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 March 31, 2002
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
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(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 April
30, 2002, was 6,962,130.
eResearchTechnology, Inc. and Subsidiaries
INDEX
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Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated balance sheets--March 31, 2002 (unaudited) and
December 31, 2001 3
Consolidated statements of operations (unaudited)--Three Months
Ended March 31, 2002 and 2001 4
Consolidated statements of cash flows (unaudited)--Three Months
Ended March 31, 2002 and 2001 5
Notes to consolidated financial statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10-16
Item 3. Qualitative and Quantitative Disclosures about Market Risk 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
a.) Exhibits
b.) Reports on Form 8-K
None
Signatures 18
2
Part 1. Financial Information
Item 1. Consolidated Financial Statements
eResearchTechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
March 31, 2002 December 31 2001
-------------- ----------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,637 $ 11,364
Short-term investments 7,139 7,066
Marketable securities 2,420 2,695
Accounts receivable, net 5,759 5,900
Prepaid expenses and other 1,662 1,320
Deferred income taxes 212 212
---------------- ----------------
Total current assets 29,829 28,557
Property and equipment, net 9,667 8,110
Goodwill, net 1,212 1,212
Investments in non-marketable securities 509 509
Other assets 21 21
Deferred income taxes 2,257 2,591
---------------- ----------------
$ 43,495 $ 41,000
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,558 $ 1,383
Accrued expenses 2,060 2,394
Income taxes payable 464 461
Current portion of capital lease obligations 346 155
Deferred revenues 4,576 3,475
---------------- ----------------
Total current liabilities 9,004 7,868
---------------- ----------------
Capital lease obligations 711 340
---------------- ----------------
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,
7,552,074 and 7,496,187 shares issued 76 75
Additional paid-in capital 39,377 39,068
Unrealized gain on marketable securities 634 665
Treasury stock, 597,000 shares at cost (3,229) (3,229)
Accumulated deficit (3,078) (3,787)
---------------- ----------------
Total stockholders' equity 33,780 32,792
---------------- ----------------
$ 43,495 $ 41,000
================ ================
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 March 31,
----------------------------
2002 2001
---- ----
(unaudited)
Net revenues:
Licenses and subscriptions $ 754 $ 26
Services 7,607 5,868
---------------- ----------------
Total net revenues 8,361 5,894
---------------- ----------------
Costs of revenues:
Cost of licenses and subscriptions 134 106
Cost of services 3,401 3,114
---------------- ----------------
Total costs of revenues 3,535 3,220
---------------- ----------------
Gross margin 4,826 2,674
---------------- ----------------
Operating expenses:
Selling and marketing 1,475 1,329
General and administrative 1,342 1,329
Research and development 1,159 1,249
---------------- ----------------
Total operating expenses 3,976 3,907
---------------- ----------------
Operating income (loss) 850 (1,233)
Interest income, net 158 361
Investment asset impairment charge - (4,970)
Gain on sale of domestic CRO operation 35 232
---------------- ----------------
Income (loss) before income taxes 1,043 (5,610)
Income tax provision (benefit) 334 (279)
Minority interest dividend - 116
---------------- ----------------
Net income (loss) $ 709 $ (5,447)
================ ================
Basic and diluted net income (loss) per share $ 0.10 $ (0.78)
================ ================
Shares used to calculate basic net income (loss)
per share 6,930 6,970
================ ================
Shares used to calculate diluted net income (loss)
per share 7,326 6,970
================ ================
The accompanying notes are an integral part of these statements.
4
eResearchTechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(unaudited)
Operating activities:
Net income (loss) $ 709 $ (5,447)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of the domestic CRO operation (35) (232)
Gain on sale of marketable securities (2) -
Depreciation and amortization 545 442
Issuance of stock options to non-employees - 12
Deferred income taxes 334 (467)
Investment asset impairment charge - 4,970
Changes in operating assets and liabilities:
Accounts receivable 141 1,384
Prepaid expenses and other (427) 613
Accounts payable 175 250
Accrued expenses (334) (572)
Income taxes payable 3 182
Deferred revenues 1,101 (52)
---------- -----------
Net cash provided by operating activities 2,210 1,083
---------- -----------
Investing activities:
Purchases of property and equipment (1,481) (1,364)
Net (purchases) sales of short-term investments (73) 2,020
Net proceeds from sale of the domestic CRO operation - 167
Proceeds from sales of marketable securitites 246 -
---------- -----------
Net cash provided by (used in) investing activities (1,308) 823
---------- -----------
Financing activities:
Purchase of convertible preferred stock in subsidiary - (9,500)
Repayments of capital lease obligations (59) -
Minority interest dividend paid - (639)
Net proceeds from exercise of stock options 430 -
Repurchase of common stock for treasury - (27)
---------- -----------
Net cash provided by (used in) financing activities 371 (10,166)
---------- -----------
Net increase (decrease) in cash and cash equivalents 1,273 (8,260)
Cash and cash equivalents, beginning of period 11,364 21,910
---------- -----------
Cash and cash equivalents, end of period $ 12,637 $ 13,650
========== ===========
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 three month period ended March 31, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002.
Further information on potential factors that could affect the Company's
financial results can be found in the Company's Report on Form 10-K filed with
the Securities and Exchange Commission and in this Form 10-Q.
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 inter-company
balances 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 March 31, 2002, marketable securities consisted of an investment in 484,025
shares of the common stock of Digital Angel Corporation (DAC) (formerly known as
Medical Advisory Systems, Inc.), a publicly traded company, with an adjusted
cost basis of $1,786,000. The Company purchased 550,000 shares of DAC 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. In March 2001, in accordance with SFAS No. 115, management
determined that an other than temporary decline in the fair value of DAC common
stock existed and as a result wrote down the initial cost basis of the DAC
investment from $5,775,000 to $2,029,000, which was the market value of the DAC
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. During the three months ended March 31, 2002, the Company sold
65,975 shares of its investment in DAC at prices per share between $3.70 and
$4.63 and recorded a realized gain of $2,000. As of March 31, 2002, the carrying
value of the Company's investment in DAC stock exceeded its adjusted cost basis
by $634,000.
At March 31, 2002, investments in non-marketable securities consist of an
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." As of March 31, 2001, in
accordance with APB No. 18, management determined that a decrease in 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 from $2,300,000 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. In December
2001, management determined that an additional 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 from $1,076,000 to $509,000. In
connection with this write-down, an asset impairment charge of $566,000 was
recorded during the quarter ended December 31, 2001.
6
The Company will continue to assess the fair value of these investments and
whether or not any declines in fair value below the current cost basis are
deemed to be other than temporary. If a decline in the fair value of these
investments is judged to be other than temporary, the cost basis of these
investments would be written down to fair value, and the amount of the
write-down would be included in the Company's results. Given the current
performance and general market conditions for technology related companies,
additional write-downs of these investments may occur in the future.
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 March 31,
----------------------------
Per
Net Share
2002 Income (Loss) Shares Amount
------------- ------ ------
Basic net income.......................................... $ 709,000 6,930,000 $ 0.10
Effect of dilutive shares................................. - 396,000 -
-------------- ----------- -----------
Diluted net income........................................ $ 709,000 7,326,000 $ 0.10
============== =========== ===========
2001
Basic net loss............................................ $ (5,447,000) 6,970,000 $ (0.78)
Effect of dilutive shares................................. - - -
------------- ----------- -----------
Diluted net loss.......................................... $ (5,447,000) 6,970,000 $ (0.78)
============= =========== ===========
Options to purchase 1,113,967 shares of common stock were outstanding at March
31, 2002 and were included in the computation of diluted net income per share.
Options to purchase 60,000 shares of common stock were outstanding at March 31,
2002 but were not included in the computation of diluted net income per share
because the exercise prices were greater than the average market price of the
Company's common stock during the period.
Options to purchase 1,070,900 shares of common stock were outstanding at March
31, 2001, but were not included in the diluted computation because the Company
incurred a net loss and the inclusion would be anti-dilutive.
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 March 31, 2002 and 2001. For the three months ended March 31, 2002, the
Company recorded an unrealized gain of $634,000 from its investment in
marketable securities. For the three months ended March 31, 2001, there were no
unrealized gains or losses from investments in marketable securities.
Note 6. Recent Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). They also issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (SFAS 144), in October 2001.
7
SFAS 141 requires all business combinations initiated after June 30, 2001 be
accounted for under the purchase method of accounting. SFAS 141 supersedes APB
Opinion No. 16, "Business Combinations", and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises", and is effective for all
business combinations initiated after June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired goodwill
and other intangible assets. Under the new rules, the Company is no longer
required to amortize goodwill and other intangible assets with indefinite lives,
but will be subject to periodic testing for impairment. SFAS 142 supersedes APB
Opinion No. 17, "Intangible Assets". The Company adopted SFAS 142 effective
January 1, 2002 and implemented certain provisions, specifically the
discontinuation of goodwill amortization. During the three months ended March
31, 2001, the Company recorded $79,000 of goodwill amortization. The following
table reflects the adjustment to exclude goodwill amortization expense,
including related tax effects, recognized in the prior period as presented (in
thousands, except per share amounts):
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(unaudited)
Reported net income (loss) $ 709 $ (5,447)
Add back goodwill amortization - 54
---------- -----------
Adjusted net income (loss) $ 709 $ (5,393)
========== ===========
Income per share - basic:
Reported net income (loss) $ 0.10 $ (0.78)
Goodwill amortization - 0.01
---------- -----------
Adjusted net income (loss) $ 0.10 $ (0.77)
========== ===========
Income per share - diluted:
Reported net income (loss) $ 0.10 $ (0.78)
Goodwill amortization - 0.01
---------- -----------
Adjusted net income (loss) $ 0.10 $ (0.77)
========== ===========
The Company has not completed its initial assessment of impairment of goodwill
in accordance with the provisions of SFAS 142, but does not believe that the
initial assessment, which will be completed by June 30, 2002, will have a
material impact on its consolidated results of operations or financial position.
SFAS 144 establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
(SFAS 121), and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001. The
Company adopted SFAS 144 on January 1, 2002 and the adoption had no impact on
its consolidated results of operations or financial position.
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: Diagnostics Technology and Services, which
includes centralized electrocardiographic services; and Clinical Research
Technology and Services, which includes software sales and support and
consulting services. Identifiable assets and income (loss) from operations not
included in reportable segments are reported as 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 March 31, 2002
------------------------------------------------------------------------------------
Diagnostics Clinical Research
Technology Technology and
and Services Services Other Total
----------------- ------------------- ------------------ ------------------
License and subscription revenues $ - $ 754,000 $ - $ 754,000
Services revenues 6,289,000 1,318,000 - 7,607,000
------------ ------------- ------------ ------------
Net revenues from external customers 6,289,000 2,072,000 - 8,361,000
Income (loss) from operations 1,472,000 (622,000) - 850,000
Identifiable assets 14,312,000 4,009,000 25,174,000 43,495,000
Three Months Ended March 31, 2001
------------------------------------------------------------------------------------
Diagnostics Clinical Research
Technology Technology and
and Services Services Other Total
----------------- ------------------- ------------------ ------------------
License and subscription revenues $ - $ 26,000 $ - $ 26,000
Services revenues 4,123,000 1,745,000 - 5,868,000
----------- ------------- ------------- ------------
Net revenues from external customers 4,123,000 1,771,000 - 5,894,000
Income (loss) from operations 150,000 (1,383,000) - (1,233,000)
Identifiable assets 8,680,000 5,274,000 26,259,000 40,213,000
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-K dated December 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
throughout this Form 10-Q and the Company's other reports filed with the
Securities and Exchange Commission.
Overview
eResearchTechnology, Inc. (the "Company") is a provider of technology and
services to the pharmaceutical, biotechnology and medical device industries on a
global basis. The Company is a market leader in providing centralized
core-diagnostic electrocardiographic (ECG) services (Diagnostic services) to
evaluate cardiac safety in clinical development. The Company is also a leader in
providing technology and services to streamline the clinical trials process by
enabling its customers to automate the collection, analysis, and distribution of
clinical data in all phases of clinical development.
The Company was founded in 1977 to provide Diagnostic services used to evaluate
the safety of new drugs. In February 1997, the Company completed an initial
public offering of its common stock.
In October 1997, the Company acquired the assets and business of a provider of
clinical research technology and consulting services to the pharmaceutical,
biotechnology and medical device industry.
The Company's solutions improve the accuracy, timeliness and efficiency of trial
set-up, data collection, interpretation and new drug or medical device
application submission. The Company's products and services are provided, both
in the United States and internationally, through two business segments:
Diagnostics Technology and Services, which include centralized Diagnostic
services; and Clinical Research Technology and Services, which include the
developing, marketing and support of clinical research technology and services.
The Company's Diagnostic services are utilized by clinical trial sponsors during
their conduct of clinical trials. Such services are generally similar in nature,
have similar production processes, distribution methods and general economics
and, therefore, have been aggregated in the Company's Diagnostics Technology and
Services segment. The Company's Clinical Research Technology and Services
segment includes the licensing of its proprietary software products and the
provision of maintenance services in support of its proprietary software
products and, therefore, have been aggregated in one segment. See Note 7 to the
Consolidated Financial Statements appearing herein for information pertaining to
the amounts of net revenue, operating profit and identifiable assets
attributable to each of the Company's industry segments for the three months
ended March 31, 2002 and 2001.
The Company's license and subscription revenues consist of license fees for
upfront license sales and monthly and annual subscription license sales. The
Company's service revenues consist of Diagnostic services, technology consulting
and training services and software maintenance services.
10
The Company recognizes software revenues under the residual method 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 subscription license fee
revenues over the term of the subscription. Diagnostic service revenues consist
of revenues from services that the Company provides on a fee-for-service basis
and the Company recognizes such 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.
Cost of licenses and subscriptions consists primarily of fees associated with
third-party application service providers, 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 Diagnostic
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 revenue represented 23.0%
and 30.0% of total net revenue for the three months ended March 31, 2002 and
2001, respectively.
11
Results of Operations
The following table presents certain financial data as a percentage of total net
revenues:
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Net revenues:
Licenses and subscriptions 9.0% 0.4%
Services 91.0 99.6
------ -------
Total net revenues 100.0 100.0
------ -------
Costs of revenues:
Cost of licenses and subscriptions 1.6 1.8
Cost of services 40.7 52.8
------ -------
Total costs of revenues 42.3 54.6
------ -------
Gross margin 57.7 45.4
------ -------
Operating expenses:
Selling and marketing 17.6 22.5
General and administrative 16.0 22.5
Research and development 13.9 21.2
------ -------
Total operating expenses 47.5 66.2
------ -------
Operating income (loss) 10.2 (20.8)
Interest income, net 1.9 6.1
Investment asset impairment charge - (84.4)
Gain on sale of domestic CRO operation 0.4 3.9
------ -------
Income (loss) before income taxes 12.5 (95.2)
Income tax provision (benefit) 4.0 (4.8)
Minority interest dividend - 2.0
------ -------
Net income (loss) 8.5% (92.4)%
====== =======
12
Three months ended March 31, 2002 compared to three months ended March 31, 2001
Total net revenues increased 42.4% to $8.4 million for the three months ended
March 31, 2002 compared to $5.9 million for the three months ended March 31,
2001.
License and subscription revenues increased to $ 754,000 for the three months
ended March 31, 2002 from $26,000 for the three months ended March 31, 2001. The
increase in license and subscription revenues was primarily due to an increase
in upfront license contract signings and software deliveries in the first
quarter of 2002.
Total service revenues increased 28.8% to $7.6 million for the three months
ended March 31, 2002 from $5.9 million for the three months ended March 31,
2001.
Diagnostic service revenues increased 53.7% to $6.3 million for the three months
ended March 31, 2002 compared to $4.1 million for the three months ended March
31, 2001. The increase in Diagnostic service revenues was primarily due to
increased sales volume with both new and existing clients, including a $741,000
increase in revenue from the rental of diagnostic equipment which is used by the
Company's clients to perform diagnostic procedures.
Technology consulting and training service revenues decreased 51.7% to $366,000
for the three months ended March 31, 2002 compared to $757,000 for the three
months ended March 31, 2001. The decrease in technology consulting and training
service revenues was due primarily to reduced support revenues from new software
installations and consulting activity in support of the Company's software and
client needs.
Software maintenance service revenues were $1.0 million for the three months
ended March 31, 2002 and 2001.
Total cost of revenues increased 9.4% to $3.5 million for the three months ended
March 31, 2002 compared to $3.2 million for the three months ended March 31,
2001. As a percentage of total net revenues, total cost of revenues decreased to
42.3% for the three months ended March 31, 2002 from 54.6% for the three months
ended March 31, 2001.
The cost of licenses and subscriptions increased 26.4% to $134,000 for the three
months ended March 31, 2002 from $106,000 for the three months ended March 31,
2001. The increase in the cost of licenses and subscriptions was primarily due
to an increase in ASP hosting fees associated with expanding hosting
capabilities to support additional ASP accounts.
As a percentage of license and subscription revenues, the cost of licenses and
subscriptions decreased to 17.8% for the three months ended March 31, 2002 from
407.7% for the three months ended March 31, 2001. The decrease was due primarily
to the increase in license and subscription revenues without a comparable
increase in costs, many of which are fixed in nature.
The cost of services increased 9.7% to $3.4 million for the three months ended
March 31, 2001 from $3.1 million for the three months ended March 31, 2001. As a
percentage of service revenues, the cost of services decreased to 44.7% for the
three months ended March 31, 2002 from 52.5% for the three months ended March
31, 2001.
The cost of Diagnostic services increased 28.6% to $2.7 million for the three
months ended March 31, 2002 compared to $2.1 million for the three months ended
March 31, 2001. The increase in the cost of Diagnostic services was primarily
due to an increase in rental and depreciation costs associated with the
diagnostic rental equipment, and increased labor, facilities and other costs
associated with expanding capabilities to meet the growth in Diagnostic service
revenues.
As a percentage of Diagnostic service revenues, the cost of Diagnostic services
decreased to 42.9% for the three months ended March 31, 2002 from 51.2% for the
three months ended March 31, 2001. The decrease 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 decreased 40.8% to
$377,000 for the three months ended March 31, 2002, from $637,000 for the three
months ended March 31, 2001. The decrease in the cost of technology consulting
and training services was due primarily to a reduction in consulting and labor
costs.
The cost of technology consulting and training services as a percentage of
technology consulting and training service revenues increased to 103.0% for the
three months ended March 31, 2002 from 84.1% for the three months ended March
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31, 2001. The increase was due primarily to the decrease in technology
consulting and training service revenues with a limited decrease in costs, many
of which are fixed in nature.
The cost of software maintenance services decreased 10.2%, to $326,000, or 32.6%
of software maintenance service revenues, for the three months ended March 31,
2002, from $363,000, or 36.3% of software maintenance service revenues, for the
three months ended March 31, 2001. The decrease in both the cost of software
maintenance services and the cost of software maintenance services as a
percentage of software maintenance service revenues was due primarily to a
reduction in depreciation, travel and other costs during the first quarter of
2002.
Selling and marketing expenses increased 15.4% to $1.5 million for the three
months ended March 31, 2002 compared to $1.3 million for the three months ended
March 31, 2001. The increase was primarily due to increased commissionable
revenue and increased administrative costs due to additional personnel.
As a percentage of total net revenues, selling and marketing expenses decreased
to 17.6% for the three months ended March 31, 2002 from 22.5% for the three
months ended March 31, 2001. The decrease in selling and marketing expenses as a
percentage of total net revenues was due primarily to the increase in total net
revenues with a less than proportional increase in selling and marketing
expenses.
General and administrative expenses were $1.3 million for the three months ended
March 31, 2002 and 2001. The Company recorded higher insurance, public relations
and labor expense during the first quarter of 2002, offset by a reduction in
expenses as a result of the elimination of the amortization of goodwill. The
Company did not record $79,000 of goodwill amortization expense for the three
months ended March 31, 2002, which was recorded in the quarter ended March 31,
2001 prior to the January 1, 2002 adoption of the Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
Under SFAS 142, the Company is no longer required to amortize goodwill and other
intangible assets with indefinite lives, but such assets will be subject to
periodic testing for impairment. As a percentage of total net revenues, general
and administrative expenses decreased to 16.0% for the three months ended March
31, 2002 from 22.5% for the three months ended March 31, 2001. The decrease in
general and administrative expenses as a percentage of total net revenues was
primarily due to the increase in total net revenues without a corresponding
increase in general and administrative expenses which are largely fixed in
nature.
Research and development expenses were $1.2 million for the three months ended
March 31, 2002 and 2001. As a percentage of total net revenues, research and
development expenses decreased to 13.9% for the three months ended March 31,
2002 from 21.2% for the three months ended March 31, 2001. The decrease in
research and development expenses as a percentage of total net revenues was due
primarily to the increase in total net revenues without a corresponding increase
in research and development expenses.
Interest income, net, consisted primarily of interest income realized from the
Company's cash, cash equivalents and short-term investments. Additionally,
$47,000 of interest income was earned on the escrow accounts related to the sale
of the domestic clinical research operations to SCP Communications, Inc. and was
recorded during the three months ended March 31, 2002. Interest income decreased
56.2% to $158,000 for the three months ended March 31, 2002 compared to $361,000
for the three months ended March 31, 2001. The primary reason for the decrease
was due to a lower cash balance and lower interest rates during the first
quarter of 2002.
The Company recorded an asset impairment charge of $5.0 million in the three
months ended March 31, 2001. This charge was the result of continued negative
market conditions affecting the carrying value of the Company's investments in
Digital Angel Corporation (formerly known as Medical Advisory Systems, Inc.) and
AmericasDoctor.com, Inc.
In December 1999, the Company sold its domestic clinical research operations to
SCP Communications, Inc. In the first quarter of 2002, the Company recorded
$35,000 of additional gain on the sale compared to $232,000 recorded in the
first quarter of 2001. During the first quarter of 2002, the Company finalized
the accounting for the disposition related to certain earn-outs. The Escrow
Account has been terminated effective with the last income distribution received
by the Company during the first quarter of 2002.
In the first quarter of 2001, the Company accrued $116,000 of dividends on
preferred stock. This preferred stock was redeemed during 2001.
14
The Company's effective tax rate was 32.0% and 5.0% for the three months ended
March 31, 2002 and 2001, respectively. The increase in the Company's effective
tax rate was due primarily to the Company fully reserving for the long-term
capital loss deferred tax asset during the first quarter of 2001 associated with
the investment asset impairment charge of $5.0 million recognized during that
quarter, 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 March 31, 2002, the Company had $12.6 million of cash and cash equivalents
and $7.1 million invested in short-term investments. The Company generally
places its investments in money market funds, municipal securities, bonds of
government sponsored agencies, certificates of deposit with maturities of less
than one year, and A1P1 rated commercial bonds and paper.
For the three months ended March 31, 2002, the Company's operations provided
cash of $2.2 million compared to $1.1 million for the three months ended March
31, 2001. The change was primarily the result of improved operating income and
an increase in deferred revenues partially offset by a lower decrease in
accounts receivable during the three months ended March 31, 2002 compared to the
three months ended March 31, 2001.
During the three months ended March 31, 2002, the Company expended $1.5 million
on equipment purchases and costs related to internal use software compared to
$1.4 million during the three months ended March 31, 2001. The increase was
primarily the result of higher internal use software costs during this period
associated with the development of a new data and communications management
services software product to be used in connection with the Company's
centralized core-diagnostic electrocardiographic services. The Company
capitalizes its internal use software costs in accordance with SOP No. 98-1.
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 three months ended March 31, 2001, the Company
used $27,000 to purchase 5,000 shares of its common stock on the open market at
an average price of $5.51 per share. The Company did not purchase shares under
this program in the first quarter of 2002.
During the three months ended March 31, 2002, the Company received $310,000 in
cash from the exercise of 61,387 stock options at exercise prices per option of
between $2.27 and $10.4375. Cash was increased by an additional $120,000 in
January 2002 which related to options exercised in 2001.
During the three months ended March 31, 2002, the Company received $246,000 from
the sale of 65,975 shares of its investment in Digital Angel Corporation, at
prices per share between $3.70 and $4.63.
The Company has a line of credit arrangement with First Union National Bank
totaling $3.0 million. At March 31, 2002, 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.
15
Inflation
The Company believes the effects of inflation and changing prices 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
The Company's primary financial market risks include fluctuations in interest
rates and currency exchange rates.
Interest Rate Risk
The Company generally places its investments in money market funds, municipal
securities, bonds of government sponsored agencies, certificates of deposit with
fixed rates with maturities of less than one year, and A1P1 rated commercial
bonds and paper. The Company actively manages its portfolio of cash equivalents
and marketable securities but in order to ensure liquidity will only invest in
instruments with high credit quality where a secondary market exists. The
Company has not and does not hold any derivatives related to its interest rate
exposure. Due to the average maturity and conservative nature of the Company's
investment portfolio, a sudden change in interest rates would not have a
material effect on the value of the portfolio. Management estimates that had the
average yield of the Company's investments decreased by 100 basis points, the
Company's interest income for the three months ended March 31, 2002 would have
decreased by less than $50,000. This estimate assumes that the decrease occurred
on the first day of 2002 and reduced the yield of each investment by 100 basis
points. The impact on the Company's future interest income of future changes in
investment yields will depend largely on the gross amount of the Company's cash,
cash equivalents and short-term investments. See "Liquidity and Capital
Resources".
Foreign Currency Risk
The Company operates on a global basis from locations in the United States and
the United Kingdom. All international net revenues are billed and expenses
incurred in either US dollars or pounds sterling. As such, the Company faces
exposure to adverse movements in the exchange rate of the pound sterling. As the
currency rate changes, translation of the income statement of the Company's UK
subsidiary from the local currency to U.S. dollars affects year-to-year
comparability of operating results. The Company does not hedge translation risks
because any cash flows from international operations are generally reinvested.
To date, the effect of foreign currency fluctuations are reflected in the
Company's operating results and have not been material.
Management estimates that a 10% change in the exchange rate of the pound
sterling would have impacted the reported operating income for international
operations by less than $50,000.
The introduction of the Euro as a common currency for members of the European
Monetary Union took place in January 1999. To date, the introduction of the Euro
has had no impact on the Company's operations in the UK, as all net revenues
have been billed in pounds sterling.
16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
None
b.) Reports on Form 8-K
On February 7, 2002, the Company filed a report on Form 8-K
relating to financial information for eResearchTechnology, Inc. for
the quarter and year ended December 31, 2001 and forward-looking
statements relating to 2002 as presented in a press release of
February 7, 2002.
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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: May 10, 2002 By: /s/ Joseph A. Esposito
-----------------------------------
Joseph A. Esposito
President and Chief Executive Officer
Date: May 10, 2002 By: /s/ Bruce Johnson
--------------------------
Bruce Johnson
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
18