DATATRAK International, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
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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 000-20699
DATATRAK International, Inc.
(Exact name of registrant as specified in its charter)
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| Ohio |
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34-1685364 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
identification no.) |
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| 6150 Parkland Boulevard, Mayfield Hts., Ohio |
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44124 |
| (Address of principal executive offices)
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(Zip code) |
Registrant’s telephone number, including area code: (440) 443-0082
Securities registered pursuant to Section 12(b) of the Act: None
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| Securities registered pursuant to Section 12(g) of the Act:
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Common Shares, without par value. |
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Series A Junior Participating Preferred Stock Purchase Rights. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) the Act.
Yeso No þ
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
þ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large
accelerated
filer
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Accelerated filer
þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
Yes
o No þ
As of June 30, 2005, the aggregate market value of the 9,460,731 common shares then
outstanding, which together constituted all of the voting shares of the registrant, held by
non-affiliates was $109,271,443 (based upon the
closing price of $11.55 per common share on the Nasdaq SmallCap Market on June 30, 2005). For
purposes of this calculation, the registrant deems the common shares held by all of its Directors
and executive officers to be the common shares held by affiliates. As of February 28, 2006, the
registrant had 11,355,246 common shares, without par value, issued and outstanding.
Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2005.
TABLE OF CONTENTS
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Part I
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Item 1. Business
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Item 1A. Risk Factors
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Item 1B. Unresolved Staff Comments
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Item 2. Properties
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Item 3. Legal Proceedings
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 4A. Executive Officers of the Company
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Part II
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Item 5. Market for Registrant’s Common Shares and Related Shareholder Matters
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Item 6. Selected Financial Data
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23 |
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Item 8. Financial Statements and Supplementary Data
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item 9A. Controls and Procedures
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Item 9B. Other Information
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Part III |
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Item 10. Directors and Executive Officers of the Registrant
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Item 11. Executive Compensation
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Item 12. Security Ownership of Certain Beneficial Owners and Management
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Item 13. Certain Relationships and Related Transactions
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Item 14. Principal Accountant Fees and Services
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Part IV |
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Item 15. Exhibits and Financial Statement Schedules
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PART I
General
We are a provider of software and other related services, commonly referred to as an
application service provider, or ASP. Our customers use our software to collect and transmit
clinical trial data electronically, commonly referred to as electronic data capture, or EDC. Our
customers are companies in the clinical pharmaceutical, biotechnology, contract research
organization, or CRO, and medical device research industries. Our services assist these companies
in accelerating the completion of clinical trials by providing improved data quality and reducing
the time required to review the results of each clinical trial.
We currently operate in one business segment as an ASP business providing EDC and other
services to the clinical research industry. We began EDC operations in 1997. During that year, we
participated in a joint venture with IBM Global Services to develop and market a data collection
and management system for use in clinical trials. The joint venture was terminated, and in January
1998, we purchased the software now known as DATATRAK EDC® from PadCom Clinical Research. DATATRAK
EDC® was developed to provide clinical research data to sponsors of clinical trials faster and more
efficiently than other forms of information-processing. Since the purchase of DATATRAK EDC®, we
have devoted the majority of our efforts to developing and improving the EDC technology employed by
this software and establishing the market presence necessary to compete in the evolving EDC sector
of the clinical research industry.
In December 2004, we entered into an alliance agreement with SAS Institute Inc. (“SAS”).
Pursuant to this alliance, DATATRAK and SAS are making a joint offering to customers to gather and
analyze clinical trial data. During the initial two-year term of the alliance, we are obligated to
make an aggregate of $650,000 in fixed payments to SAS, for among other things, access to the SAS®
Drug Development software. These fixed payments allow us to make the SAS® Drug Development
software available to our customers during the initial term of the alliance. We are also entitled
to provide similar use of the SAS software to our customers during a third option year upon the
payment of a $200,000 fixed fee. We will charge fees to our customers, who utilize the SAS® Drug
Development software, which will be designed to allow us to recoup some or all of the fixed fees
payable to SAS.
On February 13, 2006, we acquired all of the outstanding stock of ClickFind, Inc.
(“ClickFind”), a company focused on the application of technology in clinical trials, located in
Bryan, Texas, for a total purchase price of $18,000,000, less approximately $328,000 in certain
transaction expenses and certain outstanding indebtedness of ClickFind. The purchase price
consisted of approximately $4,000,000 of cash, $4,000,000 in notes payable and approximately
$10,000,000 in Common Shares (1,026,522 Common Shares). ClickFind’s product suite will now be
known as DATATRAK eClinical™. As a result of the acquisition, we expect to have the most extensive
eClinical™ software suite in the clinical trials industry.
Overview of the Clinical Research Industry
Our customers are companies in the clinical pharmaceutical, biotechnology, CRO and medical
device research industry. This industry is driven by regulatory requirements which mandate that
new drugs and medical devices be adequately tested in clinical trials prior to marketing these
drugs and devices.
Competitive pressures are forcing the pharmaceutical and biotechnology industries to become
more efficient when developing new products. To improve returns on research and development
investments, pharmaceutical and biotechnology companies are continuing to develop new products,
while at the same time attempting to shorten product development timelines. These efforts have
placed more drugs into the clinical development process and have increased the pressure for
companies to develop products faster in order to maintain growth and continue to achieve acceptable
returns on research and
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development expenditures. Sponsors of clinical trials have attempted to
create process efficiencies, control fixed costs and expand capacity by outsourcing clinical
research activities.
DATATRAK Software and Services
Under the traditional method of clinical research, clinical trial data from each patient is
recorded and maintained on paper in a binder, known as a case report form. A separate case report
form is maintained for each patient. Clinical research associates then visit research sites to
review the clinical trial data for accuracy and integrity. During these visits, known as
monitoring visits, the research associate must review each page of each case report form. These
visits may last several days, and corrections to the case report forms are frequently required
before the data can be delivered to the clinical trial sponsor. Several weeks, or even months, of
data may be reviewed during each monitoring visit. At the completion of a monitoring visit, the
completed case report form pages are physically transferred to a central location where the data is
then entered into a database for statistical compilation. Using this method of data collection and
quality control, the duration of the clinical trial process, from patient visit to delivery of
clean data to the clinical trial sponsor, can range from six to nine months. Such delays are
significant because errors or trends may not be detected until long after the interaction between
the patient and clinical investigator.
DATATRAK EDC® was developed to provide clinical research data to sponsors of clinical research
trials faster and more efficiently than other forms of information-processing that utilize paper.
Automating data entry and review procedures can save time in the drug development and medical
device approval process, and possibly result in enhanced patient safety. The DATATRAK EDC®
software and its earlier versions have supported many international clinical trials involving
thousands of clinical research sites and tens of thousands of patients in over 50 countries. Our
product suite has been utilized in the clinical development of 14 separate drugs that have received
regulatory approval from either the U.S. Food and Drug Administration (“FDA”) or counterpart
regulatory bodies in Europe.
The DATATRAK EDC® technology platform consists of Windows™ compatible software and hardware
designed to assist clinical trial sponsors in starting and finishing their clinical trials on a
more timely and efficient basis while also enhancing the quality of the data. In addition to
providing technology, we are also a service business that offers EDC and clinical trial data
management capabilities across numerous research sites. Our objective is to improve the
traditional process of collecting clinical research and non-interventional health care data by
providing cleaner data more quickly than what is available in a paper environment.
The DATATRAK EDC® system consists of numerous modules designed for flexible adaptation to the
clinical research process. We initially provide a set of electronic data forms that can be modeled
to suit the needs of each particular clinical trial. Each form is then made available through data
entry capability to each research site participating in the clinical trial via the Internet. Once
clinical trial data has been collected and entered, the clinical trial sponsor, or other contracted
vendor, can review the data remotely via the Internet. After the data is reviewed and cleansed of
all entry errors, DATATRAK EDC®’s report capability can generate customized reports. Finally, the
software’s export feature allows completed data and reports to be transmitted directly to a
clinical trial sponsor’s in-house database. Under this model, research data is collected more
quickly and with greater accuracy than with physical review of paper reports.
We are continually enhancing and testing the DATATRAK EDC® software suite. Recent initiatives
and enhancements to the DATATRAK EDC® software include a new portal of entry for all of DATATRAK’s
future clinical trials called StudyTrakÔ, our Technology Transfer program which will allow
customers to design their own EDC case report forms, and an EDC certification program known as
eMerge. Research and development expenses were $1,650,000, $1,142,000, and $850,000 in 2005, 2004,
and 2003, respectively. The low level of our research and development expenses during 2003 was
largely a result of the staff reductions and other payroll cost savings that were initiated at the
end of 2002. During 2004 and 2005, in conjunction with our increased revenue, we increased
expenses in research and development.
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During the performance of clinical trials, a variety of technology applications are used for
the collection, management and storage of information. Many of these applications perform limited
but important functions that contribute to the overall successful accomplishment of a clinical
trial. Because the use of technology in this industry is relatively new, as compared to others,
the specific functionalities of individual technology applications have advanced as single point
solutions rather than an overall product
suite, existing under a single application, architecture and corporate offering. As the
global clinical trial market transitions from a paper-based data collection and management process
to a technology-enabled process over the next several years, we believe that the clinical trials
industry will increasingly demand multiple applications. As the demand for multiple applications
increase, we believe sponsors of clinical research will gravitate from the challenges encountered
with information collected and residing in several disparate applications to one that houses
multiple applications under a single software architecture and corporate structure. This would
represent a simplified approach from the workflow process of clinical trials itself and would also
yield contracting advantages by being able to deal with only one vendor for a variety of necessary
software applications.
Our recent ClickFind acquisition will expand our product offerings. This new product,
DATATRAK eClinical™, will provide the following capabilities: EDC, interactive voice response
systems (“IVRS”) (via phone or internet), medical coding, a randomization tool, clinical trial
management system (“CTMS”), drug inventory management, digitized electrocardiograms, imaging
capabilities, electronic patient recorded outcomes (“ePRO”) and workgroup collaboration
capabilities. Several of these new capabilities will represent new revenue opportunities for us as
the DATATRAK eClinical™ offering matures. DATATRAK eClinical™ has been used in many clinical
trails in nineteen separate countries but has never been utilized in a large multi-national
clinical trial with over 1,000 patients, and will require additional investment and testing on our
part before it can be used in a clinical trial involving such large volumes of information.
All clinical trials currently being performed with DATATRAK EDC® will continue through
conclusion with that product suite. At this time, it is anticipated that the DATATRAK EDC®
platform will be utilized in these, and perhaps some new, clinical trials until the end of 2009.
As such, we will provide two different architectures for the use of technology in clinical trials
until current trials, and perhaps future trials, using the previous platform are finished. We will
continue to support and provide, as needed, appropriate service packs for the maintenance of
DATATRAK EDC® as well as DATATRAK eClinical™. However, no extensive, future development efforts
are planned for DATATRAK EDC®, and following the conclusion of all clinical trials using DATATRAK
EDC®, that product suite will be discontinued.
Our alliance with SAS, which has been branded as DATATRAK Aware – Powered by SAS, is designed
to bring greater speed and efficiency to the conduct of clinical trials. This Alliance will
directly integrate clinical trial information from our software with SAS® Drug Development software
to allow clinical trial sponsors to have immediately analyzable SAS datasets, automatically
updated, for their clinical trials.
Our software can be deployed globally via a distributed platform using laptop computers, in a
centralized environment with resident hardware, or in a wireless mode, all utilizing the Internet.
Our DataUnifyer™ product will allow data from different data sources to be combined into one
general repository. We began work on the prototype of the DataUnifyer™ in 2002, but delayed
additional funding for this product as part of our overall cost cutting strategy implemented at the
end of 2002. We anticipate significant development of the DataUnifyer™ during 2006.
Customers and Marketing
Our customers are largely comprised of clinical trial sponsors. We market our software and
services through a sales and marketing staff located in the United States and Europe. The market
for EDC in general and for our services specifically, has been an emerging one. Our marketing
efforts have included selective participation in scientific and medical meetings to promote our
services and we have occasionally used direct mail and journal advertisements to build awareness of
our capabilities.
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Our marketing and sales efforts have been focused upon building reference accounts with key
customers and leveraging these relationships into new divisions of our current customers, and
growing new customers through maintaining a high level of satisfaction in the delivery of our
product suite on a worldwide basis.
The EDC market has been slow to develop. The growth of the Internet has drastically altered
business strategies and pricing models in this specific sector. Most EDC vendors have
insignificant revenues and are classified as start-ups. Nonetheless, we believe that some type of
automation in the collection and review of clinical trial data is inevitable.
It is our belief that our software offering can be competitive in this emerging marketplace.
Our product has been tested and verified to be in compliance with FDA and other regulations. Our
software offering is delivered primarily via the Internet and supports multiple languages.
Furthermore, many clinical trial sponsors have published statistics indicating that EDC can reduce
the length of time to complete a clinical trial, and can reduce the number of questions concerning
the clinical trial data thereby improving the quality of the clinical trial data.
We believe that the efficiencies represented by our relationship with SAS will further
contribute to enhancing adoption rates for EDC. We plan to have our DATATRAK EDC® and DATATRAK
eClinical™ software offerings automatically integrated with SAS® Drug Development software. SAS®
Drug Development software is a set of tools that analyze clinical trial data. SAS data sets are
the standard used in the clinical trial industry and with regulatory agencies.
The extent to which we rely on revenue from one customer varies from period to period,
depending upon, among other things, our ability to generate new business, and the timing and size
of clinical trials. In light of our small revenue base, we are more dependent on major customers
than many of the larger participants in the EDC industry. The table below sets forth the
percentage of revenue generated from customers who accounted for more than 10% of our revenue
during 2005, 2004 and 2003.
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Year ended December 31, |
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Aventis Pharmaceuticals |
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15 |
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22 |
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Control Delivery Systems |
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Otsuka Research Institute |
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Less than 10% of revenue. |
Contracting and Backlog
Our contracts provide a fixed price for each component or service to be delivered, and revenue
is recognized as these components or services are delivered. We recognize revenue based on the
performance or delivery of the following specified services or components of its EDC contracts in
the manner described below:
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Project management and data management (design, report and export) services are
recorded as revenue proportionally over the life of a contract as services are
performed based on the contractual billing rate per hour for those services. |
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Data items revenue is earned based on a price per data unit as data items are
entered into DATATRAK’s hosting facility. |
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Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program. |
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Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed. |
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Help desk revenue is recognized based on a monthly price per registered user
under the contract. |
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Services
provided by us that are in addition to those provided for in our contracts are
billed on a fee for service basis as services are completed. Costs associated with contract
revenue are recognized as incurred. Costs that are paid directly by our clients, and for which we
do not bear the risk of economic loss, are excluded from revenue. The termination of a standard
contract will not result in a material adjustment to the revenue or costs previously recognized.
Our customers, with or without cause,
can terminate a contract at any time. If one of our contracts is cancelled, we are entitled to
payment for all work performed through the date of notice of termination and for recovery of some
or all costs incurred to terminate a contract. The termination of a standard contract will not
result in a material adjustment to the revenue or costs we have previously recognized.
In some instances, we offer volume discounts to customers over multiple contracts. We
estimate the volume discounts to be earned over the life of the contracts to which the discount
applies. As a contract progresses, revenues are recorded using rates that reflect the anticipated
volume discount to be achieved by the customer. The termination of a contract subject to a volume
discount could result in a material adjustment to revenue previously recognized, in order to
reflect the true economic value of the contract at the time of cancellation. For the years ended
December 31, 2005 and December 31, 2004, we deferred $56,000 and $69,000 of revenue, respectively,
as a result of contracts subject to volume discounts. No revenue was deferred in 2003 as a result
of contracts subject to volume discounts.
Our backlog consists of anticipated revenue from authorization letters to commence services
and signed contracts yet to be completed. We do not include in our backlog potential contracts or
authorization letters that, regardless of whether they have passed the verbal stage, have not yet
been signed. At December 31, 2005, our backlog was $20,324,000 compared to backlog of $14,057,000
at December 31, 2004. We expect to convert approximately $11,200,000 of our December 31, 2005
backlog into revenue during 2006. Our contracts can be cancelled or delayed at anytime and,
therefore, our backlog, at any point in time, is not an accurate predictor of future levels of
revenue. As a result of our transactional and service-based business model combined with the
dynamic nature of the clinical trials market where changes in scope are common, backlog has
historically been an imprecise predictor of short-term revenue.
Competition
We compete within the clinical research and the EDC markets. Both of these industries are
highly competitive and fragmented. In addition, the EDC industry is currently emerging and is
characterized by rapidly evolving technology. The largest competitor to the EDC market is the
traditional paper-based method of collecting clinical trial data. EDC may not effectively replace
paper as the preferred method of collecting and managing clinical trial data to the extent that we
believe it will.
We compete in the EDC market on the strength of our software’s functionality, design
architecture and data entry and review tools, which we believe equal or exceed those available in
the market. As demonstrated by our alliance with SAS, we believe that we may be able to enhance
our competitive strength through the formation of strategic alliances with established industry
organizations.
Our major competitors include software vendors specializing in EDC, clinical trial data
service companies and large pharmaceutical companies currently developing their own in-house
technology. Because of the expanded software offering obtained through the acquisition of
ClickFind, we now have additional competitors that we did not have before this transaction. The
DATATRAK eClinical™ software suite has a variety of unified offerings, such as core laboratory ECG
and imaging capabilities; IVRS – both voice- and web-activated; CTMS; Randomization, Medical
Coding and ePRO. Each of these individual offerings have distinct single point solution
competitors in the clinical trial market. Sponsors of clinical research have a variety of choices
in which to satisfy each of these capabilities for their clinical trials from many different
organizations. We are not aware of any competitors that have all of these individual components
contained under one software offering.
Many current and potential future competitors have or may have substantially greater financial
and technical resources, greater name recognition and more extensive customer bases that could be
leveraged, thereby gaining market share or product acceptance to our detriment. We may not be able
to capture or
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establish the market presence necessary to effectively compete in this emerging
sector of the clinical research industry. Clinical trial sponsors also may continue to contract
with individual vendors instead of utilizing our single software solution.
We are aware of other EDC systems that compete or, in the future, may compete directly with
DATATRAK EDC® and DATATRAK eClinical™. There are other companies that have developed or are in the
process of developing technologies that are, or, in the future, may be, the basis for competitive
products in the clinical research EDC market. Some of those technologies may have an entirely
different approach or means of accomplishing the desired effects of DATATRAK EDC® and DATATRAK
eClinical™. Either existing or new competitors may also develop products that are superior to or
that otherwise achieve greater market acceptance than our software. In addition, we believe that
certain large companies in the information technology industry may be forming alliances and
attempting to capitalize on the data delivery options offered by the Internet. To the extent that
our approach to EDC may gain market acceptance, larger companies in the information technology
industry may develop competing technology to our detriment.
Regulatory Matters
The FDA has issued guidelines and rules on the use of computer systems in clinical trials
relating to standard operating procedures, data entry, system design, security, system
dependability and controls, personnel training, records inspection and certification of electronic
signatures. Based on our review, we believe that both DATATRAK EDC® and DATATRAK eClinical™ comply
with these guidelines and rules. The FDA’s guidelines and rules related to the use of computerized
systems in clinical trials are still in the early stages of development. Any release of FDA
guidance that is significantly inconsistent with the design of our software may cause us to incur
substantial costs to remain in compliance with FDA guidance and regulations. We are continuing to
monitor the FDA’s guidance to ensure compliance.
In addition to FDA guidelines and rules, we also comply with International Conference on
Harmonization (“ICH”) Regulations guidelines for good clinical practices. These guidelines have
been developed by the ICH and have been subject to consultation by regulatory parties, in
accordance with the ICH process. The regulatory bodies consist of representatives from the
European Union, Japan and the U.S.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) applies to health
care providers, health plans and health care clearinghouses, or covered entities. Under HIPPA,
covered entities are required to protect the confidentiality, integrity and availability of certain
electronic patient information they collect, maintain, use or transmit. Neither we, nor our
customers, are covered entities under HIPPA, however, we have taken steps, including encryption
techniques, to ensure the confidentiality of all electronic patient information that is captured
and transmitted through the use of our software.
Potential Liability and Insurance
Our services are supported by telecommunications equipment, software, operating protocols and
proprietary applications for high-speed transmission of large quantities of data among multiple
locations. In such operations, it is possible that data files may be lost, altered or distorted.
DATATRAK EDC®, DATATRAK eClinical™ and future enhancements or adaptations may contain undetected
design faults and software “bugs” that, despite our testing, are discovered only after the system
has been installed and used by customers. Such faults or errors could cause delays or require
design modifications on our part. In addition, clinical pharmaceutical and medical device research
requires the review and handling of large amounts of patient data. Potential liability may arise
from a breach of contract or a loss of or unauthorized release of clinical trial data. Contracts
with our customers are designed to limit our liability for damages resulting from errors in the
transportation and handling of data. Nevertheless, we may still be subject to claims for data
losses in the transportation and handling of data over our information technology network.
If we were forced to undertake the defense of, or were found financially responsible for,
claims based upon the foregoing or related risks we could incur significant costs relating to these
claims, and our financial resources could be diminished. We maintain an errors and omissions
professional liability insurance
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policy to cover claims in an amount up to $5,000,000 that may be
brought against us. This coverage may not be adequate, and insurance may not continue to be
available to us, in the future.
Intellectual Property
Intellectual property rights are significant to our ongoing operations and future
opportunities. We have taken steps to secure patent protection for recently-developed database
technology. Our software and business processes embody numerous trade secrets which we protect
through various physical and technical security measures, as well as by agreement. Modules of our
DATATRAK EDC® and DATATRAK eClinical™ software, related manuals and other written and graphical
materials are subject to copyright protection. Our DATATRAK® brand is at the heart of a family of
registered trademarks and service marks that identify and distinguish our software and services in
the market. We sell our services and license our software subject to contract provisions intended
to provide appropriate protection to these valuable intellectual property assets.
Employees
As of February 28, 2006, we had approximately 110 full-time employees. None of our employees
are represented by a union, and we consider relations with our employees to be satisfactory. We
have employment agreements with all of our executive officers. Due to the early stage of
development of our industry and business, the loss of the services of any of our executive officers
could put us at a competitive disadvantage, since we would need to attract a qualified new
executive to fill the vacancy. To address these risks, we must, among other things, continue to
attract, retain and motivate qualified personnel.
Available Information
Our
Internet address is www.datatrak.net which includes links to our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports, as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). Our SEC reports
can be accessed through the investor relations section of our Web site. The information found on
our Web site is not part of this or any other report we file with or furnish to the SEC.
Upon the receipt of a written request from any shareholder we will mail, at no charge to the
shareholder, a copy of our Annual Report, including the financial statements and schedules required
to be filed with the Commission pursuant to Rule 13a-1 under the Exchange Act, for our most recent
fiscal year.
Certain statements made in this Annual Report on Form 10-K contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). All
statements that address operating performance, events or developments that we anticipate will occur
in the future, including statements related to future revenue, profits, expenses, income and
earnings per share or statements expressing general optimism about future results, are
forward-looking statements. In addition, words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “estimates,” variations of such words, and similar expressions are intended to
identify forward-looking statements. Forward-looking statements are subject to the safe harbors
created in the Exchange Act.
Forward-looking statements are subject to numerous assumptions and risks and uncertainties
that may cause our actual results or performance to be materially different from any future results
or performance expressed or implied by the forward-looking statements. We have identified the
following important factors, which could cause our actual operational or financial results to
differ materially from any projections, estimates, forecasts or other forward-looking statements
made by or on our behalf. Under no circumstances should the factors listed below be construed as
an exhaustive list of all factors that could cause actual results to differ materially from those
expressed in forward-looking statements. We undertake no obligation to review or confirm analysts’
expectations or estimates or to release publicly any revisions to
7
forward-looking statements
contained herein to take into account events or circumstances that occur after the date of this
Annual Report on Form 10-K. In addition, we do not undertake any responsibility to update publicly
the occurrence of unanticipated events, which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained herein.
We have a limited operating history and we have not until recently had profitable operations.
We began providing EDC services in 1997 and have a limited operating history upon which our
performance may be evaluated. Although we were profitable in 2004 and 2005, we had previously
recognized operating losses in each year since 1997. Our cumulative operating loss since 1997 from
EDC operations totaled $37,411,000 at December 31, 2005. We anticipate that we will be profitable
in 2006. However, any number of factors, including, but not limited to, termination or delays in
contracts, inability to grow and convert backlog into revenue or being unable to quickly reduce
costs if required, could cause us to record losses in 2006 and in future periods.
If we do not continue to enhance our software, we may not be able to meet the evolving needs of our
customers.
Although our proprietary DATATRAK EDC® and DATATRAK eClinical™ software solutions have been
used in clinical trials, continued enhancement is necessary to provide additional functions and
services to meet the ever-changing needs and expectations of our customers. To date we have had
limited EDC revenue from which to support the costs of this continued software enhancement. Our
potential future revenue may not be sufficient to absorb corporate overhead and other fixed
operating costs that will be necessary for our future success.
Our quarterly results fluctuate significantly.
We are subject to significant fluctuations in quarterly results caused by many factors,
including
| |
• |
|
our success in obtaining new contracts, |
| |
| |
• |
|
the size and duration of the clinical trials in which we participate, and |
| |
| |
• |
|
the timing of clinical trial sponsor decisions to conduct new clinical trials
or cancel or delay ongoing trials. |
Our expense levels are based in part on our expectations as to future revenue and to a certain
extent are fixed. We cannot make assurances as to our revenues in any given period, and we may be
unable to adjust expenses in a timely manner to compensate for any unexpected revenue shortfall.
As a result of our relatively small revenue base, any significant shortfall in revenue recognized
during a particular period could have an immediate adverse effect on our income from operations and
financial condition. Volatility in our quarterly results may adversely affect the market price of
our common shares.
Our business strategies are unproven and we are in an early stage of development.
Our efforts to establish a standardized EDC process for collection and management of clinical
research data represent a significant departure from the traditional clinical research practices of
clinical trial sponsors. The long-term viability of our business remains unproven. Our strategy
may not gain acceptance among sponsors of clinical research, research sites or investigators. Our
prospects must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly companies in new and
rapidly evolving markets.
We may lose revenue if we experience delays in clinical trials or if we lose contracts.
Although our contracts provide that we are entitled to receive revenue earned through the date
of termination, our customers generally are free to delay or terminate a clinical trial or our
contract related to
8
the trial at any time. The length of a typical clinical trial contract varies
from several months to several years. Clinical trial sponsors may delay or terminate clinical
trials for several reasons, including
| |
• |
|
unexpected results or adverse patient reactions to a potential product, |
| |
| |
• |
|
inadequate patient enrollment or investigator recruitment, |
| |
| |
• |
|
manufacturing problems resulting in shortages of a potential product, or |
| |
| |
• |
|
sponsor decisions to de-emphasize or terminate a particular trial or drug. |
We may lose revenues if a clinical trial sponsor decides to delay or terminate a trial in which we
participate.
We may lose future revenue if our major customers decrease their research and development
expenditures, or if we lose any of our major customers.
Our primary customers are companies in the pharmaceutical industry. Our business is
substantially dependent on the research and development expenditures of companies in this industry.
The extent to which we rely on revenue from one customer varies from period to period, depending
upon, among other things, our ability to generate new business and the timing and size of clinical
trials. In light of our small revenue base, we are more dependent on major customers than many of
the larger participants in the EDC industry. During 2005, one customer accounted for 59% of our
total revenue for the year. Our operations could be materially and adversely affected by, among
other things,
| |
• |
|
any economic downturn or consolidations in the pharmaceutical or biotechnology
industries, |
| |
| |
• |
|
any decrease in these industries’ research and development expenditures, or |
| |
| |
• |
|
changes in the regulatory environment in which companies in these industries operate. |
Changes in government regulations relating to the health care industry could have a material
adverse effect on the demand for our services.
Demand for our services is largely a function of the regulatory requirements associated with
the approval of a New Drug Application by the FDA. These requirements are more stringent and thus
more burdensome than those imposed by many other developed countries. In recent years, efforts
have been made to streamline the drug approval process and coordinate U.S. standards with those of
other developed countries. Changes in the level of regulation, including a relaxation in
regulatory requirements or the introduction of simplified drug approval procedures could reduce the
demand for our services. Several competing proposals to reform the system of health care delivery
in the United States have been considered by Congress from time to time. To date, none of these
proposals have been adopted.
The FDA’s guidelines and rules related to the use of computerized systems in clinical trials
are still in the early stages of development. Our software may not continue to comply with these
guidelines and rules as they develop, and corresponding changes to our product may be required.
Any release of FDA guidance that is significantly inconsistent with the design of DATATRAK EDC® or
DATATRAK eClinical™ may cause us to incur substantial costs to remain in compliance with FDA
guidance and regulations.
9
We may not be able to capture or establish the market presence necessary to compete in the EDC
market.
The EDC market, which is still developing, and must compete with the traditional paper method
of collecting clinical trial data, is highly fragmented. The major competitors in the EDC market
include
| |
• |
|
EDC software vendors, |
| |
| |
• |
|
clinical trial data service companies that use paper for data collection, |
| |
| |
• |
|
vendors offering single component solutions and |
| |
| |
• |
|
in-house development efforts within large pharmaceutical companies. |
Our current and potential future competitors have or may have substantially greater resources,
greater name recognition and more extensive customer bases that could be leveraged, thereby gaining
market share or product acceptance to our detriment. We may not be able to capture or establish
the market presence necessary to effectively compete in this emerging sector of the clinical
research industry.
We may be subject to liability for potential breaches of contracts or losses relating to the
unauthorized release of clinical trial data.
Our services are supported by telecommunications equipment, software, operating protocols and
proprietary applications for high-speed transmission of large quantities of data among multiple
locations. In addition, clinical pharmaceutical and medical device research requires the review
and handling of large amounts of patient data. Potential liability may arise from a breach of
contract or a loss of or unauthorized release of clinical trial data. If we were forced to
undertake the defense of, or were found financially responsible for, claims based upon these types
of losses, our financial resources could be diminished. We maintain a $5,000,000 errors and
omissions professional liability insurance policy to cover claims that may be brought against us.
This coverage may not be adequate, and insurance may not continue to be available to us, in the
future.
Our competitive position and business may be adversely affected if we are unable to protect
our intellectual property rights or infringe upon the intellectual property rights of others.
Intellectual property rights, including patent rights, are significant to our ongoing
operations and future opportunities. Our success will depend, in part, on our ability to secure
our own intellectual property rights (e.g., patents, copyrights, trademarks, trade secrets), obtain
licenses to technology owned by third parties when necessary, and conduct our business without
infringing on the proprietary rights of others. There can be no assurance, however, that our
proprietary rights will provide us significant protection or commercial advantage or that measures
taken to protect our confidential information will adequately prevent the disclosure or misuse of
such confidential information. In addition, there can be no assurance that, in the future, a third
party will not assert that we are violating their proprietary rights, including that our
technologies, products or services infringe their patents. In that event, we could incur
substantial costs and diversion of the time and attention of management and technical personnel in
defending ourselves against any such claims. Any meritorious claim of intellectual property
infringement against us could have a material adverse effect on our competitive position and
business.
We may not be able to successfully integrate our recently acquired business into our current
business operations.
We
recently completed an acquisition of ClickFind and its product suite. This new product
suite, now called DATATRAK eClinical™, will play a significant role in our efforts to continue to
be a leading ASP for the EDC industry. We may not be able to successfully integrate and profitably
manage ClickFind and our new software offering without substantial costs, delays or other problems.
Acquisitions also may involve a number of special risks, including adverse short-term effects on
our reported operating results, potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities, diversion of management’s attention, dependence on retention
hiring and training of key personnel and risks associated with unanticipated problems or legal
liabilities some or all of which could have a material adverse effect on our business, results of
operations and financial condition.
We will incur increased costs associated with the integration of our new product suite.
All clinical trials currently being performed with DATATRAK EDC® will continue through
conclusion with that product suite. At this time, it is anticipated that the DATATRAK EDC®
platform will be utilized in these, and perhaps some new, clinical trials until the end of 2009.
As such, we will provide two different architectures for the use of technology in clinical trials
until current trials, and perhaps future trials, using the previous platform are finished. We will
incur additional costs by continuing to support and provide, as needed, appropriate service packs
for the maintenance of DATATRAK EDC® as well as supporting and providing appropriate service packs
for the maintenance of DATATRAK eClinical™. We will also incur additional costs to integrate the
DATATRAK eClinical™ product into our current operating systems.
10
Furthermore, our two product offerings will run on parallel systems, as such we will incur
additional costs of maintaining two parallel production systems.
DATATRAK eClinical™, which has been used in many clinical trails in nineteen separate
countries, has never been utilized in a large multi-national clinical trial with over 1,000
patients. As such, we are investing in additional infrastructure, so that DATATRAK eClinical™ can
be scaled to meet the needs of clinical trials with such large volumes of data and the software
performs to the level of satisfaction that our customers have come to expect. We may incur
unforeseen costs if significant modification and testing become necessary to ensure the scalability
of DATATRAK eClinical™.
The price of our common shares could be adversely affected by the dilution caused by the common
shares issued in our recently completed acquisition.
In February 2006, we issued 1,026,522 of our unregistered common shares to the former
shareholders of ClickFind as part of the acquisition of the outstanding stock of ClickFind. These
1,026,522 common shares represent approximately 9.0% of our outstanding common shares, as of
February 28, 2006. Sales of a substantial number of these common shares in the public market could
depress the market price of our common shares. The perceived risk resulting from the sale of these
common shares could cause some of our shareholders to sell their common shares, thus causing the
price of our common shares to further decline. In addition, the downward pressure on the price of
our common shares could cause some of our shareholders to engage in short sales of our common
shares, which may cause the price of our common shares to decline even further.
We have Anti-takeover Provisions and Preferred Share Purchase Rights
Our Articles of Incorporation and By-Laws contain provisions that may discourage a third party
from acquiring, or attempting to acquire us. These provisions could limit the price that certain
investors might be willing to pay for our common shares. In addition preferred shares of our stock
can be issued by our Board of Directors, without shareholder approval, whether under our
shareholder rights plan or for other uses determined by the Board. The issuance of preferred
shares may adversely affect the rights of common shareholders, the market price of our common
shares and may make it more difficult for a third party to acquire a majority of our outstanding
common shares. At the present time, we do not plan to issue any preferred shares.
|
|
|
| ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
We presently lease approximately 13,000 square feet of office space in Mayfield Heights, Ohio.
This space is used for our executive offices and U.S. operations. In addition, we have U.S. based
operations in Bryan, Texas, where we lease approximately 6,000 square feet of office space. We
also lease approximately 17,000 square feet of office space in Bonn, Germany for our European
operations. We believe that our facilities are suitable and adequate for the current and
anticipated conduct of our operations.
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS |
From time to time, we are a party to various lawsuits arising in the ordinary course of
business. We do not believe that the outcome of any current such litigation will have a material
adverse effect on our results of operations or financial condition.
11
|
|
|
| ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year ended December 31, 2005.
|
|
|
| ITEM 4A. |
|
EXECUTIVE OFFICERS OF THE COMPANY* |
The name, age and positions of each of the Company’s executive officers, as of February 28,
2006, are as follows:
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
Dr. Jeffrey A. Green
|
|
|
50 |
|
|
President, Chief Executive Officer and Director |
Terry C. Black
|
|
|
48 |
|
|
Vice President of Finance, Chief Financial
Officer, Treasurer and Assistant Secretary |
Marc J. Shlaes
|
|
|
51 |
|
|
Vice President of Product Strategy |
Dr. Wolfgang Summa
|
|
|
41 |
|
|
Vice President of Global Operations |
Jim Bob Ward
|
|
|
45 |
|
|
Vice President of eClinical Development |
|
|
|
| * |
|
Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. |
Jeffrey A. Green, Pharm.D., FCP. Dr. Green is our founder and has served as our President,
Chief Executive Officer and a Director since March 1992. Prior to joining us in 1992, Dr. Green
served as an Assistant Professor of Medicine and Radiology at Case Western Reserve University,
Cleveland, Ohio. During his tenure at Case Western Reserve University, Dr. Green established and
directed the Cardiovascular Clinical Pharmacology Research Program at University Hospitals of
Cleveland, and was responsible for directing over 90 individual investigations during his tenure.
Dr. Green has authored over 90 publications and has been an invited speaker at more than 170
national meetings.
Terry C. Black, MBA, CPA. Mr. Black has served as our Vice President of Finance and Chief
Financial Officer since June 1994 and has served as our Treasurer and Assistant Secretary since
January 1996. Prior to joining us, Mr. Black served in a variety of financial and accounting
positions within the insurance replacement rental car industry.
Marc J. Shlaes, BB. Mr. Shlaes has served as our Vice President of Product Strategy since
February 2006. Mr. Shlaes is responsible for the continuing innovation of our product solutions.
From December 2000 through January 2006, Mr. Shlaes served as our Vice President of Research and
Development. Mr. Shlaes has been employed by us since 1998. Prior to joining us, Mr. Shlaes
served in a variety of positions in the software development and delivery industry.
Wolfgang Summa, PhD., MSc. Dr. Summa has served as our Vice President of Global Operations
since December 2000. Dr. Summa is responsible for our operational strategy including delivery of
our software to customers. Dr. Summa has been employed by us since 1998. Prior to joining us, Dr.
Summa served in various research positions within the EDC industry.
Jim Bob Ward MS. Mr. Ward has been our Vice President of eClinical Development since February
2006. Mr. Ward is responsible for the continuing development of our DATATRAK eClinical™ product
suite. Mr. Ward is the former President and Chief Executive Officer of ClickFind. From 2000
through January 2005, while employed at ClickFind, Mr. Ward developed the workflow and clinical
research applications that make up the DATATRAK eClinical™ product suite.
12
PART II
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON SHARES AND RELATED SHAREHOLDER MATTERS |
Our common shares are traded on The Nasdaq SmallCap Market under the symbol “DATA.”
Our common shares were initially offered to the public on June 11, 1996 at a stock split
adjusted price of $9.00 per share and commenced trading on Nasdaq on that date. On July 20, 2005,
our Board of Directors approved a three-for-two share split that was distributed in the form of a
50% share dividend. Our shareholders of record at the close of business on August 15, 2005
received one additional Common Share for every two common shares held on that date. The new common
shares were distributed on or around August 31, 2005 and began trading ex-dividend on September 1,
2005. We have restated all prior reported common share and per share amounts as if the share split
had occurred at the beginning of the earliest period being reported. The following table sets
forth, for the years ended December 31, 2005 and 2004, the high and low sale prices per common
share, as reported by Nasdaq. These prices do not include retail markups, markdowns or
commissions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| 2005 |
|
|
|
|
|
High |
|
Low |
First Quarter |
|
|
|
|
|
$ |
14.47 |
|
|
$ |
6.97 |
|
Second Quarter |
|
|
|
|
|
$ |
12.99 |
|
|
$ |
9.33 |
|
Third Quarter |
|
|
|
|
|
$ |
16.00 |
|
|
$ |
8.43 |
|
Fourth Quarter |
|
|
|
|
|
$ |
12.74 |
|
|
$ |
8.48 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| 2004 |
|
|
|
|
|
High |
|
Low |
First Quarter |
|
|
|
|
|
$ |
6.77 |
|
|
$ |
4.06 |
|
Second Quarter |
|
|
|
|
|
$ |
8.81 |
|
|
$ |
6.05 |
|
Third Quarter |
|
|
|
|
|
$ |
8.81 |
|
|
$ |
6.13 |
|
Fourth Quarter |
|
|
|
|
|
$ |
8.20 |
|
|
$ |
6.53 |
|
On February 28, 2006, the last sale price of our common shares as reported by Nasdaq was $7.50
per share. As of February 28, 2006, we had 86 shareholders of record.
We have never declared or paid cash dividends on our common shares. Any determination to pay
cash dividends in the future will be at the discretion of our Board of Directors after taking into
account various factors, including our financial condition, results of operations, current and
anticipated cash needs and plans for expansion.
13
|
|
|
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
(In thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
15,735 |
|
|
$ |
11,305 |
|
|
$ |
7,052 |
|
|
$ |
4,721 |
|
|
$ |
2,246 |
|
Direct costs |
|
|
3,789 |
|
|
|
2,634 |
|
|
|
1,622 |
|
|
|
1,804 |
|
|
|
1,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,946 |
|
|
|
8,671 |
|
|
|
5,430 |
|
|
|
2,917 |
|
|
|
466 |
|
Selling, general and administrative expenses |
|
|
10,025 |
|
|
|
7,229 |
|
|
|
5,551 |
|
|
|
7,893 |
|
|
|
7,210 |
|
Special items |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
364 |
|
|
|
— |
|
Depreciation and amortization |
|
|
748 |
|
|
|
651 |
|
|
|
937 |
|
|
|
1,122 |
|
|
|
949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,173 |
|
|
|
791 |
|
|
|
(1,058 |
) |
|
|
(6,462 |
) |
|
|
(7,693 |
) |
Other income, net |
|
|
182 |
|
|
|
35 |
|
|
|
14 |
|
|
|
71 |
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,355 |
|
|
|
826 |
|
|
|
(1,044 |
) |
|
|
(6,391 |
) |
|
|
(7,354 |
) |
Income tax (benefit) expense |
|
|
(1,183 |
) |
|
|
9 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,538 |
|
|
$ |
817 |
|
|
$ |
(1,048 |
) |
|
$ |
(6,391 |
) |
|
$ |
(7,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: basic |
|
$ |
0.25 |
|
|
$ |
0.09 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of basic net
income (loss) per share |
|
|
10,204 |
|
|
|
9,149 |
|
|
|
8,348 |
|
|
|
7,856 |
|
|
|
4,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: diluted |
|
$ |
0.22 |
|
|
$ |
0.08 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of diluted net
income (loss) per share |
|
|
11,386 |
|
|
|
10,237 |
|
|
|
8,348 |
|
|
|
7,856 |
|
|
|
4,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
|
(In thousands, except per share data) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term
investments |
|
$ |
9,363 |
|
|
$ |
7,919 |
|
|
$ |
4,261 |
|
|
$ |
2,244 |
|
|
$ |
4,912 |
|
Working capital |
|
|
10,796 |
|
|
|
8,575 |
|
|
|
3,468 |
|
|
|
1,380 |
|
|
|
4,129 |
|
Total assets |
|
|
16,107 |
|
|
|
11,941 |
|
|
|
6,377 |
|
|
|
5,306 |
|
|
|
7,634 |
|
Long-term liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
162 |
|
Accumulated deficit |
|
|
(28,425 |
) |
|
|
(30,964 |
) |
|
|
(31,781 |
) |
|
|
(30,732 |
) |
|
|
(24,341 |
) |
Total shareholders’ equity |
|
|
13,697 |
|
|
|
10,117 |
|
|
|
4,601 |
|
|
|
3,231 |
|
|
|
5,755 |
|
Book value per common share |
|
$ |
1.33 |
|
|
$ |
1.02 |
|
|
$ |
0.51 |
|
|
$ |
0.41 |
|
|
$ |
1.17 |
|
Cash dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
We are an ASP that provides EDC and other services to companies in the clinical
pharmaceutical, biotechnology, CRO and medical device research industries. We assist our customers
in accelerating the completion of clinical trials by streamlining the collection of data relating
to clinical trials, and improving the overall quality of the clinical trial data collected.
The discussion that follows highlights our business conditions and certain financial
information. This discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
14
Approximately 58% of our assets, or $9,363,000, is held in cash, cash equivalents and
short-term investments. During 2005 and 2004, we recorded operating income for the first time
since commencing EDC operations in 1997. We are continuing to develop and commercialize our
business, and anticipate that our operating results will fluctuate significantly from period to
period.
We use a technology platform that consists of Windows™ compatible software and internet
hardware to provide EDC and other services to clinical trial sponsors and CROs. Our future success
is dependent on market acceptance of EDC in general, as an alternative to the traditional paper
method of collecting clinical trial data, and acceptance of our DATRAK EDC® and DATATRAK eClinical™
software products specifically.
At December 31, 2005, our backlog was $20,324,000 compared to backlog of $14,057,000 at
December 31, 2004. Our December 31, 2005 backlog consisted of 69 contracts with an average
remaining value of $295,000. At December 31, 2004, our backlog consisted of 58 contracts with an
average remaining value of $242,000. Our contracts in backlog at December 31, 2004 generated
$13,513,000 of revenue during 2005. If we have no delays or cancellations to the contracts in
backlog at December 31, 2005, we expect to convert approximately $11,200,000 of our December 31,
2005 backlog into revenue during 2006. Our contracts can be cancelled or delayed at anytime and,
therefore, our backlog, at any point in time, is not an accurate predictor of future levels of
revenue. As a result of our transactional and service-based business model combined with the
dynamic nature of the clinical trials market where changes in scope are common, backlog has
historically been an imprecise predictor of short-term revenue.
Critical Accounting Policies
In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About
Critical Accounting Policies,” we have identified the most critical accounting principles upon
which our financial status depends. Critical principles were determined by considering accounting
policies that involve the most complex or subjective decisions or assessments. The most critical
accounting policies were identified to be those related to revenue recognition, software
development costs and stock based compensation.
Revenue Recognition
Our contracts provide a fixed price for each component or service to be delivered, and revenue
is recognized as these components or services are delivered. We recognize revenue based on the
performance or delivery of the following specified services or components of our EDC contracts in
the manner described below:
| |
• |
|
Project management and data management (design, report and export) services are
recorded as revenue proportionally over the life of a contract as services are
performed, based on the contractual billing rate per hour for those services. |
| |
| |
• |
|
Data items revenue is earned based on a price per data unit as data items are
entered into our hosting facility. |
| |
| |
• |
|
Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program. |
| |
| |
• |
|
Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed. |
| |
| |
• |
|
Help desk revenue is recognized based on a monthly price per registered user
under the contract. |
Services provided by us that are in addition to those provided for in our contracts are billed
on a fee for service basis as services are completed. Costs associated with contract revenue are
recognized as incurred. Costs that are paid directly by our clients, and for which we do not bear
the risk of economic loss, are excluded from revenue. The termination of a standard contract will
not result in a material adjustment to the revenue or costs previously recognized.
15
In some instances, we offer volume discounts to customers over multiple contracts. We
estimate the volume discounts to be earned over the life the contracts to which the discount
applies. As a contract progresses, revenues are recorded using rates that reflect the anticipated
volume discount to be achieved by the customer. The termination of a contract subject to a volume
discount could result in a material adjustment to revenue previously recognized, in order to
reflect the true economic value of the contract at the time of cancellation. For the years ended
December 31, 2005 and December 31, 2004, we deferred $56,000 and $69,000 of revenue, respectively,
as a result of our contracts subject to volume discounts. No revenue was deferred in 2003 as a
result of volume discounts.
Software Development Costs
Development costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until technological feasibility
has been established. After technological feasibility is established, any additional costs are
capitalized in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed.” Such costs are amortized over the lesser of three years or the
economic life of the related product. We perform an annual review of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized amounts are not
recoverable based on the estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts are expensed.
Stock Based Compensation
We account for stock based compensation in accordance with Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” for stock options granted to employees
and directors. We follow the alternative fair value accounting provided for under SFAS No. 123,
“Accounting for Stock-Based Compensation” for stock options granted to non-employees. SFAS No.
148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” requires disclosure of
compensation expense under both APB No. 25 and SFAS No. 123. The following assumptions were used
to estimate the fair value for these options using the Black-Scholes option pricing model.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
| |
|
2005 |
|
2004 |
|
2003 |
Weighted average risk free interest rate |
|
|
4.2 |
% |
|
|
4.1 |
% |
|
|
4.3 |
% |
Weighted average volatility of the expected market
price of the common shares |
|
|
1.01 |
|
|
|
1.01 |
|
|
|
1.15 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted-average expected life of the option |
|
7 years |
|
8 years |
|
7 years |
Weighted-average fair value per share of options granted |
|
$ |
9.90 |
|
|
$ |
6.68 |
|
|
$ |
2.58 |
|
For purposes of pro forma disclosures, the estimated value of the options is amortized to
expense over the options’ vesting period.
16
The following table sets forth stock based compensation and pro forma information for each
period presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income (loss) recorded |
|
$ |
2,538,000 |
|
|
$ |
817,000 |
|
|
$ |
(1,049,000 |
) |
Plus: stock compensation expense recognized |
|
|
66,000 |
|
|
|
40,000 |
|
|
|
68,000 |
|
Less: stock compensation expense that would have
been recognized under SFAS No. 123 |
|
|
894,000 |
|
|
|
736,000 |
|
|
|
634,000 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
1,710,000 |
|
|
$ |
121,000 |
|
|
$ |
(1,615,000 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic income (loss) per share |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income (loss) per share |
|
$ |
0.15 |
|
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
On December 16, 2004, the FASB issued SFAS No. 123(Revised 2004), “Share-Based Payment,” which
is a revision of SFAS No.123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)
supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach
in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure will no longer
be an alternative. On April 14, 2005, the U.S. Securities and Exchange Commission (“SEC”)
announced a deferral of the effective date of SFAS 123(R) for calendar year-end companies until
January 1, 2006.
As permitted by SFAS No. 123, we currently account for share based payments to employees using
APB No. 25, and as such, generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)’s fair value method may have a significant impact on our
results of operations, although it will have no impact on our overall financial position. We will
adopt SFAS No. 123(R) on January 1, 2006. We will adopt SFAS No. 123 using the “modified
prospective” method in which compensation cost is recognized beginning January 1, 2006 based on the
requirements of SFAS No. 123(R) for all share based payments granted after the effective date, and
based on the requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123(R) that remain unvested at the effective date. We have chosen to
use the Black-Scholes option valuation model in valuing stock options granted prior to January 1,
2006, and will continue to use this valuation model for options granted after the effective date of
SFAS No. 123(R). The adoption of SFAS 123(R) will increase our operating expenses by approximately
$1,250,000 in the aggregate over the four year period beginning in January 2006 through December
2009 for options that remain unvested as of January 1, 2006. During the year ending December 31,
2006, we expect to record approximately $500,000 of stock compensation expense, as a result of the
adoption SFAS No. 123(R). The full impact of adoption of SFAS No. 123(R) cannot be predicted at
this time because it will depend on levels of share based payments in the future; however, at this
time we do not anticipate granting any additional stock options.
Income Taxes
The Company follows SFAS No. 109, “Accounting for Income Taxes.” This accounting standard
requires that the liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the differences between the
financial reporting basis and the tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that apply in the periods in which the deferred tax asset or liability
is expected to be realized or settled. A valuation allowance is provided for deferred tax assets
for which realization currently is not certain. Quarterly income taxes are recorded at the
statutory rate, based on annual forecasted income.
The Company has substantial net operating loss carryforwards from prior years. Until 2005,
the existence of operating losses provided sufficient negative evidence under SFAS No. 109,
requiring a full valuation allowance against DATATRAK’s deferred tax assets. This situation
changed in 2005, as the
17
Company realized taxable income of approximately $1,900,000 on a cumulative basis over the
past three years. Given DATATRAK’s ability to generate these profits, management now believes that
a full valuation allowance on DATATRAK’s deferred tax assets is no longer necessary. However,
because the EDC market is still developing, it is difficult to predict taxable income very far into
the future. Therefore, the reduction in the valuation allowance of $1,200,000 recorded in 2005
reflects estimates of the next three year’s taxable income based on 2005 actual results, with
adjustments for known changes and no assumptions for growth. The reduction in the deferred tax
asset valuation allowance is based on historical results and should not be viewed as an estimate of
future earnings.
Beginning in the first quarter of 2006, DATATRAK will record a tax provision at the statutory
rate against quarterly pre-tax income. An evaluation will be made at each annual reporting period
regarding the continuing need for a valuation allowance, and appropriate adjustments to the
valuation allowance will be made at such time.
Results of Operations
Despite the slow growth of the EDC market, our revenue has grown from $7,052,000 in 2003 to
$11,305,000 in 2004 and $15,735,000 in 2005. In conjunction with the growth in revenue, our
operating expenses increased to $10,514,000 in 2004 and $14,562,000 in 2005. Personnel costs
represented approximately 55.0%, or $5,813,000, of our operating costs during 2004 and
approximately 49.0%, or 7,083,000, of our operating costs during 2005. We had approximately 80
employees at December 31, 2004 and approximately 90 employees at December 31, 2005. Our continued
growth in revenue allowed us to record operating income in the amount of $791,000 and $1,173,000
for the years ended December 31, 2004 and December 31, 2005, respectively.
During the second half of 2002, we took steps to reduce our annual operating costs, primarily
through reductions in personnel costs. These cost cutting measures enabled us to reduce our
personnel costs to $4,299,000 and our total operating expenses to $8,110,000 during 2003. At
December 31, 2003 we had approximately 65 employees. Our growth in revenue together with the
decrease in our operating expenses allowed us to reduce our net operating loss to $1,058,000 in
2003 compared to $6,462,000 in 2002.
The following table shows, for the periods indicated, selected items from our Consolidated
Statements of Operations, expressed as a percentage of revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Direct costs |
|
|
24.1 |
|
|
|
23.3 |
|
|
|
23.0 |
|
Gross profit |
|
|
75.9 |
|
|
|
76.7 |
|
|
|
77.0 |
|
Selling, general and administrative expenses |
|
|
63.7 |
|
|
|
63.9 |
|
|
|
78.7 |
|
Depreciation and amortization |
|
|
4.8 |
|
|
|
5.8 |
|
|
|
13.3 |
|
Income (loss) from operations |
|
|
7.4 |
|
|
|
7.0 |
|
|
|
(15.0 |
) |
Other income, net |
|
|
1.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Net income (loss) before income taxes |
|
|
8.6 |
|
|
|
7.3 |
|
|
|
(14.8 |
) |
Income tax (benefit) expense |
|
|
(7.5 |
) |
|
|
0.1 |
|
|
|
0.1 |
|
Net income (loss) |
|
|
16.1 |
|
|
|
7.2 |
|
|
|
(14.9 |
) |
Year ended December 31, 2005 compared with year ended December 31, 2004
Revenue for the year ended December 31, 2005 increased by 39.2% to $15,735,000, compared to
$11,305,000 for the year ended December 31, 2004. During the year ended December 31, 2005, we
recorded revenue related to 81 contracts compared to 69 contracts during 2004. For the year ended
December 31, 2005, $13,513,000 of revenue was the result of contracts that were in backlog at
December 31, 2004 and $2,222,000 was the result of new business. For the year ended December 31,
2004,
18
$9,402,000 of revenue was generated from contracts that were in backlog at December 31, 2003
and $1,903,000 of revenue was the result of new business.
Direct costs of revenue, mainly personnel costs, were $3,789,000 and $2,634,000 during the
years ended December 31, 2005 and 2004, respectively. Additional staff and other payroll cost
increases accounted for $574,000 of the $1,155,000 increase in 2005. Third party license fees, as
a result of our license agreements with Microsoft and SAS increased by $444,000 during 2005. Other
direct costs, which are primarily travel and other costs billed directly to our customers,
increased by $137,000 during the year ended December 31, 2005. The increase in staff was
necessitated by the growth in revenue and the increase in the number of contracts we have been
managing over the past year. Our gross margin decreased to 75.9% for the year ended December 31,
2005 compared to 76.7% for the year ended December 31, 2004.
Selling, general and administrative (“SG&A”) expenses include all administrative personnel
costs, business and software development costs, and all other expenses not directly chargeable to a
specific contract. These expenses increased by 38.7% to $10,025,000 from $7,229,000 for the years
ended December 31, 2005 and 2004, respectively. Additional staff, other payroll cost increases and
our sales incentive and operational performance bonus plans accounted for $695,000 of the
$2,796,000 increase. Expenses related to equipment maintenance and software licensing increased
$320,000 compared to the prior year. The increase in these expenses is related to the growth of
our information technology infrastructure, and is necessary to ensure that our IT infrastructure is
properly maintained and licensed. Outside professional service fees, consisting of accounting and
auditing, legal and consulting costs, increased by $1,302,000 during 2005. Of this $1,302,000
increase, $558,000 was related to our Sarbanes-Oxley compliance efforts, $236,000 was due to
non-capitalized software development costs associated with development and modification of internal
operating systems and the remainder was due to initiatives related to enhancing our sales and
marketing efforts and other corporate initiatives. During the year ended December 31, 2005,
$105,000 of expense was recorded as a result of our previously disclosed new director compensation
program. Cost increases in all other areas, primarily related to our overall growth, resulted in
additional expenses of $374,000 during the year ended December 31, 2005.
Depreciation and amortization expense increased to $748,000 during the year ended December 31,
2005, from $651,000 during the year ended December 31, 2004. The increase is due to our increased
level of capital spending over the past fifteen months. From October 1, 2004 through December 31,
2005, we had capital expenditures totaling $1,758,000. This compares to $761,000 of capital
expenditures in the period from June 1, 2003 through September 30, 2004.
Other income for the year ended December 31, 2005 totaled $182,000, compared to $35,000 for
the year ended December 31, 2004. Other income includes interest income, which increased by
$200,000. The increase in interest income was the result of the our increase in cash and cash
equivalents primarily due to our December 2004 private placement of common shares and positive cash
flow during 2005 along with increasing interest rates on its investments.
During 2005, we recorded an income tax benefit of $1,183,000. This was the result of a
$1,200,000 decrease in our deferred tax asset valuation allowance. The decrease in our deferred
tax asset valuation allowance was offset by U.S. federal alternative minimum tax of $17,000. Due
to our net loss carryforwards, we had no state or local income tax expense in 2005. At December
31, 2005 we had a net operating loss carryforward of $18,869,000 for United States income tax
purposes. An equity transaction completed on January 7, 2002 has limited our net operating loss
carryforwards, incurred prior to that date, to a maximum amount of $967,000 per year, under Section
382 of the Internal Revenue Code. All of our United States net operating loss carryforwards will
begin expiring in the year 2018 and will be fully expired in the year 2022. The Company also has a
net operating loss carryforward of approximately 8,077,000 Euro for German income tax purposes with
no expiration date. For the three years ended December 31, 2005, we realized taxable income of
approximately $1,900,000 on a cumulative basis. Given our ability to generate profits over the
past three years, we believe that a full valuation allowance on our deferred tax assets is no
longer necessary. However, because the EDC market is still developing, it is difficult to predict
taxable income very far into the future. Therefore, the reduction in the valuation allowance of
$1,200,000 recorded in 2005 reflects estimates of the next three year’s taxable income based on
2005 actual results,
19
with adjustments for known changes and no assumptions for growth; and therefore should not be
viewed as an estimate of future earnings. At December 31, 2005, a valuation allowance of
approximately $9,290,000 remains against our deferred tax assets, which consist primarily of net
operating loss carryforwards for both U.S. and non-U.S income taxes. Of the $9,290,000 total
allowance, approximately $5,550,000 is recorded against the portion of our deferred tax assets that
represent net operating loss carryforwards for U.S income taxes, and approximately $3,480,000 is
recorded against the portion of our deferred tax assets that represent net operating loss
carryforwards for German income taxes.
Year ended December 31, 2004 compared with year ended December 31, 2003
Revenue for the year ended December 31, 2004 increased by 60.3% to $11,305,000, compared to
$7,052,000 for the year ended December 31, 2003. Included in revenue for the year ended December
31, 2003, is a one-time fee of $150,000. The $150,000 fee relates to consulting work performed for
a current customer that was outside of a traditional EDC contract. During the year ended December
31, 2004, we recorded revenue related to 69 contracts compared to 56 contracts during 2003. For
the year ended December 31, 2004, $9,402,000 of revenue was the result of contracts that were in
backlog at December 31, 2003 and $1,903,000 was the result of new business. For the year ended
December 31, 2003, $4,700,000 of revenue was generated from contracts that were in backlog at
December 31, 2002 and $2,352,000 was the result of new business.
Direct costs of revenue were $2,634,000 and $1,622,000 during the years ended December 31,
2004 and 2003, respectively. Additional staff and other payroll cost increases accounted for
$708,000 of the $1,012,000 increase in 2004. Third party license fees, as a result of our license
agreements with Microsoft and SAS, increased by $163,000 during 2004. Other direct costs, which
are primarily travel and other costs billed directly to our customers, increased by $141,000 during
the year ended December 31, 2004. The increase in staff was necessitated by the growth in revenue
and the increase in the number of contracts being managed. Our gross margin decreased to 76.7% for
the year ended December 31, 2004 compared to 77.0% for the year ended December 31, 2003. The
$150,000 one-time revenue item caused a 0.5% increase in gross margin in 2003.
SG&A expenses increased by 30.2% to $7,229,000 from $5,551,000 for the years ended December
31, 2004 and 2003, respectively. Additional staff, other payroll cost increases and our new sales
incentive and operational and corporate performance bonus plans accounted for $806,000 of the
$1,678,000 increase. Expenses related to equipment maintenance and software licensing increased
$168,000 compared to the prior year. The increase in these expenses is related to the growth of
our information technology infrastructure, and is necessary to ensure that our IT infrastructure is
properly maintained. Consulting costs, primarily associated with non-capitalized software
development and testing, increased by $321,000 during 2004. Cost increases in other areas,
primarily due to the increased marketing of DATATRAK EDC®, and development of the Company’s
corporate infrastructure, resulted in additional expenses of $383,000 during the year ended
December 31, 2004.
Depreciation and amortization expense fell to $651,000 during the year ended December 31,
2004, from $937,000 during the year ended December 31, 2003. The decrease was the result of aging
assets, whose replacement was deferred to future periods, not being replaced as indicated by the
low level of capital expenditures during 2003 of $184,000. During 2004, we increased capital
expenditures to a total of $1,054,000.
Other income for the year ended December 31, 2004 totaled $35,000, compared to $14,000 for the
year ended December 31, 2003. Other income includes interest income, which increased $17,000 for
the year ended December 31, 2004 compared to December 31, 2003, primarily due to increasing
interest rates during the year.
During 2004, we provided for U.S. federal alternative minimum tax of $9,000. Due to our net
loss carryforwards, we had no other federal, state or local income tax expense in 2004.
20
Liquidity and Capital Resources
Our principal sources of cash have been cash flow from operations and proceeds from the sale
of equity securities. Our investing activities primarily reflect capital expenditures and
purchases and maturities of short-term investments. In December 2004, we received approximately
$4,376,000 in net proceeds from the completion of a private placement of our common shares.
Contracts with our customers usually require a portion of the contract amount to be paid at
the time the contract is initiated. Additional payments are generally received monthly as work on
the contract progresses. We record all amounts received as a liability (deferred revenue) until
work has been completed and revenue is recognized. Cash receipts do not necessarily correspond to
costs incurred or revenue recognized. We typically receive a low volume of large-dollar receipts.
Our accounts receivable will fluctuate due to the timing and size of cash receipts. Our
contracting and collection practices are designed to maintain an average collection period for
accounts receivable of one to three months. Any increase in our normal collection period for
accounts receivable could negatively impact our cash flow from operations and our working capital.
At December 31, 2005, our average collection period for accounts receivable was 56 days compared to
45 days at December 31, 2004. Accounts receivable (net of allowance for doubtful accounts) was
$2,854,000 at December 31, 2005 and $1,990,000 at December 31, 2004. Deferred revenue was
$1,027,000 at December 31, 2005 compared to $585,000 at December 31, 2004.
Cash and cash equivalents increased $2,175,000 during the year ended December 31, 2005. This
was the result of $1,717,000 provided by operating activities, $378,000 used in investing
activities and $992,000 provided by financing activities. Foreign currency fluctuations caused a
$156,000 decrease in cash and cash equivalents. Cash provided by operating activities was the
result of the Company’s net income of $2,538,000, plus non cash operating items of $766,000. This
$3,304,000 increase along with the $442,000 increase in deferred revenue was offset by the $864,000
increase in accounts receivable, which was caused by our growth in revenue during 2005, and the
$1,200,000 increase in deferred tax assets. Changes in other current assets and liabilities caused
cash from operating activities to increase by $35,000. Investing activities included net cash
proceeds of $905,000 from purchases and maturities of short-term investments and $1,283,000 used to
purchase property and equipment. Financing activities consist of net proceeds from the issuance of
common shares resulting from exercises of common share options offset by costs associated with the
Company’s private placement of common shares and warrants to purchase its common shares.
At December 31, 2005, we had working capital of $10,796,000, and our cash, cash equivalents
and short-term investments totaled $9,363,000. Our working capital has increased by $2,221,000
since December 31, 2004. The increase was the result of the $2,175,000 increase in our cash, cash
equivalents, due to our cash flow from operations and sales of common shares as a result of the
exercise of common share options and warrants. The current portion of our deferred tax assets
increased by $287,000. Changes in other current assets and liabilities caused working capital to
decrease by $241,000.
We are party to a lease agreement that requires us to maintain a restricted cash balance. Our
restricted cash balance was $70,000 at December 31, 2005.
We have established a line of credit, with a bank, that allows us to borrow up to a certain
percentage of our investments, as determined by the type of investment, held at the bank. The line
of credit bears interest at rates based on the prime rate, and is payable on demand. We had no
amounts outstanding against this line of credit at December 31, 2005.
The terms of our recently completed acquisition of ClickFind required us to pay approximately
$4,000,000 of cash to the former shareholders of ClickFind in February 2006. We also issued notes
payable to the former shareholders of ClickFind in the amount of $4,000,000 that bear interest at
prime plus 1.0%, and are payable in installments of $500,000, $500,000 and $3,000,000 on February
1, 2007, 2008 and 2009, respectively. We are responsible for the costs of integrating ClickFind’s
operations with our current operations, and all future operating costs of ClickFind. During the
twelve months ended December
21
31, 2005, Click Find recorded revenue of $1,346,000 and incurred operating costs of $1,093,000. We
intend to fund these additional costs with our cash and cash equivalents, maturities of short-term
investments, cash flow from operations and borrowings against our line of credit.
We intend to continue to fund the enhancement and testing of the DATATRAK EDC® software, as
well invest in the development, enhancement and testing of DATATRAK eClinical™. Our operations and
the EDC market are still in a developmental stage. We have experienced revenue growth; and
anticipate positive cash flow from operations during 2006 as we continue to build our customer
base, increase our backlog and convert our current backlog into revenue. We anticipate capital and
related expenditures of approximately $1,900,000 for the twelve months ending December 31, 2006,
for the continued commercialization and enhancement of our two clinical trial product offerings as
well as improvements to our internal operating systems. Of the $1,900,000 total, $1,100,000 is
required to maintain and upgrade current systems. The remaining $800,000 is in conjunction with
the anticipated growth of our business, and is to some extent discretionary. Additionally, we
anticipate spending approximately $1,400,000 for maintenance of our information technology
infrastructure during 2006.
Our research and development expenditures have historically been for the continued enhancement
of and modifications to our DATATRAK EDC® software. For the twelve months ended December 31, 2005,
we expensed approximately $1,600,000 for research and development. During 2006, we anticipate that
our research and development expenditures will increase by approximately $1,500,000 to $2,000,000
compared to 2005. Our 2006 research and development expenditures will be for the continued
enhancement and modifications to our DATATRAK EDC® and DATATRAK eClinical™ software solutions, the
integration with SAS® Drug Development software and the development of our DataUnifyer™ product.
We expect to fund our working capital requirements from existing cash and cash equivalents,
maturities of short-term investments, cash flow from operations and borrowings against our line of
credit. We believe that, with the continued anticipated growth in revenue, our cash and cash
equivalents, maturities of short-term investments and cash flow from operations will be sufficient
to meet our working capital and capital expenditure requirements for the foreseeable future.
However, we may need to raise additional funds to offset delays or cancellations of contacts,
support expansion, respond to competitive pressures, acquire complementary businesses or technology
or take advantage of unanticipated opportunities. We may raise additional funds by selling debt or
equity securities, by entering into strategic relationships or through other arrangements.
Additional capital may not be available on acceptable terms, if at all. To the extent that
additional equity capital is raised, it could have a dilutive effect on our existing shareholders.
Contractual Obligations
The table below shows our contractual cash obligations, expressed in thousands, at December
31, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
| Contractual Obligations |
|
Total |
|
|
1 year |
|
|
1 – 3 years |
|
|
3 – 5 years |
|
|
5 years |
|
Operating leases |
|
$ |
2,787 |
|
|
$ |
541 |
|
|
$ |
1,066 |
|
|
$ |
712 |
|
|
$ |
468 |
|
Purchase obligations |
|
|
150 |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
2,937 |
|
|
$ |
691 |
|
|
$ |
1,066 |
|
|
$ |
712 |
|
|
$ |
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our purchase obligations consist of the final $150,000 payment, which was made in January
2006, to SAS for access to the SAS® Drug Development software.
Our recent acquisition of ClickFind resulted in a $4,000,000 purchase obligation that was paid
in February 2006, and $4,000,000 in debt obligations that will be paid in installments of $500,000,
$500,000
22
and $3,000,000 on February 1, 2007, 2008 and 2009, respectively. These obligations are not
included in our contractual obligations as of December 31, 2005.
Inflation
To date, we believe that the effects of inflation have not had a material adverse effect on
our results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange
rates since we fund our operations through short-term investments and have business transactions in
Euros. A summary of our primary market risk exposures is presented below.
Interest Rate Risk
We have fixed income investments consisting of cash equivalents and short-term investments,
which may be affected by changes in market interest rates. We do not use derivative financial
instruments in our investment portfolio. We place our cash equivalents and short-term investments
with high-quality financial institutions, limit the amount of credit exposure to any one
institution and have established investment guidelines relative to diversification and maturities
designed to maintain safety and liquidity. Investments are reported at amortized cost, which
approximates fair value. A 1.0% change in interest rates during the year ended December 31, 2005
would have resulted in an $87,000 change in our interest income during the year.
Foreign Currency Risk
Our foreign results of operations are subject to the impact of foreign currency fluctuations
through both foreign currency transaction and foreign currency translation adjustments. We manage
our risk to foreign currency transaction adjustments by maintaining foreign currency bank accounts
in currencies in which we regularly transact business. We do not currently hedge against the risk
of exchange rate fluctuations.
Our financial position and results of operations are impacted by translation adjustments
caused by the conversion of foreign currency accounts and operating results into U.S. dollars for
financial reporting purposes. A 1.0% fluctuation in the exchange rate between the U.S. dollar and
the Euro at December 31, 2005 would have resulted in a $20,000 change in the foreign currency
translation amount recorded on our balance sheet, due to foreign currency translations. A 1.0%
fluctuation in the average exchange rate between the U.S. dollar and the Euro for the year ended
December 31, 2005 would have resulted in a $42,000 change in our net income for the year ended
December 31, 2005, due to foreign currency translations. During 2005 the average exchange rate
between the Euro and the U.S. dollar increased by approximately 0.1%. The conversion of our
foreign operations into U.S. dollars upon consolidation resulted in net income that was
approximately $5,000 lower than would have been recorded had the exchange rate between the Euro and
the U.S. dollar remained consistent with 2004 rates.
23
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
| |
|
|
|
|
| |
|
|
Page |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2005 and 2004 |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2005 |
|
|
F-4 |
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity for each of the three
years in the period ended December 31, 2005 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2005 |
|
|
F-6 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F-7 |
|
Quarterly results of operations for the year ended December 31, 2005 are included in Note 13
of the Consolidated Financial Statements.
|
|
|
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
| ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the chief executive officer and chief financial officer, of the
design and operation of the Company’s disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-14(e)) as of the end of the period covered by this Annual Report on
Form 10-K. Based upon that evaluation, the Company’s management, including the chief executive
officer and chief financial officer, have concluded that, as of December 31, 2005, the Company’s
disclosure controls and procedures were effective to ensure that information required to be
disclosed by the Company in the reports it files and submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
The management of DATATRAK International, Inc. (“DATATRAK” or the “Company”) is responsible
for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. DATATRAK’s internal
control system was designed to provide reasonable assurance to the Company’s management and Board
of Directors regarding the reliability of financial reporting and the preparation and fair
presentation of financial statements issued for external purposes in accordance with U.S. generally
accepted accounting principles.
24
All internal control systems, no matter how well designed, have inherent limitations and may
not prevent or detect misstatements. Therefore, even those systems determined to be effective can
only provide reasonable assurance with respect to financial reporting reliability and financial
statement preparation and presentation. DATATRAK’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2005. In making our
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of
the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment we
believe that, as of December 31, 2005, the Company’s internal control over financial reporting is
effective, at the reasonable assurance level, based on the COSO criteria.
DATATRAK’s independent registered public accounting firm, Ernst & Young LLP, has issued an
audit report on our assessment of the Company’s internal control over financial reporting which
immediately follows this report.
Report of Independent Registered Public Accounting Firm On
Internal Control Over Financial Reporting
The Board of Directors and Shareholders
DATATRAK International, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, that DATATRAK International, Inc. maintained effective
internal control over financial reporting as of December 31, 2005, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). DATATRAK International, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to
25
the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that DATATRAK International, Inc. maintained effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, DATATRAK International Inc.
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of DATATRAK International, Inc. as
of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2005 of
DATATRAK International, Inc. and our report dated February 13, 2006 expressed an unqualified
opinion thereon.
ERNST & YOUNG LLP
Cleveland, Ohio
February 13, 2006
Changes in Internal Control
There were no changes in the Company’s internal control over financial reporting that occurred
during our last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions “Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be used in
connection with our Annual Meeting of Shareholders to be held on June 8, 2006 (the “2006 Proxy
Statement”) is incorporated herein by reference. Information regarding our executive officers is
included as Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to
Item 401(b) of Regulation S-K.
We have adopted a code of ethics, as such phrase is defined in Item 406 of Regulation S-K,
that applies to all of our directors, officers and employees and all employees of our subsidiaries.
The code of ethics, entitled “Code of Business Conduct and Ethics,” has been filed as an exhibit
hereto.
Additionally, we have adopted a code of ethics, as such phrase is defined in Item 406 of
Regulation S-K, that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions. The code of
ethics, entitled “Financial Code of Ethics,” has been filed as an exhibit hereto.
26
|
|
|
| ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information appearing under the captions “Compensation of Directors,” “Executive Officer
Compensation” and “Compensation Committee Interlocks and Insider Participation” in the 2006 Proxy
Statement is incorporated herein by reference.
|
|
|
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The information appearing under the captions “Executive Officer Compensation” and “Security
Ownership of Certain Beneficial Holders and Management” in the 2006 Proxy Statement is incorporated herein
by reference.
|
|
|
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
To
the extent applicable, the information appearing under the caption
“Certain Related Party Transactions”
in the 2006 Proxy Statement is incorporated herein by reference.
|
|
|
| ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information appearing under the caption “Independent Auditors” in the 2006 Proxy Statement
is incorporated herein by reference.
PART IV
|
|
|
| ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
See Item 8 of Part II of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules for the Company and its subsidiaries have been included in
the consolidated financial statements or the related footnotes, or such schedules are either
inapplicable or not required.
(a)(3) Exhibits
See the Index to Exhibits at page E-1 of this Annual Report on Form 10-K.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| |
|
|
|
|
|
|
|
|
|
|
|
DATATRAK INTERNATIONAL, INC. |
|
|
|
|
|
|
|
| |
|
|
/s/ Jeffrey A. Green |
|
|
|
|
|
|
|
|
|
Jeffrey A. Green |
|
|
|
|
President and Chief Executive Officer |
|
|
Date: March 13, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
|
|
Title |
| |
/s/ Jeffrey A. Green
|
|
|
|
President and Chief Executive Officer and Director |
| |
|
|
|
|
Jeffrey A. Green
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ Terry C. Black
|
|
|
|
Vice President of Finance, Chief Financial Officer and Treasurer and
Assistant Secretary |
| |
|
|
|
|
Terry C. Black
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
/s/ Timothy G. Biro
|
|
|
|
Director |
| |
|
|
|
|
Timothy G. Biro |
|
|
|
|
|
|
|
|
|
/s/ Seth B. Harris
|
|
|
|
Director |
| |
|
|
|
|
Seth B. Harris |
|
|
|
|
|
|
|
|
|
/s/ Robert M. Stote
|
|
|
|
Director |
| |
|
|
|
|
Robert M. Stote |
|
|
|
|
|
|
|
|
|
/s/ Jerome H. Kaiser
|
|
|
|
Director |
| |
|
|
|
|
Jerome H. Kaiser |
|
|
|
|
|
|
|
|
|
/s/ Mark J. Ratain
|
|
|
|
Director |
| |
|
|
|
|
Mark J. Ratain |
|
|
|
|
Date: March 13, 2006
28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
| |
|
Page |
DATATRAK International, Inc. and Subsidiaries |
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2 |
Consolidated Balance Sheets at December 31, 2005 and 2004
|
|
F-3 |
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 2005
|
|
F-4 |
Consolidated Statements of Shareholders’ Equity for each of the three
years in the period ended December 31, 2005
|
|
F-5 |
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2005
|
|
F-6 |
Notes to Consolidated Financial Statements
|
|
F-7 |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
DATATRAK International, Inc.
We have audited the accompanying consolidated balance sheets of DATATRAK International, Inc. and subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of DATATRAK International, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of DATATRAK International Inc.’s internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 13, 2006 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Cleveland, Ohio
February 13, 2006
F-2
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,407,431 |
|
|
$ |
2,232,276 |
|
Short-term investments |
|
|
4,955,491 |
|
|
|
5,686,957 |
|
Accounts receivable, net |
|
|
2,853,823 |
|
|
|
1,989,948 |
|
Deferred tax asset — current |
|
|
287,000 |
|
|
|
— |
|
Prepaid expenses and other current assets |
|
|
702,075 |
|
|
|
488,505 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
13,205,820 |
|
|
|
10,397,686 |
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Equipment |
|
|
4,902,894 |
|
|
|
5,299,820 |
|
Leasehold improvements |
|
|
618,409 |
|
|
|
614,507 |
|
|
|
|
|
|
|
|
|
|
|
5,521,303 |
|
|
|
5,914,327 |
|
Less accumulated depreciation |
|
|
3,642,899 |
|
|
|
4,491,563 |
|
|
|
|
|
|
|
|
|
|
|
1,878,404 |
|
|
|
1,422,764 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
69,976 |
|
|
|
80,611 |
|
Deferred tax asset |
|
|
913,000 |
|
|
|
— |
|
Deposit |
|
|
39,549 |
|
|
|
39,549 |
|
|
|
|
|
|
|
|
|
|
|
1,022,525 |
|
|
|
120,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,106,749 |
|
|
$ |
11,940,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
549,886 |
|
|
$ |
185,974 |
|
Accrued expenses |
|
|
832,860 |
|
|
|
1,052,301 |
|
Deferred revenue |
|
|
1,027,015 |
|
|
|
584,857 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,409,761 |
|
|
|
1,823,132 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Serial Preferred Shares, without par value; authorized
1,000,000 shares; none issued |
|
|
— |
|
|
|
— |
|
Common shares, without par value, authorized 25,000,000;
issued 13,613,161 shares as of December 31, 2005 and
13,223,791 shares as of December 31, 2004; outstanding
10,313,161 shares as of December 31, 2005 and 9,923,791
as of December 31, 2004 |
|
|
61,810,321 |
|
|
|
60,584,110 |
|
Treasury shares, 3,300,000 shares at cost |
|
|
(20,188,308 |
) |
|
|
(20,188,308 |
) |
Common share warrants |
|
|
711,872 |
|
|
|
711,872 |
|
Accumulated deficit |
|
|
(28,425,289 |
) |
|
|
(30,963,636 |
) |
Foreign currency translation |
|
|
(211,608 |
) |
|
|
(26,560 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
13,696,988 |
|
|
|
10,117,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
16,106,749 |
|
|
$ |
11,940,610 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenue |
|
$ |
15,734,745 |
|
|
$ |
11,305,112 |
|
|
$ |
7,052,158 |
|
Direct costs |
|
|
3,788,771 |
|
|
|
2,633,805 |
|
|
|
1,622,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,945,974 |
|
|
|
8,671,307 |
|
|
|
5,429,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
10,025,029 |
|
|
|
7,229,433 |
|
|
|
5,550,833 |
|
Depreciation and amortization |
|
|
748,358 |
|
|
|
650,961 |
|
|
|
936,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,172,587 |
|
|
|
790,913 |
|
|
|
(1,057,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
243,315 |
|
|
|
42,927 |
|
|
|
25,596 |
|
Interest expense |
|
|
— |
|
|
|
(203 |
) |
|
|
(6,701 |
) |
Other income (expense) |
|
|
(60,902 |
) |
|
|
(8,103 |
) |
|
|
(5,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,355,000 |
|
|
|
825,534 |
|
|
|
(1,044,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
(1,183,347 |
) |
|
|
8,500 |
|
|
|
4,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,538,347 |
|
|
$ |
817,034 |
|
|
$ |
(1,048,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
0.25 |
|
|
$ |
0.09 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
10,203,646 |
|
|
|
9,149,127 |
|
|
|
8,347,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
0.22 |
|
|
$ |
0.08 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
11,386,413 |
|
|
|
10,237,449 |
|
|
|
8,347,671 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Shares |
|
|
Treasury Shares |
|
|
Common Share Warrants |
|
|
|
|
|
|
Foreign |
|
|
|
|
| |
|
Number |
|
|
Stated |
|
|
Number |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Accumulated |
|
|
Currency |
|
|
|
|
| |
|
of Shares |
|
|
Amount |
|
|
of Shares |
|
|
Cost |
|
|
of Shares |
|
|
Cost |
|
|
Deficit |
|
|
Translation |
|
|
Total |
|
Balance at January 1, 2003 |
|
|
7,895,701 |
|
|
$ |
53,868,303 |
|
|
|
3,300,000 |
|
|
$ |
(20,188,308 |
) |
|
|
288,378 |
|
|
$ |
357,589 |
|
|
$ |
(30,732,049 |
) |
|
$ |
(74,918 |
) |
|
$ |
3,230,617 |
|
Private placement of common shares |
|
|
903,750 |
|
|
|
2,103,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,103,914 |
|
Issuance of common share warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,688 |
|
|
|
135,424 |
|
|
|
|
|
|
|
|
|
|
|
135,424 |
|
Exercise of common share options |
|
|
75,845 |
|
|
|
60,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,919 |
|
Exercise of common share warrants |
|
|
88,731 |
|
|
|
357,589 |
|
|
|
|
|
|
|
|
|
|
|
(288,378 |
) |
|
|
(357,589 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
Stock compensation |
|
|
45,000 |
|
|
|
68,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,271 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,307 |
|
|
|
50,307 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,048,621 |
) |
|
|
|
|
|
|
(1,048,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(998,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
9,009,027 |
|
|
|
56,458,996 |
|
|
|
3,300,000 |
|
|
|
(20,188,308 |
) |
|
|
37,688 |
|
|
|
135,424 |
|
|
|
(31,780,670 |
) |
|
|
(24,611 |
) |
|
|
4,600,831 |
|
Private placement of common shares |
|
|
729,470 |
|
|
|
3,628,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,628,717 |
|
Issuance of common share warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,399 |
|
|
|
643,823 |
|
|
|
|
|
|
|
|
|
|
|
643,823 |
|
Exercise of common share options |
|
|
166,544 |
|
|
|
328,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,824 |
|
Exercise of common share warrants |
|
|
18,750 |
|
|
|
127,375 |
|
|
|
|
|
|
|
|
|
|
|
(18,750 |
) |
|
|
(67,375 |
) |
|
|
|
|
|
|
|
|
|
|
60,000 |
|
Stock compensation |
|
|
|
|
|
|
40,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,198 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,949 |
) |
|
|
(1,949 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
817,034 |
|
|
|
|
|
|
|
817,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
815,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
9,923,791 |
|
|
|
60,584,110 |
|
|
|
3,300,000 |
|
|
|
(20,188,308 |
) |
|
|
160,337 |
|
|
|
711,872 |
|
|
|
(30,963,636 |
) |
|
|
(26,560 |
) |
|
|
10,117,478 |
|
Private placement of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Issuance of common share warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Exercise of common share options |
|
|
383,253 |
|
|
|
1,095,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095,103 |
|
Exercise of common share warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Stock compensation |
|
|
6,117 |
|
|
|
131,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,108 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(185,048 |
) |
|
|
(185,048 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,538,347 |
|
|
|
|
|
|
|
2,538,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,353,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
10,313,161 |
|
|
$ |
61,810,321 |
|
|
|
3,300,000 |
|
|
$ |
(20,188,308 |
) |
|
|
160,337 |
|
|
$ |
711,872 |
|
|
$ |
(28,425,289 |
) |
|
$ |
(211,608 |
) |
|
$ |
13,696,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-5
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,538,347 |
|
|
$ |
817,034 |
|
|
$ |
(1,048,621 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
748,358 |
|
|
|
650,961 |
|
|
|
936,958 |
|
Accretion of discount on investments |
|
|
(173,946 |
) |
|
|
(27,420 |
) |
|
|
(14,456 |
) |
Stock compensation |
|
|
131,108 |
|
|
|
40,198 |
|
|
|
68,271 |
|
Other |
|
|
60,902 |
|
|
|
18,203 |
|
|
|
6,330 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(863,875 |
) |
|
|
(1,211,706 |
) |
|
|
95,242 |
|
Prepaid expenses and other assets |
|
|
(213,570 |
) |
|
|
(318,756 |
) |
|
|
(8,227 |
) |
Deferred tax assets |
|
|
(1,200,000 |
) |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
247,596 |
|
|
|
280,564 |
|
|
|
(156,495 |
) |
Deferred revenue |
|
|
442,158 |
|
|
|
(312,281 |
) |
|
|
(4,371 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
1,717,078 |
|
|
|
(63,203 |
) |
|
|
(125,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash |
|
|
— |
|
|
|
23,979 |
|
|
|
138,388 |
|
Purchases of property and equipment |
|
|
(1,282,992 |
) |
|
|
(1,054,189 |
) |
|
|
(183,520 |
) |
Maturities of short-term investments |
|
|
11,500,000 |
|
|
|
7,536,021 |
|
|
|
3,729,612 |
|
Purchases of short-term investments |
|
|
(10,594,588 |
) |
|
|
(10,661,709 |
) |
|
|
(5,626,095 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(377,580 |
) |
|
|
(4,155,898 |
) |
|
|
(1,941,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Payments under capital lease obligation |
|
|
— |
|
|
|
(23,979 |
) |
|
|
(138,388 |
) |
Repayment, net, of notes receivable |
|
|
— |
|
|
|
803 |
|
|
|
3,132 |
|
Proceeds from issuance of shares, net of issuance costs |
|
|
(103,125 |
) |
|
|
4,375,665 |
|
|
|
2,239,338 |
|
Proceeds from exercise of stock options and warrants |
|
|
1,095,103 |
|
|
|
388,824 |
|
|
|
60,919 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
991,978 |
|
|
|
4,741,313 |
|
|
|
2,165,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
|
(156,321 |
) |
|
|
(17,271 |
) |
|
|
8,611 |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
2,175,155 |
|
|
|
504,941 |
|
|
|
106,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
2,232,276 |
|
|
|
1,727,335 |
|
|
|
1,620,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
4,407,431 |
|
|
$ |
2,232,276 |
|
|
$ |
1,727,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
— |
|
|
$ |
203 |
|
|
$ |
6,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for income taxes |
|
$ |
40,000 |
|
|
$ |
4,316 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid share issuance costs |
|
$ |
— |
|
|
$ |
103,125 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2005, 2004 and 2003
1. Accounting Policies
Description of Business
DATATRAK International, Inc. (“DATATRAK” or the “Company”) is an Application Service Provider
(“ASP”) that provides electronic data capture (“EDC”) and other services, which assist companies in
the clinical pharmaceutical, biotechnology, contract research organization (“CRO”) and medical
device research industries, to accelerate the completion of clinical trials. The Company’s
wholly-owned subsidiary, DATATRAK GmbH, provides the Company with various customer support services
and software development services. The Company’s other wholly-owned subsidiary, DATATRAK Inc., is
an inactive holding company with no employees that does not provide any services to the Company or
its customers.
Stock Split
On July 20, 2005 DATATRAK’s Board of Directors approved a three-for-two share split that was
distributed in the form of a 50% share dividend (the “Share Split”). The Company’s shareholders of
record at the close of business on August 15, 2005 received one additional common share for every
two common shares held on that date. The new common shares were distributed on or around August
31, 2005 and began trading ex- dividend on September 1, 2005. The Company has restated all prior
reported common share and per share amounts as if the share split had occurred at the beginning of
the earliest period being reported.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
DATATRAK’s contracts provide a fixed price for each component or service to be delivered, and
revenue is recognized as these components or services are delivered. DATATRAK recognizes revenue
based on the performance or delivery of the following specified services or components of its EDC
contracts in the manner described below:
| |
• |
|
Project management and data management (design, report and export) services are
recorded as revenue proportionally over the life of a contract as services are
performed, based on the contractual billing rate per hour for those services. |
| |
| |
• |
|
Data items revenue is earned based on a price per data unit as data items are
entered into DATATRAK’s hosting facility. |
| |
| |
• |
|
Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program. |
| |
| |
• |
|
Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed. |
| |
| |
• |
|
Help desk revenue is recognized based on a monthly price per registered user
under the contract. |
Services provided by DATATRAK that are in addition to those provided for in its contracts are
billed on a fee for service basis as services are completed. Costs associated with contract
revenue are recognized as incurred.
Costs that are paid directly by the Company’s clients, and for which the Company does not bear
the risk of economic
F-7
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
loss, are excluded from revenue. The termination of a standard contract will
not result in a material adjustment to the revenue or costs previously recognized.
In some instances, the Company offers volume discounts to customers over multiple contracts.
The Company estimates the volume discounts to be earned over the life the contracts to which the
discount applies. As a contract progresses, revenues are recorded using rates that reflect the
anticipated volume discount to be achieved by the customer. The termination of a contract subject
to a volume discount could result in a material adjustment to revenue previously recognized, in
order to reflect the true economic value of the contract at the time of cancellation. For the years
ended December 31, 2005 and December 31, 2004, DATATRAK deferred $56,000 and $69,000 of revenue,
respectively, as a result of its contracts subject to volume discounts. No revenue was deferred in
2003 as a result of volume discounts.
Concentration of Credit Risk
The Company is subject to credit risk through accounts receivable and short-term investments.
The Company generally does not require collateral and the majority of its accounts receivable are
unsecured. Short-term investments are placed with high credit-quality financial institutions or in
short-duration with high credit-quality debt securities. The Company limits the amount of credit
exposure in any one institution or type of investment instrument.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. Investments in cash equivalents are carried at cost which
approximates market value.
Short-term Investments
Short-term investments are comprised of obligations of U.S. government agencies and corporate
obligations with maturities of one year or less. These securities are stated at amortized cost,
which approximates fair value. The Company has the positive intent and ability to hold the
securities to maturity.
Property and Equipment
Property and equipment are stated at cost. Depreciable assets consist of office and computer
equipment, software and software development costs, and leasehold improvements. Depreciation and
amortization on office and computer equipment and software, and software development costs is
computed using the straight-line method over estimated useful lives of 3 to 7 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the assets’ estimated
useful life or the lease term. Depreciation and amortization expense related to depreciable assets
was $748,000, $651,000 and $937,000 for 2005, 2004 and 2003, respectively.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting
for the Impairment of Long-Lived Assets.” As such, the carrying values of long-lived assets are
evaluated if
circumstances indicate a possible impairment in value. If undiscounted cash flows over the
remaining amortization period indicate that long-lived assets may not be recoverable, the carrying
value will be reduced by the estimated shortfall of cash flows on a discounted basis.
F-8
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
Deferred Revenue
Deferred revenue represents cash advances received in excess of revenue earned on on-going
contracts. Payment terms vary with each contract but may include an initial payment at the time
the contract is executed, with future payments dependent upon the completion of certain contract
phases or targeted milestones. In the event of contract cancellation, the Company is entitled to
payment for all work performed through the point of cancellation.
Stock Based Compensation
The Company accounts for stock based compensation in accordance with Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” for stock options granted
to employees and directors. The Company follows the alternative fair value accounting provided for
under SFAS No. 123, “Accounting for Stock-Based Compensation” for stock options granted to
non-employees. SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure,” requires disclosure of compensation expense under both APB No. 25 and SFAS No. 123.
The following assumptions were used to estimate the fair value for these options using the
Black-Scholes option pricing model.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
| |
|
2005 |
|
2004 |
|
2003 |
Weighted average risk free interest rate |
|
|
4.2 |
% |
|
|
4.1 |
% |
|
|
4.3 |
% |
Weighted average volatility of the expected market price of the
common shares |
|
|
1.01 |
|
|
|
1.01 |
|
|
|
1.15 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted-average expected life of the option |
|
7 years |
|
8 years |
|
7 years |
Weighted-average fair value per share of options granted |
|
$ |
9.90 |
|
|
$ |
6.68 |
|
|
$ |
2.58 |
|
For purposes of pro forma disclosures, the estimated value of the options is amortized to
expense over the options’ vesting period.
The following table sets forth stock based compensation and pro forma information for each
period presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income (loss) recorded |
|
$ |
2,538,000 |
|
|
$ |
817,000 |
|
|
$ |
(1,049,000 |
) |
Plus: stock compensation expense recognized |
|
|
66,000 |
|
|
|
40,000 |
|
|
|
68,000 |
|
Less: stock compensation expense that would have
been recognized under SFAS No. 123 |
|
|
894,000 |
|
|
|
736,000 |
|
|
|
634,000 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
1,710,000 |
|
|
$ |
121,000 |
|
|
$ |
(1,615,000 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic income (loss) per share |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income (loss) per share |
|
$ |
0.15 |
|
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
On December 16, 2004, the FASB issued SFAS No. 123(Revised 2004), “Share-Based Payment,” which
is a revision of SFAS No.123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)
supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach
in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure will no longer
be an alternative. On April 14, 2005, the U.S. Securities and Exchange
F-9
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
Commission (“SEC”)
announced a deferral of the effective date of SFAS 123(R) for calendar year-end companies until
January 1, 2006.
As permitted by SFAS No. 123, the Company currently accounts for share based payments to
employees using APB No. 25, and as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method may have a significant
impact on the Company’s results of operations, although it will have no impact on its overall
financial position. DATATRAK will adopt SFAS No. 123(R) on January 1, 2006. The Company will
adopt SFAS No. 123 using the “modified prospective” method in which compensation cost is recognized
beginning January 1, 2006 based on the requirements of SFAS No. 123(R) for all share based payments
granted after the effective date, and based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested at the
effective date. The Company has chosen to use the Black-Scholes option valuation model in valuing
stock options granted prior to January 1, 2006, and will continue to use this valuation model for
options granted after the effective date of SFAS No. 123(R). The adoption of SFAS 123(R) will
increase DATATRAK’s operating expenses by approximately $1,250,000 in the aggregate over the four
year period beginning in January 2006 through December 2009 for options that remain unvested as of
January 1, 2006. During the year ending December 31, 2006, DATATRAK expects to record
approximately $500,000 of stock compensation expense, as a result of the adoption SFAS No. 123(R).
The full impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will
depend on levels of share based payments in the future, however, at this time the Company’s
management does not anticipate granting any additional stock options.
Income Taxes
The Company follows SFAS No. 109, “Accounting for Income Taxes”. This accounting standard
requires that the liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the differences between the
financial reporting basis and the tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that apply in the periods in which the deferred tax asset or liability
is expected to be realized or settled. A valuation allowance is provided for deferred tax assets
for which realization currently is not certain. Quarterly income taxes are recorded at the
statutory rate, based on annual forecasted income.
The Company has substantial net operating loss carryforwards from prior years. Until 2005,
the existence of operating losses provided sufficient negative evidence under SFAS No. 109,
requiring a full valuation allowance against DATATRAK’s deferred tax assets. This situation
changed in 2005, as the Company realized taxable income of approximately $1,900,000 on a cumulative
basis over the past three years. Given DATATRAK’s ability to generate these profits, management
now believes that a full valuation allowance on DATATRAK’s deferred tax assets is no longer
necessary. However, because the EDC market is still developing, it is difficult to predict taxable
income very far into the future. Therefore, the reduction in the valuation allowance of $1,200,000
recorded in 2005 reflects estimates of the next three year’s taxable income based on 2005 actual
results, with adjustments for known changes and no assumptions for growth.
Beginning in the first quarter of 2006, DATATRAK will record a tax provision at the statutory
rate against quarterly pre-tax income. An evaluation will be made at each annual reporting period
regarding the continuing need for a valuation allowance, and appropriate adjustments to the
valuation allowance will be made.
F-10
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that might
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Financial Instruments
The carrying values of cash and cash equivalents, accounts and notes receivable, accounts
payable and accrued expenses are reasonable estimates of fair value due to the short-term nature of
these financial instruments. Investments are reported at amortized cost, which approximates fair
value.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling, general and
administrative expenses. Advertising expenses were $163,000, $153,000 and $88,000 for 2005, 2004
and 2003, respectively.
Software Development Costs
Development costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until technological feasibility
has been established. After technological feasibility is established, any additional costs are
capitalized in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed.” Such costs are amortized over the lesser of three years or
the economic life of the related product. The Company performs an annual review of the
recoverability of such capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are expensed.
Research and development expenses included in selling, general and administrative expenses
were $1,650,000, $1,142,000 and $850,000 in 2005, 2004 and 2003, respectively.
Foreign Currency Translation
The assets and liabilities of the Company’s foreign subsidiary are translated into U.S.
dollars at current exchange rates. Revenue and expense accounts of these operations are translated
at average rates prevailing during the period. These translation adjustments are accumulated in a
separate component of shareholders’ equity. Foreign currency transaction gains and losses are
included in determining net income (loss) when realized.
2. Short-term Investments
The following is a summary of held-to-maturity securities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
|
|
December 31, 2004 |
|
| |
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Amortized |
|
| |
|
Cost |
|
|
Cost |
|
|
Cost |
|
|
Cost |
|
Obligations of U.S.
government agencies |
|
$ |
1,961,008 |
|
|
$ |
1,980,701 |
|
|
$ |
4,700,181 |
|
|
$ |
4,708,482 |
|
Corporate obligations |
|
|
2,951,809 |
|
|
|
2,974,790 |
|
|
|
978,400 |
|
|
|
978,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,912,817 |
|
|
$ |
4,955,491 |
|
|
$ |
5,678,581 |
|
|
$ |
5,686,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
3. Accounts Receivable
Accounts receivable consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Trade accounts receivable: |
|
|
|
|
|
|
|
|
Billed |
|
$ |
2,845,630 |
|
|
$ |
1,947,130 |
|
Unbilled |
|
|
6,894 |
|
|
|
56,445 |
|
|
|
|
|
|
|
|
Total trade accounts receivable |
|
|
2,852,524 |
|
|
|
2,003,575 |
|
Other |
|
|
51,799 |
|
|
|
36,873 |
|
Allowance for doubtful accounts |
|
|
(50,500 |
) |
|
|
(50,500 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,853,823 |
|
|
$ |
1,989,948 |
|
|
|
|
|
|
|
|
Included in trade accounts receivable at December 31, 2005 and 2004 is $1,878,000 and
$1,052,000, respectively, from one customer. This amount represents the loss the Company would
incur in the event that all trade receivables from this customer were deemed uncollectible.
Movement of the allowance for doubtful accounts is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Balance at beginning of year |
|
$ |
50,500 |
|
|
$ |
40,400 |
|
|
$ |
40,400 |
|
Provision for uncollectible accounts |
|
|
— |
|
|
|
10,100 |
|
|
|
— |
|
Uncollectible accounts written off |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
50,500 |
|
|
$ |
50,500 |
|
|
$ |
40,400 |
|
|
|
|
|
|
|
|
|
|
|
4. Accrued Expenses
Accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Office rent and utilities |
|
$ |
124,169 |
|
|
$ |
144,056 |
|
Payroll and other employee costs |
|
|
307,432 |
|
|
|
507,986 |
|
Professional fees |
|
|
280,114 |
|
|
|
274,873 |
|
Income and other taxes |
|
|
13,820 |
|
|
|
11,831 |
|
Software license fees |
|
|
26,000 |
|
|
|
40,664 |
|
Other |
|
|
81,325 |
|
|
|
72,891 |
|
|
|
|
|
|
|
|
|
|
$ |
832,860 |
|
|
$ |
1,052,301 |
|
|
|
|
|
|
|
|
F-12
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
5. Income Taxes
Income tax expense (benefit) consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
17,000 |
|
|
$ |
9,000 |
|
|
$ |
4,000 |
|
State and local |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,000 |
|
|
|
9,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,200,000 |
) |
|
|
— |
|
|
|
— |
|
State and local |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,183,000 |
) |
|
$ |
9,000 |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
|
Due to its net losses and net loss carryforwards, the Company had no state or local income tax
expense in 2005, 2004 and 2003. A reconciliation of income tax benefit at the U.S. federal
statutory rate to the effective income tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income tax provision (benefit) at the
United States statutory rate |
|
$ |
461,000 |
|
|
$ |
281,000 |
|
|
$ |
(355,000 |
) |
Non — U.S. income tax (benefit) |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
(62,000 |
) |
Change in valuation allowance |
|
|
(1,690,000 |
) |
|
|
(303,000 |
) |
|
|
417,000 |
|
Other |
|
|
36,000 |
|
|
|
21,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,183,000 |
) |
|
$ |
9,000 |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 the Company had a net operating loss carryforward of approximately
$18,869,000 for United States income tax purposes. An equity transaction completed on January 7,
2002 has limited the Company’s net operating loss carryforwards, incurred prior to that date, to a
maximum amount of $967,000 per year, under Section 382 of the Internal Revenue Code. All of the
Company’s United States net operating loss carryforwards will begin expiring in the year 2018 and
will be fully expired in the year 2022. The Company also has a net operating loss carryforward of
approximately 8,077,000 Euro for German income tax purposes with no expiration date.
F-13
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
The significant components of the Company’s deferred tax assets, stated in US dollars, are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
U.S. net operating loss carryforward |
|
$ |
6,416,000 |
|
|
$ |
6,824,000 |
|
Non — U.S. net operating loss carryforwards |
|
|
3,822,000 |
|
|
|
3,926,000 |
|
Alternative minimum tax credit carryforward |
|
|
122,000 |
|
|
|
105,000 |
|
Allowances and accruals |
|
|
70,000 |
|
|
|
69,000 |
|
Depreciation and amortization |
|
|
60,000 |
|
|
|
56,000 |
|
|
|
|
|
|
|
|
|
|
|
10,490,000 |
|
|
|
10,980,000 |
|
Valuation allowance |
|
|
(9,290,000 |
) |
|
|
(10,980,000 |
) |
|
|
|
|
|
|
|
Net deferred tax assets recorded |
|
$ |
1,200,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
For the three years ended December 31, 2005, the Company realized taxable income of
approximately $1,900,000 on a cumulative basis. Given DATATRAK’s ability to generate profits over
the past three years, management believes that a full valuation allowance on DATATRAK’s deferred
tax assets is no longer necessary. However, because the EDC market is still developing, it is
difficult to predict taxable income very far into the future. Therefore, the reduction in the
valuation allowance of $1,200,000 recorded in 2005 reflects estimates of the next three year’s
taxable income based on 2005 actual results, with adjustments for known changes and no assumptions
for growth.
At December 31, 2005, a valuation allowance of approximately $9,290,000 remains against
DATATRAK’s deferred tax assets, which consist primarily of net operating loss carryforwards for
both U.S. and non-U.S. income taxes. Of the $9,270,000 total allowance, approximately $5,550,000
is recorded against the portion of DATATRAK’s deferred tax assets that represent net operating loss
carryforwards for U.S. income taxes, and approximately $3,480,000 is recorded against the portion
of DATATRAK’s deferred tax assets that represent net operating loss carryforwards for German income
taxes.
6. Operating Leases
The Company leases certain office equipment and space. Rent expense relating to these
operating leases was approximately $588,000, $603,000 and $583,000 in 2005, 2004 and 2003,
respectively. Future minimum lease payments for the Company under noncancelable operating leases
as of December 31, 2005 are as follows:
| |
|
|
|
|
| Year Ending December 31, |
|
Amount |
|
2006 |
|
$ |
541,000 |
|
2007 |
|
|
528,000 |
|
2008 |
|
|
538,000 |
|
2009 |
|
|
415,000 |
|
2010 |
|
|
297,000 |
|
Subsequent to 2010 |
|
|
468,000 |
|
|
|
|
|
|
|
$ |
2,787,000 |
|
|
|
|
|
F-14
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
7. Shareholders’ Equity
Effective April 21, 2003, the Company entered into an agreement for consulting services
related to its investor relations program. As compensation for these services, the Company issued
45,000 restricted common shares to an outside consultant. During the year ended December 31, 2003,
a non-cash charge of $42,000 was recorded as compensation expense for these common shares.
In addition, the same investor relations consultant was granted an option to purchase 37,500
common shares on May 27, 2003. The exercise price of the options is $1.76 per share, the market
price of the common shares on the date of grant. DATATRAK has recorded $22,000, $22,000 and
$13,000 of compensation expense related to these options during the years ended December 31, 2005,
2004 and 2003, respectively. The option will become exercisable in equal amounts over a three-year
period and expires on the tenth anniversary of the date of grant. The option was granted under the
Company’s Amended and Restated 1996 Key Employees and Consultants Stock Option Plan (the “1996
Plan”).
On August 8, 2003, the Company completed a private placement of its common shares with certain
outside investors. The Company sold 903,750 of its common shares at a price of $2.67 per share.
Net of expenses, the Company raised $2,239,000 in cash. In conjunction with this private
placement, DATATRAK issued 37,688 warrants to purchase common shares at a price of $3.20 per share.
The warrants, which were valued at $135,424, are fully vested as of the grant date and will expire
five years from the date of grant. During 2004, the holders of 18,750 of these common share
warrants surrendered the warrants along with the exercise price in exchange for 18,750 common
shares.
On December 28, 2004, the Company completed another private placement of common shares with
outside investors. The Company sold 729,470 of its common shares at a price of $6.33 per share.
Net of expenses, the Company raised $4,273,000 in cash. In conjunction with this private
placement, DATATRAK issued 141,399 warrants to purchase common shares at a price of $9.60 per
share. The warrants, which were valued at $643,823, are fully vested as of the grant date and will
expire three years from the date of grant.
On July 22, 2005, the Company’s shareholders approved the DATATRAK International, Inc. 2005
Omnibus Equity Plan (the “Omnibus Plan”). The Omnibus Plan is intended to be the primary
share-based award program for covered employees and directors.
The Omnibus Plan gives the Compensation Committee, of the Board of Directors, flexibility to
grant a wider variety of share-based awards than currently available under the Company’s existing
stock option plans, by taking into account such factors as the type and level of employee, relevant
business and performance goals and the prevailing tax and accounting treatments. The goals of the
Omnibus Plan are to: (i) attract and retain skilled and qualified officers, employees and
directors who are expected to contribute to the Company’s success by providing long-term incentive
compensation opportunities competitive with those made available by other companies; (ii) motivate
participants to achieve the long-term success and growth of the Company; (iii) facilitate ownership
of shares of the Company; and (iv) align the interests of the participants with those of the
Company’s shareholders.
Under the previously disclosed new director compensation program, in consideration of their
services to the Company, each non-employee member of the Board of Directors will receive, in
addition to cash payments, an annual base compensation grant of $16,000 worth of fully-vested
common shares. In addition, non-employee Directors will receive additional awards of common shares
as compensation for attendance at Board and Committee meetings, as well as for chairing a Committee
of the Board. During the year ended December 31,
2005, non-employee Directors were awarded 6,117 common shares. Stock compensation expense of
$66,000 was recorded as a result of the common shares granted under the director compensation
program.
F-15
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
Reserved Shares
At December 31, 2005, the Company had reserved 2,047,200 common shares for the exercise of
common share options and warrants. Of the 2,047,200 reserved shares, 266,972 shares are reserved
for future grants under the Company’s previously established share option plans. Because the
Omnibus Plan was approved, the 266,972 common share options that could have been granted pursuant
to the Company’s previously established share option plans will not be granted.
In addition, at December 31, 2005 the Company had reserved 343,883 common shares for stock
grants pursuant to the Omnibus Plan.
Serial Preferred Shares
At December 31, 2005 and 2004, the Company had 1,000,000 Serial Preferred Shares, without par
value, authorized, with none outstanding.
Treasury Shares
At December 31, 2005 and 2004, the Company held 3,300,000 of its common shares in treasury at
a cost of $20,188,308.
Shareholder Rights Plan
On September 2, 1997, following the adoption of the rights agreement between the Company and
National City Bank (the “Rights Agreement”), the Board of Directors declared a dividend of one
preferred share purchase right (a “Right”) for each outstanding common share, payable to the
Company’s shareholders of record on September 15, 1997. Each Right entitled the registered holder
of the common shares to buy one one-hundredth of a Series A Junior Participating Preferred Share
(the “Preferred Share”) at an exercise price of $30.00 per one one-hundredth of a Preferred Share,
subject to adjustment as provided in the Rights Agreement and as discussed below. The value of one
one-hundredth interest in a Preferred Share purchasable upon exercise of each Right is intended to
approximate the value of one common share.
The Rights are not exercisable until such time, the earlier to occur of (i) 10 days following
a public announcement that a person or group of affiliated or associated persons (an “Acquiring
Person”) have acquired beneficial ownership of 20% or more of the Company’s outstanding common
shares or (ii) 10 business days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial ownership by a person or
group of 20% of more of the Company’s outstanding common shares (the earlier of such date being
called the “Distribution Date”).
Until the Rights are exercised, the holder has no rights as a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends. Other than as provided
for in the Rights Agreement, the Rights are not traded separately from the common shares and will
expire on September 15, 2007. Pursuant to the Rights Agreement, each Right was adjusted to reflect
the Share Split that occurred in 2005.
F-16
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
8. Share Option Plans
The Company has four share option plans with unexpired options that may be exercised by the
holders of such options. At December 31, 2005, the Company had reserved 3,046,567 common shares
for the exercise of common share options. The Company has granted 2,779,595 options to purchase
common shares to employees, directors and others of which 1,159,704 have been previously exercised.
There are 266,972 options to purchase common shares available for future grants, however no future
grants are expected be made under the Company’s share option plans. The weighted average
contractual life of all options outstanding was 5.8 years as of December 31, 2005. The range of
exercise prices for all options outstanding at December 31, 2005 was $1.33 to $12.93.
The Amended and Restated 1994 Directors’ Share Option Plan (the “1994 Director Plan”) was
established by the Company to provide common share options to directors of the Company for their
participation in Board of Directors’ meetings. All options awarded under the plan have an exercise
price per share that was equal to the fair market value of a common share on the date of grant.
All options granted under the 1994 Director Plan expire ten years after the grant date. At
December 31, 2005 there were 752 options outstanding under the 1994 Director Plan with an exercise
price of $6.40, all of which were 100% vested. These options will expire in February 2006.
The Amended and Restated 1996 Outside Directors’ Stock Option Plan, as amended ( the “1996
Director Plan”) was established by the Company to provide common share options as compensation to
directors of the Company. Certain options, as approved by the Company’s shareholders, were granted
under the 1996 Director Plan at exercise prices below the market value of a common share on the
date of approval. All compensation expense related to these common share options has been
previously recognized by the Company. All other options granted under the 1996 Director Plan have
been granted at exercise prices that represented the fair market value of a common share on the
date of grant. At December 31, 2005 there were 69,000 options outstanding under the 1996 Director
Plan with exercise prices ranging from $2.79 to $6.40, all of which were 100% vested. These
options had a weighted average contractual life of 2.3 years and a weighted average exercise price
of $3.19.
The 1996 Plan provides for the granting of options to purchase common shares to key employees
and consultants of the Company and its affiliates. During 2000, 116,031 common share options were
granted at exercise prices of less than the fair market value of a common share on the date of
grant. The Company recognized compensation expense related to these common share options of
$14,000 in 2003. All other options granted under the 1996 Plan have been granted at exercise
prices that represented the fair market value of a common share on the date of grant. In addition,
the Company has recorded compensation expense of $66,000 $40,000 and $12,000 in 2005, 2004 and
2003, respectively, related to options granted to non-employees. Vesting of options awarded under
the 1996 Plan is determined by the Board of Directors’ Compensation Committee, and all options
granted under the 1996 Plan expire ten years after the grant date. At December 31, 2005 there were
1,024,389 options outstanding under the 1996 Plan with exercise prices ranging from $1.33 to
$12.93, of which 685,361 were 100% vested. These options had a weighted average contractual life
of 6.0 years and a weighted average exercise price of $3.84.
The Amended and Restated Outside Director Stock Option Plan (the “Director Plan”) provides for
the granting of options to purchase common shares to outside directors of the Company. Certain
options approved by Company’s Board of Directors and its shareholders have been granted at
exercise prices below the market value of a common share on the grant date in 2000. All
compensation expense related to these common share options has been previously recognized by the
Company. All other options granted under the Director Plan have been granted at exercise prices
that represented the fair market value of a common share on the date of grant. Options fully vest
one year following the grant date. All options granted under the Director Plan expire ten years
after the grant date.
At December 31, 2005 there were 525,750 options outstanding under the Director Plan with
exercise prices ranging from $1.33 to $7.56, all of which were 100% vested. These options had a
weighted average contractual life of 5.8 years and a weighted average exercise price of $2.93.
F-17
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
The Company’s share option activity and related information is summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding at
beginning of
period |
|
|
1,988,974 |
|
|
$ |
3.31 |
|
|
|
1,969,967 |
|
|
$ |
2.73 |
|
|
|
1,540,191 |
|
|
$ |
2.56 |
|
Granted |
|
|
28,823 |
|
|
|
11.45 |
|
|
|
220,125 |
|
|
|
7.42 |
|
|
|
573,205 |
|
|
|
2.86 |
|
Exercised |
|
|
(383,253 |
) |
|
|
2.86 |
|
|
|
(166,544 |
) |
|
|
1.97 |
|
|
|
(75,845 |
) |
|
|
0.80 |
|
Cancelled |
|
|
(14,653 |
) |
|
|
7.56 |
|
|
|
(34,574 |
) |
|
|
3.11 |
|
|
|
(67,584 |
) |
|
|
2.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
end of period |
|
|
1,619,891 |
|
|
$ |
3.52 |
|
|
|
1,988,974 |
|
|
$ |
3.31 |
|
|
|
1,969,967 |
|
|
$ |
2.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of period |
|
|
1,280,863 |
|
|
$ |
3.00 |
|
|
|
1,457,307 |
|
|
$ |
2.70 |
|
|
|
1,376,886 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Retirement Savings Plan
The Company sponsors The DATATRAK International, Inc. Retirement Savings Plan (the “Plan”) as
defined by Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all United States employees who elect to participate. Participants may contribute up
to 20% of their annual compensation into a variety of mutual fund options. Matching and profit
sharing contributions by the Company are discretionary. The Company did not make any matching or
profit sharing contributions in 2005, 2004 or 2003.
10. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income (loss) used in the calculation of basic and
diluted loss per share |
|
$ |
2,538,347 |
|
|
$ |
817,034 |
|
|
$ |
(1,048,621 |
) |
Denominator
for basic net income (loss) per share —
weighted average common shares outstanding |
|
|
10,203,646 |
|
|
|
9,149,127 |
|
|
|
8,347,671 |
|
Effect of dilutive common share options and warrants |
|
|
1,182,767 |
|
|
|
1,088,322 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share |
|
|
11,386,413 |
|
|
|
10,237,449 |
|
|
|
8,347,671 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.25 |
|
|
$ |
0.09 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.22 |
|
|
$ |
0.08 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common share options and warrants
excluded from the computation of diluted net
income (loss) per share because they would have an
anti-dilutive effect on net income (loss) per share |
|
|
14,904 |
|
|
|
63,429 |
|
|
|
1,846,412 |
|
|
|
|
|
|
|
|
|
|
|
F-18
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
11. Segment Information
The Company operates in one business segment: the DATATRAK EDC Business.
Enterprise-Wide Disclosures
Geographic Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
|
United States |
|
Germany |
|
Total |
Revenue from external customers: |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
15,734,745 |
|
|
$ |
— |
|
|
$ |
15,734,745 |
|
2004 |
|
|
11,305,112 |
|
|
|
— |
|
|
|
11,305,112 |
|
2003 |
|
|
7,052,158 |
|
|
|
— |
|
|
|
7,052,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
6,726,776 |
|
|
|
(4,188,429 |
) |
|
|
2,538,347 |
|
2004 |
|
|
4,347,926 |
|
|
|
(3,530,892 |
) |
|
|
817,034 |
|
2003 |
|
|
1,523,476 |
|
|
|
(2,572,097 |
) |
|
|
(1,048,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net at December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
1,768,618 |
|
|
|
109,786 |
|
|
|
1,878,404 |
|
2004 |
|
|
1,283,793 |
|
|
|
138,971 |
|
|
|
1,422,764 |
|
Major Customers
The following sets forth the percentage of revenue generated by customers who accounted for
more than 10% of the Company’s revenue during each of the periods presented:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, |
| Customer |
|
2005 |
|
2004 |
|
2003 |
Aventis Pharmaceuticals |
|
|
* |
|
|
|
15 |
% |
|
|
22 |
% |
Control Delivery Systems |
|
|
* |
|
|
|
* |
|
|
|
11 |
% |
Otsuka Research Institute |
|
|
59 |
% |
|
|
55 |
% |
|
|
20 |
% |
|
|
|
| * |
|
Less than 10% of revenue. |
12. Restricted Cash
DATATRAK GmbH is required to provide a bank guarantee to the lessor of its office space equal
to three months rent. The terms of the bank guarantee require DATATRAK GmbH to maintain a
restricted cash balance of 59,000 Euros with the bank. The U.S. dollar equivalent of this amount
was $69,976 at December 31, 2005.
F-19
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
13. Quarterly Data (Unaudited)
Selected quarterly data is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2005 |
| |
|
First |
|
Second |
|
Third |
|
Fourth |
| |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
Revenue |
|
$ |
3,635 |
|
|
$ |
3,724 |
|
|
$ |
4,056 |
|
|
$ |
4,320 |
|
Gross profit |
|
|
2,721 |
|
|
|
2,797 |
|
|
|
3,157 |
|
|
|
3,271 |
|
Income from operations |
|
|
500 |
|
|
|
221 |
|
|
|
354 |
|
|
|
98 |
|
Net income |
|
|
532 |
|
|
|
261 |
|
|
|
413 |
|
|
|
1,332 |
|
Basic net income per share |
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.13 |
|
Diluted net income per share |
|
|
0.05 |
|
|
|
0.02 |
|
|
|
0.04 |
|
|
|
0.12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2004 |
| |
|
First |
|
Second |
|
Third |
|
Fourth |
| |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
Revenue |
|
$ |
2,288 |
|
|
$ |
2,630 |
|
|
$ |
2,974 |
|
|
$ |
3,413 |
|
Gross profit |
|
|
1,755 |
|
|
|
2,025 |
|
|
|
2,292 |
|
|
|
2,599 |
|
Income (loss) from operations |
|
|
(99 |
) |
|
|
96 |
|
|
|
386 |
|
|
|
408 |
|
Net income (loss) |
|
|
(95 |
) |
|
|
89 |
|
|
|
398 |
|
|
|
425 |
|
Basic net income (loss) per share |
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
0.04 |
|
|
|
0.05 |
|
Diluted net income (loss) per share |
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
0.04 |
|
|
|
0.04 |
|
The Company recorded a reduction in its deferred tax asset valuation allowance, and therefore
increased its net income in the amount of $1,200,000 during the fourth quarter of 2005. As
described further in Note 5, this reduction reflects the Company’s estimate of its deferred tax
assets it will be able to utilize over the next three years.
14. Subsequent Events
Acquisition
On February 13, 2006, DATATRAK acquired all of the outstanding stock of ClickFind, Inc.
(“ClickFind”), an EDC company located in Bryan, Texas. As a result of the acquisition, DATATRAK is
expected to have the most extensive eClinical software suite in the clinical trials industry.
The aggregate purchase price was $18,000,000, less approximately $328,000 in certain
transaction expenses and certain indebtedness of ClickFind. The purchase price consisted of
approximately $4,000,000 of cash, $4,000,000 in notes payable and approximately $10,000,000 in
common shares (1,026,522 common shares). The value of the 1,026,522 common shares was determined
based on the average closing price per share of the Company’s common shares for the thirty days
ending on and including February 10, 2006. The notes payable bear interest at prime plus 1%, and
are payable in installments of $500,000, $500,000 and $3,000,000 on February 1, 2007, 2008 and
2009, respectively.
The value of ClickFind’s stock was determined through arms-length negotiations between
DATATRAK and ClickFind. An independent third party has reviewed the transaction and consideration
paid by DATATRAK, and determined it to be fair, from a financial point of view, to DATATRAK.
F-20
DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For the Years Ended December 31, 2005, 2004 and 2003
The acquisition was accounted for as a purchase, and accordingly fair value adjustments to the
assets acquired and liabilities assumed will be recorded as of the date of acquisition. The
Company is in the process of obtaining a third party valuation of certain tangible and intangible
assets acquired. As of February 28, 2006, this evaluation has not been completed. The operating
results of ClickFind will be included in the Company’s consolidated results of operations for all
periods subsequent to February 13, 2006.
Line of Credit
In February 2006, DATATRAK established a line of credit, with a bank, that allows the Company
to borrow up to a certain percentage of its investments, as determined by the type of investment,
held at the bank. The line of credit bears interest at rates based on the prime rate, and is
payable on demand.
F-21
Exhibit Index
| |
|
|
|
|
|
|
| Exhibit No. |
|
Description |
|
Page |
2.1
|
|
Agreement and Plan of Merger among DATATRAK International, Inc.,
CF Merger Sub, Inc., ClickFind, Inc., each of the shareholders of ClickFind, Inc
and Jim Bob Ward, dated February 13, 2006
|
|
|
(10 |
) |
|
|
|
|
|
|
|
3.1
|
|
Sixth Amended and Restated Articles of Incorporation
|
|
|
(1 |
) |
|
|
|
|
|
|
|
3.2
|
|
Third Amended and Restated Code of Regulations
|
|
|
(2 |
) |
|
|
|
|
|
|
|
3.3
|
|
Amendment to the Third Amended and Restated Code of Regulations
|
|
|
(2 |
) |
|
|
|
|
|
|
|
3.4
|
|
Amendment to the Third Amended and Restated Code of Regulations
|
|
|
(1 |
) |
|
|
|
|
|
|
|
4.1
|
|
Specimen Certificate of the Company’s Common Shares, without par value
|
|
|
(5 |
) |
|
|
|
|
|
|
|
4.2
|
|
Form of Warrant Agreement, dated August 8, 2003
|
|
|
(7 |
) |
|
|
|
|
|
|
|
4.3
|
|
Form of Warrant Agreement, dated December 28, 2004
|
|
|
(5 |
) |
|
|
|
|
|
|
|
4.4
|
|
Form of Promissory Note
|
|
|
(10 |
) |
|
|
|
|
|
|
|
4.5
|
|
Registration Rights Agreement among DATATRAK International, Inc. and the
Cash and Securities Recipients, dated February 13, 2006
|
|
|
(10 |
) |
|
|
|
|
|
|
|
4.6
|
|
Rights Agreement between the
Company and National City Bank, as Rights Agent, dated September 2,
1997
|
|
|
(11 |
) |
| |
10.1
|
|
Amended and Restated 1994 Directors’ Share Option Plan*
|
|
|
(4 |
) |
|
|
|
|
|
|
|
10.2
|
|
Amendment to the Amended and Restated 1994 Directors’ Share Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.3
|
|
Amended and Restated 1996 Outside Directors’ Stock Option Plan*
|
|
|
(4 |
) |
|
|
|
|
|
|
|
10.4
|
|
Amendment No. 1 to the Amended and Restated 1996 Outside Directors’ Stock
Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.5
|
|
Amendment No. 2 to the Amended and Restated 1996 Outside Directors’ Stock
Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.6
|
|
Amendment to the Amended and Restated 1996 Outside Directors’ Stock Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.7
|
|
DATATRAK International, Inc. 2005 Omnibus Equity Plan*
|
|
|
(9 |
) |
|
|
|
|
|
|
|
10.8
|
|
Amended and Restated 1996 Key Employees’ and Consultants Stock Option Plan*
|
|
|
(4 |
) |
|
|
|
|
|
|
|
10.9
|
|
Amendment No. 1 to the Amended and Restated 1996 Key Employees’ and
Consultants Stock Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.10
|
|
Amendment No. 2 to the Amended and Restated 1996 Key Employees’ and Consultants
Stock Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.11
|
|
Amendment No. 3 to the Amended and Restated 1996 Key Employees’ and Consultants
Stock Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.12
|
|
Amendment to the Amended and Restated 1996 Key Employees’ and Consultants
Stock Option Plan*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.13
|
|
Amended and Restated Outside Director Stock Option Plan*
|
|
|
(8 |
) |
E-1
Exhibit Index
| |
|
|
|
|
|
|
| Exhibit No. |
|
Description |
|
Page |
10.14
|
|
Form of Indemnification Agreement*
|
|
|
(3 |
) |
|
|
|
|
|
|
|
10.15
|
|
Employment Agreement between the Company and Jeffrey A. Green, dated
February 5, 2001* |
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Employment Agreement between the Company and Terry C. Black,
dated February 5, 2001* |
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Employment Agreement between the Company and Marc J. Shlaes
dated March 5, 2003*
|
|
|
(2 |
) |
|
|
|
|
|
|
|
10.18
|
|
Managing Director Employment Agreement between the Company and
Wolfgang Summa, dated December 29, 2000* |
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Employment Agreement between the Company and Jim Bob Ward,
dated February 13, 2006*
|
|
|
(10 |
) |
|
|
|
|
|
|
|
10.20
|
|
DATATRAK International, Inc. Retirement Savings Plan*
|
|
|
(6 |
) |
|
|
|
|
|
|
|
10.21
|
|
Limited Software License Agreement between DATATRAK International, Inc.
and Jim Bob Ward, dated February 13, 2006
|
|
|
(10 |
) |
|
|
|
|
|
|
|
14.1
|
|
Code of Business Conduct and Ethics
|
|
|
(7 |
) |
|
|
|
|
|
|
|
14.2
|
|
Financial Code of Ethics
|
|
|
(7 |
) |
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of the Company |
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Ernst & Young LLP |
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
|
|
|
|
|
|
|
| * |
|
Management compensatory plan or arrangement. |
| |
| (1) |
|
Incorporated herein by reference to the Company’s Form 10-Q for the quarter ended June 30,
2003 (File No. 000-20699). |
| |
| (2) |
|
Incorporated herein by reference to the Company’s Form 10-K for the year ended
December 31, 2002 (File No. 000-20699). |
| |
| (3) |
|
Incorporated herein by reference to the Company’s Form S-1 Registration Statement filed on
March 8, 1996, as amended by Amendment No. 1 filed on May 10, 1996 and as amended by Amendment
No. 2 filed on June 10, 1996 (File No. 333-2140). |
| |
| (4) |
|
Incorporated herein by reference to the Company’s Form S-8 Registration Statement filed on
November 13, 1996 (File No. 333-16061). |
E-2
Exhibit Index
| |
|
|
|
|
| Exhibit No. |
|
Description |
|
Page |
(5)
|
|
Incorporated herein by reference to the Company’s Form 10-K for the year ended
December 31, 2004 (File No. 000-20699). |
|
|
|
|
|
|
|
(6)
|
|
Incorporated herein by reference to the Company’s Form S-8 Registration Statement filed on
April 30, 1997 (File No. 333-26251). |
|
|
|
|
|
|
|
(7)
|
|
Incorporated herein by reference to the Company’s Form 10-K for the year ended
December 31, 2003 (File No. 000-20699). |
|
|
|
|
|
|
|
(8)
|
|
Incorporated herein by reference to the Company’s Form 10-Q for the quarter ended June 30, 2004 (File No. 000-20699). |
|
|
|
|
|
|
|
(9)
|
|
Incorporated herein by reference to the Company’s current report on Form 8-K dated July 22, 2005 (File No. 000-20699). |
|
|
|
|
|
|
|
(10)
|
|
Incorporated herein by reference to
the Company’s current report on Form 8-K dated February 13, 2006 (File No. 000-20699). |
|
|
| |
(11)
|
|
Incorporated herein by reference to
the Company’s Form 8-A filed on September 19, 1997 (File No.
000-20699). |
|
|
E-3