<PAGE>
As filed with the Securities and Exchange Commission on November 3, 2000
Registration No. 333-33562
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
eResearchTechnology, Inc.
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<CAPTION>
Delaware 7389 23-3027275
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
30 South 17th Street
Philadelphia, Pennsylvania 19103
(215) 972-0420
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Joseph A. Esposito
President and Chief Executive Officer
eResearchTechnology, Inc.
30 South 17th Street
Philadelphia, Pennsylvania 19103
(215) 972-0420
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Thomas G. Spencer, Esquire Nils H. Okeson, Esquire
Duane, Morris & Heckscher LLP Alston & Bird LLP
4200 One Liberty Place One Atlantic Center
Philadelphia, PA 19103-7396 1201 West Peachtree Street
Atlanta, GA 30309-3424
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the Registration Statement becomes effective. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 3, 2000
PROSPECTUS
4,000,000 Shares
[LOGO]
Common Stock
This is an initial public offering of shares of common stock of
eResearchTechnology, Inc. We expect that the initial public offering price will
be between $10.00 and $12.00 per share.
We have applied for approval for trading and quotation of our common stock
on the Nasdaq National Market under the symbol "ERES."
Our business involves significant risks. These risks are described under
the caption "Risk Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price ............................................ $ $
Underwriting discounts and commissions ........................... $ $
Proceeds, before expenses, to eResearchTechnology, Inc. .......... $ $
</TABLE>
The underwriters may also purchase up to an additional 600,000 shares of
common stock at the public offering price, less the underwriting discounts and
commissions, to cover over-allotments.
----------------
SG Cowen Prudential Vector Healthcare
a unit of Prudential Securities
, 2000
<PAGE>
eRT offers its solution on an integrated basis through an eResNet or on a
modular basis
Customized Client Interface
To Improve Ease of Use
---------------------------
[Graphic of Computer Screen - Study Specific Analytical Tools
Sample Log-In Screen for our To Transform Data into Knowledge
product] ---------------------------
---------------------------
[Graphic of Computer Screen -
Sample Project Dashboard Screen
Multiple Study Tracking for our analytical processing tool]
For Management Effectiveness ---------------------------
---------------------------
[Graphic of Computer Screen - Regulatory Document Coordination
Sample Project List from our For Streamlining New Drug Applications
product] ---------------------------
---------------------------
[Graphic of Computer Screen -
Sample List of Retrievable Regulatory
Individual Study Coordination Documents from our product]
To Maximize Efficiency ---------------------------
---------------------------
[Graphic of Computer Screen -
Sample Project Information Menu
from our product]
---------------------------
<PAGE>
TABLE OF CONTENTS
Page
----------
Prospectus Summary ................................. 3
Risk Factors ....................................... 7
Forward-Looking Statements ......................... 15
Use of Proceeds .................................... 15
Dividend Policy .................................... 15
Capitalization ..................................... 16
Dilution ........................................... 17
Selected Financial Data ............................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................... 19
Page
-----
Business ........................................... 27
Management ......................................... 39
Related Party Transactions ......................... 44
Principal Stockholders ............................. 47
Description of Capital Stock ....................... 48
Shares Eligible for Future Sale .................... 50
Underwriting ....................................... 52
Legal Matters ...................................... 54
Experts ............................................ 54
Where You Can Find Additional Information .......... 54
Index to Financial Statements ...................... F-1
2
<PAGE>
PROSPECTUS SUMMARY
This prospectus summary highlights selected information contained
elsewhere in this prospectus. This summary may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the Risk Factors section
starting on page 7 and the financial statements, before making an investment
decision.
eResearchTechnology, Inc.
Our Company
We are a business-to-business provider of integrated software applications
and technology infrastructure to the pharmaceutical, biotechnology and medical
device industries. We offer Internet and other technology-based solutions
designed to streamline the clinical trials process by enabling our customers to
automate many parts of a clinical trial. We are also a leading provider of
centralized collection and interpretation of electrocardiograms, one of the
most frequently used tests in clinical trials. Our solutions improve the
accuracy, timeliness and efficiency of trial set-up, data collection,
management and interpretation and new drug or device application preparation.
As part of our integrated solutions, we offer electronic research
networks, which we call eResNets, that link important data with the key
participants in a clinical trial: sponsoring drug and medical device
manufacturers, investigating physicians, patients or subjects and any clinical
research organization that a sponsor may use to help in conducting a clinical
trial. Our eResNets integrate many of our products and provide customers with a
reusable infrastructure to conduct multiple clinical trials with minimal set-up
time and preparation. We are currently implementing our first nine eResNets,
the first and largest of which we expect eventually will connect at least 400
investigator sites in over 20 countries.
Our Market Opportunity
New drugs and medical devices generally require regulatory approval before
they can be sold to the public. In order to receive these approvals, sponsors
conduct clinical trials to assure the safety and efficacy of a product. During
1998, sponsors spent more than $15 billion on new drug development. We believe
that more than half of this amount was spent on clinical trials. The market for
clinical trials has grown significantly over the past decade and we believe
that it will continue to grow. This growth is being fueled by an increase in
new drug development, the introduction of more complex drugs and expanded
regulatory requirements for more sophisticated data regarding the effects of a
new drug or device.
The traditional clinical trial process for collecting, managing and
analyzing data is time consuming and inherently inefficient. These
inefficiencies result from the manual and paper-based processes that generate
large volumes of data, the need to coordinate the many participants in a
clinical trial and the labor-intensive organization of data into a new drug
application. On average, it costs $500 million and takes 10 to 12 years to
complete the development of a new drug. More than half of a product's patent
life can be lost in this process, which costs a sponsor in the form of lost
revenues. The combination of the increasing number of clinical trials and
increasing competitive pressures to bring drugs to market earlier are driving
sponsors to find more efficient ways to conduct clinical trials. We believe
these market dynamics will drive the adoption of our solutions.
3
<PAGE>
Our Solution
Our Internet and other technology-based solutions address the major
elements of the clinical trials process. A customer can implement our
individual solutions or an eResNet as an end-to-end solution. We believe that
our solutions provide significant benefits to our customers including:
o accelerated time to market
o lower costs
o improved research quality
o enhanced investigator participation
Our Strategy
Our objective is to become the leading provider of Internet-based clinical
trial management products and infrastructure. To achieve this objective, we are
pursuing the following strategies:
o expand our relationships with existing customers by targeting other
research groups within those companies
o expand our customer base by targeting other large pharmaceutical,
biotechnology and medical device companies that conduct numerous and
complex trials and thus can benefit most from our integrated solutions
o establish a recurring revenue model by offering our solutions, such as
eResNets, in a manner that can be used in multiple clinical trials and by
offering our products as an application service provider
o build upon our technology leadership by enhancing the capability and
functionality of our products and services
o establish strategic alliances and pursue acquisitions that accelerate the
development and assist in the marketing of our products and services
o expand our international operations to support the increasingly global
scope of clinical trials
Recent Developments
In March 2000, we sold 95,000 shares of preferred stock and agreed to
issue at the closing of this offering a warrant to purchase a number of shares
of common stock equal to 2.5% of our outstanding common stock following this
offering to an investor for an aggregate of $9.5 million. At the closing of
this offering, the preferred stock will automatically convert into a number of
shares of common stock equal to $9.5 million divided by the initial public
offering price per share net of underwriting discounts and commissions. The per
share exercise price of the warrant will be equal to 200% of the initial public
offering price per share net of underwriting discounts and commissions.
Assuming an initial public offering price of $11.00 per share, the preferred
stock will convert into 928,641 shares of common stock and the warrant will be
exercisable for 373,216 shares of common stock at an exercise price of $20.46
per share. Also in March 2000, we issued another warrant to a different third
party for business advisory services. This warrant represents the right to
purchase a number of shares of common stock equal to $1.0 million divided by
the initial public offering price per share with a per share exercise price
equal to the initial public offering price per share. Assuming an initial
public offering price of $11.00, this second warrant will be exercisable for
90,909 shares of common stock. Following the completion of this offering, both
warrants will be fully vested and exercisable for a period of two years.
We were incorporated under the laws of Delaware in December 1999 as a
wholly owned subsidiary of PRWW, Ltd. Our principal executive offices are
located at 30 South 17th Street, Philadelphia, Pennsylvania, 19103 and our
telephone number is (215) 972-0420. The information contained on our website,
www.eRT.com, is not part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered ........................... 4,000,000 shares
Common stock to be outstanding after this
offering ..................................... 14,928,641 shares
Use of proceeds ................................ For product development, sales and marketing, capital
expenditures, working capital and general corporate
purposes, which may include strategic acquisitions or the
establishment of strategic alliances. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol ......... ERES
</TABLE>
Common stock outstanding after this offering is based on the number of shares
outstanding as of October 31, 2000 and excludes:
o 373,216 shares of common stock issuable upon the exercise of a warrant
with a per share exercise price equal to $20.46, assuming an initial
public offering price of $11.00 per share
o 90,909 shares of common stock issuable upon the exercise of a warrant
with a per share exercise price equal to $11.00, assuming an initial
public offering price of $11.00 per share
o 1,595,550 shares of common stock issuable upon the exercise of options to
purchase shares of our common stock under our stock option plan with a per
share exercise price equal to $15.00.
Assumptions That Apply to This Prospectus
Unless we indicate otherwise, all information in this prospectus reflects:
o the automatic conversion of the outstanding series A convertible
preferred stock into an aggregate of 928,641 shares of common stock,
assuming an initial public offering price of $11.00 per share
o no exercise by the underwriters of their over-allotment option to
purchase up to 600,000 additional shares of common stock
5
<PAGE>
Summary Financial Information
(In thousands, except per share amounts)
We were formed in December 1999 as a wholly owned subsidiary of PRWW.
Effective January 1, 2000, PRWW contributed all of its technology and operating
businesses to us in exchange for all of our issued and outstanding common
stock. Accordingly, our historical financial statements prior to January 1,
2000 present our operations as a division of PRWW and essentially represent all
of PRWW's historical operating assets, liabilities, revenues and expenses. The
statement of operations data for the year ended December 31, 1999 is also
presented on a pro forma basis to reflect the December 31, 1999 sale of the
domestic clinical research operations, as if the sale had occurred on January
1, 1999 and the gain on the sale had been excluded. The pro forma balance sheet
data reflect the automatic conversion of the preferred stock into common stock
and the issuance of two common stock warrants. The statement of operations data
do not reflect a $1.7 million charge that will be recorded upon the closing of
this offering related to the value of the warrants and the value of the
beneficial conversion price of the preferred stock. The as adjusted balance
sheet data we present below gives effect to the sale of 4,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$11.00 per share and our application of the estimated net proceeds of this
offering after deducting underwriting discounts and commissions and estimated
offering expenses. The financial data presented below should be read in
conjunction with "Management's Discussion of Financial Condition and Results of
Operations" and our financial statements and the related notes to the financial
statements contained in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1999
---------------------------
1997 1998 Actual Pro Forma
------------ ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licenses ............................................. $ 210 $ 5,142 $ 4,381 $ 4,381
Services ............................................. 7,485 14,611 21,694 21,694
CRO operations ....................................... 6,468 12,054 16,710 721
--------- -------- -------- --------
Total net revenues .................................. 14,163 31,807 42,785 26,796
--------- -------- -------- --------
Cost of revenues:
Cost of licenses ..................................... 20 138 319 319
Cost of services ..................................... 5,250 9,131 12,578 12,578
Cost of CRO operations ............................... 6,806 10,488 12,512 1,115
--------- -------- -------- --------
Total cost of revenues .............................. 12,076 19,757 25,409 14,012
--------- -------- -------- --------
Gross margin ........................................ 2,087 12,050 17,376 12,784
--------- -------- -------- --------
Operating expenses:
Selling and marketing ................................ 2,492 3,764 5,124 2,985
General and administrative ........................... 2,873 4,966 6,565 5,422
Research and development ............................. 357 3,131 2,472 2,472
Acquired in-process research and development ......... 7,883 -- -- --
--------- -------- -------- --------
Total operating expenses ............................ 13,605 11,861 14,161 10,879
--------- -------- -------- --------
Operating income (loss) ............................... (11,518) 189 3,215 1,905
Interest income, net .................................. -- -- -- --
Gain on sale of domestic CRO business ................. -- -- 4,850 --
--------- -------- -------- --------
Income (loss) before income taxes ..................... (11,518) 189 8,065 1,905
Income tax provision (benefit) ........................ (4,530) 64 3,226 754
--------- -------- -------- --------
Net income (loss) ..................................... (6,988) 125 4,839 1,151
Preferred stock dividend .............................. -- -- -- --
--------- -------- -------- --------
Net income (loss) available to common shareholders. $ (6,988) $ 125 $ 4,839 $ 1,151
========= ======== ======== ========
Basic and diluted net income (loss) per share ......... $ (0.70) $ 0.01 $ 0.48 $ 0.12
========= ======== ======== ========
Basic and diluted net income (loss) per share
available to common shareholders ..................... $ (0.70) $ 0.01 $ 0.48 $ 0.12
========= ======== ======== ========
Shares used in computing net income (loss) per
share ................................................ 10,000 10,000 10,000 10,000
========= ======== ======== ========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Net revenues:
Licenses ............................................. $ 2,702 $3,948
Services ............................................. 16,246 17,265
CRO operations ....................................... 13,010 --
-------- ------
Total net revenues .................................. 31,958 21,213
-------- ------
Cost of revenues:
Cost of licenses ..................................... 120 491
Cost of services ..................................... 9,133 9,813
Cost of CRO operations ............................... 10,144 --
-------- ------
Total cost of revenues .............................. 19,397 10,304
-------- ------
Gross margin ........................................ 12,561 10,909
-------- ------
Operating expenses:
Selling and marketing ................................ 3,933 3,482
General and administrative ........................... 4,743 4,282
Research and development ............................. 1,801 3,650
Acquired in-process research and development ......... -- --
-------- ------
Total operating expenses ............................ 10,477 11,414
-------- ------
Operating income (loss) ............................... 2,084 (505)
Interest income, net .................................. -- 122
Gain on sale of domestic CRO business ................. -- 248
-------- ------
Income (loss) before income taxes ..................... 2,084 (135)
Income tax provision (benefit) ........................ 834 (9)
-------- ------
Net income (loss) ..................................... 1,250 (126)
Preferred stock dividend .............................. -- (335)
-------- ------
Net income (loss) available to common shareholders. $ 1,250 $ (461)
======== ======
Basic and diluted net income (loss) per share ......... $ 0.13 $(0.01)
======== ======
Basic and diluted net income (loss) per share
available to common shareholders ..................... $ 0.13 $(0.05)
======== ======
Shares used in computing net income (loss) per
share ................................................ 10,000 10,000
======== ======
</TABLE>
As of September 30, 2000
--------------------------------------
Actual Pro Forma As Adjusted
--------- ----------- ------------
(unaudited) (unaudited)
Balance Sheet Data:
Cash and cash equivalents ......... $ 5,706 $ 5,706 $45,526
Working capital ................... 6,004 6,004 45,824
Total assets ...................... 24,058 24,058 63,878
Stockholders' equity .............. 4,952 14,452 54,272
6
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our common stock.
Risks Related to Our Business
If clinical trial sponsors and clinical research organizations do not shift
from their existing paper-based methods of collecting and managing clinical
trial data to an electronic system, we may not achieve the market penetration
necessary to re-achieve profitability.
If participants conducting clinical trials are unwilling to adopt our
technology solutions and new ways of conducting business, our revenues may not
be sufficient to cover the expenses incurred in developing and marketing our
technology solutions. Our efforts to establish a standardized, electronic
process to collect, manage and analyze clinical trial data are a significant
departure from the traditional clinical research process. We estimate that the
vast majority of clinical trials today use manual, paper-based data entry,
management and analysis tools. Each clinical trial can involve a multitude of
participants, including the sponsor, a clinical research organization, regional
site managers, investigators and patients. With so many participants involved
in a clinical trial, it may be difficult to convince a sponsor or clinical
research organization to accept new methods of conducting a clinical trial. We
may not be successful in persuading these participants to change the manner in
which they have traditionally operated and to accept our products and services.
Our customers may not adopt the eResNet solution that we offer, which could
prevent us from generating recurring revenues. If we are unable to generate the
recurring revenues that securities analysts expect, our stock price will likely
fall.
A key element of our business strategy is the establishment of eResNets,
which are electronic research networks that integrate a combination of our
products and services. If we are not successful in establishing eResNets and
collecting monthly user-access fees, we will not generate the volume of
recurring revenues in the future that we are expecting and our stock price will
likely fall. We are currently implementing our first nine eResNets, but, other
than one client using an eResNet in the pilot stage of a trial, no customer is
using an eResNet currently in a trial. Therefore, the eResNet model remains
unproven and is subject to uncertain market acceptance. Our customers may not
adopt the concept of eResNets and may, instead, continue to use our products or
services on an individual or a modular basis. In addition, the concept of a
monthly user-access fee is new and our customers may not agree to pay those
types of fees.
We may suffer a reduction in revenues and may be unable to grow if customers do
not accept our planned change in pricing methods that includes the
implementation of user-access fees.
We may lose business if our customers do not accept our new
transaction-based pricing methods. Also, lack of acceptance of our new pricing
methods may impede sales of our solutions and impair our growth in new markets
and with new customers. If we fail to grow as expected, we may not meet the
expectations of securities analysts and our stock price would likely decline.
Historically, revenues from sales of our technology products and services have
come predominantly from upfront perpetual license fees together with annual
maintenance and support fees. We expect to generate an increasing percentage of
our revenues in the future through transaction-based pricing pursuant to which
we intend to charge our customers a monthly user-access fee for each site that
connects to an eResNet in each trial.
We have several large customers from whom we derive substantial revenue and
therefore the loss of even a few of our customers could significantly reduce
our revenues.
If we lose existing customers and do not replace them with new customers,
our revenues will decrease and may not be sufficient to cover our costs. We
currently derive and expect to continue to derive a significant portion of our
revenues from a limited number of customers. We currently have two reportable
businesses: clinical operations and technology operations. In 1999, three
customers each accounted for more than 10% of net revenues from our technology
operations. In addition, in 1999, two customers each accounted for more
7
<PAGE>
than 10% of net revenues from our clinical operations after excluding revenues
from clinical trial and clinical data management services, which we no longer
conduct. Customers terminate or delay trials for a variety of reasons including
the failure of the product being tested to satisfy safety or efficacy
requirements, unexpected or undesired clinical results, the customer's decision
to forgo a particular study, insufficient patient enrollment or investigator
recruitment, and production problems resulting in shortages of required
supplies.
We expect to incur losses. If we do not re-achieve or maintain profitability,
our stock price is likely to decline and we may not be able to continue to
operate.
We expect to incur losses for 2000 and into 2001, and we may not be
profitable in future periods because our business strategies may not be
successful. Failure to re-achieve or maintain profitability could reduce our
cash reserves, cause the market price of our common stock to decline and
ultimately cause us to discontinue operating our business. We have incurred
losses from time to time in the past and we expect to incur losses for 2000 and
into 2001 as we invest substantial resources in product development, sales and
customer support and in the general growth of our organization. In 2000, we
will also record a charge related to the value of two common stock warrants and
the value of the beneficial conversion price of our preferred stock. As a
result, we will need to increase our revenues in order to achieve future
profitability.
Consolidation among our customers could cause us to lose customers, decrease
the market for our products and result in a reduction of our revenues.
Our customer base could decline because of consolidation, and we may not
be able to expand sales of our products and services to new customers. In
addition, our profitability will suffer if we reduce our prices in response to
competitive pressures without achieving corresponding reductions in our
expenses. Consolidation in the pharmaceutical, biotechnology and medical device
industries and among clinical research organizations has accelerated in recent
years, and we expect this trend to continue. The new companies or organizations
that result from such consolidation may decide that our products and services
are no longer needed because of their own internal processes or the use of
alternative systems. In addition, as these industries consolidate, competition
to provide products and services to industry participants will become more
intense and the importance of establishing relationships with large industry
participants will become greater. These industry participants may try to use
their market power to negotiate price reductions for our products and services.
Our future operating results are uncertain and are likely to fluctuate. If we
fail to meet the expectations of market analysts and investors, our stock price
would likely decline.
If our operating results in any future period fluctuate significantly, we
may not meet the expectations of market analysts and investors, which would
likely cause the market price of our common stock to decline. Our operating
results have varied widely in the past and we expect that they will continue to
fluctuate in the future. In addition, our future operating results may not
follow any past trends. It is difficult to predict the timing or amount of our
revenues because:
o we generate a significant percentage of our revenues from a limited
number of customers
o our sales cycles are generally lengthy and variable
o sponsors and clinical research organizations may unexpectedly cancel,
postpone or reduce the size of clinical trials
We make decisions on operating expenses based on anticipated revenue trends and
available resources. We also incur expenses educating and providing information
to our customer base, including through consultations, without any obligation
by the customer to purchase our products and services. Because many of our
expenses are fixed and we are committed to making a significant investment in
our organization and in marketing our products and services, delays in
recognizing revenues could cause our operating results to fluctuate from period
to period.
We depend entirely on the clinical trial market and a downturn in this market
could cause our revenues to decrease.
Our business depends entirely on the clinical trials that pharmaceutical,
biotechnology and medical device companies conduct. Our revenues will decline
if there is less competition in the pharmaceutical, biotechnology
8
<PAGE>
or medical device industries, which would result in fewer products under
development and decreased pressure to accelerate a product approval. Our
revenues will also decline if the U.S. Food and Drug Administration or similar
agencies in foreign countries loosen their requirements, thereby decreasing the
complexity of conducting clinical trials. Any other developments that adversely
affect the pharmaceutical, biotechnology or medical device industries
generally, including product liability claims, new technologies or products or
general business conditions, could also decrease the volume of our business.
Our failure to expand our business or manage growth successfully could disrupt
our business operations, increase our costs and delay implementation of our
business strategies.
Difficulties in managing our future growth could disrupt our business
operations, increase our costs and delay achievement of our business goals,
making it more difficult for us to re-achieve or maintain profitability. Our
growth strategy depends on our ability to expand and improve our field sales,
marketing and services organization, our technology operations and our
corporate and administrative organizations, both in the United States and
throughout the world. In order to grow, we will need to hire additional
personnel. There are a limited number of experienced personnel with an adequate
knowledge of our industry, and competition for their services is intense. In
addition, we may not be able to project the rate or timing of increases in the
use of products and services accurately or to expand and upgrade our systems
and infrastructure to accommodate the increases. The expansion of our foreign
operations also will require us to assimilate differences in foreign business
practices, overcome language barriers and hire and retain qualified personnel
abroad.
Our failure to establish and maintain strategic alliances may delay the
development of our products and services, cause us to lose customers and
prevent us from growing our business, any of which could cause our stock price
to decline.
We may lose business and be unable to grow our business if we do not
maintain and expand our existing alliances or establish new ones, or if our
strategic partners do not perform to our expectations. We rely significantly on
companies with whom we have strategic business alliances to provide
technologies they have developed that improve the functionality of our products
and services while allowing us to focus on our core areas of expertise. In
addition, we have entered into marketing assistance agreements with certain
strategic partners, including systems integrators and clinical research
organizations, to provide co-marketing and co-branding services. We also have
relationships with providers of hardware systems, telecommunications,
web-hosting and development, systems integration and website content that
support our sales and marketing efforts by satisfying other needs of our
existing customers that our solutions do not address and by providing us access
to their customers as potential sources of new business. We do not generally
have long-term contracts with our strategic partners, so they may cease doing
business with us on relatively short notice. See "Business -- Strategic
Alliances."
We may not be successful in competing against others providing similar products
and services, which could reduce our revenues and market share.
If our products and services do not achieve widespread acceptance by our
customers, our revenues and market share will likely decline. Our competitors
include internal research departments of pharmaceutical, biotechnology and
medical device companies, clinical research organizations, site management
companies, software vendors and clinical trial data service companies. Our
targeted customers, sponsors and clinical research organizations, may decide to
choose other technology-based products and services generated internally by
them or from another source. Many of our competitors have substantially greater
financial and other resources, greater name recognition and more extensive
customer bases than we do. In addition, many competitors focus their efforts on
providing software or services for discrete aspects of the clinical trials
process and may compare favorably to us on those discrete aspects. We may be
unable to compete successfully against our competitors.
If the use of the Internet does not continue to grow or the Internet
infrastructure cannot support the growing demand, we may not grow as expected
and our stock price would likely decline.
If the infrastructure of the Internet does not keep pace with the growth
of Internet usage and if our targeted customers do not grow comfortable using
the Internet, our business will not grow as we
9
<PAGE>
anticipate, which would likely cause our stock price to decline. One important
aspect of our solution is the ability to connect clinical trial participants
over the Internet. Despite significant increases in Internet use, many
companies have been reluctant to incorporate the Internet into their businesses
for a number of reasons, including:
o inconsistent service quality resulting in part from inadequate
infrastructure of servers, routers, switches, telecommunications links and
other components
o lack of confidence in the security and privacy of data transmitted over
the Internet
o limited internal resources and technical expertise
o reluctance to dedicate resources to an alternative method of
communicating that may render substantial personnel and infrastructure
investments obsolete
System failures or capacity constraints could result in the loss of or
liability to customers, which could reduce our revenues and increase our
expenses.
If our customers experience any significant level of problems with our
technology, we may become liable to those customers, we may be unable to
persuade our customers to change from a manual, paper-based process and we may
lose customers. The success of our products and services depends on the ability
to protect against:
o software or hardware malfunctions that interrupt operation of our
applications
o power loss or telecommunications failures
o overloaded systems
o human error
o natural disasters
In addition, when we offer our software products as an application service
provider, our network infrastructure may be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. This could also lead to delays, loss of data, interruptions or
cessation of service to our customers for which we may be liable. There is no
current technology that provides absolute protection against these events. In
addition, we may find that the cost to develop or incorporate technology into
our products that provides the maximum protection against these problems
outweighs the incremental benefits of providing such enhanced protection.
Our software products are complex and may contain undetected software errors,
which could lead to an increase in our costs or a reduction in our revenues.
The occurrence of hardware and software errors, whether caused by our
solutions or another vendor's products, could:
o cause sales of our solutions to decrease and our revenues to decline
o cause us to incur significant warranty and repair costs
o divert the attention of our technical personnel away from product
development efforts
o cause significant customer relations problems
Complex software products such as those included in our technology solutions
frequently contain undetected errors when first introduced or as new versions
are released. We have, from time to time, found errors in the software products
included in our solutions, and in the future we may find additional errors. In
addition, we combine our solutions with software and hardware products from
other vendors. As a result, we may experience difficulty in identifying the
source of an error.
10
<PAGE>
Rapidly changing technology may impair our ability to develop and market our
solutions and cause us to become less competitive.
Our failure to continuously offer competitive products and services could
cause us to lose customers and prevent us from successfully marketing our
solutions to prospective customers. As a result, our revenues would likely
decline. Because our business relies on technology, it is susceptible to:
o rapid technological change
o changing customer needs
o frequent new product introductions
o evolving industry standards
As the Internet, computer and software industries continue to experience rapid
technological change, we must quickly modify our solutions to adapt to such
changes. The demands of operating in such an environment may delay or prevent
our development and introduction of new or enhanced products and services that
continually meet changing market demands and that keep pace with evolving
industry standards. We have experienced development delays in the past and may
experience similar or more significant delays in the future. In addition,
competitors may develop products superior to our solutions, which could make
our products obsolete.
We depend on certain key executives, the loss of whom could disrupt our
operations, cause us to incur additional expenses and impede our ability to
expand our operations.
The loss of the services of one or more of our key executives could
negatively affect our ability to achieve our business goals. Our future
performance will depend significantly on the continued service and performance
of:
o Joel Morganroth, M.D., our Chairman and Chief Science Officer
o Joseph A. Esposito, our President and Chief Executive Officer
o Bruce Johnson, our Senior Vice President and Chief Financial Officer
o Vincent Renz, our Senior Vice President, Technology and Consulting, and
Chief Technology Officer
o Robert S. Brown, our Senior Vice President, Diagnostics Technology and
Services
o Jeffrey S. Litwin, M.D., our Senior Vice President and Chief Medical
Officer
We also depend on our key technical, customer support, sales and other
managerial employees. We believe that it would be costly and time consuming to
find suitable replacements for these employees.
If we are unable to protect our proprietary technology or maintain our
technological advantages, we may lose our intellectual property rights and
become less competitive.
If we fail to protect our intellectual property from infringement, other
companies may use our intellectual property to offer competitive products at
lower prices. If we fail to compete effectively against these companies, we
could lose customers and experience a decline in sales of our solutions and
revenues. We currently have no patents or registered trademarks. To protect our
intellectual property rights, we rely on a combination of copyright and trade
secret laws and restrictions on disclosure. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy or otherwise obtain and use
our products and technology. Monitoring unauthorized use of our solutions is
difficult and the steps we have taken may not prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
Third parties may claim that we infringe upon their intellectual property
rights, which could result in the loss of our rights, subject us to liability
and divert management attention.
Although we are not currently involved in any intellectual property
litigation, we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement by us
11
<PAGE>
of the intellectual property of others. These claims and any resulting
litigation could subject us to significant liability or invalidate our
ownership rights in the technology used in our solutions. As a result, we may
have to stop selling our solutions. Litigation, regardless of the merits of the
claim or outcome, could consume a great deal of our time and money and would
divert management time and attention away from our core business.
Any potential intellectual property litigation also could force us to do
one or more of the following:
o stop using the challenged intellectual property or selling our products
or services that incorporate it
o obtain a license to use the challenged intellectual property or to sell
products or services that incorporate it, which could be costly or
unavailable
o redesign those products or services that are based on or incorporate the
challenged intellectual property, which could be costly and time consuming
or could adversely affect the functionality and market acceptance of our
products
If we must take any of the foregoing actions, we may be unable to sell our
solutions, which would substantially reduce our revenues.
Extensive governmental regulation of the clinical trial process could require
costly modifications to our products or could adversely affect prospective
customers' willingness to use our products and services.
We may incur increased expenses or suffer a reduction in revenues if our
products and services do not comply with applicable government regulations. The
U.S. Food and Drug Administration has published guidelines addressing a broad
range of matters relating to the use of computerized systems to collect, manage
and analyze data from clinical trials. Moreover, electronic data entry,
management and analysis of medical information pertaining to subjects in
clinical trials is a recent concept that will be subject to state and federal
government regulations that are not yet finalized. Conforming our products and
services to these guidelines or to future changes in regulation could
substantially increase our expenses. In the United States and in foreign
countries, regulatory authorities have also established other standards for
conducting clinical trials leading to the approval of new products with which
we must comply. We are subject to these regulations because our products and
services assist sponsors and clinical research organizations in conducting
trials and preparing new drug or device applications. If a regulatory authority
concludes that trials were not conducted in accordance with established
requirements, it may take a variety of enforcement actions depending upon the
nature of the violation and the applicable country. In the United States, these
measures may range from issuing a warning letter or seeking injunctive relief
or civil penalties to recommending criminal prosecution, which could result in
a prohibition upon our continued participation in future clinical trials. In
addition, regulations have been proposed in the United States to establish
privacy standards for individually identifiable health information that may be
maintained or transmitted electronically. Our customers and prospective
customers will be less likely to use our products and services if the products
and services do not comply with regulatory requirements in all countries where
clinical trials are expected to take place or if we are precluded from
participating in clinical trials in countries where trials will be conducted.
See "Business -- Government Regulation."
Our international operations expose us to significant risks and the revenues
generated from these operations may not exceed the expenses of maintaining and
expanding our international presence.
A key element of our business strategy is to expand our global operations.
We face a number of risks and expenses that are inherent in operating in
foreign countries and, accordingly, our global operations may never be
profitable to us. The risks to us from our global operations include:
o Government regulations
o Trade restrictions
o Burdensome foreign taxes
o Exchange rate controls and currency exchange rate fluctuations
o Political and economic instability
o Varying technology standards
o Difficulties in staffing and managing foreign operations
12
<PAGE>
We will be subject to a variety of government regulations in the countries
where we market our products and services. We currently operate in the United
Kingdom through a foreign subsidiary and may operate in other countries through
additional foreign subsidiaries. If we form foreign subsidiaries outside of the
United Kingdom, we may need to withhold taxes on earnings or other payments
they distribute to us. Generally, we can claim a foreign tax credit against our
federal income tax expense for these taxes. However, the United States tax laws
have a number of limitations on our ability to claim that credit or to use any
foreign tax losses, which could result in higher payment by us of taxes in the
United States. We may also need to include our share of our foreign
subsidiaries' earnings in our income even if the subsidiaries do not distribute
money to us. As a result, less cash would be available to us in the United
States.
Our global operations may involve transactions in a variety of currencies.
Fluctuations in currency exchange rates could reduce our reported revenues or
increase our reported expenses. We currently do not have hedging investments.
The agreements that we sign with customers outside the United States may
be governed by the laws of the countries where we provide our products and
services. We may also need to resolve any disputes under these agreements in
the courts or other dispute resolution forums in those countries. This could be
expensive or could distract management's attention away from our core business.
We may incur liability as a result of providing electrocardiogram analysis and
interpretation services.
We provide centralized analysis and interpretation of electrocardiograms
in connection with our customers' clinical trials. It is possible that
liability may be asserted against us and the physicians who interpret the
electrocardiograms for us for failing to accurately diagnose a medical problem
indicated by the electrocardiogram or for failing to disclose a medical problem
to the investigator responsible for the subject being tested. If we are found
liable, we may be forced to pay fines and damages and to discontinue a portion
of our operations. The contractual protections included in our customer
contracts and our insurance coverage may not be sufficient to protect us
against such liability. If the protections are not adequate, we may be unable
to achieve or maintain profitability and our stock price would likely fall.
Risks Related to this Offering
PRWW will be able to control matters requiring stockholder approval and may
have interests that differ from our other investors, either of which could
cause the price of our stock to decline.
Following the closing of this offering, PRWW will beneficially own
approximately 67.0% of the outstanding shares of our common stock, or 64.4% if
the underwriters exercise their over-allotment option in full. As a result,
PRWW will be able to control all matters requiring stockholder approval
including the election of directors. PRWW may have interests that differ from
our other investors. If PRWW acts in a manner inconsistent with the interests
of other investors, our stock price may decline. In addition, this
concentration of ownership may delay, deter or prevent acts that would result
in a change of control, which in turn could also reduce the market price of our
common stock.
We will have broad discretion as to use of proceeds from this offering, and if
we do not use the proceeds in a manner that improves our operating results or
market value, our stock price may decline.
Our failure to use the net proceeds from this offering effectively could
impair the value of your investment in our common stock. We have broad
discretion as to the use of proceeds from this offering. As of the date of this
prospectus, we have only designated $13.0 million of the proceeds from this
offering for specific purposes. Accordingly, you will have to rely on our
management to apply a significant portion of these proceeds in an effective
manner. Moreover, our intended use of proceeds may change as a result of many
factors, including a change in our business strategy.
13
<PAGE>
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of common stock in the public
market following this offering or the perception that sales may occur could
reduce the market price of our common stock. All the shares sold in this
offering will be freely tradable. The remaining shares of common stock
outstanding after this offering will be available for sale in the public
market, subject to compliance with Rule 144 and to lock-up arrangements, as
follows:
Date of Availability for Sale Number of Shares
------------------------------- -----------------
January 1, 2001 10,000,000
March 24, 2001 928,641
We have granted options to purchase 1,595,550 shares of our common stock
under an equity compensation plan and reserved an additional 404,450 shares for
future grants. We intend to register all shares of common stock issuable or
reserved for issuance under the plan within 180 days after the consummation of
this offering, which would make these shares eligible for public sale. See
"Underwriting."
New investors in our common stock will experience immediate and substantial
dilution.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing our common stock in
this offering will, therefore, incur immediate and substantial dilution of
$7.47 in the pro forma net tangible book value per share of our common stock,
based on an assumed initial public offering price of $11.00 per share. See
"Dilution."
If our stock is volatile, there could be stockholder suits, which would be
distracting and potentially costly to us.
Securities class action claims have been brought against companies whose
stock prices have been volatile. Our stock price may be volatile. This kind of
litigation could be very costly and could divert our management's attention and
resources. Any adverse determination in this type of litigation could also
subject us to significant liabilities, any or all of which could seriously harm
our business and financial condition.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks
and uncertainties. These forward-looking statements are often accompanied by
words such as believe, anticipate, plan, expect and similar expressions. These
statements include, without limitation, statements about our market opportunity
and our growth strategy. These statements may be found in the sections of this
prospectus entitled Prospectus Summary, Risk Factors, Use of Proceeds,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Business and elsewhere in this prospectus generally. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
Risk Factors and elsewhere in this prospectus.
USE OF PROCEEDS
We expect to receive approximately $39.8 million in net proceeds from the
sale of the 4,000,000 shares of common stock in this offering, at an assumed
initial public offering price of $11.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses. We expect to receive
an additional approximately $6.1 million in net proceeds if the underwriters'
over-allotment option is exercised in full.
We currently estimate that we will use approximately $5.0 million of the
net proceeds of this offering for product development, approximately $3.0
million to expand our sales and marketing capabilities, approximately $5.0
million for capital expenditures and the remainder for working capital and
general corporate purposes. Although we expect to incur losses in 2000 in part
as a result of these investments in product development, sales and customer
support and the general growth of our organization, we do not believe that we
will need to use the proceeds from this offering to fund our operations except
for the expenditures noted above. We believe that the proceeds of this
offering, together with our current cash and cash from operations, will be
sufficient to meet our foreseeable cash needs for at least the next year.
We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies or to invest in strategic partners that
we believe will complement our business. However, we have no specific plans,
agreements or commitments to do so, nor are we currently involved in any
negotiations to do so. As a result, no specific acquisition or investment is
probable at this time. We anticipate that any such acquisition or investment
will involve businesses engaged in developing, implementing or supporting
technology that automates the clinical trials process.
We have no specific plans for approximately $26.8 million, or
approximately 67.3%, of the anticipated net proceeds from this offering. We are
raising those funds to ensure that we have the necessary financial resources to
undertake our growth strategy, including potential acquisitions, prior to fully
implementing our strategy. We believe that having such resources on hand will
allow us to more effectively implement our strategy by allowing us to pursue
acquisitions, investments and other opportunities in a rapidly evolving
industry in a timely fashion.
The amounts that we actually expend for the specified purposes may be
greater than or less than our estimates and may vary significantly depending on
a number of factors, including any change to our business strategy, future
revenue growth, if any, and the amount of cash we generate from operations. If
our business strategy changes, we may use proceeds from this offering to
acquire or develop new products or engage in businesses not currently
contemplated by our present business strategy. In addition, if our future
revenue growth and available cash are less than we currently anticipate, we may
need to support our ongoing business operations with proceeds from this
offering that we otherwise would use to support growth and expansion. As a
result, we will retain broad discretion in the allocation of the net proceeds
of this offering and may spend such proceeds for any purpose, including
purposes not presently contemplated. Pending the uses described above, we will
invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2000. We present capitalization:
o on an actual basis
o on a pro forma basis to reflect the automatic conversion of the preferred
stock into common stock immediately upon the closing of this offering and
the issuance of two common stock warrants, assuming an initial public
offering price of $11.00 per share
o as adjusted to reflect the sale of 4,000,000 shares of common stock in
this offering at an assumed initial public offering price of $11.00 per
share and our application of the estimated net proceeds of approximately
$39.8 million
This table does not reflect 1,595,550 shares of common stock issuable upon
the exercise of options to purchase shares of our common stock under our stock
option plan that are outstanding as of October 31, 2000. You should read this
table in conjunction with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our historical financial
information contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------
Actual Pro Forma As Adjusted
----------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
Long-term debt and capital lease obligations ..................... $ -- $ -- $ --
Redeemable convertible preferred stock ........................... 9,500 -- --
------- -------- --------
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued and outstanding ................................... -- -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
10,000,000 shares issued and outstanding, actual;
10,928,641 shares issued and outstanding, pro forma; and
14,928,641 shares issued and outstanding, as adjusted ......... 100 109 149
Common stock warrants ........................................... -- 963 963
Additional paid-in capital ...................................... 5,462 15,668 55,448
Accumulated deficit ............................................. (610) (2,288) (2,288)
------- -------- --------
Total stockholders' equity .................................... 4,952 14,452 54,272
------- -------- --------
Total capitalization .......................................... $14,452 $ 14,452 $ 54,272
======= ======== ========
</TABLE>
16
<PAGE>
DILUTION
As of September 30, 2000, our pro forma net tangible book value, after
giving effect to the conversion of the preferred stock into common stock
immediately upon the closing of this offering assuming an initial public
offering price of $11.00 per share, was $12,845,000 or $1.18 per share of
common stock. Pro forma net tangible book value per share represents the amount
of our total pro forma tangible assets reduced by the amount of our total
liabilities, divided by the pro forma number of shares of common stock
outstanding. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of common stock
in this offering and the pro forma net tangible book value per share of our
common stock immediately afterwards. Assuming our sale of 4,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$11.00 per share, and after deducting underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book value at
September 30, 2000 would have been $52,665,000 or $3.53 per share. This
represents an immediate increase in pro forma net tangible book value of $2.35
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $7.47 per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ............................. $ 11.00
Pro forma net tangible book value per share at September 30, 2000 ......... $ 1.18
Increase per share attributable to new investors .......................... 2.35
------
Adjusted pro forma net tangible book value per share after the offering ..... 3.53
-------
Dilution per share to new investors ......................................... $ 7.47
=======
</TABLE>
The following table shows, on a pro forma basis as of September 30, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by new investors purchasing shares in this offering. We have
assumed an initial public offering price of $11.00 per share, and we have not
deducted underwriting discounts and commissions and estimated offering expenses
in our calculations.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration
------------------------ -------------------------- Price
Number Percent Amount Percent Per Share
------------ --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 10,928,641 73% $14,762,000 25% $ 1.35
New investors ................. 4,000,000 27 44,000,000 75 11.00
---------- -- ----------- --
Total ...................... 14,928,641 100% $58,762,000 100%
========== === =========== ===
</TABLE>
These tables do not assume exercise of outstanding stock options. As of
October 31, 2000, there were 1,595,550 shares issuable upon the exercise of
outstanding stock options with an exercise price of $15.00 per share. These
tables also do not assume the exercise of a warrant for 373,216 shares of
common stock with a per share exercise price equal to $20.46, assuming an
initial offering price of $11.00 per share, or a warrant for 90,909 shares of
common stock with a per share exercise price of $11.00, assuming an initial
offering price of $11.00 per share.
17
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
We were formed in December 1999 as a wholly owned subsidiary of PRWW.
Effective January 1, 2000, PRWW contributed all of its technology and operating
businesses to us in exchange for all of our issued and outstanding common
stock. Accordingly, our historical financial statements prior to January 1,
2000 present our operations as a division of PRWW and essentially represent all
of PRWW's historical operating assets, liabilities, revenues and expenses. The
statement of operations data for the year ended December 31, 1999 is also
presented on a pro forma basis to reflect the December 31, 1999 sale of the
domestic clinical research operations, as if the sale had occurred on January
1, 1999 and the gain on the sale had been excluded. The pro forma balance sheet
data reflect the automatic conversion of the preferred stock into common stock
and the issuance of two common stock warrants. The statement of operations data
do not reflect a $1.7 million charge that will be recorded upon the closing of
this offering related to the value of the warrants and the value of the
beneficial conversion price of the preferred stock. The financial data
presented below should be read in conjunction with "Management's Discussion of
Financial Condition and Results of Operations" and our financial statements and
the related notes to the financial statements contained in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
Pro Forma
1995 1996 1997 1998 1999 1999
----------- ----------- ------------ ----------- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licenses .................................. $ -- $ -- $ 210 $ 5,142 $ 4,381 $ 4,381
Services .................................. 7,721 12,035 7,485 14,611 21,694 21,694
CRO operations ............................ 4,343 3,248 6,468 12,054 16,710 721
--------- -------- --------- -------- -------- --------
Total net revenues ....................... 12,064 15,283 14,163 31,807 42,785 26,796
Cost of revenues:
Cost of licenses .......................... -- -- 20 138 319 319
Cost of services .......................... 4,881 6,440 5,250 9,131 12,578 12,578
Cost of CRO operations .................... 3,564 3,815 6,806 10,488 12,512 1,115
--------- -------- --------- -------- -------- --------
Total cost of revenues ................... 8,445 10,255 12,076 19,757 25,409 14,012
--------- -------- --------- -------- -------- --------
Gross margin ............................. 3,619 5,028 2,087 12,050 17,376 12,784
Operating expenses:
Selling & marketing ....................... 1,057 1,163 2,492 3,764 5,124 2,985
General & administrative .................. 2,010 2,365 2,873 4,966 6,565 5,422
Research and development .................. -- -- 357 3,131 2,472 2,472
Acquired in-process research and
development .............................. -- -- 7,883 -- -- --
--------- -------- --------- -------- -------- --------
Total operating expenses ................. 3,067 3,528 13,605 11,861 14,161 10,879
--------- -------- --------- -------- -------- --------
Operating income (loss) .................... 600 1,832 (11,518) 189 3,215 1,905
Interest income, net ....................... -- -- -- -- -- --
Gain on sale of domestic CRO ............... -- -- -- -- 4,850 --
--------- -------- --------- -------- -------- --------
Income (loss) before income taxes and
minority interest ......................... 552 1,500 (11,518) 189 8,065 1,905
Minority interest in limited liability
company ................................... 48 332 -- -- -- --
--------- -------- --------- -------- -------- --------
Income (loss) before income taxes .......... 600 1,832 (11,518) 189 8,065 1,905
Income tax provision (benefit) ............. 259 773 (4,530) 64 3,226 754
--------- -------- --------- -------- -------- --------
Net income (loss) .......................... 341 1,059 (6,988) 125 4,839 1,151
Preferred stock dividend ................... -- -- -- -- -- --
--------- -------- --------- -------- -------- --------
Net income (loss) available to common
shareholders .............................. $ 341 $ 1,059 $ (6,988) $ 125 $ 4,839 $ 1,151
========= ======== ========= ======== ======== ========
Basic and diluted net income (loss) per
share ..................................... $ 0.03 $ 0.11 $ (0.70) $ 0.01 $ 0.48 $ 0.12
========= ======== ========= ======== ======== ========
Basic and diluted net income (loss) per
share available to common shareholders..... $ 0.03 $ 0.11 $ (0.70) $ 0.01 $ 0.48 $ 0.12
========= ======== ========= ======== ======== ========
Shares used to compute net income (loss)
per share ................................. 10,000 10,000 10,000 10,000 10,000 10,000
========= ======== ========= ======== ======== ========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
--------------------------
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Net revenues:
Licenses .................................. $ 2,702 $3,948
Services .................................. 16,246 17,265
CRO operations ............................ 13,010 --
-------- ------
Total net revenues ....................... 31,958 21,213
Cost of revenues:
Cost of licenses .......................... 120 491
Cost of services .......................... 9,133 9,813
Cost of CRO operations .................... 10,144 --
-------- ------
Total cost of revenues ................... 19,397 10,304
-------- ------
Gross margin ............................. 12,561 10,909
Operating expenses:
Selling & marketing ....................... 3,933 3,482
General & administrative .................. 4,743 4,282
Research and development .................. 1,801 3,650
Acquired in-process research and
development .............................. -- --
-------- ------
Total operating expenses ................. 10,477 11,414
-------- ------
Operating income (loss) .................... 2,084 (505)
Interest income, net ....................... -- 122
Gain on sale of domestic CRO ............... -- 248
-------- ------
Income (loss) before income taxes and
minority interest ......................... 2,084 (135)
Minority interest in limited liability
company ................................... -- --
-------- ------
Income (loss) before income taxes .......... 2,084 (135)
Income tax provision (benefit) ............. 834 (9)
-------- ---------
Net income (loss) .......................... $ 1,250 $ (126)
Preferred stock dividend ................... -- (335)
-------- --------
Net income (loss) available to common
shareholders .............................. $ 1,250 $ (461)
======== ========
Basic and diluted net income (loss) per
share ..................................... $ 0.13 $(0.01)
======== ========
Basic and diluted net income (loss) per
share available to common shareholders..... $ 0.13 $(0.05)
======== ========
Shares used to compute net income (loss)
per share ................................. 10,000 10,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 2000
--------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 Actual Pro Forma
-------- -------- --------- --------- ----------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ -- $ -- $ -- $ -- $ -- $ 5,706 $ 5,706
Working capital (deficit) ......... 1,696 97 (102) 3,398 (2,199) 6,004 6,004
Total assets ...................... 4,367 4,250 15,011 22,553 13,325 24,058 24,058
Stockholders' equity .............. 2,625 1,018 8,704 13,322 5,262 4,952 14,452
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our financial statements and the related notes to the financial statements
appearing elsewhere in this prospectus. The following includes a number of
forward-looking statements that reflect our current views with respect to
future events and financial performance. We use 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 prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. For a description of these risks, see the section entitled "Risk
Factors."
Overview
We are a business-to-business provider of technology-based products and
services used to manage clinical trials and collect, analyze and report
clinical data. We also provide centralized collection and interpretation of
electrocardiograms. We offer our products and services to our customers in the
pharmaceutical, biotechnology and medical device industries and to clinical
research organizations serving those industries.
We were formed in December 1999 as a wholly owned subsidiary of PRWW.
Effective January 1, 2000, PRWW contributed all of its technology and operating
businesses to us in exchange for all of our issued and outstanding common
stock. Accordingly, our historical financial statements prior to January 1,
2000 present our operations as a division of PRWW and essentially represent all
of PRWW's historical operating assets, liabilities, revenues and expenses.
Through PRWW, we have been continuously committed to the effective use of
technology in clinical applications for over 20 years. This commitment included
our filing of the first computer-assisted new drug application with the Food
and Drug Administration in 1985, our introduction of a technology-enhanced
electrocardiogram service in 1988 and our acquisition of DLB Systems in October
1997. The research and development and baseline technology obtained in the DLB
Systems acquisition provided the platform for the development of our current
software applications. Over time, we have also conducted various clinical and
diagnostic operations, including operating a clinical research organization
from 1995 until December 31, 1999. See note 3 of the notes to our historical
financial statements. The sale of our domestic clinical research operations on
December 31, 1999 marked the completion of our efforts to cease providing
clinical research services and allowed us to focus exclusively on providing
technology-based solutions to the clinical trials market. Following this sale,
our operations consisted solely of the business operations described in this
prospectus which, as mentioned above, PRWW contributed to us on January 1,
2000.
Our license revenues consist of upfront software license fees. Our service
revenues consist of technology consulting and training services, software
maintenance services and usage service revenues that we generate from repeated
use of our products and services. To date, usage service revenues have
consisted primarily of fees generated from our centralized electrocardiogram
services. Prior to the December 1999 sale of the domestic clinical research
service business, we also generated revenues from managing clinical trials. We
have not accounted for the clinical research service business as a discontinued
operation because it was not a separate reportable segment. We will not
generate any future revenues from clinical research services.
Our 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 and charge for their use on
a per user, per trial, per site basis. We anticipate that an increasing portion
of our revenues will be attributable to these types of usage service revenues.
However, this business model is in an emerging state and its revenue and income
potential is unproven. Furthermore, our historical revenue sources will likely
continue to be major contributors to our overall revenues.
We expect to incur losses during 2000 and into 2001 for two primary
reasons. First, we plan to invest substantial resources in product development,
sales and customer support and the general growth of our organization. Second,
we will record a charge upon the closing of this offering related to the value
of two common stock warrants and the value of the beneficial conversion price
of our preferred stock.
19
<PAGE>
We recognize software revenues in accordance with Statement of Position
97-2, Software Revenue Recognition, as amended by Statement of Position 98-9.
Accordingly, we recognize license 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. We recognize revenues
from software maintenance contracts on a straight-line basis over the term of
the maintenance contract, which is typically twelve months. We provide
consulting and training services on a time and materials basis and recognize
revenues as we perform the services. Usage service revenues consist of revenues
from services that we provide on a fee-for-service basis. We recognize usage
service revenues as the services are performed. Clinical research services were
generally based on fixed-price contracts, with variable components. Revenues
from clinical research services were recognized as services were rendered.
Usage service and clinical research service revenues vary based on the
conduct of our customers' clinical trials. Customers terminate or delay trials
for a variety of reasons, including the failure of the product being tested to
satisfy safety or efficacy requirements, unexpected or undesired clinical
results, the customer's decision to forgo a particular study, insufficient
patient enrollment or investigator recruitment, and production problems
resulting in shortages of required supplies. Under a typical contract for usage
services, customers pay us a portion of our fee for these services upon
contract execution as an upfront deposit, which is typically nonrefundable upon
contract termination.
Cost of licenses consists primarily of the cost of producing compact disks
and related documentation and royalties paid to third parties in connection
with their contributions to our product development. Cost of services includes
the cost of technology consulting and maintenance services and the cost of
usage services. Cost of technology consulting and maintenance services consists
primarily of wages, fees paid to outside consultants and other direct operating
costs related to our consulting and customer support functions. Cost of usage
services consists primarily of direct costs related to our centralized
electrocardiogram services and includes wages, fees paid to outside
consultants, shipping expenses and other direct operating costs. Cost of
clinical research services consisted primarily of wages, fees paid to outside
consultants and other direct operating costs associated with our clinical
research operations. Selling and marketing expenses consist primarily of
salaries 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 salaries, benefits and direct costs for our finance,
administrative and executive management functions, in addition to professional
service fees. Research and development expenses consist primarily of salaries
and benefits paid to our product development staff, costs paid to outside
consultants and direct costs associated with the development of our technology
products.
Historically, we operated through two business segments: technology
operations and clinical operations. See note 10 of the notes to our historical
financial statements. We conduct our operations on a global basis, with offices
in the United States and the United Kingdom. Our international net revenues
represented 6.9% of total net revenues in 1997, 14.5% of total net revenues in
1998, 12.6% of total net revenues in 1999 and 19.8% of total net revenues for
the nine months ended September 30, 2000.
20
<PAGE>
Results of Operations
The following table presents certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Licenses ................................. 1.5% 16.2% 10.2% 8.5% 18.6%
Services ................................. 52.8 45.9 50.7 50.8 81.4
CRO operations ........................... 45.7 37.9 39.1 40.7 --
----- ----- ----- ----- -----
Total net revenues .................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of licenses ......................... 0.1 0.4 0.7 0.4 2.3
Cost of services ......................... 37.1 28.7 29.4 28.6 46.3
Cost of CRO operations ................... 48.1 33.0 29.2 31.7 --
----- ----- ----- ----- -----
Total cost of revenues ................ 85.3 62.1 59.3 60.7 48.6
----- ----- ----- ----- -----
Gross margin .......................... 14.7 37.9 40.7 39.3 51.4
Operating expenses:
Selling and marketing .................... 17.6 11.8 12.0 12.3 16.4
General and administrative ............... 20.3 15.6 15.3 14.8 20.2
Research and development ................. 2.5 9.8 5.8 5.7 17.2
Acquired in-process research and devel-
opment ................................. 55.7 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses .............. 96.1 37.2 33.1 32.8 53.8
----- ----- ----- ----- -----
Operating income (loss) ................... (81.3) 0.6 7.5 6.5 ( 2.4)
Interest income, net ...................... -- -- -- -- 0.5
Gain on sale of domestic CRO .............. -- -- 11.3 -- 1.2
----- ----- ----- ----- -----
Income (loss) before income taxes ......... (81.3) 0.6 18.9 6.5 ( 0.7)
Income tax provision (benefit) ............ (32.0) 0.2 7.5 2.6 ( 0.1)
----- ----- ----- ----- -----
Net income (loss) ......................... (49.3)% 0.4% 11.3% 3.9% ( 0.6)%
===== ===== ===== ===== =====
</TABLE>
Nine months ended September 30, 2000, compared to nine months ended September
30, 1999.
Total net revenues decreased 33.8% to $21.2 million for the nine months
ended September 30, 2000 compared to $32.0 million for the nine months ended
September 30, 1999. Total net revenues for the nine months ended September 30,
1999 included net revenues of $13.0 million from clinical research services. We
sold our domestic clinical research operations to SCP Communications, Inc. in
December 1999 and closed our international clinical research operations during
the second half of 1999.
License revenues increased 44.4% to $3.9 million for the nine months ended
September 30, 2000 from $2.7 million for the nine months ended September 30,
1999. The increase in license revenues was due primarily to revenue recognized
under master software license agreements that included our eResNet product.
Technology consulting and training service revenues increased 13.8% to $3.3
million for the nine months ended September 30, 2000 compared to $2.9 million
for the nine months ended September 30, 1999. The increase in technology
consulting and training service revenues was due primarily to additional
support revenues from new software installations and increased consulting
activity in support of our clients' needs. Software maintenance revenue
increased 7.4% to $2.9 million for the nine months ended September 30, 2000
compared to $2.7 million for the nine months ended September 30, 1999. The
increase in software maintenance was due to a larger installed base of software
licenses during the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. Usage service revenues increased 4.7% to $11.1
million for the nine months ended September 30, 2000 compared to $10.6 million
for the nine months ended September 30, 1999. During 1999, our clinical
laboratory operation was included in usage service revenues. Clinical
laboratory operations were phased out during the second half of 1999. Clinical
laboratory operations net revenues for the nine months ended September 30, 1999
were $578,000.
21
<PAGE>
Total cost of revenues decreased 46.9% to $10.3 million, or 48.6% of
revenues, for the nine months ended September 30, 2000 compared to $19.4
million, or 60.7% of revenues, for the nine months ended September 30, 1999.
Total cost of revenues for the nine months ended September 30, 1999 included
cost of revenues of $10.1 million from clinical research services. We sold our
domestic clinical research operations in December 1999 and closed our
international clinical research operations during the second half of 1999.
The cost of license revenues increased 309.2% to $491,000, or 12.6% of
license revenues, for the nine months ended September 30, 2000 from $120,000,
or 4.4% of license revenues, for the nine months ended September 30, 1999. The
increase in both the cost of licenses and the cost of licenses as a percentage
of license revenues was primarily due to third party royalties incurred in the
first nine months of 2000 based on software revenues. There were no royalties
payable to third parties in the first nine months of 1999. In addition,
documentation costs have increased due to requirements associated with new
software releases in 2000. The cost of consulting and software maintenance
revenues increased 40.7% to $3.8 million for the nine months ended September
30, 2000 compared to $2.7 million for the nine months ended September 30, 1999.
As a percentage of consulting and software maintenance revenues, the cost of
consulting and software maintenance revenues increased to 61.3% of revenues for
the nine months ended September 30, 2000 from 48.2% of revenues for the nine
months ended September 30, 1999. The increase was due primarily to additional
personnel, recruiting fees, subcontracting costs and travel and increased
facility and depreciation expenses to support the increase in maintenance and
consulting revenues and to implement our new business model. The cost of usage
services decreased 6.3% to $6.0 million for the nine months ended September 30,
2000 compared to $6.4 million for the nine months ended September 30, 1999. The
decrease in the cost of usage revenues was primarily due to the cost associated
with our clinical laboratory operations, which were included in our cost of
usage services during the first nine months in 1999 and were phased out during
the second half of 1999. For the nine months ended September 30, 1999, cost of
services for the clinical laboratory operations were $1.0 million. As a
percentage of usage service revenues, cost of usage services decreased to 54.1%
for the nine months ended September 30, 2000 from 60.4% for the nine months
ended September 30, 1999. The decrease in the cost of usage services as a
percentage of usage revenues was primarily due to the phase-out of the clinical
laboratory operations.
Selling and marketing expenses decreased 10.3% to $3.5 million for the nine
months ended September 30, 2000 compared to $3.9 million for the nine months
ended September 30, 1999. The decrease in selling and marketing expenses was due
to lower compensation costs resulting from the sale of our domestic clinical
research services in December 1999. This decrease was partially offset by
increased advertising, promotion, convention and other selling expenses as a
result of our corporate formation and branding program, in addition to increased
commission expense resulting from increased software license revenues in the
nine months ended September 30, 2000. As a percentage of revenues, selling and
marketing expenses increased to 16.4% for the nine months ended September 30,
2000 from 12.3% for the nine months ended September 30, 1999. This increase is
due to reduced revenues as a result of the sale of our domestic clinical
research operations in December 1999 and increased spending for brand awareness.
General and administrative expenses decreased 8.5% to $4.3 million for the
nine months ended September 30, 2000 from $4.7 million for the nine months
ended September 30, 1999. This decrease was primarily due to lower professional
fees and insurance expenses and lower compensation costs from reduced personnel
as a result of the sale of our domestic clinical research services in December
1999, partially offset by an increased provision for bad debts primarily
related to a specific customer receivable account. As a percentage of revenues,
general and administrative expenses increased to 20.2% from 14.8% primarily
because a significant portion of our expenses are fixed in nature and revenues
decreased in 2000 due to our sale of the domestic clinical research operations.
Research and development expenses increased 105.6% to $3.7 million, or
17.2% of revenues, for the nine months ended September 30, 2000 compared to
$1.8 million, or 5.7% of revenues, for the nine months ended September 30,
1999. We increased our investment in research related activities to implement
our new business model. This increase was due primarily to increased payroll,
subcontracting, training and facility costs.
22
<PAGE>
Interest income, net, consisted primarily of interest income, partially
offset by interest expense owed to our parent, PRWW, for cash borrowed during
the nine months ended September 30, 2000.
Our effective tax rate was 6.7% for the nine months September 30, 2000
compared to 40.0% for the nine months ended September 30, 1999. The 2000 rate
reflects certain nondeductible expenses and a relatively small amount of net
loss before tax benefit.
Year ended December 31, 1999, compared to the year ended December 31, 1998
Total net revenues increased 34.6% or $11.0 million to $42.8 million in
1999 compared to $31.8 million in 1998.
License revenues declined 13.7% to $4.4 million in 1999 from $5.1 million
in 1998. During 1999, we sold fewer software licenses as we focused our
marketing efforts on larger, enterprise-wide software sales, which have a
longer sales cycle. Technology consulting and training service revenues
increased 6.7% to $1.6 million in 1999 compared to $1.5 million for the same
period in 1998. In addition, during 1999, we signed a two-year consulting
contract with AmericasDoctor.com to help it enhance its capabilities to
identify and recruit patients for clinical trials. We recognized $2.3 million
of consulting revenues from this contract during 1999. Software maintenance
revenue increased 12.1% to $3.7 million in 1999, compared to $3.3 million in
1998. The increase was due to a larger installed base of software licenses in
1999 compared to 1998. Usage service revenues increased 42.9% to $14.0 million
in 1999 from $9.8 million in 1998. Usage service revenues consisted primarily
of revenues from electrocardiogram services. This increase was due primarily to
increased contract signings during 1999 and the associated increase in the
number of procedures performed.
Clinical research services revenues increased 38.0% to $16.7 million in
1999 from $12.1 million in 1998. This increase was primarily due to the
increased volume of services under existing contracts and new contracts signed
in 1999.
Total cost of revenues increased 28.3% to $25.4 million in 1999, compared
to $19.8 million in 1998. As a percentage of net revenues, total cost of
revenues declined from 62.1% in 1998 to 59.3% in 1999.
The cost of license revenues increased 131.2% to $319,000 in 1999, or 7.3%
of license revenues, from $138,000 in 1998, or 2.7% of license revenues. The
increase was primarily due to a 5% royalty arrangement with a third party on
sales of two software products that first became payable during 1999. The cost
of consulting and software maintenance services increased 26.7% to $3.8 million
in 1999, or 49.3% of such revenues, from $3.0 million, or 62.5% of such
revenues in 1998. This increase was primarily due to additional personnel,
travel and other direct costs to support the increase in maintenance and
consulting revenues in addition to increased facility and depreciation
expenses. The cost of usage services increased 44.3% to $8.8 million, or 62.9%
of such revenues, in 1999 from $6.1 million, or 62.2% of such revenues, in
1998. The increase was primarily due to additional personnel, subcontracted
electrocardiogram interpretation fees and shipping costs related to the
increase in electrocardiogram services revenues.
The cost of clinical research services increased 19.0% to $12.5 million in
1999 from $10.5 million in 1998, primarily due to additional personnel and
direct costs to support clinical research revenue growth. As a percentage of
clinical research services revenue, cost of clinical research services
decreased to 74.9% in 1999 from 86.8% in 1998. The percentage decrease is due
to a significant portion of the costs being fixed in nature and revenues
increasing 38.0%.
Selling and marketing expenses increased 34.2% to $5.1 million, or 12.0%
of revenues, in 1999 from $3.8 million, or 11.8% of revenues, in 1998. The
increase was due primarily to increased compensation expense due to additional
personnel, commissions paid under new marketing assistance agreements and
increased direct selling expenses related to the overall increase in our
revenues.
General and administrative expenses increased 32.0% to $6.6 million, or
15.3% of revenues, in 1999 from $5.0 million, or 15.6% of revenues, in 1998.
The dollar increase was due primarily to increased compensation expense due to
salary increases and additional personnel, increased professional fees and a
$399,000 provision for bad debts. The bad debt provision was due to
uncollectible accounts primarily in our
23
<PAGE>
clinical operations segment. In particular, we increased our reserve for bad
debts relating to receivables of the domestic clinical research operation,
which was sold in December 1999, and receivables of the international clinical
research operation, which was closed during the last half of 1999.
Research and development expenses declined 19.4% to $2.5 million, or 5.8%
of revenues, in 1999 from $3.1 million, or 9.8% of revenues, in 1998. The
decline was due primarily to a decrease in 1999 in the use of third party
product development consultants.
Our income tax provision, calculated on a separate-company basis, was $3.2
million in 1999 compared to $64,000 in 1998. Our effective income tax rate was
40.0% in 1999 and 33.9% in 1998. The 33.9% rate in 1998 was due to the majority
of our taxable income being generated in the United Kingdom at an effective tax
rate of 31.0%.
Year ended December 31, 1998, compared to the year ended December 31, 1997
Total net revenues increased 123.9% or $17.6 million to $31.8 million in
1998 compared to $14.2 million in 1997. As a percentage of net revenues, total
cost of revenues declined from 85.0% in 1997 to 62.0% in 1998.
License revenues increased to $5.1 million in 1998 from $210,000 in 1997.
The increase was primarily attributable to the full year impact in 1998 of our
October 1997 acquisition of DLB Systems. Technology consulting and training
service revenues increased to $1.5 million for 1998 from $150,000 in 1997.
Software maintenance revenues increased to $3.3 million in 1998 from $438,000
in 1997. The increase in both consulting and training service revenues and
software maintenance revenues was primarily attributable to the full year
impact in 1998 of our October 1997 acquisition of DLB Systems. Usage service
revenues increased 42.0% to $9.8 million in 1998 compared to $6.9 million in
1997. Usage service revenues consisted primarily of electrocardiogram services.
The increase resulted primarily from increased contract signings in 1998, and
the associated increase in the number of procedures performed. In addition,
1998 usage service revenues included the recognition of a non-refundable
deposit and termination fee of $750,000 under a contract that was cancelled
before completion.
Clinical research services revenue increased 86.2% to $12.1 million in
1998 compared to $6.5 million in 1997. The increase in clinical research
services revenues was attributable to recognition of part of the 1997 backlog
and new contracts signed in 1998. The increase in clinical research services
revenues included $619,000 of revenues generated from our United Kingdom
operation, which did not offer such services until late 1997. The increase in
clinical research revenues was partially offset by a decrease in revenues from
our Phase I clinical research unit, which we closed during the first quarter of
1998. Phase I net revenues, which were included in clinical research services
revenues, declined 91.0% to $189,000 in 1998 compared to $2.1 million in 1997.
Total cost of revenues increased 63.6% to $19.8 million in 1998 compared
to $12.1 million for 1997.
The cost of license revenues increased to $138,000, or 2.7% of such
revenues, in 1998 from $20,000, or 9.5% of such revenues, for 1997. This
increase was primarily attributable to the full year impact in 1998 of our
October 1997 acquisition of DLB Systems. The cost of consulting and software
maintenance revenues increased to $3.0 million, or 62.5% of such revenues, in
1998 from $421,000, or 72.0% of such revenues, in 1997. This increase was
primarily due to the full year impact in 1998 of our October 1997 acquisition
of DLB Systems. The cost of usage services increased 27.1% to $6.1 million, or
62.2% of such revenues, in 1998 from $4.8 million, or 69.6% of such revenues,
in 1997. The increase was due to increased direct labor and related expenses to
support the growth in revenues in 1998 and to support anticipated future
revenue growth in addition to increased depreciation expense.
The cost of clinical research services increased 54.4% to $10.5 million in
1998 compared to $6.8 million in 1997. The increase was due primarily to
increased direct labor expenses to support the increase in clinical research
services revenues and our expansion of the domestic and international clinical
research infrastructure to support anticipated future revenue growth, partially
offset by decreased costs related to our Phase I unit, which was closed during
the first quarter of 1998. As a percentage of clinical research services
revenues, cost of clinical research services decreased to 86.8% in 1998 from
104.6% in 1997. The percentage decrease is due to the majority of the costs
being fixed in nature and revenues increasing 86.2%.
24
<PAGE>
Selling and marketing expenses increased 52.0% to $3.8 million in 1998
compared to $2.5 million in 1997. The increase in sales and marketing expenses
was due primarily to increased commissions related to our increased revenues
and the full year impact in 1998 of our October 1997 acquisition of DLB
Systems. As a percentage of revenues, selling and marketing expenses decreased
to 11.8% from 17.6% in 1997 due to a significant portion of such expenses in
1998 being fixed in nature and revenues increasing 123.9%.
General and administrative expenses increased 72.4% to $5.0 million in
1998 from $2.9 million in 1997. The increase resulted primarily from building
our domestic and international infrastructure to support anticipated future
operations and from the full year impact in 1998 of our October 1997
acquisition of DLB Systems. As a percentage of revenues, general and
administrative expenses decreased to 15.6% in 1998 from 20.3% in 1997 due to a
significant portion of such expenses being fixed in nature and revenues
increasing 123.9% in 1998.
Research and development expenses increased to $3.1 million, or 9.8% of
revenues in 1998 compared to $357,000, or 2.5% of revenues, in 1997. This
increase was due primarily to the full year impact in 1998 of our October 1997
acquisition of DLB Systems. Prior to the acquisition of DLB Systems, we
incurred no research and development expenses.
We had an income tax provision of $64,000 in 1998 compared to a tax
benefit of $4.5 million in 1997. Our effective income tax rate was 33.9% in
1998 and 39.3% in 1997. The 33.9% rate in 1998 was due to the majority of our
taxable income being generated in the United Kingdom at an effective tax rate
of 31.0%.
Liquidity and Capital Resources
Historically, our principal cash needs related to funding working capital
requirements. For the nine months ended September 30, 2000, we used cash in
operations of $1.0 million, compared to cash provided by operations of $0.7
million for the nine months ended September 30, 1999. The change was a result of
reduced net income and increased working capital needs in 2000. In 1999, we
generated cash from operating activities of $8.1 million compared to cash used
by operating activities of $1.8 million in 1998. The increase in operating cash
flow was due to increased income before depreciation and amortization and
decreased working capital needs. Our working capital needs decreased primarily
because of decreases in accounts receivable and prepaid expenses and increases
in accrued expenses partially offset by a decrease in deferred revenues.
For the nine months ended September 30, 2000, we had capital expenditures
of $2.3 million, compared to $1.7 million during the nine months ended
September 30, 1999. The increase is due to a higher level of spending on
infrastructure during 2000 to accommodate future business needs, anticipated
growth and capital expenditures related to our increased headcount. In 1999, we
had capital expenditures of $2.3 million compared to $3.4 million in 1998. The
decrease reflected our higher level of spending on infrastructure in 1998 to
accommodate future business needs, anticipated growth and capital expenditures
related to our planned move to new facilities.
On March 24, 2000, we sold 95,000 shares of our convertible preferred
stock to Communicade Inc. and agreed to issue a warrant to purchase 2.5% of our
outstanding common stock for total gross proceeds of $9.5 million. The
preferred stock will automatically convert into common stock upon consummation
of this offering. On March 27, 2000, we issued a warrant to purchase our common
stock to Scirex Corporation. The warrant entitles Scirex to purchase the number
of common shares equal to $1.0 million divided by our initial public offering
price per share, at an exercise price per share equal to our initial public
offering price per share.
For the remainder of 2000, we plan to invest substantial resources in the
areas of product development and sales and marketing, in addition to possible
acquisitions or investments in strategic alliances or partnerships. The
execution of this plan may have a significant, negative impact on our
profitability and cash flows in 2000 and 2001.
We expect that existing cash and cash equivalents, cash flows from
operations, and proceeds from this offering will be sufficient to meet our
foreseeable cash needs for at least the next year. PRWW has agreed to provide
cash advances for our operations as we need them under a Services and Support
Agreement. However, there may be acquisition and other growth opportunities
that require additional external financing and we may from time to time seek to
obtain additional funds from the public or private issuances of equity or debt
securities. There can be no assurance that such financings will be available or
available on terms acceptable to us.
25
<PAGE>
Inflation
We do not believe that the effects of inflation and changing prices
generally have a material effect on our results of operations or financial
condition.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
We operate on a global basis from locations in the United States and the
United Kingdom. All international net revenues are billed in either U.S.
dollars or pounds sterling and international expenses are primarily incurred in
pounds sterling. Therefore, we face exposure to adverse movements in the
exchange rate of the pound sterling. As the currency rate changes, translation
of the income statement of our United Kingdom entity from the local currency to
U.S. dollars affects year-to-year comparability of our operating results. We do
not hedge translation risks because these risks have not been material. We
estimate that a 10% change in the exchange rate of the pound sterling would
have impacted the reported operating loss for international operations by less
than $100,000. The introduction of the Euro as a common currency for members of
the European Monetary Union took place in January 1999. To date, the Euro has
had no material impact on our operations.
Interest Rate Risk
Our future interest income will be sensitive to changes in the general
level of U.S. interest rates. However, we plan to invest our excess cash in
short-term, investment-grade, interest-bearing securities, and we have
concluded that there is no material market risk exposure relating to these
investments.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP No. 98-1). SOP
No. 98-1 requires entities to capitalize specified costs related to
internal-use software once criteria have been met. We adopted SOP No. 98-1 in
fiscal 1999. The adoption of SOP No. 98-1 did not have a material impact on our
financial position or results of operations.
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning
after June 15, 2000. We do not believe the adoption of SFAS No. 133 will have a
material effect on our financial position or results of operations.
26
<PAGE>
BUSINESS
Our Company
We provide a full range of Internet and other technology-based software
applications and technology infrastructure designed to streamline the clinical
trials process by enabling our customers to automate many parts of a clinical
trial. We are also a leader in providing centralized collection and
interpretation of electrocardiograms, which investigators increasingly use to
measure the electrical activity of a patient's heart in clinical trials. Our
solutions enhance our customers' ability to set-up clinical trials, collect,
manage and interpret data and prepare new drug or device applications.
Our Market Opportunity
For sponsors in the pharmaceutical, biotechnology and medical device
industries to get their products to market, they must complete an extensive
clinical trial process. The current drug development process, including
clinical trials in which the sponsor uses investigators to test new products on
human patients, costs on average approximately $500 million per drug and takes
10 to 12 years to complete. This time-consuming process significantly reduces
the period during which a sponsor can enjoy the competitive advantages of
patent protection for their products. Sponsors also face competitive pressure
to reduce high product development costs. We believe our opportunity is being
driven by the following factors:
A Large and Growing Clinical Trials Market
The global pharmaceutical, biotechnology and medical device industries
spent more than $15 billion in 1998 on the development of new drugs and
devices. We believe that more than half of this spending involved clinical
trials. We believe the clinical trials market will continue to grow for the
following reasons:
o the number of products for which sponsors must conduct clinical trials is
increasing, primarily because of the growth of the biotechnology industry
o sponsors are developing drugs for more complex diseases and these drugs
require a greater number of more complicated clinical trials
o sponsors are increasingly conducting clinical trials on a global basis as
worldwide revenues become more important to offset high development costs
o expanded and more detailed regulatory requirements to produce more
sophisticated data regarding the safety and efficacy of new drugs and
medical devices are increasing the number and scope of clinical trials
The Traditional Clinical Trial is Inefficient
The successful development of new drugs, including clinical testing,
regulatory review and research setbacks, is a costly and time-consuming
process. The current clinical trial model suffers from the following
inefficiencies that affect the timeliness and accuracy of the process:
o the near-exclusive reliance upon investigators to recruit patients for
participation can significantly prolong the patient enrollment process
o under existing manual and paper-based systems, investigators record data
that monitors then periodically review to generate inquiries regarding
errors or incomplete data entries for the investigators to resolve
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<PAGE>
o the entry of trial data into many isolated, non-standardized databases
makes it difficult for a sponsor or clinical research organization to
promptly and accurately identify reliable trends or adverse events that
could affect the sponsor's decision to proceed with, change or cancel a
clinical trial
o the manual collection and organization of data from separate databases
for purposes of preparing and submitting new drug or device applications
is a labor-intensive and prolonged process
Clinical Trials Feature Multiple Participants Performing Varied Tasks
A clinical trial generally requires that a sponsor or clinical research
organization manage and coordinate the interaction of many parties. In a
typical clinical research trial, a sponsor, one or more clinical research
organizations, a multitude of investigators and a large number of patients
undertake a research process that generates a large volume of data. The trial
participants must interact with each other so that the sponsor can collect,
manage and, ultimately, organize this data into a new drug or device
application. The sponsor or clinical research organization must monitor sites
that may be located throughout the world. At each of these sites, investigators
usually collect data from a few to hundreds of patients and then edit and
report the data to the sponsor or clinical research organization for entry into
a database.
Our Solution
We provide solutions that are designed to accelerate the clinical trials
process. Our automated solutions allow our customers to migrate to electronic
forms of data collection, management and analysis. We also offer centralized
electrocardiogram analysis, which is an important part of most clinical trials.
We believe our products and services are most effective when customers
integrate them in the form of an eResNet that connects the multiple
participants in the clinical trial.
We believe our solutions provide the following significant benefits to
sponsors, clinical research organizations and investigators:
Accelerated Time-To-Market. Our products and services accelerate data
collection and resolution of errors and incomplete data entries, thereby
compressing the overall development timeline. Our Internet-based patient
recruitment service has the potential to accelerate the often prolonged process
of patient enrollment. Our electronic new drug application submission process
allows a sponsor or clinical research organization to access a centralized
database electronically, which reduces the time needed to prepare and submit
such applications. Because sponsors are focusing their research efforts on
drugs or devices with large market potential, virtually any shortening of the
clinical trial process provides a significant benefit to sponsors by allowing
them to bring products to market sooner.
Lower Costs. Our products and services increase the productivity of the
clinical research process by enabling:
o the rapid set-up of new trials
o the creation of customized reports and data analysis tools
o customers to capture and perform interim analysis of data needed for new
drug application submissions during the course of a clinical trial rather
than aggregating the data at the end of the trial
o customers to establish standardized data entry and management processes
that they can reuse in future trials with considerable time savings with
appropriate modifications for the particular trial or sponsor
o customers to make an earlier decision to modify or terminate a trial if
warranted, potentially providing considerable research and development
savings
Improved Research Quality. Our solution allows users to access and analyze
frequently updated clinical trial data that is captured quickly and accurately.
This enables sponsors and clinical research organizations to make adjustments
during the course of a clinical trial or cancel a clinical trial in response to
safety and efficacy information, thereby increasing the quality of research.
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<PAGE>
Enhancing Investigator Participation in the Clinical Trial
Process. Sponsors and clinical research organizations must recruit numerous
investigators to participate in clinical trials. The sponsors and clinical
research organizations depend almost exclusively on investigators to recruit
patients for the trials and generally compensate investigators based on the
number of patients the investigator tests. We strengthen this investigator
relationship by:
o improving the quality of and access to research data as the trial is
being conducted, which provides investigators greater assurance that they
are satisfying their responsibilities to patients they recruit, as well as
to the sponsors
o allowing investigators, where appropriate, to compare their data with
data that other investigators generate and providing investigators with
access to other information about various treatment and research methods
o increasing the pool of potential trial participants through our Internet
patient recruitment service
Our Strategy
Our objective is to become the leading provider of Internet-based
solutions for sponsors and clinical research organizations that are evolving
from manual to automated methods of conducting clinical trials. To achieve this
objective, we intend to maintain our commitment to superior customer service
and pursue the following strategies:
Expand our relationships with current customers. Generally, large
pharmaceutical companies have a number of divisions organized by areas of
medical specialty, each of which is responsible for its own clinical trial
process. Although we provide our products and services to the vast majority of
the world's largest pharmaceutical companies, we are not providing our products
and services to all of the divisions within any one company. We intend to use
the goodwill we have established with the divisions for which we do provide
products and services to increase the volume of business we do with them and to
market our products and services to other divisions within those companies.
Target new customers and markets. We intend to continue targeting other
large and mid-sized pharmaceutical, biotechnology and medical device companies
and clinical research organizations. We believe these customers are the types
of organizations most likely to have the resources and commercial and clinical
needs to build eResNets that connect the customer to a large number of
investigator sites and that can be reused for multiple trials. We also are
developing an application service provider capability that will allow us to
target smaller biotechnology, pharmaceutical and medical device companies by
providing access to our electronic clinical research solutions without
significant investments in hardware, software and personnel.
Establish a recurring revenue model by deploying eResNets, providing our
solutions as an application service provider and offering modular solutions for
use in multiple clinical trials. We believe that once we have developed
eResNets for our customers, they will continue to use our products and services
for future clinical trials rather than developing separate networks offered by
our competitors. Customers can use our products and services as discrete
modular solutions on a per user basis. We are also establishing an application
services provider capability that will allow our customers to use our products
and services on a subscription fee basis. We believe that establishing such
long-term relationships will allow us to:
o generate recurring per trial, per site user-access fees based on the
frequency of use of our of products and services
o capture incremental revenues by providing additional products and
services through an eResNet or on a modular basis
o capture subscription fees for providing services as an application
service provider
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<PAGE>
Build upon our technology leadership. We intend to continue enhancing our
core technology by:
o furthering the development of the web-interfaces of our products
o image-enabling our products to permit additional forms of data entry
o further enhancing our products' management of the flow of work throughout
the clinical trial, thereby improving clinical research practices
o facilitating integration with other vendors' products
o upgrading the functionality of our products to anticipate or address
technical or clinical developments
Establish strategic alliances and pursue acquisitions to accelerate the
development and marketing of our products and services. We are fostering
strategic alliances and intend to pursue suitable acquisitions that will allow
us to focus on our core area of expertise while using technologies that others
have developed to provide added functionality to our products and services. The
alliances may involve equity investments by one or both parties in the other.
We are also establishing strategic relationships with industry leaders in the
areas of hardware systems, telecommunications, web-hosting and development,
systems integration, content, distance learning and clinical research services.
Expand our global operations. The high cost of product development has led
many sponsors to pursue clinical research only if they can anticipate
significant worldwide revenues from a particular product. To generate these
revenues sooner, sponsors are increasingly pursuing regulatory approvals in
multiple countries simultaneously. We currently have operations in the United
Kingdom and strategic alliances with clinical research organizations operating
in Canada, Sweden and Spain. We intend to increase our global presence by
expanding our field sales, marketing and services organization, our operations
capability and our strategic alliances in key international markets.
Our Products and Services
We offer a broad range of products and services that our customers can use
as an integrated enterprise solution or on a modular basis.
eResNet
We believe that customers will maximize the value of our products by
integrating them as part of an eResNet. An eResNet integrates the analytical
processing tool we call eResearchDashboard with any combination of our products
and services that includes our data capture system called eDataEntry and our
software for collecting, editing and managing clinical trial data called
eDataManagement. The value of an eResNet is that it will allow a sponsor or
clinical research organization to establish an infrastructure that connects
multiple participants in the clinical trial process and that can be used
repeatedly for future clinical trials. As an established infrastructure, an
eResNet will allow a sponsor or clinical research organization to improve the
efficiency and speed of the clinical trial by automating the process for
conducting each new clinical trial. As we establish additional eResNets, we
intend to charge monthly user-access fees that our customers will pay per
investigator site and per clinical trial. These fees will be in addition to the
amounts our customers pay for the products and services we integrate into the
eResNet.
We are currently implementing eResNets for nine pharmaceutical and
biotechnology companies and clinical research organizations:
<TABLE>
<S> <C> <C>
Breast Cancer International Isis Pharmaceuticals, Inc. Scirex Corporation
Research Group Limited Menarini Ricerche S.p.A. 3M Pharmaceuticals
Clinical Data Care AB Millennium Pharmaceuticals, Inc. Vertex Pharmaceuticals Incorporated
H. Lundbeck A/S
</TABLE>
The first and largest of these eResNets utilizes eDataEntry, eDataManagement,
the trial set up and management solution we call eStudyConduct and the adverse
event management system we call eSafetyNet. We expect that this eResNet will be
in operation in a clinical trial this year.
30
<PAGE>
Modular Product and Service Offerings
<TABLE>
<CAPTION>
Product/Services Description
------------------- --------------------------------------------------------------------
<S> <C>
eTrials A comprehensive trials management application comprised of
three modules: eStudyConduct, eDataEntry and
eDataManagement.
eStudyConduct A proprietary solution to set up clinical trials, establish
standards, track study activities, plan resources, distribute
supplies, manage the financials aspects of a trial and
electronically view clinical trial data on the Internet.
eDataEntry A data capture system permitting investigators to use
standard Internet browser tools to input data into a
centralized database in an online or offline environment.
eDataEntry accommodates traditional manual, paper-based
data entry, data entry using the Internet and other forms of
electronic data transmission. eDataEntry is also able to
capture data in the form of electronic images. This
proprietary product allows efficient access to the clinical
research patient data, permitting the sponsor or clinical
research organization to identify sites not complying with
trial protocols and clinical trial results requiring further study.
eDataManagement An Internet-enabled proprietary software tool for collecting,
editing and managing clinical trial data in any computing
environment. Customers use this tool to analyze data, resolve
incomplete or erroneous data entries and support early
completion of the database for a particular trial. This product
easily integrates with a wide variety of third-party software
applications for imaging, workflow and data analysis.
eSafetyNet An Internet-enabled proprietary adverse event management
system. This application facilitates compliance by sponsors,
clinical research organizations and investigators with
regulatory reporting requirements regarding adverse events
and with the sponsor's or clinical research organization's own
internal requirements for safety data analysis. Sponsors or
clinical research organizations can configure this application
to match their own processes and forms.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Product/Services Description
-------------------- -------------------------------------------------------------------
<S> <C>
eECG Analysis and interpretation of electrocardiograms performed
on research subjects by cardiologists in connection with our
customers' clinical trials. This application permits assessment
of the safety and/or efficacy of therapies by documenting the
occurrence of cardiac electrical change during daily living.
We are building a data management and communication
system that we plan to incorporate into eECG by the end of
the first quarter of 2001 and which we will call EXPERT.
EXPERT will enhance eECG by permitting cardiologists
linked on our network to perform telecardiology, which is the
ability to access and analyze electrocardiograms
electronically in remote locations. It will also establish rules
for standardized and automated work flow management,
allowing audit trail accounting and generating safety reports
on individual patients for sponsors and investigators.
EXPERT will permit electrocardiogram images to be scanned
for cardiologist interpretation and viewed as side-by-side
images for comparison, supplemented by the ability to
review all prior patient tracings.
eNDA A set of services and non-proprietary tools to generate new
drug applications electronically using data collected
throughout the clinical trial process. eNDA categorizes and
organizes clinical data to help complete a new drug
application.
eResearchDashboard An Internet-based analytical processing tool using
non-proprietary software. This tool allows participants in the
clinical trial to follow the progress and conduct of a study
based on frequently-updated data using the Internet. This
product allows the participant to analyze data and generate
reports in a broad variety of formats that permits early
strategic intervention in the clinical trial.
ePatient An Internet-based service that will assist in recruiting
patients to participate in clinical research trials. This Internet
service will collect self-referrals from prospective patients
that we forward to investigators based on geographic
proximity.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Product/Services Description
------------------ --------------------------------------------------------------
<S> <C>
eConsulting Consulting services that augment the implementation efforts
of customers by providing support in strategic planning,
methodology and technical implementation of our products
and services. The technical implementation support includes
system installation, project planning, system configuration,
network administration and database set-up. We also provide
education and training services both as part of the initial
installation and on an ongoing basis. Following the
implementation, we provide on-site research and technology
advisory services, support services, including online support
and a 24-hour, seven day help desk, and maintenance.
eHealthEducation Trial-specific educational tool that allows clinical research
professionals to learn about technology developments, new
products, clinical protocols and other educational matters.
This application will also provide a link to our website,
www.eRT.com, where we intend to provide industry news,
therapeutic information, technology updates and chat rooms
for professionals.
eVitalSigns A wireless non-proprietary tool that measures patients' blood
pressure, heart rate, temperature, weight and other important
metrics at home and then allows transmission of such
information to our data base. We recently began marketing
this tool.
</TABLE>
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<PAGE>
The following table shows those products and services that accounted for
more than 15% of our consolidated revenue in any of the past three years and
the nine months ended September 30, 2000, including our clinical research
operations that we sold in 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, Nine Months Ended
-------------------------------------------- -------------------
1997 1998 1999 September 30, 2000
----------- --------------- ------------ -------------------
(In thousands)
<S> <C> <C> <C> <C>
Clinical Research Operations $ 6,468 $ 12,054 $ 16,710 $ 0*
eTrials 645* 8,505 8,127 6,843
eECG 6,900 9,823 14,013 11,073
eConsulting 150* 1,425* 3,935* 3,297
</TABLE>
------------
*Does not account for more than 15% of consolidated revenue for period
presented.
Our products use common interfaces, allowing clinical trial participants
to learn how to use additional applications with minimal training. By
establishing common naming standards for data that clinical trial participants
may share across applications, departments and global locations, sponsors and
clinical research organizations can improve data integrity and accelerate
reconciliation of information. Our products and services can work with and
connect to leading third party finance, enterprise resource planning and
research software through a batch load utility that we have developed.
Our products and services have been provided, both in the United States
and internationally, through two business segments: clinical operations and
technology operations. Clinical operations primarily include our eECG service
and included our clinical research services prior to the December 31, 1999
divestiture of our domestic clinical research operations. Technology operations
include the developing, marketing and support of clinical trial and data
management software and related consulting services. Clinical trial sponsors
use our eECG service and our clinical research services during their conduct of
clinical trials. In 1999, our eECG service processed electrocardiograms on more
than 64,000 patients in 315 trials from over 5,400 sites in 50 countries. This
work was performed for 34 clients from the pharmaceutical, biotechnology and
clinical research organization industries. Such services are generally similar
in nature and have similar production processes, distribution methods and
general economics. As a result, we have aggregated them in our clinical
operations segment. Our technology operations include the licensing of our
proprietary software products and the provision of maintenance and consulting
services in support of our proprietary software products. Accordingly, we have
aggregated these operations in one segment. See Note 10 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 our reportable segments.
Strategic Alliances
We work with our strategic partners to develop and enhance many of our
products and services. We are embedding into our eDataManagement product a
proprietary technology developed by one of our strategic partners, Winthrop
Stewart Associates. This technology will collect data electronically from case
report form images and automatically route the data, using proprietary work
flow technology, to the clinical data base for management action. Medical
Advisory Systems is assisting the development of our application service
provider capability and will help us provide 24-hour, seven-day coverage for
our eSafetyNet service and make cardiologists available to support our eECG
application. HomMed developed the technology and equipment we intend to use in
the eVitalSigns product that we are offering.
We have entered into marketing assistance agreements with a number of our
domestic and foreign strategic partners, including systems integrators and
clinical research organizations, that provide collaborative resources to
supplement our own marketing efforts. These marketing assistance agreements
typically have terms of one year and automatically renew for additional
one-year terms. In addition, these agreements typically require us to make
commission payments to the other party based on the license fee or the license
and maintenance fee generated by sales for which the other party has provided
assistance. The commissions range from two to twenty percent depending on the
agreement. We have entered into marketing assistance agreements with clinical
research organizations operating in Canada, Sweden and Spain that provide these
co-branding and co-marketing services.
We also maintain relationships with providers of hardware systems,
telecommunications, web-hosting and development, systems integration and
website content. Under these arrangements, customers of one party are referred
to the other to provide products and services that the referring party does not
provide.
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<PAGE>
Our Customers
We target pharmaceutical, biotechnology and medical device companies as
well as clinical research organizations. We have provided our solutions to 18
of the 20 pharmaceutical companies that had the highest sales in 1999. We have
completed more than 120 installations of our products at 64 sites worldwide.
The following table identifies, for each of the last three years, the
customers who have accounted for more than 10% of our net revenues from
technology operations and those who accounted for more than 10% of our net
revenues from clinical operations, excluding revenues for clinical trial and
clinical data management services.
<TABLE>
<CAPTION>
Year Technology Operations Clinical Operations
------- -------------------------------------- -------------------------------------
<S> <C> <C>
1999 Breast Cancer International Research Novartis Pharmaceuticals Corporation
Group Limited
AmericasDoctor.com, Inc. Pfizer, Inc.
Scirex Corporation
1998 Hurley Consulting Associates, Ltd. Procter & Gamble Co.
Pharmaceutical Research Associates, Novartis Pharmaceuticals Corporation
Inc.
Centocor, Inc.
1997 Alberta Cancer Board Pfizer, Inc.
G.D. Searle & Company Novartis Pharmaceuticals Corporation
</TABLE>
Sales and Marketing
We market and sell products and services primarily through our
international direct sales, sales support and professional services
organization. As of September 30, 2000, our direct sales force consisted of 13
sales professionals located in Philadelphia, Pennsylvania, Bridgewater, New
Jersey and Peterborough, United Kingdom. Our 34 sales support and professional
services employees provide the pre- and post-sale support and consulting
services that are an integral part of our customer-driven business development
strategy.
We focus our marketing efforts toward educating our target market,
generating new sales opportunities and increasing awareness of our solutions.
We conduct a variety of marketing programs internationally, including business
seminars, trade shows, press relations and industry analyst programs and
advisory councils.
Our marketing organization also serves an integral role in managing
customer and industry feedback in order to help provide direction to our
product development organization. We implemented this customer-driven approach
by establishing advisory council meetings made up of numerous industry experts.
In addition to providing information to prospective customers, advisory council
meetings provide a useful forum in which to share information, test product
concepts and collect data on customer and industry needs.
Our sales cycle generally begins with our response to a request from a
sponsor or clinical research organization for a proposal to address a
customer-specific research requirement. We ask prospective customers to
complete a survey to allow us to provide a comprehensive response. We then
engage at our expense in a series of consultations, workshops, implementation
reviews, final proposals and contract negotiations prior to the time when the
prospective customer has any obligation to purchase our products or services.
During this process, we involve our sales, consulting and senior management
personnel in a collaborative approach. Our sales cycle can vary from a few
weeks to as long as nine months depending upon the scope of the products and
services being discussed and the scope of the clinical trial.
Technology
Our applications use a broad range of technologies. Our eTrials
applications use a Microsoft Windows-based PC platform through a graphical user
interface. The data are stored in an industry-standard
35
<PAGE>
Oracle database on a database server. We developed these applications using
Oracle Developer, which provides rapid access to both the database and an
extensive set of underlying tools. Our philosophy of using industry tools
allows us to focus our attention on the applications and on our customers, who
also use those tools to benefit from our data models.
The user interface of our products is Oracle SQL Forms based. Our standard
reports use Oracle Reports. We use the Oracle database server to provide data
storage and database-level stored procedures and triggers to maintain
consistent processing of data and to minimize network traffic for the execution
of standard operations. By using the application partitioning provided by
Oracle Developer, customers can have greater control over the use of server and
network resources. Our supported client platforms are Windows 95 and Windows
NT.
Customers can use all of our products on the Internet using a Citrix
connection. In addition, eStudyConduct, eDataEntry and portions of
eDataManagement are currently Internet-based, and we expect to have the rest of
our products Internet-based by March 2001. To accomplish this development we
are using Java technology, thus enabling the applications to operate under any
operating system supporting the Java platform, including Windows NT, Windows
95, Windows 98 and Solaris. To allow uniform client application behavior in
differing Internet browsers, we use the Java Plug-In, which is available free
from Sun Microsystems JavaSoft division. We intend to continue to develop our
products with both on-line connectivity and off-line processing capability.
Research and Development
We or our predecessors have been developing our products and services for
more than 20 years. Our applications have progressed from manual, paper-based
processing through client-server processing. We have developed or are
developing our software to take advantage of the power of the Internet. We
continue to advance our products by enhancing the human interface of some of
the modules.
As of September 30, 2000, we had 35 employees engaged in research and
development, together with 16 consultants. Our research and development efforts
are focused on improving and enhancing our existing products and services as
well as developing new products and services. We also are partnering with other
companies to broaden our product offerings.
We are currently working with a number of entities, including U.S.
Internetworking and Hewlett-Packard, that will house in their facilities the
equipment comprising our application service provider capability. We anticipate
that the initial two housing facilities and the installation and validation of
the computers, servers and other hardware and software that provide this
capability in those facilities will be completed during 2000.
Research and development expenses were $357,000 for 1997, $3.1 million for
1998, $2.5 million for 1999 and $3.7 million for the nine months ended
September 30, 2000.
Competition
The market for our products and services is extremely fragmented, with
hundreds of companies providing niche solutions to satisfy small parts of the
clinical research process. We believe we are the only provider of
technology-based solutions in the clinical research industry that offers
end-to-end research solutions that take advantage of the power of the Internet
while also addressing manual, paper-based processes used in clinical research.
The market for our solution is intensely competitive, continuously
evolving and subject to rapid technological change. The intensity of
competition has increased and is expected to further increase in the future.
This increased competition could result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered.
We believe that the principal competitive factors affecting our market
include:
o customer service
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<PAGE>
o a significant base of reference customers
o breadth and depth of solution, including the ability to accommodate both
manual, paper-based research methods and electronic forms of data
collection, management and analysis
o product quality and performance
o core technology and product features
o ability to implement solutions
o price
Although we believe that our solutions currently compete favorably with respect
to these factors, our market is relatively new and is evolving rapidly. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Government Regulation
Human and animal pharmaceutical products, biological products and blood
derivatives, and medical devices are subject to rigorous government regulation.
In the United States, the principal federal regulatory agency is the Food and
Drug Administration and there are some similar state agencies. Foreign
governments also regulate these products when they are tested or marketed
abroad. In the United States, the Food and Drug Administration has established
standards for conducting clinical trials leading to the approval for new
products. Under these standards, sponsors of such clinical trials are
responsible for:
o selecting qualified investigators
o providing investigators with protocols and other information
o monitoring the trial
o reporting changes in trial protocol to the Food and Drug Administration
o providing the Food and Drug Administration and the investigator reports
of serious and unexpected adverse experiences associated with the use of
a drug or device
o maintaining records concerning the study
Because our products and services assist the sponsor or clinical research
organization in conducting the trial and preparing the new drug or device
application, we must comply with these requirements. We also must comply with
similar regulatory requirements in foreign countries. These foreign regulations
vary somewhat from country to country, but generally establish requirements
similar to those of the Food and Drug Administration.
If the Food and Drug Administration concludes that studies were not
conducted in accordance with minimum agency requirements, it may take a variety
of enforcement actions, depending on the nature of the violation. These
measures may range from issuing a warning letter or seeking injunctive relief
or civil penalties to recommending criminal prosecution. If we are convicted of
criminal conduct relating to the approval of a new drug or device application,
or are found to have otherwise violated Food and Drug Administration
requirements, the Food and Drug Administration could prohibit us from being
involved in future clinical trials. Where the agency finds irregularities
during ongoing studies, it may require changes to the study or may request
termination of the study. In the case of clinical trials submitted as part of a
new drug or device application, the agency may require that additional clinical
work be performed before granting approval of the application. The agency may
require that entire studies be rerun, resulting in substantial delay in final
approval. In extreme cases, such as submission of fraudulent test data or
giving or offering bribes, the agency can refuse to approve a pending
application.
In April 1999, the Food and Drug Administration published guidelines
regarding the use of computerized systems to create, modify, maintain, archive,
retrieve or transmit clinical data intended for use in submissions to the
agency. The guidelines recommend that those who use computerized systems in
clinical trials design them so that they can satisfy applicable regulatory
requirements for recordkeeping and retention with the same degree of confidence
as exists with paper-based systems. The guidelines specifically address a broad
range of matters such as:
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<PAGE>
o confirming the authority of those with access to the data
o attributing edits to the data to the person making the edits
o providing quality control prompts to ensure the consistency of data and
to alert the person entering the data if the data is outside expected
ranges
o facilitating inspection and review of data
o ensuring the adequacy of system security, dependability and controls
We believe that we have designed our products and services to be
consistent with the agency's recommendations and to comply with applicable
regulatory requirements.
The Health Insurance Portability and Accountability Act of 1996
established certain requirements relating to privacy and security for personal
health information. The Health Care Financing Administration promulgated
proposed regulations setting forth standards for privacy of individually
identifiable health information in November 1999. The Health Care Financing
Administration promulgated proposed regulations addressing implementation
features for data security and electronic signature standards in August 1998.
The act affects almost every organization or individual that comes into contact
with patient information, including health care providers, health plans, health
care clearinghouses and entities that electronically maintain or transmit
individually identifiable health information. In addition, there are laws in
numerous states that relate to the protection of personal health information
that may or may not be consistent with the act's requirements.
The Health Care Financing Administration received a significant number of
public comments to the proposed regulations promulgated in November 1999 and
August 1998. These comments are likely to give rise to further clarifications
to the proposed regulations. We anticipate that final regulations on privacy
and security standards will be issued by the end of 2000. We expect that we
will need to be in compliance with the final regulations within two years of
their issuance. There are no final regulations promulgated under the Health
Insurance Portability and Accountability Act of 1996 with which to comply in
terms of privacy and security for individually identifiable health information
at this time. In anticipation of the issuance of the final regulations, we have
instituted significant efforts to review and document our health information
privacy and security policies and procedures, and we will continue to monitor
these regulatory developments in the future.
Employees
At September 30, 2000, we had a total of 178 employees, with 146 employees
(139 full-time, 7 part-time) at our locations in the United States and 32
full-time employees at our locations in the United Kingdom. We had 34 employees
performing services directly for our clients, 35 employees in research and
development, 18 employees in sales and marketing, 19 employees involved in
general and administrative activities and 72 employees in general operations.
We are not a party to any collective bargaining agreements covering any of
our employees, have never experienced any material labor disruption and are
unaware of any current efforts or plans to unionize our employees. We consider
our relationships with our employees to be good.
Properties
Our corporate headquarters are located at 30 South 17th Street,
Philadelphia, Pennsylvania, where we lease approximately 58,000 square feet,
all but approximately 20,000 square feet of which we sublease to a third party.
Our lease expires in August 2005. We also lease a 30,944 square foot facility
in Bridgewater, New Jersey under a lease that expires August 2010 and an 8,840
square foot facility in Peterborough, United Kingdom under a lease that expires
October 2009.
We anticipate that we will require additional space for our customer
network operations as we expand, and believe that suitable additional or
alternative space will be available in the future on commercially reasonable
terms.
Legal Proceedings
We are not involved currently in any pending legal proceedings that either
individually or taken as a whole will have a material adverse effect on our
business, financial condition and results of operations.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers and their respective ages and
positions as of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position
---------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Joel Morganroth, M.D.* ........... 55 Chairman, Chief Science Officer and a Director
Joseph A. Esposito* .............. 48 President, Chief Executive Officer and a Director
Bruce Johnson .................... 50 Senior Vice President and Chief Financial Officer
Vincent Renz ..................... 43 Senior Vice President, Technology and Consulting and Chief
Technology Officer
Robert S. Brown .................. 44 Senior Vice President, Diagnostics Technology and Services
Jeffrey S. Litwin, M.D. .......... 42 Senior Vice President and Chief Medical Officer
Sheldon M. Bonovitz* ............. 63 Director
Thomas L. Harrison ............... 53 Director
Howard D. Ross* .................. 48 Director
John M. Ryan* .................... 65 Director
</TABLE>
------------
* Also a director of PRWW. Mr. Bonovitz has advised us that he intends to
resign as a director of PRWW upon closing of this offering.
Dr. Joel Morganroth has been our Chairman and a director since our
formation and Chief Science Officer since March 2000. He is also a consultant
to us. Dr. Morganroth has served PRWW as Chairman since 1999, Chief Executive
Officer since 1993, a director since 1997 and a consultant since 1976. Dr.
Morganroth is an internationally recognized cardiologist and clinical
investigator. He has worked on the clinical development of several large,
well-known approved drugs. Dr. Morganroth served for over ten years as a
Medical Review Officer/Expert for the Food and Drug Administration and since
1995 has served in a similar capacity for the Health Protection Branch of
Canada.
Joseph A. Esposito has been our President, Chief Executive Officer and a
director since our formation. Mr. Esposito has served PRWW as President and
Chief Operating Officer since April 1998, and he served as President of the DLB
Systems division from October 1997 to April 1998. From May 1997 through October
1997, he was President of DLB Systems, Inc. Mr. Esposito was President of
Worldwide Operations for Computron Software Inc. from October 1994 to May 1997.
He has 25 years experience in technology, working closely with pharmaceutical
companies in the areas of clinical research, supply chain management and
regulatory document management.
Bruce Johnson has been our Senior Vice President and Chief Financial
Officer since February 2000. Mr. Johnson has over 25 years of previous
experience in public accounting and financial management positions. From March
1999 to November 1999, Mr. Johnson served as Chief Operating Officer and Chief
Financial Officer of HealthAxis.com. From February 1988 to March 1999, Mr.
Johnson was employed by N2K Inc., an online music entertainment company, most
recently as Senior Vice President, Chief Financial Officer and director. Mr.
Johnson is a certified public accountant.
Vincent Renz has been our Senior Vice President, Technology and Consulting
and Chief Technology Officer since our formation. Mr. Renz served PRWW as the
Senior Vice President and General Manager of the DLB Systems division from May
1998 to December 1999. Prior to joining PRWW, from January 1998 to May 1998, he
worked as a consultant in defining the Client Services infrastructure for the
DLB Systems division. Mr. Renz was Vice President, Client Services for
Computron Software Inc. from May 1988 to November 1997. Prior to that time, Mr.
Renz worked as an information technology consultant for Deloitte, Haskins and
Sells from 1984 to 1988 and Arthur Andersen from 1981 to 1984, serving a wide
range of industries in the design and implementation of large-scale information
systems.
Robert S. Brown has been our Senior Vice President, Diagnostics Technology
and Services since our formation. From December 1997 to December 1999, Mr.
Brown was Vice President, Business Development for PRWW. Mr. Brown was Senior
Director, Research and Regulatory Services for Research Data Worldwide, Inc.
from November 1993 to its acquisition by PRWW in December 1997.
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Dr. Jeffrey S. Litwin has been our Senior Vice President and Chief Medical
Officer since July 2000. Dr. Litwin was previously employed by Executive Health
Group from May 1993 to July 2000, most recently as Executive Vice President and
Chief Operating Officer. Dr. Litwin also served as a consultant for
Schlumberger, Ltd. from March 1996 to July 2000 and for the American and
National League of Professional Baseball Clubs from April 1995 to March 1999.
Sheldon M. Bonovitz has served on our Board of Directors since March 2000.
He has been a partner of the law firm of Duane, Morris & Heckscher LLP since
1969, where he currently serves as Chairman and Chief Executive Officer. Mr.
Bonovitz is also a director of PRWW, Comcast Corporation and Surgical Laser
Technologies, Inc.
Thomas L. Harrison has served on our Board of Directors since March 2000.
Mr. Harrison has served as Chairman and Chief Executive of the Diversified
Agency Services unit of Omnicom Group Inc., an advertising, marketing services,
specialty communications, interactive media and media buying service company,
since May 1998, having previously served as its President since February 1997.
Mr. Harrison has also served as Chairman of the Diversified Healthcare
Communications Group of Omnicom Group Inc. since its formation in 1994. Mr.
Harrison is also a director of Omnicom Group Inc.
Howard D. Ross has served on our Board of Directors since December 1999.
He has been a partner of LLR Equity Partners, L.P., a venture capital fund,
since its founding in 1999. Mr. Ross was a partner in Arthur Andersen LLP from
1984 to 1999, serving as the partner-in-charge of Arthur Andersen's
Philadelphia Growth Company Practice for 15 years. He is also a director of
PRWW, Crothall Services Group, Inc., InnaPhase Corporation, Iron Mountain,
Incorporated, nexi-i.com Inc., Omnient Corporation and VerticalNet, Inc. Mr.
Ross is a certified public accountant.
John M. Ryan has served on our Board of Directors since December 1999.
Since 1997, Mr. Ryan has been a principal in Devon Ventures, Inc. Mr. Ryan
founded SunGard Data Systems, Inc. in 1977 and served as its Chief Executive
Officer until 1986 and its Chairman until 1987. Mr. Ryan served as Chairman and
Acting Chief Executive Officer for DLB Systems from 1995 until its acquisition
by PRWW in 1997. Mr. Ryan is also a director of PRWW, Neoware Systems, Inc.,
Thermacore International, Inc., IGP, Inc., which conducts business as
iGrandparents.com, and FAI, Inc., which conducts business as VerticalFleet.com.
Our executive officers are elected by and serve at the discretion of our
board of directors. There are no family relationships among our directors and
officers.
Terms of Directors
Our Board of Directors is divided into three classes, with members serving
staggered three-year terms. The Board is comprised of two Class I directors
(Mr. Esposito and Mr. Harrison), whose term will expire in 2001, two Class II
directors (Dr. Morganroth and Mr. Bonovitz), whose term will expire in 2002,
and two Class III Directors (Mr. Ross and Mr. Ryan), whose terms will expire in
2003. At each annual meeting of stockholders commencing in 2001 the
stockholders will elect a class of directors for a three-year term to succeed
the directors of the same class whose terms are expiring.
Coordinating Committee
We and PRWW intend to establish a Coordinating Committee following
completion of this offering that will consist of two independent directors from
each company who do not also serve as directors of the other company. The
Coordinating Committee will be responsible for reviewing and approving all
matters between PRWW and us involving actual or potential conflicts of
interest, and its decisions will be binding on both companies. In order for the
Coordinating Committee to approve a transaction between PRWW and us, our
representatives on the Coordinating Committee will need to conclude that the
transaction is fair and equitable to us. We anticipate that Mr. Bonovitz and
Mr. Harrison will be our representatives on the Coordinating Committee. Mr.
Bonovitz currently serves as a director of PRWW but he has advised us that he
intends to resign upon the closing of this offering.
Board Committees
We have established an executive committee, a compensation committee and
an audit committee. The executive committee consists of Mr. Bonovitz, Dr.
Morganroth and Mr. Ross. The executive committee has
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<PAGE>
full authority to act on behalf of the Board of Directors for any matter
arising between meetings that may be lawfully delegated to a committee under
applicable law. The compensation committee consists of Mr. Bonovitz, Mr.
Harrison and Mr. Ryan. The compensation committee:
o reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plan
o makes recommendations to the board of directors regarding such matters
The audit committee consists of Mr. Bonovitz, Mr. Harrison and Mr. Ross.
The audit committee:
o reviews the results and scope of the audit and other services provided
by our independent auditors
o reviews and evaluates our audit and control functions
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Mr. Harrison and Mr. Ryan. None of
our directors, including Mr. Harrison and Mr. Ryan, is an executive officer of
any entity for which any of our executive officers serves as a director or a
member of the compensation committee.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
board of directors currently receives any additional cash compensation. Each
outside director received a grant of 30,000 options in June 2000, which will
vest over three years.
Executive Compensation
Because we were formed only in December 1999 and did not obtain any assets
until January 1, 2000, we did not pay any compensation to our Chief Executive
Officer or any of our other executive officers in 1999.
We have an employment agreement with Mr. Esposito to serve as our
President and Chief Executive Officer for which we pay him an annual salary of
$270,000. Either Mr. Esposito or we may terminate the agreement at any time
upon written notice given at least 30 days prior to termination, but if we
terminate the agreement without cause, we must pay Mr. Esposito a severance
package consisting of his annual salary and benefits for one year. We must pay
Mr. Esposito a lump sum severance payment equal to his annual salary plus any
pro-rated bonus and continue to provide his health, dental, disability, life
and accident insurance for twelve months if (a) he is not offered a position
with comparable responsibilities, authority, compensation or location following
a change in control or (b) within the first year after the change in control,
Mr. Esposito decides that the responsibilities, authority, location or
compensation of the position he holds following the change in control are not
acceptable. Pursuant to a plan approved by our compensation committee, Mr.
Esposito will also receive an annual bonus of $125,000 if our Board-approved
2000 budget is met.
We have an employment agreement with Mr. Johnson to serve as our Senior
Vice President and Chief Financial Officer for which we pay him an annual
salary of $150,000. Mr. Johnson will also receive a $75,000 bonus if our
Board-approved 2000 budget is met and, regardless of whether the budget is met,
we must pay Mr. Johnson a minimum bonus of $25,000 in January 2001 if we still
employ him at that time. Either Mr. Johnson or we may terminate the agreement
at any time upon written notice given at least 30 days prior to termination,
but if we terminate the agreement without cause, we must pay Mr. Johnson a
severance package consisting of six months of his annual salary and benefits.
We must pay Mr. Johnson a lump sum severance payment equal to six months of his
annual salary plus any pro-rated bonus and continue to provide his health,
dental, disability, life and accident insurance for six months if (a) he is not
offered a position with comparable responsibilities, authority, compensation or
location following a change in control or (b) within the first year after the
change in control, Mr. Johnson decides that the responsibilities, authority,
location or compensation of the position he holds following the change in
control are not acceptable. We separately provide Mr. Johnson with a $500 per
month car allowance.
We have an employment agreement with Mr. Renz to serve as our Senior Vice
President, Technology and Consulting, for which we pay him an annual salary of
$150,000. Mr. Renz also receives a $500 per month car
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<PAGE>
allowance. Either Mr. Renz or we may terminate the agreement at any time upon
written notice given at least 30 days prior to termination, but if we terminate
the agreement without cause, we must pay Mr. Renz a severance package
consisting of six months of his annual salary and benefits. We must pay Mr.
Renz a lump sum severance payment equal to six months of his annual salary plus
any pro-rated bonus and continue to provide his health, dental, disability,
life and accident insurance for six months if (a) he is not offered a position
with comparable responsibilities, authority, compensation or location following
a change in control or (b) within the first year after the change in control,
Mr. Renz decides that the responsibilities, authority, location or compensation
of the position he holds following the change in control are not acceptable.
Pursuant to a bonus plan approved by our compensation committee, Mr. Renz will
also receive an annual bonus of $100,000, based upon achieving 100% of targeted
corporate and department goals.
We have an employment agreement with Mr. Brown to serve as our Senior Vice
President, Diagnostics Technology and Services, for which we pay him an annual
salary of $150,000. Mr. Brown will also receive an annual bonus of $100,000,
based upon achieving 100% of targeted corporate and department goals. Mr. Brown
also receives a $500 per month car allowance. Either Mr. Brown or we may
terminate the agreement at any time upon written notice given at least 30 days
prior to termination, but if we terminate the agreement without cause, we must
pay Mr. Brown a severance package consisting of six months of his annual salary
and benefits. We must pay Mr. Brown a lump sum severance payment equal to six
months of his annual salary plus any pro-rated bonus and continue to provide
his health, dental, disability, life and accident insurance for six months if
(a) he is not offered a position with comparable responsibilities, authority,
compensation or location following a change in control or (b) within the first
year after the change in control, Mr. Brown decides that the responsibilities,
authority, location or compensation of the position he holds following the
change in control are not acceptable.
We have an employment agreement with Dr. Litwin to serve as our Senior
Vice President and Chief Medical Officer for which we pay him an annual salary
of $150,000. Under the agreement, the Company agreed to issue options to
purchase 50,000 shares of our common stock to Dr. Litwin. Dr. Litwin will also
receive an annual bonus of $100,000, based upon achieving 100% of targeted
corporate and department goals; $50,000 of the bonus is guaranteed for each
year. Dr. Litwin also receives a $500 per month car allowance. Either Dr.
Litwin or we may terminate the agreement at any time upon written notice given
at least 30 days prior to termination, but if we terminate the agreement
without cause, we must pay Dr. Litwin a severance package consisting of six
months of his annual salary and benefits.
Option Grants and Exercises and Long Term Incentive Plan Awards in Last Fiscal
Year
We did not grant any options during 1999 and, as a result, no options were
exercised during 1999 or outstanding at the end of the year. In June 2000, we
adopted a stock option plan under which we have granted options to a number of
our directors and employees, including the following executive officers, at an
exercise price of $15.00 per share:
Number of
Name Options
--------------------------- ----------
Joel Morganroth, M.D. 324,000
Joseph A. Esposito 324,000
Bruce Johnson 120,000
Vincent Renz 120,000
Robert S. Brown 120,000
Jeffrey S. Litwin, M.D. 25,000
We do not have any other long-term incentive plan.
Stock Option Plan
We have adopted a stock option plan that provides for grants of incentive
stock options and nonqualified stock options to our directors and those
employees and other individuals who provide services to us or otherwise have a
relationship with us or our subsidiaries as the compensation committee shall
determine to be key individuals to our success.
Shares Authorized Under the Plan; Administration; Grants
The plan authorizes the issuance of up to 2.0 million shares of common
stock. Shares that by reason of the expiration of an option or otherwise are no
longer subject to purchase pursuant to an option may be used for the grant of
options under the plan. We have granted options to purchase an aggregate of
1,595,550 shares under the plan at a per share exercise price of $15.00.
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The compensation committee administers the plan. The plan provides that
the compensation committee must consist of not less than two directors
appointed by the board of directors, each of whom must be a non-employee
director as defined by Rule 16b-3 under the Exchange Act and an outside
director as defined by Section 162(m) of the Internal Revenue Code.
The compensation committee may grant options intended as incentive stock
options under Section 422 of the Internal Revenue Code or nonqualified stock
options. Each option must be evidenced by a stock option agreement in a form
approved by the compensation committee.
The compensation committee determines the exercise price and the term of
options granted under the plan. The plan provides that the exercise price of an
incentive stock option must equal at least 100% of the fair market value of the
common stock on the date of grant, and the term of the incentive stock option
may not exceed ten years. If a person who owns more than 10% of the outstanding
common stock receives an incentive stock option, however, the exercise price
must equal at least 110% of the fair market value per share of common stock on
the grant date, and the term of the incentive stock option may not exceed five
years.
Vesting of Options; Transferability; Amendment and Termination of the Plan
The compensation committee determines the vesting terms for each option
under the optionee's stock option agreement. No optionee, however, will be able
to exercise an option until at least six months have elapsed from the grant
date, unless a change of control of us occurs. Also, the compensation committee
has the discretion to accelerate the vesting of any stock option. The plan
provides that an optionee may not transfer the option otherwise than by will or
the laws of descent and distribution.
The plan provides that our compensation committee may amend or terminate
the plan at any time. The holder of an option previously granted under the plan
must approve any amendment that alters or impairs any right or obligation under
that option. In addition, the compensation committee may elect to seek
stockholder approval for any other amendment it considers advisable, including
any approval required under applicable tax or securities laws or regulations.
Section 162(m) of the Internal Revenue Code
Under Section 162(m) of the Internal Revenue Code, we may be precluded
from claiming a federal income tax deduction for total remuneration in excess
of $1.0 million paid to the chief executive officer or to any other of our four
most highly compensated officers in any one year. Total remuneration would
include amounts received upon the exercise of stock options granted under the
plan or such other time when income is recognized. An exception does exist,
however, for performance-based compensation, including amounts received upon
the exercise of stock options pursuant to a plan approved by stockholders that
meets specified requirements. The plan was approved by stockholders on June 13,
2000 and we intend to make grants of options under the plan exempt from the
Section 162(m) calculation by meeting the requirements of performance-based
compensation.
Limitations on Liability and Indemnification of Directors and Officers
As permitted by the Delaware General Corporation Law, we have included in
our certificate of incorporation a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, other than breaches of their duty of
loyalty, actions not in good faith or which involve intentional misconduct, or
transactions from which they derive improper personal benefit. In addition, our
bylaws provide that we are required to indemnify our officers and directors
under specified circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.
Any amendment to or repeal of such provisions will not eliminate or reduce
the effect of such provisions in respect of any act or failure to act, or any
cause of action, suit or claim that would accrue or arise prior to any such
amendment. If the Delaware General Corporation Law is subsequently amended to
provide for further limitations on the personal liability of directors of
corporations for breach of duty of care or other duty as a director, then the
personal liability of our directors will be further limited to the greatest
extent permitted by the Delaware General Corporation Law.
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Our directors and officers are covered under liability insurance policies
with coverage in the amount of $10.0 million that PRWW has purchased. We intend
to purchase and maintain our own directors' and officers' liability insurance
policies.
At present, we are not aware of any pending or threatened litigation or
proceeding involving our directors, officers, employees or agents in which
indemnification would be required or permitted. We believe that our certificate
of incorporation and bylaw provisions and the liability insurance policy will
facilitate our ability to attract and retain qualified persons as directors and
officers.
RELATED PARTY TRANSACTIONS
Relationship with PRWW
PRWW is currently the owner of all of our outstanding common stock. Upon
completion of the offering, PRWW will own approximately 67.0% of our
outstanding common stock, or approximately 64.4% if the underwriters'
over-allotment option is exercised in full, and thus will continue to have the
ability to elect all of our directors and otherwise exercise a controlling
influence over our business and affairs. PRWW obtained its shares of common
stock on January 1, 2000 in exchange for the assignment to us of all of the
assets, subject to all of the liabilities, relating to PRWW's technology and
operating businesses.
For as long as PRWW continues to own shares of common stock representing
more than 50% of the voting power of our common stock, PRWW will be able, among
other things, to determine the outcome of any corporate action requiring
approval of holders of common stock representing a majority of the voting
ownership of our common stock without the consent of our other stockholders. In
addition, through its control of the Board of Directors and ownership of common
stock, PRWW will be able to control decisions that include dividend policy, our
access to capital, including borrowing from third-party lenders and issuing
additional equity securities, mergers or other business combinations in which
we are involved, our acquisition or disposition of assets and any change in our
control.
PRWW has agreed to vote the common stock in favor of nominees of our Board
of Directors for election as directors so that we have at least three directors
who are independent and who are not affiliates, officers or directors of PRWW.
PRWW has advised us that its current intent is to continue to hold all of
its outstanding shares of our common stock. Further, PRWW has agreed, for a
period of 180 days after the date of this prospectus, subject to exceptions,
that without the prior written consent of SG Cowen Securities Corporation, it
will not:
o issue, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into, exercisable or exchangeable for common stock
o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock
However, after such 180-day period, there can be no assurance concerning the
period of time during which PRWW will maintain its ownership of our common
stock.
Our relationship with PRWW is also governed by a Tax Sharing Agreement and
a Services and Support Agreement. Since we were a wholly owned subsidiary of
PRWW when these arrangements were negotiated, none of these arrangements result
from arm's length negotiations, and therefore, the prices charged to us for
services provided thereunder may be higher or lower than prices that may be
charged by third parties. The descriptions of the agreements set forth below
are only summaries and, while material terms of the agreements are described
below, you should review the full provisions of these agreements, which we have
filed with the Securities and Exchange Commission as exhibits to our
registration statement.
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Tax Sharing Agreement. We currently are included as a member of PRWW's
consolidated group for federal income tax purposes and, for certain state and
local tax purposes, we also are included as a member of a consolidated,
combined or unitary group where PRWW files a consolidated, combined or unitary
state or local return. Upon completion of the offering, if PRWW owns less than
80% of the value of our outstanding stock, we will no longer be included as a
member of PRWW's consolidated group for federal tax purposes. Effective January
1, 2000, we entered into a Tax Sharing Agreement with PRWW. Pursuant to the Tax
Sharing Agreement, we and PRWW will make payments between ourselves such that,
with respect to any period, we will determine the amount of taxes we pay or the
amount of the benefit we receive by calculating the difference between PRWW's
consolidated combined unitary group tax liability with and without our
inclusion. PRWW will continue to have all the rights of a common parent of a
consolidated group, will be the sole and exclusive agent for us in any and all
matters relating to our income tax liability in connection with consolidated or
combined federal and state returns, will have the sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined state income tax returns, and will have the power and
sole discretion to contest or compromise any asserted tax adjustment or
deficiency and to file, litigate or compromise any claim for refund on our
behalf. However, we will have the right to participate in any such audit or
proceeding concerning taxes for which we are liable. In addition, PRWW will not
contest, compromise or litigate any assessment or assertion of liability with
respect to any taxes for which we are liable without our consent. Each member
of a consolidated group for federal income tax purposes is severally liable for
the income tax liability of the group for periods in which it was a member of
the group. Though valid as between PRWW and us, the Tax Sharing Agreement is
not binding on the Internal Revenue Service and does not affect the several
liability of any subsidiaries to the Internal Revenue Service for all federal
income taxes due with respect to PRWW's consolidated federal tax returns.
In general, the Tax Sharing Agreement is effective only for tax periods in
which we are a member of the PRWW consolidated group for federal income tax
purposes. Once we are no longer a member of the PRWW consolidated group, the
effect of the Tax Sharing Agreement is generally limited to matters relating to
tax returns of the PRWW consolidated group in which we were included as a
member. The Tax Sharing Agreement, however, does allow for us, if we should so
choose, to carry back any applicable net operating loss, net capital loss or
tax credit that arises in any taxable year in which we are not a member of the
PRWW consolidated group, to a tax return filed by the PRWW consolidated group
in which we were included as a member. In that case, we would be entitled to
receive from PRWW any refund of taxes resulting from such carryback. Similar
rules apply to state and local taxes, as well.
Services and Support Agreement. Other than Joel Morganroth, PRWW does not
have any employees. Even though it transferred substantially all of its
operating assets to us in December 1999, PRWW continues to conduct business as
a separate entity from us, holding several investments in addition to its
ownership of our common stock and continuing to evaluate other investment
opportunities. PRWW also remains obligated to file periodic reports with the
Securities and Exchange Commission and to otherwise comply with its obligations
as a public company, including holding annual stockholder meetings and
communicating with those stockholders and the investment community. We are
providing to PRWW a broad range of financial and administrative services that
it requires in connection with the conduct of its business for which it pays us
a $10,000 monthly fee and reimburses us 6.5% of our chief executive officer's
salary and 25% of our chief financial officer's salary. We will also provide
office space for the Chairman and Chief Executive Officer of PRWW. PRWW has
also agreed to:
o provide any cash advances we reasonably need for our business and
operations, subject to a maximum of $10.0 million, for which we pay
interest at the prime rate
o make PRWW's Chairman and Chief Executive Officer available to us to
provide management support, consultation and advice to us regarding
strategic business planning, corporate development, acquisitions,
technology and securities laws compliance matters
o provide a broad range of insurance coverage for us under its insurance
policies
We will pay 50% of the salary paid by PRWW to its Chairman and Chief
Executive Officer, in addition to a portion of the premiums for any PRWW
insurance policies that provide coverage for us. The amount of the premium we
pay will be determined by the Coordinating Committee. PRWW has also agreed to
consider in good faith any adjustments that may be necessary to the monthly fee
if the resources we must provide under the agreement are disproportionate to
the fee.
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Relationship with our Chairman
Joel Morganroth, M.D., P.C., a professional corporation of which Joel
Morganroth, M.D., our chairman, is the sole stockholder and employee, has
agreed to provide services to us, including serving as medical director and
providing medical interpretation for diagnostic tests, pursuant to a management
consultant agreement. We have agreed to pay an annual fee of $156,000 for these
services and to reimburse the consultant for its out-of-pocket expenses. The
agreement expires December 31, 2000, but will continue from year to year
thereafter unless terminated by the consultant on 60 days' notice or by us on
180 days' notice or immediately upon the consultant's failure to perform its
duties under the agreement. The agreement contains customary provisions
regarding confidentiality and assignment of inventions or discoveries.
Communicade Investment
In March 2000, we sold 95,000 shares of preferred stock and agreed to
issue a common stock warrant to Communicade Inc. for an aggregate of $9.5
million. At the closing of this offering, the shares of preferred stock will
automatically convert into an aggregate of 928,641 shares of common stock,
assuming an initial public offering price of $11.00 per share. The warrant will
entitle Communicade to purchase 2.5% of our outstanding common stock following
this offering, or 373,216 shares of common stock, assuming an initial public
offering price of $11.00 per share, at an exercise price equal to 200% of the
initial public offering price per share less the underwriting discounts and
commissions. Following consummation of this offering, the warrant will be fully
vested and exercisable for a period of two years. See "Description of Capital
Stock--Preferred Stock" and "Description of Capital Stock--Warrants."
We also entered into an Investor Rights Agreement under which we agreed to
provide Communicade registration rights for the common stock issuable on
conversion of the preferred stock. Under that agreement, Communicade agreed not
to sell any preferred stock until September 2000 without our consent and,
thereafter, to give us a right of first refusal to purchase any shares of
preferred stock it proposes to sell or transfer other than to specified
permitted transferees. We also agreed to give Communicade the right to
participate on a proportionate basis if we sell additional securities in the
future other than in specified types of transactions, which include this
offering. Communicade's participation right will terminate after the closing of
this offering. Prior to the completion of this offering, we have also agreed to
provide periodic financial information to Communicade and to allow Communicade
to designate one director. See "Description of Capital Stock--
Registration Rights."
Communicade is a wholly owned subsidiary of Omnicom Group Inc. One of our
directors, Thomas L. Harrison, is Chairman and Chief Executive Officer of the
Diversified Agency Services unit of Omnicom Group and serves as a director of
Omnicom Group.
Scirex Corporation
In March 2000, we issued a warrant to purchase shares of common stock to
Scirex Corporation for business advisory services it provided to us. The
warrant entitles Scirex to purchase a number of shares of common stock equal to
$1.0 million divided by the initial offering price, or 90,909 shares of common
stock, assuming an initial public offering price of $11.00 per share. The
Scirex warrant has a per share exercise price equal to the initial public
offering price per share. Following consummation of this offering, the warrant
will be fully vested and exercisable for a period of two years. See
"Description of Capital Stock -- Warrants."
We license our software applications and provide consulting and software
maintenance services to Scirex. In 1999, we had revenues of $1.4 million from
Scirex, and for the nine months ended September 30, 2000, we had revenues of
$1.7 million from Scirex. These amounts represent approximately 5.2% of our pro
forma revenues for 1999 and approximately 8.0% of our revenues for the nine
months ended September 30, 2000. One of our directors, Thomas L. Harrison, is
also a director of Scirex.
Relationship with Mr. Bonovitz
Sheldon M. Bonovitz, one of our directors and a member of our audit and
executive committees, is the Chairman, Chief Executive Officer and a partner of
Duane, Morris & Heckscher LLP, which serves as our primary legal counsel.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 31, 2000, and as adjusted to
reflect the sale of common stock in this offering, by:
o All those known by us to own beneficially more than 5% of our outstanding
common stock
o Our chief executive officer
o Each of our directors
o All directors and executive officers as a group
Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are currently
exercisable or will become exercisable within 60 days of October 31, 2000 are
deemed outstanding, while such shares are not deemed outstanding for purposes
of computing percentage ownership of any other person. Percentage ownership in
the following table is based on 10,000,000 shares of common stock currently
outstanding and 14,928,641 shares of common stock outstanding immediately
following the completion of this offering.
In addition, the following table assumes that the underwriters do not
exercise their over-allotment option.
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
-----------------------------------
Number of Shares
Name Beneficially Owned(1) Before Offering After Offering
------------------------------------- ------------------------- ----------------- ---------------
<S> <C> <C> <C>
PRWW 10,000,000 100% 67%
30 South 17th Street
Philadelphia, PA 19103
Joseph A. Esposito -- -- --
Joel Morganroth, M.D. 10,000,000(2) 100 67
Sheldon M. Bonovitz -- -- --
Thomas L. Harrison --(1) -- --
Howard D. Ross -- -- --
John M. Ryan -- -- --
All directors and executive officers
as a group (10 persons) 10,000,000(1)(2) 100 67
</TABLE>
------------
(1) Excludes 95,000 shares of our preferred stock owned by Communicade, which
will convert upon the closing of this offering into 928,641 shares of
common stock, assuming an initial public offering price of $11.00 per
share. Also excludes the common stock issuable upon the exercise of a
warrant we will grant to Communicade upon closing of this offering to
purchase 373,216 shares of common stock, assuming an initial public
offering price of $11.00 per share. Communicade is a wholly owned
subsidiary of Omnicom Group. Mr. Harrison is a director of Omnicom Group
and is Chairman and Chief Executive Officer of its Diversified Services
Agency unit. Mr. Harrison disclaims beneficial ownership of these shares.
(2) These shares are owned of record by PRWW, of which Dr. Morganroth is
Chairman and Chief Executive Officer. Dr. Morganroth disclaims beneficial
ownership of such shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock, no
par value per share. As of October 31, 2000, there were outstanding 10,000,000
shares of common stock and 95,000 shares of preferred stock that will
automatically convert to shares of our common stock upon the completion of this
offering. As of October 31, 2000, we had one holder of our common stock and one
holder of our preferred stock.
The following description of our capital stock and our certificate of
incorporation and bylaws is only a summary. You should review the full
provisions of our certificate of incorporation and bylaws, which we have filed
with the Securities and Exchange Commission as exhibits to our registration
statement.
Common Stock
Holders of common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The certificate of incorporation
does not provide for cumulative voting for the election of directors. Holders
of common stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the board of directors out of funds legally
available therefor, and shall be entitled to receive, pro rata, all of our
assets available for distribution to such holders upon liquidation. Holders of
common stock have no preemptive, subscription or redemption rights.
Preferred Stock
General. We are authorized to issue "blank check" preferred stock, which
may be issued from time to time in one or more series upon authorization by our
board of directors. The board of directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation, preferences
and any other rights, preferences, privileges and restrictions applicable to
each series of the preferred stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of common stock and, under certain circumstances, make it
more difficult for a third party to gain control of us, discourage bids for our
common stock at a premium or otherwise adversely affect the market price of our
common stock.
Series A Convertible Preferred Stock. As of October 31, 2000, we had
95,000 shares of preferred stock outstanding. Upon completion of this offering,
the outstanding preferred stock will automatically convert into the number of
shares of common stock equal to $9.5 million divided by the initial public
offering price per share, net of underwriting discounts and commissions.
Assuming an initial public offering price of $11.00 per share, the shares of
preferred stock will convert into 928,641 shares of common stock.
Warrants
On completion of this offering and assuming an initial public offering
price of $11.00 per share, we will have outstanding warrants to purchase:
o 90,909 shares of common stock exercisable at a price equal to $11.00 per
share
o 373,216 shares of common stock exercisable at a price equal to $20.46
per share
Both warrants will expire two years after the completion of the offering.
The exercise price and the number of shares issuable upon exercise of the
warrants may be adjusted following specific events including stock splits,
stock dividends, reorganizations, recapitalizations, mergers or a sale of all
or substantially all of our assets.
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<PAGE>
Options
As of October 31, 2000, we had outstanding options to purchase an
aggregate of 1,595,550 shares of common stock under our stock option plan, all
of which have an exercise price of $15.00 per share. The exercise price and the
number of shares issuable upon exercise of the options may be adjusted
following specific events including stock splits, stock dividends,
reorganizations, recapitalizations, mergers or a sale of all or substantially
all of our assets. These options will become exercisable in three or four equal
consecutive annual installments beginning one year after their respective 2000
grant dates.
Registration Rights
Following completion of this offering, holders of the shares of common
stock into which the preferred stock is converted will have the right to have
those shares registered under the Securities Act of 1933. We provided these
rights in our Investor Rights Agreement with Communicade. This agreement
provides, in specific instances starting six months after completion of this
offering, the holders of these shares with the right to require us to file a
registration statement on their behalf. The agreement also provides these
holders with the right to require us to include these shares in future
registration statements we file under the Securities Act of 1933. Communicade
has agreed, as part of its lock-up agreement, not to exercise these
registration rights during the 180-day period after the date of this prospectus
without the prior written consent of SG Cowen Securities Corporation. We do not
know whether Communicade currently intends to exercise any of its registration
rights. If we register shares of common stock pursuant to the exercise of these
rights, the shares we register would become freely tradeable without
restriction under the Securities Act of 1933 immediately upon the effectiveness
of the registration and may adversely affect our stock price.
Certain Certificate of Incorporation, Bylaw and Statutory Anti-Takeover
Provisions Affecting Stockholders
Classified Board. We have divided our board of directors into three
classes. Initially, Class I will serve until the annual meeting of stockholders
in 2001, Class II will serve until the annual meeting of stockholders in 2002
and Class III will serve until the annual meeting of stockholders in 2003.
Following this initial transition period, each class will serve for three
years, with one class being elected each year. Removal of a member of the board
of directors with or without cause requires a majority vote of the board of
directors or of the stockholders. A majority of the remaining directors then in
office, though less than a quorum, and the stockholders, are empowered to fill
any vacancy on the board of directors.
Advance Notice Bylaws. Our bylaws establish an advance notice procedure
for stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nominations of persons for election to the
board. Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the board of directors or by a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has delivered timely written notice in proper form to our Secretary of the
stockholder's intention to bring such business before the meeting.
Section 203 of Delaware Law. We are subject to the "business combination"
statute of the Delaware General Corporation Law. In general, this statute
prohibits a publicly held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless (a) the transaction is approved by
the board of directors of the corporation prior to the interested stockholder
attaining that status, (b) upon consummation of the transaction which resulted
in the shareholder becoming an "interested stockholder," the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purpose of
determining the number of shares outstanding those shares owned by (X) persons
who are directors and also officers and (Y) employee stock plans in which
employee participants do not have the right to determine confidentiality
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (c) on or subsequent to such date the "business combination"
is approved by the board of directors and authorized at an annual or
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<PAGE>
special meeting of stockholders by the affirmative vote of at least 662/3% of
the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to a stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years, did own, 15% or more of a corporation's voting stock. By
virtue of our decision not to elect out of the statute's provisions, the
statute applies to us. PRWW is not an "interested stockholder" because its
acquisition of shares was approved by our board of directors. The statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Directors Liability. The certificate of incorporation provides that no
director shall be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director notwithstanding any
provision of law imposing such liability, provided that, to the extent provided
by applicable law, the certificate of incorporation shall not eliminate the
liability of a director for (a) any breach of the director's duty of loyalty to
us or our stockholders, (b) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) acts or
omissions in respect of certain unlawful dividend payments or stock redemptions
or repurchases or (d) any transaction from which such director derives improper
personal benefit. The effect of this provision is to eliminate our rights and
our stockholders' rights, through stockholder's derivative suits against us, to
recover monetary damages against a director for breach of the fiduciary duty of
care as a director, including breaches resulting from negligent or grossly
negligent behavior, except in the situations described in clauses (a) through
(d) above. The limitations summarized above, however, do not affect the ability
of us or our stockholders to seek non-monetary based remedies, such as an
injunction or rescission, against a director for breach of his fiduciary duty
nor would such limitations limit liability under the federal securities laws.
Our bylaws provide that we shall, to the extent permitted by Delaware law, as
amended from time to time, indemnify and advance expense to the currently
acting and former directors, officers, employees and agents of ours or of
another enterprise if those individuals are serving at our request against all
expenses arising in connection with their acting in such capacities. The
provisions described above may also have the effect of delaying stockholder
actions with respect to business combinations and the election of new members
to our board of directors. As such, the provisions could have the effect of
discouraging open market purchases of our common stock because they may be
considered disadvantageous by a stockholder who desires to participate in a
business combination with us or elect a new director to our board.
Transfer Agent
The transfer agent and registrar for the common stock is First Union
National Bank.
Nasdaq National Market Listing
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol ERES.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect the market price of our common stock. Upon completion of this
offering, we will have outstanding 14,928,641 shares of common stock, assuming
no exercise of the underwriters' over-allotment option and an initial public
offering price of $11.00 per share. Excluding the 4,000,000 shares of common
stock offered hereby and assuming no exercise of the underwriters'
over-allotment option and an initial public offering price of $11.00 per share,
as of the effective date of this registration statement, there will be
10,928,641 shares of common stock outstanding, all of which will be restricted
shares under the Securities Act of 1933. All restricted shares are subject to
lock-up arrangements with the underwriters pursuant to which the holders of
those shares have agreed not to sell, pledge or otherwise dispose of such
shares for a period of 180 days after the date of this prospectus. Beginning
January 1, 2001 and subject to the lock-up arrangements described above,
10,000,000 of such restricted shares will become available for sale pursuant to
Rule 144. The remaining restricted shares will
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<PAGE>
become available for sale pursuant to Rule 144 on March 24, 2001, subject to
the lock-up arrangements described above. The general provisions of Rule 144
are described below. All of the restricted shares that will become available
for sale in the public market beginning January 1, 2001 will be subject to
volume and other resale restrictions pursuant to Rule 144 because PRWW, the
holder of those shares, is one of our affiliates. SG Cowen Securities
Corporation may release the shares subject to the lock-up agreements in whole
or in part at any time with or without notice. However, SG Cowen Securities
Corporation has no current plans to do so.
Rule 144 and Rule 144(k)
In general, under Rule 144, any of our affiliates who has beneficially
owned restricted shares for at least one year will be entitled to sell in any
three-month period a number of shares that does not exceed the greater of (a)
1% of the then outstanding shares of our common stock, approximately 149,286
shares immediately after this offering, assuming no exercise of the
underwriters' over-allotment option and an initial public offering price of
$11.00 per share or (b) the average weekly trading volume during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
requirements relating to manner of sale, notice and availability of current
public information about us. A person, or persons whose shares are aggregated,
who is not deemed to have been one of our affiliates at any time during the 90
days immediately preceding the sale and who has beneficially owned his or her
shares for at least two years is entitled to sell such shares pursuant to Rule
144(k) without regard to the limitations described above.
Stock Options
We intend to file, within 180 days after the date of this prospectus, a
Form S-8 registration statement under the Securities Act to register shares
issued in connection with option exercises. Shares of common stock issued upon
exercise of options after the effective date of the Form S-8 will be available
for sale in the public market, subject to Rule 144 volume limitations
applicable to affiliates and lock-up agreements.
Lock-Up Agreements
All of our officers, directors, stockholders and warrant holders have
agreed pursuant to lock-up agreements that, among other things, they will not
offer, sell, contract to sell, pledge, grant any option to sell, or otherwise
dispose of, or request that we register for sale, directly or indirectly, any
shares of common stock or securities convertible or exchangeable for common
stock, or warrant or other rights to purchase common stock for a period of 180
days after the date of this prospectus without the prior written consent of SG
Cowen Securities Corporation. We do not know whether any parties to these
lock-up agreements intend to ask for permission to offer, sell or otherwise
dispose of their common stock within the lock-up period. See "Underwriting."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions in an underwriting agreement, dated
, 2000, the underwriters named below, through their representatives
SG Cowen Securities Corporation and Prudential Securities Incorporated, have
severally agreed to purchase from us the number of shares of common stock set
forth opposite their names at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters expect to deliver the shares against payment in New York, New York
on , 2000.
Underwriters Number of Shares
------------ ----------------
SG Cowen Securities Corporation .............
Prudential Securities Incorporated .......... ---------
Total ....................................... 4,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all the common stock offered by us, other than those
shares covered by the over-allotment option described below, if any shares are
purchased.
At our request, the underwriters have reserved up to 5% of the shares of
common stock for sale at the public offering price to our employees, friends,
family members of our employees and employees of companies with which we do
business. Prospective participants will not receive any investment materials
other than a copy of this prospectus, and will be permitted to participate in
this offering at the initial public offering price presented on the cover page
of this prospectus. No commitment to purchase shares by any participant in the
directed share program will be accepted until after the registration statement,
of which this prospectus is a part, is effective and an initial public offering
price has been established. The number of shares available for sale to the
general public will be reduced to the extent any reserved shares are purchased.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as the shares sold hereby.
The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus.
The underwriters may offer the common stock to securities dealers at that price
less a concession not in excess of $ per share. Securities dealers may
reallow a concession not in excess of $ per share to other dealers. After the
initial offering of the common stock, the underwriters may vary offering price
and other selling terms from time to time.
We have granted to the underwriters an option to purchase up to an
aggregate of 600,000 additional shares of common stock at the public offering
price set forth on the cover of this prospectus to cover over-allotments, if
any. The option is exercisable for a period of 30 days. If the underwriters
exercise the over-allotment option, the underwriters have severally agreed to
purchase shares in approximately the same proportion as shown in the table
above.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by us to the underwriters and the proceeds
from the sale of shares to the underwriters before our expenses. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
----------- --------- -------
<S> <C> <C> <C>
Public offering price ....................
Underwriting discount ....................
Proceeds, before expenses, to us .........
</TABLE>
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<PAGE>
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, and to contribute to payments
that the underwriters may be required to make in respect of those liabilities.
Our directors, executive officers, stockholders and warrant holders have
agreed that for a period of 180 days following the date of this prospectus,
without the prior written consent of SG Cowen Securities Corporation, none of
them will, directly or indirectly:
o offer, sell, assign, transfer, pledge, contract to sell, or otherwise
dispose of, other than by operation of law, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common
stock, including, without limitation, common stock which may be deemed to
be beneficially owned in accordance with rules and regulations promulgated
under the Securities Act
o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock
SG Cowen Securities Corporation may, in its sole discretion, and at any time
without notice, release all or a portion of the shares subject to lock-up
agreements. SG Cowen Securities Corporation has informed us that it has no
current intentions of releasing any shares subject to the lock-up agreements.
Any determination made by SG Cowen Securities to release any shares subject to
the lock-up agreements would be based on a number of factors on a case by case
basis.
The representatives may engage in over-allotment, open market purchases,
stabilizing transactions and penalty bids in accordance with Regulation M under
the Securities Exchange Act of 1934. In connection with this offering, the
underwriters may make short sales by selling more shares than they are
obligated to purchase under the underwriting agreement. Covered short sales are
sales made in an amount not greater than the number of shares available for
purchase by the underwriters under the over-allotment option. The underwriters
may close out a covered short sale by exercising their over-allotment option or
purchasing shares in the open market. In determining the source of the shares
to close out a covered short sale, the underwriters will consider, among other
things, the price of shares in the open market compared to the price at which
they may purchase shares under the over-allotment option. Naked short sales are
sales made in an amount in excess of the number of shares available under the
over-allotment option. The underwriters must close out any naked short sale by
purchasing shares in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market after pricing that
could adversely affect investors who purchase in this offering. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
the common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Any of these
activities may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The underwriters have advised us that they do not intend to confirm sales
in excess of 5% of the common stock offered hereby to any account over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price range will be determined
by negotiations between us and the underwriters. Among the factors considered
in these negotiations will be prevailing market conditions, the market
capitalizations and the stages of development of other companies that we and
the underwriters believe to be comparable to us, estimates of our business
potential, our results of operation in recent periods, the present state of our
development and other factors deemed relevant.
One of the representatives, Prudential Securities Incorporated,
facilitates the marketing of new issues online through its
PrudentialSecurities.com division. Clients of Prudential AdvisorSM, a full
service brokerage firm program, may view offering terms and a prospectus online
and place orders through their financial
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<PAGE>
advisors. Other than the prospectus in electronic format, the information on
this web site is not part of this prospectus or the registration statement of
which this prospectus forms a part and has not been approved and/or endorsed by
us or any underwriter in such capacity and should not be relied upon by
prospective investors.
We estimate that our out-of-pocket expenses for this offering, not
including the underwriting discount, will be approximately $1.1 million.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol ERES.
LEGAL MATTERS
Duane, Morris & Heckscher, LLP, Philadelphia, Pennsylvania will provide us
an opinion relating to the validity of the common stock issued in this
offering. Sheldon M. Bonovitz, the Chairman and a partner of Duane, Morris &
Heckscher, LLP, is a director of both eResearchTechnology, Inc. and PRWW.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock we are offering by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information described in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to eRT and the
common stock, refer to the registration statement and the related exhibits and
schedules. You may read and copy any document we file at the Securities and
Exchange Commission's public reference rooms at 450 Fifth Street NW,
Washington, D.C., 20549, Seven World Trade Center, Suite 1300, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. Our Securities and
Exchange Commission filings are also available to the public from the
Securities and Exchange Commission's website at www.sec.gov. Upon completion of
this offering, we must comply with the information and periodic reporting
requirements of the Securities Exchange Act and will file periodic reports,
proxy statements and other information with the Securities and Exchange
Commission. These periodic reports, proxy statements and other information will
be available for inspection and copying at the Securities and Exchange
Commission's public reference room and the website of the Securities and
Exchange Commission.
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INDEX TO FINANCIAL STATEMENTS
eRESEARCHTECHNOLOGY, INC:
Pro Forma Financial Statement--
Basis of Presentation ............................................ F-2
Pro Forma Statement of Operations ................................ F-3
Historical Financial Statements--
Report of Independent Public Accountants ......................... F-4
Balance Sheets ................................................... F-5
Statements of Operations ......................................... F-6
Statements of Stockholders' Equity ............................... F-7
Statements of Cash Flows ......................................... F-8
Notes to Financial Statements .................................... F-9
DLB SYSTEMS, INC.:
Report of Independent Public Accountants ......................... F-27
Statement of Operations .......................................... F-28
Statement of Cash Flows .......................................... F-29
Notes to Financial Statements .................................... F-30
F-1
<PAGE>
eRESEARCHTECHNOLOGY, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENT
BASIS OF PRESENTATION
On December 31, 1999, our parent, PRWW, Ltd. ("PRWW") sold the business
and certain of the net assets of its domestic clinical trials management and
clinical data management operations ("clinical research operations"). The sale
agreement provides for PRWW to receive consideration that could total
$18,000,000, of which $1,000,000 was paid on December 31, 1999, $8,000,000 was
paid on January 31, 2000, and $248,000 was paid on May 1, 2000, with the
balance, if any, payable over time, subject to adjustments and earn-outs.
Effective January 1, 2000, PRWW contributed its technology and remaining
operating business to us in exchange for all of our issued and outstanding
stock. Accordingly, our historical financial statements present the Company as
a division of PRWW, but essentially represent all of PRWW's operating assets,
liabilities, revenues and expenses, including those related to the domestic
clinical research operation. Our historical financial statements exclude PRWW's
cash and cash equivalents, marketable securities, investments, interest income
and related income tax amounts.
The Pro Forma Statement of Operations for the year ended December 31, 1999
presents the Company's results of operations, assuming that the divestiture
occurred as of January 1, 1999. The divestiture adjustments reflect the
adjustments required to remove the results of operations directly attributable
to the domestic clinical research operations that are factually supportable and
to remove the gain on the sale. The Pro Forma Statement of Operations does not
consider any adjustments for the Company's international clinical research
operations, which were closed in the third quarter of 1999 as Article 11 of
Regulation S-X only allows pro forma adjustments that are directly attributable
to the transaction.
On March 24, 2000, the Company sold 95,000 shares of preferred stock and
agreed to issue a warrant to purchase 2.5% of the Company's outstanding common
stock, as defined, for $9.5 million. The preferred stock is automatically
convertible into Company common stock upon an initial public offering with
proceeds of at least $25 million at the initial public offering price per share
less the underwriting discounts and commissions. The warrant is issuable
concurrent with an initial public offering and is exercisable for a two-year
period at 200% of the initial public offering price per share less the
underwriting discounts and commissions. The Company also issued a warrant to a
customer to purchase the number of shares of common stock equal to $1.0 million
divided by the initial public offering price per share. The warrant is
exercisable for a two-year period following the initial public offering at a
per share exercise price equal to the initial public offering price per share.
The value of the beneficial conversion feature of the preferred stock of
$715,000 and the value of the warrant issued to the preferred stockholder of
$618,000 will be recorded as a charge against net income available to common
stockholders upon the closing of the Company's initial public offering. The
value of the warrant issued for advisory services of $345,000 will be recorded
as a charge against operations upon the closing of the Company's initial public
offering. The accompanying Pro Forma Statement of Operations does not include
an adjustment to reflect these charges.
The Pro Forma Statement of Operations should be read in conjunction with
the historical financial statements and notes thereto included elsewhere in
this prospectus. The Pro Forma Statement of Operations is presented for
informational purposes only and is not intended to be indicative of the results
of operations that would have occurred had the divestiture been consummated as
of the beginning of the period presented, nor is it intended to be indicative
of future results of operations.
F-2
<PAGE>
eRESEARCHTECHNOLOGY, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Divestiture
Historical Adjustments Pro Forma
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net revenues:
Licenses ........................................... $ 4,381,000 $ -- $ 4,381,000
Services ........................................... 21,694,000 -- 21,694,000
CRO operations ..................................... 16,710,000 (15,989,000) 721,000
------------ ------------- ------------
Total net revenues .............................. 42,785,000 (15,989,000) 26,796,000
------------ ------------- ------------
Cost of revenues:
Cost of licenses ................................... 319,000 -- 319,000
Cost of services ................................... 12,578,000 -- 12,578,000
Cost of CRO operations ............................. 12,512,000 (11,397,000) 1,115,000
------------ ------------- ------------
Total cost of revenues .......................... 25,409,000 (11,397,000) 14,012,000
------------ ------------- ------------
Gross margin .................................... 17,376,000 (4,592,000) 12,784,000
------------ ------------- ------------
Operating expenses:
Selling and marketing .............................. 5,124,000 (2,139,000) 2,985,000
General and administrative ......................... 6,565,000 (1,143,000) 5,422,000
Research and development ........................... 2,472,000 -- 2,472,000
------------ ------------- ------------
Total operating expenses ........................ 14,161,000 (3,282,000) 10,879,000
------------ ------------- ------------
Operating income .................................... 3,215,000 (1,310,000) 1,905,000
Gain on sale of CRO operations ...................... 4,850,000 (4,850,000) --
------------ ------------- ------------
Income before income taxes .......................... 8,065,000 (6,160,000) 1,905,000
Income tax provision ................................ 3,226,000 (2,472,000) 754,000
------------ ------------- ------------
Net income .......................................... $ 4,839,000 $ (3,688,000) $ 1,151,000
============ ============= ============
Basic and diluted net income per share .............. $ 0.48 $ 0.12
============ ============
Shares used to compute net income per share ......... 10,000,000 10,000,000
============ ============
</TABLE>
See Unaudited Pro Forma Financial Statement -- Basis of Presentation
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eResearchTechnology, Inc.:
We have audited the accompanying consolidated balance sheets of
eResearchTechnology, Inc., (a Delaware corporation and majority-owned
subsidiary of PRWW, Ltd. -- see Note 1) and subsidiary as of December 31, 1998
and 1999 and September 30, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999 and the nine months ended September 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eResearchTechnology, Inc. and
subsidiary as of December 31, 1998 and 1999 and September 30, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 and the nine months ended September 30, 2000,
in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Philadelphia, PA
October 27, 2000
F-4
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
December 31, at
-------------------------------- September 30, September 30,
1998 1999 2000 2000
--------------- --------------- --------------- --------------
(Unaudited)
(Note 11)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................... $ -- $ -- $ 5,706,000
Accounts receivable, net ........................... 10,423,000 4,537,000 6,729,000
Due from Parent .................................... -- -- 771,000
Prepaid expenses and other ......................... 2,047,000 1,092,000 1,498,000
Deferred income taxes .............................. 159,000 235,000 906,000
------------ ------------ -----------
Total current assets ............................ 12,629,000 5,864,000 15,610,000
Property and equipment, net ......................... 4,110,000 2,705,000 3,908,000
Goodwill, net ....................................... 2,160,000 1,844,000 1,607,000
Other assets ........................................ 23,000 23,000 87,000
Deferred income taxes ............................... 3,631,000 2,889,000 2,846,000
------------ ------------ -----------
$ 22,553,000 $ 13,325,000 $24,058,000
============ ============ ===========
Liabilities, Redeemable Preferred Stock and
Stockholders' Equity
Current liabilities:
Accounts payable ................................... $ 2,519,000 $ 1,761,000 $ 2,017,000
Accrued expenses ................................... 1,099,000 3,322,000 4,171,000
Income taxes payable ............................... 57,000 576,000 499,000
Deferred revenues .................................. 5,556,000 2,404,000 2,919,000
------------ ------------ -----------
Total current liabilities ....................... 9,231,000 8,063,000 9,606,000
------------ ------------ -----------
Redeemable convertible preferred stock .............. -- 9,500,000 $ --
------------ ------------ ----------- ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued and outstanding .......... -- -- -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, none issued and outstanding at
December 31, 1998 and 1999; 10,000,000
shares issued and outstanding at September 30,
2000 actual and 10,928,641 shares issued and
outstanding pro forma ............................ -- -- 100,000 109,000
Additional paid-in capital ......................... -- -- 5,462,000 15,668,000
Common stock warrants .............................. -- -- -- 963,000
Accumulated deficit ................................ -- -- (610,000) (2,288,000)
Division equity .................................... 13,322,000 5,262,000 -- --
------------ ------------ ----------- ------------
Total stockholders' equity ...................... 13,322,000 5,262,000 4,952,000 $ 14,452,000
============ ============ =========== ============
$ 22,553,000 $ 13,325,000 $24,058,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
<S> <C> <C> <C>
Net revenues:
Licenses ..................................... $ 210,000 $ 5,142,000 $ 4,381,000
Services ..................................... 7,485,000 14,611,000 21,694,000
CRO operations ............................... 6,468,000 12,054,000 16,710,000
------------- ------------ ------------
Total net revenues ........................ 14,163,000 31,807,000 42,785,000
Cost of revenues:
Cost of licenses ............................. 20,000 138,000 319,000
Cost of services ............................. 5,250,000 9,131,000 12,578,000
Cost of CRO operations ....................... 6,806,000 10,488,000 12,512,000
------------- ------------ ------------
Total cost of revenues .................... 12,076,000 19,757,000 25,409,000
------------- ------------ ------------
Gross margin .............................. 2,087,000 12,050,000 17,376,000
------------- ------------ ------------
Operating expenses:
Selling and marketing ........................ 2,492,000 3,764,000 5,124,000
General and administrative ................... 2,873,000 4,966,000 6,565,000
Research and development ..................... 357,000 3,131,000 2,472,000
Acquired in-process research and
development ................................ 7,883,000 -- --
------------- ------------ ------------
Total operating expenses .................. 13,605,000 11,861,000 14,161,000
------------- ------------ ------------
Operating income (loss) ....................... (11,518,000) 189,000 3,215,000
Interest income, net .......................... -- -- --
Gain on sale of domestic CRO business ......... -- -- 4,850,000
------------- ------------ ------------
Income (loss) before income taxes ............. (11,518,000) 189,000 8,065,000
Income tax provision (benefit) ................ (4,530,000) 64,000 3,226,000
------------- ------------ ------------
Net income (loss) ............................. (6,988,000) 125,000 4,839,000
Dividends on preferred stock .................. -- -- --
------------- ------------ ------------
Net income (loss) available to common
shareholders ................................. $ (6,988,000) $ 125,000 $ 4,839,000
============= ============ ============
Basic and diluted net income (loss)
per share .................................... $ (0.70) $ 0.01 $ 0.48
============= ============ ============
Basic and diluted net income (loss) per
share available to common shareholders $ (0.70) $ 0.01 $ 0.48
============= ============ ============
Shares used in computing net income
(loss) per share ............................. 10,000,000 10,000,000 10,000,000
============= ============ ============
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
--------------------------------
1999 2000
----------------- -------------
(Unaudited)
<S> <C> <C>
Net revenues:
Licenses ..................................... $ 2,702,000 $ 3,948,000
Services ..................................... 16,246,000 17,265,000
CRO operations ............................... 13,010,000 --
------------- -----------
Total net revenues ........................ 31,958,000 21,213,000
Cost of revenues:
Cost of licenses ............................. 120,000 491,000
Cost of services ............................. 9,133,000 9,813,000
Cost of CRO operations ....................... 10,144,000 --
------------- -----------
Total cost of revenues .................... 19,397,000 10,304,000
------------- -----------
Gross margin .............................. 12,561,000 10,909,000
------------- -----------
Operating expenses:
Selling and marketing ........................ 3,933,000 3,482,000
General and administrative ................... 4,743,000 4,282,000
Research and development ..................... 1,801,000 3,650,000
Acquired in-process research and
development ................................ -- --
------------- -----------
Total operating expenses .................. 10,477,000 11,414,000
------------- -----------
Operating income (loss) ....................... 2,084,000 (505,000)
Interest income, net .......................... -- 122,000
Gain on sale of domestic CRO business ......... -- 248,000
------------- -----------
Income (loss) before income taxes ............. 2,084,000 (135,000)
Income tax provision (benefit) ................ 834,000 (9,000)
------------- -----------
Net income (loss) ............................. 1,250,000 (126,000)
Dividends on preferred stock .................. -- (335,000)
------------- -----------
Net income (loss) available to common
shareholders ................................. $ 1,250,000 $ (461,000)
============= ===========
Basic and diluted net income (loss)
per share .................................... $ 0.13 $ (0.01)
============= ===========
Basic and diluted net income (loss) per
share available to common shareholders $ 0.13 $ (0.05)
============= ===========
Shares used in computing net income
(loss) per share ............................. 10,000,000 10,000,000
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in Accumulated Division
Shares Amount Capital Deficit Equity Total
------------- ----------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ............. -- $ -- $ -- $ -- $ 1,018,000 $ 1,018,000
Net loss .............................. -- -- -- -- (6,988,000) (6,988,000)
Deemed distribution to Parent of
deferred tax asset .................. -- -- -- -- (493,000) (493,000)
Net cash contribution from Parent ..... -- -- -- -- 15,167,000 15,167,000
---------- -------- ---------- ---------- ------------ -----------
Balance, December 31, 1997 ............. -- -- -- -- 8,704,000 8,704,000
Net income ............................ -- -- -- -- 125,000 125,000
Deemed distribution to Parent of
deferred tax asset .................. -- -- -- -- (647,000) (647,000)
Net cash contribution from Parent ..... -- -- -- -- 5,140,000 5,140,000
---------- -------- ---------- ---------- ------------ -----------
Balance, December 31, 1998 ............. -- -- -- -- 13,322,000 13,322,000
Net income ............................ -- -- -- -- 4,839,000 4,839,000
Deemed distribution to Parent of
proceeds from sale of domestic
clinical research operations, net
of tax .............................. -- -- -- -- (7,060,000) (7,060,000)
Issuance of Parent common stock
option to non-employee .............. -- -- -- -- 30,000 30,000
Net cash distribution to Parent ....... -- -- -- -- (5,869,000) (5,869,000)
---------- -------- ---------- ---------- ------------ -----------
Balance, December 31, 1999 ............. -- -- -- -- 5,262,000 5,262,000
Contribution of business from
Parent in exchange for common
stock ............................... 10,000,000 100,000 5,162,000 -- (5,262,000) --
Deemed distribution to Parent of
proceeds from sale of domestic
clinical research operations, net
of tax .............................. -- -- -- (149,000) -- (149,000)
Deemed contribution by Parent of
note receivable ..................... -- -- 300,000 -- -- 300,000
Net loss .............................. -- -- -- (126,000) -- (126,000)
Dividends on preferred stock .......... -- -- -- (335,000) -- (335,000)
---------- -------- ---------- ---------- ------------ -----------
Balance, September 30, 2000 ............ 10,000,000 $100,000 $5,462,000 $ (610,000) $ -- $ 4,952,000
========== ======== ========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1998 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ........................... $ (6,988,000) $ 125,000 $ 4,839,000
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities--
Gain on sale of domestic CRO
operation, net of tax .................... -- -- (2,910,000)
Depreciation and amortization ............. 709,000 1,606,000 2,167,000
Provision for losses on accounts
receivable ............................... -- -- 399,000
Provision for impairment of note
receivable ............................... -- -- --
Issuance of stock options and war-
rants for services rendered .............. -- -- 30,000
Acquired in-process research and
development .............................. 7,883,000 -- --
Deferred income taxes ..................... (4,642,000) (5,000) 688,000
Loss on sales of property and
equipment ................................ 36,000 -- 20,000
Changes in operating assets and
liabilities, excluding effects of
business acquisition and disposi-
tion: ....................................
Accounts receivable .................... (1,277,000) (5,254,000) 1,320,000
Prepaid expenses and other ............. (524,000) (1,231,000) 955,000
Accounts payable ....................... (295,000) 774,000 (550,000)
Accrued expenses ....................... 21,000 11,000 2,128,000
Income taxes payable ................... (512,000) (22,000) 497,000
Deferred revenues ...................... 586,000 2,208,000 (1,470,000)
------------- ------------- -------------
Net cash provided by (used
in) operating activities ............ (5,003,000) (1,788,000) 8,113,000
------------- ------------- -------------
Investing activities:
Purchases of property and
equipment ................................ (1,509,000) (3,352,000) (2,317,000)
Proceeds from sales of property and
equipment ................................ -- -- 73,000
Net cash paid for business
acquisition .............................. (8,655,000) -- --
------------- ------------- -------------
Net cash used in investing
activities ............................ (10,164,000) (3,352,000) (2,244,000)
------------- ------------- -------------
Financing activities:
Proceeds from issuance of redeem-
able convertible preferred stock ......... -- -- --
Increase in amount due from Parent. -- -- --
Net contribution from (distribution
to) Parent ............................... 15,167,000 5,140,000 (5,869,000)
------------- ------------- -------------
Net cash provided by (used in)
financing activities: .................... 15,167,000 5,140,000 (5,869,000)
------------- ------------- -------------
Net increase in cash and cash equivalents -- -- --
Cash and cash equivalents, beginning of
period ...................................... -- -- --
------------- ------------- -------------
Cash and cash equivalents, end of period $ -- $ -- $ --
============= ============= =============
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
--------------------------------
1999 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) ........................... $ 1,250,000 $ (126,000)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities--
Gain on sale of domestic CRO
operation, net of tax .................... -- (149,000)
Depreciation and amortization ............. 1,658,000 1,327,000
Provision for losses on accounts
receivable ............................... 206,000 638,000
Provision for impairment of note
receivable ............................... -- 300,000
Issuance of stock options and war-
rants for services rendered .............. -- --
Acquired in-process research and
development .............................. -- --
Deferred income taxes ..................... 598,000 (285,000)
Loss on sales of property and
equipment ................................ -- --
Changes in operating assets and
liabilities, excluding effects of
business acquisition and disposi-
tion: ....................................
Accounts receivable .................... (746,000) (2,830,000)
Prepaid expenses and other ............. 561,000 (470,000)
Accounts payable ....................... (999,000) 256,000
Accrued expenses ....................... 2,174,000 171,000
Income taxes payable ................... (57,000) (77,000)
Deferred revenues ...................... (973,000) 515,000
------------- -------------
Net cash provided by (used
in) operating activities ............ 3,672,000 (730,000)
------------- -------------
Investing activities:
Purchases of property and
equipment ................................ (1,719,000) (2,293,000)
Proceeds from sales of property and
equipment ................................ -- --
Net cash paid for business
acquisition .............................. -- --
------------- -------------
Net cash used in investing
activities ............................ (1,719,000) (2,293,000)
------------- -------------
Financing activities:
Proceeds from issuance of redeem-
able convertible preferred stock ......... -- 9,500,000
Increase in amount due from Parent. -- (771,000)
Net contribution from (distribution
to) Parent ............................... 1,953,000 --
------------- -------------
Net cash provided by (used in)
financing activities: .................... (1,953,000) 8,729,000
------------- -------------
Net increase in cash and cash equivalents -- 5,706,000
Cash and cash equivalents, beginning of
period ...................................... -- --
------------- -------------
Cash and cash equivalents, end of period $ -- $ 5,706,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine months ended
September 30, 1999 is unaudited)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background and Basis of Presentation
eResearchTechnology, Inc. (the "Company") is a provider of integrated
software applications and technology consulting services to its customers in
the pharmaceutical, biotechnology and medical device industries and clinical
research organizations serving those industries. The Company is also a leading
provider of centralized collection and interpretation of electrocardiograms,
one of the most frequently used diagnostic tests in a clinical trial. Prior to
the December 31, 1999 sale of the domestic clinical research operations (see
Note 3), the Company also provided its customers clinical trial and data
management services. The clinical research operations were not a reportable
business segment and, therefore, the sale has not been reported as a
discontinued operation.
Historically, the Company operated through two business segments:
Technology Operations and Clinical Operations (see Note 10). Technology
Operations include software development, sales and support and consulting
services. Clinical Operations include clinical trial support services, which
consist primarily of the centralized collection and interpretation of
electrocardiograms, and clinical research operations, which consist primarily
of clinical trial and data management.
The Company was incorporated in December 1999 as a wholly owned subsidiary
of PRWW, Ltd. ("PRWW"), a publicly traded company. Effective January 1, 2000,
PRWW contributed its technology and operating businesses to the Company in
exchange for all of its issued and outstanding capital stock. Accordingly, the
historical financial statements present the Company as a division of PRWW
through December 31, 1999, but essentially represent all of PRWW's historical
operating assets, liabilities, revenues and expenses for all periods presented.
The Company's financial statements exclude PRWW's cash and cash equivalents,
marketable securities, investments, interest income and related income tax
amounts.
The financial statements for the nine months ended September 30, 1999 are
unaudited and, in the opinion of the management of the Company, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for such period. The results of operations for
the nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues
The Company's software revenues relate primarily to sales of perpetual
licenses to end-users. Software arrangements with customers often include
multiple elements, including product licenses, maintenance and/or other
services. The Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables
determined based on vendor-specific objective evidence. This objective evidence
of fair value is specific to the Company and consists either of prices derived
from sales of elements when they are sold separately, such as the stated
renewal rate for maintenance, or the price established by management for the
sale of the elements in the ordinary course of business.
F-9
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Revenues from software licenses are recognized when a formal agreement
exists, delivery of the software has occurred, collectibility is probable and
the license fee is fixed or determinable. Revenues from software maintenance
and support contracts are recognized on a straight-line basis over the term of
the contract, typically 12 months. Revenues from training and consulting
services are recognized as services are performed (see Note 7). Revenues from
usage-based services for which the Company charges a contracted fee-for-service
and clinical research services are generally recorded when services are
rendered. Usage services consist primarily of the centralized collection and
interpretation of electrocardiograms. The Company often receives non-refundable
deposits from its customers related to usage services and clinical research
services that are recorded as deferred revenues in the accompanying
consolidated balance sheets. Revenues for the year ended December 31, 1998
include a $750,000 nonrefundable deposit and termination fee under a contract
that was cancelled before completion.
Warranty
The Company does not offer its customers a general right of return.
Software license agreements provide for a 30-day warranty period for defects.
The Company's policy is to estimate the amount of future warranty costs at the
date revenue is recognized and to accrue that amount as a liability. To date,
warranty costs have been nominal and no amount has been accrued.
Prepaid Expenses and Other
Prepaid expenses and other current assets includes advances of $989,000
and $282,000 at December 31, 1998 and 1999, respectively, made by the Company
for lease build-out costs reimbursed by landlords.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets ranging
from three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining lease term. Repair and maintenance costs are expensed as
incurred. Improvements and betterments are capitalized. Gains or losses on the
disposition of property and equipment are included in operations. Depreciation
expense was $605,000, $1,228,000, $1,851,000, $1,421,000 and $1,090,000 for the
years ended December 31, 1997, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000, respectively.
Goodwill
Goodwill is amortized using the straight-line method over eight years and
is net of accumulated amortization of $704,000, $1,020,000 and $1,257,000 as of
December 31, 1998 and 1999 and September 30, 2000, respectively. The related
amortization expense was $104,000, $378,000, $316,000, $237,000 and $237,000
for the years ended December 31, 1997, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000, respectively.
Long-Lived Assets
The Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining estimated useful life may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable. If factors indicate that long-lived assets should be evaluated for
possible impairment, the Company would use an estimate of the related
undiscounted cash flows in measuring whether long-lived
F-10
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
assets should be written down to their fair value, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Management
believes that there has been no impairment of long-lived assets as of September
30, 2000.
Accrued Expenses
Included in accrued expenses at December 31, 1998 and 1999 and September
30, 2000 was accrued compensation of $515,000, $1,390,000 and $1,054,000,
respectively. Also included in accrued expenses at December 31, 1999 was
$620,000 for a commission payable to a third-party under a marketing assistance
agreement.
Software Development Costs
Research and development expenditures are charged to operations as
incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires the capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. The Company has determined that technological feasibility for its
products is generally achieved upon completion of a working model. Since
software development costs have not been significant after the completion of a
working model, all such costs have been charged to expense as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 1997, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000 was $310,000, $473,000, $481,000, $375,000 and
$560,000, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Prior to 2000, the Company was not a tax paying entity and was included in the
consolidated federal tax return of PRWW. The accompanying financial statements
reflect the accounting for income taxes on a separate-company basis as if the
Company was a tax paying entity separate from PRWW for all periods presented.
In 1997 and 1998, net operating loss carryforwards generated by the Company on
a separate-company basis were utilized by PRWW to offset nonoperating income.
The corresponding reduction to the Company's deferred income tax assets has
been recorded as a deemed distribution to PRWW.
In 2000, the Company will be included in certain PRWW consolidated income
tax filings and, accordingly, the Company and PRWW have entered into a tax
sharing agreement that requires the Company to pay PRWW for the Company's
portion of PRWW's tax liabilities, as defined. Under the agreement, PRWW will
reimburse the Company for any tax benefit, as defined, generated by the Company
(see Note 7).
Supplemental Cash Flow Information
The following table displays the net non-cash assets that were
consolidated (deconsolidated) as a result of the Company's 1997 business
acquisition (see Note 2) and 1999 business divestiture (see Note 3):
F-11
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1999
-------------- -----------------
<S> <C> <C>
Non-cash assets (liabilities):
Accounts receivable ......................... $ 1,055,000 $ (4,167,000)
Prepaid expenses and other .................. 35,000 --
Property and equipment ...................... 386,000 (1,778,000)
Other assets ................................ 23,000 --
In-process research and development ......... 7,883,000 --
Goodwill .................................... 2,548,000 --
Accounts payable ............................ (1,209,000) 208,000
Accrued expenses ............................ (450,000) (95,000)
Deferred revenues ........................... (1,616,000) 1,682,000
------------ -------------
$ 8,655,000 $ (4,150,000)
============ =============
</TABLE>
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade accounts receivable
from companies operating in the pharmaceutical, biotechnology and medical
device industries. For the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 2000, no single client accounted for greater
than 10% of net revenues. For the year ended December 31, 1999, one clinical
research operations client accounted for 11.1% of net revenues. The loss of a
significant customer could have a material adverse effect on the Company's
operations.
Translation of Foreign Financial Statements
Assets and liabilities of the Company's UK subsidiary are translated at
the exchange rate as of the end of each reporting period. The income statement
is translated at the average exchange rate for the period. Annual and
cumulative adjustments from translating the UK financial statements are
immaterial.
Restatement of Certificate of Incorporation and Stock Split
During 2000, the Company authorized new shares and effectuated a split of
its common stock, which has been retroactively reflected in the accompanying
financial statements (see Note 12).
Net Income (Loss) Per Common 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 year.
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
year, adjusted for the dilutive effect of common stock equivalents. As the
Company did not have any common stock equivalents outstanding during the three
years ended December 31, 1999, basic and diluted net income (loss) per share are
the same for the years ended December 31, 1997, 1998 and 1999. As of September
30, 2000, there were options to purchase 1,562,350 shares of common stock,
warrants to purchase 464,125 shares of common stock based on an $11.00 per share
initial public offering price and preferred stock convertible into 928,641
shares of common stock based on an $11.00 per share initial public offering
price excluded from the calculation of diluted net loss per share, as the impact
would be antidilutive. In addition, net income (loss) per share has been
calculated for all periods presented based on the 10,000,000 shares of common
stock issued to PRWW effective January 1, 2000.
F-12
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
2. ACQUISITION OF DLB SYSTEMS, INC.
Overview -- The Acquisition of DLB Systems, Inc.
Effective October 31, 1997, the Company acquired substantially all of the
assets of DLB Systems, Inc. ("DLB") for $6,500,000 in cash, its prior $1.0
million investment and the assumption of certain liabilities. The acquisition
was accounted for under the purchase method of accounting, whereby the purchase
price was allocated to the assets acquired and the liabilities assumed, based
on their fair market values at the acquisition date. The excess of the purchase
price over the estimated fair market value of the net assets acquired was
assigned to identifiable intangibles. The Company assigned $7,883,000 to
in-process research and development and such amount was charged to operations
in the accompanying consolidated statement of operations. The Company also
recorded goodwill of $2,548,000, which is being amortized on a straight-line
basis over eight years.
DLB's results of operations have been included in the Company's
consolidated financial statements from the effective date of the acquisition.
The following table summarizes the unaudited pro forma results of operations of
the Company as if the acquisition of DLB had occurred on January 1, 1996. The
pro forma information does not purport to be indicative of the results that
would have been attained if the operations had actually been combined during
the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net revenues ................................. $ 21,615,000 $ 18,868,000
Operating loss ............................... (1,751,000) (5,687,000)
Net loss ..................................... (1,477,000) (3,527,000)
Basic and diluted net loss per share ......... (0.15) (0.35)
</TABLE>
The pro forma amounts do not include the one-time charge of $7,883,000
related to the write-off of in-process research and development.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. If the research and development project and technologies are not
completed as planned, they will neither satisfy the technical requirements of a
changing market nor be cost effective.
As of the acquisition date, DLB had progressed in its development efforts
related to the next-generation software technology. This new product suite was
being designed with a dramatically more flexible software architecture allowing
for new advanced features and functionality.
The technology development projects under development at the time of the
acquisition primarily involved significant efforts as follows.
Recorder Technology. At the acquisition date, the research and development
related to the Recorder and Recorder Remote technology project (collectively
referred to as the "Recorder Project") involved software and system technology
designed to enable effective clinical data management. The Recorder Project
focused on designing software and system technology that would allow for fast
setup, standardization through a modular approach, unified report form design,
improved data quality and reduced programmer support needs and
F-13
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
2. ACQUISITION OF DLB SYSTEMS, INC. -- (Continued)
would be Internet enabled. Overall, substantial progress had been made related
to the research and development of the Recorder Project at the acquisition
date. The primary remaining risks at the acquisition date included the
completion of remaining final design work, prototyping and testing activities.
The Company anticipated that development related to this project would be
completed in late 1998, after which the Company expected to begin generating
economic benefits from completed development associated with the in-process
research and development. The Recorder technology was approximately 60%
complete at the time of the acquisition and costs to complete the research and
development efforts related to the Recorder technology project were expected to
total approximately $2,100,000.
Monitor Technology. At the acquisition date, the research and development
related to the Monitor technology project involved creation of new software
technology designed to enable planning, managing and monitoring of clinical
trials. The Monitor project focused on designing software and system technology
that would allow increased flexibility and functionality in the clinical trial
process, including planning and scheduling, budgeting and reporting of clinical
trials, and provide system security features. Overall, significant progress had
been made related to the research and development of the Monitor project at the
acquisition date. The primary remaining risks at the acquisition date were
related to the completion of prototyping and testing functions.
The Company anticipated that development related to this project would be
completed in mid 1998, after which the Company expected to begin generating
economic benefits from the development. The Monitor technology was
approximately 85% complete at the time of the acquisition and costs to complete
the research and development efforts related to the Monitor technology project
were expected to total approximately $200,000.
Alert Technology. At the acquisition date, the research and development
related to the Alert technology project involved software and system technology
designed to handle and post regulatory requirements related to clinical trials.
The Alert project focused on designing software and system technology that
would allow tracking of adverse event cases through all stages of data entry,
assessment, follow-up, and regulatory reporting by enabling the user to quickly
generate reports, track reports and view a single screen summary for management
review. Overall, substantial progress had been made related to the research and
development of the Alert project at the acquisition date. The primary remaining
risks at the acquisition date were related to the completion of remaining
prototyping and testing activities.
The Company anticipated that development related to this project would be
completed in the beginning of 1998, after which the Company expected to begin
generating economic benefits from the completed development. The Monitor
technology was approximately 85% to 90% complete at the time of the acquisition
and costs to complete the research and development efforts related to the Alert
technology project were expected to total approximately $400,000.
Valuation Analysis
Revenue
The value of the acquired in-process technologies was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net
F-14
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
2. ACQUISITION OF DLB SYSTEMS, INC. -- (Continued)
cash flows to their present value. The revenue projection used to value the
in-process research and development was based on estimates of relevant market
sizes and growth factors, expected trends in technology and the nature and
expected timing of new product introductions by the Company and its
competitors. Future revenue estimates were generated from the next-generation
DLB product line. Aggregate revenue for DLB products was estimated to be
approximately $7,800,000 for the period ending December 31, 1997. Thereafter,
revenue was estimated to increase at a compound annual rate of 29% through
fiscal year 2002, with the growth rate then steadily declining to approximately
7% growth.
Operating Expenses
Operating expenses used in the valuation analysis of DLB included (i) cost
of sales and selling, general and administrative expenses and (ii) research and
development expenses. Operating expenses were estimated based on historical
results and discussions with management regarding anticipated cost savings. Due
to purchasing power increases and general economies of scale, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
Operating Expenses: Operating expenses, expressed as a percentage of
revenue, for the developed and in-process technologies identified in the
valuation were estimated to range from 107% down to 82% for fiscal 1997 through
1999 and remain steady thereafter.
Research and Development: Research and development expenses consist of the
costs associated with activities undertaken to develop new software and to keep
products responsive to market demands. The research and development expense was
estimated to be 18% of revenues in fiscal 1997, declining to 15% of revenues by
1999 and remaining steady thereafter.
Effective income tax rate
The effective income tax rate utilized in the analysis of the DLB
technology was 40% throughout the valuation period. The 40% reflects the
Company's estimated combined federal and state statutory income tax rate.
Discount rate
The discount rate selected for developed and in-process technology was 25%
and 30%, respectively. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model (CAPM). The
discount rate utilized for the in-process technology was significantly higher
than the Company's WACC due to the risk of realizing cash flows from products
that had yet to reach technological feasibility.
Allocation of Value
The fair values of the assets acquired from DLB were allocated among
in-process research and development, developed technology and purchase price in
excess of identifiable assets. The results of the allocation of values between
the assets are as follows: in-process research and development of $7,883,000 and
purchase price in excess of identifiable assets of $2,548,000.
Comparison to Actual Results
The Company believed that the foregoing assumptions used in the DLB's
in-process research and development analysis were reasonable at the time of the
acquisition. No assurance could be given that the
F-15
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
2. ACQUISITION OF DLB SYSTEMS, INC. -- (Continued)
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, would
transpire as estimated. However, management indicated that as of a current
date, the in-process research and development projects have all been completed.
The Company currently believes that actual results have been consistent
with forecasts related to the acquired in-process revenues. In addition, the
Company believes that expenses incurred to date associated with the development
and integration of the in-process research and development projects are
consistent with the Company's previous estimates.
3. SALE OF THE DOMESTIC CLINICAL RESEARCH OPERATIONS:
On December 31, 1999, PRWW sold the business and certain of the net assets
of its domestic clinical research operation, which consisted of clinical trial
management and clinical data management operations. PRWW received cash
consideration of $1,000,000 on December 31, 1999, $8,000,000 on January 31,
2000 and $248,000 on May 1, 2000, with additional consideration, if any,
payable over time, subject to adjustments and earn-outs. The Company receives
no proceeds from the sale as PRWW retains all proceeds. Accordingly, we have
recorded the proceeds received on the sale, net of taxes, as a deemed
distribution to PRWW.
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
December 31,
--------------------------------- September 30,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Billed .................................. $ 10,307,000 $ 4,624,000 $ 7,543,000
Unbilled ................................ 359,000 338,000 215,000
Allowance for doubtful accounts ......... (243,000) (425,000) (1,029,000)
------------ ----------- ------------
$ 10,423,000 $ 4,537,000 $ 6,729,000
============ =========== ============
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
------------------------------- September 30,
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Computer and other equipment .......... $ 9,466,000 $ 9,230,000 $ 11,225,000
Furniture and fixtures ................ 1,436,000 1,154,000 1,365,000
Leasehold improvements ................ 808,000 480,000 563,000
------------ ------------ ------------
11,710,000 10,864,000 13,153,000
Less-Accumulated depreciation ......... (7,600,000) (8,159,000) (9,245,000)
------------ ------------ ------------
$ 4,110,000 $ 2,705,000 $ 3,908,000
============ ============ ============
</TABLE>
<PAGE>
6. INCOME TAXES:
Prior to 2000, the Company was not a tax paying entity and was included in
the consolidated federal tax return of PRWW. The accompanying financial
statements reflect the accounting for income taxes on a separate-company basis
as if the Company was a tax paying entity separate from PRWW for all periods
presented. In 2000, the Company will be included in certain PRWW consolidated
income tax filings and, accordingly the Company and PRWW have entered into a
tax sharing agreement that requires the Company to pay PRWW for the Company's
portion of PRWW's tax liabilities, as defined. Under the agreement, PRWW will
reimburse the Company for any tax benefit, as defined, generated by the Company
(see Note 7).
F-16
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
6. INCOME TAXES: -- (Continued)
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
------------------------------------------------- September 30,
1997 1998 1999 2000
----------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Current provision (benefit):
Federal .................... $ -- $ -- $1,165,000 $ (95,000)
State ...................... 112,000 69,000 207,000 --
Foreign .................... -- -- 128,000 371,000
------------- ---------- ---------- ----------
112,000 69,000 1,500,000 276,000
------------- ---------- ---------- ----------
Deferred provision (benefit):
Federal .................... (3,100,000) (109,000) 1,372,000 (201,000)
State ...................... (1,113,000) (105,000) 354,000 (84,000)
Foreign .................... (429,000) 209,000 -- --
------------- ---------- ---------- ----------
(4,642,000) (5,000) 1,726,000 (285,000)
------------- ---------- ---------- ----------
$ (4,530,000) $ 64,000 $3,226,000 $ (9,000)
============= ========== ========== ==========
</TABLE>
Foreign income (loss) before income taxes was $(1,300,000), $676,000,
$414,000 and $1,197,000 for the years ended December 31, 1997, 1998 and 1999
and the nine months ended September 30, 2000, respectively.
The reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
------------------------------ September 30,
1997 1998 1999 2000
---------- ------ -------- --------------
<S> <C> <C> <C> <C>
Tax at federal statutory rate ................. (34)% 34% 34% (34%)
State and local taxes, net of federal ......... (6) -- 6 (6%)
Other, primarily non-deductible expenses ...... 1 -- -- 33%
--- -- -- ---
(39)% 34% 40% (7)%
=== == == ===
</TABLE>
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
1998 1999 2000
--------------- ------------- --------------
<S> <C> <C> <C>
Goodwill amortization ..................... $ 2,986,000 $2,876,000 $2,737,000
Net operating loss carry-forwards ......... 652,000 33,000 --
Depreciation .............................. (7,000) (86,000) (8,000)
Reserves and accruals ..................... 159,000 301,000 1,023,000
----------- ---------- ----------
$ 3,790,000 $3,124,000 $3,752,000
=========== ========== ==========
</TABLE>
F-17
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
7. RELATED PARTY TRANSACTIONS:
Transactions with the Company's Chairman
The Company's Chairman, who is the Chief Executive Officer of PRWW, is a
cardiologist who provides medical services to the Company as an independent
contractor through his wholly-owned professional corporation (see Note 9). Fees
incurred under this consulting arrangement approximated $144,000, $144,000,
$156,000, $117,000 and $117,000 for the years ended December 31, 1997, 1998 and
1999 and the nine months ended September 30, 1999 and 2000, respectively. In
addition, at December 31, 1998 and 1999 amounts owed to the Company's Chairman
in connection with the consulting agreement were $48,000 and $52,000,
respectively. No amount was owed to the Company's Chairman at September 30,
2000.
Transactions with PRWW
Effective January 1, 2000, the Company entered into a tax sharing
agreement with PRWW. Pursuant to the tax sharing agreement, the Company and
PRWW will make payments to one another that, with respect to any period, will
be determined by calculating the difference between PRWW's consolidated
combined unitary group tax liability with and without the Company's inclusion.
In general, the tax sharing agreement is effective only for tax periods in
which the Company is a member of the PRWW consolidated group for federal income
tax purposes. The tax sharing agreement allows for the Company to carry back
any net operating loss, net capital loss or tax credit allowed under the tax
law that arises in any taxable year in which the Company is not a member of the
PRWW consolidated group, to a tax return filed by the PRWW consolidated group
in which the Company was included as a member. In that case, the Company would
be entitled to receive from PRWW any refund of taxes resulting from such
carryback. Similar rules apply to state and local taxes, as well.
Effective January 1, 2000, the Company also entered into a services and
support agreement with PRWW. Other than their CEO, who is the Company's
Chairman, PRWW does not have any employees. The Company provides a broad range
of financial and administrative services to PRWW for which PRWW pays a $10,000
monthly fee and reimburses the Company 6.5% of its chief executive officer's
salary and 25% of its chief financial officer's salary. The Company accounts
for these transactions as a reduction of operating expenses, as the agreement
is intended to represent a cost sharing arrangement based on actual costs
incurred. The Company also provides office space for the Chief Executive
Officer of PRWW. PRWW has also agreed to: (i) provide any cash advances the
Company reasonably needs for business and operations, subject to a $10.0
million limit, for which interest will be paid at the prime rate; (ii) make
PRWW's Chairman and CEO available to the Company to provide management support,
consultation and advice to the Company regarding strategic business planning,
corporate development, acquisitions, technology and securities laws compliance
matters, (iii) provide a broad range of insurance coverage for the Company
under its insurance policies. The Company pays 50% of the salary paid by PRWW
to its Chairman and CEO and a portion of the premiums for any PRWW insurance
policies. We believe there will be no material difference between the cost of
services provided and the fees paid or received. However, PRWW has agreed to
consider in good faith any adjustments that may be necessary to the monthly fee
if the resources the Company provides under the agreement are disproportionate
to the fee. Any material difference between the actual cost of services
provided and the adjusted monthly fees received will be accounted for as a
deemed capital transaction. Total charges to PRWW by the Company and to the
Company by PRWW under these arrangements for the nine months ended September
30, 2000 were $546,000 and $141,000, respectively. The Company believes such
fees are reflective of the actual costs incurred and resources received,
respectively. At September 30, 2000, the Company's receivable from PRWW was
$771,000. The Company also borrowed money from PRWW for working capital
purposes during the nine months ended September 30, 2000 and such borrowings
were repaid as of September 30, 2000. Interest was charged at the prime rate.
F-18
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
7. RELATED PARTY TRANSACTIONS: -- (Continued)
Consulting Agreement with AmericasDoctor.com
PRWW owns an equity investment in AmericasDoctor.com, an Internet company
that provides physician referrals and healthcare events on AOL's health web
page. In 1999, the Company entered into a two-year, $4.6 million consulting
contract with AmericasDoctor.com to help them develop their clinical trial
patient recruitment site. During 1999 and the nine months ended September 30,
2000, the Company recognized net revenues of $2.3 million and $1.7 million,
respectively, under this consulting contract.
Transactions with Medical Advisory Services
The Company has entered into a software license agreement with Medical
Advisory Services ("MAS") in which license fee revenues of approximately
$800,000 were recognized during the nine months ended September 30, 2000. MAS is
a publicly traded company and in March 2000, PRWW purchased common stock from
MAS at the market price for $5.8 million.
Transactions with Scirex Corporation
Scirex Corporation ("SC") is a customer of the Company. The Company
recorded software and service revenues from SC totaling approximately $1.4
million in 1999 and $1.7 million for the nine months ended September 30, 2000.
In March 2000, the Company issued a warrant to SC for business advisory services
it provided to us (see Note 11). One of our directors is also a director of SC
and our preferred stockholder (see Note 11) is an investor in SC.
Transactions with UM Holdings Ltd.
Prior to PRWW's initial public offering in February 1997, PRWW was a
wholly owned subsidiary of UM Holdings Ltd. ("UM"). The Company leased its
primary operating facility from UM (see Note 9) in 1997 and 1998 and
participated in UM's 401(k) profit sharing plan in 1997. The Company was
charged $349,000 for rent under the facility lease for the years ended December
31, 1997 and 1998, and $47,000 for profit sharing plan contributions for the
year ended December 31, 1997. The Company believes that all amounts charged by
UM were reasonable. In 1997, the Company paid UM $485,000 for 1996 income taxes
and $90,000 for estimated 1997 income taxes due under the tax sharing agreement
between PRWW and UM.
8. STOCK OPTION PLANS:
In June 2000, the Company adopted a stock option plan that provides for
grants of incentive stock options and nonqualified stock options to directors,
employees and other individuals who provide services to the Company. The plan
authorizes the issuance of up to 2,000,000 shares of common stock. As of
September 30, 2000, the Company had granted options to purchase 1,562,350
shares of common stock at a per share exercise price of $15.00. As of September
30, 2000, no options were exercisable and 437,650 options were available for
future grants under the Company's plan.
In August 1993, PRWW established a nonqualified stock option plan (the
"1993 Plan") authorizing the grant of options to acquire up to 1,100,500 shares
of the PRWW common stock. The options cover the purchase of common stock at
exercise prices initially set at or above current fair value as determined by
the Board of Directors. Options granted under the 1993 Plan became fully vested
nine days after the Company's initial public offering and expire five years
from the initial public offering date. No additional options may be granted
under this plan.
F-19
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
8. STOCK OPTION PLANS: -- (Continued)
In 1996, PRWW adopted a new stock option plan (the "1996 Plan") that
authorized the grant of both incentive and non-qualified options to acquire up
to 500,000 shares of the PRWW common stock. PRWW's Board of Directors
determines the exercise price of the options under the 1996 Plan. The exercise
price of incentive stock options may not be below fair value on the grant date.
Incentive stock options under the 1996 Plan expire ten years from the grant
date and are exercisable in accordance with vesting provisions set by the
Board. In May 1999, the shareholders of PRWW approved an amendment to the 1996
Plan that increased the number of shares authorized to be granted to 1,100,000.
Information with respect to outstanding options under PRWW's plans is as
follows:
Outstanding Option Price
Shares Per Share
------------- ----------------
Balance, December 31, 1996 .......... 530,441 $ 2.27-17.00
Granted .......................... 330,679 8.25-17.00
Cancelled ........................ (9,500) 13.00-17.00
------- -------------
Balance, December 31, 1997 .......... 851,620 2.27-13.125
Granted .......................... 252,675 3.75-9.00
Exercised ........................ (279,120) 2.27
Cancelled ........................ (151,675) 8.25-13.125
-------- -------------
Balance, December 31, 1998 .......... 673,500 2.27-13.125
Granted .......................... 181,500 5.50-9.38
Exercised ........................ (172,632) 2.27-6.625
Cancelled ........................ (134,745) 3.75-13.125
-------- -------------
Balance, December 31, 1999 .......... 547,623 2.27-13.125
Granted .......................... 314,500 10.00-16.25
Exercised ........................ (80,535) 2.27-13.125
Cancelled ........................ (35,096) 2.27-13.125
-------- -------------
Balance, September 30, 2000 ......... 746,492 $ 2.27-16.25
======== ==============
As of September 30, 2000, 248,373 options with a weighted average exercise
price of $9.33 per share were exercisable and 347,230 options were available for
future grants under the 1996 Plan.
The Company and PRWW account for their option grants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
and the related interpretations. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-based Compensation". SFAS No. 123 established a fair
value based method of accounting for stock-based compensation plans. Had
compensation cost for the stock option plans been determined based upon the
fair value of the options at the date of grant, as prescribed under SFAS No.
123, the Company's net income (loss) and basic and diluted net income (loss)
per share would have been adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
---------------------------------------------- --------------
1997 1998 1999 2000
---------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss): ............................
As reported ................................ $ (6,988,000) $ 125,000 $ 4,839,000 $ (126,000)
Pro forma .................................. (7,099,000) (25,000) 4,696,000 (635,000)
Basic and diluted net income (loss) per share:
As reported ................................ (0.70) 0.01 0.48 (0.01)
Pro forma .................................. (0.71) 0.00 0.47 (0.06)
</TABLE>
F-20
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
8. STOCK OPTION PLANS: -- (Continued)
The weighted average fair value per share of the PRWW options granted
during 1997, 1998, 1999 and 2000 was estimated as $5.40, $2.12, $2.56 and
$4.79, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Risk-free interest rate.......... 6.1% 5.3% 5.7% 6.0%
Expected dividend yield.......... 0.0% 0.0% 0.0% 0.0%
Expected life .................... 3 years 3 years 3 years 3 years
Expected volatility .............. 55.0% 55.0% 55.0% 55.0%
</TABLE>
The fair value per share of the Company options granted in 2000 was
estimated as $3.58, based on a risk-free interest rate of 6.0%, an expected
dividend yield of 0.0%, an expected life of 3 years, an expected volatility of
55.0% and the fair value per share of the Company's common stock of $11.00.
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to options granted
prior to 1995 and additional option grants are anticipated.
9. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and equipment under operating leases.
During the years ended December 31, 1997 and 1998, the Company leased its
primary operating facility from UM under a lease agreement executed in June
1996 that was to expire in September 2003 (see Note 7). The Company terminated
the facility lease with UM, without penalty, on January 3, 1999 and moved into
a new facility under a lease agreement that expires in August 2005. Rent
expense for all operating leases for the years ended December 31, 1997, 1998
and 1999 and the nine months ended September 30, 1999 and 2000 was $708,000
$1,203,000, $1,579,000, $1,213,000 and $722,000, respectively. In connection
with the sale of the domestic clinical research operations, PRWW entered into a
sublease agreement with the buyer to lease approximately two-thirds of its
primary operating facility through August 2005.
In 2000, the Company entered into a lease for a new facility that it plans
to occupy beginning January 1, 2001. The Company is currently in the process of
identifying a sublease tenant for the old facility. Based on current market
conditions and consultation with its real estate agent, the Company believes it
will be able to sublease the entire facility at equivalent rates beginning on
April 1, 2001. Therefore, the Company has accrued three months of lease
payments as of September 30, 2000.
Future minimum lease payments, contracted sublease income and estimated
sublease income as of September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Estimated
Gross Sublease Sublease
Obligation Income Income
------------ ------------- ----------
<S> <C> <C> <C>
2001 ........................ $ 2,559,000 $ 686,000 $ 282,000
2002 ........................ 2,568,000 695,000 338,000
2003 ........................ 2,568,000 695,000 338,000
2004 ........................ 2,469,000 695,000 338,000
2005 and thereafter ......... 7,351,000 464,000 451,000
----------- ---------- ----------
$17,515,000 $3,235,000 $1,747,000
=========== ========== ==========
</TABLE>
F-21
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
9. COMMITMENTS AND CONTINGENCIES: -- (Continued)
Royalties
In 1997, the Company entered into a development agreement, as amended,
that provides for royalty-based payments on two of the Company's software
products. The agreement provides for a 5% royalty on certain net license
revenues during a three-year period, not to exceed total royalties of $775,000.
During 1999 and the nine months ended September 30, 2000, the Company charged
$131,000 and $107,000, respectively, to expense under this agreement.
Agreements with Management
PRWW has entered into an employment agreement with its Chief Executive
Officer, who is the Company's Chairman, for a one-year period that commenced in
September 1999. Either PRWW or the Chairman may terminate the employment
agreement at any time, with or without cause. However, if PRWW terminates the
employment agreement without cause, PRWW must continue to pay the Chairman's
salary for a one-year period subsequent to the termination. In 2000, the Company
entered into a consulting agreement with the Chairman that relates to the
Chairman's capacity as a medical doctor and cardiologist and, among other
things, requires the Chairman to serve as the Company's medical director and
chief science officer, in addition to providing medical interpretations of
diagnostic tests from time to time, as required. Compensation under the
consulting agreement is $156,000 per year.
The Company entered into employment agreements with certain of its
executive officers. Either the Company or the employee may terminate the
employment agreement(s) at any time, with or without cause. However, if the
Company terminates the employment agreement(s) without cause, the Company must
continue to pay certain salaries for up to a one-year period subsequent to
termination.
Litigation
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company.
10. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION:
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 clinical
research support services, clinical trial management services and clinical data
management services; and Technology Operations, which includes software sales
and support and consulting services.
During 1997 and 1998, no single client accounted for more than 10% of a
segment's net revenues. In 1999, one client accounted for 15.5% of Clinical
Operations net revenues and three clients accounted for 25.9%, 19.1% and 11.7%,
respectively, of Technology Operations net revenues.
F-22
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
10. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION: -- (Continued)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). The Company
evaluates performance based on the net revenues and operating earnings
performance of the respective business segments.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------
Clinical
Operations Technology Other Total
--------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
License revenues ............................. $ -- $ 210,000 $ -- $ 210,000
Service revenues ............................. 6,900,000 585,000 7,485,000
CRO operations revenues ...................... 4,415,000 -- 2,053,000 6,468,000
------------ ------------ ---------- -------------
Net revenues from external customers ......... 11,315,000 795,000 2,053,000 14,163,000
Loss from operations ......................... (2,525,000) (8,311,000) (682,000) (11,518,000)
Identifiable assets .......................... 6,263,000 3,573,000 5,175,000 15,011,000
Depreciation and amortization ................ 547,000 75,000 87,000 709,000
Capital expenditures ......................... 1,437,000 30,000 42,000 1,509,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------------
Clinical
Operations Technology Other Total
--------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
License revenues ............................. $ -- $5,142,000 $ -- $5,142,000
Service revenues ............................. 9,823,000 4,788,000 -- 14,611,000
CRO operations revenues ...................... 11,865,000 -- 189,000 12,054,000
------------ ---------- --------- ----------
Net revenues from external customers ......... 21,688,000 9,930,000 189,000 31,807,000
Income (loss) from operations ................ (1,565,000) 1,689,000 65,000 189,000
Identifiable assets .......................... 14,189,000 4,588,000 3,776,000 22,553,000
Depreciation and amortization ................ 1,097,000 509,000 -- 1,606,000
Capital expenditures ......................... 2,864,000 488,000 -- 3,352,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------------
Clinical
Operations Technology Other Total
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
License revenues ............................. $ -- $4,381,000 $ -- $4,381,000
Service revenues ............................. 14,013,000 7,681,000 -- 21,694,000
CRO operations revenues ...................... 16,710,000 -- -- 16,710,000
----------- ---------- --------- ----------
Net revenues from external customers ......... 30,723,000 12,062,000 -- 42,785,000
Income (loss) from operations ................ (755,000) 3,970,000 -- 3,215,000
Identifiable assets .......................... 5,318,000 4,884,000 3,123,000 13,325,000
Depreciation and amortization ................ 1,585,000 582,000 -- 2,167,000
Capital expenditures ......................... 1,654,000 663,000 -- 2,317,000
</TABLE>
F-23
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
10. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION: -- (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------------------
Clinical
Operations Technology Other Total
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
License revenues ............................. $ -- $2,702,000 $ -- $2,702,000
Service revenues ............................. 10,624,000 5,622,000 -- 16,246,000
CRO operations revenues ...................... 13,010,000 -- -- 13,010,000
---------- ---------- --------- ----------
Net revenues from external customers ......... 23,634,000 8,324,000 -- 31,958,000
Income from operations ....................... 609,000 1,475,000 -- 2,084,000
Identifiable assets .......................... 14,763,000 3,912,000 2,931,000 21,606,000
Depreciation and amortization ................ 1,212,000 446,000 -- 1,658,000
Capital expenditures ......................... 1,227,000 492,000 -- 1,719,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
---------------------------------------------------------------
Clinical
Operations Technology Other Total
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
License revenues ............................. $ -- $ 3,948,000 $ -- $3,948,000
Service 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 ................ 771,000 (1,276,000) -- (505,000)
Identifiable assets .......................... 8,462,000 5,367,000 10,229,000 24,058,000
Depreciation and amortization ................ 569,000 758,000 -- 1,327,000
Capital expenditures ......................... 1,935,000 358,000 -- 2,293,000
</TABLE>
The Company operates on a worldwide basis with two locations in the United
States and two locations in the United Kingdom.
Geographic information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------
North
America Europe Total
---------------- --------------- ----------------
<S> <C> <C> <C>
License revenues ............................. $ 210,000 $ -- $ 210,000
Service revenues ............................. 6,510,000 975,000 7,485,000
CRO operations revenues ...................... 6,468,000 -- 6,468,000
------------- ------------ -------------
Net revenues from external customers ......... 13,188,000 975,000 14,163,000
Loss from operations ......................... (10,218,000) (1,300,000) (11,518,000)
Identifiable assets .......................... 14,463,000 548,000 15,011,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------
North
America Europe Total
------------- --------------- -------------
<S> <C> <C> <C>
License revenues ............................. $4,094,000 $ 1,048,000 $5,142,000
Service revenues ............................. 11,658,000 2,953,000 14,611,000
CRO operations revenues ...................... 11,435,000 619,000 12,054,000
---------- ------------ ----------
Net revenues from external customers ......... 27,187,000 4,620,000 31,807,000
Income (loss) from operations ................ 2,037,000 (1,848,000) 189,000
Identifiable assets .......................... 20,414,000 2,139,000 22,553,000
</TABLE>
F-24
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------
North
America Europe Total
------------- ------------ -------------
<S> <C> <C> <C>
License revenues ............................. $4,381,000 $ -- $4,381,000
Service revenues ............................. 17,004,000 4,690,000 21,694,000
CRO operations revenues ...................... 15,993,000 717,000 16,710,000
---------- --------- ----------
Net revenues from external customers ......... 37,378,000 5,407,000 42,785,000
Income (loss) from operations ................ 3,808,000 (593,000) 3,215,000
Identifiable assets .......................... 12,924,000 401,000 13,325,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------------
North
America Europe Total
------------- ------------ -------------
<S> <C> <C> <C>
License revenues ............................. $2,702,000 $ 0 $2,702,000
Service revenues ............................. 12,734,000 3,512,000 16,246,000
CRO operations revenues ...................... 13,010,000 0 13,010,000
---------- --------- ----------
Net revenues from external customers ......... 28,446,000 3,512,000 31,958,000
Income (loss) from operations ................ 2,410,000 (326,000) 2,084,000
Identifiable assets .......................... 20,456,000 1,150,000 21,606,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
----------------------------------------------
North
America Europe Total
--------------- ------------ -------------
<S> <C> <C> <C>
License revenues ............................. $ 3,654,000 $ 294,000 $3,948,000
Service revenues ............................. 13,355,000 3,910,000 17,265,000
------------ --------- ----------
Net revenues from external customers ......... 17,009,000 4,204,000 21,213,000
Income (loss) from operations ................ (1,203,000) 698,000 (505,000)
Identifiable assets .......................... 22,695,000 1,363,000 24,058,000
</TABLE>
11. SALE OF PREFERRED STOCK AND ISSUANCE OF COMMON STOCK WARRANTS:
On March 24, 2000, the Company sold 95,000 shares of preferred stock and
agreed to issue a warrant to purchase 2.5% of the Company's outstanding common
stock, as defined, for an aggregate of $9.5 million. The preferred stock is
automatically convertible into Company common stock upon an initial public
offering with proceeds of at least $25 million at the initial public offering
price per share less the underwriting discounts and commissions. If the Company
does not complete an initial public offering before March 24, 2001, the holder
of the preferred stock has the right to require PRWW to purchase the preferred
stock for a price equal to the holder's original purchase price, with the
purchase price being paid at PRWW's option in cash or shares of PRWW common
stock at the then market price, as defined. The preferred stockholder receives
a 7% dividend, payable on March 24, 2001. The Company has accrued dividends
payable on the preferred of $335,000 as of September 30, 2000. The warrant is
issuable concurrent with an initial public offering and is exercisable for a
two-year period at 200% of the initial public offering price per share less the
underwriting discounts and commissions. The Company also issued a warrant to a
customer (see Note 7) to purchase the number of shares of common stock equal to
$1.0 million divided by the initial public offering price per share. The
warrant is exercisable for a two-year period following the initial public
offering at a per share exercise price equal to the initial public offering
price per share. The warrant was issued in consideration of advisory services
provided by the customer with respect to the customer's relationship with the
purchaser of the preferred stock.
F-25
<PAGE>
eRESEARCHTECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended
September 30, 1999 is unaudited)
11. SALE OF PREFERRED STOCK AND ISSUANCE OF COMMON
STOCK WARRANTS: -- (Continued)
The value of the beneficial conversion feature of the preferred stock of
$715,000 and the value of the warrant issued to the preferred stockholder of
$618,000 will be recorded as a charge against net income available to common
stockholders upon the closing of the Company's initial public offering. The
value of the warrant issued for advisory services of $345,000 will be recorded
as a charge against operations upon the closing of the Company's initial public
offering. The warrant values have been estimated using the Black-Scholes option
pricing model and the following assumptions: volatility of 55%, risk-free
interest rate of 6%, fair market value of a share of common stock equal to the
initial public offering price of $11.00 and a term of two years.
The accompanying balance sheet presents the Company's stockholders' equity
on a pro forma basis to reflect the automatic conversion of the preferred
stock, the warrant issuances and the charges the Company will record in
connection with the beneficial conversion feature of the preferred stock and
the value of the warrants.
12. RESTATEMENT OF CERTIFICATE OF INCORPORATION:
On March 23, 2000 the Company's certificate of incorporation was restated
to authorize 10,000,000 shares of no par value preferred stock and 50,000,000
shares of $.01 par value common stock. In addition, on July 28, 2000, the
Company effected a 10,000-for-1 split of its common stock.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DLB Systems, Inc.:
We have audited the accompanying statements of operations and cash flows of DLB
Systems, Inc. (a Delaware corporation) for the ten months ended October 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of DLB Systems,
Inc. for the ten months ended October 31, 1997, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 24, 2000
F-27
<PAGE>
DLB SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Net revenue:
License fees ..................................................... $ 1,483,220
Software maintenance and support ................................. 2,275,489
Consulting and training services ................................. 946,017
------------
Net revenue ................................................... 4,704,726
Cost of revenue ..................................................... 1,276,857
------------
Gross margin .................................................. 3,427,869
------------
Operating expenses:
Selling and marketing ............................................ 1,366,311
Research and development ......................................... 2,231,263
General and administrative ....................................... 1,618,969
------------
Total operating expenses ...................................... 5,216,543
------------
Operating loss ................................................ (1,788,674)
Interest expense, net ............................................... (290,491)
------------
Net loss ............................................................ (2,079,165)
Preferred dividends ................................................. (250,000)
------------
Net loss to common shareholders ..................................... $ (2,329,165)
============
Basic and diluted net loss per common share ......................... $ (11.65)
============
Shares used to compute basic and diluted net loss per share ......... 200,000
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE>
DLB SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss ................................................................... $ (2,079,165)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization ............................................ 195,933
Provision for losses on accounts receivable .............................. 50,000
Loss of disposals of fixed assets ........................................ 2,171
Changes in operating assets and liabilities:
Accounts receivable ..................................................... 1,080,430
Prepaid expenses and other current assets ............................... 10,137
Other assets ............................................................ 41,074
Accounts payable ........................................................ 197,321
Accrued expenses ........................................................ (61,074)
Deferred revenue ........................................................ (161,816)
-------------
Net cash used in operating activities .............................. (724,989)
-------------
Cash flows from investing activities:
Purchases of fixed assets .................................................. (71,860)
-------------
Cash flows from financing activities:
Payments of capital lease obligations ...................................... (18,967)
Proceeds from financing arrangements ....................................... 1,818,789
Payments of principal on financing arrangements ............................ (1,647,287)
Proceeds from issuance of Series B redeemable cumulative preferred stock ... 1,000,000
-------------
Net cash provided by financing activities .......................... 1,152,535
-------------
Net increase in cash ........................................................ 355,686
Cash at beginning of period ................................................. 29,002
-------------
Cash at end of period ....................................................... $ 384,688
=============
Supplemental information:
Cash paid for interest ..................................................... $ 290,491
=============
Supplemental noncash financing activities:
Accrual of preferred stock dividend ........................................ $ 250,000
=============
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE>
DLB SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
DLB Systems, Inc. (DLB or the Company) was incorporated in Delaware on
July 31, 1995 to continue to conduct certain business operations formerly
conducted by DLB Systems, Inc., a New Jersey corporation (DLB-NJ). DLB-NJ was
founded in 1992 as a wholly-owned subsidiary of DLB Systems, Ltd. (DLB-Ltd.), a
U.K.-based company. On August 1, 1995, substantially all of the assets and
liabilities of DLB-NJ were transferred to the Company under an asset purchase
agreement among DLB, DLB-NJ and DLB-Ltd. (the Agreement). The assets and
liabilities transferred to the Company had a negative net book value of
$(2,911,784). The transfer has been accounted for at historical book values
without any purchase accounting adjustments due to the common shareholders of
DLB and DLB-NJ.
The principal activities of the Company are the development and licensing
of computer software products and associated services to the pharmaceutical
industry to assist with clinical research and development and regulatory
compliance.
Revenue Recognition
Revenue is derived primarily from one-time software license fees, software
maintenance and support contracts and consulting and training services. DLB
recognizes revenue from software license transactions at the date of delivery
or upon customer acceptance, as appropriate. Revenue from software maintenance
and continuing support contracts is recognized on a straight-line basis over
the period in which the software maintenance and continuing support is
provided. Revenue from consulting and training services is recognized when
services are performed.
Income Taxes
The asset and liability method prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," requires
recognition of deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using tax rates in effect for the year in which the differences
are expected to reverse.
Differences between pre-tax book losses and taxable losses are generated
mainly from certain nondeductible permanent differences and temporary
differences such as accelerated methods of calculating tax depreciation. At
October 31, 1997, the Company had net Federal and state net operating losses
available for carryforward of approximately $8,000,000 and $6,000,000,
respectively, expiring through the years 2011 and 2003, respectively.
Research and Development and Software Development Costs
Research and development costs are charged to expense when incurred. Costs
incurred in the research and development of new software products and
enhancements to existing software products are also expensed as incurred until
the technological feasibility of the product or enhancement has been
established. After technological feasibility has been established and prior to
product release, any additional development costs are capitalized in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed," and are
included in the balance sheet. However, to date, software development costs on
DLB products, after achieving technological feasibility, have been immaterial.
F-30
<PAGE>
DLB SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
OCTOBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Stock-based Employee Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS No. 123) No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net earnings disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and the pro forma disclosure required by SFAS
No. 123 is not material to the Company and, therefore, has not been presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of 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.
2. LEASE COMMITMENTS:
At October 31, 1997, the Company is obligated to pay $7,220 under
operating leases, which expire through 1998 for office space and equipment.
Rental expense for operating leases during the ten months ended October 31,
1997 was $196,106.
3. CONCENTRATION OF CREDIT RISK:
During the ten months ended October 31, 1997, one customer accounted for
approximately 11% of net revenue. Substantially all sales are made to customers
who are in the pharmaceutical industry. The Company performs periodic credit
evaluations of its customers' financial condition and frequently does not
require collateral.
4. RELATED-PARTY TRANSACTIONS:
DLB, DLB-NJ and DLB-Ltd. entered into a consulting agreement, which
provides for the payment of support service fees by DLB. These fees cover the
consulting and related costs of specified employees of DLB-NJ including two
directors of the Company. During the ten months ended October 31, 1997, DLB
paid $1,173,250 and $407,546, respectively in support service fees to DLB-Ltd.
and DLB-NJ.
DLB and its preferred stockholder entered into an Administrative Services
Agreement whereby the preferred stockholder will provide the Company with
certain administrative support services, as defined in the Administrative
Services Agreement, for which the preferred stockholder shall be paid an annual
fee equal to 1/2% of the Company's gross revenues. The Administrative Services
Agreement shall automatically continue on an annual basis, subject to
termination on the final day of any succeeding calendar year by delivery of 90
days' notice by either party prior to the termination date.
5. RETIREMENT SAVINGS PLAN:
The Company maintains a 401(k) retirement savings plan (the 401(k) Plan).
The Company administers the 401(k) Plan at its own expense and provides no
match to employee contributions.
F-31
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,000,000 Shares
[LOGO]
Common Stock
-------------------------------
PROSPECTUS
-------------------------------
SG Cowen
Prudential Vector Healthcare
a unit of Prudential Securities
, 2000
In making your investment decision relating to the shares offered hereby, you
should rely on the information contained in this prospectus and not on any
other information. We have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus.
Until _____________, 2000 all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments and subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
Part II
Information Not Required in Prospectus
<TABLE>
<CAPTION>
<S> <C>
Registration fee ............................................. $ 19,800
National Association of Securities Dealers, Inc. fee ......... 8,000
Nasdaq National Market listing fee ........................... 95,000
Printing and engraving expenses .............................. 125,000*
Legal fees and expenses ...................................... 400,000*
Accountants' fees and expenses ............................... 400,000*
Blue sky fees and expenses ................................... 6,000*
Transfer agent and registrar fees and expenses ............... 15,000*
Miscellaneous ................................................ 31,200*
----------
Total ...................................................... $1,100,000
==========
</TABLE>
------------
*Estimated.
Item 14. Indemnification of Directors and Officers.
The Company's Bylaws provide for the maximum indemnification of our
directors and officers as Delaware law permits. Section 145 of the General
Corporation Law of the State of Delaware empowers a Delaware corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgement, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
In the case of an action or suit by or in the right of the corporation to
procure a judgment in its favor, Section 145 empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by reason of the fact
that he is or was acting in any of the capacities set forth above against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that indemnification is not
permitted in respect of any claim, issue or matter as to which such person is
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court deems proper.
Section 145 further provides: that a Delaware corporation is required to
indemnify a present or former director or officer against expenses (including
attorneys' fees) actually and reasonably incurred by him in defense of any
action, suit or proceeding referred to above or in defense of any claim, issue
or matter therein as to which such person has been successful on the merits or
otherwise; that the indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; that the indemnification provided for by Section 145 shall, unless
otherwise provided when
II-1
<PAGE>
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under Section 145. A Delaware corporation
may provide indemnification only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct. Such determination is to be made (i) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum or (ii) by a committee of such
directors designated by majority vote of such directors, even though less than
a quorum, or (iii) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (iv) by the
stockholders.
Article Sixth of the Company's Restated Certificate of Incorporation
limits the liability of the Company's directors to the fullest extent permitted
by Section 102(b)(7) of the General Corporation Law of the State of Delaware,
as the same may be amended and supplemented. Section 102(b)(7) permits the
certificate of incorporation of a Delaware corporation to include a provision
eliminating or limiting the personal liability of a director of a corporation
to the corporation or its stockholders for monetary damages for breach of his
fiduciary duty as a director; provided, however, that the provision may not
eliminate or limit the liability of a director for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) the unlawful payment of dividends or unlawful
purchase or redemption of stock under Section 174 of the General Corporation
Law of the State of Delaware; or (iv) any transaction from which the director
derived an improper personal benefit.
The Company's directors and officers are covered under liability insurance
policies with coverage in the amount of $10 million that PRWW, Ltd. has
purchased. The Company intends to purchase and maintain its own directors' and
officers' liability insurance policies.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
On January 1, 2000, in reliance upon the exemption contained in Section
4(2) of the Securities Act, the Company issued 1,000 shares of common stock to
PRWW, Ltd. in exchange for all of the assets and business of that corporation's
technology and operating business.
On March 24, 2000, in reliance upon the exemption contained in Section
4(2) of the Securities Act, the Company sold 95,000 shares of its series A
convertible preferred stock and agreed to issue a common stock warrant to
Communicade Inc. for $9.5 million. The warrant will entitle Communicade to
purchase a number of shares of common stock equal to 2.5% of the
then-outstanding shares of common stock, at an exercise price per share equal
to 200% of the initial public offering price per share less the underwriting
discounts and commissions.
On March 27, 2000, in reliance upon the exemption contained in Section
4(2) of the Securities Act, the Company issued a warrant to purchase shares of
common stock to Scirex Corporation. The warrant entitles Scirex to purchase a
number of shares of common equal to $1 million divided by the initial public
offering price per share, at an exercise price per share equal to the initial
public offering price per share.
On June 13, 2000, July 18, 2000 and September 25, 2000, in reliance upon
the exemptions contained in Section 4(2) or Rule 701 promulgated under the
Securities Act, the Company granted options to employees and directors to
purchase an aggregate of 1,602,750 shares of the Company's common stock under
the Company's 2000 Stock Option Plan. Options for 7,200 shares of the Company's
common stock were forfeited subsequent to grant prior to October 31, 2000. All
of the options have an exercise price of $15.00 per share.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No.
------------- Exhibit
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company, as amended.
3.2** Amended and Restated Bylaws of the Company.
4.1 Form of the Company's Common Stock certificate.
5.1 Opinion of Duane, Morris & Heckscher LLP.
10.1* Management Consulting Agreement effective as of January 1, 2000 between Joel Morganroth, M.D.,
P.C. and the Company.
10.2* Management Employment Agreement effective as of January 1, 2000 between Joseph A. Esposito and
the Company.
10.3* Management Employment Agreement effective as of January 1, 2000 between Bruce Johnson and the
Company.
10.4* Management Employment Agreement effective as of January 1, 2000 between Vincent Renz and the
Company.
10.5*** Management Employment Agreement effective as of January 1, 2000 between Robert Brown and the
Company, as amended.
10.6** Voting Agreement dated as of March 24, 2000 between PRWW, Ltd. and the Company.
10.7** Tax Sharing Agreement effective as of January 1, 2000 between PRWW, Ltd. and the Company.
10.8 Services and Support Agreement effective as of January 1, 2000 between PRWW, Ltd. and the
Company, as amended by Supplement to Services and Support Agreement dated April 17, 2000.
10.9** Sublease Agreement dated June 25, 1998 between Raytheon Engineers & Constructors, Inc. and the
Company (as successor by assignment).
10.10 Lease Agreement dated August 18, 2000 between Advance/GLB 2 L.L.C. and the Company.
10.11** Lease Agreement effective October 1, 1999 between CAEC Howard (Arkwright) Limited and the
Company (as successor by assignment).
10.12** Marketing Service Agreement dated March, 1999 between the Company (as successor by assignment)
and AmericasDoctor.com, Inc.
10.13** Master Software License Agreement dated as of July 31, 1999 between the Company (as successor
by assignment) and Breast Cancer International Research Group Limited.
10.14** Professional Services Agreement dated as of July 31, 1999 between the Company (as successor by
assignment) and Breast Cancer International Research Group Limited.
10.15** Series A Preferred Stock Purchase Agreement dated as of March 24, 2000 between the Company,
PRWW, Ltd. and Communicade Inc.
10.16** Investor Rights Agreement dated as of March 24, 2000 between the Company, PRWW, Ltd. and
Communicade Inc.
10.17** Form of Warrant to be issued by the Company in favor of Communicade Inc.
10.18** Warrant dated March 27, 2000 by the Company in favor of Scirex Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No.
--------------- Exhibit
<S> <C>
10.19*** 2000 Stock Option Plan.
10.20*** Management Employment Agreement effective as of July 5, 2000 between Jeffrey Litwin, M.D. and
the Company, as amended.
11.1 Intentionally Omitted.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1** Powers of Attorneys of certain signatories.
27.1 Financial Data Schedule -- eResearchTechnology, Inc.
27.2 Financial Data Schedule -- DLB Systems.
</TABLE>
------------
* Previously filed; management contract or compensatory plan or arrangement.
** Previously filed.
*** Management contract or compensatory plan or agreement.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on
November 3, 2000.
eRESEARCHTECHNOLOGY, INC.
By: /s/ Joseph A. Esposito
---------------------------
Joseph A. Esposito, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------------------------ -------------------------------------------- -----------------
<S> <C> <C>
/s/ Joseph A. Esposito President, Chief Executive Officer and November 3, 2000
--------------------------- Director (principal executive officer)
Joseph A. Esposito
* Chairman and Director November 3, 2000
---------------------------
Joel Morganroth, M.D.
* Senior Vice President and Chief Financial November 3, 2000
--------------------------- Officer (principal financial and accounting
Bruce Johnson officer)
* Director November 3, 2000
---------------------------
Sheldon M. Bonovitz
* Director November 3, 2000
---------------------------
Thomas L. Harrison
* Director November 3, 2000
---------------------------
Howard D. Ross
* Director November 3, 2000
---------------------------
John M. Ryan
*By: /s/ Joseph A. Esposito
-----------------------
Joseph A. Esposito
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eResearchTechnology, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of eResearchTechnology, Inc. included in this registration
statement and have issued our report thereon dated October 27, 2000. Our audit
was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The following schedule is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, PA
October 27, 2000
S-1
<PAGE>
SCHEDULE II
eRESEARCHTECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance Balance
Beginning of Charges to Deductions End
Period Expense from Reserve Other of Period
-------------- ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
September 30, 2000 $425,000 $638,000 $ 34,000 $ -- $1,029,000
December 31, 1999 243,000 399,000 217,000 -- 425,000
December 31, 1998 178,000 -- -- 65,000 243,000
December 31, 1997 140,000 -- 3,000 41,000 178,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
--- -------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company, as amended.
4.1 Form of the Company's Common Stock certificate.
5.1 Opinion of Duane, Morris & Heckscher LLP.
10.5* Management Employment Agreement effective as of January 1, 2000 between Robert Brown and the
Company, as amended.
10.8 Services and Support Agreement effective as of January 1, 2000 between PRWW, Ltd. and the
Company, as amended by Supplement to Services and Support Agreement dated April 17, 2000.
10.10 Lease Agreement dated August 18, 2000 between Advance/GLB 2 L.L.C. and the Company.
10.19* 2000 Stock Option Plan.
10.20* Management Employment Agreement effective as of July 5, 2000 between Jeffrey Litwin, M.D. and
the Company, as amended.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule -- eResearchTechnology, Inc.
27.2 Financial Data Schedule -- DLB Systems.
</TABLE>
------------
* Management contract or compensatory plan or agreement.
