Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the quarterly period ended March 31,
2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from
to
Commission
File Number: 000-50839
Phase Forward Incorporated
(Exact name of registrant as
specified in its charter)
Delaware
|
|
04-3386549
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification No.)
|
|
|
|
77 Fourth
Avenue
|
|
|
Waltham, Massachusetts
|
|
02451
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
(888)
703-1122
(Registrants telephone number, including
area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions
of large accelerated filer, accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do not check if a smaller
reporting company)
|
|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of April 26, 2010, the registrant had
43,744,864 shares of common stock outstanding.
Table of Contents
PHASE
FORWARD INCORPORATED
QUARTERLY
REPORT ON FORM 10-Q
For
the quarterly period ended March 31, 2010
Table of Contents
2
Table of Contents
Part IFinancial
Information
Item 1.
Condensed Consolidated Financial Statements
Phase Forward Incorporated
Condensed Consolidated Balance
Sheets
(unaudited)
(in thousands, except per
share amounts)
|
|
December 31, 2009
|
|
March 31, 2010
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,862
|
|
$
|
53,290
|
|
Short-term investments
|
|
67,241
|
|
76,449
|
|
Securities settlement
agreement
|
|
4,345
|
|
3,280
|
|
Accounts receivable, net of
allowance of $781 and $769, respectively
|
|
56,034
|
|
44,660
|
|
Deferred income taxes
|
|
9,521
|
|
9,521
|
|
Other current assets
|
|
14,694
|
|
15,564
|
|
|
|
|
|
|
|
Total current assets
|
|
193,697
|
|
202,764
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
52,840
|
|
52,015
|
|
Intangible assets, net of
accumulated amortization of $7,332 and $8,782, respectively
|
|
41,661
|
|
40,211
|
|
Goodwill
|
|
59,027
|
|
59,027
|
|
Deferred income taxes
|
|
5,465
|
|
5,465
|
|
Restricted cash
|
|
962
|
|
982
|
|
Long-term investments
|
|
26,439
|
|
|
|
Other assets
|
|
9,865
|
|
9,213
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
389,956
|
|
$
|
369,677
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,909
|
|
$
|
3,649
|
|
Accrued expenses and other
current liabilities
|
|
28,006
|
|
19,136
|
|
Deferred revenues
|
|
85,896
|
|
95,394
|
|
|
|
|
|
|
|
Total current liabilities
|
|
119,811
|
|
118,179
|
|
|
|
|
|
|
|
Deferred rent, net of
current portion
|
|
2,115
|
|
2,489
|
|
Deferred revenue, net of
current portion
|
|
12,478
|
|
15,055
|
|
Other long-term liabilities
|
|
10,224
|
|
10,177
|
|
|
|
|
|
|
|
Total liabilities
|
|
144,628
|
|
145,900
|
|
|
|
|
|
|
|
Commitments and
contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 5,000 shares authorized, none issued
|
|
|
|
|
|
Common stock, $0.01 par
value; 100,000 shares authorized: 43,577 and 43,732 issued, respectively
|
|
436
|
|
438
|
|
Additional paid-in capital
|
|
296,572
|
|
299,478
|
|
Treasury stock, 980 and
2,915 shares at cost, respectively
|
|
(14,147
|
)
|
(40,111
|
)
|
Accumulated other
comprehensive income (loss)
|
|
71
|
|
(357
|
)
|
Accumulated deficit
|
|
(37,604
|
)
|
(35,671
|
)
|
Total stockholders equity
|
|
245,328
|
|
223,777
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
389,956
|
|
$
|
369,677
|
|
See accompanying
notes.
3
Table of Contents
Phase
Forward Incorporated
Condensed
Consolidated Statements of Income
(unaudited)
(in
thousands, except per share amounts)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
License
|
|
$
|
14,116
|
|
$
|
15,141
|
|
Service
|
|
34,700
|
|
42,059
|
|
Total revenues
|
|
48,816
|
|
57,200
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
License (2)
|
|
566
|
|
566
|
|
Service (1), (2)
|
|
19,899
|
|
25,716
|
|
Total cost of revenues
|
|
20,465
|
|
26,282
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
License
|
|
13,550
|
|
14,575
|
|
Service
|
|
14,801
|
|
16,343
|
|
Total gross margin
|
|
28,351
|
|
30,918
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing (1),
(2)
|
|
7,206
|
|
8,986
|
|
Research and development
(1)
|
|
8,180
|
|
9,698
|
|
General and administrative
(1), (2)
|
|
7,804
|
|
9,184
|
|
Total operating expenses
|
|
23,190
|
|
27,868
|
|
|
|
|
|
|
|
Income from operations
|
|
5,161
|
|
3,050
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
Interest income
|
|
640
|
|
316
|
|
Other income (expense), net
|
|
409
|
|
(184
|
)
|
Total other income
|
|
1,049
|
|
132
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
6,210
|
|
3,182
|
|
Provision for income taxes
|
|
2,132
|
|
1,249
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,078
|
|
$
|
1,933
|
|
|
|
|
|
|
|
Net income per share
applicable to common stockholders:
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.05
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.05
|
|
|
|
|
|
|
|
Weighted average number of
common shares used in net income per share calculations:
|
|
|
|
|
|
Basic
|
|
42,430
|
|
41,085
|
|
|
|
|
|
|
|
Diluted
|
|
43,998
|
|
42,764
|
|
(1) Amounts include
stock-based compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service revenues
|
|
$
|
476
|
|
$
|
636
|
|
Sales and marketing
|
|
415
|
|
468
|
|
Research and development
|
|
621
|
|
1,036
|
|
General and administrative
|
|
1,057
|
|
1,361
|
|
|
|
|
|
|
|
(2) Amounts include
amortization expense of acquired intangible assets, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Costs of license revenues
|
|
$
|
155
|
|
$
|
237
|
|
Cost of service revenues
|
|
261
|
|
447
|
|
Sales and marketing
|
|
320
|
|
740
|
|
General and administrative
|
|
25
|
|
26
|
|
See accompanying
notes.
4
Table of Contents
Phase
Forward Incorporated
Condensed
Consolidated Statements of Cash Flows
(unaudited)
(in
thousands)
|
|
Three
Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,078
|
|
$
|
1,933
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
3,713
|
|
5,806
|
|
Stock-based compensation expense
|
|
2,569
|
|
3,501
|
|
Amortization of leasehold incentive obligation
|
|
(198
|
)
|
(247
|
)
|
Provision for allowance for doubtful accounts
|
|
13
|
|
12
|
|
Deferred income taxes
|
|
2,444
|
|
|
|
Amortization of premiums or discounts on
investments
|
|
(3
|
)
|
254
|
|
Change in fair value of investments
|
|
(437
|
)
|
(1,112
|
)
|
Change in fair value of securities settlement
agreement
|
|
185
|
|
1,065
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(2,210
|
)
|
11,406
|
|
Other assets
|
|
(1,881
|
)
|
(670
|
)
|
Accounts payable
|
|
(4,125
|
)
|
(2,254
|
)
|
Accrued expenses
|
|
(6,715
|
)
|
(8,756
|
)
|
Deferred revenues
|
|
7,465
|
|
12,137
|
|
Deferred rent
|
|
1,135
|
|
374
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
6,033
|
|
23,449
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
|
(20
|
)
|
Proceeds from maturities of short-term and
long-term investments
|
|
12,000
|
|
29,125
|
|
Purchase of short-term and long-term investments
|
|
(9,536
|
)
|
(10,750
|
)
|
Purchase of property and equipment
|
|
(5,174
|
)
|
(3,049
|
)
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
(2,710
|
)
|
15,306
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
342
|
|
134
|
|
Purchase of treasury stock
|
|
|
|
(25,964
|
)
|
Withholding taxes in connection with vesting of
restricted stock awards
|
|
(459
|
)
|
(727
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(117
|
)
|
(26,557
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(547
|
)
|
(770
|
)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
2,659
|
|
11,428
|
|
Cash and cash equivalents at beginning of period
|
|
131,550
|
|
41,862
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
134,209
|
|
53,290
|
|
Short-term and long-term investments at end of
period
|
|
43,891
|
|
76,449
|
|
Total cash, cash equivalents and short-term and
long-term investments at end of period
|
|
$
|
178,100
|
|
$
|
129,739
|
|
See accompanying
notes.
5
Table of Contents
Phase Forward Incorporated
Notes to Condensed Consolidated
Financial Statements
(unaudited)
(in thousands, except share and per share amounts)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Phase Forward Incorporated (the Company)
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States have been condensed or omitted
pursuant to such SEC rules and regulations. Management of the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. In the opinion of management, the unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and reflect all material adjustments
(consisting only of those of a normal and recurring nature) which are necessary
to present fairly the consolidated financial position of the Company as of March 31,
2010, the results of its operations for the three months ended March 31,
2009 and 2010 and its cash flows for the three months ended March 31, 2009
and 2010. These unaudited condensed consolidated financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the year ending December 31, 2010.
As
of March 31, 2010, the Companys significant accounting policies and
estimates, which are detailed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009, have not changed except for the
adoption or application of the accounting pronouncements applicable for
subsequent periods as set forth in Note 16.
2.
Revenue Recognition
The Company
derives revenues from software licenses and services of its
Integrated
Clinical Research Suite
(ICRS) products which can be purchased on a stand-alone basis or
bundled together. License revenues are derived principally from the sale of
term licenses of its software products and service revenues are derived
principally from the Companys delivery of the hosted solutions of its software
products, consulting services and customer support including training, for all
of the Companys products.
Revenue arrangements may include one of these
single elements, or may incorporate one or more elements in a single transaction
or combination of related transactions. In the first quarter of 2010, the
Company adopted the guidance of Accounting Standards Update (ASU) No. 2009-13,
Revenue Recognition
(Topic 605):
Multiple-Deliverable Revenue Arrangements,
which was
ratified by the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force on September 23, 2009. ASU No. 2009-13 affects accounting
and reporting for all multiple-deliverable arrangements.
ASU No. 2009-13
establishes a selling price hierarchy for determining the selling price of a
deliverable in a sale arrangement. The selling price for each deliverable is
based on vendor-specific objective evidence (VSOE) if available, third-party
evidence (TPE) if VSOE is not available, or estimated selling price if
neither VSOE or TPE is available. The amendments in this ASU eliminate the
residual method of allocation and require that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. The relative selling price method allocates any
discount in the arrangement proportionately to each deliverable on the basis of
the deliverables selling price. The Company adopted these standards in the
first quarter of 2010, effective as of January 1, 2010 and on a
prospective basis thereafter. The adoption of this standard did not materially
affect the results of operations for three months ended March 31, 2010. See Note 16 for further discussion on the
adoption of this standard.
The
components of revenue are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
License
|
|
$
|
14,116
|
|
$
|
15,141
|
|
Application hosting services
|
|
26,626
|
|
33,782
|
|
Consulting services
|
|
4,861
|
|
5,207
|
|
Customer support
|
|
3,213
|
|
3,070
|
|
Total
|
|
$
|
48,816
|
|
$
|
57,200
|
|
6
Table of Contents
Customers generally have the ability to terminate application hosting,
consulting and training service agreements upon 30 days notice. License
agreements, multiple element arrangements, including license and service
agreements and certain application hosting services can generally be terminated
by either party for material breach of obligations not corrected within 30 days
after notice of the breach.
The Company recognizes revenues when all of the following conditions
are satisfied: (1) there is persuasive evidence of an arrangement; (2) the
product or service has been provided to the customer; (3) the collection
of fees is probable; and (4) the amount of fees to be paid by the customer
is fixed or determinable.
The Company generally enters into software term licenses for its
software products with its customers for 1 to 5 year periods. These
arrangements typically include multiple elements: software license, consulting
services and customer support. The Company bills its customers in accordance
with the terms of the underlying contract. Generally, the Company bills license
fees annually in advance for each year of the license term. Payment terms are
generally net 30 days.
The Companys software license revenues are earned from the sale of
off-the-shelf software requiring no significant modification or customization
subsequent to delivery to the customer. Consulting services, which can also be
performed by third-party consultants, are deemed to be non-essential to the
functionality of the software and typically are for trial configuration,
implementation planning, loading of software, building simple interfaces and
running test data and documentation of procedures.
Customer support includes training services, telephone support and
software maintenance. The Company generally bundles customer support with the
software license for the entire term of the arrangement. As a result, the
Company generally recognizes revenues for all elements, including consulting
services, ratably over the term of the software license and support
arrangement. The Company allocates the revenues recognized for these
arrangements to the different elements based on managements estimate of the
relative fair value of each element. For its term-based licenses, the Company
allocates to consulting services, the anticipated service effort and value
throughout the term of the arrangement at an amount that would have been
allocated had those services been sold separately to the customer. The value of
the Companys consulting services sold within a bundled arrangement is equal to
the value of consulting services sold on a stand-alone basis, as the activities
performed under both types of arrangements are similar in nature. The remaining
value is allocated to license and support services, with 10% of this amount
allocated to support services. The customer support services rate of 10% for
multi-year term-based licenses reflects a significant discount from the rate
for customer support services associated with perpetual licenses due to the
reduction in the time period during which the customer can utilize the upgrades
and enhancements. The Company believes this rate is substantive and represents
an amount it believes reasonable to be allocated. The Company has allocated the
estimated fair value to its multiple element arrangements to provide meaningful
disclosures about each of its revenue streams. The costs associated with the
consulting and customer support services are expensed as incurred. There are
instances in which the Company sells software licenses based on usage levels.
These software licenses can be based on estimated usage, in which case the
license fee charged to the customer is fixed based on this estimate. When the
fee is fixed, the revenues are generally recognized ratably over the
contractual term of the arrangement. If the fee is based on actual usage, and
therefore variable, the revenues are recognized in the period of use. Revenues
from certain follow-on consulting services, which are sold separately to
customers with existing software licenses and are not considered part of a
multiple element arrangement, are recognized as the services are performed.
The Company continues to sell additional perpetual licenses for
software products in certain situations to existing customers with the option
to purchase customer support, and may in the future do so for new customers
based on customer requirements or market conditions. For the
Clintrial
and
Empirica Trace
products, the Company has established vendor
specific objective evidence of fair value for the customer support.
Accordingly, license revenues are recognized upon delivery of the software and
when all other revenue recognition criteria are met. Customer support revenues
are recognized ratably over the term of the underlying support arrangement. For
Clinical Development Center
products, vendor specific objective evidence of fair value for the customer
support has not been established, and therefore, revenue for the entire
agreement is recognized ratably over the term of the underlying support
agreement. The Company generates customer support and maintenance revenues from
its perpetual license customer base. Training revenues are recognized as
earned.
Revenues resulting from
InForm
and
OutcomeLogix
application hosting
services consist of three stages for each clinical trial: the first stage
involves application set up, including design of electronic case report forms
and edit checks, installation and server configuration of the system; the
second stage involves application hosting and related support services; and the
third stage involves services required to close out, or lock, the database for
the clinical trial. Revenues resulting from
Phase
Forward IRT
and
Covance IVRS/IWRS
application hosting services also consist of three stages for each clinical
trial: the first stage involves application set up, including design and set up
for the subject randomization and medication inventory management, installation
and server configuration of the system; the second stage involves application
hosting and related support services; and the third stage involves services
required to close out, or lock, the database for the clinical trial. Services
provided for the
InForm, Phase Forward IRT,
OutcomeLogix
and
Covance
IVRS/IWRS
products for the first and third stages are provided on a
fixed-fee basis based upon the complexity of the trial and
7
Table of Contents
system
requirements. Services for the second stage are charged separately as a fixed
monthly fee. The Company recognizes revenues from all stages of the
InForm, Phase Forward IRT, OutcomeLogix
and
Covance IVRS/IWRS
hosting
services ratably over the hosting period. Work performed outside the original
scope of work is contracted for separately as an additional fee and is
generally recognized ratably over the remaining term of the hosting period.
Fees for the first and third stages of the service are billed based upon
milestones. Fees for application hosting and related services in the second
stage are generally billed quarterly in advance. Bundled into this revenue
element are revenues attributable to the software license used by the customer.
Revenues resulting from hosting services for the
Empirica Signal
,
Empirica Study
and
WebSDM
products consist of installation
and server configuration, application hosting and related support services.
Services for this offering are generally charged a monthly fixed fee. Revenues
are recognized ratably over the period of the service.
In the event that an application hosting customer cancels its related
statement of work, all deferred revenues are recognized. In addition, certain
termination related fees may be charged and if so, such fees are recognized in
the period of termination.
Provisions
for estimated losses on uncompleted contracts are made on a contract-by-contract
basis and are recognized in the period in which such losses become probable and
can be reasonably estimated. To date, the Company has not experienced any
material losses on uncompleted application hosting or consulting contracts.
In
the three months ended March 31, 2009 and 2010, no customer accounted for
10% or more of the Companys total revenues for the period.
The
Company may also enter into arrangements to provide consulting services
separate from a license arrangement. In these situations, revenue is recognized
on either a time-and-materials basis or using the proportional performance
method. If the Company is not able to produce reasonably dependable estimates,
revenue is recognized upon completion of the project and final acceptance from the
customer. If significant uncertainties exist about project completion or
receipt of payment, the revenue is deferred until the uncertainty is resolved.
Provisions for estimated losses on contracts are recorded during the period in
which they are identified.
Deferred revenue
represents amounts billed or cash received in advance of revenue recognition.
Internal Use Software and Website
Development Costs
The
Company capitalizes qualifying computer software costs which are incurred
during the application development stage, and amortizes them over the softwares
estimated useful life. The Company capitalized $206 and $191 during the three
months ended March 31, 2009 and 2010, respectively, related to
Company-wide financial systems and outside software development costs
associated with the Companys hosting operation, of which both had certain
portions that became operational in 2009 and 2010. Capitalized amounts include software and
direct external implementation costs and are classified as Property and Equipment,
net in the accompanying unaudited condensed consolidated balance sheets.
The Company-wide financial system is being amortized over five years while the
outside software development costs associated with the Companys hosting
operation is being amortized over three years.
Amortization expense was $9 and $80 during the three months ended March 31,
2009 and 2010, respectively.
Computer Software Development Costs and Research and
Development Expenses
The Company sells products in a market that is
subject to rapid technological change, new product development and changing
customer needs. Accordingly, the Company has evaluated the establishment of
technological feasibility of its products and concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. The Company defines technological feasibility as the
completion of a working model. The time period during which costs could be
capitalized, from the point of reaching technological feasibility until the
time of general product release, is very short, and consequently, the amounts
that could be capitalized are not material to the Companys financial position
or results of operations. Therefore, the Company has charged all such costs to
research and development expense in the period incurred.
3. Prepaid Sales Commissions,
Royalties
and Deferred Set Up Costs
Prepaid Sales Commissions.
For
arrangements where revenues
are recognized over the relevant contract period, the Company defers related
commissions paid to its direct sales force and amortizes them over the period
in which the related revenues are
recognized.
Royalty Obligations.
For
arrangements
where revenues are recognized over the relevant contract period, the Company
defers related software license royalties paid to third parties, and amortizes
them over the period in which the related revenues are
8
Table of Contents
recognized.
The Companys royalty
obligation is based upon the license and customer support revenues earned for
certain products in an arrangement. The Company has the right to recover the
royalties in the event the arrangement is cancelled.
Deferred Set Up Costs.
Costs incurred for the trial system design,
set up and implementation are deferred until the start of the hosting period
and are amortized and recognized ratably over the estimated hosting period. The
deferred costs include incremental direct costs with third parties and certain
internal direct costs related to the trial and application set up. These costs
include salary and benefits associated with direct labor costs incurred during
trial set up, as well as third-party subcontract fees and other contract labor
costs. In the event that an application hosting customer cancels its related
statement of work, all deferred set up costs are expensed.
Prepaid sales
commissions, royalty obligations and deferred set up costs are included in other
current assets and other assets in the accompanying unaudited condensed
consolidated balance sheets.
Commissions, royalty obligations and deferred set up costs are amortized
to sales and marketing, cost of revenues and cost of services, respectively.
The Company deferred and amortized the following amounts
for the three months ended March 31, 2009 and 2010:
|
|
Deferred
|
|
Amortized
|
|
Description
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Prepaid Sales Commissions
|
|
$
|
1,984
|
|
$
|
2,325
|
|
$
|
1,744
|
|
$
|
2,173
|
|
Royalty Obligations
|
|
1,089
|
|
535
|
|
661
|
|
367
|
|
Deferred Set Up Costs
|
|
1,295
|
|
2,054
|
|
917
|
|
1,292
|
|
Total
|
|
$
|
4,368
|
|
$
|
4,914
|
|
$
|
3,322
|
|
$
|
3,832
|
|
4.
Warranties
and Indemnification
The Companys software license arrangements and hosting services are
typically warranted to perform in a manner consistent with general industry
standards that are reasonably applicable and substantially in accordance with
the Companys product documentation under normal use and circumstances. The
Companys arrangements also include certain provisions for indemnifying
customers against liabilities if its products or services infringe a third
partys intellectual property rights.
The
Company has entered into service level agreements with some of its hosted
application customers warranting certain levels of uptime reliability and
permitting those customers to receive credits against monthly hosting fees or
terminate their agreements in the event that the Company fails to meet those
levels.
To
date, the Company has not incurred any material costs as a result of such
indemnifications and has not accrued any liabilities related to such
obligations in the accompanying unaudited condensed consolidated financial
statements.
5.
Acquisitions
From time to time the Company has expanded its product and service
offerings through the acquisition of other businesses or technologies. The most
recent transactions include the 2009 acquisitions of Waban Software, Inc.
(Waban), Maaguzi LLC (Maaguzi), and the Interactive Voice and Web
Response Services business (Covance IVRS/IWRS) of Covance Inc., all of
which are further described below.
Covance IVRS/IWRS.
In August 2009 the
Company acquired the Interactive Voice and Web Response Services business of
Covance Inc. (Covance IVRS/IWRS). The aggregate purchase price was
$10,000 in cash
,
of which $5,280 and $5,610 was recorded as goodwill and intangible assets,
respectively, with all of the intangible assets consisting of customer relationships.
All of the goodwill is expected to be
deductible for income tax purposes. While the Company has existing trials
running on the Covance IVRS/IWRS system, no new trials or offerings will be
sold or implemented.
Maaguzi.
In July 2009 the Company
acquired all of the outstanding membership interests of Maaguzi LLC (Maaguzi),
a privately-held innovative provider of a Web-based product called
OutcomeLogix
, which is an electronic
patient reported outcomes (ePRO) and late phase solution. The acquisition of
Maaguzi extends the Companys ICRS and marks the Companys entry into the ePRO
and observational studies markets. The aggregate purchase price was $11,000 in
cash, of which $6,301and $5,338 was recorded as goodwill
and intangible assets, respectively.
All of the
goodwill is expected to be deductible for income tax purposes.
Waban.
In April
2009 the Company acquired all of the outstanding
common stock of Waban Software, Inc. (Waban), a privately-held provider
of platform solutions for the automation and compliance of clinical data
analysis and reporting. Wabans software, which the Company has branded as
Clinical Development Center
product,
provides automation, traceability and control of the key activities involved in
the integration, analysis and reporting on clinical trial data. The Company
acquired the technology of
9
Table of Contents
Waban
to allow it to penetrate the market for statistical computing and clinical data
repository solutions. The aggregate purchase price was $13,764 in cash, of
which $7,850 and $8,905 was recorded as goodwill
and intangible assets, respectively
. None of the
goodwill is expected to be deductible for income tax purposes.
All of the assets acquired and liabilities assumed in the above
acquisitions are recognized at their acquisition-date fair values, while
transaction costs were expensed as incurred.
The difference between the aggregate purchase price and the fair value
of assets acquired and liabilities assumed, if any, was allocated to goodwill.
Acquired intangible assets were valued using the discounted cash flows and
relief-from royalty approaches. If an allocated asset becomes impaired or is
abandoned, the carrying value of the related intangible asset will be written
down to its fair value and an impairment charge will be taken in the period in
which the impairment occurs. The acquired intangible assets are subject to
review for impairment as indicators of impairment develop and, otherwise, at
least annually. The results of each acquisition have been included in the
unaudited condensed consolidated financial statements since the respective
dates of acquisition.
6.
Net Income Per Share
Basic
net income per common share for all periods presented was determined by
dividing net income applicable to common stockholders by the weighted average
number of common shares outstanding during the period. Weighted average shares
outstanding exclude unvested restricted common stock. Diluted net income per
share includes the effects of all dilutive, potentially issuable common shares
using the treasury stock method.
The
calculation of basic and diluted net income per share is as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
Net income
|
|
$
|
4,078
|
|
$
|
1,933
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
43,022,458
|
|
41,459,557
|
|
Less weighted-average unvested restricted common
stock awards outstanding
|
|
(592,150
|
)
|
(374,625
|
)
|
Basic weighted-average common shares outstanding
|
|
42,430,308
|
|
41,084,932
|
|
Dilutive effect of common stock options
|
|
1,071,713
|
|
917,886
|
|
Dilutive effect of unvested restricted common
stock awards and units
|
|
495,665
|
|
760,963
|
|
Diluted weighted-average common shares outstanding
|
|
43,997,686
|
|
42,763,782
|
|
|
|
|
|
|
|
Net income per share applicable to common
stockholders:
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.05
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.05
|
|
Diluted
weighted average common shares outstanding do not include options, awards and
units outstanding to purchase 350,011 and 629,678 common equivalent shares for
the three months ended March 31, 2009 and 2010, respectively, as their
effect would have been anti-dilutive.
7.
Cash, Cash Equivalents, Short-term and Long-term Investments
Securities
that the Company has the intent and ability to hold to maturity are reported at
amortized cost and are classified as held-to-maturity. Securities for which it
is not the Companys intent to hold to maturity are classified as either
available-for-sale securities or trading securities. Available-for-sale
securities are reported at fair value, with temporary unrealized gains/(losses)
excluded from earnings and reported as a separate component of stockholders
equity and other than temporary unrealized losses included in earnings. Trading
securities are reported at fair value, with unrealized gains/(losses) included
in earnings. The Companys c
ash equivalents principally consist of
money market funds and corporate bonds with maturities of 90 days or less at
the date of purchase. Short-term
and long-term
investments primarily consist of
investment-grade corporate bonds, U.S. government agency notes and auction rate
securities
(ARS) with original maturities of greater than 90 days.
10
Table of Contents
During
the three-months ended March 31, 2010, the Company elected to sell certain
investments which were classified as held-to-maturity. As a result, the Company determined that all
investments should now be classified as available-for-sale, and accordingly,
the Company recorded unrealized gains of $286 through other comprehensive
income in the period ended March 31, 2010 to properly record the
available-for-sale securities at fair value.
Cash,
cash equivalents, short-term and long-term investments as of December 31,
2009 and March 31, 2010 consist of the following:
|
|
December 31,
2009
|
|
|
|
Contracted
|
|
Amortized
|
|
Fair Market
|
|
Balance Per
|
|
Description
|
|
Maturity
|
|
Cost
|
|
Value
|
|
Balance Sheet
|
|
Cash
and cash equivalents
|
|
Demand
|
|
$
|
41,862
|
|
$
|
41,862
|
|
$
|
41,862
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes
|
|
138 days
|
|
$
|
22,348
|
|
$
|
22,413
|
|
$
|
22,348
|
|
Corporate bonds
|
|
177 days
|
|
25,523
|
|
25,678
|
|
25,523
|
|
Auction rate securities
|
|
181 days
|
|
23,800
|
|
19,370
|
|
19,370
|
|
Total short-term investments
|
|
|
|
$
|
71,671
|
|
$
|
67,461
|
|
$
|
67,241
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes
|
|
499 days
|
|
$
|
13,742
|
|
$
|
14,577
|
|
$
|
13,742
|
|
Corporate bonds
|
|
460 days
|
|
12,697
|
|
12,898
|
|
12,697
|
|
Total long-term investments
|
|
|
|
$
|
26,439
|
|
$
|
27,475
|
|
$
|
26,439
|
|
|
|
March 31, 2010
|
|
|
|
Contracted
|
|
Amortized
|
|
Fair Market
|
|
Balance Per
|
|
Description
|
|
Maturity
|
|
Cost
|
|
Value
|
|
Balance Sheet
|
|
Cash
and cash equivalents
|
|
Demand
|
|
$
|
53,290
|
|
$
|
53,290
|
|
$
|
53,290
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes
|
|
216 days
|
|
$
|
27,694
|
|
$
|
27,724
|
|
$
|
27,724
|
|
Corporate bonds
|
|
239 days
|
|
30,236
|
|
30,493
|
|
30,493
|
|
Auction rate securities
|
|
90 days
|
|
21,550
|
|
18,232
|
|
18,232
|
|
Total short-term investments
|
|
|
|
$
|
79,480
|
|
$
|
76,449
|
|
$
|
76,449
|
|
As
of March 31, 2010 all securities, with the exception of ARS, are
classified as available-for-sale securities. In prior periods and up through
the execution of the signed settlement agreement with UBS AG (UBS) in November 2008
as further discussed below, the ARS were classified as available-for-sale
because it was the Companys intent not to hold them to maturity. Upon the
execution of the settlement agreement with UBS, the Company elected to make a
one-time transfer of the ARS from available-for-sale securities to trading
securities. Accordingly, on a prospective basis, all unrealized gains/(losses)
for these trading securities have been included in earnings.
Interest and dividends on all of the Companys
securities are included in interest income
in the accompanying
unaudited condensed consolidated statement of income.
As
of December 31, 2009 and March 31, 2010, the Company held ARS
totaling $23,800 and $21,550, respectively, at par value, which are classified
as short-term investments in the accompanying unaudited condensed consolidated
balance sheets, and which are recorded at fair value. These ARS are debt
instruments issued by various states throughout the United States to finance
student loans. The types of ARS that the Company owns are backed by student
loans, 95% of which are guaranteed under the Federal Family Education Loan
Program, and all have credit ratings of AAA (or equivalent) from a recognized
rating agency. Historically, the carrying value of ARS approximated fair value
due to the frequent resetting of the interest rates. With the liquidity issues
experienced in the global credit and capital markets, the Companys ARS have
experienced multiple failed auctions. While the Company continues to earn and
receive interest on these investments at the maximum contractual rate, the
estimated fair value of these ARS no longer approximates par value.
In
November 2008, the Company accepted an offer from and entered into an
agreement (the Agreement) with UBS with respect to all of the Companys ARS
held at that time. As a UBS client who holds ARS, the Company will receive
certain rights, which will
11
Table of Contents
entitle
the Company to sell ARS to UBS affiliates during the period from June 30,
2010 to July 2, 2012 for a price equal to par value. In accepting the
Agreement, the Company granted UBS the authority to sell or auction the ARS at
par at any time up until the expiration date of the Agreement and released UBS
from any claims relating to the marketing and sale of ARS. UBS obligations
under the Agreement are not secured by its assets and do not require UBS to
obtain any financing to support its performance obligations under the
Agreement. UBS has disclaimed any assurance that it will have sufficient
financial resources to satisfy its obligations under the Agreement. If UBS has
insufficient funding to buy back the ARS and the auction process continues to
fail, the Company may incur further losses on the carrying value of the ARS.
The
Company performed a fair value calculation of these ARS as of March 31,
2010. Fair value was determined using a secondary market indications
method (direct discounts) and a discounted cash flow method as recent auctions
of these securities were not successful, resulting in the Company continuing to
hold these securities and issuers paying interest at the maximum contractual
rate. This valuation technique considers the following: time left to maturity,
the rate of interest paid on the securities, the amount of principal to be
repaid to the holders of the securities; the credit worthiness of the issuer
and guarantors (if any) and the sufficiency of the collateral; trading
characteristics of the securities; ability to borrow against the ARS; evidence
from secondary market sales; and the market-clearing yield for the securities.
Based
upon the valuation performed, the Company concluded that the fair value of
these ARS at December 31, 2009 was $19,370, a decline of $4,430 from par
value. As of March 31, 2010, the Company concluded that the fair value of
these ARS was $18,232, and therefore, recorded the change in fair value of
$1,112 in the accompanying unaudited condensed consolidated statement of income
for the three months ended March 31, 2010.
During the three months ended March 31, 2010, $2,250 of the Companys
ARS were called by the respective issuers at par value. As of March 31, 2010, it remained the
Companys intent to sell the ARS on June 30, 2010 in accordance with its
rights under the Agreement. Accordingly,
the ARS are classified as short-term investments in the accompanying unaudited
condensed consolidated balance sheets.
Fair
value of the Companys put option was determined using a discounted cash flow
method, which considered the following factors: term of the agreement, the
availability to borrow against the ARS, the creditworthiness of UBS and current
market interest rates. Based on the valuation performed, the Company concluded that
the fair value of the put option as of December 31, 2009 and March 31,
2010 was $4,345 and $3,280, respectively. Accordingly, the decrease in
fair value of $1,065 for the three months ended March 31, 2010 was
recorded in the Companys accompanying unaudited condensed consolidated
statements of income. As of March 31, 2010, it remained the Companys
intent to sell the ARS on June 30, 2010 in accordance with its rights
under the settlement agreement and, accordingly, the Company classifies the
fair value of the securities settlement agreement as current assets in the
accompanying unaudited condensed consolidated balance sheets.
Refer
to Note 15 for further discussion on Fair Value Measurements.
8.
Goodwill
and Intangible Assets
Intangible assets that have indefinite lives are not
amortized while intangible assets that have finite lives are amortized over
their useful lives. Both goodwill and
intangible assets are evaluated for impairment annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
The
goodwill resulting from acquisitions is reviewed for impairment on an annual
basis
.
Consistent with prior years, the Company will
conduct its annual impairment test of goodwill during the fourth quarter of
2010. For the three months ended March 31,
2010, there have been no changes to the goodwill balance and there have been no
impairment indicators that would lead the Company to write down an asset.
Intangible
assets consist of the following:
|
|
|
|
As of December 31, 2009
|
|
As of March 31, 2010
|
|
Description
|
|
Estimated
Useful Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Developed technology and know-how
|
|
5-15 years
|
|
$
|
21,447
|
|
$
|
3,604
|
|
$
|
21,447
|
|
$
|
4,288
|
|
Customer relationships
|
|
5-18 years
|
|
22,190
|
|
2,574
|
|
22,190
|
|
3,087
|
|
Non-compete agreements
|
|
2-3 years
|
|
610
|
|
438
|
|
610
|
|
464
|
|
Trade name
|
|
1-8 years
|
|
3,140
|
|
396
|
|
3,140
|
|
563
|
|
In process research and development
|
|
8 years
|
|
886
|
|
|
|
886
|
|
|
|
Customer backlog
|
|
3 years
|
|
720
|
|
320
|
|
720
|
|
380
|
|
Total
|
|
|
|
$
|
48,993
|
|
$
|
7,332
|
|
$
|
48,993
|
|
$
|
8,782
|
|
12
Table of Contents
Amortization
expense related to intangible assets for the three months ended March 31,
2009 and 2010 was $761 and $1,450, respectively.
The
estimated remaining amortization expense for each of the five succeeding years
is as follows:
Year ended December 31,
|
|
Amount
|
|
2010
(nine months ended
December 31, 2010)
|
|
$
|
4,158
|
|
2011
|
|
4,987
|
|
2012
|
|
4,914
|
|
2013
|
|
4,543
|
|
2014
|
|
4,039
|
|
2015 and thereafter
|
|
17,570
|
|
Total
|
|
$
|
40,211
|
|
9.
Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
|
|
As of
December 31,
|
|
As of
March 31,
|
|
|
|
2009
|
|
2010
|
|
Accrued payroll and related benefits
|
|
$
|
17,278
|
|
$
|
10,244
|
|
Accrued royalties
|
|
1,867
|
|
748
|
|
Accrued outside contractors
|
|
2,013
|
|
1,621
|
|
Leasehold incentive obligation (1)
|
|
956
|
|
1,002
|
|
Accrued other expenses
|
|
5,892
|
|
5,521
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,006
|
|
$
|
19,136
|
|
(1)
In conjunction with the February 2008
lease agreement (see Note 10) the Company was reimbursed for leasehold
improvements totaling $8,104. In
conjunction with the August 2009 lease agreement (see Note 10), the
Company was reimbursed for leasehold improvements totaling $2,163, of which
$1,640 was received in 2009 and $523 received in 2010. Both leasehold
improvements are recognized in property and equipment in the accompanying condensed
consolidated balance sheets, with the corresponding reimbursement recognized as
accrued expenses and other current liabilities and other long-term
liabilities on the unaudited condensed consolidated balance sheets. The amount
of the incentive is being amortized on a straight-line basis over the lease
term as a reduction of rental expense and commenced at the beginning of
occupancy. The leasehold improvements in property and equipment will be
amortized over the shorter of the lease term or the estimated useful life of
the asset. The Company amortized the leasehold incentive obligation as a
reduction to rent expense of $198 and $247 in the three months ended March 31,
2009 and 2010, respectively.
10.
Commitments, Contingencies
and Restricted Cash
From
time to time and in the ordinary course of business, the Company is subject to
various claims, charges and litigation. Intellectual property disputes often
have a risk of injunctive relief which, if imposed against the Company, could
materially and adversely affect its financial condition or results of
operations. From time to time, third parties have asserted and may in the
future assert intellectual property rights to technologies that are important
to the Companys business and have demanded and may in the future demand that
the Company license their technology. Although the outcome of litigation cannot
be predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, which could materially and adversely
affect its financial condition or results of operations, the Company does not
believe that it is currently a party to any material legal proceedings.
On
April 20, 2010, a lawsuit,
Selma Ehrlich
et al. v. Phase Forward Incorporated, et al.,
Civ. A.
No. 10-1463, was filed in the Superior Court for Middlesex County,
Massachusetts against the Company, the members of the Companys board of
directors, Oracle Corporation, and Pine Acquisition Corporation. Refer to Note 17 for further discussion.
13
Table of Contents
On August 17, 2009,
the Company entered into a lease (IRT Lease) with KBS Five Tower Bridge, LLC
to secure office space for the Companys
Phase
Forward IRT
business operations at 300 Barr Harbor Drive, West
Conshohocken, Pennsylvania. The commencement date for occupancy under the IRT
Lease was September 2009 with rent payments commencing in June 2010.
The IRT Lease provides for the rental of 44,907 square feet of space and has an
initial term of 10 years and one month. The Company can, subject to
certain conditions, extend this term by exercising up to two consecutive
five-year options. The annual rent under the IRT Lease for the first year is
$1,325, or approximately $110 per month, with annual escalations in rent for
each subsequent year in the amount of $22, or fifty cents per rentable square
foot. The total base rent payable in the initial term is $14,258.
On February 13, 2008,
the Company entered into a lease (Headquarters Lease) with BP Fourth Avenue,
LLC (the Landlord) to secure office space for the Companys current corporate
headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date
for occupancy under the Headquarters Lease was December 2008. The lease
for the Companys previous corporate headquarters at 880 Winter Street in
Waltham, Massachusetts expired in February 2009. The Headquarters Lease
provides for the rental of 165,129 square feet of space and has an initial term
of 10 years and three months. The Company can, subject to certain
conditions, extend this term by exercising up to two consecutive five year
options. The Company was not required to pay any rent for the first three months
of the initial Headquarters Lease term. After the initial three months, the
annual rent under the Headquarters Lease for years one through five is $6,600,
or approximately $548 per month. For years six through ten, the annual rent
will be $7,200, or approximately $603 per month. The total base rent payable in
the initial term is $69,100. In connection with the signing of the Headquarters
Lease, the Company has deposited with the Landlord an unconditional,
irrevocable letter of credit in Landlords favor in the amount of $962, secured
by a certificate of deposit. The certificate of deposit has been classified as Restricted
cash in the accompanying unaudited condensed consolidated balance sheets as of
December 31, 2009 and March 31, 2010.
11.
Stockholders Equity and
Stock-Based Compensation
Stock-based
Compensation Expense
For
stock options issued under the Companys 2004 Stock Option and Incentive Plan
(the 2004 Plan), the fair value of each option grant is estimated on the date
of grant using the Black-Scholes pricing model, and an estimated forfeiture
rate is used when calculating stock-based compensation expense for the
period. For restricted stock awards and
units issued under the Companys 2004 Plan, the fair value of each grant is
calculated based on the Companys stock price on the date of grant and an
estimated forfeiture rate when calculating stock-based compensation expense for
the period. During the three months
ended March 31, 2009 and 2010, the Company recorded $2,569 and $3,501 of
aggregate stock-based compensation expense, respectively. As of March 31, 2010, there was $27,675
of unrecognized stock-based compensation expense related to stock-based awards
that is expected to be recognized over a weighted average period of 2.33 years.
The
Company applied forfeiture rates derived from an analysis of its historical
data in determining the expense recorded in the Companys unaudited condensed
consolidated statements of income as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
Restricted stock units and awards
|
|
5.8
|
%
|
5.8
|
%
|
Service-based stock options
|
|
9.0
|
%
|
9.0
|
%
|
Milestone options
|
|
12.0
|
%
|
12.0
|
%
|
Common Stock
In the three months ended March 31,
2010, the Company issued 30,899 shares of common stock in connection with the
exercise of stock options resulting in proceeds of $132. In the three months ended March 31,
2010, the Company released 190,195 shares of
14
Table of Contents
common stock in connection with the vesting of
restricted stock awards and units and retired 65,755 of these shares to cover
withholding taxes in the amount of $727.
Stock Option Activity
A
summary of stock option activity under the Phase Forward Incorporated 1997
Stock Option Plan, the Phase Forward Incorporated 2004 Stock Option and
Incentive Plan and the 2003 Non-Employee Director Stock Option Plan as of March 31,
2010, and changes during the three months ended March 31, 2010, is as follows:
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate Intrinsic
Value (2)
|
|
Outstanding as of December 31, 2009
|
|
1,816,004
|
|
$
|
4.70
|
|
3.69
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(30,899
|
)
|
4.27
|
|
|
|
$
|
275
|
|
Canceled
|
|
(3,600
|
)
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2010
|
|
1,781,505
|
|
$
|
4.71
|
|
3.49
|
|
$
|
14,932
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2010
|
|
1,701,755
|
|
$
|
4.63
|
|
3.42
|
|
$
|
14,390
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of March 31,
2010 (1)
|
|
1,776,107
|
|
$
|
4.70
|
|
3.48
|
|
$
|
14,895
|
|
(1)
The vested or expected to
vest options at March 31, 2010 include both the vested options and the
number of options expected to vest calculated after applying an estimated
forfeiture rate to the unvested options.
(2)
The aggregate intrinsic
value for shares outstanding, exercisable and vested is calculated based on the
positive difference between the fair value per share of the Companys common
stock on March 31, 2010 of $13.09, or the date of exercise, as applicable,
and the exercise price of the underlying options.
Restricted Stock Awards and Unit Activity
A
summary of activity related to restricted common stock awards and unit awards
as of March 31, 2010 and changes during the three months ended March 31,
2010, is as follows:
|
|
Number
of
Shares
|
|
Market
Price
Per Share
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
Weighted
Average
Remaining
contractual
Term
(years)
|
|
Aggregate Intrinsic Value (2)
|
|
Unvested at December 31, 2009
|
|
2,931,363
|
|
$
|
10.85 - 23.20
|
|
$
|
15.21
|
|
|
|
|
|
Granted
|
|
165,025
|
|
11.93 - 15.34
|
|
|
|
|
|
|
|
Vested
|
|
(190,195
|
)
|
13.23 - 23.20
|
|
|
|
|
|
|
|
Forfeited
|
|
(26,268
|
)
|
10.85 - 23.20
|
|
|
|
|
|
|
|
Unvested at March 31, 2010
|
|
2,879,925
|
|
$
|
10.85 - 23.20
|
|
$
|
14.92
|
|
2.46
|
|
$
|
37,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be free of restrictions (1)
|
|
2,284,312
|
|
$
|
10.85 - 23.20
|
|
$
|
14.93
|
|
2.46
|
|
$
|
29,902
|
|
(1)
The expected to be free of
restrictions at March 31, 2010 was calculated by applying an estimated
forfeiture rate to the unvested shares.
(2)
The aggregate intrinsic
value is calculated based on the fair value per share of the Companys common
stock on March 31, 2010 of $13.09.
15
Table of Contents
Stock Repurchase Program
On
November 3,
2009, the Companys Board of Directors authorized the repurchase of up to
$40,000 of its common stock, par value $0.01 per share, through a share
repurchase program. On February 12, 2010, the Companys Board of Directors
increased the amount available under the share repurchase program by an
additional $25,000. As authorized by the program, shares may be purchased in
the open market or through privately negotiated transactions in a manner
consistent with applicable securities laws and regulations, including pursuant
to a Rule 10b5-1 plan maintained by the Company. For the three months ended March 31,
2010 1,934,707 shares of the Companys common stock had been purchased as part
of this repurchase program at an average price of $13.42 per share
12. Comprehensive Income
The
Companys other comprehensive income relates to foreign currency translation
adjustments and unrealized gains and losses on marketable securities. Accumulated other comprehensive income is
presented separately on the balance sheet as required.
Comprehensive
income consisted of the following:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
Net income
|
|
$
|
4,078
|
|
$
|
1,933
|
|
Unrealized
gain/(loss) on marketable securities
|
|
|
|
286
|
|
Cumulative Translation adjustment
|
|
373
|
|
(712
|
)
|
Comprehensive income
|
|
$
|
4,451
|
|
$
|
1,507
|
|
13. Forward
Foreign Exchange Contracts and Foreign Currency Translation
The
Company enters into transactions in currencies other than the U.S. dollar and
holds cash in foreign currencies which expose the Company to transaction gains
and losses as foreign currency exchange rates fluctuate against the U.S.
dollar. The Company from time to time enters into forward foreign exchange
contracts to hedge the foreign currency exposure of non-U.S. dollar denominated
third-party and intercompany receivables and cash balances. The contracts,
which relate to the British pound, euro, and the Japanese yen, generally have
terms of one month. The Company settles forward foreign exchange contracts in
cash. These hedges are deemed fair value hedges and have not been designated
for hedge accounting. The gains or losses on the forward foreign exchange
contracts along with the associated losses and gains on the revaluation and
settlement of the short-term intercompany balances, accounts receivable and
cash balances are recorded in current operations in other income.
The
following table summarizes the outstanding forward foreign exchange contracts
held by the Company as of December 31, 2009 and March 31, 2010:
|
|
|
|
As of December 31, 2009
|
|
As of March 31, 2010
|
|
Currency
|
|
Hedge Type
|
|
Local
Currency
Amount
|
|
Approximate
U.S. Dollar
Equivalent
|
|
Local
Currency
Amount
|
|
Approximate
U.S. Dollar
Equivalent
|
|
British pound
|
|
Sale
|
|
1,000
|
|
$
|
1,612
|
|
560
|
|
$
|
847
|
|
Euro
|
|
Sale
|
|
3,200
|
|
4,571
|
|
3,200
|
|
4,339
|
|
|
|
|
|
|
|
$
|
6,183
|
|
|
|
$
|
5,186
|
|
The
financial statements of the Companys foreign subsidiaries are translated into
U.S. dollars, which is the Companys reporting currency. The functional
currency of the Companys subsidiaries in Australia, Belgium, France, India,
Japan, Romania and the United Kingdom are the local currencies of those
countries. Accordingly, the assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. dollars using the exchange rate in effect
at each balance sheet date. Revenue and expense accounts are translated using
an average rate of exchange during the period. Gains and losses arising from
transactions denominated in foreign currencies are primarily related to intercompany
accounts that have been determined to be temporary in nature and cash accounts
and accounts receivable denominated in non-functional currencies.
Foreign
currency translation adjustments are accumulated as a component of other
comprehensive income as a separate component of stockholders equity. Realized
and unrealized foreign currency gains and losses, net of hedging, are accounted
for in other income. The Company
recorded foreign currency gains/(losses) of $147 and $(236) in the three months
ended March 31, 2009 and 2010. As of March 31, 2009 and 2010, the
Company recorded $(248) and $31, respectively, of foreign exchange
gains/(losses) in other income (expense)
as a result of outstanding forward foreign exchange contracts.
16
Table of Contents
14.
Income
Taxes
The
Companys effective tax rates for the three months ended March 31, 2009
and 2010 were 34% and 39%, respectively.
The Companys effective tax rate for the three months
ended March 31, 2010 is higher than the effective tax rate for the three
months ended March 31, 2009 principally due to the benefit derived in the
prior year from the federal research and development tax credit. The federal research and development tax
credit expired effective December 31, 2009 and, as such, the Company has
not forecasted a current tax benefit for this item in 2010.
As
of March 31, 2010, the Company had a liability of $1,535 for net
unrecognized tax benefits, all of which would favorably impact the Companys
effective tax rate if recognized. The Company recognizes interest and
penalties related to uncertain tax positions as a component of income tax
expense. As of March 31, 2010, the Company had approximately $12 and
$7, respectively, of accrued interest and penalties related to unrecognized tax
benefits. The Company anticipates a reduction of approximately $81 to the
amount of unrecognized tax benefits over the next twelve months associated with
lapsing statutes of limitations. The unrecognized tax liability of $1,535
and accrued interest and penalties of $19 are classified as other long-term
liabilities on the unaudited condensed consolidated balance sheet.
15. Fair Value Measurements
Fair
value is an exit price, representing the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants based on the highest and best use of the asset or
liability. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing
an asset or liability. The Company uses valuation techniques to measure fair
value that maximize the use of observable inputs and minimize the use of
unobservable inputs. These inputs are prioritized as follows:
·
Level
1
: Observable inputs such as quoted prices for identical assets or
liabilities in active markets;
·
Level
2
: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly such as quoted prices for similar
assets or liabilities or market-corroborated inputs; and
·
Level
3
: Unobservable inputs for which there is little or no market data,
which require the reporting entity to develop its own assumptions about how
market participants would price the assets or liabilities.
The
valuation techniques that may be used to measure fair value are as follows:
Market approach
- Uses prices
and other relevant information generated by market transactions involving
identical or comparable assets or liabilities
Income approach
- Uses
valuation techniques to convert future amounts to a single present amount based
on current market expectations about those future amounts, including present
value techniques, option-pricing models and excess earnings method
Cost approach
- Based on the
amount that currently would be required to replace the service capacity of an
asset (replacement cost)
The
following table sets forth the Companys financial instruments carried at fair
value and using the lowest level of input as of March 31, 2010:
|
|
Quoted
Prices
|
|
Significant
Other
|
|
Significant
|
|
|
|
|
|
in
Active Markets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
for
Identical Items
|
|
Inputs
|
|
Inputs
|
|
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
53,290
|
|
$
|
|
|
$
|
|
|
$
|
53,290
|
|
Restricted cash
|
|
982
|
|
|
|
|
|
982
|
|
Total cash equivalents and restricted cash
|
|
$
|
54,272
|
|
$
|
|
|
$
|
|
|
$
|
54,272
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes (2)
|
|
$
|
|
|
$
|
27,724
|
|
$
|
|
|
$
|
27,724
|
|
Corporate bonds (2)
|
|
|
|
30,493
|
|
|
|
30,493
|
|
Securities settlement agreement (1)
|
|
|
|
|
|
3,280
|
|
3,280
|
|
Auction rate securities (1)
|
|
|
|
|
|
18,232
|
|
18,232
|
|
Total short-term investments
|
|
$
|
|
|
$
|
58,217
|
|
$
|
21,512
|
|
$
|
79,729
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
54,272
|
|
$
|
58,217
|
|
$
|
21,512
|
|
$
|
134,001
|
|
17
Table of Contents
(1)
The Companys investments in ARS and the securities
settlement agreement with UBS are classified within Level 3 because there
are currently no active markets for ARS and the Company is unable to obtain
independent valuations from market sources. Therefore, the ARS were primarily
valued based on an income approach using an estimate of future cash
flows. For additional information regarding ARS, see Note 7.
(2) Fair
value for Level 2 assets was determined using quoted market prices for similar
assets. For the three months ended March
31, 2010 the Companys Level 2 transaction activity included $10,750 of
purchases, $2,000 of sales, $16,875 of maturities and $8,000 of settlements.
The
following table sets forth a summary of changes in the fair value of the
Companys Level 3 financial assets for the three months ended March 31,
2010:
|
|
Level 3 Financial
|
|
|
|
Assets
|
|
Balance, beginning of period
|
|
$
|
23,715
|
|
Transfers in (out) of Level 3
|
|
|
|
Purchase
|
|
|
|
Sales
|
|
|
|
Issuance
|
|
|
|
Settlement
|
|
(2,250
|
)
|
Realized gains/(losses)
|
|
|
|
Unrealized gains/(losses) on securities held at
period end
|
|
47
|
|
Balance, end of period
|
|
$
|
21,512
|
|
The
Company has also adopted the provisions of FASB ASC No. 825,
Financial Instruments
, in the first quarter of 2008 which
allows companies to choose to measure eligible assets and liabilities at fair
value with changes in value recognized in earnings. Fair value treatment may be
elected either upon initial recognition of an eligible asset or liability or,
for an existing asset or liability, if an event triggers a new basis of
accounting. The Company did not elect to re-measure any of its existing
financial assets or liabilities, and did not elect the fair value option for
any financial assets and liabilities transacted in the year-ended December 31,
2009. To date, the Company has only
elected the fair value option
for the put option related to the Companys ARS that
was recorded in conjunction with a settlement agreement with UBS as more fully
described in Note 7
.
16.
Recently Issued Accounting
Pronouncements
On January 1,
2010, the Company adopted the guidance of ASU No. 2009-13, Revenue
Recognition (Topic 605):
Multiple-Deliverable
Revenue Arrangements
, which was ratified by the FASB Emerging Issues
Task Force on September 23, 2009.
ASU No. 2009-13
addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. This guidance establishes a selling price hierarchy
for determining the selling price of a deliverable, which is based on: (a) vendor-specific
objective evidence; (b) third-party evidence; or (c) estimates. This
guidance also eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. In addition, this
guidance significantly expands required disclosures related to a vendors
multiple-deliverable revenue arrangements.
The impact of
this standard was not material to the Companys reported results of operations
for the three months ended March 31, 2010.
On January 21,
2010, the FASB issued ASU No. 2010-06,
Fair
Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair
Value Measurements
. The ASU requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by FASB ASC 820,
Fair Value Measurements.
During the three months ended March 31, 2010
the Company had no movements among Levels 1 and 2 of the three-tier fair value
hierarchy. Entities will also need to provide a reconciliation of purchases,
sales, issuance, and settlements of anything valued with a Level 3 method,
which is used to price the hardest to value instruments. The new disclosures
and clarifications of existing disclosures were adopted on January 1,
2010. Adoption of this portion of ASU No. 2010-06
did not have an impact on the Companys consolidated financial position and
results of operation. Disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.
The Company elected to adopt this portion of ASU No. 2010-06 on January
1, 2010. Adoption of this portion of ASU
No. 2010-06 did not have an impact on the Companys consolidated financial
position and results of operation.
18
Table of Contents
17.
Subsequent Event
Merger
Agreement with Oracle (Non-recognized subsequent event)
On
April 15, 2010, the Company, Oracle Corporation, a Delaware corporation
(Oracle) and Pine Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of Oracle (Merger Sub), entered into an Agreement and
Plan of Merger (the Merger Agreement), pursuant to which, subject to
satisfaction or waiver of the conditions therein, Merger Sub will merge with
and into the Company (the Merger) with the Company surviving as a
wholly-owned subsidiary of Oracle. A description of the Merger Agreement is
contained in the Companys Current Report on Form 8-K filed with the SEC
on April 16, 2010, and a copy of the Merger Agreement is attached thereto
as Exhibit 2.1.
Shareholder
Litigation (Non-recognized subsequent event)
On
April 20, 2010, a lawsuit,
Selma Ehrlich
et al. v. Phase Forward Incorporated, et al.,
Civ. A.
No. 10-1463, was filed in the Superior Court for Middlesex County,
Massachusetts against the Company, the members of the Companys board of
directors, Oracle Corporation, and Pine Acquisition Corporation. The action, brought by plaintiffs who are
purported stockholders of the Company, individually and on behalf of a putative
class of stockholders, alleges that the board breached fiduciary duties, and
that the Company and Oracle aided and abetted the purported breaches, in
connection with the proposed Merger. The
complaint seeks equitable relief, including, among other things, to enjoin
consummation of the proposed Merger, rescission of the Merger Agreement and an
award of all costs of the action, including reasonable attorneys fees. The Company denies the allegations in the complaint,
and intends to vigorously defend the lawsuit.
However, there can be no assurance that the Company or the other
defendants will be successful in such defense.
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
.
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction
with our unaudited condensed consolidated financial statements and related
notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q
and the audited financial statements and related notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended December 31,
2009, which has been filed with the Securities and Exchange Commission (SEC).
Overview
Phase
Forward Incorporated is a provider of an Integrated Clinical Research Suite, or
ICRS, of enterprise-level software products, services and hosted solutions for
use in our customers global clinical trial and drug safety monitoring
activities. Our customers include pharmaceutical, biotechnology and medical
device companies, as well as academic institutions, governmental regulatory
agencies, contract research organizations, or CROs, and other entities engaged
in clinical trial and drug safety monitoring activities. By automating
essential elements of the clinical trial and drug safety monitoring processes,
we believe our products allow our customers to accelerate the market
introduction of new medical therapies and corresponding revenues, reduce
overall research and development expenditures, enhance existing data quality
control efforts, increase drug safety compliance and reduce clinical and
economic risk.
Subsequent Event
On
April 15, 2010, we entered into an Agreement and Plan of Merger (the
Merger Agreement) with Oracle Corporation, a Delaware corporation (Oracle)
and Pine Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Oracle (Merger Sub), pursuant to which, subject to satisfaction
or waiver of the conditions therein, Merger Sub will merge with us (the
Merger) with the Company surviving as a wholly-owned subsidiary of Oracle. A
description of the Merger Agreement is contained in our Current Report on Form 8-K
filed with the SEC on April 16, 2010, and a copy of the Merger Agreement
is attached thereto as Exhibit 2.1.
19
Table of Contents
On April 20, 2010, a lawsuit,
Selma
Ehrlich et al. v. Phase Forward Incorporated, et al.,
Civ. A. No.
10-1463, was filed in the Superior Court for Middlesex County, Massachusetts
against us, our board of directors, Oracle, and Pine Acquisition Corporation.
The action, brought by plaintiffs who are purported stockholders of our
Company, individually and on behalf of a putative class of stockholders,
alleges that the board breached fiduciary duties, and that Oracle and Phase Forward
aided and abetted the purported breaches, in connection with the proposed
Merger. The complaint seeks equitable relief, including, among other things, to
enjoin consummation of the proposed Merger, rescission of the Merger Agreement
and an award of all costs of the action, including reasonable attorneys fees.
We deny the allegations in the complaint, and intend to vigorously defend the
lawsuit. However, there can be no assurance that we, or the other defendants,
will be successful in such defense.
Sources of Revenues
We derive our revenues from software licenses and services of our ICRS
products, which can be purchased on a stand-alone basis or bundled together.
Our product line is comprised of four general categories that include the
following software products:
·
Electronic
Data Capture (EDC)
·
InForm
, our
Internet-based electronic data capture solution for collection and transmission
of patient information in clinical trials;
·
LabPas
, our system
for Phase I clinic automation; and
·
OutcomeLogix
, our electronic
patient reported outcomes, or ePRO, and late phase solution for data capture
which supports data entry via web interface and/or mobile interface for
handheld devices, which we acquired as a result of the acquisition of
Maaguzi, LLC in July 2009.
·
Clinical
Data Management
·
Clintrial
, our clinical
data management solution;
·
WebSDM,
our system for
validating and reviewing clinical trial data represented in formats meeting
industry standards, such as those established by the Clinical Data Interchange
Standards Consortium, or CDISC; and
·
Clinical
Development Center
, which includes our clinical data repository
product for storing and managing clinical trials data and our statistical
control environment, which we acquired as a result of the acquisition of Waban
Software, Inc. in April 2009.
·
Drug
Safety
·
Empirica
Trace
, our adverse event management solution for monitoring drug safety and
reporting adverse events that occur during and after conclusion of the clinical
trial process;
·
Empirica
Signal
, our data mining and signal detection solution for post-marketing
data; and
·
Empirica
Study
(formerly known as
CTSD
),
our signal detection solution for data from clinical trials.
·
Interactive
Response Technology (IRT)
·
Phase
Forward IRT
(formerly known as
Clarix
),
our Web-integrated interactive response technology; and
20
Table of Contents
·
Covance
IVRS/IWRS
, a legacy phone-integrated interactive response
technology, which we acquired from Covance, Inc. in August 2009.
We generally offer our software products under term enterprise licenses
or as a hosted application solution delivered through a standard Web-browser.
The following table details these offerings:
|
|
Available As:
|
|
Product
|
|
Term
License
|
|
Hosted
Application
|
|
Electronic Data Capture
|
|
|
|
|
|
InForm
|
|
Yes
|
|
Yes
|
|
LabPas
|
|
Yes
|
|
Yes
|
|
OutcomeLogix
|
|
No
|
|
Yes
|
|
Clinical Data Management
|
|
|
|
|
|
Clintrial
|
|
Yes
|
|
No
|
|
WebSDM
|
|
Yes
|
|
Yes
|
|
Clinical Development Center
|
|
Yes
|
|
Yes
|
|
Drug Safety
|
|
|
|
|
|
Empirica Trace
|
|
Yes
|
|
Yes
|
|
Empirica Signal
|
|
Yes
|
|
Yes
|
|
Empirica Study
|
|
Yes
|
|
Yes
|
|
Interactive Response Technology
|
|
|
|
|
|
Phase Forward IRT
|
|
No
|
|
Yes
|
|
Covance IVRS/IWRS
(1)
|
|
No
|
|
Yes
|
|
(1)
While we have
existing trials running on the Covance IVRS/IWRS system, we do not intend to
sell this offering or implement any new trials for use on this system.
In the three months ended March 31, 2009 and
2010, no customer accounted for 10% or more of our total revenues for the
period. Our top 20 customers accounted
for approximately 64% and 58% of our total revenues, net of reimbursable
out-of-pocket expenses, in the three months ended March 31, 2009 and 2010,
respectively.
Cost of Revenues and Operating Expenses
We allocate overhead expenses such as rent and
occupancy charges and employee benefit costs to all departments based on
headcount. As such, general overhead expenses are reflected in cost of service
revenues and in the sales and marketing, research and development, and general
and administrative expense categories.
Costs of Revenues
.
Costs of license revenues
consist primarily of the amortization of royalties paid for certain modules
within our
Clintrial
software
product as well as our
InForm
software
product. In addition, costs of revenues include expense for the amortization of
acquired technologies associated with acquisitions. The costs of license
revenues vary based upon the mix of revenues from software licenses for our
products. We operate our service organization on a global basis as one distinct
unit, and do not segment costs for our various service revenue elements. These
services include performing application hosting, consulting and customer
support services. Costs for these services consist primarily of
employee-related costs associated with these services, amortization of the
deferred clinical trial set up costs, allocated overhead, outside contractors,
royalties associated with providing customer support for use with the
Clintrial
and
InForm
software products and reimbursable out-of-pocket
expenses. Costs of services also include hosting costs that primarily consist
of hosting facility fees and server depreciation and amortization of acquired
technologies associated with the acquisition of Clarix and Maaguzi.
The costs of service revenues vary based upon the
number of employees in the service organization, the type of work performed,
and royalties associated with revenues derived from providing customer support,
as well as costs associated with the flexible use of outside contractors to
support internal resources. We supplement the trial design and set up activity
for our
InForm, Phase Forward IRT
and
OutcomeLogix
application
hosting services through the use of outside contractors. This allows us to
utilize outside contractors in those periods where trial design and set up
activity is highest while reducing the use of outside contractors in those
periods where trial activity lessens, allowing for a more flexible delivery
model. The percentage of the services workforce represented by outside
contractors varies from period to period depending on the volume of specific
support required. The costs of service revenues is
21
Table of Contents
significantly
higher as a percentage of revenues as compared to our costs of license revenues
primarily due to the employee-related and outside contractor expenses
associated with providing services.
Gross Margin
.
Our gross margin on license
revenues varies based on the mix of royalty-bearing and non-royalty-bearing
license revenues and the amount of amortization of acquired technologies. Our
gross margin on service revenues varies primarily due to variations in the
utilization levels of the professional service team and the timing of expense
and revenue recognition under our service arrangements. In situations where the
service revenues are recognized ratably over the software license term, our
costs associated with delivery of the services are recognized as the services
are performed, which is typically during the first 6 to 12 months of the
contract period. Accordingly, our gross margin on service revenues will vary
significantly over the life of a contract due to the timing, amount and type of
service required in delivering certain projects. In addition, consolidated
gross margin will vary depending upon the mix of license and service revenues.
Sales and Marketing.
Sales and marketing expenses
consist primarily of employee-related expenses, including travel, marketing
programs which include product marketing expenses such as trade shows,
workshops and seminars, corporate communications, other brand building and
advertising, allocated overhead and the amortization of commissions. In
addition, sales and marketing include expense for the amortization of
intangible assets associated with our acquisitions. We expect that sales and
marketing expenses will continue to increase in absolute dollars as commission
expense increases with our revenues and as we continue to expand sales coverage
and to build brand awareness through what we believe are the most cost
effective channels available, but may fluctuate quarter over quarter due to the
timing of marketing programs.
Research and Development
.
Research and development
expenses consist primarily of employee-related expenses, allocated overhead and
outside contractors. We focus our research and development efforts on
increasing the functionality, performance and integration of our software
products. We expect that in the future, research and development expenses will
increase in absolute dollars as we continue to add features and functionality
to our products, introduce additional integrated software solutions to our
product suite and expand our product and service offering.
General and Administrative
.
General and administrative
expenses consist primarily of employee-related expenses, professional fees,
primarily consisting of expenses for accounting, compliance with the
Sarbanes-Oxley Act of 2002, and legal services, including litigation,
information technology and other corporate expenses and allocated overhead. We
expect that in the future our general and administrative expenses will increase
in absolute dollars as we add personnel and incur additional costs related to
the growth of our business and operations.
Stock-Based Compensation Expenses
.
Our cost of service
revenues, sales and marketing, research and development, and general and
administrative expenses include stock-based compensation expense. Stock-based
compensation expense is the fair value of outstanding stock options and
restricted stock awards and units, which are recognized over the respective
stock option and award or unit service periods.
Foreign Currency Translation
With regard to our international operations, we
frequently enter into transactions in currencies other than the U.S. dollar. As
a result, our revenues, expenses and cash flows are subject to fluctuations due
to changes in foreign currency exchange rates, particularly changes in the
euro, British pound, Australian dollar, Indian rupee, Japanese yen and Romanian
leu. In the three months ended March 31, 2009 and 2010, approximately 38%
and 37%, respectively, of our revenues were generated in locations outside the
United States. The majority of these
revenues are in currencies other than the U.S. dollar, as are many of the
associated expenses. In periods when the U.S. dollar declines in value as
compared to the foreign currencies in which we conduct business, our foreign
currency-based revenues and expenses generally increase in value when
translated into U.S. dollars.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets,
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 periods. On an ongoing basis, we evaluate our estimates
and assumptions with our audit committee, including those related to revenue
recognition, deferred set up costs, commissions and royalties, accounts
receivable reserves, stock-based compensation expense, long-lived assets,
intangibles assets and goodwill, income taxes, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. There have
been no material changes to these estimates for the periods presented in this
Quarterly Report on Form 10-Q. Our actual results may differ from these
estimates under different assumptions or conditions.
22
Table of Contents
We believe that of our significant accounting
policies, which are described in Note 1 and Note 2 of the notes to our
consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2009, the following condensed accounting
policies involve a greater degree of judgment and complexity. Accordingly,
these are the policies we believe are the most critical to aid in fully
understanding and evaluating our consolidated financial condition and results
of operations.
Revenue Recognition.
We
derive revenues from software licenses and services of
our ICRS products which can be purchased on a stand-alone basis or bundled
together. License revenues are derived principally from the sale of term
licenses of our software products and service revenues are derived principally
from the delivery of the hosted solutions of our software products, consulting
services and customer support including training, for all of our products.
Revenue
arrangements may include one of these single elements, or may incorporate one
or more elements in a single transaction or combination of related transactions.
In the first quarter of 2010, we adopted the guidance of Accounting Standards Update (ASU) No. 2009-13,
Revenue Recognition
(Topic 605):
Multiple-Deliverable Revenue Arrangements
which was ratified
by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force
on September 23, 2009. ASU No. 2009-13 affects accounting and
reporting for all multiple-deliverable arrangements.
The adoption of this standard did not
materially affect the results of operations for three months ended March 31,
2010.
Customers generally have the ability to terminate application hosting,
consulting and training service agreements upon 30 days notice. License
agreements, multiple element arrangements, including license and services
agreements and certain application hosting services can generally be terminated
by either party for material breach of obligations not corrected within
30 days after notice of the breach.
We recognize revenues when all of the following conditions are
satisfied: (1) there is persuasive evidence of an arrangement; (2) the
product or service has been provided to the customer; (3) the collection
of our fees is probable; and (4) the amount of fees to be paid by the
customer is fixed or determinable.
We generally enter into software term licenses for our products with
our customers for 1- to 5-year periods. These arrangements typically include
multiple elements: software license, consulting services and customer support.
We bill our customers in accordance with the terms of the underlying contract.
Generally, we bill license fees annually in advance for each year of the
license term. Our payment terms are generally net 30 days.
Our software license revenues are earned from the sale of off-the-shelf
software requiring no significant modification or customization subsequent to
delivery to the customer. Consulting services, which can also be performed by
third-party consultants, are deemed to be non-essential to the functionality of
the software and typically are for trial configuration, implementation
planning, loading of software, building simple interfaces and running test data
and documentation of procedures.
Customer support includes training services, telephone support and
software maintenance. We generally bundle customer support with the software
license for the entire term of the arrangement. As a result, we generally
recognize revenues for all elements, including consulting services, ratably
over the term of the software license and support arrangement. We allocate the
revenues recognized for these arrangements to the different elements based on
managements estimate of the relative fair value of each element. For our
term-based licenses, we allocate to consulting services the anticipated service
effort and value throughout the term of the arrangement at an amount that would
have been allocated had those services been sold separately to the customer.
The value of our consulting services sold within a bundled arrangement is equal
to the value of consulting services sold on a stand-alone basis, as the
activities performed under both types of arrangements are similar in nature.
The remaining value is allocated to license and support services, with 10% of
this amount allocated to support services. The customer support services rate
of 10% for multi-year term-based licenses reflects a significant discount from
the rate for customer support services associated with perpetual licenses due
to the reduction in the time period during which the customer can utilize the
upgrades and enhancements. We believe this rate is substantive and represents a
reasonable basis of allocation. We have allocated the estimated fair value to
our multiple element arrangements to provide meaningful disclosures about each
of our revenue streams. The costs associated with the consulting and customer
support services are expensed as incurred. There are instances in which we sell
software licenses based on usage levels. These software licenses can be based
on estimated usage, in which case the license fee charged to the customer is
fixed based on this estimate. When the fee is fixed, the revenues are generally
recognized ratably over the contractual term of the arrangement. If the fee is
based on actual usage, and therefore variable, the revenues are recognized in
the period of use. Revenues from certain follow-on consulting services, which
are sold separately to customers with existing software licenses and are not
considered part of a multiple element arrangement, are recognized as the
services are performed.
We continue to sell additional perpetual licenses for the
Clintrial, Empirica Trace
and
Clinical Development Center
software
products in certain situations to our existing customers with the option to
purchase customer support, and may in the future do so for new customers based
on customer requirements or market conditions. For our
Clintrial
and
Empirica Trace
products we have
23
Table of Contents
established
vendor specific objective evidence of fair value for the customer support.
Accordingly, license revenues are recognized upon delivery of the software and
when all other revenue recognition criteria are met. Customer support revenues
are recognized ratably over the term of the underlying support arrangement. For
our
Clinical Development Center
products vendor specific objective evidence of fair value for the customer
support has not been established, and therefore, revenue for the entire agreement
is recognized ratably over the term of the underlying support agreement. We
continue to generate customer support and maintenance revenues from our
perpetual license customer base. Training revenues are recognized as earned.
Revenues resulting from
InForm
and
OutcomeLogix
application hosting
services consist of three stages for each clinical trial: the first stage
involves application set up, including design of electronic case report forms
and edit checks, installation and server configuration of the system; the
second stage involves application hosting and related support services; and the
third stage involves services required to close out, or lock, the database for
the clinical trial. Revenues resulting from
Phase
Forward IRT
and
Covance IVRS/IWRS
application hosting services also consist of three stages for each clinical
trial: the first stage involves application set up, including design and set up
for the subject randomization and medication inventory management, installation
and server configuration of the system; the second stage involves application
hosting and related support services; and the third stage involves services
required to close out, or lock, the database for the clinical trial. Services
provided for
InForm, Phase Forward IRT, OutcomeLogix
and
Covance IVRS/IWRS
for the
first and third stages are provided on a fixed fee basis based upon the
complexity of the trial and system requirements. Services for the second stage
are charged separately as a fixed monthly fee. We recognize revenue from all
stages of the
InForm, Phase Forward IRT,
OutcomeLogix
and
Covance
IVRS/IWRS
hosting service ratably over the hosting period. Work
performed outside the original scope of work is contracted for separately as an
additional fee and is generally recognized ratably over the remaining term of
the hosting period. Fees for the first and third stages of the services are
billed based upon milestones. Fees for application hosting and related services
in the second stage are billed quarterly in advance. Bundled into this revenue
element are the revenues attributable to the software license used by the
customer.
Revenues resulting from hosting services for our
Empirica Signal
,
Empirica Study
and
WebSDM
products consist of installation
and server configuration, application hosting and related support services.
Services for these offerings are charged monthly as a fixed fee. Revenues are
recognized ratably over the period of the service.
In the event that an application hosting customer
cancels its related statement of work, all deferred revenues are recognized. In
addition, certain termination related fees may be charged and if so, such fees
are recognized in the period of termination.
We may also enter into arrangements to provide
consulting services separate from a license arrangement. In these situations,
revenue is recognized on either a time-and-materials basis or using the
proportional performance method. If we are not able to produce reasonably
dependable estimates, revenue is recognized upon completion of the project and
final acceptance from the customer. If significant uncertainties exist about
project completion or receipt of payment, the revenue is deferred until the
uncertainty is resolved. Provisions for estimated losses on contracts are
recorded during the period in which they are identified.
Deferred revenues represent amounts billed or cash
received in advance of revenue recognition.
Accounting for Prepaid Sales
Commissions, Royalties and Deferred Set Up Costs
. For arrangements where we recognize revenue
over the relevant contract period, we defer related commission payments to our
direct sales force and software license royalties paid to third parties and
amortize these amounts over the same period that the related revenues are
recognized. This is done to better match commission and royalty expenses with
the related revenues. Commission payments are nonrefundable unless amounts due
from a customer are determined to be uncollectible or if the customer
subsequently changes or terminates the level of service, in which case
commissions which were paid are recoverable by us.
Our royalty obligation is based upon the license and
customer support revenues earned for certain products in an arrangement.
Royalties are paid on a percentage of billings basis for certain of our
products, and we have the right to recover royalties in the event an
arrangement is cancelled.
Fees charged and costs incurred for the trial system
design, set up and implementation are deferred as applicable, until the start
of the hosting period and then amortized and recognized, as applicable, ratably
over the estimated hosting period. The deferred costs include incremental
direct costs with third parties and certain internal direct costs related to
the trial and application set up. These costs include salary and benefits
associated with direct labor costs incurred during trial set up, as well as
third-party subcontract fees and other contract labor costs. In the event that an application hosting
customer cancels its related statement of work, all deferred set up costs are
expensed.
Accounts Receivable Reserve.
We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We regularly evaluate the collectability of our trade
receivables based on a combination of factors, which may include dialogue with
the customer to determine the cause of non-payment, the use of collection
agencies, and/or
24
Table of Contents
the
use of litigation. In the event it is determined that the customer may not be
able to meet its full obligation to us, we record a specific allowance to
reduce the related receivable to the amount that we expect to recover given all
information available to us. We continuously monitor collections from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates in the future. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Accounting for Income Taxes.
We are subject to income taxes in both the
United States and foreign jurisdictions, and we use estimates in determining
our provision for income taxes. We account for income taxes using the asset and
liability method for accounting and reporting for income taxes. Under this
method, deferred tax assets and liabilities are recognized based on temporary
differences between the financial reporting and income tax bases of assets and
liabilities using statutory rates. This process requires that we project our
current tax liability and estimate our deferred tax assets and liabilities,
including net operating loss and tax credit carryforwards. In assessing the
need for a valuation allowance, we have considered our recent operating
results, future taxable income projections and all prudent and feasible tax
planning strategies.
Accounting for Stock-Based
Awards.
For service-based options
and restricted stock units and awards, we recognize compensation expense on a
straight-line basis over the requisite service period of the award. For
performance based options, we recognize expense over the estimated performance
period. In addition the benefits of tax deductions in excess of recognized
stock-based compensation is reported as a financing activity rather than an
operating activity in the statements of cash flows. This requirement can have
the effect of reducing net operating cash flows and increasing net financing
cash flows in certain periods. To date, we have not recorded these benefits as
they have not been realized.
We use the Black-Scholes option pricing model to
determine the weighted average fair value of options granted.
For the three months ending March 31, 2009 and
2010, stock-based compensation expense reduced basic earnings per share by
$0.04 and $0.05, respectively, and diluted earnings per share by $0.04 and
$0.05, respectively.
Other Significant Estimates
Goodwill and Intangible Assets
Impairment.
We review the
carrying value of goodwill and intangible assets annually based upon the
expected future discounted operating cash flows of our business. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of our operating results in future periods. Actual results may differ
materially from these estimates. The timing and size of impairment charges, if
any, involves the application of managements judgment regarding the estimates
and could significantly affect our operating results.
Overview of Results of Operations in the Three Months
Ended March 31, 2009 and 2010
Total revenues increased by 17%, or $8.4 million, in the three months
ended March 31, 2010, or 2010, compared to the three months ended March 31,
2009, or 2009, primarily due to an increase in total service revenues of 21%,
or $7.4 million, and to a lesser extent, an increase in license revenues
of 7%, or $1.0 million. Our revenue growth included a 20% increase in
revenues from contract research organizations, or CROs, which increased to
$13.1 million from $10.9 million. The increase in services revenues
is primarily associated with revenues from application hosting services due to
increased production trials under management for our
InForm
license
customers as well as trials under management as a result of our recent
acquisitions of Maaguzi, and Covance IVRS/IWRS. Through these recent
acquisitions and the acquisition of Clarix in 2008, our objective is to provide
an Integrated Clinical Research Suite (ICRS) of technology solutions,
which consists of multiple products that can be purchased on a stand-alone
basis, to automate and integrate the entire clinical development process from
study initiation and regulatory submission through post-approval trials. Our
ability to provide ICRS as a single source vendor and to continue to provide
the product functionality and performance that our customers require will be a
major factor in our ability to continue to increase revenues.
Our gross margin increased by 9%, or $2.6 million, in 2010
compared to 2009, primarily due to a higher increase in revenues in relation to
cost of revenues. The increase in gross margins is primarily due to the
increase in the services gross margin of $1.5 million resulting from higher
services revenues and lower services expense. With the continued shift in our
revenues from license revenues to services revenues associated primarily with
our recent acquisitions and our ICRS strategy, our ability to continue to
maintain our overall gross margins will depend on our ability to continue to
increase services efficiencies and lower our cost of delivery.
Operating income in 2010 of $3.1 million decreased by $2.1 million,
or 41%, compared to 2009. Operating income for 2009 and 2010 included
$2.6 million and $3.5 million of stock-based compensation expense,
respectively, and $0.8 million and $1.5 million of amortization
expense related to acquisitions, respectively. We expect to increase operating
income through increased revenues from
25
Table of Contents
our
recent acquisitions and execution of our ICRS strategy and through our ability
to lower services and operating expenses as a percentage of revenues through
improved efficiencies throughout our services organization and leveraging our
operating expenses as revenues continue to increase.
The results of 2010 compared to 2009 were impacted by foreign exchange
rate fluctuations, resulting in a decrease in revenue of approximately
$0.6 million, or 1% of revenues, and an increase in expense of
approximately $1.2 million, or 3% of expenses.
As of March 31, 2010, we had
$129.7 million of unrestricted cash, cash equivalents and short-term
investments, an increase of $20.6 million from $109.1 million at December 31,
2009. In addition, as of March 31, 2010, we had $3.3 million in
current assets associated with a securities settlement agreement with UBS AG.
As of March 31, 2010, we had no outstanding debt.
Revenues
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Revenues by Product Line (in thousands) (1)
|
|
Amount
|
|
Percentage
of
Revenues
|
|
Amount
|
|
Percentage
of
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
data capture
|
|
$
|
36,527
|
|
75
|
%
|
$
|
40,325
|
|
71
|
%
|
$
|
3,798
|
|
10
|
%
|
Clinical
data management
|
|
5,618
|
|
11
|
|
4,797
|
|
8
|
|
(821
|
)
|
(15
|
)
|
Safety
|
|
5,383
|
|
11
|
|
6,188
|
|
11
|
|
805
|
|
15
|
|
Interactive
Response Technology
|
|
1,288
|
|
3
|
|
5,890
|
|
10
|
|
4,602
|
|
357
|
|
Total
|
|
$
|
48,816
|
|
100
|
%
|
$
|
57,200
|
|
100
|
%
|
$
|
8,384
|
|
17
|
%
|
(1)
Revenues by
Product Line include product license revenues and product-related service
revenues
.
The increase in electronic data capture revenues is
primarily due to an increase in application hosting services of
$2.4 million as well as an increase in license revenues of
$1.5 million. These increases were
partly off-set by a decrease in consulting revenues of $0.2 million. The
decrease in clinical data management is primarily due to a decrease in license
revenues of $0.7 million. The increase
in safety revenues is primarily due to increases in consulting and license
revenues of $0.3 million and $0.2 million, respectively. The increase in
interactive response technology revenues is primarily related to increased
application hosting revenues of $4.6 million.
To a lesser extent the increase is attributable to revenues related to
the acquisition of Covance IVRS/IWRS in August 2009.
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Revenues by Type (in thousands)
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
14,116
|
|
29
|
%
|
$
|
15,141
|
|
27
|
%
|
$
|
1,025
|
|
7
|
%
|
Application hosting
services
|
|
26,626
|
|
55
|
|
33,782
|
|
59
|
|
7,156
|
|
27
|
|
Consulting services
|
|
4,861
|
|
10
|
|
5,207
|
|
9
|
|
346
|
|
7
|
|
Customer support
|
|
3,213
|
|
6
|
|
3,070
|
|
5
|
|
(143
|
)
|
(4
|
)
|
Total
|
|
$
|
48,816
|
|
100
|
%
|
$
|
57,200
|
|
100
|
%
|
$
|
8,384
|
|
17
|
%
|
Total revenues increased in 2010 as compared to
2009, primarily due to increases in application hosting and license revenues.
The increase in 2010 revenues associated with our application hosting services
was partially due to a 10% increase in production trials under management from
approximately 955 in 2009 to approximately 1,050 in 2010, which includes
application hosting services trials and trials hosted for our
InForm
license customers. The
increase in production trials relates to a relative increase in the number of
customers who purchase all trial-related services from us, customers who
license
InForm
and build
their own studies. Our application hosting services also increased due to the
impact of additional trials under management for our web-integrated
Phase Forward IRT
product offering with production trials increasing 85% from 96
in 2009 to 178 in 2010. The increase in license revenues was primarily the
result of additional electronic data capture revenues from both new and
existing customers, and to a lesser extent, growth in sales relating to our
safety products. The increase in consulting services was primarily attributable
to additional revenue related to consulting services provided for our safety
products for both new and existing customers, and to a lesser extent, growth in
sales relating to our clinical data management products. The decrease in
customer support revenues was primarily due to decreases in
26
Table of
Contents
clinical
data management products. Our revenues were not significantly impacted by price
increases or decreases. Inflation had only a nominal impact on our revenues.
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Revenues by Geography
(in thousands)
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
30,339
|
|
62
|
%
|
$
|
35,843
|
|
63
|
%
|
$
|
5,504
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
12,619
|
|
26
|
|
14,358
|
|
25
|
|
1,739
|
|
14
|
|
France
|
|
3,651
|
|
7
|
|
3,758
|
|
7
|
|
107
|
|
3
|
|
Asia Pacific
|
|
2,207
|
|
5
|
|
3,241
|
|
5
|
|
1,034
|
|
47
|
|
International subtotal
|
|
18,477
|
|
38
|
|
21,357
|
|
37
|
|
2,880
|
|
16
|
|
Total
|
|
$
|
48,816
|
|
100
|
%
|
$
|
57,200
|
|
100
|
%
|
$
|
8,384
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in revenues worldwide was primarily due to an increase in interactive
response technology revenues and electronic data capture revenues of
$4.6 million and $3.8 million, respectively. The increase in North
American revenues is primarily related to an increase in interactive response
technology revenues and electronic data capture revenues of $3.8 million and
$1.4 million, respectively. The increase in interactive response technology
revenues is primarily a result of the acquisition of Clarix. To a lesser
extent, the increase is attributable to the 2010 period including a full
quarter of application hosting services revenues relating to the acquisition of
Covance IVRS/IWRS in August 2009, while the 2009 period included no
revenue. The increase in international revenues is primarily related to an
increase in electronic data capture revenues, interactive response technology
revenues and safety revenues of $2.4 million, $0.8 million and $0.4
million, respectively. These increases were slightly off-set by a decrease in
clinical data management revenues of $0.8 million.
Cost of Revenues
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Costs of Revenues
(in thousands)
|
|
Amount
|
|
Percentage
of Related
Revenues
|
|
Amount
|
|
Percentage
of Related
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
566
|
|
4
|
%
|
$
|
566
|
|
4
|
%
|
$
|
|
|
|
%
|
Services
|
|
19,899
|
|
57
|
|
25,716
|
|
61
|
|
5,817
|
|
29
|
|
Total
|
|
$
|
20,465
|
|
42
|
%
|
$
|
26,282
|
|
46
|
%
|
$
|
5,817
|
|
28
|
%
|
There
was no change in the cost of license revenues when comparing 2010 to 2009. The
increase in cost of services in 2010 was primarily due to increases in
employee-related expenses of $2.4 million related to a headcount increase
of 66 people, and increases in depreciation expenses of $1.0 million. We also
had expense increases for network hosting, outside contractors, customer
pass-though expenses and computer related expenses of $0.7 million, $0.5
million, $0.4 million and $0.3 million, respectively. Computer-related expenses
include hardware and software support agreements as well as computer
accessories.
Gross Margin
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Gross Margin
(in thousands)
|
|
Amount
|
|
Percentage
of Related
Revenues
|
|
Amount
|
|
Percentage
of Related
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
13,550
|
|
96
|
%
|
$
|
14,575
|
|
96
|
%
|
$
|
1,025
|
|
8
|
%
|
Services
|
|
14,801
|
|
43
|
|
16,343
|
|
39
|
|
1,542
|
|
10
|
|
Total
|
|
$
|
28,351
|
|
58
|
%
|
$
|
30,918
|
|
54
|
%
|
$
|
2,567
|
|
9
|
%
|
27
Table of Contents
The
overall gross margin percentage decreased in 2010 as compared to 2009 due to a
lower service margin percentage. The decrease in the services gross margin
percentage was due to higher services expenses as a percentage of related
revenues, as well as the inclusion of our
OutcomLogix
product from the acquisition of Maaguzi in July 2009 and the acquisition
of Covance IVRS/IWRS in August 2009. The license gross margin percentage
remained the same in 2010 as compared to 2009. It is likely that gross margin,
as a percentage of revenues, will fluctuate quarter by quarter due to the
timing and mix of license and service revenues, and the type, amount and timing
of service required in delivering certain projects.
Operating Expenses
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Operating Expenses
(in thousands)
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
7,206
|
|
15
|
%
|
$
|
8,986
|
|
16
|
%
|
$
|
1,780
|
|
25
|
%
|
Research and development
|
|
8,180
|
|
17
|
|
9,698
|
|
17
|
|
1,518
|
|
19
|
|
General and administrative
|
|
7,804
|
|
16
|
|
9,184
|
|
16
|
|
1,380
|
|
18
|
|
Total
|
|
$
|
23,190
|
|
48
|
%
|
$
|
27,868
|
|
49
|
%
|
$
|
4,678
|
|
20
|
%
|
Sales and Marketing.
Sales
and marketing expenses increased in 2010 primarily due to employee-related
expense of $0.5 million related to a headcount increase of 18 people, as
well as an increase in amortization of intangible assets of $0.4 million.
We also had increases in commissions expenses, outside contractor expenses and
travel expenses of $0.4 million, $0.1 million and $0.1 million,
respectively. We expect that our sales and marketing expense will continue to
increase in absolute dollars as commission expense increases with our revenues
and as we continue to expand sales coverage and to build brand awareness
through what we believe are the most cost effective channels available. We
expect that such increases may fluctuate, however, due to the timing of
marketing programs.
Research and Development.
Research
and development expenses increased in 2010 primarily due to employee-related
expenses of $1.3 million related to a headcount increase of 74 people. We
also had expense increases related to stock-based compensation, facilities
expenses and travel expenses of $0.4 million, $0.2 million and
$0.1 million, respectively. Increases were partially off-set by a decrease
in outside contractor expenses of $0.4 million.
We expect that our research and development costs will continue to
increase in absolute dollars as we continue to add features and functionality
to our products, introduce additional integrated software solutions to our
product suite and expand our product and service offerings.
General and Administrative.
General
and administrative expenses increased in 2010 primarily due to increases in
depreciation, outside contractor and stock-based compensation expenses of $0.4
million, $0.3 million and $0.3 million, respectively. We also had expense increases related to
facilities and taxes and fees expenses of $0.3 million and $0.1 million,
respectively. We expect that in the future our general and administrative
expenses will increase in absolute dollars as we add personnel and incur
additional costs related to the growth of our business and operations.
Other Income
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Other
income (in thousands)
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
640
|
|
1
|
%
|
$
|
316
|
|
1
|
%
|
$
|
(324
|
)
|
(51
|
)%
|
Other, net
|
|
409
|
|
1
|
|
(184
|
)
|
|
|
(593
|
)
|
(145
|
)
|
Total other income
|
|
$
|
1,049
|
|
2
|
%
|
$
|
132
|
|
|
%
|
$
|
(917
|
)
|
(87
|
)%
|
The
decrease in interest income in 2010 was primarily due to the net decrease in
cash and cash equivalents and short and long-term investments. The decrease in
other, net in 2010 was primarily due to decreases in the fair value associated
with our securities settlement agreement.
Provision for Income Taxes
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
Change
|
|
Provision
for income taxes (in thousands)
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
Percentage
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,132
|
|
4
|
%
|
$
|
1,249
|
|
2
|
%
|
$
|
(883
|
)
|
(41
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
Our
effective tax rate for 2009 and 2010 was 34% and 39%, respectively. Our
effective tax rate for 2010 is higher
than the effective tax rate for 2009 principally due to the benefit derived in
the prior year from the federal research and development tax credit. The federal research and development tax
credit expired effective December 31, 2009 and, as such, we have not
forecasted a current tax benefit for this item in 2010.
Non-GAAP Financial Information
We provide non-GAAP revenues, income from operations, net income, and
net income per share applicable to common stockholders data as additional
information for our operating results. These measures are not in accordance
with, or an alternative for, generally accepted accounting principles and may
be different from non-GAAP measures used by other companies. We believe these
non-GAAP measures are useful to investors because this supplemental information
facilitates comparisons to prior periods. We use these non-GAAP measures to evaluate
our financial results, develop budgets and manage expenditures. Investors are
encouraged to review the reconciliations of these non-GAAP financial measures
to the comparable GAAP results.
The table below presents a reconciliation of GAAP to non-GAAP revenues,
income from operations and net income and net income per share applicable to
common stockholders for the three months ended March 31, 2009 and 2010.
Non-GAAP results exclude the impact of stock-based compensation expense,
amortization of intangible assets, the effects of purchase accounting
adjustment to record deferred revenues and backlog assumed in acquisitions at
fair value, impairment of intangible assets and restructuring expenses.
Reconciliation of GAAP Revenues, GAAP Income From Operations
and GAAP Net Income (Loss) to
Non-GAAP
Revenues, Non-GAAP Income From Operations and Non-GAAP Net Income (Loss)
(unaudited)
(in
thousands, except per share amounts)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
TOTAL REVENUES:
|
|
|
|
|
|
GAAP total revenues
|
|
$
|
48,816
|
|
$
|
57,200
|
|
Deferred revenues and backlog adjustments related
to acquisitions(1)
|
|
628
|
|
296
|
|
Non-GAAP total revenues
|
|
$
|
49,444
|
|
$
|
57,496
|
|
INCOME FROM OPERATIONS:
|
|
|
|
|
|
GAAP income from operations
|
|
$
|
5,161
|
|
$
|
3,050
|
|
Stock-based compensation expense
|
|
2,570
|
|
3,501
|
|
Amortization of intangible assets
|
|
761
|
|
1,450
|
|
Deferred revenues and backlog adjustments related
to acquisitions(1)
|
|
628
|
|
296
|
|
Non-GAAP income from operations
|
|
$
|
9,120
|
|
$
|
8,297
|
|
NET INCOME (LOSS):
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
4,078
|
|
$
|
1,933
|
|
Stock-based compensation expense, net of tax
|
|
1,687
|
|
2,197
|
|
Amortization of intangible assets, net of tax
|
|
500
|
|
910
|
|
Deferred revenues and backlog adjustments related
acquisitions, net of tax(1)
|
|
412
|
|
187
|
|
Non-GAAP net income
|
|
$
|
6,677
|
|
$
|
5,227
|
|
GAAP net income per share applicable to common
stockholders:
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.05
|
|
Non-GAAP net income per share applicable to common
stockholders:
|
|
|
|
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.12
|
|
(1)
Fair value
adjustments to deferred revenues and backlog. Purchase accounting requires that
deferred revenue assumed in an acquisition be recorded and subsequently
recognized at its fair value as of the time of the acquisition. Consequently,
we do not recognize the full amount of these deferred revenues and backlog. We
add back non-GAAP revenues associated with
29
Table of Contents
deferred revenues and backlog that were excluded as a result of
purchase accounting adjustments, as we believe that this provides information
about the operating impact of the acquired business in a manner consistent with
the revenue recognition for our pre-existing products and services.
Liquidity
and Capital Resources
Our
principal sources of liquidity were unrestricted cash, cash equivalents, short
and long-term investments totaling $135.5 million and $129.7 million at December 31,
2009 and March 31, 2010, respectively, and accounts receivable of
$56.0 million and $44.7 million, respectively. For the periods ended March 31, 2009 and
2010 we had no outstanding debt and, in general, we do not enter into long-term
binding purchase commitments. We currently expect to retain any future earnings
for use in the operation and expansion of our business, including our stock
repurchase program, and do not anticipate paying any cash dividends on our
common stock.
We
believe that our existing cash, cash equivalents, short-term investments and
cash provided by operating activities will be sufficient to meet our working
capital and capital expenditure needs over at least the next 12 months.
Our future capital requirements will depend on many factors, including our rate
of revenue growth, the expansion of our marketing and sales activities, the
timing and extent of spending to support product development efforts, the
timing of introductions of new products and services and enhancements to
existing products and services and the continuing market acceptance of our
products and services. From time to time, we may also enter into agreements
with respect to potential investments in, or acquisitions of, businesses,
services or technologies, which could also require us to seek additional equity
or debt financing. To the extent that existing cash and securities and cash
from operations are insufficient to fund our future activities, we may need to
raise additional funds through public or private equity or debt financing.
Substantially
all of our long-lived assets at December 31, 2009 and March 31, 2010
are located in the United States.
Net Operating Loss Carryforwards
At
December 31, 2009, we had $19.2 million of net operating loss
carryforwards that may be used to offset future U.S. federal taxable income,
which may reduce our future cash tax liability. In addition, we had
$20.3 million of net operating losses resulting from excess tax deductions
related to stock-based compensation. We will realize the benefit of these
excess tax deductions through increases to stockholders equity in the periods
in which the losses are utilized to reduce tax payments. At December 31,
2009, we had $3.7 million of federal research and development tax credit
carryforwards that may be utilized to offset future U.S. taxes. In addition, we
had $0.4 million of federal research and development tax credits resulting
from excess tax deductions related to stock-based compensation, the benefits of
these credits will be realized through increases to stockholders equity in the
periods in which the credits are utilized to offset future U.S. taxes. The net
operating loss and tax credit carryforward periods extend through 2029. We also
had $4.5 million of research and development tax credit carryforwards and
$1.4 million of investment tax credits that may be utilized to offset
future Massachusetts state taxable income. The Massachusetts research and
development tax credit carryforward period extends through 2024. The
Massachusetts investment tax credits begin to expire in 2010. The federal and
state net operating loss carryforwards and research and development tax credits
are subject to review and possible adjustment by the taxing authorities. Also,
the Internal Revenue Code contains provisions that may limit the net operating
loss and tax credit carryforwards available in any given year in the event of
certain changes in the ownership interests of significant stockholders. We
currently expect to realize the benefit of all recorded deferred tax assets as
of December 31, 2009. Our conclusion that such assets will be recovered is
based upon our expectation that our future earnings combined with tax planning
strategies available to us will provide sufficient taxable income to realize
recorded tax assets.
We
may be required to make cash outlays related to our unrecognized tax
benefits. However, due to the uncertainty of the timing of future cash
flows associated with our unrecognized tax benefits, we are unable to make
reasonably reliable estimates of the period of cash settlement, if any, with
the respective taxing authorities. Accordingly, unrecognized tax benefits
of $1.6 million as of December 31, 2009 have been excluded from the
contractual obligations table below under the heading
Contractual Obligations
. For further
information on unrecognized tax benefits, see Note 6 in the notes to our 2009
consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2009.
Auction Rate Securities
Included
within our investment portfolio at December 31, 2009 and March 31,
2010 were $23.8 million and $21.6 million of auction rate securities, or
ARS, at par value, which are classified as short-term investments on our
unaudited condensed consolidated balance sheets, and recorded at fair market
value. These ARS are debt instruments issued by various states throughout the
United States to finance student loans. The types of ARS that we own are backed
by student loans, 95% of which are guaranteed under the Federal Family
Education Loan Program, and all had credit ratings of AAA (or equivalent) from
a recognized rating agency.
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Historically,
the carrying value of ARS approximated fair value due to the frequent resetting
of the interest rates. With the liquidity issues experienced in the global
credit and capital markets, our ARS have experienced multiple failed auctions.
While we continue to earn and receive interest on these investments at the maximum
contractual rate, the estimated fair value of these ARS no longer approximates
par value.
In
November 2008, we accepted an offer from UBS AG, or UBS, with respect to
all of our ARS held at that time. Under our agreement with UBS, we received
certain rights which entitle us to sell our ARS to UBS affiliates during the
period from June 30, 2010 to July 20, 2012, for a price equal to par
value. In accepting the offer, we granted UBS the authority to sell or auction
the ARS at par at any time up until the expiration date of our agreement with
UBS and released UBS from any claims relating to the marketing and sale of the
ARS. UBSs obligations under the agreement are not secured by its assets and do
not require UBS to obtain any financing to support its performance obligations.
UBS has disclaimed any assurance that it will have sufficient financial
resources to satisfy its obligations under the agreement. If UBS has
insufficient funding to buy back the ARS and the auction process continues to
fail, then we may incur further losses on the carrying value of the ARS.
We
performed a fair value calculation of our ARS as of December 31, 2009 and March 31,
2010. Fair value was determined using a secondary market indications method
(direct discounts) and a discounted cash flow method as recent auctions of
these securities were not successful, resulting in our continuing to hold these
securities and issuers paying interest at the maximum contractual rate. This
valuation technique considers the following: time left to maturity, the rate of
interest paid on the securities, the amount of principal to be repaid to the
holders of the securities; the credit worthiness of the issuer and guarantors
(if any) and the sufficiency of the collateral; trading characteristics of the securities;
ability to borrow against the ARS; evidence from secondary market sales; and
the market-clearing yield for the securities.
Based
upon the valuation performed, we concluded that the fair value of these ARS at December 31,
2009 was $19.4 million, a decline of $4.4 million from par value. As of March 31,
2010, we concluded that the fair value of these ARS was $18.2 million, and
therefore, recorded the change in fair value of $1.1 million in the
accompanying unaudited condensed consolidated statement of income for the three
months ended March 31, 2010. As of March 31, 2010, it remained our
intent to sell the ARS on June 30, 2010 in accordance with our rights
under the settlement agreement.
Accordingly the ARS are classified as short-term investments in the
unaudited condensed consolidated balance sheets.
We
elected to measure the fair value of the settlement agreement (the put option)
under the fair value option. Fair value was determined using a discounted cash
flow method which considered the following factors: the term of the agreement,
the availability to borrow against the ARS, the creditworthiness of UBS and
current market interest rates. Based on the valuation performed, we concluded
that the fair value of the put option as of December 31, 2009 and March 31,
2010 was $4.3 million and $3.3 million, respectively. Accordingly, the
decrease in fair value of $1.1 million for the three months ended March 31,
2010 was recorded in our accompanying unaudited condensed consolidated
statement of income. As of March 31,
2010, it remained our intent to sell the ARS on June 30, 2010 in
accordance with our rights under the settlement agreement, and accordingly we
classify the fair value of the securities settlement agreement as current
assets in the unaudited condensed consolidated balance sheets.
Cash
Flows
Cash
provided by and used in operating activities has historically been affected by
changes in working capital accounts, primarily deferred revenues, accounts
receivable and accrued expenses, and add-backs of non-cash expense items such
as depreciation and amortization and stock-based compensation expense.
Fluctuations within accounts receivable and deferred revenues are primarily
related to the timing of billings to our customers, payments from our customers
and the associated revenue recognition. Movements in deferred costs are related
to the volume and stages of hosted clinical trials and movements in accrued
expenses and accounts payable are due to the timing of certain transactions.
Net Cash Provided by Operating Activities.
Net cash provided by operating activities was
$23.4 million in the three months ended March 31, 2010, which was
more than net income of $1.9 million. The difference is primarily due to
various changes in working capital accounts of $12.2 million which include
changes to accounts receivable and deferred revenue of $11.4 million and 12.1
million, respectively, off-set by changes to accrued expenses and accounts
payable of $8.8 million and $2.3 million, respectively. Non-cash adjustments included $5.8 million of
depreciation and amortization expense, $3.5 million of stock-based compensation
expense, and $1.1 million related to the change in fair value of the securities
settlement agreement, partially offset by a $1.1 million change in fair value
of our investments.
Net Cash Provided by Investing Activities.
Net cash provided by investing activities was
$15.3 million during the three months ended March 31, 2010, which was
primarily due proceeds from maturities of short-term and long-term investments
of $29.1 million.
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Cash
provided by investing activities was partially offset by the purchase of short
and long-term investments of $10.8 million, and the purchase of property and
equipment of $3.0 million.
Net Cash Used In Financing Activities.
Net cash used in financing activities was
$26.6 million in the three months ended March 31, 2010, primarily due to
the purchase of treasury stock of $26.0 million.
Contractual
Obligations
Our principal commitments consist of obligations under non-cancelable
operating leases for office space. The following table of our material
contractual obligations as of December 31, 2009 summarizes the aggregate
effect that these obligations are expected to have on our cash flows in the
periods indicated:
|
|
Payments Due by Period
|
|
Contractual
Obligations (in thousands)
|
|
Total
|
|
1 year or less
|
|
2-3 years
|
|
4-5 years
|
|
More than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
83,440
|
|
$
|
10,041
|
|
$
|
19,166
|
|
$
|
17,552
|
|
$
|
36,681
|
|
Total
|
|
$
|
83,440
|
|
$
|
10,041
|
|
$
|
19,166
|
|
$
|
17,552
|
|
$
|
36,681
|
|
The above table includes the lease entered into on February 13,
2008 with BP Fourth Avenue, L.L.C. to secure office space for our corporate
headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date
for occupancy under the lease was December 2008.
The lease provides for the rental of 165,129 rentable square feet of
space and has an initial term of 10 years and three months. We can,
subject to certain conditions, extend this term by exercising up to two
consecutive five year options. We were not required to pay any rent for the
first three months of the initial lease term. Thereafter, the annual rent on
the lease for years one through five will be $6.6 million, or
approximately $0.5 million per month. For years six through ten, the
annual rent will be $7.2 million, or approximately $0.6 million per
month. The total base rent payable in the initial term is $69.1 million.
In addition to base rent, commencing on January 1, 2010, the lease
for our current headquarters requires us to pay our proportionate share of the
amount by which defined operating expenses incurred by the landlord exceed the
base year (2009) operating expenses, as defined in the lease. The lease also
requires us to pay our proportionate share of the amount by which real estate
taxes paid or incurred by the landlord exceed the tax base year (fiscal 2010),
as defined in the lease. In addition, we are receiving lease incentives,
including free rent for the first three months of occupancy, which totaled
approximately $1.6 million, and allowances for tenant improvements
totaling approximately $8.1 million. The allowances for tenant
improvements are being amortized on a straight-line basis over the lease term
as a reduction of rental expense.
In connection with the signing of the lease for our current
headquarters, we have deposited with the landlord an unconditional, irrevocable
letter of credit in the landlords favor in the amount of $1.0 million.
The above table also includes the lease which we entered into on August 17,
2009 with KBS Five Tower Bridge, L.L.C. to secure office space for our
IRT
business operations at 300 Barr Harbor
Drive, West Conshohocken, Pennsylvania. The commencement date for occupancy
under the lease was September 2009 with rent payments commencing in February 2010.
The lease provides for the rental of 44,907 square feet of space and has an
initial term of 10 years and one month. We can, subject to certain
conditions, extend this term by exercising up to two consecutive five year
options. The annual rent under this lease for the first year is
$1.3 million, or approximately $0.1 million per month, with annual
escalations in rent for each subsequent year in the amount fifty cents per
square foot. The total base rent payable in the initial term is
$14.2 million.
In addition to base rent,
commencing on January 1, 2012, the lease for our
IRT
operations requires us to pay our
proportionate share of the amount by which defined operating expenses incurred
by the landlord exceed the base year operating expenses, as defined in the
lease. The lease also requires us to pay our proportionate share of the amount
by which real estate taxes paid or incurred by the landlord exceed the tax base
year, as defined in the lease.
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Recently Issued Accounting
Pronouncements
On January 1,
2010, we adopted the guidance of ASU No. 2009-13, Revenue Recognition
(Topic 605):
Multiple-Deliverable Revenue
Arrangements
, which was ratified by the FASB Emerging Issues Task
Force on September 23, 2009.
ASU No. 2009-13
addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather
than as a combined unit. This guidance establishes a selling price hierarchy
for determining the selling price of a deliverable, which is based on: (a) vendor-specific
objective evidence; (b) third-party evidence; or (c) estimates. This
guidance also eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. In addition, this
guidance significantly expands required disclosures related to a vendors
multiple-deliverable revenue arrangements.
The impact of
this standard was not material to our reported results of operations. Refer to
our revenue recognition policies for further discussion.
On January 21,
2010, the FASB issued ASU No. 2010-06,
Fair
Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair
Value Measurements
. The ASU requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by FASB ASC 820,
Fair Value Measurements.
During the three
months ended March 31, 2010 we had no movements among Level 1 and 2 of the
three-tier fair value hierarchy. Entities will also need to provide a
reconciliation of purchases, sales, issuance, and settlements of anything
valued with a Level 3 method, which is used to price the hardest to value
instruments. The new disclosures and clarifications of existing disclosures
were adopted on January 1, 2010.
Adoption of this portion of ASU No. 2010-06 did not have an impact
on our consolidated financial position and results of operation. Disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those
fiscal years. We elected to adopt this
portion of ASU No. 2010-06 on January 1, 2010.
Adoption of this portion of ASU No. 2010-06 did not have an impact
on our consolidated financial position and results of operation.
Off-Balance
Sheet Arrangements
We
do not have any special purpose entities or off-balance sheet arrangements.
Special Note Regarding Forward-Looking Statements
In
addition to historical consolidated financial information, this Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities and Exchange Act of 1934, as amended, and are intended to be
covered by the safe harbor created by those sections. All statements,
other than statements of historical facts, included in this Quarterly Report on
Form 10-Q regarding our strategy, future operations, future financial
position, future net sales, projected costs, projected expenses, prospects and
plans and objectives of management are forward-looking statements. The words anticipates,
believes, estimates, expects, intends, may, plans, projects, will,
would and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that the expectations underlying any of our
forward-looking statements are reasonable, these expectations may prove to be incorrect,
and all of these statements are subject to risks and uncertainties. We discuss
many of the risks that we believe could cause actual results or events to
differ materially from these forward-looking statements in greater detail in
the section entitled Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2009.
We urge you to consider the risks and uncertainties described in Item 1A
of our Annual Report on Form 10-K for the year ended December 31,
2009 in evaluating our forward-looking statements. Should one or more of these
risks and uncertainties materialize, or should underlying assumptions,
projections or expectations prove incorrect, actual results, performance or
financial condition may vary materially and adversely from those anticipated,
estimated or expected. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures or investments we may make.
We caution readers not to place undue reliance upon
any such forward-looking statements, which speak only as of the date made.
Except as otherwise required by the federal securities laws, we disclaim any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein (or elsewhere) to reflect any change
in our expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Item 3.
Quantitative and
Qualitative Disclosures about Market Risk
Foreign Currency
Exchange Risk
We
are exposed to a variety of market risks, including
changes in interest rates and the market value of our investments.
33
Table of Contents
Financial Instruments,
Other Financial Instruments
Financial instruments meeting fair value disclosure requirements
consist of cash equivalents, short-term investments, securities settlement
agreement, accounts receivable, accounts payable and forward foreign exchange
contracts. The fair value of these financial instruments approximates their
carrying amount.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due
to changes in foreign currency exchange rates, particularly changes in the
euro, British pound, Australian dollar and Japanese yen. Except for revenue
transactions in Japan, we enter into transactions directly with substantially
all of our foreign customers.
Percentage of revenues and expenses in foreign currency is as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2010
|
|
Revenues generated in locations outside the United
States
|
|
38
|
%
|
37
|
%
|
Revenues in currencies other than the United
States dollar (1)
|
|
22
|
|
26
|
|
Expenses in currencies other than the United
States dollar (1)
|
|
21
|
|
25
|
|
(1)
Percentage of revenues and
expenses denominated in foreign currency for the three months ended March 31,
2010:
|
|
Revenues
|
|
Expenses
|
|
euros
|
|
15
|
%
|
5
|
%
|
British pound
|
|
6
|
|
12
|
|
Japanese yen
|
|
5
|
|
5
|
|
Other
|
|
|
|
3
|
|
Total
|
|
26
|
%
|
25
|
%
|
As of March 31, 2009 and 2010, we had $9.0 million and
$21.1 million, respectively, of receivables denominated in currencies
other than the U.S. dollar. We also maintain cash accounts denominated in
currencies other than the local currency which exposes us to foreign exchange
rate movements.
In addition, although our foreign subsidiaries have intercompany
accounts that eliminate upon consolidation, such accounts expose us to foreign
currency rate movements. Exchange rate fluctuations on short-term intercompany
accounts are recorded in our consolidated statements of operations under other
income (expense), net, while exchange rate fluctuations on long-term
intercompany accounts are recorded in our consolidated balance sheets under accumulated
other comprehensive income (loss) in stockholders equity, as they are
considered part of our net investment and hence do not give rise to gains or
losses.
We have implemented a risk management program under which we measure
foreign currency exchange risk monthly and manage those exposures through the
use of various operating strategies and, as more fully described in
Note 13 of the notes to the accompanying unaudited condensed consolidated
financial statements included in this Quarterly Report. We regularly purchase short-term foreign
currency forward contracts, designed to hedge fluctuation in non-functional
currencies and our subsidiaries against the U.S. dollar. This process is
designed to minimize foreign currency translation exposures that could
otherwise affect consolidated results of operations. The terms of these
contracts are generally for periods of one month.
Currently, our largest foreign currency exposures are the British pound
and euro, primarily because our European operations have a higher proportion of
our local currency denominated expenses. Relative to foreign currency exposures
existing at December 31, 2008 and 2009, a 10% unfavorable movement in
foreign currency exchange rates would expose us to significant losses in
earnings or cash flows or significantly diminish the fair value of our foreign
currency financial instruments. For the year ended December 31, 2009, we
estimated that a 10% unfavorable movement in foreign currency exchange rates
would have decreased revenues by $5.3 million, decreased expenses by
$4.5 million and decreased operating income by $0.8 million. For the
three months ended March 31, 2010, we estimated that a 10% unfavorable
movement in foreign currency exchange rates would have decreased revenues
34
Table of
Contents
by
$1.5 million, decreased expenses by $1.3 million and decreased
operating income by $0.1 million. The estimates used assumes that all
currencies move in the same direction at the same time and the ratio of
non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated
revenue and expenses does not change from current levels. Since a large portion
of our revenue is deferred revenue that is recorded at different foreign
currency exchange rates, the impact to revenue of a change in foreign currency
exchange rates is recognized over time, whereas the impact to expenses is more
immediate, as expenses are recognized at the current foreign currency exchange rate
in effect at the time the expense is incurred. All of the potential changes
noted above are based on sensitivity analyses performed on our financial
results as of December 31, 2009 and March 31, 2010.
As
of March 31, 2010, we entered into forward foreign exchange contracts to
hedge approximately $5.2 million of receivables, intercompany accounts and cash
balances denominated in currencies other than the U.S. dollar. We recorded foreign currency gains/(losses) of
$0.1 million and $(0.2) million for the three months ended March 31,
2009 and 2010, respectively.
We settle
forward foreign exchange contracts in cash. As of December 31, 2009 and March 31,
20109, we recorded $0.2 and less than $0.1 million, respectively, of foreign
exchange gains in other income (expense) as a result of outstanding forward
foreign exchange contracts.
Interest Rate Sensitivity
We had unrestricted cash, cash equivalents,
short-term and long-term investments totaling $129.7 million at March 31,
2010. These amounts were invested primarily in money market funds, corporate
bonds and government agency securities, and are held for working capital
purposes. We do not use derivative financial instruments in our investment
portfolio. We have established investment guidelines relative to credit
quality, diversification, marketability and performance measurement designed to
maintain safety and liquidity. With the exception of auction rate securities,
investments in securities are invested primarily in high quality securities of
a short duration and historically have not been materially affected by
fluctuations in interest rates. With the exception of auction rate securities,
which are recorded at fair value, investments are reported at amortized cost.
We considered the historical volatility of short-term and long-term interest
rates and determined that, due to the size and duration of our investment
portfolio, a 100-basis-point increase in interest rates would not have any
material exposure to changes in the fair value of our portfolio at March 31,
2010. A decline in interest rates, however, would reduce future investment
income.
We believe that our existing cash, cash equivalents,
short-term investments and cash provided by operating activities will be
sufficient to meet our working capital and capital expenditure needs over at
least the next 12 months.
Item 4.
Controls and Procedures
We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are
designed to do, and management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.
As of March 31, 2010, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective at that reasonable assurance
level in (i) enabling us to record, process, summarize and report
information required to be included in our periodic Securities and Exchange
Commission filings within the required time period and (ii) ensuring that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
There have been no changes in our internal control
over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
35
Table of Contents
Part IIOther Information
Item 1.
Legal Proceedings
From time to time and in the ordinary course of
business, we are subject to various claims, charges and litigation. The outcome of litigation cannot be predicted
with certainty and some lawsuits, claims or proceedings may be disposed of
unfavorably to us, which could materially affect our financial condition or
results of operations.
Item 1A.
Risk Factors
We operate in a rapidly
changing environment that involves a number of risks, some of which are beyond
our control. In addition to the other
information set forth in this report, the risks and uncertainties that we
believe are most important for you to consider are described under the title Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2009 other than as set forth below.
There are no material changes to the risk factors described in the Risk
Factors section in our Annual Report on Form 10-K for the year ended December 31,
2009. Additional risks and uncertainties
not presently known to us, which we currently deem immaterial or which are
similar to those faced by other companies in our industry or business in
general, may also impair our business operations. If any of the foregoing risks or uncertainties
actually occurs, our business, financial condition and operating results would
likely suffer.
The
announcement and pendency of our agreement to be acquired by Oracle could
adversely affect our business.
On
April 15, 2010, we entered into a Merger Agreement with Oracle and Pine
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Oracle (Merger Sub), pursuant to which, subject to satisfaction or waiver of
the conditions therein, Merger Sub will merge with us (the Merger) with the
Company surviving as a wholly-owned subsidiary of Oracle. Subject to the terms of the Merger Agreement,
which has been approved by our board of directors and the boards of directors
of Oracle and Merger Sub, at the effective time of the Merger (the Effective
Time), each share of our common stock issued and outstanding immediately prior
to the Effective Time will be converted into the right to receive $17.00 in
cash, without interest. The Merger is
conditioned upon, among other things, approval by our stockholders, the
expiration or early termination of the applicable premerger waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other
customary conditions. We will continue
to operate separately from Oracle until the transaction closes. The announcement and pendency of the Merger
could cause disruptions in our business, including affecting our relationship
with our customers, vendors and employees, which could have an adverse effect
on our business, financial results and operations.
The
failure to complete the merger could adversely affect our business.
There
is no assurance that the Merger with Oracle or any other transaction will
occur. If the proposed Merger or a similar transaction is not completed, the
share price of our common stock may change to the extent that the current
market price of our common stock reflects an assumption that a transaction will
be completed. In addition, under circumstances defined in the Merger Agreement,
we may be required to pay a termination fee of $24.7 million and, in certain
circumstances, reimburse reasonable out-of-pocket fees and expenses of Oracle
up to $4.0 million incurred with respect to the transactions contemplated by
the Merger Agreement. Further, a failed transaction may result in negative
publicity and a negative impression of us in the investment community.
In certain
instances, the Merger Agreement requires us to pay a termination fee of $24.7
million to Oracle. This payment could affect the decisions of a third party
considering making an alternative acquisition proposal to the merger.
Under the terms of the merger agreement, we will be
required to pay to Oracle a termination fee of $24.7 million if the Merger
Agreement is terminated under certain circumstances. This payment could affect
the structure, pricing and terms proposed by a third party seeking to acquire
or merge with us and could deter such third party from making a competing
acquisition proposal.
Item 2.
Unregistered Sale of Equity Securities and Use of
Proceeds
Under the terms of our 2004 Amended and Restated
Stock Option and Incentive Plan, or the 2004 Plan, we have issued shares of
restricted stock to our employees. On
the date that these restricted shares vest, we withhold, via a net exercise provision
pursuant to our applicable restricted stock agreements and the 2004 Plan, the
number of vested shares (based on the closing price of our common stock on such
vesting date) equal to tax withholdings required by us. Up until May 2009
the shares withheld from the grantees to settle their tax liability were
reallocated to the number of shares available for issuance under the 2004 Plan;
in May 2009 the 2004 Plan was amended and shares withheld from the
grantees to settle taxes are no longer reallocated to the number of shares
available for issuance. For the three month period ending March 31, 2010,
we withheld an aggregate of 65,755 common shares under restricted stock units
at a price of $11.04 per share.
Purchases of Equity Securities by the Issuer and
Affiliated Purchasers
On November 3, 2009, our board of directors authorized the
repurchase of up to $40.0 million of our common stock, par value $0.01 per
share, through a share repurchase program. On February 12, 2010, our board
of directors increased the amount available under the share repurchase program
by an additional $25.0 million. As authorized by the program, shares may
be purchased in the open market or through privately negotiated transactions in
a manner consistent with applicable securities laws and regulations, including
pursuant to a Rule 10b5-1 plan maintained by us.
This share repurchase program does not obligate us to acquire any
specific number of shares and may be extended, suspended or discontinued at any
time. All repurchases are expected to be funded from our cash and investment
balances. While our board of directors have approved the share purchasing
guidelines, the timing of the repurchases and the exact number of shares of
common stock to be purchased were determined at managements discretion, and
depended upon market conditions and other factors, including price, corporate
and regulatory requirements and alternative investment opportunities. The new
repurchase program is currently scheduled to terminate on December 31,
2010.
For the three months ended March 31, 2010, we repurchased
1,934,707 shares of our common stock for an aggregate purchase price, including
applicable brokers fees, of $26.0 million pursuant to this stock
repurchase program.
The following table sets forth our purchases of equity securities for
the three months ended March 31, 2010:
Period
|
|
Total number
of shares
purchased
|
|
Average
Price Paid
per Share(1)
|
|
Total number of
shares purchased
as part of
publicly
announced
plans or
programs
|
|
Approximate dollar
value of shares
that may yet be
purchased under
the plans
or programs
(in thousands)
|
|
January 1, 2010January 31, 2010
|
|
731,843
|
|
$
|
14.96
|
|
731,843
|
|
$
|
40,013
|
|
February 1, 2010February 28, 2010
|
|
1,202,864
|
|
12.48
|
|
1,202,864
|
|
25,000
|
|
March 1, 2010March 31, 2010
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,934,707
|
|
|
|
1,934,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of
Contents
(1)
Includes applicable brokers
fees and commissions
Item 4.
(Removed and Reserved)
Item 5.
Other Information
Our policy governing transactions in our securities
by directors, officers and employees permits our officers, directors and
certain other persons to enter into trading plans complying with Rule 10b5-1
under the Securities Exchange Act of 1934, as amended. Generally, under these
trading plans, the individual relinquishes control over the transactions once
the trading plan is put into place. Accordingly, sales under these plans may
occur at any time, including possibly before, simultaneously with, or
immediately after significant events involving our company. As of the date of
this filing no directors or officers have trading plans in effect.
We anticipate that, as permitted by Rule 10b5-1
and our policy governing transactions in our securities, some or all of our
officers, directors and employees may establish trading plans in the future. We
intend to disclose the names of executive officers and directors who establish
a trading plan in compliance with Rule 10b5-1 and the requirements of our
policy governing transactions in our securities in our future quarterly and
annual reports on Form 10-Q and 10-K filed with the Securities and
Exchange Commission. However, we undertake no obligation to update or revise
the information provided herein, including for revision or termination of an
established trading plan, other than in such quarterly and annual reports.
37
Table of Contents
Item 6.
Exhibits
.
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan of Merger by and among Phase Forward Incorporated,
Oracle Corporation and Pine Acquisition Corporation, dated as of April 15,
2010. (Incorporated by reference herein to Exhibit 2.1 of the Companys
Current Report on Form 8-K filed with the SEC on April 16, 2010.)
|
10.1 *+
|
|
Amended and restated summary of cash compensation practices for
non-employee directors
|
31.1 *
|
|
Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934.
|
31.2 *
|
|
Certification of CFO pursuant to rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934.
|
32.1 *
|
|
Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2 *
|
|
Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
* Filed
herewith.
+
Indicates a management contract or any compensatory plan, contract or arrangement
38
Table of Contents
Signatures
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
PHASE FORWARD INCORPORATED
|
|
|
|
By:
|
/s/ ROBERT K. WEILER
|
|
|
Robert K. Weiler
|
|
|
Chief Executive Officer
|
|
|
(Duly authorized officer)
|
|
|
|
|
By:
|
/s/ CHRISTOPHER A. MENARD
|
|
|
Christopher A. Menard
|
|
|
Chief Financial Officer
|
|
|
(Duly authorized officer and principal financial
officer)
|
Date: May 10, 2010
|
|
|
39
Table of Contents
EXHIBIT INDEX
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan of Merger by and among Phase Forward Incorporated,
Oracle Corporation and Pine Acquisition Corporation, dated as of April 15,
2010. (Incorporated by reference herein to Exhibit 2.1 of the Companys
Current Report on Form 8-K filed with the SEC on April 16, 2010.)
|
10.1 *+
|
|
Amended and restated summary of cash compensation practices for
non-employee directors
|
31.1 *
|
|
Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934.
|
31.2 *
|
|
Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934.
|
32.1 *
|
|
Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2 *
|
|
Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
* Filed herewith.
+
Indicates a management contract or any compensatory plan, contract or
arrangement
40
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