, we
anticipate that the percentage of revenues represented by our
largest customer and the next five largest customers will
increase in 2011. If we lose all or a material amount of our
revenues from any significant customers and do not replace them
with revenues from new customers, 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
customers.
21
Our
failure to continue to expand our business or manage growth
successfully could disrupt our business operations, increase our
costs and delay implementation of our business
strategies.
Difficulties in managing future growth could disrupt our
business operations, increase our costs and delay achievement of
our business goals, making it more difficult for us to maintain
profitability. Our growth strategy depends on our ability to
expand and improve our field sales, marketing and services
organization and our operations organization, both in the United
States and throughout the world. In order to grow, we will need
to hire additional personnel. There are a limited number of
experienced personnel with an adequate knowledge of our
industry, and competition for their services is intense. In
addition, we may not be able to project the rate or timing of
increases, if any, in the use of our product and service
solutions accurately or to expand and upgrade our systems and
infrastructure to accommodate the increases. The expansion of
our foreign operations also will require us to assimilate
differences in foreign business practices, overcome language
barriers and hire and retain qualified personnel abroad.
We may
not be successful in competing against others providing similar
product and service solutions, which could reduce our revenues,
profitability and market share.
If our product and service solutions do not achieve widespread
acceptance by our customers, our revenues, profitability and
market share will likely decline. Our competitors include other
centralized clinical research diagnostic laboratories and CROs.
Our targeted customers may decide to choose other product and
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 customer bases than we do. Further, certain drug
development organizations may decide not to outsource all or a
significant portion of the clinical research diagnostic
activities associated with their clinical research programs,
which could reduce our revenues, profitability and market share.
Our
failure to establish and maintain partnerships and other
strategic alliances may delay the development of our product and
service solutions, cause us to lose customers 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 customers that our
solutions do not address and by providing us access to their
customers 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
diagnostic analysis and interpretation services.
We provide products for respiratory, cardiac safety and ePRO
measurements as well as services that collect, transmit, analyze
and process such data in connection with our customers
clinical trials. It is possible that liability may be asserted
against us and the physicians who provide services for us for
failing to accurately diagnose a medical problem indicated by
such diagnostic services or for failing to disclose a medical
problem to the investigator responsible for the subject being
tested. In addition, product liability claims could be asserted
against us if our diagnostic devices fail to perform to their
specification or to the expectation of our customers or their
patients. 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 customer 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.
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 product and service solutions. We may increase
our dependence on certain suppliers as we continue to develop
and enhance our product and service solutions. Our dependence on
a limited number of suppliers leaves us vulnerable to having an
inadequate supply of required components, reduced services
capacity, price increases, delayed supplier performance and poor
22
component and services quality. For instance, we rely on a
limited number of providers to supply ECG, Respiratory and ePRO
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 service 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
equipment that we manufacture, acquire and lease could
malfunction or become obsolete due to technological advance.
Malfunctions in the equipment may result in inaccurate or lost
data. If we experience malfunctions or obsolescence, we may not
be able to provide the quantity of equipment needed to service
our customers. We may fail to obtain the necessary
certifications for use of the equipment. Any such development
would reduce our revenues and profitability and/or subject us to
third party claims.
We manufacture, acquire and lease equipment, which we provide to
our customers to perform our service solutions. This equipment
may malfunction resulting in inaccurate data or lost data. Such
occurrence could cause significant study delays or possible
discontinuance and may result in a third party claim against us.
In addition, our equipment could 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 and failing to meet equipment demands. In addition,
certifications are required for the use of certain 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 customers, which may jeopardize our business
relationship and our ability to continue providing products and
services. As a result, we may lose clinical customers if
adequate equipment is not available, resulting in reduced
revenues and profitability and we may be subject to third party
claims if we are unable to perform under existing contracts.
Our equipment is subject to governmental regulation. In
particular, the IEC
60601-1:2005
(3rd
edition) was published in December 2005. In this publication,
standards are listed as general requirements concerning basic
safety and the essential performance of equipment. These new
standards must be in place by June 1, 2012 in Europe and
June 1, 2013 in the United States. If we are unable to
adhere to this or other regulations, we will be unable to use
our equipment for our clinical trials. As a result, we could be
found in breach of existing customer contracts
and/or
unable to obtain new contracts, both of which will have a
negative impact on earnings.
23
Capacity
constraint or system or device failures could result in the loss
of or liability to customers, 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 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 customers experience any significant level of problems
with our technology, we may become liable to those customers, we
may be unable to persuade our customers to change from a manual,
paper-based process and we may lose customers. The success of
our product and service solutions depends on the ability to
protect against:
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medical device malfunctions;
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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 product and
service solutions could cause us to lose customers and prevent
us from successfully marketing our solutions to prospective
customers. 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 customer needs;
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frequent new product introductions; and
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evolving industry standards.
|
As the Internet, computer and software industries continue to
experience rapid technological change, we must quickly modify
our solutions to adapt to such changes. We must develop and
introduce new or enhanced product and service solutions that
continually meet changing market demands and that keep pace with
evolving industry standards. We have experienced development
delays in the past and may experience similar or more
significant delays in the future. In addition, competitors may
develop products superior to our solutions, which could make our
products obsolete.
If
clinical trial sponsors and CROs do not shift from their
existing paper-based methods of collecting and managing clinical
trial data at investigator sites to an electronic system with
centralization, we may not achieve the market penetration
necessary to grow the business at expected levels.
If participants conducting clinical trials are unwilling to
adopt our technology solutions and new ways of conducting
business, our revenues may not be sufficient to achieve our
expected growth rate. Our efforts to establish a standardized,
electronic process to collect, manage and analyze clinical trial
and cardiac safety data are a significant departure from the
traditional clinical research process. We estimate that the
majority of clinical trials today use manual, paper-based data
entry, management and analysis tools. Each clinical trial can
involve a multitude of participants, including the sponsor, a
CRO, regional site managers, investigators and subjects. With so
many participants involved in a clinical trial, it may be
difficult to convince a sponsor or CRO to accept new methods of
conducting a clinical trial. We may not be successful in
persuading these participants to change the manner in which they
have traditionally operated and to use our product and service
solutions.
We depend
on certain key executives. If we lose the services of any of
these executives or are unable to fill open positions existing
for these key executives, our operations could be disrupted, we
could incur additional
24
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, interim President and Chief Executive Officer and
Chief Scientific Officer. In addition, we remain focused on
actively recruiting a Chief Executive Officer for our company.
If we are unable to find a suitable Chief Executive Officer in a
timely manner, our ability to achieve our business goals could
be negatively affected. We also depend on our key technical,
customer 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, including both
software and devices, 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
customers and experience a decline in sales of our solutions. To
protect our intellectual property rights, we rely on a
combination of confidentiality agreements and similar
restrictions on disclosure as well as patent protection. Despite
our efforts to protect our proprietary rights, unauthorized
parties may copy or otherwise obtain and use our products and
technology. In addition, our patents 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.
Goodwill
is subject to impairment which could result in a significant
expense.
We have recorded approximately $70.5 million in goodwill as
a result of the RS and CCSS acquisitions. 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, 2010, 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 product and 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.
|
25
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, and the RS acquisition has
substantially increased our operations in Europe. We face a
number of risks and expenses that are inherent in operating in
foreign countries and, accordingly, our international operations
may not achieve profitability consistently each year. The risks
to us from our international operations include:
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government regulations;
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trade restrictions;
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burdensome foreign taxes;
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|
exchange rate controls and currency exchange rate fluctuations;
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political and economic instability;
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varying technology standards; and
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difficulties in staffing and managing foreign operations.
|
We are subject to a variety of government regulations in the
countries where we market our product and service solutions. We
currently operate in the United Kingdom and Germany through
foreign subsidiaries and may operate in the future in other
countries through additional foreign subsidiaries. If we form
foreign subsidiaries outside of the United Kingdom and Germany,
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 customers outside the United
States may be governed by the laws of the countries where we
provide our product and service solutions. We may also need to
resolve any disputes under these agreements in the courts or
other dispute resolution forums in those countries. This could
be expensive or could distract managements attention away
from our core business.
Our
revenue and earnings are exposed to exchange rate fluctuations,
which has substantially affected our operating
results.
We conduct a significant portion of our operations in foreign
countries. Because our financial statements are denominated in
U.S. dollars, changes in foreign currency exchange rates
could have and have had a significant effect on our operating
results.
While a majority of the 2010 revenue of our foreign operations
are denominated in U.S. dollars, foreign revenue will
increase in 2011 and most of the expenses of our foreign
operations are generally denominated in local currencies,
primarily the pound sterling and the euro, and are translated
into U.S. dollars for financial reporting purposes.
Accordingly, changes in exchange rates between foreign
currencies and the U.S. dollar will affect the translation
of foreign results into U.S. dollars for purposes of
reporting our consolidated results.
Our
effective income tax rate may fluctuate from quarter to quarter,
which may affect our earnings and earnings per share.
Our quarterly effective income tax rate is influenced by our
projected profitability in the various taxing jurisdictions in
which we operate. Changes in the distribution of profits and
losses among taxing jurisdictions may
26
have a significant impact on our effective income tax rate,
which in turn could have a material adverse effect on our net
income and earnings per share. Factors that affect the effective
income tax rate include, but are not limited to:
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the requirement to exclude from our quarterly worldwide
effective income tax calculations losses in jurisdictions where
no tax benefit can be recognized;
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actual and projected full year pretax income;
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transfer pricing;
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changes in tax laws in various taxing jurisdictions;
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audits by taxing authorities; and
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the establishment of valuation allowances against deferred tax
assets if it is determined that it is more likely than not that
future tax benefits will not be realized.
|
Any potential changes in either the U.S., UK or German tax law
could cause fluctuations in our effective income tax rate that
could cause fluctuations in our earnings and earnings per share,
which can affect our stock price.
Our
existing credit facility contains covenants that limit our
flexibility and prevent us from taking certain
actions.
The agreement in connection with our 2010 credit facility
requires us to maintain a maximum senior leverage ratio of 2.0
to 1.0 and a minimum debt service coverage ratio of 1.5 to 1.0.
The agreement contains other customary affirmative and negative
covenants including, but not limited to, limitations upon our
ability to:
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incur liens or indebtedness;
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merge, consolidate or dispose of assets;
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make loans or investments;
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pay dividends or other distributions;
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engage in certain transactions with affiliates; and
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change our business or amend our organizational documents.
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The agreement contains events of default customary for
facilities of this type including, but not limited to:
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nonpayment of principal, interest, fees or other amounts when
due;
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breach of any representations or warranties;
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breach of any affirmative or negative covenants, subject to any
applicable cure periods;
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default in respect of any indebtedness of us or any of our
subsidiaries in an amount in excess of $1.0 million;
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bankruptcy, insolvency or similar events involving us or any of
our subsidiaries;
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entry of a judgment against us or any of our subsidiaries of at
least $750,000;
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a change of control;
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certain adverse events under our ERISA plans or those of our
subsidiaries; and
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the occurrence of any event that has or could reasonably be
expected to have a material adverse effect as define in the
agreement.
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These covenants may limit our operating and financial
flexibility and limit our ability to respond to changes in our
business or competitive activities. Our failure to comply with
these covenants could result in an event of default, which, if
not cured or waived, could result in our being required to repay
these borrowings before their scheduled due date.
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
27
reports and effectively prevent fraud, our brand and operating
results could be harmed. Pursuant to the Sarbanes-Oxley Act of
2002, we are required to furnish a report by management on
internal control over financial reporting, including
managements assessment of the effectiveness of such
control. Internal control over financial reporting may not
prevent or detect misstatements because of its inherent
limitations, including the possibility of human error, the
circumvention or overriding of controls, or fraud. Therefore,
even effective internal controls can provide only reasonable
assurance with respect to the preparation and fair presentation
of financial statements. In addition, projections of any
evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk
that the control may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate. If we fail to maintain the
adequacy of our internal controls, including any failure to
implement required new or improved controls, or if we experience
difficulties in their implementation, our business and operating
results could be harmed, we could fail to meet our reporting
obligations, and there could also be a material adverse effect
on our stock price.
In the
course of conducting our business, we possess or could be deemed
to possess personal medical information in connection with the
conduct of clinical trials. If we fail to keep this information
properly protected we could be subject to significant
liability.
Our software solutions are used to collect, manage and report
information in connection with the conduct of clinical trial and
safety evaluation and monitoring activities. This information is
or could be considered to be personal medical information of the
clinical trial participants or patients. Regulation of the use
and disclosure of personal medical information is complex and
growing. Increased focus on individuals rights to
confidentiality of their personal information, including
personal medical information, could lead to an increase of
existing and future legislative or regulatory initiatives giving
direct legal remedies to individuals, including rights to
damages, against entities deemed responsible for not adequately
securing such personal information. In addition, courts may look
to regulatory standards in identifying or applying a common law
theory of liability, whether or not that law affords a private
right of action. Since we receive and process personal
information of clinical trial participants and patients from
customers utilizing our hosted solutions, there is a risk that
we could be liable if there were a breach of any obligation to a
protected person under contract, standard of practice or
regulatory requirement. If we fail to properly protect this
personal information that is in our possession or deemed to be
in our possession, we could be subjected to significant
liability.
The
market price and trading volume of our common stock may be
volatile, which could result in substantial losses for investors
purchasing shares in the public markets and subject us to
securities class action litigation. The current market price of
our common stock may not be indicative of future market prices
and we may be unable to sustain or increase the value of an
investment in our common stock.
Market prices for securities of software, technology and health
care companies have been volatile. The trading price of our
common stock has fluctuated significantly and may continue to do
so. Accordingly, the trading price for our common stock at any
particular time may not be indicative of future trading prices
and we may be unable to sustain or increase the value of an
investment in our common stock. Some of the factors that may
cause the market price of our common stock to fluctuate include:
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changes in estimates of our financial results or recommendations
by securities analysts;
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financial results that are below estimate of such results;
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changes in general economic, industry and market conditions;
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sales or transfers of large blocks of stock by existing
investors;
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investors general perception of us;
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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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28
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success of competitive products and technologies;
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the failure of any of our software products, services and hosted
solutions to achieve or maintain commercial success;
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regulatory developments in the United States and foreign
countries;
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changes in industry analyst recommendations;
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additions or departures of key personnel; and
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litigation involving our company or our general industry or both.
|
In addition, if the market for software, technology or health
care stocks or the stock market in general experiences a loss of
investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, operating results
or financial condition. If any of the foregoing occurs, it could
cause our stock price to fall and may expose us to class action
lawsuits that, even if unsuccessful, could be costly to defend
and a distraction to management.
Sales of
large blocks of our common stock could cause the market price of
our common stock to drop significantly, even if our business is
doing well.
Some stockholders may acquire or own large blocks of shares of
our outstanding common stock. We cannot predict the effect that
public sales of these shares or the availability of these shares
for sale will have on the market price of our common stock, if
any. If our stockholders, and particularly our directors and
officers, sell substantial amounts of our common stock in the
public market, or if the public perceives that such sales could
occur, this could have an adverse impact on the market price of
our common stock, even if there is no relationship between such
sales and the performance of our business.
In the future, we may also issue additional shares to our
employees, directors or consultants, in connection with
corporate alliances or acquisitions, and issue additional shares
in follow-on offerings to raise additional capital. Due to these
factors, sales of a substantial number of shares of our common
stock in the public market could occur at any time. Such sales
could reduce the market price of our common stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
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
lease approximately 57,000 square feet of office and
warehouse space in Höchberg, Germany, which expires in
December 2012. We also lease approximately 19,000 square
feet of office space in Bridgewater, New Jersey, under a
sublease which expires January 2013 and a direct lease which
will begin in February 2013 and will expire in January 2021.
This replaced a lease of approximately 31,000 square feet
which expired in January 2011. We lease approximately
18,000 square feet of office space in Peterborough, United
Kingdom, which expires in June 2013. We believe that these
facilities are adequate for our current and reasonably
foreseeable operations and that we will be able to locate
comparable space in these markets on terms acceptable to us if
our business grows more rapidly than we currently anticipate.
We also lease approximately 51,000 square feet in Reno,
Nevada, which expires in November 2013. We vacated the Reno
location in September 2008 and we are seeking to sublease the
property. We were responsible for all payment obligations on the
Reno lease until November 28, 2008. From November 28,
2008 through November 28, 2012, we will equally share the
payment obligations on the Reno lease with Covance, to the
extent such obligations are not covered by a new tenant.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
In December 2010, we terminated the employment relationship with
one of our employees. The employee filed a lawsuit in December
2010 against such termination, applying for a ruling that the
termination was not legally
29
effective and that the employment relationship is not
terminated. While a formal hearing has not been held, based on a
review of the current facts and circumstances, management is of
the opinion that this will not have a material effect on our
consolidated financial statements.
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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Joel Morganroth, MD
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65
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Chairman of the Board of Directors, President, Chief Executive
Officer and Chief Scientific Officer
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Keith D. Schneck
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55
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Executive Vice President, Chief Financial Officer and Secretary
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John M. Blakeley
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43
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Executive Vice President and Chief Commercial Officer
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Thomas P. Devine
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58
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Executive Vice President and Chief Information Officer
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Amy Furlong
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38
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Executive Vice President and Chief Operations Officer
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Jeffrey S. Litwin, MD
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52
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Executive Vice President and Chief Medical Officer
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Achim Schuelke
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49
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Executive Vice President and Chief Technology Officer
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Eric Schwartz
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42
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Executive Vice President and Chief Legal Officer
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John B. Sory
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45
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Executive Vice President and Chief Development Officer
|
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 interim President and Chief
Executive Officer since December 2010 and Chief Scientific
Officer since April 2006. Prior to that, he served as our Chief
Scientist from March 2001 to December 2005 and our Chief
Executive Officer from 1993 to March 2001. In addition,
Dr. Morganroth has consulted for us since 1977.
Dr. Morganroth is a globally recognized cardiologist and
clinical researcher. Dr. Morganroth served for over ten
years as a Medical Review Officer/Expert for the U.S. Food
and Drug Administration.
Mr. Schneck has been our Executive Vice President, Chief
Financial Officer and Secretary since July 2008. Prior to
joining us, Mr. Schneck worked as a financial and
operational consultant for various firms from December 2007 to
July 2008. From April 2003 until December 2007, Mr. Schneck
served as the Executive Vice President and Chief Financial
Officer of Neoware, Inc. Mr. Schneck is a certified public
accountant.
Mr. Blakeley has been our Executive Vice President and
Chief Commercial Officer since October 2010. Prior to that,
Mr. Blakeley served as Executive Vice President, Sales and
Marketing from February 2008 to October 2010. 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. Devine has been our Executive Vice President and Chief
Information Officer since October 2010. Prior to that,
Mr. Devine served as our Executive Vice President and Chief
Development Officer from December 2005 to October 2010. 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 and Chief
Operations Officer since October 2010. Prior to that,
Ms. Furlong served as our Executive Vice President, Cardiac
Safety Operations from December 2005 to October 2010. 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.
30
Mr. Schuelke has been our Executive Vice President and
Chief Technology Officer since October 2010. Mr. Schuelke
joined our company in May 2010 following our acquisition of
Research Services Germany 234 GmbH and held the position of Vice
President until October 2010. Prior to that, Mr. Schuelke
held various leadership positions in healthcare technology
within CareFusion Corporation, including the position of Vice
President of CareFusion from September 2009 until May 2010, the
position of Vice President of Cardinal Health from July 2008 to
September 2009 and the position of Vice President of VIASYS
Healthcare from 2001 to 2007.
Mr. Schwartz has been our Executive Vice President and
Chief Legal Officer since February 2011. He joined us from
Johnson & Johnson, where he had been Assistant General
Counsel from 2006 to 2011. From 2005 to 2006, Mr. Schwartz
was Vice President and General Counsel of Animas Corporation, a
publicly held medical devices company. Animas was acquired by
Johnson & Johnson in 2006.
Mr. Sory has been our Executive Vice President and Chief
Development Officer since October 2010. Prior to that,
Mr. Sory served as our Senior Vice President, Health Care
Solutions from November 2009 to October 2010. Prior to joining
ERT, Mr. Sory served as General Manager, Vice President of
Pfizer Health Solutions from 2002 to 2009.
31
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the Nasdaq Global Select Market
under the symbol ERES. In order to better align with
our business identity, the symbol will be changing effective
March 7, 2011 to ERT. 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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2009
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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
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6.68
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4.90
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Third Quarter
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7.56
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|
|
|
5.32
|
|
Fourth Quarter
|
|
|
8.50
|
|
|
|
5.74
|
|
2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.93
|
|
|
$
|
5.34
|
|
Second Quarter
|
|
|
8.73
|
|
|
|
6.37
|
|
Third Quarter
|
|
|
8.95
|
|
|
|
6.42
|
|
Fourth Quarter
|
|
|
8.59
|
|
|
|
5.36
|
|
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 18, 2011, there were 48 record holders of
our common stock.
32
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, 2005 and
ending December 31, 2010. 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 12/31/05 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31.
33
|
|
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 CCSS and RS operating results in
our Consolidated Statements of Operations from the dates of
acquisition, November 28, 2007 and May 28, 2010,
respectively.
Consolidated
Statements of Operations Data (in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
59,712
|
|
|
$
|
55,309
|
|
|
$
|
96,567
|
|
|
$
|
64,655
|
|
|
$
|
85,718
|
|
Site support
|
|
|
21,072
|
|
|
|
28,042
|
|
|
|
30,679
|
|
|
|
26,667
|
|
|
|
55,274
|
|
EDC licenses and services
|
|
|
6,063
|
|
|
|
3,017
|
|
|
|
5,894
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
86,847
|
|
|
|
86,368
|
|
|
|
133,140
|
|
|
|
93,823
|
|
|
|
140,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
24,337
|
|
|
|
25,431
|
|
|
|
38,609
|
|
|
|
29,886
|
|
|
|
43,403
|
|
Cost of site support
|
|
|
13,965
|
|
|
|
18,821
|
|
|
|
18,445
|
|
|
|
13,544
|
|
|
|
30,212
|
|
Cost of EDC licenses and services
|
|
|
436
|
|
|
|
286
|
|
|
|
1,843
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
38,738
|
|
|
|
44,538
|
|
|
|
58,897
|
|
|
|
44,293
|
|
|
|
73,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
48,109
|
|
|
|
41,830
|
|
|
|
74,243
|
|
|
|
49,530
|
|
|
|
67,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
9,122
|
|
|
|
11,051
|
|
|
|
13,273
|
|
|
|
12,905
|
|
|
|
16,064
|
|
General and administrative
|
|
|
11,458
|
|
|
|
14,668
|
|
|
|
18,181
|
|
|
|
14,859
|
|
|
|
30,607
|
|
Research and development
|
|
|
4,093
|
|
|
|
4,146
|
|
|
|
4,394
|
|
|
|
3,853
|
|
|
|
5,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
24,673
|
|
|
|
29,865
|
|
|
|
35,848
|
|
|
|
31,617
|
|
|
|
51,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,436
|
|
|
|
11,965
|
|
|
|
38,395
|
|
|
|
17,913
|
|
|
|
15,617
|
|
Foreign exchange (losses) gains
|
|
|
(296
|
)
|
|
|
(154
|
)
|
|
|
832
|
|
|
|
(618
|
)
|
|
|
(956
|
)
|
Other income (expense), net
|
|
|
1,232
|
|
|
|
1,404
|
|
|
|
898
|
|
|
|
183
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,372
|
|
|
|
13,215
|
|
|
|
40,125
|
|
|
|
17,478
|
|
|
|
14,422
|
|
Income tax provision
|
|
|
9,007
|
|
|
|
4,905
|
|
|
|
15,123
|
|
|
|
6,791
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,365
|
|
|
$
|
8,310
|
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
$
|
9,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.31
|
|
|
$
|
0.17
|
|
|
$
|
0.49
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
Diluted net income per share
|
|
$
|
0.29
|
|
|
$
|
0.16
|
|
|
$
|
0.48
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
Consolidated
Balance Sheet Data (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
56,913
|
|
|
$
|
46,879
|
|
|
$
|
66,426
|
|
|
$
|
78,761
|
|
|
$
|
30,393
|
|
Working capital
|
|
|
61,320
|
|
|
|
45,594
|
|
|
|
75,289
|
|
|
|
82,950
|
|
|
|
47,819
|
|
Total assets
|
|
|
115,064
|
|
|
|
147,696
|
|
|
|
169,122
|
|
|
|
164,861
|
|
|
|
214,835
|
|
Total stockholders equity
|
|
|
93,622
|
|
|
|
113,512
|
|
|
|
137,428
|
|
|
|
137,672
|
|
|
|
150,655
|
|
34
|
|
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 are a global
technology-driven provider of services and customizable medical
devices to biopharmaceutical and healthcare organizations. We
are the market leader for centralized cardiac safety and
respiratory efficacy services in drug development and also
collect, analyze and distribute electronic patient reported
outcomes
(ePROtm)
in multiple modalities across all phases of clinical research.
We provide centralized cardiac safety testing which is a
critical component of diagnostic testing in 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 services 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 offer centralized Respiratory
solutions, which are utilized by biopharmaceutical and
healthcare organizations and CROs that are developing new
compounds for the treatment of asthma, cystic fibrosis and
Chronic Obstructive Pulmonary Disease (COPD) to assess the
efficacy of a drug or to evaluate compounds that have an effect
on pulmonary functions. We also offer site support, which
includes the rental and sale of equipment to support cardiac and
respiratory services along with related supplies and logistics
management. We also offer ePRO solutions along with proprietary
clinical assessments.
On May 28, 2010, we acquired Research Services Germany 234
GmbH (Research Services or RS), a leading provider of
respiratory diagnostics services and a manufacturer of equipment
that also offers cardiac safety and ePRO services. RS was formed
as a result of a demerger of CareFusion Germany 234 GmbH under
German law, which effectively divided CareFusion Germany 234
GmbH into RS and another entity. RS is comprised of the research
services division of CareFusion Germany 234 GmbH and certain
research operations of CareFusion Corporation (CareFusion). We
paid $82.7 million for RS. The acquisition and related
transaction costs were financed from our existing cash and a
portion of the $23.0 million drawn from our
$40.0 million revolving credit facility. The credit
facility was established on May 27, 2010. We have included
RSs operating results in our consolidated statements of
operations from the date of acquisition.
Our services revenues consist primarily of our services offered
under our Cardiac Safety, Respiratory and, to a lesser extent,
our ePRO solutions that we provide on a fee for services basis.
Our services revenue are recognized as the services are
performed. We also provide Cardiac Safety and Respiratory
consulting services on a time and materials basis and recognize
revenues as we perform the services. Our site support revenue,
consisting of equipment rentals and sales along with related
supplies and logistics management, 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 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
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.
35
Our former electronic data capture (EDC) operations are included
in EDC licenses and services revenue 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,
Respiratory and ePRO services. Cost of services consists
primarily of wages, depreciation, amortization of intangible
assets, fees paid to consultants, royalties on licensed
technology and other direct operating costs. Cost of site
support consists primarily of wages, equipment rent and
depreciation, amortization of intangible assets, 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, advertising and promotional expenditures and royalties
paid to our business development partners. General and
administrative expenses consist primarily of wages and direct
costs for our finance, administrative, corporate information
technology 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 customer
support functions.
We conduct our operations through offices in the United States
(U.S.) and Europe (the United Kingdom and Germany). Our
international net revenues represented approximately 21%, 24%
and 57% of total net revenues for the years ended
December 31, 2008, 2009 and 2010, respectively. The
majority of our revenues are allocated among our geographic
segments based upon the profit split transfer pricing
methodology which equalizes gross margins for each legal entity,
based upon its respective direct revenue or direct costs, as
determined by the relevant revenue source. Through
September 30, 2009, we calculated our transfer pricing for
Cardiac Safety services using a profit split methodology based
on cost. Subsequent to September 30, 2009, the profit split
transfer pricing methodology was modified for Cardiac Safety
services to allocate costs based on revenue instead of
allocating revenue based on costs. This has resulted in an
increase in revenue attributed to the UK beginning in the fourth
quarter of 2009.
Results
of Operations
Executive
Overview
Net revenues were $141.0 million for 2010, an increase of
$47.2 million or 50.3% from $93.8 million in 2009 due
to the acquisition of RS which contributed $47.2 million of
revenue from the acquisition date. Revenue from our legacy
business, which excludes the results of RS, reflected continued
slower conversion of backlog to revenue as larger customers
reacted to the recent economic recession by reducing costs
through delay of development spending and cancellation of trials
for drugs and our small to mid-sized customers continued to be
impacted by the tight credit conditions from the recession. We
also continued to see low demand for Thorough QTc studies from
our customers as these studies are performed largely for small
to mid-sized customers and it was this sector of the economy
that was most severely impacted by the very tight credit
conditions caused by the recession. Our legacy business did
experience revenue of $24.9 million in the fourth quarter
of 2010 which reflected its highest level in the past eight
quarters. New bookings were $212.2 million for the year
ended December 31, 2010 and backlog was $302.9 million
as of December 31, 2010.
Gross margin percentage was 47.8% in 2010 compared to 52.8% in
2009. Gross margin percentage was impacted by lower transaction
volume in our legacy business which declined 6.1% in 2010
compared to 2009 as much of our cost structure is fixed in
nature. In addition, the RS operations have historically
generated a lower margin than our legacy ERT business due to
their higher proportion of lower margin site related revenue,
higher services costs due to the more labor intensive delivery
and the overall impact of integration expenses. Gross margin
36
was also negatively impacted by $5.6 million of
amortization of acquired intangible assets directly related to
the RS acquisition.
Operating income for 2010 was $15.6 million or 11.1% of
total net revenues compared to $17.9 million or 19.1% of
total net revenues in 2009. Total expenses were
$125.4 million in 2010, an increase of $49.5 million,
from $75.9 million in 2009. Total expenses primarily
increased due to the addition of the RS business. Total expenses
also include the $5.6 million of amortization of acquired
intangible assets plus $5.9 million of acquisition and
other related costs, which included a $0.6 million payment
to our Chief Executive Officer upon his retirement in 2010. Our
effective income tax rate for 2010 was 31.6% compared to 38.9%
in 2009, with the reduction due to a greater proportion of
income generated from lower tax rate countries, primarily from
Germany, and from internal structural changes which had the
benefit of lowering our U.S. income tax rate.
Net income for 2010 was $9.9 million, or $0.20 per diluted
share, compared to $10.7 million, or $0.22 per diluted
share, in 2009.
During the latter half of 2010, we recognized the need to modify
the RS operations work flow processes and infrastructure to
expand capacity to support customer requirements for active and
new studies. This did impact our ability to contract for new
business with certain clients who required faster commencement
of studies than our standard delivery time would allow and still
maintain our desired level of quality. We added new staff in
Germany during the fourth quarter and into our first quarter of
2011 and continue the development of our new integrated data
handling platform, EXPERT 3. The EXPERT 3 platform
will further expand the RS capacity by improving the efficiency
and reducing the complexity of our processes. In 2011, we will
be making investments to complete the integration of the RS
business and to strengthen our infrastructure and pilot
expansion projects of our products and services into adjacent
markets. While these investments will impact our 2011 earnings,
we continue to believe our strategy will better position us for
improved growth and profitability in 2012 and beyond.
37
The following table presents certain financial data as a
percentage of total net revenues (except for the gross margin
for each product line which is a percentage of that product
lines revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
72.6
|
%
|
|
|
68.9
|
%
|
|
|
60.8
|
%
|
Site support
|
|
|
23.0
|
%
|
|
|
28.4
|
%
|
|
|
39.2
|
%
|
EDC licenses and services
|
|
|
4.4
|
%
|
|
|
2.7
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
29.0
|
%
|
|
|
31.9
|
%
|
|
|
30.8
|
%
|
Cost of site support
|
|
|
13.8
|
%
|
|
|
14.4
|
%
|
|
|
21.4
|
%
|
Cost of EDC licenses and services
|
|
|
1.4
|
%
|
|
|
0.9
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
44.2
|
%
|
|
|
47.2
|
%
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin services
|
|
|
60.0
|
%
|
|
|
53.8
|
%
|
|
|
49.4
|
%
|
Gross margin site support
|
|
|
39.9
|
%
|
|
|
49.2
|
%
|
|
|
45.3
|
%
|
Gross margin EDC licenses and services
|
|
|
68.7
|
%
|
|
|
65.5
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
|
55.8
|
%
|
|
|
52.8
|
%
|
|
|
47.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
10.0
|
%
|
|
|
13.8
|
%
|
|
|
11.4
|
%
|
General and administrative
|
|
|
13.7
|
%
|
|
|
15.8
|
%
|
|
|
21.7
|
%
|
Research and development
|
|
|
3.3
|
%
|
|
|
4.1
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27.0
|
%
|
|
|
33.7
|
%
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
28.8
|
%
|
|
|
19.1
|
%
|
|
|
11.1
|
%
|
Foreign exchange gains (losses)
|
|
|
0.6
|
%
|
|
|
(0.7
|
)%
|
|
|
(0.7
|
)%
|
Other income (expense), net
|
|
|
0.7
|
%
|
|
|
0.2
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
30.1
|
%
|
|
|
18.6
|
%
|
|
|
10.2
|
%
|
Income tax provision
|
|
|
11.3
|
%
|
|
|
7.2
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
18.8
|
%
|
|
|
11.4
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Year
Ended December 31, 2009 Compared to the Year Ended
December 31, 2010
The following table presents statements of operations data with
product line detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Increase (Decrease)
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
64,655
|
|
|
$
|
85,718
|
|
|
$
|
21,063
|
|
|
|
32.6
|
%
|
Costs of revenues
|
|
|
29,886
|
|
|
|
43,403
|
|
|
|
13,517
|
|
|
|
45.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
34,769
|
|
|
$
|
42,315
|
|
|
$
|
7,546
|
|
|
|
21.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
26,667
|
|
|
$
|
55,274
|
|
|
$
|
28,607
|
|
|
|
107.3
|
%
|
Costs of revenues
|
|
|
13,544
|
|
|
|
30,212
|
|
|
|
16,668
|
|
|
|
123.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
13,123
|
|
|
$
|
25,062
|
|
|
$
|
11,939
|
|
|
|
91.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,501
|
|
|
$
|
|
|
|
$
|
(2,501
|
)
|
|
|
(100.0
|
)%
|
Costs of revenues
|
|
|
863
|
|
|
|
|
|
|
|
(863
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
1,638
|
|
|
$
|
|
|
|
$
|
(1,638
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
93,823
|
|
|
$
|
140,992
|
|
|
$
|
47,169
|
|
|
|
50.3
|
%
|
Costs of revenues
|
|
|
44,293
|
|
|
|
73,615
|
|
|
|
29,322
|
|
|
|
66.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
49,530
|
|
|
|
67,377
|
|
|
|
17,847
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
12,905
|
|
|
|
16,064
|
|
|
|
3,159
|
|
|
|
24.5
|
%
|
General and administrative
|
|
|
14,859
|
|
|
|
30,607
|
|
|
|
15,748
|
|
|
|
106.0
|
%
|
Research and development
|
|
|
3,853
|
|
|
|
5,089
|
|
|
|
1,236
|
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,617
|
|
|
|
51,760
|
|
|
|
20,143
|
|
|
|
63.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,913
|
|
|
|
15,617
|
|
|
|
(2,296
|
)
|
|
|
(12.8
|
)%
|
Foreign exchange losses
|
|
|
(618
|
)
|
|
|
(956
|
)
|
|
|
(338
|
)
|
|
|
54.7
|
%
|
Other income (expense), net
|
|
|
183
|
|
|
|
(239
|
)
|
|
|
(422
|
)
|
|
|
(230.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,478
|
|
|
|
14,422
|
|
|
|
(3,056
|
)
|
|
|
(17.5
|
)%
|
Income tax provision
|
|
|
6,791
|
|
|
|
4,551
|
|
|
|
(2,240
|
)
|
|
|
(33.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,687
|
|
|
$
|
9,871
|
|
|
$
|
(816
|
)
|
|
|
(7.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2009
|
|
2010
|
|
(Decrease)
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
46.2
|
%
|
|
|
50.6
|
%
|
|
|
4.4
|
%
|
Cost of site support
|
|
|
50.8
|
%
|
|
|
54.7
|
%
|
|
|
3.9
|
%
|
Cost of EDC licenses and services
|
|
|
34.5
|
%
|
|
|
N.M.
|
|
|
|
N.M.
|
|
Total costs of revenues
|
|
|
47.2
|
%
|
|
|
52.2
|
%
|
|
|
5.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
13.8
|
%
|
|
|
11.4
|
%
|
|
|
(2.4
|
)%
|
General and administrative
|
|
|
15.8
|
%
|
|
|
21.7
|
%
|
|
|
5.9
|
%
|
Research and development
|
|
|
4.1
|
%
|
|
|
3.6
|
%
|
|
|
(0.5
|
)%
|
Total operating expenses
|
|
|
33.7
|
%
|
|
|
36.7
|
%
|
|
|
3.0
|
%
|
39
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
Services revenues for the year ended December 31, 2010
included $21.1 million from the operations of RS. Apart
from the impact of RS, services revenues were essentially flat
from 2009 to 2010, with a $3.0 million reduction in
transaction revenue related to lower volume of transactions
performed in the year ended December 31, 2010 as compared
to the year ended December 31, 2009 being offset by a
number of revenue increases totaling $3.0 million,
primarily from our ePRO operations.
Site support revenues for the year ended December 31, 2010
included $26.0 million from the operations of RS. Apart
from the impact of RS, the increase in site support revenue was
primarily due to $2.9 million associated with an increase
in the number of units rented in the year ended
December 31, 2010 as compared to the year ended
December 31, 2009, $0.3 million increase in equipment
sales and $0.2 million increase in supplies revenue.
Partially offsetting these increases was a $0.6 million
decrease in revenue attributable to decreases in average rental
per unit and a decrease of $0.2 million of other revenue
items.
Costs of
Revenues
The cost of services revenues for the year ended
December 31, 2010 included $14.1 million from the
operations of RS. Apart from the impact of RS, the decrease in
the cost of services was primarily due to a $1.8 million
reduction in labor costs, largely as a result of a change in the
classification of the costs associated with the customer support
center to report these as additional costs of site support in
2010 to better align costs with related revenue. We have also
realized cost savings as a result of efficiency initiatives
implemented in the latter part of 2009. Additionally,
depreciation expense decreased by $0.4 million as computer
equipment purchased for the development and implementation of
the EXPERT 2 technology platform has become fully depreciated.
Partially offsetting these decreases were increases in variable
incentive compensation expenses of $1.2 million, $0.3 for
consulting and $0.3 million for telephone and connectivity.
The increase in cost of services revenues as a percentage of
service revenues was due to the RS operations.
The cost of site support revenues for the year ended
December 31, 2010 included $17.4 million from the
operations of RS. Apart from the impact of RS, the decrease in
the cost of site support was primarily due to a
$1.5 million decrease in depreciation expense as older,
more expensive ECG equipment has become fully depreciated and a
$0.2 million decrease in freight. Partially offsetting
these decreases was a $1.1 million increase in labor costs
in 2010, largely associated with the customer support center as
discussed above. The increase in cost of site support revenues
as a percentage of site support revenues was due to the RS
operations.
Operating
Expenses
Selling and marketing expenses for the year ended
December 31, 2010 included $1.9 million from the
operations of RS. Apart from the impact of RS, the increase in
selling and marketing expenses was due primarily to
$0.4 million in higher labor costs due to higher
commissionable revenue, $0.5 million in higher variable
incentive compensation expenses and $0.2 million each in
higher marketing costs and royalties. These increases were
partially offset by $0.2 million lower consulting costs.
The decrease in selling and marketing expenses as a percentage
of total net revenues reflects the fact that the costs do not
necessarily change in direct relation with changes in revenue.
General and administrative expenses for the year ended
December 31, 2010 included $6.8 million from the
operations of RS. Apart from the impact of RS, the increase in
general and administrative expenses, both in absolute terms and
as a percentage of total net revenues, was due primarily to
$4.0 million of professional fees incurred related to
transaction costs associated with our acquisition of RS. Labor
costs increased $1.1 million which included a payment to
our Chief Executive Officer upon his retirement in 2010. We
added $0.6 million to the reserve for
40
losses on the lease of our former Reno, Nevada facility due to
continued poor prospects for subleasing that facility. We
recognized a $0.5 million gain on sale of our former EDC
business in the second quarter of 2009 which decreased our
expenses in 2009. Additionally, software costs increased
$0.6 million and consultant costs increased
$0.3 million as a result of an information technology
modernization and virtualization project started in late 2009
and continuing in 2010. There was a $0.9 million increase
in variable incentive compensation expenses. Travel costs
increased $0.4 million as a result of continuing
integration costs associated with the RS acquisition.
Research and development expenses for the year ended
December 31, 2010 included $1.5 million from the
operations of RS. Apart from the impact of RS, the decrease in
research and development expenses was primarily due to a
$0.2 million reduction in labor costs as a result of the
sale of our former EDC operations in June 2009 and a
$0.4 million increase in the capitalization of salaries and
consultant fees associated with internal-use software
development projects during 2010. These decreases were partially
offset by a $0.4 million increase in variable incentive
compensation expenses. The decrease in research and development
expenses as a percentage of total net revenues reflects the fact
that the costs do not necessarily change in direct relation with
changes in revenue.
Foreign exchange losses increased primarily due to the movement
in the exchange rate between the euro, British pound sterling
and U.S. dollar that impacts our operations in Germany and
in the UK.
Other income (expense), net, changed as we incurred interest
expense on advances under our line of credit in 2010 that we
used to purchase RS and to fund related acquisition expenses and
working capital needs, while 2009 included a small amount of
interest income on our cash balance, a substantial portion of
which we used to purchase RS.
Our effective tax rate for the year ended December 31, 2010
was 31.6% compared to 38.9% for the year ended December 31,
2009. Through September 30, 2009, we calculated our
transfer pricing for Cardiac Safety services using a profit
split methodology based on cost. Subsequent to
September 30, 2009, the profit split transfer pricing
methodology was modified for Cardiac Safety services to allocate
costs based on revenue instead of allocating revenue based on
costs. Our effective tax rate for the year ended
December 31, 2010 included the impact of the RS
acquisition, which operates primarily in Germany which has a
lower tax rate than our historic effective tax rate. However,
acquisition costs are not deductible for tax purposes which
increased the effective tax rate for the year ended
December 31, 2010 by approximately nine percentage points.
Additionally, as of July 1, 2010, we reorganized our
operations in the United States to align our corporate structure
along departmental business lines which has reduced our
effective tax rate. The effective tax rate for the year ended
December 31, 2010 also includes the impact of UK research
and development credits for 2008 and 2009 not previously claimed
and a reserve for a UK tax audit.
41
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)
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
Foreign exchange gains (losses)
|
|
|
832
|
|
|
|
(618
|
)
|
|
|
(1,450
|
)
|
|
|
(174.3
|
)%
|
Other income, net
|
|
|
898
|
|
|
|
183
|
|
|
|
(715
|
)
|
|
|
(79.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
40.0
|
%
|
|
|
46.2
|
%
|
|
|
6.2
|
%
|
Cost of site support
|
|
|
60.1
|
%
|
|
|
50.8
|
%
|
|
|
(9.3
|
)%
|
Cost of EDC licenses and services
|
|
|
31.3
|
%
|
|
|
34.5
|
%
|
|
|
3.2
|
%
|
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
|
%
|
42
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 customers, 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 revenues we recognize 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.
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
43
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.
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 while the gains in 2008 resulted from more favorable
exchange rates.
In the year ended December 31, 2009 and 2008, other income,
net, consisted primarily of interest income which decreased as
the result of lower interest rates in 2009 as compared to 2008.
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.
Liquidity
and Capital Resources
At December 31, 2010, we had $30.4 million of cash,
cash equivalents and short-term investments, primarily invested
in money market funds and commercial bank accounts. Of the
$30.4 million, $6.9 million and $13.1 million was
held by our UK and German subsidiaries, respectively. Although a
portion of our UK subsidiarys current undistributed net
earnings, as well as any future net earnings of our UK and
German subsidiaries, will be permanently reinvested, we believe
that this does not have a material impact on our overall
liquidity
For the year ended December 31, 2010, our operations
provided cash of $35.9 million, an increase of
$2.0 million compared to $33.9 million during the year
ended December 31, 2009. The increase was primarily the
result of an increase of $8.1 million increase in accrued
expenses in the year ended December 31, 2010 as compared to
a $3.5 million decrease in the year ended December 31,
2009. The increase in the 2010 accrued expenses was
44
largely due to an increase in the RS accrued expenses and an
increase in the 2010 accrual for incentive compensation due to
expected improved results against targets as compared to 2009.
The decrease in 2009 was largely the result of the decline in
the accrual for variable incentive compensation due to operating
results as compared to targets. Other items with a positive
impact on operating cash flow in the year ended
December 31, 2010 as compared to the same period in 2009
included net income before depreciation and amortization, which
increased $6.4 million in 2010 as compared to 2009 and an
increase in accounts payable in 2010 which provided
$4.1 million of cash as compared to a $0.8 million
decrease in accounts payable in 2009. Partially offsetting these
increases was an increase in accounts receivable in the year
ended December 31, 2010 of $7.1 million as compared to
a decrease of $12.7 million in the year ended
December 31, 2009. The accounts receivable were reduced
significantly during the year ended December 31, 2009 as a
result of focused collection efforts and a reduction in revenue.
The increase in the accounts receivable in 2010 was primarily
due to an increase in the RS accounts receivables as RS revenue
increased.
For the year ended December 31, 2010, our investing
activities used cash of $94.8 million as compared to
$17.7 million during the year ended December 31, 2009.
Acquisition payments totaled $82.8 million in the year
ended December 31, 2010, substantially all for RS, as
compared to $0.7 million related to Covance Cardiac Safety
Services (CCSS) in the year ended December 31, 2009.
Proceeds from sales of investments net of purchases were
$9.7 million during the year ended December 31, 2010
as compared to purchases of investments of $9.7 million
during the year ended December 31, 2009.
During the year ended December 31, 2010 and 2009, we
capitalized $21.7 million and $6.2 million,
respectively, of property and equipment. Included in property
and equipment acquisitions was $6.2 million and
$3.0 million for the year ended December 31, 2010 and
2009, respectively, of internal use software. The balance of the
change was primarily due to an increase in purchases of ECG and
respiratory equipment commensurate with the additional units
rented in the year ended December 31, 2010, which included
RS for seven months, as compared to the year ended
December 31, 2009.
For the year ended December 31, 2010, our financing
activities provided cash of $21.3 million as compared to a
$14.5 million use of cash for the year ended
December 31, 2009. We obtained proceeds of
$23.0 million from our Citizens Bank of Pennsylvania credit
facility which we used to purchase RS on May 28, 2010 and
to fund related transaction costs and working capital needs. We
subsequently repaid $2.0 million. In the year ended
December 31, 2009, we repurchased $15.0 million of our
common stock under our stock buy-back program, with no
corresponding expenditure in the year ended December 31,
2010.
We have a revolving line of credit arrangement with Citizens
Bank of Pennsylvania in the aggregate amount of
$40.0 million, with an additional $10.0 million
increase option. As of December 31, 2010, we have
outstanding $21.0 million under our line of credit and
$29.0 million remains available for us to borrow including
the increase option. The line has a three-year term which
expires May 27, 2013 and annual interest rates based upon
LIBOR plus a margin of 1.00% to 1.75% based upon a total
leverage ratio and unused commitment fees of 0.10% to 0.20%
based upon the same total leverage ratio. From the initial
borrowing on May 27, 2010 through December 31, 2010,
the annual interest rate ranged from 1.35% to 1.60% and the
unused commitment fee was 0.10%. Financial covenants include
maximum total senior funded debt to earnings before interest,
income taxes, depreciation and amortization (EBITDA) of 2.0 and
minimum debt service coverage ratio of 1.5. At December 31,
2010, we were in compliance with all debt covenants. Borrowings
under the line of credit are secured by 65% of the capital stock
in certain of our foreign subsidiaries.
In December 2010, we entered into a commitment to purchase
$5.1 million of equipment from a manufacturer over a
15-month
period beginning in January 2011. 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 have a prior commitment to purchase approximately
$2.8 million of private label cardiac safety equipment from
the same manufacturer over a twelve-month period ending in the
first quarter of 2011. As of December 31, 2010,
substantially all of the equipment was purchased under the
$2.8 million commitment.
45
In March 2010, the Patient Protection and Affordable Care Act
and the Health Care and Education Act of 2010 became law. The
provisions of these laws are not expected to have a significant
impact to our consolidated financial statements.
We expect that existing cash and cash equivalents, cash flows
from operations and amounts available under the $40 million
credit facility as discussed above will be sufficient to meet
our foreseeable cash needs for at least the next year. In
addition, 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.
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, 2010. 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. No shares were purchased during the year
ended December 31, 2010.
The following table presents contractual obligations information
as of December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Long-term debt(a)
|
|
$
|
21,759
|
|
|
$
|
316
|
|
|
$
|
21,443
|
|
|
$
|
|
|
|
$
|
|
|
Purchase obligations(b)
|
|
|
5,116
|
|
|
|
3,813
|
|
|
|
1,303
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
22,727
|
|
|
|
4,201
|
|
|
|
5,974
|
|
|
|
4,034
|
|
|
|
8,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,602
|
|
|
$
|
8,330
|
|
|
$
|
28,720
|
|
|
$
|
4,034
|
|
|
$
|
8,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Debt amounts include principal maturity and expected interest
payments that reflects the year-end interest rate. |
|
(b) |
|
Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding on us and that
specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. We
have excluded agreements that are cancelable without penalty.
Purchase obligations relate to purchases of rental equipment. |
The long-term portion of other liabilities is comprised of the
present value of estimated lease costs for the Reno location.
The gross amount of the payments associated with these
liabilities is included in operating leases in the contractual
obligations table above.
Inflation
We believe the effects of inflation and changing prices
generally do not have a material adverse effect on our results
of operations or financial condition.
Recent
Accounting Pronouncements
In September 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
46
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 do not believe that this
consensus will have a material impact on our consolidated
financial statements.
In January 2010, the FASB issued Accounting Standard Update
2010-06
which will require reporting entities to make new disclosures
about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and
Level 2 fair-value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair-value measurements. The
FASB also clarified existing fair-value measurement disclosure
guidance about the level of disaggregation, inputs, and
valuation techniques. Except for the detailed Level 3 roll
forward disclosures, we adopted this standard effective
January 1, 2010. The adoption of this aspect of the
accounting standard did not have any impact on our consolidated
financial statements. The new disclosures about purchases,
sales, issuances, and settlements in the roll forward activity
for Level 3 fair-value measurements are effective for
interim and annual reporting periods beginning after
December 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 primarily of our services offered
under our Cardiac Safety, Respiratory Services and, to a lesser
extent, ePRO solutions 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. Our site support revenue, consisting of equipment
rentals and sales along with related supplies and logistics
management, 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 customer 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 customer acceptance has occurred.
47
Collectability is assessed based on a number of factors,
including past transaction history with the customer and the
creditworthiness of the customer. 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,
customers 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
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
On May 28, 2010, we acquired Research Services Germany 234
GmbH (Research Services or RS), a leading provider of
respiratory diagnostics services and a manufacturer of equipment
that also offers cardiac safety and ePRO services. RS was formed
as a result of a demerger of CareFusion Germany 234 GmbH under
German law, which effectively divided CareFusion Germany 234
GmbH into RS and another entity. RS is comprised of the research
services division of CareFusion Germany 234 GmbH and certain
research operations of CareFusion Corporation (CareFusion). We
paid $82.7 million for RS. The acquisition and related
transaction costs were financed from our existing cash and a
portion of the $23.0 million drawn from our
$40.0 million revolving credit facility. The credit
facility was established on May 27, 2010. See Note 2
to our consolidated financial statements for additional
disclosure on the RS acquisition and Note 7 to our
consolidated financial statements for additional disclosure
regarding the revolving credit facility.
We allocated the purchase price 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.
For a discussion of how we allocated the purchase price of RS,
see Note 2 to our consolidated financial statements.
Goodwill
The carrying value of goodwill was $34.7 million as of
December 31, 2009 and $71.6 million as of
December 31, 2010. During the first nine months of 2010,
goodwill increased $36.9 million with $36.8 million
due to the acquisition of RS. See Note 2 to our
consolidated financial statements for additional disclosure
regarding the RS and CCSS acquisitions. Goodwill is not
amortized but is subject to an impairment test at least
annually. We perform the impairment test using a two-step
process annually as of December 31 or more frequently if events
or circumstances indicate that the value of goodwill might be
impaired. The first step is a comparison of the fair value of an
internal reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit
48
exceeds its carrying value, goodwill of the reporting unit is
not considered impaired and the second step is unnecessary. If
the carrying value of the reporting unit exceeds its fair value,
a second test is performed to measure the amount of impairment
by comparing the carrying amount of the goodwill to a
determination of the implied value of the goodwill. If the
carrying amount of the goodwill is greater that the implied
value, an impairment loss is recognized for the difference.
The implied value of goodwill is determined as of the test date
by performing a purchase price allocation, as if the reporting
unit had just been acquired, using currently estimated fair
values of the individual assets and liabilities of the reporting
unit, together with an estimate of the fair value of the
reporting unit taken as a whole. The estimate of the fair value
of the reporting unit is based upon information available
regarding prices of similar groups of assets, or other valuation
techniques including present value techniques based upon
estimates of future cash flow.
The results of our annual impairment test performed in 2010
indicated that our goodwill and intangible assets were not
impaired. We used many assumptions and estimates that directly
impacted the results of our impairment testing, including an
estimate of future expected revenues, earnings and cash flows,
and discount rates applied to such expected cash flows in order
to estimate fair value. We had the ability to influence the
outcome and ultimate results based on the assumptions and
estimates we chose for testing. To mitigate undue influence, we
set criteria that were reviewed and approved by various levels
of management. The determination of whether or not goodwill has
become impaired involves a significant level of judgment in the
assumptions underlying the approach used to determine the value
of our reporting unit. Changes in our strategy or market
conditions could significantly impact these judgments and
require adjustments to recorded amounts of intangible assets.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
management having to estimate our current tax exposure together
with assessing temporary differences resulting from the
differing treatment of certain items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance
sheets. Management must then assess the likelihood that our net
deferred tax assets will be recovered from future taxable
income, and, to the extent that management believes that
recovery is not likely, a valuation allowance must be
established. To the extent management establishes or increases a
valuation allowance in a period, the consolidated statement of
operations will reflect additional income tax expense.
Significant management judgment is required in determining our
provision for income taxes, deferred taxes and any valuation
allowance recorded against deferred tax assets. As of
December 31, 2010, we had a valuation allowance of
$1.2 million related to the uncertain realization of
certain deferred tax assets. See Note 8 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 and RS acquisitions is recognized on an accelerated basis
while other intangibles are amortized using the straight-line
method.
Changes in the estimated useful lives or an impairment 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
49
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
Long-term
debt
At December 31, 2010, our long-term debt was comprised of
$21.0 million drawn under our $40.0 million credit
facility with Citizens Bank of Pennsylvania. We do not manage
the interest rate risk on our debt through the use of derivative
instruments. Our credit facilitys interest rates may be
reset due to fluctuations in the London Interbank Offered Rate
(LIBOR). A hypothetical 100-basis-point change in the interest
rate of our credit facilities would change our annual pre-tax
earnings by $0.2 million based on our current borrowings
under the credit facility.
Investments
We generally place our investments in highly-rated securities
such as 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. 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 long-term investments.
See Liquidity and Capital Resources as part of
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Foreign
Currency Risk
We operate on a global basis from locations in the United States
(U.S.), the United Kingdom (UK) and Germany. All international
net revenues and expenses are billed or incurred in either
U.S. dollars, British pounds sterling or euros. As such, we
face exposure to adverse movements in the exchange rate of the
pound sterling and euro. As the currency rate changes,
translation of the statement of operations of our UK and German
subsidiaries from the local currency to U.S. dollars
affects
year-to-year
comparability of operating results. With the recent RS
acquisition, there has been a significant increase in activity
in countries outside the U.S. As a result, while we did not
hedge translation risks through December 31, 2010, we have
implemented a hedging strategy in 2011. Our costs in Germany are
subject to foreign exchange fluctuations as the majority of
these costs are paid in euros. We entered into foreign exchange
contracts in January and February 2011 to mitigate such foreign
exchange fluctuations. We entered into forward contracts to sell
$3.5 million U.S. dollars and purchase euros at an
average price of $1.37 U.S. dollars to 1 euro. Such
contracts have various maturities through March 29, 2011.
Management estimates that a 10% change in the exchange rate of
the pound sterling and euro would have impacted the reported
operating income for the year ended December 31, 2010 by
approximately $1.6 million.
50
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information called for by this Item is set forth on Pages
F-1 through F-34.
|
|
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.
Management has not evaluated the effectiveness of internal
control over financial reporting at Research Services Germany
234 GmbH (RS), which we acquired on May 28, 2010 and, as
such, does not extend its conclusion regarding the effectiveness
of internal control over financial reporting to the controls of
that entity. RS total assets were $99.9 million as of
December 31, 2010 and total revenues were
$47.2 million for the period May 28, 2010 through
December 31, 2010. See Note 2 of the notes to the
consolidated financial statements for additional information on
the RS acquisition. Accordingly, managements assessment as
of December 31, 2010 does not include the internal control
over financial reporting of RS.
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, 2010,
excluding the internal control over financial reporting of RS.
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 2010 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
51
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, 2011, 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 Plans 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.
52
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.
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3
|
.1
|
|
Restated Certificate of Incorporation, as amended.(1)
|
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|
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|
3
|
.2
|
|
Bylaws.(2)
|
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|
|
|
|
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3
|
.3
|
|
Amendment to Bylaws.(3)
|
|
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|
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3
|
.4
|
|
Certificate of Merger between the Company and ERT Operating
Company.(4)
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4
|
.1
|
|
Form of Stock Certificate.(4)
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|
10
|
.1
|
|
Registration Rights Agreement dated August 27, 1999.(5)
|
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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)
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10
|
.4
|
|
Exclusive Marketing Agreement dated November 27, 2007 by
and between the Company and Covance Inc.(7)
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10
|
.7
|
|
1996 Stock Option Plan, as amended.(4)*
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|
10
|
.9
|
|
Definitive Purchase Agreement between Blitz
F10-acht-drei-fünf GmbH & Co. KG, an indirect
wholly-owned
subsidiary of eResearchTechnology, Inc., and CareFusion Germany
234 GmbH, an indirect wholly-owned subsidiary of CareFusion
Corporation, dated April 29, 2010.(8)
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|
10
|
.10
|
|
Reciprocal Guaranty between CareFusion Corporation, in favor of
Blitz F10-acht-drei-fünf GmbH & Co. KG, and
eResearchTechnology, Inc., in favor of CareFusion Germany 234
GmbH.(8)
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|
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|
10
|
.13
|
|
2010 Bonus Plan.(8)*
|
|
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|
|
10
|
.14
|
|
2009 Bonus Plan.(9)*
|
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|
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|
|
10
|
.15
|
|
Credit Agreement dated May 27, 2010 between
eResearchTechnology, Inc. and Citizens Bank of Pennsylvania.(10)
|
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|
|
10
|
.16
|
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Revolver Note dated May 27, 2010 made by
eResearchTechnology, Inc. payable to the order of Citizens Bank
of Pennsylvania.(11)
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53
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10
|
.17
|
|
Guaranty dated May 27, 2010 by ERT Tech Corporation, ERT
Investment Corporation, Covance Cardiac Safety Services Inc. and
eResearchTechnology, Inc. in favor of Citizens Bank of
Pennsylvania.(12)
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10
|
.18
|
|
Charge Over Shares and Securities dated May 27, 2010
between eResearchTechnology, Inc. and Citizens Bank of
Pennsylvania.(13)
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10
|
.19
|
|
First Amendment dated May 28, 2010 to the Agreement
Relating to the Sale, Purchase and Transfer of All Shares of
Research Services Germany 234 GmbH between CareFusion Germany
234 GmbH and Blitz F10-acht-drei-fünf GmbH & Co.
KG.(14)
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10
|
.20
|
|
1818 Market Street Office Lease between the Company and NNN 1818
Market Street, LLC and Affiliates.(15)
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10
|
.31
|
|
Amended and Restated 2003 Equity Incentive Plan, as amended.(16)*
|
|
|
|
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|
|
10
|
.42
|
|
Management Employment Agreement effective March 1, 2010
between Dr. Joel Morganroth and the Company.(8)*
|
|
|
|
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|
|
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)*
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|
|
|
|
10
|
.46
|
|
Consultant Agreement effective March 1, 2010 between Joel
Morganroth, M.D., P.C. and the Company.(8)*
|
|
|
|
|
|
|
10
|
.48
|
|
Management Employment Agreement effective June 23, 2006
between Michael J. McKelvey and the Company.(17)*
|
|
|
|
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|
|
10
|
.49
|
|
Amendment to Management Employment Agreement effective
March 17, 2010 between Michael McKelvey and the Company.(8)*
|
|
|
|
|
|
|
10
|
.50
|
|
Amendment to Management Employment Agreement effective
March 17, 2010 between Jeffrey S. Litwin and the
Company.(8)*
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|
10
|
.51
|
|
Amendment to Management Employment Agreement effective
March 17, 2010 between Amy Furlong and the Company.(8)*
|
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|
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|
|
10
|
.52
|
|
Lease Agreement dated August 18, 2000 between Advance/GLD 2
L.L.C. and the Company.(18)
|
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|
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10
|
.53
|
|
Management Employment Agreement effective July 28, 2008
between Keith D. Schneck and the Company.(19)*
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10
|
.54
|
|
Lease Agreement dated September 28, 2004 between Royal and
Sun Alliance Insurance PLC and the Companys subsidiary,
eResearchTechnology Limited.(20)
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|
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10
|
.56
|
|
Amendment to Management Employment Agreement effective
March 17, 2010 between Keith D. Schneck and the
Company.(8)*
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54
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|
|
|
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10
|
.57
|
|
Management Employment Agreement effective January 1, 2009
between Dr. Joel Morganroth and the Company.(9)*
|
|
|
|
|
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|
10
|
.58
|
|
Consultant Agreement effective January 1, 2009 between
Dr. Joel Morganroth and the Company.(9)*
|
|
|
|
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|
10
|
.59
|
|
Retirement Agreement effective December 21, 2010 between
Michael J. McKelvey and the Company.*
|
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12
|
.1
|
|
Statement of Computation of Ratio of Earnings to Fixed Charges.
|
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|
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21
|
.1
|
|
Subsidiaries of the Registrant.
|
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|
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23
|
.1
|
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Consent of KPMG LLP.
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31
|
.1
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|
Certification of Chief Executive Officer.
|
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31
|
.2
|
|
Certification of Chief Financial Officer.
|
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|
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|
32
|
.1
|
|
Statement of Chief Executive Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
|
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32
|
.2
|
|
Statement of Chief Financial Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
|
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*
|
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.
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(3)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 31, 1999.
|
|
|
(4)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 12, 2002.
|
|
|
(5)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 8-K
on September 9, 1999.
|
|
|
(6)
|
Incorporated by reference to Exhibit 2.1, filed with the
Companys
Form 8-K
on December 4, 2007.
|
|
|
(7)
|
Incorporated by reference to Exhibit 10.1, filed with the
Companys
Form 8-K
on December 4, 2007. Confidential treatment has been
requested with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the SEC.
|
|
|
(8)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on May 7, 2010.
|
|
|
(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 Exhibit 10.1, filed in
connection with the Companys Form
8-K on
June 3, 2010.
|
|
|
(11)
|
Incorporated by reference to Exhibit 10.2, filed in
connection with the Companys Form
8-K on
June 3, 2010.
|
|
|
(12)
|
Incorporated by reference to Exhibit 10.3, filed in
connection with the Companys Form
8-K on
June 3, 2010.
|
55
|
|
|
|
(13)
|
Incorporated by reference to Exhibit 10.4, filed in
connection with the Companys Form
8-K on
June 3, 2010.
|
|
|
(14)
|
Incorporated by reference to Exhibit 10.5, filed in
connection with the Companys Form
8-K on
June 3, 2010.
|
|
|
(15)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 7, 2008.
|
|
|
(16)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 6, 2009.
|
|
|
(17)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 7, 2008.
|
|
|
(18)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on August 4, 2006.
|
|
|
(19)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-Q
on November 13, 2000.
|
|
|
(20)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 2, 2009.
|
|
|
(21)
|
Incorporated by reference to the exhibit with the same number,
filed in connection with the Companys
Form 10-K
on March 11, 2005.
|
56
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 2011.
eResearchTechnology, Inc.
|
|
|
|
By:
|
/s/ Joel
Morganroth, MD
|
Joel Morganroth, MD
President and Chief Executive Officer,
Chairman of the Board of Directors
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/ Joel
Morganroth, MD
Joel
Morganroth, MD
|
|
President and Chief Executive Officer, Chairman of the Board of
Directors (Principal executive officer)
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Keith
D. Schneck
Keith
D. Schneck
|
|
Executive Vice President, Chief Financial Officer and Secretary
(Principal financial and accounting officer)
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Klaus
P. Besier
Klaus
P. Besier
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Sheldon
M. Bonovitz
Sheldon
M. Bonovitz
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Michael
DeMane
Michael
DeMane
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Gerald
A. Faich, MD, MPH
Gerald
A. Faich, MD, MPH
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Elam
M. Hitchner
Elam
M. Hitchner
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Stephen
S. Phillips
Stephen
S. Phillips
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ Stephen
M. Scheppmann
Stephen
M. Scheppmann
|
|
Director
|
|
March 3, 2011
|
57
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.
Management has not evaluated the effectiveness of internal
control over financial reporting at Research Services Germany
234 GmbH (RS), which we acquired on May 28, 2010 and, as
such, does not extend its conclusion regarding the effectiveness
of internal control over financial reporting to the controls of
that entity. RS total assets were $99.9 million as of
December 31, 2010 and total revenues were
$47.2 million for the period May 28, 2010 through
December 31, 2010. See Note 2 of the notes to the
consolidated financial statements for additional information on
the RS acquisition. Accordingly, managements assessment as
of December 31, 2010 does not include the internal control
over financial reporting of RS.
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, 2010,
excluding the internal control over financial reporting of RS.
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, Inc.s (the Company)
internal control over financial reporting as of
December 31, 2010, 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, 2010, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
The Company acquired Research Services Germany 234 GmbH (RS) on
May 28, 2010, and management excluded from its assessment
of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2010, RS
internal control over financial reporting associated with total
assets of $99.9 million as of December 31, 2010 and
total revenues of $47.2 million for the period May 28,
2010 through December 31, 2010 included in the consolidated
financial statements of eResearchTechnology, Inc. and
subsidiaries as of and for the year ended December 31,
2010. Our audit of internal control over financial reporting of
the Company also excluded an evaluation of the internal control
over financial reporting of RS.
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. and
subsidiaries as of December 31, 2010 and 2009, 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, 2010, and our report dated March 3, 2011
expressed an unqualified opinion on those consolidated financial
statements.
Philadelphia, Pennsylvania
March 3, 2011
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, 2010 and 2009, 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, 2010. In
connection with our audits of the consolidated financial
statements, we also have audited financial statement
Schedule II Valuation and Qualifying Accounts.
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, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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, 2010,
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, 2011 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 3, 2011
F-4
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,979
|
|
|
$
|
30,343
|
|
Short-term investments
|
|
|
9,782
|
|
|
|
50
|
|
Investment in marketable securities
|
|
|
1,026
|
|
|
|
648
|
|
Accounts receivable, less allowance for doubtful accounts of
$548 and $515, respectively
|
|
|
16,579
|
|
|
|
37,236
|
|
Inventory
|
|
|
|
|
|
|
4,698
|
|
Prepaid income taxes
|
|
|
2,698
|
|
|
|
1,988
|
|
Prepaid expenses and other
|
|
|
3,308
|
|
|
|
4,393
|
|
Deferred income taxes
|
|
|
1,649
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
104,021
|
|
|
|
82,787
|
|
Property and equipment, net
|
|
|
24,205
|
|
|
|
42,615
|
|
Goodwill
|
|
|
34,676
|
|
|
|
71,637
|
|
Intangible assets
|
|
|
1,607
|
|
|
|
17,187
|
|
Other assets
|
|
|
352
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
164,861
|
|
|
$
|
214,835
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,007
|
|
|
$
|
7,136
|
|
Accrued expenses
|
|
|
5,990
|
|
|
|
16,162
|
|
Income taxes payable
|
|
|
346
|
|
|
|
|
|
Deferred revenues
|
|
|
11,728
|
|
|
|
11,670
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,071
|
|
|
|
34,968
|
|
Deferred rent
|
|
|
2,357
|
|
|
|
2,368
|
|
Deferred income taxes
|
|
|
2,502
|
|
|
|
3,703
|
|
Long-term debt
|
|
|
|
|
|
|
21,000
|
|
Other liabilities
|
|
|
1,259
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,189
|
|
|
|
64,180
|
|
|
|
|
|
|
|
|
|
|
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, 60,189,235 and
60,460,782 shares issued, respectively
|
|
|
602
|
|
|
|
605
|
|
Additional paid-in capital
|
|
|
97,367
|
|
|
|
100,441
|
|
Accumulated other comprehensive loss
|
|
|
(1,580
|
)
|
|
|
(1,545
|
)
|
Retained earnings
|
|
|
121,166
|
|
|
|
131,037
|
|
Treasury stock, 11,589,603 shares at cost
|
|
|
(79,883
|
)
|
|
|
(79,883
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
137,672
|
|
|
|
150,655
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
164,861
|
|
|
$
|
214,835
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
96,567
|
|
|
$
|
64,655
|
|
|
$
|
85,718
|
|
Site support
|
|
|
30,679
|
|
|
|
26,667
|
|
|
|
55,274
|
|
EDC licenses and services
|
|
|
5,894
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
133,140
|
|
|
|
93,823
|
|
|
|
140,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
38,609
|
|
|
|
29,886
|
|
|
|
43,403
|
|
Cost of site support
|
|
|
18,445
|
|
|
|
13,544
|
|
|
|
30,212
|
|
Cost of EDC licenses and services
|
|
|
1,843
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
58,897
|
|
|
|
44,293
|
|
|
|
73,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
74,243
|
|
|
|
49,530
|
|
|
|
67,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
13,273
|
|
|
|
12,905
|
|
|
|
16,064
|
|
General and administrative
|
|
|
18,181
|
|
|
|
14,859
|
|
|
|
30,607
|
|
Research and development
|
|
|
4,394
|
|
|
|
3,853
|
|
|
|
5,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35,848
|
|
|
|
31,617
|
|
|
|
51,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
38,395
|
|
|
|
17,913
|
|
|
|
15,617
|
|
Foreign exchange gains (losses)
|
|
|
832
|
|
|
|
(618
|
)
|
|
|
(956
|
)
|
Other income (expense), net
|
|
|
898
|
|
|
|
183
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
40,125
|
|
|
|
17,478
|
|
|
|
14,422
|
|
Income tax provision
|
|
|
15,123
|
|
|
|
6,791
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
$
|
9,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50,870
|
|
|
|
49,173
|
|
|
|
48,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
52,015
|
|
|
|
49,468
|
|
|
|
49,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
|
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
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,871
|
|
|
|
|
|
|
|
9,871
|
|
Change in unrealized losses on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
Currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,906
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,718
|
|
Capitalized share-based compensation
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Restricted stock grants
|
|
|
209,116
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Exercise of stock options
|
|
|
62,431
|
|
|
|
1
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
60,460,782
|
|
|
$
|
605
|
|
|
$
|
100,441
|
|
|
$
|
(1,545
|
)
|
|
$
|
131,037
|
|
|
$
|
(79,883
|
)
|
|
$
|
150,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,002
|
|
|
$
|
10,687
|
|
|
$
|
9,871
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of EDC operations
|
|
|
|
|
|
|
(530
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
16,038
|
|
|
|
12,583
|
|
|
|
19,751
|
|
Cost of sales of equipment
|
|
|
743
|
|
|
|
96
|
|
|
|
1,158
|
|
Provision for uncollectible accounts
|
|
|
189
|
|
|
|
210
|
|
|
|
|
|
Share-based compensation
|
|
|
2,604
|
|
|
|
2,790
|
|
|
|
2,717
|
|
Deferred income taxes
|
|
|
1,098
|
|
|
|
1,680
|
|
|
|
(651
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,840
|
)
|
|
|
12,726
|
|
|
|
(7,091
|
)
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
(1,265
|
)
|
Prepaid expenses and other
|
|
|
41
|
|
|
|
(293
|
)
|
|
|
476
|
|
Accounts payable
|
|
|
175
|
|
|
|
(767
|
)
|
|
|
4,131
|
|
Accrued expenses
|
|
|
1,162
|
|
|
|
(3,490
|
)
|
|
|
8,054
|
|
Income taxes
|
|
|
(1,290
|
)
|
|
|
(3,286
|
)
|
|
|
(687
|
)
|
Deferred revenues
|
|
|
(1,909
|
)
|
|
|
1,379
|
|
|
|
(358
|
)
|
Deferred rent
|
|
|
(64
|
)
|
|
|
148
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
39,949
|
|
|
|
33,933
|
|
|
|
35,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(10,969
|
)
|
|
|
(6,207
|
)
|
|
|
(21,746
|
)
|
Purchases of investments
|
|
|
|
|
|
|
(9,732
|
)
|
|
|
(999
|
)
|
Proceeds from sales of investments
|
|
|
8,747
|
|
|
|
|
|
|
|
10,731
|
|
Payment related to sale of EDC operations
|
|
|
|
|
|
|
(1,150
|
)
|
|
|
|
|
Payments for acquisitions
|
|
|
(6,042
|
)
|
|
|
(655
|
)
|
|
|
(82,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,264
|
)
|
|
|
(17,744
|
)
|
|
|
(94,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
23,000
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
Repayment of capital lease obligations
|
|
|
(1,102
|
)
|
|
|
(43
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
2,369
|
|
|
|
523
|
|
|
|
229
|
|
Stock option income tax benefit
|
|
|
849
|
|
|
|
152
|
|
|
|
55
|
|
Repurchase of common stock for treasury
|
|
|
(2,573
|
)
|
|
|
(15,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(457
|
)
|
|
|
(14,488
|
)
|
|
|
21,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(2,934
|
)
|
|
|
902
|
|
|
|
(1,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
28,294
|
|
|
|
2,603
|
|
|
|
(38,636
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
38,082
|
|
|
|
66,376
|
|
|
|
68,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
66,376
|
|
|
$
|
68,979
|
|
|
$
|
30,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 are a global
technology-driven provider of services and customizable medical
devices primarily to biopharmaceutical organizations and, to a
lesser extent, healthcare organizations. We are the market
leader for centralized cardiac safety and respiratory efficacy
services in drug development and also collect, analyze and
distribute electronic patient reported outcomes
(ePROtm)
in multiple modalities across all phases of clinical research.
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 offer centralized
Respiratory solutions, which are utilized by biopharmaceutical
and healthcare organizations and CROs that are developing new
compounds for the treatment of asthma, emphysema, cystic
fibrosis and Chronic Obstructive Pulmonary Disease (COPD) to
assess the efficacy of a drug or to evaluate compounds that have
an effect on pulmonary functions. We also offer site support,
which includes the rental and sale of equipment to support
cardiac and respiratory services along with related supplies and
logistics management. We also offer ePRO solutions along with
proprietary clinical assessments.
On May 28, 2010, we acquired Research Services Germany 234
GmbH (Research Services or RS), a leading provider of
respiratory diagnostics services and a manufacturer of equipment
that also offers cardiac safety and ePRO services. RS was formed
as a result of a demerger of CareFusion Germany 234 GmbH under
German law, which effectively divided CareFusion Germany 234
GmbH into RS and another entity. RS is comprised of the research
services division of CareFusion Germany 234 GmbH and certain
research operations of CareFusion Corporation (CareFusion). We
paid $82.7 million for RS. The acquisition and related
transaction costs were financed from our existing cash and a
portion of the $23.0 million drawn from our
$40.0 million revolving credit facility. The credit
facility was established on May 27, 2010.
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.
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, foreign exchange losses were
reclassified from other income (expense), net, to a separate
line item on the consolidated statements of operations.
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 Respiratory solutions and, to a
lesser extent, our ePRO solutions that we provide on a fee for
services basis. Our services revenues 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. Our site support revenue,
consisting of equipment rentals and sales along with related
supplies and logistics management, 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 customer 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 customer acceptance has
occurred.
Collectability is assessed based on a number of factors,
including past transaction history with the customer and the
creditworthiness of the customer. 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,
customers 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 EDC operations are included in EDC licenses and
services revenue 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.
F-10
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Business
Combinations
On May 28, 2010, we acquired Research Services Germany 234
GmbH (Research Services or RS), a leading provider of
respiratory diagnostics services and a manufacturer of equipment
that also offers cardiac safety and ePRO services. RS was formed
as a result of a demerger of CareFusion Germany 234 GmbH under
German law, which effectively divided CareFusion Germany 234
GmbH into RS and another entity. RS is comprised of the research
services division of CareFusion Germany 234 GmbH and certain
research operations of CareFusion Corporation (CareFusion). We
paid $82.7 million for RS. The acquisition and related
transaction costs were financed from our existing cash and a
portion of the $23.0 million drawn from our
$40.0 million revolving credit facility. See Note 2
for additional disclosure on the RS acquisition and Note 7
for additional disclosure regarding the revolving credit
facility.
We allocated the purchase price 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 this
acquisition may change as additional information becomes
available regarding the assets we acquired and liabilities we
assumed and are subject to final working capital adjustments.
For a discussion of how we allocated the purchase price of RS,
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, 2009 and 2010, approximately
$13.9 million and $6.9 million, respectively, was held
by our UK subsidiary. At December 31, 2010, approximately
$13.1 million was held by our German subsidiary.
Short-term
Investments and Investments in Marketable Securities
At December 31, 2010, short-term investments consisted of
an auction rate security issued by a municipality 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, 2009 and 2010 as
available-for-sale.
At December 31, 2009 and 2010, unrealized gains and losses
were immaterial. Realized gains and losses during 2008, 2009 and
2010 were immaterial. For purposes of determining realized gains
and losses, the cost of the securities sold is based upon
specific identification.
F-11
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The following summarizes the short-term investments at
December 31, 2009 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal securities
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments as of December 31, 2010
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Historically, the level of uncollectable accounts
has not been significant.
Inventory
We compute inventory cost on a
first-in,
first-out basis (FIFO). We reduce the carrying value of
inventories to a lower of cost or market basis for those items
that are potentially excess, obsolete or slow-moving. We record
charges for inventory obsolescence based upon sales trends and
age of on-hand inventory.
Work-in-process
and finished goods inventories include raw materials, direct
labor and manufacturing overhead.
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 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
$11.9 million, $8.6 million and $9.9 million for
the years ended December 31, 2008, 2009 and 2010,
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.
F-12
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Amortization of capitalized software development costs is
charged to costs of revenues. Amortization of capitalized
software development costs was $2.5 million,
$3.4 million and $3.7 million for the years ended
December 31, 2008, 2009 and 2010, respectively. For the
years ended December 31, 2008, 2009 and 2010, we
capitalized $2.0 million, $3.0 million and
$6.2 million, respectively, of software development costs.
As of December 31, 2010, $5.6 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 rental
equipment which we manufacture internally and also purchase from
third parties. Our customers use the rental equipment to perform
the ECG, respiratory and ePRO tests and collect and send the
related data to us. Our customers use the respiratory diagnostic
equipment to perform the centralized spirometry and pulmonary
function recordings, and it also provides the means to send such
recordings to us. We provide this equipment to customers
primarily through rentals via cancellable agreements and, in
some cases, through non-recourse equipment sales. The equipment
rentals and sales are included in our services agreements with
our customers and the decision to rent or buy equipment is made
by our customers prior to the start of the study. The decision
to buy rather than rent is usually predicated upon the economics
to the customer based upon the length of the study and the
number of diagnostic tests to be performed each month. The
longer the study and the fewer the number of tests performed,
the more likely it is that the customer may request to purchase
equipment rather than rent. Regardless of whether the customer
rents or buys the 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 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 customer acceptance are resolved and there are no
customer-negotiated refund or return rights affecting the
revenue recognized for delivered elements.
The gross cost for rental equipment was $37.3 million and
$56.2 million at December 31, 2009 and 2010,
respectively. The accumulated depreciation for rental equipment
was $30.9 million and $35.9 million at
December 31, 2009 and 2010, respectively. At
December 31, 2009, rental equipment consisted solely of
cardiac safety equipment, whereas at December 31, 2010,
rental equipment included cardiac safety, respiratory and ePRO
equipment.
Goodwill
The carrying value of goodwill was $34.7 million and
$71.6 million as of December 31, 2009 and 2010,
respectively. During fiscal 2009 and 2010, goodwill increased
approximately $0.2 million and $36.9 million,
respectively. The increase in 2009 was due to contingent
payments, transaction fees and other adjustments related to the
CCSS acquisition while the increase in 2010 was due to the
acquisition of RS. See Note 2 for additional disclosure
regarding the RS and CCSS acquisitions. 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, 2009 or 2010. In
connection with the sale of certain assets of our EDC operations
in 2009, 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.
F-13
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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 2008, 2009
or 2010.
Software
Development Costs
Research and development expenditures related to software
development are charged to operations as incurred. We capitalize
certain software development costs subsequent to the
establishment of technological feasibility. Because software
development costs have not been significant after the
establishment of technological feasibility, all such costs have
been charged to expense as incurred.
Advertising
Costs
We expense advertising costs as incurred. Advertising expense
for the years ended December 31, 2008, 2009 and 2010 was
$1.0 million, $1.2 million and $1.5 million,
respectively.
Share-Based
Compensation
Accounting
for Share-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. The aggregate share-based
compensation expense recorded in the consolidated statements of
operations for the years ended December 31, 2008, 2009 and
2010 was $2.6 million, $2.8 million and $2.7 million,
respectively.
F-14
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Valuation
Assumptions for Options Granted
The fair value of each stock option granted during the years
ended December 31, 2008, 2009 and 2010 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
Risk-free interest rate
|
|
|
2.23
|
%
|
|
|
1.39
|
%
|
|
|
2.36
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected life
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.8 years
|
|
Expected volatility
|
|
|
51.50
|
%
|
|
|
63.97
|
%
|
|
|
61.75
|
%
|
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 $4.89,
$2.19 and $3.08 for stock options granted during the years ended
December 31, 2008, 2009 and 2010, 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 8 for further
discussion.
Other
Income (Expense), Net
Other income (expense), net consists primarily of earnings on
cash, cash equivalents and offset by interest expense related to
debt and capital lease obligations.
Supplemental
Cash Flow Information
We paid $15.2 million, $8.2 million and
$5.8 million for income taxes in the years ended
December 31, 2008, 2009 and 2010, respectively.
We paid $0.2 million for interest expense in the year ended
December 31, 2010. There were no payments for interest
expense in the years ended December 31, 2008 and 2009.
In connection with our lease for our new office in Philadelphia,
PA, that commenced in November 2008, the landlord provided
approximately $2.1 million of tenant improvements.
Concentration
of Credit Risk and Significant Customers and Vendors
Our business depends entirely on the clinical trials that
biopharmaceutical and healthcare organizations conduct. Our
revenues and profitability will decline if there is less
competition in the biopharmaceutical and healthcare 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
in a manner that decreases the need for our solutions.
F-15
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Financial instruments that potentially subject us to
concentration of credit risk consist primarily of trade accounts
receivable from companies operating in the biopharmaceutical and
healthcare industries. For the years ended December 31,
2008, 2009 and 2010, one customer accounted for approximately
23%, 18% and 28% of net revenues, respectively. The loss of this
customer 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 product and service solutions. We may increase
our dependence on certain suppliers as we continue to develop
and enhance our product and service solutions. Our dependence on
a limited number of suppliers leaves us vulnerable to having an
inadequate supply of required components, reduced services
capacity, price increases, delayed supplier performance and poor
component and services quality. For instance, we rely on 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
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.
Translation
of Foreign Financial Statements
Assets and liabilities of our German and UK subsidiaries, whose
functional currency are the euro and British pound,
respectively, 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 net in foreign
exchange losses in the consolidated statement of operations as
incurred and net gains totaled $0.8 million in 2008 and net
losses totaled $0.6 million in 2009 and $1.0 million
in 2010.
Net
Income per Common Share
Basic net income per common 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 common 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.
F-16
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The table below sets forth the reconciliation of the numerators
and denominators of the basic and diluted net income per common
share computations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common
|
|
|
|
Net
|
|
|
|
|
|
Share
|
|
Year Ended December 31,
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
9,871
|
|
|
|
48,808
|
|
|
$
|
0.20
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
9,871
|
|
|
|
49,190
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In computing diluted net income per common share, 2,623,000,
3,022,000 and 2,676,000 options to purchase shares of common
stock were excluded from the computations for the years ended
December 31, 2008, 2009 and 2010, 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 (loss) separately from retained
earnings and additional
paid-in-capital
in the stockholders equity section of the consolidated
balance sheet. Our comprehensive (loss) includes net income and
unrealized gains and losses from marketable securities and
foreign currency translation.
Recent
Accounting Pronouncements
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 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
F-17
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010. We do not believe that this consensus will
have a material impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standard Update
2010-06
which will require reporting entities to make new disclosures
about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and
Level 2 fair-value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair-value measurements. The
FASB also clarified existing fair-value measurement disclosure
guidance about the level of disaggregation, inputs, and
valuation techniques. Except for the detailed Level 3 roll
forward disclosures, we adopted this standard effective
January 1, 2010. The adoption of this aspect of the
accounting standard did not have any impact on our consolidated
financial statements. The new disclosures about purchases,
sales, issuances, and settlements in the roll forward activity
for Level 3 fair-value measurements are effective for
interim and annual reporting periods beginning after
December 15, 2010. We are evaluating the potential impact
of these requirements on our consolidated financial statements.
Research
Services (RS)
On May 28, 2010, we acquired RS. See Note 1 for a
summary of the terms of this acquisition. We have included
RSs operating results in our consolidated statements of
operations from the date of the acquisition. We present pro
forma results of operations for RS because the effect of this
acquisition was material to ERT on a standalone basis. We paid
$82.7 million for RS. We have additionally incurred
approximately $4.1 million in the year ended
December 31, 2010 in transaction costs which were included
in general and administrative expenses. Our actual consolidated
financial results for the year ended December 31, 2010
included RS revenue of $47.2 million, operating income of
$5.3 million and net income of $3.4 million. The tax
bases of the assets acquired and liabilities assumed in the RS
transaction were
stepped-up
to fair value at the date of the RS acquisition.
The RS acquisition purchase consideration of $82.7 million
has been allocated to assets acquired and liabilities assumed
based on estimated fair values at the date of acquisition, as
revised, as follows (in thousands):
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
Cash
|
|
$
|
149
|
|
Accounts receivable
|
|
|
12,729
|
|
Inventory
|
|
|
2,598
|
|
Other current assets
|
|
|
1,142
|
|
Property and equipment, net
|
|
|
11,179
|
|
Goodwill
|
|
|
36,756
|
|
Other intangible assets, net
|
|
|
21,349
|
|
Other assets
|
|
|
407
|
|
Liabilities assumed:
|
|
|
|
|
Accrued and other liabilities
|
|
|
(3,257
|
)
|
Deferred revenue
|
|
|
(375
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
82,677
|
|
|
|
|
|
|
Subsequent to the acquisition of RS, goodwill decreased
$0.4 million due to valuation adjustments to intangible
assets and deferred revenue and there was a $0.5 million
reduction in the completion payment to CareFusion as a result of
changes in estimates related to accounts receivable and prepaid
expenses.
F-18
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Pro Forma
Results
The unaudited financial information in the table below
summarizes the combined results of operations for us and RS on a
pro forma basis as though the companies had been combined as of
the beginning of each of the periods presented after giving
effect to certain adjustments. Our historical results of
operations for the year ended December 31, 2010 included
the results of RS since May 28, 2010, the date of
acquisition. The unaudited pro forma financial information for
the year ended December 31, 2009 combines our historical
results for these periods with the historical results for the
comparable reporting periods for RS. The unaudited pro forma
financial information below is for informational purposes only
and is not indicative of the results of operations or financial
condition that would have been achieved if the acquisition would
have taken place at the beginning of each of the periods
presented and should not be taken as indicative of our future
consolidated results of operations or financial condition.
Acquisition-related transaction costs of $4.1 million were
excluded from the pro forma results for the year ended
December 31, 2010. Pro forma adjustments are tax-effected
at our effective tax rate.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2010
|
|
|
(Unaudited, in thousands except per share amounts)
|
|
Revenue
|
|
$
|
143,785
|
|
|
$
|
169,332
|
|
Operating income
|
|
|
16,112
|
|
|
|
21,986
|
|
Net income
|
|
|
8,529
|
|
|
|
14,494
|
|
Basic net income per share
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
Diluted net income per share
|
|
$
|
0.17
|
|
|
$
|
0.29
|
|
Covance
Cardiac Safety Services, Inc. (CCSS)
On November 28, 2007, we completed the acquisition of CCSS
from Covance Inc. (Covance). 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. The period for contingent
payments ended on December 31, 2010 and the additional cash
payments totaled $5.4 million. 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 balance of our accrued liability relating to
lease costs associated with the closing of CCSS operations,
which is included in Accrued expenses and
Other liabilities on our Consolidated Balance Sheets
(in thousands):
|
|
|
|
|
|
|
Lease
|
|
|
|
Liability
|
|
|
Balance at December 31, 2009
|
|
$
|
1,758
|
|
Adjustments to previous estimates
|
|
|
593
|
|
Cash payments
|
|
|
(450
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
1,901
|
|
|
|
|
|
|
Due to the continued unsuccessful efforts to sublet this
facility, we increased our reserve during 2010 by
$0.6 million to reserve for the total estimated costs for
the remaining lease term.
F-19
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Goodwill
The following tables reflect changes in the carrying value of
goodwill:
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
34,603
|
|
Sale of EDC operations
|
|
|
(130
|
)
|
Other adjustments
|
|
|
203
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
34,676
|
|
Acquisition
|
|
|
36,756
|
|
Other adjustments
|
|
|
205
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
71,637
|
|
|
|
|
|
|
Other adjustments primarily include earnouts related to the CCSS
acquisition.
Inventories, accounted for at the lower of cost or market on the
FIFO method, consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Raw materials
|
|
$
|
2,196
|
|
Work in process
|
|
|
843
|
|
Finished goods
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
4,698
|
|
|
|
|
|
|
Inventory that is obsolete, damaged, defective or slow moving is
recorded to the lower of cost or market. These adjustments are
determined using historical trends and are adjusted, if
necessary, as new information becomes available.
Amortization of intangible assets represents the amortization of
the intangible assets from the RS and CCSS acquisitions. The
gross and net carrying amounts of the acquired intangible assets
as of December 31, 2009 (CCSS only) and 2010 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
Description
|
|
Gross Value
|
|
|
Amortization
|
|
|
Value
|
|
|
(In Years)
|
|
|
CCSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
Description
|
|
Gross Value
|
|
|
Amortization
|
|
|
Value
|
|
|
(In Years)
|
|
|
CCSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
1,900
|
|
|
$
|
1,900
|
|
|
$
|
*
|
|
|
|
3
|
|
Customer Relationships
|
|
|
1,700
|
|
|
|
524
|
|
|
$
|
1,176
|
|
|
|
10
|
|
Technology
|
|
|
400
|
|
|
|
400
|
|
|
$
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
2,824
|
|
|
$
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
12,782
|
|
|
$
|
4,687
|
|
|
$
|
8,095
|
*
|
|
|
4
|
|
Technology
|
|
|
8,248
|
|
|
|
602
|
|
|
|
7,646
|
|
|
|
8
|
|
Covenants
not-to-compete
|
|
|
319
|
|
|
|
49
|
|
|
|
270
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,349
|
|
|
$
|
5,338
|
|
|
$
|
16,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
CCSS backlog is being amortized over three years on an
accelerated basis and RS backlog is being amortized over four
years on an accelerated basis. |
The related amortization expense reflected in our consolidated
statements of operations for the years ended December 31,
2009 and 2010 was $0.5 million and $5.8 million,
respectively.
Estimated amortization expense for the remaining estimated
useful life of the acquired intangible assets is as follows for
the years ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Intangible Assets
|
|
Years Ending December 31,
|
|
CCSS
|
|
|
RS
|
|
|
Total
|
|
|
2011
|
|
$
|
170
|
|
|
$
|
6,735
|
|
|
$
|
6,905
|
|
2012
|
|
|
170
|
|
|
|
3,238
|
|
|
|
3,408
|
|
2013
|
|
|
170
|
|
|
|
1,451
|
|
|
|
1,621
|
|
2014
|
|
|
170
|
|
|
|
1,064
|
|
|
|
1,234
|
|
2015
|
|
|
170
|
|
|
|
1,031
|
|
|
|
1,201
|
|
Thereafter
|
|
|
326
|
|
|
|
2,492
|
|
|
|
2,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,176
|
|
|
$
|
16,011
|
|
|
$
|
17,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Accounts
Receivable, Net
|
The components of accounts receivable, net were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Billed
|
|
$
|
15,481
|
|
|
$
|
36,233
|
|
Unbilled
|
|
|
1,646
|
|
|
|
1,518
|
|
Allowance for doubtful accounts
|
|
|
(548
|
)
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,579
|
|
|
$
|
37,236
|
|
|
|
|
|
|
|
|
|
|
F-21
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
6.
|
Property
and Equipment, Net
|
The components of property and equipment, net were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Computer and other equipment
|
|
$
|
15,839
|
|
|
$
|
18,715
|
|
Rental equipment
|
|
|
37,293
|
|
|
|
56,241
|
|
Furniture and fixtures
|
|
|
3,585
|
|
|
|
3,664
|
|
Leasehold improvements
|
|
|
5,974
|
|
|
|
6,030
|
|
System development costs
|
|
|
26,830
|
|
|
|
33,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,521
|
|
|
|
117,664
|
|
Less-Accumulated depreciation
|
|
|
(65,316
|
)
|
|
|
(75,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,205
|
|
|
$
|
42,615
|
|
|
|
|
|
|
|
|
|
|
On May 27, 2010, we entered into a credit agreement (Credit
Agreement) with Citizens Bank of Pennsylvania (Lender) which
provides for a $40 million revolving credit facility, with
an option for an additional $10.0 million. Also on
May 27, 2010, we borrowed $23.0 million under the
Credit Agreement to finance a portion of the purchase price for
RS and related transaction costs and to provide working capital.
At our option, borrowings under the Credit Agreement bear
interest either at the Lenders prime rate or at a rate
equal to LIBOR plus a margin ranging from 1.00% to 1.75% based
on our senior leverage ratio as calculated under the Credit
Agreement. In addition, we pay a quarterly unused commitment fee
ranging from 0.10% to 0.20% of the unused commitment based on
our senior leverage ratio. From the initial borrowing on
May 27, 2010 through December 31, 2010, the annual
interest rate ranged from 1.35% to 1.60% and the unused
commitment fee was 0.10% resulting in payments totaling
$0.2 million. Borrowings under the Credit Agreement may be
prepaid at any time in whole or in part without premium or
penalty, other than customary breakage costs, if any. In
September 2010, we repaid $2.0 million which reduced the
balance outstanding to $21.0 million at December 31,
2010. The Credit Agreement terminates, and any outstanding
borrowings mature, on May 27, 2013.
The Credit Agreement requires us to maintain a maximum senior
leverage ratio of 2.0 to 1.0 and a minimum debt service coverage
ratio of 1.5 to 1.0, in each case as calculated under the Credit
Agreement. The Credit Agreement contains other customary
affirmative and negative covenants and customary events of
default.
At December 31, 2010, we were in compliance with all debt
covenants. Borrowings under the line of credit are secured by
65% of the capital stock of certain of our foreign subsidiaries.
F-22
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The income tax provision consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,249
|
|
|
$
|
3,909
|
|
|
$
|
1,589
|
|
State and local
|
|
|
2,822
|
|
|
|
216
|
|
|
|
493
|
|
Foreign
|
|
|
2,639
|
|
|
|
1,374
|
|
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,710
|
|
|
|
5,499
|
|
|
|
5,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,405
|
|
|
|
543
|
|
|
|
309
|
|
State and local
|
|
|
521
|
|
|
|
924
|
|
|
|
(1,089
|
)
|
Foreign
|
|
|
(513
|
)
|
|
|
(175
|
)
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,413
|
|
|
|
1,292
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,123
|
|
|
$
|
6,791
|
|
|
$
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. income before income taxes was $31.5 million,
$13.0 million and a loss of $0.2 million for the years
ended December 31, 2008, 2009 and 2010, respectively.
Foreign income before income taxes was $8.6 million,
$4.5 million and $14.7 million for the years ended
December 31, 2008, 2009 and 2010, respectively. As of
January 1, 2008, we determined that a portion of our UK
subsidiarys current undistributed net earnings, as well as
any future net earnings of our UK and German subsidiaries, will
be permanently reinvested. As a result of this determination,
the amount of unrecognized deferred tax liabilities related to
undistributed foreign earnings is approximately
$0.7 million as of December 31, 2010.
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,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Tax at federal statutory rate
|
|
$
|
14,044
|
|
|
$
|
6,118
|
|
|
$
|
4,904
|
|
State and local taxes, net of federal
|
|
|
2,172
|
|
|
|
477
|
|
|
|
(382
|
)
|
Impact of foreign operations
|
|
|
(931
|
)
|
|
|
(315
|
)
|
|
|
(1,732
|
)
|
Federal tax credits
|
|
|
(90
|
)
|
|
|
90
|
|
|
|
|
|
Tax-free interest income
|
|
|
(59
|
)
|
|
|
|
|
|
|
(6
|
)
|
Share-based compensation expense
|
|
|
352
|
|
|
|
423
|
|
|
|
481
|
|
Decrease in unrecognized tax benefits
|
|
|
(550
|
)
|
|
|
(186
|
)
|
|
|
(2
|
)
|
Acquisition transaction costs
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
Other
|
|
|
185
|
|
|
|
184
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,123
|
|
|
$
|
6,791
|
|
|
$
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits of $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, 2008 and 2009,
respectively. Tax benefits in the year ended December 31,
2010 associated with the exercise of employee stock options were
minimal.
F-23
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The components of our net deferred tax assets (liabilities) were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Depreciation
|
|
$
|
1,205
|
|
|
$
|
779
|
|
Capitalized R&D expenses
|
|
|
1,055
|
|
|
|
690
|
|
Net operating loss carryforwards
|
|
|
35
|
|
|
|
307
|
|
Investment impairment
|
|
|
1,112
|
|
|
|
1,188
|
|
Reserves and accruals
|
|
|
2,521
|
|
|
|
4,158
|
|
Share-based compensation expense
|
|
|
1,868
|
|
|
|
2,063
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
7,796
|
|
|
|
9,185
|
|
|
|
|
|
|
|
|
|
|
Repatriation of UK earnings
|
|
|
(703
|
)
|
|
|
(703
|
)
|
Depreciation
|
|
|
(5,642
|
)
|
|
|
(6,626
|
)
|
Amortization of intangibles
|
|
|
(1,192
|
)
|
|
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(7,537
|
)
|
|
|
(8,269
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets valuation allowance
|
|
|
(1,112
|
)
|
|
|
(1,188
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(853
|
)
|
|
$
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
The majority of our revenues are allocated among our geographic
segments based upon the profit split transfer pricing
methodology which equalizes gross margins for each relevant
legal entity based upon its respective direct revenue or direct
costs, as determined by the relevant revenue source. Through
2008, we calculated our transfer pricing for Cardiac Safety
services using a profit split methodology based on cost.
Subsequent to December 31, 2008, the profit split transfer
pricing methodology was modified for Cardiac Safety services to
allocate costs based on revenue instead of allocating revenue
based on costs. This has resulted in an increase in revenue
attributed to the UK beginning in 2009.
At December 31, 2010, we had net operating loss
carryforwards for state tax purposes of approximately
$8.0 million, which will begin to expire in 2026. At
December 31, 2008, 2009 and 2010, we had a valuation
allowance of $1.0 million, $1.1 million and
$1.2 million, respectively, related to the capital loss on
the investment impairment.
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, 2009, we had $0.2 million of
unrecognized tax benefits, all of which would affect our
effective tax rate if recognized. At December 31, 2010, we
had $0.5 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. There is an ongoing
examination of our UK income tax return by HM Revenue and
Customs for 2006. In 2010, we recorded a $0.2 million
reserve in connection with this examination. 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 ended December 31, 2009 as a result of
a lapse of the applicable statute of limitations.
F-24
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
The following is a rollforward of the total gross unrecognized
tax benefit liabilities for the years ended December 31,
2009 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Unrecognized tax benefits at January 1
|
|
$
|
498
|
|
|
$
|
179
|
|
Increase in unrecognized tax benefits for tax positions taken in
a prior year
|
|
|
|
|
|
|
316
|
|
Increase in unrecognized tax benefits for tax positions taken in
the current year
|
|
|
13
|
|
|
|
42
|
|
IRS audit settlement
|
|
|
(146
|
)
|
|
|
|
|
Expiration of statutes of limitations
|
|
|
(186
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at December 31
|
|
$
|
179
|
|
|
$
|
535
|
|
|
|
|
|
|
|
|
|
|
The tax years 2006 through 2010 remain open to examination by
the major taxing jurisdictions to which we are subject. The
unrecognized tax benefits are 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):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Accrued compensation
|
|
$
|
2,485
|
|
|
$
|
9,281
|
|
Due to customers
|
|
|
1,242
|
|
|
|
2,068
|
|
Accrued outside services
|
|
|
252
|
|
|
|
638
|
|
Deferred rent
|
|
|
394
|
|
|
|
186
|
|
Other accrued liabilities
|
|
|
1,617
|
|
|
|
3,989
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
5,990
|
|
|
$
|
16,162
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
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 $0.7 million in 2008, $0.6 million in 2009 and
$0.5 million in 2010.
Certain of our German employees are covered by an unfunded
defined benefit pension plan (the Pension Plan).
During the year ended and as of December 31, 2010, the net
periodic benefit cost and the projected and accumulated benefit
obligation related to our employees are immaterial. The pension
plan provides for annual payments starting with a fixed amount
upon reaching retirement at age 63 with annual increases
ranging from one percent to two percent thereafter. No benefits
have been paid to our employees since the Pension Plan inception
and none are expected to be paid in the next ten years.
|
|
11.
|
Related
Party Transactions
|
Our Chairman and interim Chief Executive Officer,
Dr. Morganroth, is a cardiologist who, through his
wholly-owned professional corporation, provides medical
professional services to the Company and, through February 2010,
received 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. In return,
Dr. Morganroths professional corporation receives a
percentage fee of 80% of the net revenues we recognize for
Dr. Morganroths services to our customers (Percentage
Fees). Our Executive Vice President and Chief Medical Officer is
responsible
F-25
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
for assigning the consulting work to internal and external
resources based upon the requirements of the engagement.
Beginning in March 2010, we entered into a new arrangement with
Dr. Morganroths professional corporation which
eliminated the consulting fees other than the percentage fees.
We recorded revenues in connection with services billed to
customers under the consulting arrangement of approximately
$1.6 million, $1.3 million and $1.5 million in
the years ended December 31, 2008, 2009 and 2010,
respectively. We incurred percentage fees of approximately
$1.3 million, $1.0 million and $1.2 million in
the years ended December 31, 2008, 2009 and 2010,
respectively. Total amounts incurred under this arrangement,
including consulting fees and the percentage fees, were
$1.8 million, $1.3 million and $1.2 million in
the years ended December 31, 2008, 2009 and 2010,
respectively. At December 31, 2009 and 2010, we owed
$0.1 million and $0.2 million, respectively, to the
professional corporation related to this 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 $0.5 million,
$0.3 million and $0.4 million for the years ended
December 31, 2008, 2009 and 2010, respectively. Also, one
of our directors provides consulting services to the law firm of
Pepper Hamilton LLP, which performs legal services for us. We
paid fees for such services in the amount of $0.5 million
for the year ended December 31, 2010 and less than
$0.1 million each for the years ended December 31,
2008 and 2009.
|
|
12.
|
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 market 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.
On April 26, 2007, the stockholders approved the adoption
of the Companys Amended and Restated 2003 Equity Incentive
Plan (the Amended 2003 Plan) which included
prohibition on repricing of any stock options 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 Amended 2003 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.
Restricted stock was granted for the first time in 2010 and is
being recorded as compensation expense over the one-year vesting
period or the four-year vesting period for grants to the
Companys directors and management, respectively. 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 1,738,390 shares available for grant as of
December 31, 2010.
F-26
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Information regarding the stock option and equity incentive
plans for the year ended December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Share Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Outstanding as of January 1, 2010
|
|
|
4,406,606
|
|
|
$
|
9.62
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
889,060
|
|
|
|
6.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(62,431
|
)
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(505,292
|
)
|
|
|
6.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
4,727,943
|
|
|
$
|
9.36
|
|
|
|
4.0
|
|
|
$
|
4,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable or expected to vest at December 31, 2010
|
|
|
4,485,744
|
|
|
$
|
9.51
|
|
|
|
3.9
|
|
|
$
|
4,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2010
|
|
|
3,113,280
|
|
|
$
|
10.72
|
|
|
|
3.2
|
|
|
$
|
2,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
Restricted Stock
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding as of January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
209,116
|
|
|
|
6.22
|
|
Exercised
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(55,331
|
)
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
153,785
|
|
|
$
|
6.28
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the share options 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 2010 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, 2008, 2009 and 2010 was
$6.1 million, $1.0 million and $0.2 million,
respectively.
As of December 31, 2010, an aggregate of 3,113,280 options
with a weighted average exercise price of $10.72 per share were
exercisable under the 1996 Plan and the 2003 Plan.
As of December 31, 2010, there was $4.7 million of
total unrecognized compensation cost related to non-vested
share-based compensation arrangements (including stock options
and restricted stock awards) granted under the plans. That cost
is expected to be recognized over a weighted-average period of
2.2 years.
On March 2, 2011, we granted 155.006 shares of restricted
stock and 833,061 stock options to employees.
Tax
Effect Related to Share-Based Compensation Expense
Income tax effects of share-based payments are recognized in the
consolidated 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
F-27
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
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, 2008, 2009 and
2010 related to share-based compensation expense was
approximately $0.6 million, $0.7 million and
$0.4 million, respectively.
|
|
13.
|
Commitments
and Contingencies
|
Leases
We lease office space and certain equipment under operating
leases. Rent expense, net of sublease rentals, for all operating
leases for the years ended December 31, 2008, 2009 and 2010
was $3.3 million, $2.9 million and $3.9 million,
respectively.
We lease office space for our Philadelphia, Pennsylvania,
Bridgewater, New Jersey, Höchberg, Germany and
Peterborough, United Kingdom facilities which expire through
2013. 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, 2010 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Leases
|
|
|
Income
|
|
|
2011
|
|
$
|
4,201
|
|
|
$
|
323
|
|
2012
|
|
|
3,053
|
|
|
|
297
|
|
2013
|
|
|
2,921
|
|
|
|
|
|
2014
|
|
|
2,036
|
|
|
|
|
|
2015
|
|
|
1,998
|
|
|
|
|
|
2016 and thereafter
|
|
|
8,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,727
|
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
Other
commitments and contingencies
We have 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 Interactive Voice Response (IVR) clinical
assessments offered by HTS along with HTSs IVR system. We
placed the system into production in December 2007. As of
December 31, 2010, we had paid HTS $1.5 million for
the license and $1.0 million in advanced payments against
future royalties. As of December 31, 2010, HTS had 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 will be applied against
these payments. All future payments to HTS will be solely based
on royalty payments based on revenues received from ePRO sales.
We have a marketing agreement with Covance where they are
obligated to use us as its provider of centralized cardiac
safety solutions, and to offer these solutions to Covances
customers, on an exclusive basis, for a
10-year
period, subject to certain exceptions. We expense payments to
Covance based upon a portion of the revenues we receive during
each calendar year of the
10-year term
that are based primarily on referrals made by Covance under the
agreement. The agreement does not restrict our continuing
collaboration with our other key CRO, Phase I units, Academic
Research Centers and other strategic partners.
F-28
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
We offer warranties on certain products for various periods of
time. We accrue for the estimated cost of product warranties at
the time revenue is recognized. Our product warranty liability
reflects managements best estimate of probable liability
based on current and historical product sales data and warranty
costs incurred.
Our costs in Germany are subject to foreign exchange
fluctuations as the majority of these costs are paid in euros.
We entered into foreign exchange contracts in January and
February 2011 to mitigate such foreign exchange fluctuations. We
entered into forward contracts to sell $3.5 million
U.S. dollars and purchase euros at an average price of
$1.37 U.S. dollars to 1 euro. Such contracts have various
maturities through March 29, 2011.
Agreements
with the Companys Management
We entered into an employment agreement with
Dr. Morganroth, our Interim Chief Executive Officer and
Chief Scientific Officer, which was amended on March 1,
2010. Under the amended agreement, we may terminate
Dr. Morganroths employment with or without cause at
any time. In the event that we terminate
Dr. Morganroths employment other than for cause,
death or disability, we are obligated to pay Dr. Morganroth
in lump sum, twelve months in salary and prorated bonus. In
addition, upon the first occurrence of a trigger event (as
defined in the agreement) resulting from a change of control, we
are obligated to pay Dr. Morganroth in lump sum, twelve
months in salary and prorated bonus and we are further obligated
to accelerate vesting of all Dr. Morganroths stock
options as of the date of the change of control, and any
restrictions with respect to any restricted stock or restricted
stock units granted to Dr. Morganroth under our equity
incentive plans shall lapse and any conditions applicable to any
long-term performance award or performance shares granted to
Dr. Morganroth under such plans shall be terminated.
In addition to an employment agreement with Dr. Morganroth,
we maintain a consulting agreement with his wholly-owned
professional corporation under which he advises the Company on
matters related to the operation, marketing and business
development of its Cardiac Safety services operations. A total
of $300,000 plus a discretionary bonus of approximately $110,000
was paid under the consulting agreement for the year ended
December 31, 2008. A total of $309,000, with no
discretionary bonus, was paid for the year ended
December 31, 2009. The consulting agreement was terminated
effective March 1, 2010 as part of the revision of the
overall compensation of Dr. Morganroth (see Note 11)
and Dr. Morganroth was paid a total of $52,000 for the
two-month period that this agreement was in effect during 2010.
We entered into a retirement agreement with Dr. McKelvey,
our former President and Chief Executive Officer, on
December 21, 2010. Under the agreement, Dr. McKelvey
resigned from his position as our President and Chief Executive
Officer. In consideration of Dr. McKelveys service
to ERT and his delivery of a general release, on January 3,
2011, we paid Dr. McKelvey a lump sum cash payment of
$902,668, less applicable tax withholdings and deductions,
representing the sum of (i) one years base salary,
(ii) pro-rated bonus opportunity for 2010 and
(iii) car allowance for the subsequent twelve months; and
we will provide to Dr. McKelvey until December 21,
2011 standard health, dental and vision benefits. We accrued all
amounts related to this agreement as of December 31, 2010.
We also have employment agreements with our executive officers
which create certain liabilities under certain circumstances. In
the event that we terminate an executives employment other
than for cause, death or disability, we are obligated to pay the
executive in lump sum, twelve months in salary and prorated
bonus and continuation of benefits for one year. In addition,
upon the first occurrence of a trigger event (as defined in the
agreement) resulting from a change of control, we are obligated
to pay the affected executive in lump sum, twelve months in
salary and prorated bonus and continuation of benefits for one
year, and we are further obligated to accelerate vesting of all
of the affected executives stock options as of the date of
change of control, and any restrictions with respect to any
restricted stock or restricted stock units granted under our
equity incentive plans shall lapse and any conditions applicable
to any long-term performance award or performance shares granted
under such plans shall be terminated.
F-29
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Contingencies
We are involved in legal proceedings from time to time in the
ordinary course of our business. We accrue an estimated loss
contingency in our consolidated financial statements if it is
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Because litigation is
inherently unpredictable and unfavorable resolutions can occur,
assessing contingencies is highly subjective and requires
judgments about future events. We regularly review contingencies
to determine whether our accruals are adequate. The amount of
ultimate loss may differ from these estimates.
We recognize estimated loss contingencies for litigation in
general and administrative operating expenses in our condensed
consolidated statements of operations.
In December 2010, we terminated the employment relationship with
one of our employees. The employee filed a lawsuit in December
2010 against such termination, applying for a ruling that the
termination was not legally effective and that the employment
relationship is not terminated. While a formal hearing has not
been held, based on a review of the current facts and
circumstances, management is of the opinion that this will not
have a material effect on our consolidated financial statements.
Potential
Indemnifications 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
customers and through insurance maintained by our customers 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 customer to
customer and from trial to trial. Although most of our customers
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
customer or where the indemnifying party does not fulfill its
indemnification obligations to us.
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.
|
|
14.
|
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, 2010 consisted of an auction
rate security or ARS, issued by a municipality, and common stock
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 common
stock which is included in investment in marketable securities.
The marketable securities
F-30
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
are included in investments in marketable securities in our
consolidated balance sheets. 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
|
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, 2009 and
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Cash and cash equivalents
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash and cash equivalents
|
|
$
|
30,343
|
|
|
$
|
30,343
|
|
|
$
|
|
|
|
$
|
|
|
Municipal securities
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Marketable securities
|
|
|
648
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,041
|
|
|
$
|
30,343
|
|
|
$
|
648
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents consist primarily of checking accounts
and highly rated money market funds with original maturities of
three months or less. The original cost of these assets
approximates fair value due to their short term maturity. Bank
debt consists of loans drawn under our bank credit facility.
Based on our assessment of the current financial market and
corresponding risks associated with the debt, we believe that
the carrying amount of bank debt at December 31, 2010
approximates fair value based on the level 2 valuation
hierarchy of the fair value measurements standard.
|
|
15.
|
Operating
Segments and Geographic Information
|
We consider our business to consist of one segment which is
providing technology and service solutions to collect, interpret
and distribute diagnostic data principally used by the
pharmaceutical industry as part of clinical drug trials. We
operate on a worldwide basis with two primary locations in the
United States, categorized below as North America, and one
primary location each in the United Kingdom and Germany. The
majority of our revenues are allocated among our geographic
segments based upon the profit split transfer pricing
methodology, and revenues are generally allocated to the
geographic segment where the work is performed.
F-31
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
Geographic information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
UK
|
|
|
Germany
|
|
|
Eliminations
|
|
|
Total
|
|
|
Service revenues
|
|
$
|
79,123
|
|
|
$
|
17,444
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
96,567
|
|
Site support revenues
|
|
|
20,644
|
|
|
|
10,035
|
|
|
|
|
|
|
|
|
|
|
|
30,679
|
|
EDC licenses and services revenues
|
|
|
5,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
UK
|
|
|
Germany
|
|
|
Eliminations
|
|
|
Total
|
|
|
Service revenues
|
|
$
|
49,869
|
|
|
$
|
14,786
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,655
|
|
Site support revenues
|
|
|
18,600
|
|
|
|
8,067
|
|
|
|
|
|
|
|
|
|
|
|
26,667
|
|
EDC licenses and services revenues
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
UK
|
|
|
Germany
|
|
|
Eliminations
|
|
|
Total
|
|
|
Service revenues
|
|
$
|
41,805
|
|
|
$
|
22,765
|
|
|
$
|
21,148
|
|
|
$
|
|
|
|
$
|
85,718
|
|
Site support revenues
|
|
|
18,918
|
|
|
|
10,312
|
|
|
|
26,044
|
|
|
|
|
|
|
|
55,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
|
60,723
|
|
|
|
33,077
|
|
|
|
47,192
|
|
|
|
|
|
|
|
140,992
|
|
Intersegment revenues
|
|
|
12,599
|
|
|
|
65
|
|
|
|
|
|
|
|
(12,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
73,322
|
|
|
$
|
33,142
|
|
|
$
|
47,192
|
|
|
$
|
(12,664
|
)
|
|
$
|
140,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(211
|
)
|
|
$
|
10,510
|
|
|
$
|
5,318
|
|
|
$
|
|
|
|
$
|
15,617
|
|
Long-lived assets
|
|
$
|
23,345
|
|
|
$
|
6,230
|
|
|
$
|
13,040
|
|
|
$
|
|
|
|
$
|
42,615
|
|
Total assets
|
|
$
|
98,266
|
|
|
$
|
16,701
|
|
|
$
|
99,868
|
|
|
$
|
|
|
|
$
|
214,835
|
|
F-32
eResearchTechnology,
Inc. and Subsidiaries
Notes To Consolidated Financial
Statements (Continued)
|
|
16.
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
16,108
|
|
|
$
|
16,215
|
|
|
$
|
15,969
|
|
|
$
|
16,363
|
|
Site support
|
|
|
6,260
|
|
|
|
6,878
|
|
|
|
6,757
|
|
|
|
6,772
|
|
EDC licenses and services
|
|
|
1,418
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
23,786
|
|
|
|
24,176
|
|
|
|
22,726
|
|
|
|
23,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
7,693
|
|
|
|
7,671
|
|
|
|
7,577
|
|
|
|
6,945
|
|
Cost of site support
|
|
|
3,635
|
|
|
|
3,470
|
|
|
|
3,418
|
|
|
|
3,021
|
|
Cost of EDC licenses and services
|
|
|
466
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
14,835
|
|
|
|
18,697
|
|
|
|
25,929
|
|
|
|
26,257
|
|
Site support
|
|
|
7,033
|
|
|
|
10,399
|
|
|
|
19,199
|
|
|
|
18,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
21,868
|
|
|
|
29,096
|
|
|
|
45,128
|
|
|
|
44,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
7,311
|
|
|
|
8,325
|
|
|
|
13,526
|
|
|
|
14,241
|
|
Cost of site support
|
|
|
2,799
|
|
|
|
4,957
|
|
|
|
11,505
|
|
|
|
10,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
10,110
|
|
|
|
13,282
|
|
|
|
25,031
|
|
|
|
25,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,758
|
|
|
|
15,814
|
|
|
|
20,097
|
|
|
|
19,708
|
|
Operating income
|
|
|
2,747
|
|
|
|
1,051
|
|
|
|
6,589
|
|
|
|
5,230
|
|
Net income
|
|
|
1,752
|
|
|
|
826
|
|
|
|
3,173
|
|
|
|
4,120
|
|
Basic net income per share
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Diluted net income per share
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
We have included RSs operating results in our consolidated
statements of operations from the date of the acquisition,
May 28, 2010.
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-33