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 June 30, 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
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|
04-3386549
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
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|
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77 Fourth Avenue
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|
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Waltham, Massachusetts
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02451
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(Address of principal executive offices)
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(Zip Code)
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(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
x
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
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|
|
|
Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
|
|
|
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 August 2, 2010, the registrant had 43,802,827 shares of common stock
outstanding.
Table of
Contents
PHASE FORWARD INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2010
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
|
|
June 30, 2010
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,862
|
|
$
|
58,704
|
|
Short-term investments
|
|
67,241
|
|
77,844
|
|
Securities settlement agreement
|
|
4,345
|
|
|
|
Accounts receivable, net of allowance of $781 and
$755, respectively
|
|
56,034
|
|
43,450
|
|
Deferred income taxes
|
|
9,521
|
|
9,521
|
|
Other current assets
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|
14,694
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|
15,426
|
|
|
|
|
|
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Total current assets
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|
193,697
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204,945
|
|
|
|
|
|
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Property and equipment, net
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|
52,840
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|
50,325
|
|
Intangible assets, net of accumulated amortization
of $7,332 and $10,259, respectively
|
|
41,661
|
|
38,734
|
|
Goodwill
|
|
59,027
|
|
59,027
|
|
Deferred income taxes
|
|
5,465
|
|
5,465
|
|
Restricted cash
|
|
962
|
|
982
|
|
Long-term investments
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|
26,439
|
|
|
|
Other assets
|
|
9,865
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|
9,880
|
|
|
|
|
|
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|
Total assets
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|
$
|
389,956
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$
|
369,358
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|
|
|
|
|
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Liabilities and Stockholders
Equity
|
|
|
|
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Current liabilities:
|
|
|
|
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Accounts payable
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|
$
|
5,909
|
|
$
|
3,728
|
|
Accrued expenses and other current liabilities
|
|
28,006
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|
21,664
|
|
Deferred revenues
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|
85,896
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|
91,203
|
|
|
|
|
|
|
|
Total current liabilities
|
|
119,811
|
|
116,595
|
|
|
|
|
|
|
|
Deferred rent, net of current portion
|
|
2,115
|
|
2,862
|
|
Deferred revenue, net of current portion
|
|
12,478
|
|
13,271
|
|
Other long-term liabilities
|
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10,224
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|
9,885
|
|
|
|
|
|
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Total liabilities
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144,628
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142,613
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Commitments and contingencies (Note 9)
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Stockholders equity:
|
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|
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Preferred stock, $0.01 par value; 5,000 shares
authorized, none issued
|
|
|
|
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Common stock, $0.01 par value; 100,000 shares
authorized: 43,577 and 43,838 issued, respectively
|
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436
|
|
439
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|
Additional paid-in capital
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|
296,572
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|
301,673
|
|
Treasury stock, 980 and 2,915 shares at cost,
respectively
|
|
(14,147
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)
|
(40,111
|
)
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Accumulated other comprehensive income (loss)
|
|
71
|
|
(1,207
|
)
|
Accumulated deficit
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|
(37,604
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)
|
(34,049
|
)
|
Total stockholders equity
|
|
245,328
|
|
226,745
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
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|
$
|
389,956
|
|
$
|
369,358
|
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
14,695
|
|
$
|
15,382
|
|
$
|
28,811
|
|
$
|
30,523
|
|
Service
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|
37,806
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|
43,211
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|
72,506
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85,270
|
|
Total revenues
|
|
52,501
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|
58,593
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|
101,317
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115,793
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|
|
|
|
|
|
|
|
|
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|
Costs of revenues:
|
|
|
|
|
|
|
|
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|
License (2)
|
|
785
|
|
574
|
|
1,351
|
|
1,140
|
|
Service (1), (2)
|
|
21,245
|
|
25,283
|
|
41,144
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|
50,999
|
|
Total cost of revenues
|
|
22,030
|
|
25,857
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|
42,495
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52,139
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|
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Gross margin:
|
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License
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13,910
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|
14,808
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|
27,460
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|
29,383
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Service
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|
16,561
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|
17,928
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|
31,362
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|
34,271
|
|
Total gross margin
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|
30,471
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|
32,736
|
|
58,822
|
|
63,654
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
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Sales and marketing (1), (2)
|
|
8,216
|
|
9,154
|
|
15,422
|
|
18,140
|
|
Research and development (1)
|
|
9,425
|
|
10,031
|
|
17,605
|
|
19,729
|
|
General and administrative (1), (2)
|
|
9,715
|
|
10,774
|
|
17,519
|
|
19,958
|
|
Total operating expenses
|
|
27,356
|
|
29,959
|
|
50,546
|
|
57,827
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
3,115
|
|
2,777
|
|
8,276
|
|
5,827
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
502
|
|
276
|
|
1,142
|
|
592
|
|
Other income (expense)
|
|
56
|
|
(385
|
)
|
465
|
|
(569
|
)
|
Total other income (expense)
|
|
558
|
|
(109
|
)
|
1,607
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
3,673
|
|
2,668
|
|
9,883
|
|
5,850
|
|
Provision for income taxes
|
|
1,446
|
|
1,046
|
|
3,578
|
|
2,295
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,227
|
|
$
|
1,622
|
|
$
|
6,305
|
|
$
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.15
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.14
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in
net income per share calculations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
42,623
|
|
42,505
|
|
42,527
|
|
40,826
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
44,298
|
|
44,374
|
|
44,190
|
|
42,647
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts include stock-based compensation
expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of service revenues
|
|
$
|
489
|
|
$
|
584
|
|
$
|
965
|
|
$
|
1,220
|
|
Sales and marketing
|
|
462
|
|
387
|
|
877
|
|
855
|
|
Research and development
|
|
705
|
|
999
|
|
1,326
|
|
2,035
|
|
General and administrative
|
|
1,969
|
|
1,365
|
|
3,026
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
(2) Amounts include amortization expense of
acquired intangible assets, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Costs of license revenues
|
|
$
|
194
|
|
$
|
237
|
|
$
|
349
|
|
$
|
474
|
|
Cost of service revenues
|
|
260
|
|
448
|
|
521
|
|
895
|
|
Sales and marketing
|
|
354
|
|
739
|
|
674
|
|
1,479
|
|
Research and development
|
|
|
|
28
|
|
|
|
28
|
|
General and administrative
|
|
28
|
|
26
|
|
53
|
|
52
|
|
See accompanying notes.
4
Table of
Contents
Phase Forward Incorporated
Condensed
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,305
|
|
$
|
3,555
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
7,699
|
|
11,701
|
|
Stock-based compensation expense
|
|
6,194
|
|
6,836
|
|
Amortization of leasehold incentive obligation
|
|
(396
|
)
|
(483
|
)
|
Provision for allowance for doubtful accounts
|
|
174
|
|
25
|
|
Deferred income taxes
|
|
2,240
|
|
|
|
Amortization of premiums or discounts on
investments
|
|
100
|
|
(148
|
)
|
Change in fair value of investments
|
|
(464
|
)
|
(4,430
|
)
|
Change in fair value of securities settlement
agreement
|
|
(14
|
)
|
4,345
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
518
|
|
12,771
|
|
Other assets
|
|
(1,725
|
)
|
(1,397
|
)
|
Accounts payable
|
|
(2,923
|
)
|
(2,150
|
)
|
Accrued expenses
|
|
(5,325
|
)
|
(6,095
|
)
|
Deferred revenues
|
|
1,642
|
|
5,933
|
|
Deferred rent
|
|
1,175
|
|
747
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
15,200
|
|
31,210
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in restricted cash
|
|
500
|
|
(20
|
)
|
Proceeds from maturities of short-term and
long-term investments
|
|
19,389
|
|
60,365
|
|
Purchase of short-term and long-term investments
|
|
(47,069
|
)
|
(39,846
|
)
|
Cash paid for acquisitions, net of cash acquired
(1)
|
|
(13,629
|
)
|
|
|
Purchase of property and equipment
|
|
(11,467
|
)
|
(5,834
|
)
|
|
|
|
|
|
|
Net cash (used in) provided by investing
activities
|
|
(52,276
|
)
|
14,665
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
1,482
|
|
606
|
|
Withholding taxes in connection with vesting of
restricted stock awards
|
|
(1,718
|
)
|
(2,337
|
)
|
Purchase of treasury stock
|
|
|
|
(25,964
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(236
|
)
|
(27,695
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
483
|
|
(1,338
|
)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
(36,829
|
)
|
16,842
|
|
Cash and cash equivalents at beginning of period
|
|
131,550
|
|
41,862
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
94,721
|
|
58,704
|
|
Short-term and long-term investments at end of
period
|
|
73,959
|
|
77,844
|
|
Total cash, cash equivalents and short-term and
long-term investments at end of period
|
|
$
|
168,680
|
|
$
|
136,548
|
|
(1) Cash paid for acquisition of Waban
Software, Inc.
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
990
|
|
$
|
|
|
Liabilities assumed
|
|
(3,982
|
)
|
|
|
Acquired intangible assets
|
|
8,905
|
|
|
|
Cost in excess of net assets acquired
|
|
7,747
|
|
|
|
Cash paid
|
|
13,660
|
|
|
|
Less cash acquired
|
|
(31
|
)
|
|
|
Cash paid for acquisition
|
|
$
|
13,629
|
|
$
|
|
|
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 June 30,
2010, the results of its operations for the three and six months ended
June 30, 2009 and 2010 and its cash flows for the three and six months
ended June 30, 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 June 30, 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 15.
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.
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, alleged 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 sought 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. After a hearing, the court issued written
decisions dated June 21, 2010 allowing the defendants motions to dismiss
the complaint and denying the plaintiffs request for injunctive relief.
The Court entered a final judgment dismissing the complaint on July 1,
2010 and awarding costs. On July 9,
2010, the plaintiffs filed a Notice of Appeal of the Superior Courts dismissal
of the complaint.
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
6
Table of
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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 and
six months ended June 30, 2010. See
Note 15 for further discussion on the adoption of this standard.
The
components of revenue are as follows:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
License
|
|
$
|
14,695
|
|
$
|
15,382
|
|
$
|
28,811
|
|
$
|
30,523
|
|
Application hosting services
|
|
29,810
|
|
35,680
|
|
56,438
|
|
69,462
|
|
Consulting services
|
|
4,701
|
|
4,318
|
|
9,561
|
|
9,525
|
|
Customer support
|
|
3,295
|
|
3,213
|
|
6,507
|
|
6,283
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,501
|
|
$
|
58,593
|
|
$
|
101,317
|
|
$
|
115,793
|
|
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.
7
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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 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 and six months ended June 30, 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 $172 and $298 during the three
months ended June 30, 2009 and 2010, respectively, and $378 and $489
during the six months ended June 30, 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 $28 and $123 during
8
Table of
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the
three months ended June 30, 2009 and 2010, respectively and $38 and $203
during the six months ended June 30, 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
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 June 30, 2009 and 2010:
|
|
Deferred
|
|
Amortized
|
|
Description
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Prepaid Sales Commissions
|
|
$
|
3,123
|
|
$
|
2,595
|
|
$
|
1,965
|
|
$
|
2,275
|
|
Royalty Obligations
|
|
638
|
|
305
|
|
819
|
|
425
|
|
Deferred Set Up Costs
|
|
1,295
|
|
2,178
|
|
985
|
|
1,209
|
|
Total
|
|
$
|
5,056
|
|
$
|
5,078
|
|
$
|
3,769
|
|
$
|
3,909
|
|
The Company deferred and amortized the following amounts
for the six months ended June 30, 2009 and 2010:
|
|
Deferred
|
|
Amortized
|
|
Description
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Prepaid Sales Commissions
|
|
$
|
5,107
|
|
$
|
4,920
|
|
$
|
3,709
|
|
$
|
4,448
|
|
Royalty Obligations
|
|
1,727
|
|
839
|
|
1,480
|
|
792
|
|
Deferred Set Up Costs
|
|
2,590
|
|
4,232
|
|
1,902
|
|
2,501
|
|
Total
|
|
$
|
9,424
|
|
$
|
9,991
|
|
$
|
7,091
|
|
$
|
7,741
|
|
9
Table of
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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.
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,227
|
|
$
|
1,622
|
|
$
|
6,305
|
|
$
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
43,159,822
|
|
42,835,347
|
|
43,091,200
|
|
41,178,554
|
|
Less weighted-average unvested restricted common
stock awards outstanding
|
|
(536,429
|
)
|
(330,015
|
)
|
(564,136
|
)
|
(352,197
|
)
|
Basic weighted-average common shares outstanding
|
|
42,623,393
|
|
42,505,332
|
|
42,527,064
|
|
40,826,357
|
|
Dilutive effect of common stock options
|
|
1,071,396
|
|
975,550
|
|
1,093,458
|
|
956,653
|
|
Dilutive effect of unvested restricted common
stock awards and units
|
|
603,584
|
|
892,889
|
|
569,653
|
|
864,221
|
|
Diluted weighted-average common shares outstanding
|
|
44,298,373
|
|
44,373,771
|
|
44,190,175
|
|
42,647,231
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.15
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.14
|
|
$
|
0.08
|
|
Diluted
weighted average common shares outstanding do not include options, awards and
units outstanding to purchase 99,883 and 2,814 common equivalent shares for the
three months ended June 30, 2009 and 2010, respectively, and do not
include options, awards, and units outstanding to purchase 100,138 and 132,706
common equivalent shares for the six months ended June 30, 2009 and 2010,
respectively as their effect would have been anti-dilutive.
6.
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
10
Table of
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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 cash 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.
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 three months ended March 31, 2010 to properly record the
available-for-sale securities at fair value.
During the three-months ended June 30, 2010 the Company recorded an
unrealized loss of $(181) through other comprehensive income 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 June 30, 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
|
|
|
|
June 30, 2010
|
|
|
|
Contracted
|
|
Amortized
|
|
Fair Market
|
|
Balance Per
|
|
Description
|
|
Maturity
|
|
Cost
|
|
Value
|
|
Balance Sheet
|
|
Cash and cash equivalents
|
|
Demand
|
|
$
|
58,704
|
|
$
|
58,704
|
|
$
|
58,704
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes
|
|
156 days
|
|
$
|
23,997
|
|
$
|
24,027
|
|
$
|
24,027
|
|
Corporate bonds
|
|
298 days
|
|
41,742
|
|
41,817
|
|
41,817
|
|
Auction rate securities
|
|
0 days
|
|
12,000
|
|
12,000
|
|
12,000
|
|
Total short-term investments
|
|
|
|
$
|
77,739
|
|
$
|
77,844
|
|
$
|
77,844
|
|
As
of June 30, 2010 all securities 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 Company held ARS which 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 June 30, 2010, the Company held ARS totaling
$23,800 and $12,000, 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.
11
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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 held ARS, the Company received certain
rights, which entitled 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 were not secured by its assets and
did not require UBS to obtain any financing to support its performance
obligations under the Agreement. UBS disclaimed any assurance that it would have
sufficient financial resources to satisfy its obligations under the Agreement.
As
of December 31, 2009 the Company held $23,800 in ARS at par with a fair
value of $23,715. During the six months
ended June, 30 2010, $11,800 of the Companys ARS were called by the respective
issuers at par value and $12,000 were liquidated on June 30, 2010 at par
value in accordance with the Agreement discussed above. For the three and six
months ended June 30, 2010 a gain of $38 and $85, respectively was
recorded in the Companys accompanying unaudited condensed consolidated
statements of income in connection with the execution of the Agreement and the
liquidation and final settlement of all of the Companys ARS.
The
Company classified the $12,000 of ARS liquidated on June 30, 2010 as
short-term investments in the accompanying unaudited condensed consolidated
balance sheets as of June 30, 2010 since the transaction did not settle
until July 2, 2010.
Refer
to Note 14 for further discussion on Fair Value Measurements.
7. 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 and six months ended
June 30, 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 June 30, 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
|
|
$
|
4,972
|
|
Customer relationships
|
|
5-18 years
|
|
22,190
|
|
2,574
|
|
22,190
|
|
3,600
|
|
Non-compete agreements
|
|
2-3 years
|
|
610
|
|
438
|
|
610
|
|
489
|
|
Trade name
|
|
1-8 years
|
|
3,140
|
|
396
|
|
3,140
|
|
730
|
|
In process research and development
|
|
8 years
|
|
886
|
|
|
|
886
|
|
28
|
|
Customer backlog
|
|
3 years
|
|
720
|
|
320
|
|
720
|
|
440
|
|
Total
|
|
|
|
$
|
48,993
|
|
$
|
7,332
|
|
$
|
48,993
|
|
$
|
10,259
|
|
Amortization
expense related to intangible assets for the three months ended June 30,
2009 and 2010 was $836 and $1,477, respectively, and $1,596 and $2,927 for the
six months ended June 30, 2009 and 2010, respectively.
The
estimated remaining amortization expense for each of the five succeeding years
is as follows:
Year ended December 31,
|
|
Amount
|
|
2010 (six months ended December 31, 2010)
|
|
$
|
2,681
|
|
2011
|
|
4,987
|
|
2012
|
|
4,914
|
|
2013
|
|
4,543
|
|
2014
|
|
4,039
|
|
2015 and thereafter
|
|
17,570
|
|
Total
|
|
$
|
38,734
|
|
12
Table of
Contents
8. Accrued Expenses
and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
|
|
As of
December 31,
|
|
As of
June 30,
|
|
|
|
2009
|
|
2010
|
|
Accrued payroll and related benefits
|
|
$
|
17,278
|
|
$
|
10,822
|
|
Accrued royalties
|
|
1,867
|
|
983
|
|
Accrued outside contractors
|
|
2,013
|
|
2,410
|
|
Leasehold incentive obligation (1)
|
|
956
|
|
1,002
|
|
Accrued other expenses
|
|
5,892
|
|
6,447
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,006
|
|
$
|
21,664
|
|
(1)
In conjunction with the
February 2008 lease agreement (see Note 9) the Company was reimbursed for
leasehold improvements totaling $8,104.
In conjunction with the August 2009 lease agreement (see Note 9), 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 $252 in the three months ended
June 30, 2009 and 2010, respectively, and $396 and $499 during the six
months ended June 30, 2009 and 2010 respectively.
9. 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. The action, brought by plaintiffs who are
purported stockholders of the Company, individually and on behalf of a putative
class of stockholders, alleged 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 sought 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. After a hearing, the court issued written
decisions dated June 21, 2010 allowing the defendants motions to dismiss
the complaint and denying the plaintiffs request for injunctive relief.
The Court entered a final judgment dismissing the complaint on July 1,
2010 and awarding costs. On July 9,
2010, the plaintiffs filed a Notice of Appeal of the Superior Courts dismissal
of the complaint.
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.
13
Table
of Contents
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 June 30, 2010.
10. 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 June 30, 2009 and 2010, the Company recorded $3,625 and $3,335 of
aggregate stock-based compensation expense, respectively, and $6,194 and $6,836
in the six months ended June 30, 2009 and 2010, respectively. As of June 30, 2010, there was $23,491
of unrecognized stock-based compensation expense related to stock-based awards
that is expected to be recognized over a weighted average period of 2.39 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Restricted stock units and awards
|
|
5.25
|
%
|
7.00
|
%
|
5.25
|
%
|
7.00
|
%
|
Service-based stock options
|
|
9.00
|
%
|
9.00
|
%
|
9.00
|
%
|
9.00
|
%
|
Milestone options
|
|
12.00
|
%
|
12.00
|
%
|
12.00
|
%
|
12.00
|
%
|
Common Stock
In the three and six
months ended June 30, 2010, the Company issued 56,653 and 87,552 shares of
common stock, respectively, in connection with the exercise of stock options
resulting in proceeds of $254 and $386, respectively. In the three and six months ended June 30,
2010, the Company issued 13,667 shares of common stock under the 2004 Employee
Stock Purchase Plan (the ESPP Plan) resulting in proceeds of $220. Effective June 1, 2010 the Company
suspended the ESPP Plan as the number of shares available under the plan had
been issued. In the three and six months ended June 30, 2010, the Company
released 300,557 and 490,752 shares of common stock in connection with the
vesting of restricted stock awards and units.
The Company retired 96,665 and 162,420 of these shares to cover
withholding taxes in the amount of $1,610 and $2,337. In the three and six months ended
June 30, 2010, 10,578 shares of restricted stock vested but were not
released. These shares relate to certain
members of the Companys board of directors who have grant agreements which
stipulate that shares will be released in a lump sum when they cease to serve
on the Companys board for any reason, or when the Company gets acquired,
whichever is earlier.
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 June 30,
2010, and changes during the six months then ended, is as follows:
14
Table of
Contents
|
|
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
|
|
(87,552
|
)
|
4.41
|
|
|
|
$
|
985
|
|
Canceled
|
|
(3,600
|
)
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2010
|
|
1,724,852
|
|
$
|
4.72
|
|
3.26
|
|
$
|
20,636
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2010
|
|
1,645,102
|
|
$
|
4.64
|
|
3.19
|
|
$
|
19,808
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of June 30,
2010 (1)
|
|
1,720,117
|
|
$
|
4.71
|
|
3.26
|
|
$
|
20,587
|
|
(1)
The vested or expected to
vest options at June 30, 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 June 30, 2010 of $16.68, 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 June 30, 2010 and changes during the six months ended June 30,
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
|
|
170,750
|
|
11.93 - 16.83
|
|
|
|
|
|
|
|
Vested
|
|
(501,330
|
)
|
11.10 - 23.20
|
|
|
|
|
|
|
|
Forfeited
|
|
(75,973
|
)
|
10.85 - 23.20
|
|
|
|
|
|
|
|
Unvested at June 30, 2010
|
|
2,524,810
|
|
$
|
10.85 - 23.20
|
|
$
|
15.15
|
|
2.39
|
|
$
|
42,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be free of restrictions (1)
|
|
1,894,628
|
|
$
|
10.85 - 23.20
|
|
$
|
15.17
|
|
2.39
|
|
$
|
31,602
|
|
(1)
The expected to be free of
restrictions at June 30, 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 June 30, 2010 of $16.68.
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 six months ended June 30, 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.
15
Table of
Contents
11. 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Net income
|
|
$
|
2,227
|
|
$
|
1,622
|
|
$
|
6,305
|
|
$
|
3,555
|
|
Unrealized (loss)/gain on marketable securities
|
|
|
|
(181
|
)
|
|
|
105
|
|
Cumulative Translation adjustment
|
|
967
|
|
(670
|
)
|
594
|
|
(1,382
|
)
|
Comprehensive income
|
|
$
|
3,194
|
|
$
|
771
|
|
$
|
6,899
|
|
$
|
2,278
|
|
12. 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 June 30, 2010:
|
|
|
|
As of December 31, 2009
|
|
As of June 30, 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
|
|
4,500
|
|
$
|
6,681
|
|
Euro
|
|
Sale
|
|
3,200
|
|
4,571
|
|
4,300
|
|
5,222
|
|
|
|
|
|
|
|
$
|
6,183
|
|
|
|
$
|
11,903
|
|
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 (losses) of $(174) and $(379) in the three months
ended June 30, 2009 and 2010, respectively, and $(26) and $(615) in the
six months ended June 30, 2010, respectively. As of June 30, 2009 and
2010, the Company recorded $23 and $(124), respectively, of foreign exchange
gains/(losses) in other income (expense) as a result of outstanding forward
foreign exchange contracts.
13.
Income Taxes
The
Companys effective tax rates for the three months ended June 30, 2009 and
2010 were 39% and 39%, respectively, and for the six months ended June 30,
2009 and 2010 were 36% and 39%, respectively. The Companys effective tax rate
for the six months ended June 30, 2010 is higher than the effective tax
rate for the six months ended June 30, 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.
16
Table
of Contents
As
of June 30, 2010, the Company had a liability of $1,446 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 June 30, 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 $1,446
and accrued interest and penalties of $19 are classified as other long-term
liabilities on the unaudited condensed consolidated balance sheet.
14. 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 June 30, 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
|
|
$
|
58,704
|
|
$
|
|
|
$
|
|
|
$
|
58,704
|
|
Restricted cash
|
|
982
|
|
|
|
|
|
982
|
|
Total cash equivalents and restricted cash
|
|
$
|
59,686
|
|
$
|
|
|
$
|
|
|
$
|
59,686
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency notes (1)
|
|
$
|
|
|
$
|
24,027
|
|
$
|
|
|
$
|
24,027
|
|
Corporate bonds (1)
|
|
|
|
41,817
|
|
|
|
41,817
|
|
Auction rate securities
|
|
|
|
12,000
|
|
|
|
12,000
|
|
Total short-term investments
|
|
$
|
|
|
$
|
77,844
|
|
$
|
|
|
$
|
77,844
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
59,686
|
|
$
|
77,844
|
|
$
|
|
|
$
|
137,530
|
|
(1)
Fair value for
Level 2 assets was determined using quoted market prices for similar assets. For the three months ended June 30, 2010
the Companys Level 2 transaction activity included $12,000 of transfers in
from level 3, $29,096 of purchases, $7,500 of sales, $12,190 of maturities and
$2,000 of settlements. For the six months ended June 30, 2010 the Companys
Level 2 transaction activity included $39,846 of purchases, $9,500 of sales,
$29,065 of maturities and $10,000 of settlements.
17
Table of Contents
The
following table sets forth a summary of changes in the fair value of the
Companys Level 3 financial assets for the six months ended June 30,
2010:
|
|
Level 3 Financial
|
|
|
|
Assets
|
|
Balance, beginning of period
|
|
$
|
23,715
|
|
Transfers in (out) of Level 3
|
|
(12,000
|
)
|
Purchase
|
|
|
|
Sales
|
|
|
|
Issuance
|
|
|
|
Settlement
|
|
(11,800
|
)
|
Realized gains/(losses)
|
|
85
|
|
Unrealized gains/(losses) on securities held at
period end
|
|
|
|
Balance, end of period
|
|
$
|
|
|
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 6.
15.
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 and six months ended June 30, 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 June 30,
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.
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).
18
Table of
Contents
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.
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.
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 Corporation, 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, alleged that
the board breached fiduciary duties, and that the Oracle and Phase Forward
aided and abetted the purported breaches, in connection with the proposed
Merger. The complaint sought 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.
After a hearing, the court issued written decisions dated June 21,
2010 allowing the defendants motions to dismiss the complaint and denying the
plaintiffs request for injunctive relief. The Court entered a final
judgment dismissing the complaint on July 1, 2010 and awarding costs. On July 9, 2010, the plaintiffs filed a
Notice of Appeal of the Superior Courts dismissal of the complaint.
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.
19
Table of
Contents
·
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
·
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 and six months ended June 30, 2009 and 2010, no customer
accounted for 10% or more of our total revenues for the period. Our top 20 customers accounted for
approximately 59% and 60% of our total revenues, net of reimbursable
out-of-pocket expenses, in the three months ended June 30, 2009 and 2010,
respectively, and 61% and 58% of our total revenues, net of reimbursable
out-of-pocket expenses, in the six months ended June 30, 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
20
Table of
Contents
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 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 June 30, 2009 and 2010, approximately 39% and 33%, respectively, of
our revenues were generated in locations outside the United States. In the six months ended June 30, 2009
and 2010, approximately 39% and 35%, 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.
21
Table of
Contents
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.
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 and six ended June 30, 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
22
Table of
Contents
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 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.
23
Table
of Contents
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 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 June 30, 2009 and 2010, stock-based compensation
expense reduced basic earnings per share by $0.05 and $0.05, respectively, and
diluted earnings per share by $0.05 and $0.05, respectively. For the six months ending June 30, 2009
and 2010, stock-based compensation expense reduced basic earnings per share by
$0.09 and $0.10, respectively, and diluted earnings per share by $0.09 and
$0.10, 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 June 30,
2009 and 2010
Total revenues increased by 12%, or $6.1 million, in the three
months ended June 30, 2010 (the 2010 Three Month Period), compared to
the three months ended June 30, 2009 (the 2009 Three Month Period),
primarily due to an increase in total service revenues of 14%, or
$5.4 million, and to a lesser extent, an increase in license revenues of
5%, or $0.7 million. Our revenue growth included a 23% increase in
revenues from contract research organizations, or CROs, which increased to $13.8 million
from $11.2 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
24
Table of
Contents
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 7%, or $2.3 million, in the 2010
Three Month Period compared to the 2009 Three Month Period, primarily due to
the increase in the services gross margin of $1.4 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 the 2010 Three Month Period of $2.8 million
decreased by $0.3 million, or 11%, compared to the 2009 Three Month
Period. Operating income for the 2009 Three Month Period and the 2010 Three
Month Period included $3.6 million and $3.3 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 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 the 2010 Three Month Period compared to the 2009 Three
Month Period were impacted by foreign exchange rate fluctuations, resulting in
a decrease in revenue of approximately $1.5 million, or 3% of revenues,
and a decrease in expense of approximately $2.2 million, or 5% of
expenses.
As
of June 30, 2010, we had $136.5 million of unrestricted cash, cash
equivalents and short-term investments, an increase of $27.4 million from
$109.1 million at December 31, 2009. As of June 30, 2010, we had
no outstanding debt.
Revenues
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
Change
|
|
Revenues by Product Line (in thousands) (1)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic data capture
|
|
$
|
38,377
|
|
73
|
%
|
$
|
39,692
|
|
68
|
%
|
$
|
1,315
|
|
3
|
%
|
Clinical data management
|
|
5,822
|
|
11
|
|
4,854
|
|
8
|
|
(968
|
)
|
(17
|
)
|
Safety
|
|
6,079
|
|
12
|
|
6,072
|
|
10
|
|
(7
|
)
|
NM*
|
|
Interactive Response
Technology
|
|
2,223
|
|
4
|
|
7,975
|
|
14
|
|
5,752
|
|
259
|
|
Total
|
|
$
|
52,501
|
|
100
|
%
|
$
|
58,593
|
|
100
|
%
|
$
|
6,092
|
|
12
|
%
|
(1)
Revenues by
Product Line include product license revenues and product-related service
revenues
.
* Not Meaningful
The
increase in interactive response technology revenues is primarily related to
increased application hosting revenues of $5.7 million. The increase in electronic data capture
revenues is primarily due to an increase in license revenues of
$1.1 million as well as an increase in application hosting services
revenues of $0.3 million. The decrease in clinical data management is
primarily due to a decrease in license revenues of $0.7 million as well as a
decrease in customer support of $0.3 million. Safety revenues remained
relatively unchanged.
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Revenues
by Type (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
14,695
|
|
28
|
%
|
$
|
15,382
|
|
27
|
%
|
$
|
687
|
|
5
|
%
|
Application hosting services
|
|
29,810
|
|
57
|
|
35,680
|
|
61
|
|
5,870
|
|
20
|
|
Consulting services
|
|
4,701
|
|
9
|
|
4,318
|
|
7
|
|
(383
|
)
|
(8
|
)
|
Customer support
|
|
3,295
|
|
6
|
|
3,213
|
|
5
|
|
(82
|
)
|
(2
|
)
|
Total
|
|
$
|
52,501
|
|
100
|
%
|
$
|
58,593
|
|
100
|
%
|
$
|
6,092
|
|
12
|
%
|
Total
revenues increased in the 2010 Three Month Period as compared to the 2009 Three
Month Period, primarily due to
25
Table of
Contents
increases
in application hosting and license revenues. The increase in the 2010 Three
Month Period revenues associated with our application hosting services was
partially due to a 17% increase in electronic data capture production trials
under management from approximately 968 in the 2009 Three Month Period to
approximately 1,129 in the 2010 Three Month Period, 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 and phone-integrated
Phase Forward IRT
product offerings with production trials increasing 162% from
104 in the 2009 Three Month Period to 272 in the 2010 Three Month Period. The
increase in license revenues was primarily the result of additional electronic
data capture revenues, and to a lesser extent, growth in sales relating to our
safety products. The decrease in consulting services was primarily attributable
to lower revenue related to consulting services provided for our electronic
data capture products. The decrease in customer support revenues was primarily
due to decreases in 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 June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Revenues by Geography
(in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
31,726
|
|
61
|
%
|
$
|
39,341
|
|
67
|
%
|
$
|
7,615
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
14,202
|
|
27
|
|
12,425
|
|
21
|
|
(1,777
|
)
|
(13
|
)
|
France
|
|
4,284
|
|
8
|
|
3,940
|
|
7
|
|
(344
|
)
|
(8
|
)
|
Asia Pacific
|
|
2,289
|
|
4
|
|
2,887
|
|
5
|
|
598
|
|
26
|
|
International subtotal
|
|
20,775
|
|
39
|
|
19,252
|
|
33
|
|
(1,523
|
)
|
(7
|
)
|
Total
|
|
$
|
52,501
|
|
100
|
%
|
$
|
58,593
|
|
100
|
%
|
$
|
6,092
|
|
12
|
%
|
The
increase in revenues worldwide was primarily due to an increase in interactive
response technology revenues and electronic data capture revenues of
$5.8 million and $1.3 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 $4.3 million and
$3.6 million, respectively. The increase in interactive response technology
revenues is primarily a result of increased sales of our
Phase
Forward IRT
product offering. To a lesser extent, the increase is
attributable to the 2010 Three Month Period including a full quarter of
application hosting services revenues relating to the acquisition of Covance
IVRS/IWRS in August 2009, while the 2009 Three Month Period included no
revenue related to the acquisition. The
decrease in international revenues is primarily related to a decrease in
electronic data capture revenues and clinical data management revenues of $2.3
million and $0.9 million, respectively.
These decreases were partially off-set by increases in interactive
response technology revenues and safety revenues of $1.4 million and $0.2 million,
respectively.
Cost of Revenues
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
of Related
|
|
|
|
Percentage
of Related
|
|
Change
|
|
Costs of Revenues
(in thousands)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
785
|
|
5
|
%
|
$
|
574
|
|
4
|
%
|
$
|
(211
|
)
|
(27
|
)%
|
Services
|
|
21,245
|
|
56
|
|
25,283
|
|
59
|
|
4,038
|
|
19
|
|
Total
|
|
$
|
22,030
|
|
42
|
%
|
$
|
25,857
|
|
44
|
%
|
$
|
3,827
|
|
17
|
%
|
The
cost of license revenues decreased when comparing the 2010 Three Month Period
to the 2009 Three Month Period primarily due to a $0.3 million decrease in
royalty expenses. The increase in cost
of services in the 2010 Three Month Period was primarily due to increases in
outside contractor expenses of $1.1 million, and employee-related expenses of
$0.8 million related to a headcount increase of 47 people. We also had expense increases for
depreciation, network hosting and customer pass-though of $0.8 million, $0.8
million and $0.7 million, respectively.
26
Table of
Contents
Gross Margin
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
of Related
|
|
|
|
Percentage
of Related
|
|
Change
|
|
Gross Margin
(in thousands)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
13,910
|
|
95
|
%
|
$
|
14,808
|
|
96
|
%
|
$
|
898
|
|
6
|
%
|
Services
|
|
16,561
|
|
44
|
|
17,928
|
|
41
|
|
1,367
|
|
8
|
|
Total
|
|
$
|
30,471
|
|
58
|
%
|
$
|
32,736
|
|
56
|
%
|
$
|
2,265
|
|
7
|
%
|
The
overall gross margin percentage decreased in the 2010 Three Month Period as
compared to the 2009 Three Month Period 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
Clinical Development Center
product from the acquisition of Waban in April 2009, 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 increased slightly in the 2010 Three Month
Period as compared to the 2009 Three Month Period due to increased sales in
products that do not carry an associated royalty expense. 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 June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Operating Expenses
(in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
8,216
|
|
15
|
%
|
$
|
9,154
|
|
16
|
%
|
$
|
938
|
|
11
|
%
|
Research and development
|
|
9,425
|
|
18
|
|
10,031
|
|
17
|
|
606
|
|
6
|
|
General and administrative
|
|
9,715
|
|
19
|
|
10,774
|
|
18
|
|
1,059
|
|
11
|
|
Total
|
|
$
|
27,356
|
|
52
|
%
|
$
|
29,959
|
|
51
|
%
|
$
|
2,603
|
|
10
|
%
|
Sales and Marketing.
Sales
and marketing expenses increased in the 2010 Three Month Period primarily due
to increases of $0.4 million in both commissions and amortization expenses. We also had increases in employee-related
expense of $0.1 million related to a headcount increase of 16 people. 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 the 2010 Three Month Period primarily due
to an increase in employee-related expenses of $0.3 million related to a
headcount increase of 32 people, and an increase in stock-based compensation expense
of $0.3 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 the 2010 Three Month Period primarily
due to increases in professional fees and outside contractor expenses of $1.0
million and $0.8 million, respectively.
These increases were partially off-set by a decrease in stock-based
compensation expenses of $0.6 million.
Professional fees expense in the 2010 Three Month Period includes $1.7
million related to deal costs associated with our acquisition by Oracle,
representing an increase in deal costs of $1.3 million from the 2009 Three
Month Period. 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 June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Other
income (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
502
|
|
1
|
%
|
$
|
276
|
|
|
%
|
$
|
(226
|
)
|
(45
|
)%
|
Other income (expense), net
|
|
56
|
|
|
|
(385
|
)
|
|
|
(441
|
)
|
(788
|
)
|
Total other income
|
|
$
|
558
|
|
1
|
%
|
$
|
(109
|
)
|
|
%
|
$
|
(667
|
)
|
(120
|
)%
|
27
Table of
Contents
The
decrease in interest income in the 2010 Three Month Period was primarily due to
the net decrease in cash and cash equivalents and short and long-term
investments. The decrease in other, net in the 2010 Three Month Period was
primarily due to the liquidation of our auction rate securities as well as
greater losses associated with foreign currency transactions.
Provision for Income Taxes
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Provision
for income taxes (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
1,446
|
|
3
|
%
|
$
|
1,046
|
|
2
|
%
|
$
|
(400
|
)
|
(28
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
effective tax rate for the 2009 Three Month Period and the 2010 Three Month
Period was 39% and 39%, respectively. 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.
Overview of Results of Operations in the Six Months Ended
June 30, 2009 and 2010
Total revenues increased by 14%, or $14.5 million, in the six
months ended June 30, 2010 (the 2010 Six Month Period), compared to the
six months ended June 30, 2009 (the 2009 Six Month Period), primarily
due to an increase in total service revenues of 18%, or $12.8 million, and
to a lesser extent, an increase in license revenues of 6%, or
$1.7 million. Our revenue growth included a 22% increase in revenues from
contract research organizations, or CROs, which increased to $26.9 million
from $22.1 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.
Our gross margin increased by 8%, or $4.8 million, in the 2010 Six
Month Period compared to the 2009 Six Month Period, 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 $2.9
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 the 2010 Six Month Period of $5.8 million
decreased by $2.4 million, or 30%, compared to the 2009 Six Month Period.
Operating income for the 2009 Six Month Period and the 2010 Six Month Period
included $6.2 million and $6.8 million of stock-based compensation
expense, respectively, and $1.6 million and $2.9 million of
amortization expense related to acquisitions, respectively. We expect to
increase operating income through increased revenues from 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 the 2010 Six Month Period compared to the 2009 Six Month
Period were impacted by foreign exchange rate fluctuations, resulting in a
decrease in revenue of approximately $2.1 million, or 2% of revenues, and
a decrease in expense of approximately $1.0 million, or 1% of expenses.
Revenues
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
Change
|
|
Revenues by Product Line (in thousands) (1)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic data capture
|
|
$
|
74,903
|
|
74
|
%
|
$
|
80,017
|
|
69
|
%
|
$
|
5,114
|
|
7
|
%
|
Clinical data management
|
|
11,440
|
|
11
|
|
9,650
|
|
8
|
|
(1,790
|
)
|
(16
|
)
|
Safety
|
|
11,462
|
|
11
|
|
12,260
|
|
11
|
|
798
|
|
7
|
|
Interactive Response
Technology
|
|
3,512
|
|
4
|
|
13,866
|
|
12
|
|
10,354
|
|
295
|
|
Total
|
|
$
|
101,317
|
|
100
|
%
|
$
|
115,793
|
|
100
|
%
|
$
|
14,476
|
|
14
|
%
|
28
Table of
Contents
(1)
Revenues by
Product Line include product license revenues and product-related service
revenues
.
The
increase in interactive response technology revenues is primarily related to
increased application hosting revenues of $10.3 million. To a lesser extent the increase is
attributable to revenues related to the acquisition of Covance IVRS/IWRS in
August 2009. The increase in electronic data capture revenues is primarily
due to an increase in application hosting services of $2.7 million as well
as an increase in license revenues of $2.5 million. The increase in safety revenues is primarily
due to increases in license and consulting revenues of $0.5 million and $0.3
million, respectively. The decrease in clinical data management is primarily
due to a decrease in license and customer support revenues of $1.4 million and
$0.6 million, respectively.
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Revenues
by Type (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
28,811
|
|
29
|
%
|
$
|
30,523
|
|
26
|
%
|
$
|
1,712
|
|
6
|
%
|
Application hosting services
|
|
56,438
|
|
56
|
|
69,462
|
|
60
|
|
13,024
|
|
23
|
|
Consulting services
|
|
9,561
|
|
9
|
|
9,525
|
|
8
|
|
(36
|
)
|
*NM
|
|
Customer support
|
|
6,507
|
|
6
|
|
6,283
|
|
6
|
|
(224
|
)
|
(3
|
)
|
Total
|
|
$
|
101,317
|
|
100
|
%
|
$
|
115,793
|
|
100
|
%
|
$
|
14,476
|
|
14
|
%
|
* Not Meaningful
Total
revenues increased in the 2010 Six Month Period as compared to the 2009 Six Month
Period, due to increases in application hosting and license revenues. The
increase in the 2010 Six Month Period revenues associated with our application
hosting services was partially due to a 17% increase in electronic data capture
production trials under management from approximately 968 in the 2009 Six Month
Period to approximately 1,129 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 and
phone-integrated
Phase Forward IRT
product offerings with production trials
increasing 162% from 104 in the 2009 Six Month Period to 274 in the 2010
Six Month Period. The increase in license revenues was primarily the result of
additional electronic data capture revenues, and to a lesser extent, growth in
sales relating to our safety products. The decrease in consulting services was
primarily attributable to lower revenue related to consulting services provided
for our electronic data capture which were slightly off-set by increased
revenue related to consulting services provided for our safety products. The
decrease in customer support revenues was primarily due to decreases in
clinical data management products which were slightly off-set by increased
revenue related to electronic data capture products. Our revenues were not
significantly impacted by price increases or decreases. Inflation had only a
nominal impact on our revenues.
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Revenues by Geography
(in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
62,065
|
|
61
|
%
|
$
|
75,185
|
|
65
|
%
|
$
|
13,120
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
26,821
|
|
27
|
|
26,782
|
|
23
|
|
(39
|
)
|
*NM
|
|
France
|
|
7,935
|
|
8
|
|
7,698
|
|
7
|
|
(237
|
)
|
(3
|
)
|
Asia Pacific
|
|
4,496
|
|
4
|
|
6,128
|
|
5
|
|
1,632
|
|
36
|
|
International subtotal
|
|
39,252
|
|
39
|
|
40,608
|
|
35
|
|
1,356
|
|
3
|
|
Total
|
|
$
|
101,317
|
|
100
|
%
|
$
|
115,793
|
|
100
|
%
|
$
|
14,476
|
|
14
|
%
|
* Not Meaningful
The
increase in revenues worldwide was primarily due to an increase in interactive
response technology revenues and electronic data capture revenues of
$10.4 million and $5.1 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 $8.1 million and
$5.0 million, respectively. The increase in interactive response technology
revenues is primarily a result of increased sales of our
Phase
Forward IRT
product offering. To a lesser extent, the increase is
attributable to the 2010 Six Month Period including a full quarter of
29
Table of
Contents
application
hosting services revenues relating to the acquisition of Covance IVRS/IWRS in
August 2009, while the 2009 Six Month Period included no revenue related
to the acquisition. The increase in international revenues is primarily related
to an increase in interactive response technology revenues, safety revenues and
electronic data capture revenues of $2.3 million, $0.7 million and $0.1
million, respectively. These increases
were slightly off-set by a decrease in clinical data management revenues of
$1.7 million.
Costs of Revenues
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
of Related
|
|
|
|
Percentage
of Related
|
|
Change
|
|
Costs of Revenues (in thousands)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
1,351
|
|
5
|
%
|
$
|
1,140
|
|
4
|
%
|
$
|
(211
|
)
|
(16
|
)%
|
Services
|
|
41,144
|
|
57
|
|
50,999
|
|
60
|
|
9,855
|
|
24
|
|
Total
|
|
$
|
42,495
|
|
42
|
%
|
$
|
52,139
|
|
45
|
%
|
$
|
9,644
|
|
23
|
%
|
The
cost of license revenues decreased when comparing the 2010 Six Month Period to
the 2009 Six Month Period primarily due to a $0.3 million decrease in royalty
expenses. The increase in cost of services in the 2010 Six Month Period was
primarily due to increases in employee-related expenses of $3.3 million
related to a headcount increase of 47 people, and in depreciation expenses of
$1.7 million. We also had expense increases for outside contractors, network
hosting and customer pass-though expenses of $1.6 million, $1.4 million and
$1.0 million.
Gross Margin
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
of Related
|
|
|
|
Percentage
of Related
|
|
Change
|
|
Gross Margin
(in thousands)
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
27,460
|
|
95
|
%
|
$
|
29,383
|
|
96
|
%
|
$
|
1,923
|
|
7
|
%
|
Services
|
|
31,362
|
|
43
|
|
34,271
|
|
40
|
|
2,909
|
|
9
|
|
Total
|
|
$
|
58,822
|
|
58
|
%
|
$
|
63,654
|
|
55
|
%
|
$
|
4,832
|
|
8
|
%
|
The
overall gross margin percentage decreased in the 2010 Six Month Period as
compared to the 2009 Six Month Period 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
Clinical Development Center
product from the acquisition of
Waban in April 2009, 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
increased slightly in the 2010 Six Month Period as compared to the 2009 Six
Month Period due to increased sales in products that do not carry an associated
royalty expense. 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
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Operating Expenses (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
15,422
|
|
15
|
%
|
$
|
18,140
|
|
16
|
%
|
$
|
2,718
|
|
18
|
%
|
Research and development
|
|
17,605
|
|
17
|
|
19,729
|
|
17
|
|
2,124
|
|
12
|
|
General and administrative
|
|
17,519
|
|
17
|
|
19,958
|
|
17
|
|
2,439
|
|
14
|
|
Total
|
|
$
|
50,546
|
|
49
|
%
|
$
|
57,827
|
|
50
|
%
|
$
|
7,281
|
|
14
|
%
|
Sales and Marketing.
Sales
and marketing expenses increased in the 2010 Six Month Period primarily due to increases
of $0.8 million in both commissions and amortization expenses. We also had an increase in employee-related
expense of $0.7 million related to a headcount increase of 16 people, as
well as increases in travel and outside contractor expenses of $0.2
30
Table of
Contents
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 the 2010 Six Month Period primarily due
to an increase in employee-related expenses of $1.6 million related to a
headcount increase of 32 people, and an increase related to stock-based
compensation of $0.7 million. These
increases were partially off-set by a decrease in outside contractor expenses
of $0.3 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 the 2010 Six Month Period primarily
due to increases of $1.1 million in each of outside contractor, depreciation
and professional fees. These increases
were partially off-set by decreases in employee-related expenses and
stock-based compensation of $0.4 million and $0.3 million, respectively.
Professional fees expense in the 2010 Three Month Period includes $1.9 million
related to deal costs associated with our acquisition by Oracle, representing
an increase in deal costs of $1.6 million from the 2009 Three Month Period. 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
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage of
|
|
Change
|
|
Other income (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,142
|
|
1
|
%
|
$
|
592
|
|
|
%
|
$
|
(500
|
)
|
(48
|
)%
|
Other income (expense), net
|
|
465
|
|
|
|
(569
|
)
|
|
|
(1,034
|
)
|
(222
|
)
|
Total other income
|
|
$
|
1,607
|
|
1
|
%
|
$
|
23
|
|
|
%
|
$
|
(1,584
|
)
|
(99
|
)%
|
The
decrease in interest income in the 2010 Six Month Period was primarily due to
the net decrease in cash and cash equivalents and short and long-term
investments. The decrease in other, net in the 2010 Six Month Period was
primarily due to greater losses associated with foreign currency transactions
as well as the liquidation of our auction rate securities.
Provision for Income Taxes
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
Provision
for income taxes (in thousands)
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
of Revenues
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
3,578
|
|
4
|
%
|
$
|
2,295
|
|
2
|
%
|
$
|
(1,283
|
)
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
effective tax rate for the 2009 Six Month Period and the 2010 Six Month Period
was 36% and 39%, respectively. Our effective tax rate for the 2010 Six
Month Period is higher than the effective tax rate for the 2009 Six Month
Period 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.
31
Table of
Contents
Liquidity
and Capital Resources
Our
principal sources of liquidity were unrestricted cash, cash equivalents, short
and long-term investments totaling $135.5 million and $136.5 million at
December 31, 2009 and June 30, 2010, respectively, and accounts receivable
of $56.0 million and $43.5 million, respectively. For the periods ended December 31, 2009 and June 30,
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.
32
Table of
Contents
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 June 30, 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 June 30,
2010 were $23.8 million and $12.0 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.
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 and entered into an agreement
(the Agreement) with UBS with respect to all of our ARS held at that time. As
a UBS client who held ARS, we received certain rights, which entitled us 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,
we 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
were not secured by its assets and did not require UBS to obtain any financing
to support its performance obligations under the Agreement. UBS disclaimed any
assurance that it would have sufficient financial resources to satisfy its
obligations under the Agreement.
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As
of December 31, 2009 we held $23,800 in ARS at par with a fair value of
$23,715. During the six months ended
June, 30 2010, $11,800 of our ARS were called by the respective issuers at par
value and $12,000 were liquidated on June 30, 2010 at par value in
accordance with our agreement with UBS discussed above. For the three and six
months ended June 30, 2010 a gain of $38 and $85, respectively was
recorded in our accompanying unaudited condensed consolidated statements of
income in connection with the execution of our agreement with UBS and the
liquidation and final settlement of all of our ARS.
We
classified the $12.0 million of ARS liquidated on June 30, 2010 as
short-term investments in the accompanying unaudited condensed consolidated
balance sheets as of June 30, 2010 since the transaction did not settle
until July 2, 2010.
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
$31.2 million in the six months ended June 30, 2010, which was more
than net income of $3.6 million. The difference is primarily due to various
changes in working capital accounts of $9.8 million which include changes to
accounts receivable and deferred revenue of $12.8 million and $5.9 million,
respectively, off-set by changes to accrued expenses and accounts payable of
$6.1 million and $2.2 million, respectively.
Non-cash adjustments included $11.7 million of depreciation and
amortization expense, $6.8 million of stock-based compensation expense, and
$4.3 million related to the change in fair value of the securities settlement
agreement, partially offset by a $4.4 million change in fair value of our
investments.
Net Cash Provided by Investing Activities.
Net cash provided by investing activities was
$14.7 million during the six months ended June 30, 2010, which was
primarily due to proceeds from maturities of short-term and long-term
investments of $60.4 million. Cash provided by investing activities was
partially offset by the purchase of short and long-term investments of $39.8
million, and the purchase of property and equipment of $5.8 million.
Net Cash Used In Financing Activities.
Net cash used in financing activities was
$27.7 million in the six months ended June 30, 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.
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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
Phase Forward
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
Phase Forward
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.
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 June 30, 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,
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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.
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Table of Contents
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.
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Revenues generated in locations outside the United
States
|
|
39
|
%
|
33
|
%
|
39
|
%
|
35
|
%
|
Revenues in currencies other than the United
States dollar (1)
|
|
25
|
|
26
|
|
23
|
|
25
|
|
Expenses in currencies other than the United
States dollar (1)
|
|
21
|
|
23
|
|
21
|
|
24
|
|
(1)
Percentage of revenues and
expenses denominated in foreign currency for the three months ended June 30,
2010:
|
|
Three Months Ended
June 30, 2010
|
|
Six Months Ended
June 30, 2010
|
|
|
|
Revenues
|
|
Expenses
|
|
Revenues
|
|
Expenses
|
|
euros
|
|
16
|
%
|
4
|
%
|
15
|
%
|
5
|
%
|
British pound
|
|
6
|
|
11
|
|
6
|
|
12
|
|
Japanese yen
|
|
4
|
|
4
|
|
4
|
|
4
|
|
Other
|
|
|
|
4
|
|
|
|
3
|
|
Total
|
|
26
|
%
|
23
|
%
|
25
|
%
|
24
|
%
|
As of June 30, 2009 and 2010, we had $9.9 million and
$21.9 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 12 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
37
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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 June 30, 2010, we estimated that a 10% unfavorable
movement in foreign currency exchange rates would have decreased revenues by
$1.5 million, decreased expenses by $1.3 million and decreased
operating income by $0.2 million. For the six months ended June 30,
2010, we estimated that a 10% unfavorable movement in foreign currency exchange
rates would have decreased revenues by $2.9 million, decreased expenses by
$2.6 million and decreased operating income by $0.3 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 June 30,
2010.
As
of June 30, 2010, we entered into forward foreign exchange contracts to
hedge approximately $11.9 million of receivables, intercompany accounts and
cash balances denominated in currencies other than the U.S. dollar. We recorded foreign currency gains/(losses)
of $(0.2) million and $(0.4) million for the three months ended
June 30, 2009 and 2010, respectively, and less than $(0.1) million and
$(0.6) million for the six months ended June 30, 2009 and 2010,
respectively.
We settle forward foreign
exchange contracts in cash. As of December 31, 2009 and June 30,
2010, we recorded $0.2 and $(0.1) million, respectively, of foreign exchange
gains/(losses) 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 $136.5 million at June 30, 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.
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. All investments are recorded at fair value. 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 June 30, 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 June 30, 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
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that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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. Legal
proceedings that we believe are most important for you to consider are
described under the title Overview in Item 2 of Managements Discussion and
Analysis of Financial Conditions and 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, customary closing 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.
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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 six
month period ending June 30, 2010, we withheld an aggregate of 328,332
common shares under restricted stock units at a price of $14.39 per share. Effective
June 1, 2010 we suspended our 2004 Employee Stock Purchase Plan as the
number of shares available under the plan had been issued.
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 June 30, 2010, we repurchased no shares
of our common stock pursuant to this stock repurchase program.
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.
40
Table of
Contents
Item 6.
Exhibits
.
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
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.
|
101*
|
|
The
following materials from the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30,2010, formatted in XBRL (eXtensible Business
Reporting Language): (i) the Consolidated Balance Sheets; (ii) the
Consolidated Statements of Operations and Comprehensive Income; (iii) the
Consolidated Statements of Shareholders Equity; (iv) the Consolidated
Statements of Cash Flows; and (iv) the Notes to Condensed Consolidated
Financial Statements, tagged as block of text.
|
* Filed herewith.
41
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:
August 9, 2010
|
|
|
42
Table of
Contents
EXHIBIT INDEX
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
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.
|
101*
|
|
The
following materials from the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30,2010, formatted in XBRL (eXtensible Business
Reporting Language): (i) the Consolidated Balance Sheets; (ii) the
Consolidated Statements of Operations and Comprehensive Income; (iii) the
Consolidated Statements of Shareholders Equity; (iv) the Consolidated
Statements of Cash Flows; and (iv) the Notes to Condensed Consolidated
Financial Statements, tagged as block of text.
|
* Filed herewith.
43
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