UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 205498
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 2001
------------------
or
[ ] Transitional report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transitional period from___________to_____________
Commission file number 0-29100
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eResearchTechnology, Inc.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3264604
----------------------------------------------------------- -----------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
30 South 17th Street
Philadelphia, PA 19103
----------------------------------------------------------- ------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
215-972-0420
----------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
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.
X Yes No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock, $.01 par value, outstanding as of October
31, 2001, was 6,887,187.
eResearchTechnology, Inc. and Subsidiaries
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated balance sheets--September 30, 2001 (unaudited) and
December 31, 2000 3
Consolidated statements of operations (unaudited)--Three and
Nine Months Ended September 30, 2001 and 2000 4
Consolidated statements of cash flows (unaudited)--Nine Months
Ended September 30, 2001 and 2000 5
Notes to consolidated financial statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10-17
Item 3. Qualitative and Quantitative Disclosures about Market Risk 17
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
a.) Exhibits
b.) Reports on Form 8-K
Signatures 20
2
Part 1. Financial Information
Item 1. Consolidated Financial Statements
eResearchTechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 14,142 $ 21,910
Short-term investments 7,001 5,747
Marketable securities 1,425 2,372
Accounts receivable, net 4,482 6,811
Prepaid expenses and other 1,378 3,710
Deferred income taxes 527 433
---------- ---------
Total current assets 28,955 40,983
Property and equipment, net 6,129 4,429
Goodwill, net 1,291 1,528
Investments in non-marketable securities 1,226 2,450
Other assets 29 405
Deferred income taxes 2,713 4,169
---------- ---------
$ 40,343 $ 53,964
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,937 $ 1,745
Accrued expenses 4,140 3,843
Income taxes payable 750 1,209
Deferred revenues 3,439 3,497
---------- ---------
Total current liabilities 10,266 10,294
---------- ---------
Minority interest in subsidiary - 9,500
---------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $10 par value, 500,000 shares authorized,
none issued and outstanding - -
Common stock - $.01 par value, 15,000,000 shares authorized,
7,478,687 and 7,470,687 shares issued 75 75
Additional paid-in capital 38,938 38,861
Unrealized loss on marketable securities (605) (2,042)
Treasury stock, 591,500 and 499,800 shares at cost (3,229) (2,711)
Accumulated deficit (5,102) (13)
---------- ---------
Total stockholders' equity 30,077 34,170
---------- ---------
$ 40,343 $ 53,964
========== =========
The accompanying notes are an integral part of these statements.
3
eResearchTechnology, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share information)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(unaudited) (unaudited)
Net revenues:
Licenses $ 71 $ 1,593 $ 332 $ 3,948
Services 7,260 6,478 19,851 17,265
------ ------- -------- -------
Total net revenues 7,331 8,071 20,183 21,213
------ ------- -------- -------
Costs of revenues:
Cost of licenses 175 252 409 491
Cost of services 2,988 3,430 9,143 9,813
------ ------- -------- -------
Total costs of revenues 3,163 3,682 9,552 10,304
------ ------- -------- -------
Gross margin 4,168 4,389 10,631 10,909
------ ------- -------- -------
Operating expenses:
Selling and marketing 1,370 1,016 4,100 3,482
General and administrative 1,388 1,964 3,989 5,237
Research and development 1,188 1,692 3,653 3,650
Asset impairment charge - - 4,970 -
------ ------- -------- -------
Total operating expenses 3,946 4,672 16,712 12,369
------ ------- -------- -------
Operating income (loss) 222 (283) (6,081) (1,460)
Interest income, net 231 458 835 1,112
Gain on sale of domestic CRO operations - - 232 248
------ ------- -------- -------
Income (loss) before income taxes 453 175 (5,014) (100)
Income tax benefit (provision) (181) (70) 41 40
Minority interest dividend - (335) (116) (335)
------ ------- -------- -------
Net income (loss) $ 272 $ (230) $ (5,089) $ (395)
====== ======= ======== =======
Basic and diluted net income (loss) per share $ 0.04 $ (0.03) $ (0.73) $ (0.06)
====== ======= ======== =======
The accompanying notes are an integral part of these statements.
4
eResearchTechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
(unaudited)
Operating activities:
Net loss $ (5,089) $ (395)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of the domestic CRO operations (232) (248)
Depreciation and amortization 1,300 1,327
Provision for losses on accounts receivable - 638
Provision for impairment of note receivable - 300
Issuance of common stock options and warrants for services rendered 29 122
Deferred income taxes - (880)
Asset impairment charge 4,970 -
Changes in assets and liabilities:
Accounts receivable 2,329 (2,830)
Prepaid expenses and other 1,091 (648)
Accounts payable (429) 256
Accrued expenses (207) 181
Income taxes payable (459) (1,392)
Deferred revenues (58) 515
--------- --------
Net cash provided by (used in) operating activities 3,245 (3,054)
--------- --------
Investing activities:
Purchases of property and equipment (2,142) (2,293)
Net (purchases) sales of short-term investments (1,254) 131
Purchase of marketable securities - (5,775)
Investment in non-marketable securities - (175)
Proceeds from note receivable - 8,000
Net proceeds from sale of the domestic CRO operations 2,992 248
--------- --------
Net cash provided by (used in) investing activities (404) 136
--------- --------
Financing activities:
Net proceeds from the issuance of convertible preferred
stock in subsidiary - 9,500
Net proceeds from exercise of stock options 48 388
Purchase of convertible preferred stock in subsidiary (9,500) -
Minority interest dividend paid (639) -
Repurchase of common stock for treasury (518) -
--------- --------
Net cash provided by (used in) financing activities (10,609) 9,888
--------- --------
Net increase (decrease) in cash and cash equivalents (7,768) 6,970
Cash and cash equivalents, beginning of period 21,910 16,765
--------- --------
Cash and cash equivalents, end of period $ 14,142 $ 23,735
========= ========
The accompanying notes are an integral part of these statements.
5
eResearchTechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements, which include the
accounts of eResearchTechnology, Inc. (the "Company") and its wholly owned
subsidiaries, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. Operating results
for the periods ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. Further
information on potential factors that could affect the Company's financial
results can be found in the Company's Reports on Forms 10-K and 10-Q filed with
the Securities and Exchange Commission.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Reclassifications. The consolidated financial statements for prior periods have
been reclassified to conform to the current period's presentation.
Management's Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Note 3. Asset Impairment Charge - Marketable and Non-Marketable Securities
At September 30, 2001, marketable securities consisted of an investment in the
common stock of Medical Advisory Systems (MAS), a publicly traded company, which
the Company purchased in March 2000 for $5,775,000. This investment has been
classified as available-for-sale, pursuant to Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Available-for-sale securities are carried at fair value, based on
quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity. As of December 31, 2000, an unrealized loss
of $2,042,000, net of tax, was reported as a separate component of stockholders'
equity. In March 2001, in accordance with SFAS No. 115, management determined
the decline in the fair value of MAS common stock to be other than temporary,
and as a result wrote down the cost basis of the MAS investment to $2,029,000,
which was the market value of the MAS common stock held on March 31, 2001. In
connection with this write-down, an asset impairment charge of $3,746,000 was
recorded during the quarter ended March 31, 2001. As of September 30, 2001, an
unrealized loss of $605,000 was reported as a separate component of
stockholders' equity.
At September 30, 2001, investments in non-marketable securities include the
carrying value of the Company's investment in AmericasDoctor.com, Inc., which is
accounted for under the cost method in accordance with Accounting Principles
Board (APB) No. 18, "The Equity Method of Accounting for Investments in Common
Stock." In March 2001, in accordance with APB No. 18, management determined that
a decrease in the value of the investment occurred which was deemed to be other
than temporary, and as a result wrote down the cost basis of the investment to
$1,076,000. In connection with this write-down, an asset impairment charge of
$1,224,000 was recorded during the quarter ended March 31, 2001.
The Company will continue to assess the fair values of these investments and
whether or not any declines in fair values below the current cost bases are
deemed to be other than temporary. If declines in the fair values of these
investments are judged to be other than temporary, the cost bases of these
investments would be written down to fair value, and the amount of the
write-down would be included in the Company's operating results. Given the
current performance and general market conditions for technology related
companies, additional write-downs of these investments may occur.
6
Note 4. Net Income (Loss) per Share
The Company follows SFAS No. 128 "Earnings per Share". This statement requires
the presentation of basic and diluted earnings per share. Basic net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period,
adjusted for the dilutive effect of common stock equivalents, which consist
primarily of stock options, using the treasury stock method.
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted net income (loss) per share computations.
Three Months Ended September 30,
-------------------------------- Per
Net Share
2001 Income (loss) Shares Amount
--------------------------------------- ------------- ------ ------
Basic net income....................... $ 272,000 6,957,000 $ 0.04
Effect of dilutive shares.............. -- 84,000 --
----------- --------- --------
Diluted net income..................... $ 272,000 7,041,000 $ 0.04
=========== ========= ========
2000
---------------------------------------
Basic net loss......................... $ (230,000) 6,969,000 $ (0.03)
Effect of dilutive shares.............. -- -- --
----------- --------- --------
Diluted net loss....................... $ (230,000) 6,969,000 $ (0.03)
=========== ========= ========
Options to purchase 437,000 shares of common stock were outstanding at September
30, 2001 and were included in the computation of diluted net income per share.
Options to purchase 787,000 shares of common stock were outstanding at September
30, 2001 but were not included in the computation of diluted net income per
share because the option exercise prices were greater than the average market
price of the Company's common stock during the period.
Options to purchase 746,000 shares of common stock were outstanding at September
30, 2000 but were not included in the diluted computation because the Company
incurred a net loss and the inclusion would be anti-dilutive.
Nine Months Ended September 30,
------------------------------- Per
Net Share
2001 Loss Shares Amount
--------------------------------------- ----------- ------ ------
Basic net loss......................... $(5,089,000) 6,964,000 $ (0.73)
Effect of dilutive shares.............. -- -- --
----------- --------- --------
Diluted net loss....................... $(5,089,000) 6,964,000 $ (0.73)
=========== ========= ========
2000
---------------------------------------
Basic net loss......................... $ (395,000) 6,951,000 $ (0.06)
Effect of dilutive shares.............. -- -- --
----------- --------- --------
Diluted net loss....................... $ (395,000) 6,951,000 $ (0.06)
=========== ========= ========
Options to purchase 1,224,000 and 746,000 shares of common stock were
outstanding at September 30, 2001 and 2000, respectively, but were not included
in the diluted computation because the Company incurred a net loss and the
inclusion would be anti-dilutive.
7
Note 5. Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income." The
Company's comprehensive income includes net income and unrealized gains and
losses from foreign currency translation and marketable securities. The
unrealized gains and losses from foreign currency translation were immaterial as
of September 30, 2001 and 2000. For the nine months ended September 30, 2001 and
2000, the Company recorded an unrealized loss of $605,000 and $413,000,
respectively, from its investment in marketable securities.
Note 6. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (effective July 1, 2001), and SFAS No. 142 "Goodwill and
Other Intangible Assets" (effective for the Company on January 1, 2002). SFAS
No.141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142
specifies that goodwill and some intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. The Company is in
the process of evaluating the financial statement impact of the adoption of SFAS
No. 142.
Note 7. Operating Segments
The Company's operating segments are strategic business units that offer
different products and services to a common client base. The Company's products
and services are provided both in the United States and internationally through
two reportable business segments: Clinical Operations, which includes
centralized core-diagnostic electrocardiogram services; and Technology
Operations, which includes the development, marketing and support of clinical
trial and data management software and consulting services. Results of
operations and identifiable assets that cannot be directly attributed to either
Clinical or Technology Operations are included in Other.
8
The Company evaluates performance based on the net revenues and operating
earnings performance of the respective business segments. Segment information is
as follows:
Three Months Ended September 30, 2001
----------------------------------------------------------------------------
Clinical Technology
Operations Operations Other Total
--------------- ----------------- --------------- ----------------
License revenues $ - $ 71,000 $ - $ 71,000
Services revenues 5,427,000 1,833,000 - 7,260,000
--------------- ----------------- --------------- ---------------
Net revenues from external customers 5,427,000 1,904,000 - 7,331,000
Income (loss) from operations 1,297,000 (1,075,000) - 222,000
Identifiable assets 9,386,000 3,923,000 27,034,000 40,343,000
Three Months Ended September 30, 2000
-----------------------------------------------------------------------------
Clinical Technology
Operations Operations Other Total
---------------- ------------------ ---------------- ----------------
License revenues $ - $ 1,593,000 $ - $ 1,593,000
Services revenues 4,457,000 2,021,000 - 6,478,000
---------------- ------------------ ---------------- ----------------
Net revenues from external customers 4,457,000 3,614,000 - 8,071,000
Income (loss) from operations 524,000 (807,000) - (283,000)
Identifiable assets 8,599,000 5,493,000 40,047,000 54,139,000
Nine Months Ended September 30, 2001
-----------------------------------------------------------------------------
Clinical Technology
Operations Operations Other Total
--------------- ----------------- --------------- ---------------
License revenues $ - $ 332,000 $ - $ 332,000
Services revenues 14,517,000 5,334,000 - 19,851,000
--------------- ----------------- --------------- ---------------
Net revenues from external customers 14,517,000 5,666,000 - 20,183,000
Income (loss) from operations 2,431,000 (3,542,000) (4,970,000) (6,081,000)
Identifiable assets 9,386,000 3,923,000 27,034,000 40,343,000
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------
Clinical Technology
Operations Operations Other Total
--------------- ----------------- --------------- ---------------
License revenues $ - $ 3,948,000 $ - $ 3,948,000
Services revenues 11,073,000 6,192,000 - 17,265,000
--------------- ----------------- --------------- ---------------
Net revenues from external customers 11,073,000 10,140,000 - 21,213,000
Income (loss) from operations 273,000 (1,733,000) - (1,460,000)
Identifiable assets 8,599,000 5,493,000 40,047,000 54,139,000
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement for Forward-Looking Information
The following discussion and analysis should be read in conjunction with the
Company's financial statements and the related notes to the financial statements
appearing elsewhere in this report. The following includes a number of
forward-looking statements that reflects the Company's current views with
respect to future events and financial performance. The Company uses words such
as anticipate, believe, expect, future, and intend, and similar expressions to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. These forward-looking statements are subject to risks and uncertainties
such as competitive factors, technology development, market demand and the
Company's ability to obtain new contracts and accurately estimate net revenues
due to variability in size, scope and duration of projects, and internal issues
of the sponsoring client. These and other risk factors have been further
discussed in the Company's Report on Form 10-Q dated March 31, 2001. Such risks
and uncertainties could cause actual results to differ materially from
historical results or future predictions. Further information on potential
factors that could affect the Company's financial results can be found in the
Company's Registration Statement on Form S-1 and its Reports on Forms 10-K and
10-Q filed with the Securities and Exchange Commission.
Overview
eResearchTechnology, Inc. (the "Company") is a market leader in providing
centralized core-diagnostic electrocardiogram (Diagnostic) services and a
business-to-business provider of integrated software applications and technology
consulting services to the pharmaceutical, biotechnology and medical device
industries. The Company offers Internet and other technology-based solutions
designed to streamline the clinical trials process by enabling its customers to
automate many parts of a clinical trial. Historically, the Company's products
and services have been provided, both in the United States and internationally,
through two business segments: Clinical Operations and Technology Operations.
Clinical Operations include Diagnostic services. Technology Operations include
the development, marketing and support of clinical trial and data management
software and consulting services.
The Company's license revenues consist of up-front software license fees and
monthly and annual subscription fees. The Company's service revenues consist of
Diagnostic services, technology consulting and training services and software
maintenance services.
The Company recognizes software revenues in accordance with Statement of
Position 97-2, Software Revenue Recognition, as amended by Statement of Position
98-9. Accordingly, the Company recognizes up-front license fee revenues when a
formal agreement exists, delivery of the software and related documentation has
occurred, collectibility is probable and the license fee is fixed or
determinable. The Company recognizes monthly and annual subscription fee
revenues ratably on a monthly basis. Diagnostic service revenues consist of
revenues from services that the Company provides on a fee-for-service basis. The
Company recognizes Diagnostic service revenues as the services are performed.
The Company recognizes revenues from software maintenance contracts on a
straight-line basis over the term of the maintenance contract, which is
typically twelve months. The Company provides consulting and training services
on a time and materials basis and recognizes revenues as the Company performs
the services.
The Company's software strategy is to create more of a recurring revenue
business model by deploying eResNets and modular solutions under agreements that
permit their use in multiple clinical trials at any number of sites. An eResNet
integrates the Company's analytical processing tools, called eCommunity, with
any combination of the Company's products and services that includes the data
capture system called eDataEntry and the Company's software for collecting,
editing and managing clinical trial data called eDataManagement. By offering the
eResNet and modular solutions to its customers, the Company gives the customer
the option of either using an existing license, purchasing an additional license
or paying monthly for the use of these solutions on a per user, per trial, per
site basis. In the third quarter, the Company introduced its Accelerator series
of products which offers customers the option to rent the Company's applications
on either a monthly or annual basis with the option to have the applications
hosted in an applications service provider (ASP) environment. Through its
flexible offerings, the Company seeks to build market share and obtain customers
who were not otherwise willing to purchase legacy solutions by traditional
means. These strategies and offerings are in an emerging state and their revenue
and income potential is unproven. Furthermore, the Company's historical revenue
sources will likely continue to be major contributors to the Company's overall
revenues.
10
Cost of licenses consists primarily of the cost of ASP fees, the cost of
producing compact disks and related documentation and royalties paid to third
parties in connection with their contributions to the Company's product
development. Cost of services includes the cost of Diagnostic services and the
cost of technology consulting, training and maintenance services. Cost of
Diagnostic services consists primarily of direct costs related to the Company's
centralized electrocardiogram services and includes wages, fees paid to outside
consultants, shipping expenses and other direct operating costs. Cost of
technology consulting, training and maintenance services consists primarily of
wages, fees paid to outside consultants and other direct operating costs related
to the Company's consulting and customer support functions. Selling and
marketing expenses consist primarily of wages and commissions paid to sales and
marketing personnel or paid to third parties under marketing assistance
agreements, travel expenses and advertising and promotional expenditures.
General and administrative expenses consist primarily of wages and direct costs
for the Company's finance, administrative, corporate information technology and
executive management functions, in addition to professional service fees.
Research and development expenses consist primarily of wages paid to the
Company's product development staff, costs paid to outside consultants and
direct costs associated with the development of the Company's technology
products.
The Company conducts its operations with offices in the United States and the
United Kingdom (UK). The Company's international net revenues represented 17.0%
and 23.3% of total net revenues for the three months ended September 30, 2001
and 2000, respectively, and 21.9% and 19.6% of total net revenues for the nine
months ended September 30, 2001 and 2000, respectively.
11
Results of Operations
The following table presents certain financial data as a percentage of total net
revenues:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(unaudited) (unaudited)
Net revenues:
Licenses 1.0% 19.7% 1.6% 18.6%
Services 99.0 80.3 98.4 81.4
----------- ---------- ----------- -----------
Total net revenues 100.0 100.0 100.0 100.0
----------- ---------- ----------- -----------
Costs of revenues:
Cost of licenses 2.4 3.1 2.0 2.3
Cost of services 40.7 42.5 45.3 46.3
----------- ---------- ----------- -----------
Total costs of revenues 43.1 45.6 47.3 48.6
----------- ---------- ----------- -----------
Gross margin 56.9 54.4 52.7 51.4
----------- ---------- ----------- -----------
Operating expenses:
Selling and marketing 18.7 12.6 20.3 16.4
General and administrative 19.0 24.3 19.8 24.7
Research and development 16.2 21.0 18.1 17.2
Asset impairment charge - - 24.6 -
----------- ---------- ----------- -----------
Total operating expenses 53.9 57.9 82.8 58.3
----------- ---------- ----------- -----------
Operating income (loss) 3.0 (3.5) (30.1) (6.9)
Interest income, net 3.2 5.7 4.1 5.2
Gain on sale of domestic CRO operations - - 1.2 1.2
----------- ---------- ----------- -----------
Income (loss) before income taxes 6.2 2.2 (24.8) (0.5)
Income tax benefit (provision) (2.5) (0.9) 0.2 0.2
Minority interest dividend - (4.2) (0.6) (1.6)
----------- ---------- ----------- -----------
Net income (loss) 3.7% (2.9)% (25.2)% (1.9)%
=========== ========== =========== ===========
12
Three months ended September 30, 2001 compared to three months ended September
30, 2000.
Total net revenues decreased 9.9% to $7.3 million for the three months ended
September 30, 2001 compared to $8.1 million for the three months ended September
30, 2000.
License revenues decreased 95.6% to $71,000 for the three months ended September
30, 2001 compared to $1.6 million for the three months ended September 30, 2000.
The decrease in license revenues was primarily due to fewer license contract
signings in the third quarter of 2001. The Company believes the decrease in
license contract signings was primarily the result of growing caution in the
general business climate and particularly in the technology sector, which has
impacted final decisions on new software licenses in 2001. The Company cannot
predict what impact the current economic climate will have on future software
license revenues.
Services revenues increased 12.3% to $7.3 million for the three months ended
September 30, 2001 compared to $6.5 million for the three months ended September
30, 2000.
Diagnostic service revenues increased 20.0% to $5.4 million for the three months
ended September 30, 2001 compared to $4.5 million for the three months ended
September 30, 2000. The increase in Diagnostic service revenues was primarily
due to increased sales volume with both new and existing clients.
Technology consulting and training service revenues decreased 23.7% to $839,000
for the three months ended September 30, 2001 compared to $1.1 million for the
three months ended September 30, 2000. The decrease in technology consulting and
training service revenues was due primarily to the termination of a two-year
consulting contract in December 2000, which accounted for $575,000 of revenue in
the third quarter of 2000. This decrease was partially offset by additional
support revenues from new software installations and increased consulting
activity in support of the Company's software and client needs during the third
quarter of 2001.
Software maintenance revenues increased 3.5% to $994,000 for the three months
ended September 30, 2001 compared to $960,000 for the three months ended
September 30, 2000. The increase in software maintenance revenues was due to a
larger installed base of software licenses during the third quarter of 2001
compared to the third quarter of 2000.
Total cost of revenues decreased 13.5% to $3.2 million, or 43.1% of total net
revenues, for the three months ended September 30, 2001 compared to $3.7
million, or 45.6% of total net revenues for the three months ended September 30,
2000.
The cost of licenses decreased 30.6% to $175,000 for the three months ended
September 30, 2001 from $252,000 for the three months ended September 30, 2000.
The decrease in the cost of licenses was primarily due to third party royalties
incurred in the third quarter of 2000 from software sales. There were no
royalties payable to third parties in the third quarter of 2001. This decrease
was partially offset by ASP hosting fees incurred in the third quarter of 2001.
There were no ASP hosting fees in the third quarter of 2000.
As a percentage of license revenues, the cost of licenses increased to 246.5%
for the three months ended September 30, 2001 from 15.8% for the three months
ended September 30, 2000. The increase in the cost of licenses as a percentage
of license revenues was due to the significant decrease in license revenues in
the third quarter of 2001 with only a small reduction in costs, some of which
are relatively fixed in nature.
The cost of services decreased 11.8% to $3.0 million, or 41.1% of services
revenues, for the three months ended September 30, 2001 from $3.4 million, or
52.3% of services revenues for the three months ended September 30, 2000.
The cost of Diagnostic services decreased 8.7% to $2.1 million, or 38.9% of
Diagnostic service revenues, for the three months ended September 30, 2001
compared to $2.3 million, or 51.1% of Diagnostic service revenues, for the three
months ended September 30, 2000. The decrease in the cost of Diagnostic services
was due primarily to a cost control initiative, which took effect during the
second quarter of 2001. This decrease was partially offset by an increase in
variable costs associated with the increase in Diagnostic service revenues. The
decrease in the cost of Diagnostic services as a percentage of Diagnostic
service revenues was due primarily to the increase in Diagnostic service
revenues without a comparable increase in costs, many of which are fixed in
nature.
13
The cost of technology consulting and training services increased 9.4% to
$536,000, or 63.9% of technology consulting and training service revenues, for
the three months ended September 30, 2001 compared to $490,000, or 44.5% of
technology consulting and training service revenues, for the three months ended
September 30, 2000. The increase in both the costs of technology consulting and
training services and the cost of technology consulting and training services as
a percentage of technology consulting and training service revenues was due
primarily to additional personnel, subcontracting costs and travel and increased
facility and depreciation expenses. The increase in the costs of technology and
training services as a percentage of technology consulting and training service
revenues was also due to the termination of a two-year consulting contract in
December 2000 which accounted for $575,000 of revenue for the third quarter of
2000 with a higher than typical margin.
The cost of software maintenance services decreased 44.0% to $364,000, or 36.6%
of software maintenance revenues, for the three months ended September 30, 2001
compared to $650,000, or 67.7% of software maintenance revenues, for the three
months ended September 30, 2000. The decrease in both the cost of software
maintenance services and the cost of software maintenance services as a
percentage of software maintenance revenues was due primarily to a reduction in
subcontracting costs, recruitment fees and personnel dedicated to software
maintenance during the third quarter of 2001.
Selling and marketing expenses increased 40.0% to $1.4 million, or 18.7% of
total net revenues, for the three months ended September 30, 2001 compared to
$1.0 million, or 12.6% of total net revenues, for the three months ended
September 30, 2000. The increase in both selling and marketing expenses and
selling and marketing expenses as a percentage of revenues was primarily due to
increased payroll costs associated with expanding the Company's sales force
during the fourth quarter of 2000. This increase was partially offset by lower
advertising and promotion costs in the third quarter of 2001.
General and administrative expenses decreased 30.0% to $1.4 million, or 19.0% of
total net revenues, for the three months ended September 30, 2001 from $2.0
million, or 24.3% of total net revenues, for the three months ended September
30, 2000. The decrease in both general and administrative expenses and general
and administrative expenses as a percentage of revenues was primarily due to
provisions for the impairment of specific notes receivable recorded in the third
quarter of 2000 and for bad debt expense recognized in the third quarter of 2000
that were not recognized in 2001.
Research and development expenses decreased 29.4% to $1.2 million, or 16.2% of
total net revenues, for the three months ended September 30, 2001 from $1.7
million, or 21.0% of total net revenues, the three months ended September 30,
2000. The decrease in both research and development expenses and research and
development expenses as a percentage of revenues was primarily due to additional
expenditures incurred under a funded research and development arrangement in the
third quarter of 2000.
Interest income consisted of interest earned on the Company's cash, cash
equivalents and short-term investments, and decreased to $231,000 from $458,000
for the three months ended September 30, 2001 and 2000, respectively. The
decrease in interest income was due to lower cash and short-term investment
balances and lower interest rates in 2001.
The Company's effective tax rate was 40.0% for the three months ended September
30, 2001 and 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000.
Total net revenues decreased 4.7% to $20.2 million for the nine months ended
September 30, 2001 compared to $21.2 million for the nine months ended September
30, 2000.
License revenues decreased 91.5% to $332,000 for the nine months ended September
30, 2001 compared to $3.9 million for the nine months ended September 30, 2000.
The decrease in license revenues was primarily due to fewer license contract
signings for the nine months ended September 30, 2001. The Company believes the
decrease in license contract signings was primarily the result of growing
caution in the general business climate and particularly in the technology
sector, which has impacted final decisions on new software licenses in 2001.
The Company cannot predict what impact the current economic climate will have on
future software license revenues.
Services revenues increased 15.0% to $19.9 million for the nine months ended
September 30, 2001 compared to $17.3 million for the nine months ended September
30, 2000.
14
Diagnostic service revenues increased 30.6% to $14.5 million for the nine months
ended September 30, 2001 compared to $11.1 million for the nine months ended
September 30, 2000. The increase in Diagnostic service revenues was primarily
due to increased sales volume with both new and existing clients.
Technology consulting and training service revenues decreased 30.3% to $2.3
million for the nine months ended September 30, 2001 compared to $3.3 million
for the nine months ended September 30, 2000. The decrease in technology
consulting and training service revenues was due primarily to the termination of
a two-year consulting contract in December 2000, which accounted for $1.7
million of revenue in the nine months ended September 30, 2000. This decrease
was partially offset by additional support revenues from new software
installations and increased consulting activity in support of the Company's
software and client needs during 2001.
Software maintenance revenues increased 3.4% to $3.0 million for the nine months
ended September 30, 2001 compared to $2.9 million for the nine months ended
September 30, 2000. The increase in software maintenance revenues was due to a
larger installed base of software licenses during the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000.
Total cost of revenues decreased 6.8% to $9.6 million, or 47.3% of total net
revenues, for the nine months ended September 30, 2001 compared to $10.3
million, or 48.6% of total net revenues, for the nine months ended September 30,
2000.
The cost of licenses decreased 16.7% to $409,000 for the nine months ended
September 30, 2001 from $491,000 for the nine months ended September 30, 2000.
The decrease in the cost of licenses was primarily due to third party royalties
incurred in the nine months ended September 30, 2000 from software sales. There
were minimal royalties payable to third parties in the nine months ended
September 30, 2001. This decrease was partially offset by ASP hosting fees
incurred in the nine months ended September 30, 2001. There were no ASP hosting
fees in the nine months ended September 30, 2000.
As a percentage of license revenues, the cost of licenses increased to 123.2%
for the nine months ended September 30, 2001 from 12.6% for the nine months
ended September 30, 2000. The increase in the cost of licenses as a percentage
of license revenues was due to the significant decrease in license revenues with
only a small reduction in costs, some of which are relatively fixed in nature.
The cost of services decreased 7.1% to $9.1 million, or 45.7% of services, for
the nine months ended September 30, 2001 from $9.8 million, or 56.6% of services
revenues, for the nine months ended September 30, 2000.
The cost of Diagnostic services increased 1.6% to $6.3 million for the nine
months ended September 30, 2001 compared to $6.2 million for the nine months
ended September 30, 2000. The increase in the cost of Diagnostic services was
due primarily to an increase in variable costs associated with the increase in
Diagnostic service revenues. This increase was partially offset by a cost
control initiative, which took effect during the second quarter of 2001.
As a percentage of Diagnostic service revenues, the cost of Diagnostic services
decreased to 43.4% for the nine months ended September 30, 2001 from 55.9% for
the nine months ended September 30, 2000. The decrease in the cost of Diagnostic
services as a percentage of diagnostic service revenues was due primarily to the
increase in Diagnostic service revenues without a comparable increase in costs,
many of which are fixed in nature.
The cost of technology consulting and training services increased 6.3% to $1.7
million, or 73.9% of technology consulting and training service revenues, for
the nine months ended September 30, 2001 compared to $1.6 million, or 48.5% of
technology consulting and training services revenues, for the nine months ended
September 30, 2000. The increase in both the cost of technology consulting and
training services and the cost of technology consulting and training services as
a percentage of technology consulting and training service revenues was due
primarily to additional personnel, subcontracting costs and travel and increased
facility and depreciation expenses. The increase in the costs of technology
consulting and training services as a percentage of technology consulting and
training service revenues was also due to the termination of a two-year
consulting contract in December 2000 that accounted for $1.7 million of revenue
in the nine months ended September 30, 2000 with a higher than typical margin.
15
The cost of software maintenance services decreased 45.0% to $1.1 million, or
36.7% of software maintenance revenues, for the nine months ended September 30,
2001 compared to $2.0 million, or 69.0% of software maintenance revenues, for
the nine months ended September 30, 2000. The decrease in both the cost of
software maintenance services and the cost of software maintenance services as a
percentage of software maintenance revenues was due primarily to a reduction in
subcontracting costs, recruiting fees, and personnel dedicated to software
maintenance during the nine months ended September 30, 2001.
Selling and marketing expenses increased 17.1% to $4.1 million, or 20.3% of
total net revenues, for the nine months ended September 30, 2001 compared to
$3.5 million, or 16.4% of total net revenues, for the nine months ended
September 30, 2000. The increase in both the selling and marketing expense and
the selling and marketing expense as a percentage of revenue was primarily due
to increased payroll costs associated with expanding the Company's sales force
during the fourth quarter of 2000. This increase was partially offset by lower
advertising and promotion costs in the nine months ended September 30, 2001.
General and administrative expenses decreased 23.1% to $4.0 million, or 19.8% of
total net revenues, for the nine months ended September 30, 2001 from $5.2
million, or 24.7% of total net revenues, for the nine months ended September 30,
2000. The decrease in both general and administrative expenses and general and
administrative expenses as a percentage revenue was primarily due to bad debt
expense and a provision for the impairment of specific notes receivable
recognized in 2000 that were not recognized in 2001 and a decrease in
professional fees in the nine months ended September 30, 2001.
Research and development expenses were $3.7 million for the nine months ended
September 30, 2001 and 2000. As a percentage of total net revenues, research and
development expenses increased to 18.1% from 17.2%. The increase in research and
development expense as a percentage of sales was primarily due to a decrease in
revenue in 2001 without a comparable decrease in cost, many of which are fixed
in nature.
The Company recorded an asset impairment charge of $5.0 million in the nine
months September 30, 2001. This charge was the result of continued negative
market conditions affecting the carrying value of the Company's investments in
Medical Advisory Systems, Inc. and AmericasDoctor.com, Inc., both of which are
Internet based service organizations. The Company will continue to assess the
fair values of these investments and whether or not any declines in fair values
below the current cost bases are deemed to be other than temporary. If declines
in the fair values of these investments are judged to be other than temporary,
the cost bases of these investments would be written down to fair value, and the
amount of the write-down would be included in the Company's operating results.
Given the current performance and general market conditions for technology
related companies, additional write-downs of these investments may occur.
Interest income consisted of interest earned on the Company's cash, cash
equivalents and short-term investments, and decreased to $835,000 from $1.1
million for the nine months ended September 30, 2001 and 2000, respectively. The
decrease in interest income was due to lower cash and short-term investment
balances and lower interest rates in 2001.
The Company's effective tax rate was 0.8% and 40.0% for the nine months ended
September 30, 2001 and 2000, respectively. The decrease in the Company's
effective tax rate in 2001 was due primarily to the Company fully reserving for
the long-term capital loss deferred tax asset associated with the asset
impairment charge of $5.0 million recognized during the first quarter of 2001,
due to the uncertainty of the realization of any tax benefit associated with
these long-term capital losses in future periods.
Liquidity and Capital Resources
At September 30, 2001, the Company had $14.1 million of cash and cash
equivalents and $7.0 million invested in short-term investments. The Company
generally places its investments in A1P1 rated commercial bonds and paper,
municipal securities and certificates of deposit with maturities of less than
one year.
For the nine months ended September 30, 2001, the Company's operations provided
cash of $3.2 million compared to cash used in operations of $3.1 million for the
nine months ended September 30, 2000. The change was primarily the result of
decreased accounts receivable and changes to other working capital accounts for
the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000.
During the nine months ended September 30, 2001, the Company purchased $2.1
million of equipment compared to $2.3 million during the nine months ended
September 30, 2000. The decrease was primarily the result of higher expenditures
related to the development of a new data and communications management services
software product to be used in connection with the Company's centralized
core-diagnostic electrocardiogram services in the nine months ended September
30, 2000, compared to the nine months ended September 30, 2001. This was
partially offset by furniture and equipment purchases for the Company's office
expansion in the first quarter of 2001 at its Bridgewater, NJ location and the
purchase of diagnostic rental equipment in the nine months ended September 30,
2001.
16
In December 1999, the Company sold its domestic clinical research operations to
SCP Communications, Inc. The Asset Purchase Agreement related to this sale
called for two escrow accounts (collectively hereinafter referred to as the
"Escrow Account") from which the Company would be entitled to additional
proceeds upon the occurrence of certain events. In January 2001, the Company
received $167,000 from the Escrow Account which was recorded as additional gain
on sale in the fourth quarter of 2000. In April 2001, the Company received $2.6
million from the Escrow Account of which $1.5 million was recorded as additional
gain on sale in the fourth quarter of 2000, $232,000 was recorded as additional
gain on sale in the first quarter of 2001, and the remaining balance of $893,000
was included in accrued expenses. In August 2001, the Company received $250,000
from the Escrow Account which was also recorded as an accrued expense for a
total accrued expense balance related to proceeds from the Escrow Account of
$1.1 million as of September 30, 2001. During the fourth quarter of 2001, the
Company expects to finalize the accounting for the Escrow Account and record any
additional gain on sale, thereby eliminating the balance of related proceeds in
accrued expenses.
In March 2000, the Company's wholly-owned subsidiary, eRT Operating Company (eRT
OC), sold 95,000 shares of its convertible preferred stock to Communicade, Inc.
and agreed to issue a warrant to purchase 2.5% of eRT OC's outstanding common
stock for a total gross proceeds of $9.5 million. The preferred stock would have
automatically converted into common stock upon consummation of an eRT OC initial
public offering. In March 2000, eRT OC issued a warrant to purchase common stock
to Scirex Corporation. The warrant entitles Scirex to purchase the number of
common shares equal to $1.0 million divided by eRT OC's initial public offering
price per share, at an exercise price per share equal to eRT OC's initial public
offering price per share. On March 1, 2001, eRT OC withdrew the registration
statement associated with its initial public offering and the Company purchased
the convertible preferred stock sold to Communicade, Inc. for the original
purchase price of $9.5 million plus $639,000 in accrued dividends. The agreement
to issue a warrant to Communicade, Inc. and the warrant issued to Scirex
Corporation remain outstanding.
In February 2001, the Board of Directors authorized a stock buy-back program of
up to 500,000 shares of the Company's common stock. The share purchase
authorization allows the Company to make purchases from time to time on the open
market at prevailing prices or in privately negotiated transactions. Company
management will make the purchase decisions based upon market conditions and
other considerations. During the nine months ended September 30, 2001, the
Company used $518,000 to purchase 91,700 shares of its common stock on the open
market at an average price of $5.65 per share.
The Company has a line of credit arrangement with First Union National Bank
totaling $3.0 million. At September 30, 2001, the Company had no outstanding
borrowings under the line.
The Company expects that existing cash and cash equivalents, short-term
investments, marketable securities, cash flows from operations and available
borrowings under its line of credit will be sufficient to meet its foreseeable
cash needs for at least the next year. However, there may be acquisition and
other growth opportunities that require additional external financing and the
Company 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
such financings will be available or available on terms acceptable to the
Company.
Inflation
The Company believes the effects of inflation generally do not have a material
adverse effect on its results of operations or financial condition.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
There have been no material changes in qualitative and quantitative market risk
from the disclosure within the December 31, 2000 Form 10-K which is incorporated
here by reference.
17
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(1) Effective Date of Securities Act Registration Statement: February 3, 1997
registration No.: 333-17001
(2) Offering Date: February 4, 1997
(3) Not Applicable
(4) (i) The offering terminated after all shares registered were sold
(ii) Managing Underwriters: Montgomery Securities
Furman Selz
Genesis Merchant Group
(iii) Class of Securities Registered: Common Stock
(iv) Account of Company Account of Selling Shareholder
------------------ ------------------------------
Amount Registered 2,206,250 common stock 956,250 common stock
Aggregate price of
Amount Registered $37,506,250 $16,256,250
Amount Sold 2,206,250 956,250
Aggregate Offering
Price of Amount Sold $37,506,250 $16,256,250
(v) Expenses of offering for account of the Company:
Underwriting Discount and Commission $2,625,437
Other expenses 698,813
Total Expenses $3,324,250
(A) There were no direct or indirect payments to directors,
officers, general partners of the issuer or their
associates; to persons owning ten (10) percent or more of
common stock of the Company; or affiliates of the Company.
(B) All of the above payments were direct or indirect payments
to others not described in clause (A).
(vi) Net Offering Proceeds to the Company: $34,182,000
(vii) Use of Proceeds as of September 30, 2001:
Net cash paid for business acquisition 8,655,000
Net cash paid for minority investments 8,725,000
Purchases of equipment 12,491,000
Net cash paid for repurchase of common stock 3,229,000
Temporary Investments (consisting of short-term,
Investment-grade securities) 1,082,000
All of the above payments were to others not described in item (v)
(A) above.
(viii) The use of proceeds is consistent with the Prospectus.
18
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
10.59 Promissory Note to First Union National Bank
b.) Reports on Form 8-K
None
19
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
eResearchTechnology, Inc.
(Registrant)
Date: November 8, 2001 By: /s/ Joseph Esposito
--------------------------------
Joseph Esposito
Chief Executive Officer
Date: November 8, 2001 By: /s/ Bruce Johnson
--------------------------------
Bruce Johnson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20