<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
-----------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from
----------------------
Commission File Number 0-26138
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Dendrite International, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2786386
------------------------ --------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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1200 Mt. Kemble Avenue
Morristown, NJ 07960
201-425-1200
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(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
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 last 90 days YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at May 10, 1996
-------------------------- ----------------------------------
Common Stock, no par value 11,246,989
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1
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DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements Page No.
--------
<S> <C>
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1996 and 1995....................... 3
Consolidated Balance Sheets
March 31, 1996 (unaudited) and December 31, 1995................. 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1996 and 1995....................... 5
Notes to Unaudited Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 7
PART II - OTHER INFORMATION
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Not Applicable.................................................... 11
Signatures........................................................ 12
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
Dendrite International, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
REVENUES:
License Fees $ 1,873 $ 1,030
Services 12,351 10,143
------- -------
14,224 11,173
------- -------
COST OF REVENUES:
Cost of license fees 185 126
Cost of services 5,782 4,667
------- -------
5,967 4,793
------- -------
Gross margin 8,257 6,380
------- -------
OPERATING EXPENSES:
Selling, general and administrative 5,235 5,112
Research and development 1,520 833
------- -------
6,755 5,945
------- -------
Operating income 1,502 435
INTEREST EXPENSE 3 -
OTHER INCOME (237) (28)
------- -------
Income before income taxes 1,736 463
INCOME TAXES 661 185
------- -------
NET INCOME $ 1,075 $ 278
======= =======
NET INCOME PER SHARE $ 0.10 $ 0.03
======= =======
SHARES USED IN COMPUTING NET INCOME PER SHARE 11,246 9,621
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Dendrite International, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $16,982 $11,530
Short-term investments 10,010 10,955
Accounts receivable 15,259 14,699
Prepaid expenses and other 1,106 1,292
Deferred tax assets 1,157 1,157
------- -------
Total current assets 44,514 39,633
PROPERTY AND EQUIPMENT, net 3,413 3,602
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,146 2,032
------- -------
$50,073 $45,267
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 849 $ 1,002
Income taxes payable 423 2,528
Accrued compensation and benefits 2,360 2,174
Other accrued expenses 2,843 2,102
Deferred revenues 3,490 3,172
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Total current liabilities 9,965 10,978
------- -------
DEFERRED RENT 607 464
------- -------
DEFERRED TAXES 1,515 1,515
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued - -
Common stock, no par value, 50,000,000 shares
authorized: 11,246,989 and 10,675,581 shares issued
and outstanding 31,521 26,809
Retained earnings 7,645 6,570
Deferred compensation (585) (502)
Unrealized holding gain on short-term investments 10 14
Cumulative translation adjustments (605) (581)
------- -------
Total stockholders' equity 37,986 32,310
------- -------
$50,073 $45,267
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Dendrite International, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,075 $ 278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 446 558
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (560) 271
Decrease in prepaid expenses and other 186 1,269
Increase (decrease) in accounts payable and accrued expenses 774 (435)
Increase in deferred rent 143 124
Increase (decrease) in income taxes payable (2,105) 138
Increase in deferred revenues 318 1,813
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Net cash provided by operating activities 277 4,016
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INVESTING ACTIVITIES:
Purchases of short-term investments (1,261) -
Sales of short-term investments 2,206 -
Purchases of property and equipment (72) (388)
Additions to capitalized software development costs (285) (200)
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Net cash provided by (used in) investing activities 588 (588)
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FINANCING ACTIVITIES:
Payments on capital lease obligations - (3)
Issuance of Common Stock from secondary
offering, net of offering costs 4,450 -
Issuance of Common Stock 141 72
Purchase of Common Stock - (85)
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Net cash provided by (used in) financing activities 4,591 (16)
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EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (4) (328)
------- ------
NET INCREASE IN CASH 5,452 3,084
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,530 3,910
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $16,982 $6,994
======= ======
</TABLE>
The accompanying notes are an integral part of theses statements.
5
<PAGE>
Dendrite International, Inc.
Notes To Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Registration Statement on Form S-1
which was declared effective on March 8, 1996, the Form 10-K for the year
ended December 31, 1995, the 1995 Annual Report to shareholders, and in this
report on Form 10-Q.
2. SALE OF COMMON STOCK
The Company has consummated two Public Offerings of Common Stock which
closed on July 6, 1995 and March 13, 1996, respectively. The Company offered
and sold 1,500,000 and 300,000 shares of Common Stock at public offering
prices of $14.50 and $18.25 per share, respectively. The net proceeds to the
Company from the public offerings, after payment of offering expenses, were
approximately $18,770,000 and $4,450,000, respectively. An additional
1,490,000 and 2,805,000 shares respectively, of common stock (including
390,000 and 405,000 shares, respectively, purchased by the underwriters upon
the exercise in full of an over-allotment option) were offered and sold by
certain stockholders of the Company during these Public Offerings. The
Company did not receive any proceeds from the sale of shares by selling
stockholders.
3. NET INCOME PER SHARE COMPUTATION
Net income per share was calculated by dividing net income by the weighted
average number of common shares outstanding for the respective periods
adjusted for the dilutive effect of common stock equivalents, which consist
of stock options, using the treasury stock method. The calculation of shares
used in computing net income per share also includes 5,607,000 shares of
Series A Convertible Preferred Stock which converted into 5,607,000 shares of
Common Stock upon the consummation of the Initial Public Offering, as if they
were converted to Common Stock on their original date of issuance.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
--------
The Company succeeded in 1991 to a business co-founded in 1986 by the
Company's President and Chief Executive Officer and others to provide
comprehensive Electronic Territory Management ("ETM") solutions used to
manage, coordinate and control the activities of large sales forces in
complex selling environments, primarily in the pharmaceutical industry. The
Company's solutions combine advanced software products with a wide range of
specialized support services including implementation services, technical and
hardware support services and sales force support services. The Company
develops, implements and services advanced ETM systems in the United States,
Canada, Western Europe, Japan, Australia, New Zealand, Hong Kong and Brazil
through its own sales, support and technical personnel located in eleven
offices worldwide.
The Company generates revenues from two sources-license fees and fees from
support services. License fees are charged by the Company for use of its
proprietary computer software. Customers generally pay one-time perpetual
license fees for a particular version of the Company's software based upon
the number of users, territory covered and the number of modules in the
particular system licensed by the customer. Certain license contracts
contain customer acceptance provisions which require the Company to customize
the system in accordance with agreed upon specifications before the system is
accepted by the customer. License fee revenue is deferred on contracts with
customer acceptance provisions until such time as the acceptance provisions
are satisfied. To date there have been no instances in which customer
acceptance provisions have led to nonpayment of license fees. Additional
license fees are payable when customers agree to license additional modules,
acquire an upgraded version of the Company's software and/or when the maximum
number of users or initial geographic coverage is exceeded. Beginning in
1995, the Company made available an alternative license fee arrangement known
as a "capitation" agreement which is a long term agreement (currently up to
10 years) under which the customer licenses Dendrite software and upgrades
for an increasing preset annual charge. Under the capitation agreements
there is an annual fee payable each year during the term of the agreement,
and the fee increases each year. The fee encompasses all users in all
geographic regions, and covers all maintenance fees and upgrades. This
differs from the Company's other license agreements, where there is generally
a one-time license fee, and customers pay additional fees for additional
users and modules and future upgrades. If a customer anticipates expanding
the number of users and its geographic reach, can take advantage of more
sophisticated modules and is also confident of the Company's ability to
satisfy its needs, the capitation arrangement is more cost effective than the
traditional license fee arrangement. One customer has executed a capitation
agreement to date. The Company actively markets the concept to existing and
potential customers.
The second and more significant component of the Company's revenues
consist of fees from a wide variety of contracted services which the Company
makes available to its customers, generally under multi-year contracts.
Implementation fees are generated from services provided to design and
implement the ETM solution. Technical and hardware support services are
derived from services related to the operation of the file server and from
the provision of ongoing technical and customer service support including
customization of the software following implementation. Sales force support
fees are derived from organizing and managing support for the customer's
sales force.
7
<PAGE>
Currently, the Company's products are marketed in over 13 countries. The
United States, the United Kingdom and France are the Company's main markets.
The Company expects its foreign operations to grow and to continue to account
for a material part of its revenues. Operating results generated in local
currencies are translated into United States dollars at the average exchange
rate in effect for the reporting period.
Results of Operations
---------------------
Three Months Ended March 31, 1995 and 1996
Revenues. Total revenues increased $3,051,000 or 27% from $11,173,000 in
the three months ended March 31, 1995 to $14,224,000 in the three months
ended March 31, 1996 as a result of an increase in the installed base of
Dendrite systems, both from new customers and existing customers.
Fluctuations in the Company's revenues depend on a number of factors, some of
which are beyond the Company's control. These factors include, among others,
the timing of contracts, delays in customer acceptance of the Company's
software, the length of sales cycles, customer budget changes and changes in
pricing policy by the Company or its competitors.
License fee revenues increased to $1,873,000 in the three months ended
March 31, 1996 from $1,030,000 in the three months ended March 31, 1995.
This increase was primarily attributable to the effect on licenses fee
revenues as a result of a number of factors discussed in the previous
paragraph. The Company typically expects to realize a greater percentage of
its license fee revenues for the year in the last two quarters of the year
with a lower percentage in the first two quarters of the year.
Service revenues increased 22% from $10,143,000 in the three months ended
March 31, 1995 to $12,351,000 in the three months ended March 31, 1996. The
quarterly increase in service revenues is primarily the result of an increase
in the Company's installed base of Dendrite systems.
Cost of Revenues. Cost of revenues increased 24% from $4,793,000 in the
three months ended March 31, 1995 to $5,967,000 in the three months ended
March 31, 1996 primarily due to an increase in the number of service
representatives and technical staff and, to a lesser extent, an increase in
associated support costs.
Cost of license fees include the amortization of capitalized software
costs in 1996 and 1995. Cost of license fees increased from $126,000 in the
three months ended March 31, 1995 to $185,000 in the three months ended March
31, 1996.
Cost of service revenues increased from $4,667,000 in the three months
ended March 31, 1995 to $5,782,000 in the three months ended March 31, 1996.
As a percentage of service revenues, cost of service revenues increased from
46% of service revenues for the three months ended March 31, 1995 to 47% of
service revenues for the three months ended March 31, 1996 as a result
reduced customization and training.
Selling, General and Administrative (SG&A). SG&A expenses increased 2%
from $5,112,000 in the three months ended March 31, 1995 to $5,235,000 in the
three months ended March 31, 1996. The increase in 1996 was primarily
attributable to increased staff and, to a lesser extent, an increase in
facilities growth to support operations and sales. As a percentage of
revenues, SG&A expenses decreased from 46% for the three months ended March
31, 1995 to 37% for the three months ended March 31, 1996 as a result of
leveraging investments made in past years.
8
<PAGE>
Research and Development. Research and development expense increased 82%
from $833,000 in the three months ended March 31, 1995 to $1,520,000 in the
three months ended March 31, 1996, while it increased from 7% to 11% as a
percentage of revenues. The increase in research and development expenses in
1996 is attributable to increased staff and resources required to continue
development of updates and upgrades for the Company's Series 6 software
product and for the development of prototypes for the next series of
products.
Provision for Income Taxes. The effective tax rate decreased slightly, 38%
for the three months ended March 31, 1996 as compared to 40% for the three
months ended March 31, 1995. This decrease was primarily attributable to the
shift in the distribution of pre-tax income among taxable entities.
Variability of Quarterly Results
Fluctuations in the Company's quarterly revenues depend on a number of
factors, some of which are beyond the Company's control. These factors
include, among others, the timing of contracts, delays in customer acceptance
of the Company's software, the length of the sales cycle, customer budget
changes and changes in the pricing policy by the Company or its competitors.
The Company establishes its expenditure levels for product development and
other operating expenses based in large part on its expected future revenues.
As a result, should revenues fall below expectations, operating results are
likely to be adversely and disproportionately affected because only a small
portion of the Company's expenses vary with its revenues. In addition, the
Company's quarterly revenues from software license fees and related income
may vary due to seasonal and cyclical factors. The Company typically expects
to realize a greater percentage of its license fees and service revenues for
the year in the third and fourth quarters with a lower percentage in the
first and second quarters. In the future, to the extent the percentage of
revenue from service revenues from existing customers of the Company
continues to increase, and to the extent more customers choose to enter into
long-term agreements to license software and upgrades for an increasing
preset annual charge, seasonal and cyclical trends in the Company's revenues
may be reduced.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through
cash generated by operations. Net cash provided by operating activities was
$277,000 during the three months ended March 31, 1996 compared to $4,016,000
provided during the three months ended March 31, 1995. Cash provided by
operating activities for the three months ended March 31, 1996 decreased
compared to the three months ended March 31, 1995 primarily due to income
taxes paid in the period, an increase in accounts receivable, partially
offset by an increase in net income.
The Company provided $588,000 of cash in investing activities in the first
three months of 1996 compared to $588,000 utilized in the first three months
of 1995. The increase is primarily attributable to the sale of short-term
investments. The Company's net cash provided by financing activities has been
primarily limited to the issuance of common stock from the Secondary Public
Offering.
9
<PAGE>
The Company maintains a $5,000,000 revolving line of credit agreement with
Chase Manhattan Bank N.A. The agreement provides for borrowings up to
$1,000,000 in local currencies directly by the Company or certain of its
overseas subsidiaries and is available to finance working capital needs and
possible future acquisitions. The $5,000,000 line of credit is secured by
substantially all of the Company's assets. The $5,000,000 line of credit
agreement requires the Company to maintain a minimum consolidated net worth,
among other covenants, measured quarterly which is equal to the Company's net
worth as of December 31, 1994 plus 50% of net income earned after December
31, 1994. This covenant has the effect of limiting the amount of cash
dividends the Company may pay. At March 31, 1996 there was no borrowings
outstanding under the agreement.
At March 31, 1996, the Company's working capital was approximately
$34,549,000. Upon closing the Secondary Public Offering on March 13, 1996,
the Company received net proceeds, after payment of offering expenses, of
approximately $4,450,000. The Company has no significant capital spending or
purchasing commitments other than normal purchase commitments and commitments
under facility and capital leases. The Company believes that the proceeds
from the offering, available funds, anticipated cash flows from operations
and its line of credit will satisfy the Company's projected working capital
and capital expenditure requirements through at least the next two years.
10
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PART II - OTHER INFORMATION
- ---------------------------
Not Applicable
11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 10, 1996
DENDRITE INTERNATIONAL, INC.
(Registrant)
By: /s/ John E. Bailye
------------------------------------
John E. Bailye, President and
Chief Executive Officer
By: /s/ Charles Warczakowski
------------------------------------
Charles Warczakowski, V. P. Finance,
Secretary and Treasurer (Principal
Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 16,982 11,530
<SECURITIES> 10,010 10,955
<RECEIVABLES> 15,259 14,699
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 44,514 39,633
<PP&E> 3,413 3,602
<DEPRECIATION> 471 1,769
<TOTAL-ASSETS> 50,073 45,267
<CURRENT-LIABILITIES> 9,965 10,978
<BONDS> 0 0
0 0
0 0
<COMMON> 31,521 26,809
<OTHER-SE> 6,465 5,501
<TOTAL-LIABILITY-AND-EQUITY> 50,073 32,310
<SALES> 0 0
<TOTAL-REVENUES> 14,224 11,173
<CGS> 0 0
<TOTAL-COSTS> 5,967 4,793
<OTHER-EXPENSES> 6,755 5,945
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 0
<INCOME-PRETAX> 1,736 463
<INCOME-TAX> 661 185
<INCOME-CONTINUING> 1,075 278
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,075 278
<EPS-PRIMARY> .10 .03
<EPS-DILUTED> .10 .03
</TABLE>
