<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1998
[ ] 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
DENDRITE INTERNATIONAL, INC.
(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.)
1200 Mount Kemble Avenue
Morristown, NJ 07960
973-425-1200
(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 past 90 days. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
Class Shares Outstanding at November 4, 1998
----- --------------------------------------
<S> <C>
Common Stock 23,241,612
</TABLE>
<PAGE> 2
DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Statements of Operations
Three months and nine months ended September 30, 1998 and 1997 3
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
2
<PAGE> 3
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 1,116 $ 2,370 $ 8,386 $ 5,189
Services 29,352 17,998 73,036 49,888
-------- -------- -------- --------
30,468 20,368 81,422 55,077
-------- -------- -------- --------
Cost of revenues:
Cost of license fees 379 729 1,764 1,393
Cost of services 13,645 8,795 35,941 26,923
-------- -------- -------- --------
14,024 9,524 37,705 28,316
-------- -------- -------- --------
Gross margin 16,444 10,844 43,717 26,761
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 10,280 7,678 28,701 21,688
Research and development 847 606 2,617 1,942
Write-off of in-process research
and development 1,230 -- 1,230 --
-------- -------- -------- --------
12,357 8,284 32,548 23,630
-------- -------- -------- --------
Operating income 4,087 2,560 11,169 3,131
Interest income 280 100 690 366
Other income (expense) 117 (21) (248) (180)
-------- -------- -------- --------
Income before income taxes 4,484 2,639 11,611 3,317
Income taxes 2,043 1,047 4,751 1,344
-------- -------- -------- --------
Net income $ 2,441 $ 1,592 $ 6,860 $ 1,973
======== ======== ======== ========
Net income per share:
Basic $ .11 $ .07 $ .31 $ .09
======== ======== ======== ========
Diluted $ .10 $ .07 $ .28 $ .09
======== ======== ======== ========
Shares used in computing net income per share:
Basic 22,705 22,201 22,475 22,265
======== ======== ======== ========
Diluted 24,818 23,226 24,437 22,942
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 24,929 $ 15,917
Short-term investments 1,384 2,955
Accounts receivable, net 28,306 24,724
Prepaid expenses and other 2,771 2,222
Deferred tax asset 441 441
-------- --------
Total current assets 57,831 46,259
Property and equipment, net 3,957 3,110
Deferred taxes 667 667
Goodwill, net 2,619 575
Capitalized software development costs, net 3,304 2,408
-------- --------
$ 68,378 $ 53,019
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,796 $ 2,211
Income taxes payable 997 867
Accrued compensation and benefits 3,943 3,439
Other accrued expenses 7,424 4,352
Deferred revenues 1,346 1,409
-------- --------
Total current liabilities 16,506 12,278
-------- --------
Deferred rent 456 598
-------- --------
Deferred taxes 2,293 1,970
-------- --------
Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 100,000,000 shares
authorized, 23,209,612 and 22,659,548 shares issued
and 22,808,612 and 22,258,548 outstanding 36,965 32,814
Retained earnings 16,128 9,268
Deferred compensation (1,160) (1,141)
Cumulative translation adjustment (883) (841)
Less treasury stock, at cost (1,927) (1,927)
-------- --------
49,123 38,173
-------- --------
$ 68,378 $ 53,019
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income $ 6,860 $ 1,973
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,116 2,018
Deferred income taxes -- 73
Write-off of in-process research and development 1,230 --
Changes in assets and liabilities:
Increase in accounts receivable (3,859) (6,110)
Increase in prepaid expenses and other (536) (691)
Increase (decrease) in accounts payable and accrued expenses 3,708 (670)
Decrease in deferred rent (142) (128)
Increase in income taxes payable 130 673
Decrease in deferred revenues (37) (511)
-------- --------
Net cash provided by (used in) operating activities 9,470 (3,373)
-------- --------
Investing activities:
Purchases of short-term investments (3,942) (2,843)
Sales of short-term investments 5,513 8,650
Purchase of ABC, net of cash acquired (2,295) --
Purchases of property and equipment (1,261) (918)
Additions to capitalized software development costs (1,067) (756)
-------- --------
Net cash provided by (used in) investing activities (3,052) 4,133
-------- --------
Financing activities:
Purchase of Treasury Stock -- (1,927)
Issuance of Common Stock 2,594 384
-------- --------
Net cash provided by (used in) financing activities 2,594 (1,543)
-------- --------
Effect of foreign exchange rate changes on cash -- (130)
-------- --------
Net increase (decrease) in cash and cash equivalents 9,012 (913)
Cash and cash equivalents, beginning of period 15,917 10,912
-------- --------
Cash and cash equivalents, end of period $ 24,929 $ 9,999
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE> 6
DENDRITE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Dendrite International, Inc. and its
subsidiaries (collectively, the "Company") included herein 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 three and nine month periods
ended September 30, 1998. These consolidated financial statements should be read
in conjunction with the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The interim operating results of the Company may not be indicative of
operating results for the full year.
2. Net Income Per Share
The Company has presented net income per share pursuant to Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98.
Basic income per share ("Basic EPS") was computed by dividing the net income
for each period by the weighted average number of shares of Common Stock
outstanding for each period. Diluted income per share ("Diluted EPS") was
computed by dividing net income for each period by the weighted average number
of shares of Common Stock and Common Stock equivalents outstanding during each
period. For the three months ended September 30, 1998 and 1997, Common Stock
equivalents used in computing Diluted EPS were 2,113,000 and 1,025,000,
respectively. For the nine months ended September 30, 1998 and 1997, Common
Stock equivalents used in computing Diluted EPS were 1,962,000 and 677,000,
respectively.
3. Recently Adopted Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS No. 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income.
For the three and nine months ended September 30, 1998 and 1997, the Company
engaged in numerous transactions involving foreign currency, which resulted in
unrealized gains and losses. Total after-tax comprehensive income for the
quarters ended September 30, 1998 and 1997 was $2.564 million and $1.484 million
respectively. Total after-tax comprehensive income for the nine months ended
September 30, 1998 and 1997 was $6.835 million and $1.868 million, respectively.
4. Stock Split
On July 21, 1998, the Company's Board of Directors declared a two-for-one
common stock split. The stock split was distributed in the form of a 100% stock
dividend on August 21, 1998 to stockholders of record as of August 11, 1998. All
share and per share information have been retroactively adjusted to reflect the
stock split.
5. Certain Reclassifications
During the second quarter of 1998, the Company determined that costs
associated with certain activities that were previously classified as research
and development expense, should be classified as cost of services, as these
expenditures relate to client specific activities. For consistency of
presentation, prior periods have been reclassified. The reclassification for the
nine months ended September 30, 1998 and 1997 was $2.189 million and $1.929
million, respectively. The reclassification for the three months ended September
30, 1998 and 1997 was $790,000 and $663,000, respectively.
6
<PAGE> 7
6. Acquisition
On July 24, 1998, the Company acquired 100% of the capital stock of Associated
Business Computing N.V. and an affiliated company (collectively, "ABC") for
approximately $4,013,000 and transaction costs of $150,000. The purchase was
accounted for under the purchase method of accounting, whereby the purchase
price is allocated to the assets and liabilities assumed of ABC based on their
respective fair market values at the acquisition date. The excess of purchase
price over the fair value of net assets acquired was assigned to identifiable
intangibles. The Company assigned $1,230,000 to in-process research and
development and such amount was written-off in the accompanying statement of
operations. The Company also recorded $2,226,000 as goodwill. ABC's results of
operations have been included in the Company's financial statements from the
date of acquisition.
7
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of section 27A of the Securities Act of 1933, as amended, and Section
21-E of the Securities Exchange Act of 1934, as amended, which are intended to
be covered by the safe harbors created thereby. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Investors are cautioned that
all forward-looking statements involve risks and uncertainties, including the
factors set forth under "Factors that May Affect Future Operating Results", many
of which are beyond the Company's control. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate and there can be no
assurance that actual results will be the same as those indicated by the
forward-looking statements included in this Form 10-Q. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Moreover, the Company assumes no obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
Overview
The Company succeeded in 1991 to a business co-founded in 1986 by the
Company's current Chairman, President and Chief Executive Officer to provide
comprehensive Electronic Territory Management ("ETM") solutions to be used to
manage, coordinate and control the activities of large sales forces in complex
selling environments, primarily in the ethical pharmaceutical industry. Today,
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 and Brazil through its own
sales, support and technical personnel located in offices worldwide.
The Company generates revenues from two sources: service and license
fees. Service revenues, which account for a substantial majority 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. Customization and implementation fees are generated from services
provided to modify and implement the ETM solution for the customer. Technical
and hardware support fees are derived from services related to the operation of
the customer's server computers and from the provision of ongoing technical and
customer service support including customization of the software following
initial implementation. Sales force support fees are derived from organizing and
managing support for the customer's sales force.
License fees are charged by the Company for use of its proprietary
computer software. Customers generally pay one-time perpetual license fees based
upon the number of users, territory covered and the number of modules in the
particular system licensed by the customer. The Company generally recognizes
one-time license fees as revenue using the percentage of completion method over
a period of time that commences with execution of the license agreement and
concludes with the completion of initial customization, if any. For license
contracts that contain customer acceptance provisions, revenue is not recognized
until such time as the acceptance provisions are satisfied. Certain license
revenue relates to software which the Company considers to be off-the-shelf.
These revenues are generally recognized upon delivery of the software.
Additional license fees are recognized when customers agree to license
additional functions or enhancements, acquire an upgraded version of the
Company's software and/or when the maximum number of users or initial geographic
coverage is exceeded.
The United States, the United Kingdom, France and Japan are the
Company's main markets. Approximately 42% and 22% of the Company's total
revenues were generated outside the United States during the three month periods
ended September 30, 1997 and 1998, respectively. Approximately 46% and 27% of
the Company's total revenues were generated outside the United States during the
nine month periods ended September 30, 1997 and 1998, respectively. This
decrease in the percentage of revenues generated outside the United States was
principally due to very strong revenue growth in the United States
pharmaceutical and consumer packaged goods businesses, in addition to a modest
revenue decline outside the United States, concentrated in Europe. Services
provided by Dendrite's foreign branches and subsidiaries are billed in local
currency. License fees for Dendrite products are billed in U.S. dollars
regardless of where they originate. Operating results generated in local
currencies are translated into United States dollars at the average exchange
rate in effect for the reporting period.
8
<PAGE> 9
Results of Operations
Three Months Ended September 30, 1997 and 1998
Revenues. Total revenues increased $10.100 million or 50% from $20.368
million in the three months ended September 30, 1997 to $30.468 million in the
three months ended September 30, 1998.
License fee revenues decreased 53% from $2.370 million in the three
months ended September 30, 1997 to $1.116 million in the three months ended
September 30, 1998. This decrease was primarily attributable to the acceleration
of anticipated license revenues into the first half of the year as a result of
efficiencies realized during the implementation process for significant new
licencees, as well as the absence of significant third party software resales.
Service revenues increased 63% from $17.998 million in the three months
ended September 30, 1997 to $29.352 million in the three months ended September
30, 1998. This increase was primarily the result of an increase in the Company's
installed base of Dendrite ETM systems at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to the Company's existing customers.
Cost of Revenues. Cost of revenues increased $4.500 million or 47% from
$9.524 million in the three months ended September 30, 1997 to $14.024 million
in the three months ended September 30, 1998.
Cost of license fees decreased 48% from $729,000 in the three months
ended September 30, 1997 to $379,000 in the three months ended September 30,
1998. Cost of license fees for the three months ended September 30, 1998
represents the amortization of capitalized software development costs of
$332,000 and third party vendor license fees of $47,000. Cost of license fees
for the three months ended September 30, 1997 represents the amortization of
capitalized software development costs of $272,000 and third party license fees
of $457,000. The increase in the amortization of capitalized software
development costs is due to the increase in capitalized software development
costs during 1997 associated with the Company's development efforts in
conjunction with new products. The decline in cost of third party vendor license
fees is attributable to the absence of significant third party software sales.
Cost of services increased 55% from $8.795 million in the three months
ended September 30, 1997 to $13.645 million in the three months ended September
30, 1998. This increase was primarily due to an increase in staff required to
support higher client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 49% of service revenues in the three months ended September 30,
1997 to 46% in the three months ended September 30, 1998. This decrease was
primarily the result of increased operational efficiencies in 1998.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 34% from $7.678 million in the three months ended September 30, 1997
to $10.280 million in the three months ended September 30, 1998. This increase
was primarily attributable to increased staff required for sales and support
operations, severance costs associated with the Company's European business and
significantly higher incentive compensation expense for its United States
business. As a percentage of revenue, SG&A expenses decreased from 38% in
the three months ended September 30, 1997 to 34% in the three months ended
September 30, 1998, due to leveraging the fixed cost elements in general and
administrative expenses over a higher revenue base.
Research and Development Expenses. Research and development expenses
increased 40% from $606,000 in the three months ended September 30, 1997 to
$847,000 in the three months ended September 30, 1998. As a percentage of
revenues, research and development expenses remained relatively constant at 3%.
The increase in research and development expenses during the most recent period
was primarily attributable to increased spending on development of the Company's
Consumer Packaged Goods products, the continued development of Force
MultiplieRx(TM) and the development of the next generation pharmaceutical ETM
system, Force Pharma(TM).
Write-off of in-process research and development costs. The Company
incurred a one-time charge of $1.230 million to record the write-off of
in-process research and development costs resulting from the acquisition of
Associated Business Computing N.V. and an affiliated company ("ABC"). This
amount represents the estimated fair values, based on an independent appraisal,
related to in-process research and development projects that were acquired. The
technology acquired will require substantial additional development by the
Company.
Provision for Income Taxes. The effective tax rate, excluding the
write-off of the in-process research and development which is not tax
deductible, was reduced to 37%, retroactive to the first quarter, during the
three months ended September 30, 1998 as opposed to 40% during the three months
ended September 30, 1997. This decrease was due primarily to the implementation
of tax minimization strategies throughout the world.
9
<PAGE> 10
Nine months Ended September 30, 1997 and 1998
Revenues. Total revenues increased $26.345 million or 48% from $55.077
million in the nine months ended September 30, 1997 to $81.422 million in the
nine months ended September 30, 1998.
License fee revenues increased 62% from $5.189 million in the nine
months ended September 30, 1997 to $8.386 million in the nine months ended
September 30, 1998. This increase was primarily attributable to the recognition
of revenue related to license fees from several significant contracts, new
customer wins for the Company's consumer business division and increased sales
of third party software.
Service revenues increased 46% from $49.888 million in the nine months
ended September 30, 1997 to $73.036 million in the nine months ended September
30, 1998. This increase was primarily the result of an increase in the Company's
installed base of Dendrite ETM systems at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to the Company's existing customers.
Cost of Revenues. Cost of revenues increased $9.389 million or 33% from
$28.316 million in the nine months ended September 30, 1997 to $37.705 million
in the nine months ended September 30, 1998.
Cost of license fees increased 27% from $1.393 million in the nine
months ended September 30, 1997 to $1.764 million in the nine months ended
September 30, 1998. Cost of license fees for the nine months ended September 30,
1998 represents the amortization of capitalized software development costs of
$996,000 and third party vendor license fees of $768,000. Cost of license fees
for the nine months ended September 30, 1997 represents the amortization of
capitalized software development costs of $818,000 and third party vendor
license fees of $575,000. The increase in the amortization of capitalized
software development costs is due to the increase in capitalized software
development costs during 1997 associated with the Company's development efforts
in conjunction with new products. The increase in third party vendor license
fees is attributable to the increase in third party software sales.
Cost of services increased 33% from $26.923 million in the nine months
ended September 30, 1997 to $35.941 million in the nine months ended September
30, 1998. This increase was primarily due to an increase in staff required to
support higher client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 54% of service revenues in the nine months ended September 30,
1997 to 49% in the nine months ended September 30, 1998. This decrease was
primarily the result of increased operational efficiencies in 1998 as well as
unusually high costs in the first quarter of 1997.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 32% from $21.688 million in the nine months ended September 30, 1997
to $28.701 million in the nine months ended September 30, 1998. This increase is
primarily attributable to increased staff required for sales and support
operations. As a percentage of revenue, SG&A expenses decreased from 39% in the
nine months ended September 30, 1997 to 35% in the nine months ended September
30, 1998, due to leveraging the fixed cost elements in general and
administrative expenses over a higher revenue base.
Research and Development Expenses. Research and development expenses
increased 35% from $1.942 million in the nine months ended September 30, 1997 to
$2.617 million in the nine months ended September 30, 1998. As a percentage of
revenues, research and development expenses remained relatively constant at 3%.
The increase in research and development expenses during the most recent period
was primarily attributable to increased spending on development of the Company's
Consumer Packaged Goods products, the continued development of Force
MultiplieRx(TM) and the development of the next generation pharmaceutical ETM
system, Force Pharma(TM).
Write-off of in-process research and development costs. The Company
incurred a one-time charge of $1.230 million to record the write-off of
in-process research and development costs resulting from the acquisition of ABC.
This amount represents the estimated fair values, based on an independent
appraisal, related to in-process research and development projects that were
acquired. The technology acquired will require substantial additional
development by the Company.
Provision for Income Taxes. The effective tax rate, excluding the
write-off of the in-process research and development which is not tax
deductible, was reduced to 37% during the nine months ended September 30, 1998
as opposed to 41% during the nine months ended September 30, 1997. This decrease
was due primarily to the implementation of tax minimization strategies
throughout the world.
10
<PAGE> 11
Liquidity and Capital Resources
On January 16, 1997 the Board of Directors approved a stock buy-back
program initially limited to $3,000,000, which subject to further Board review
and approval could be increased to a maximum of $10,000,000, but not greater
than 9% of the Company's outstanding shares of Common Stock. During the nine
months ended September 30, 1997, the Company repurchased 401,000 shares of
Common Stock for a total value of $1,927,000.
The Company has historically financed its operations primarily through
cash generated by operations. Net cash provided by operating activities was
$9.470 million for the nine months ended September 30, 1998 compared to cash
used in operating activities of $3.373 million for the nine months ended
September 30, 1997. This increase is due primarily to higher net income, as well
as more efficient accounts receivable and liability management during the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997.
Cash used in investing activities was $3.052 million in the nine months
ended September 30, 1998 compared to cash obtained from investing activities of
$4.133 million in the nine months ended September 30, 1997. This change was due
primarily to the decreased sales of short-term investments as well as the
purchase of ABC in the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997.
The Company obtained $2.594 million of cash from financing activities
in the nine months ended September 30, 1998 compared to the utilization of
$1.543 million in cash from financing activities in the nine months ended
September 30, 1997. The change in the Company's cash provided from financing
activities is due an increase in the issuance of common stock primarily from the
exercise of employee stock options during the nine months ended September 30,
1998 and open-market purchases of its common stock during the nine months ended
September 30, 1997.
The Company maintains a $5.0 million revolving line of credit agreement
with the Chase Manhattan Bank, N.A. The agreement provides for borrowing up to
$1.0 million 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 $5.0 million line of credit is secured by
substantially all of the Company's assets. The $5.0 million 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 and plus the net proceeds of any stock offering. This covenant has the
effect of limiting the amount of cash dividends the Company may pay. At
September 30, 1998, there were no borrowings outstanding under the agreement.
At September 30, 1998, the Company's working capital was approximately
$41.325 million. 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 available funds,
anticipated cash flows from operations and its line of credit will satisfy the
Company's projected working capital and capital expenditure requirements,
exclusive of cash required for possible acquisitions of businesses, products
and technologies, through at least the next two years.
Management regularly evaluates opportunities to acquire products or
businesses complementary to the Company's operations. Such acquisition
opportunities, if they arise, and are successfully completed, may involve the
use of cash or equity instruments.
Year 2000
The year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a loss of data or temporary inability to process data or transactions.
The efficient operation of the Company's business is dependent in part
on computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). Since 1997, as part of its
Year 2000 compliance program, the Company has been evaluating its Internal
Programs and Systems to identify potential Year 2000 compliance problems. To the
extent practicable, the Company has completed testing of the Internal Programs
and Systems. As a result of the testing, the Company has determined that some of
its Internal Programs and Systems are not Year 2000 compliant. The Company has
begun and will continue to modify or replace some of its Internal Programs and
Systems to make such Internal Programs and Systems Year 2000 compliant. The
Company is also communicating with its suppliers and others to coordinate Year
2000 conversion and is requesting assurances from all software vendors from
which it may purchase or license software that such software will correctly
process all date information at all times.
11
<PAGE> 12
Based on present information, the Company believes that it will be able
to achieve such Year 2000 compliance through a combination of modification of
some existing Internal Programs and Systems and the replacement of other
Internal Programs and Systems with new programs and systems that are already
Year 2000 compliant. Dendrite expects to have its Year 2000 compliance program
substantially completed by the end of the first quarter of 1999. However, no
assurance can be given that these efforts will be successful or completed in a
timely manner.
The Company believes most of its ETM systems and other software
products (in base line form) which it licenses to customers (collectively, its
"External Programs and Systems") will be Year 2000 compliant. Dendrite defines
"Year 2000 compliant" to mean that the applicable Dendrite product is capable of
recognizing and processing date data beyond the Year 2000 as belonging to the
correct century provided all products (for example, hardware, firmware, and
software including interfacing programs, operating systems and database engines)
used with the software are Year 2000 compliant and properly exchange data with
it. Dendrite uses an industry-recognized methodology known as "windowing" for
Year 2000 compliance for its current software products.
The Company, however, has identified the products that will not process
dates beyond December 31, 1999. Such older products are mature products and will
not be supported by Dendrite. In addition, as a result of certain products being
customized in the process of installation, it is possible that dates were
hardcoded to "19xx" during such process. In order to determine whether any such
hardcoding has occurred, the Company has strongly encouraged each customer to
have its product tested by Dendrite for Year 2000 compliance.
To date, the Company has spent approximately $100,000 to evaluate, test
and remediate, if necessary, its Internal Programs and Systems for Year 2000
compliance problems and expects to spend up to an additional $50,000 through
2000. These costs will be funded through cash flows from operations. To date,
the Company has not spent any material amount on evaluating the Year 2000
compliance status of its ETM systems and software products licensed to customers
and does not anticipate any future material expenditures. The Company expects
that the expenses and capital expenditures associated with achieving Year 2000
compliance will not have a material adverse effect on its results of operations
or financial condition. For a discussion of the risks associated with the Year
2000, see "Factors that May Affect Future Operating Results - Risks to the
Company Relating to the Year 2000".
Because of the Company's relatively advanced state of readiness, the
Company has not yet formulated a reasonably likely worst case scenario. During
the first quarter of 1999, as the Company assesses the state of readiness for
January 1, 2000, the Company expects to formulate such a scenario and to
prepare a contingency plan, if the reasonably likely worst case scenario
warrants such a contingency plan.
Factors that May Affect Future Operating Results
Impact on Company of changes in ethical drug market. A majority of the
Company's ETM systems are currently used in connection with the marketing and
sale of prescription-only drugs ("ethical pharmaceutical products" or "ethical
drugs"). The market currently serviced by the Company is undergoing a number of
significant changes, including (i) consolidations and mergers which may reduce
the number of existing and potential customers of the Company, (ii) the
increasing prescription of generic drugs, in substitution for ethical drugs,
produced by manufacturers which do not use a Company ETM system, (iii) the trend
toward the reclassification of formerly prescription-only drugs to permit their
over-the-counter sale and (iv) competitive pressures on the Company's
pharmaceutical customers resulting from the increasing emphasis in the United
States on the delivery of healthcare through managed care organizations such as
health maintenance organizations and preferred provider organizations,
consolidation of the managed care industry in the United States and other
changes in healthcare delivery systems occurring in other countries. Any one or
more of these changes may adversely affect the Company's business, operating
results or financial condition. The Company may also be materially affected by
legislative enactments which alter the structure of, or increase regulations
governing, the healthcare systems in any of the countries where Company
customers and potential customers are located, including, without limitation,
government mandated price reductions in the price of ethical pharmaceutical
products. There can be no assurance that the Company can respond positively to
all of these and other changes in the marketplace and maintain profitability.
Potential for significant fluctuations in quarterly results;
seasonality; lengthy sales and implementation cycle. The Company's quarterly
revenues, expenses and operating results have varied considerably in the past
and are likely to vary from quarter to quarter in the future. 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 installation of the Company's software, the length
of sales cycles, customer budget changes and changes in pricing policy by the
Company or its competitors. For example, the Company incurred a net loss of $3.3
million in the fourth quarter of 1996, which loss was attributable to, among
other things, the delay of certain new license purchases by an existing
customer, the delay of an existing client's upgrade decision, the postponement
of certain post-production implementations for an existing client in multiple
country sites and increased research and development spending.
The Company establishes its expenditure levels for product development,
personnel 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 a
significant portion of the Company's expenses do not vary with its revenues.
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In addition, the Company's quarterly license fees and service revenues
may vary due to seasonal, cyclical and other factors. Selection of an ETM system
often entails an extended decision-making process for the customer because of
the substantial costs and strategic implications associated with acquiring the
system. Senior levels of management are often involved in this process, given
the importance of the decision as well as the risks faced by the customer should
a system fail or not perform as expected. Depending upon the size of the system
and the associated computer hardware and software costs, senior corporate
management or even the board of directors of a customer may make the final
decision to license a Company ETM system. Therefore, decisions to acquire a
Company ETM system involve long selling cycles, typically 12 to 18 months for
larger customers, although sometimes as long as 24 months, and usually require
lengthy periods of evaluation prior to full installation and roll-out. In
addition, the Company's ability to recognize license revenue is affected by the
duration of the customization process, if any. Finally, the Company has
historically realized a greater percentage of its annual license fees and
service revenues in the second half of the year than it does in the first half
because, among other things, the Company's customers typically spend more of
their annual budget authorization for ETM products and services in the second
half of the year. However, the interplay among the foregoing factors means that
actual results for a given year may vary from this seasonal expectation. In the
future, because service revenues tend to be less seasonal and cyclical than
license fees, to the extent the percentage of revenue from service revenues from
existing customers of the Company continues to increase, seasonal and cyclical
trends in the Company's revenues may change.
New products and technological change. The market for ETM systems is
characterized by rapid change and improvements in computer hardware and software
technology. The Company's future success will depend in part on its ability to
enhance its current products, to introduce new products that keep pace with
technological and market developments and to address the increasingly
sophisticated needs of its customers. While the Company expects to continue
doing so, there can be no assurance that the Company will be successful in
developing and marketing in a timely manner product enhancements or new products
that respond to the technological advances by others, or that its products will
adequately and competitively address the needs of the changing marketplace.
Competition with respect to software products has been characterized by
shortening product cycles, and there can be no assurance that the Company will
not be adversely affected by this trend. If the product cycles for the Company's
systems prove to be shorter than management anticipates, the Company's operating
results could be adversely affected. In addition, in order to remain
competitive, the Company may be required to expend a greater percentage of its
revenues on product innovation and development than historically has been the
case, in which case, the Company's gross profit margins and results of
operations could be materially and adversely affected. In addition, products as
complex as those offered by the Company may contain previously undetected errors
or failures. Such errors have occurred in the past and there can be no assurance
that, despite testing by the Company, errors will not be found in new products
resulting in losses or delays which could have a material adverse effect on the
Company's business, operating results or financial condition.
Recent ETM product offerings by the Company include, and future ETM
product offerings may include, ETM products designed for markets other than the
ethical pharmaceutical market. Recent product offerings also include products
that can be used by customers independently of ETM systems, such as the
analytical tools the Company has recently introduced that permit managers to
analyze data collected by their sales representatives. The selling environment
in each market has characteristics that are unique to it. There can be no
assurance that the Company will be able to achieve in such markets or with new
products the success it has attained in the ethical pharmaceutical market.
Dependence on major customers. The Company has approximately 77
pharmaceutical customers. Considering all members of an affiliated group to be a
single customer, the Company derived approximately 56%, 58% and 59% of its
revenues in the aggregate in the years ended December 31, 1995, 1996 and 1997,
respectively, from its three largest pharmaceutical customers, two of which had
been among the three largest customers of the Company in terms of revenues in
each of those periods. The Company believes that the costs to its customers of
switching to an ETM system offered by a competitor, or taking significant system
management functions in-house would be substantial. Nevertheless, from time to
time in the past, such a change has been made by some of the Company's customers
with respect to a Company ETM system or all or some of the services offered by
the Company. If such change is made by one or more of the Company's major
customers, the Company's business, operating results or financial condition
could be materially and adversely affected.
Risks from competition. Globally, the current market for sales and
marketing information management systems of the type sold by the Company is
highly competitive. Many companies offer sales force automation and ETM systems.
In addition to Dendrite, the Company believes that there are several companies
which supply products automating sales, marketing and customer service functions
and specifically target the pharmaceutical industry. The Company believes at
least four of these companies are actively selling in more than one country. In
addition, the other vertical markets in which the Company markets its products
possess numerous vendors who market and sell sales force automation and ETM
systems. The Company believes that most of its competitors offer a variety of
less configurable software products, which are typically available more rapidly
than Company systems and often at a substantially lower price. In addition,
competition will increase as new competitors enter the market to supply ETM
systems and as existing competitors expand their product lines or consolidate.
The Company expects it may encounter additional competition in the
future from firms offering outsourcing of information technology services, from
purveyors of software products providing specialized applications not offered by
the Company, including enterprise resource planning vendors and database vendors
not currently in this market space to any substantial degree, and from the
development and/or operation of in-house systems by its customers and potential
customers. Many of the Company's competitors and potential competitors have
longer operating histories and significantly greater financial, technical,
sales, marketing and other resources than those of the Company. Some of the
Company's competitors and potential competitors are part of large corporate
groups with significantly greater resources and broader technology bases than
those of the Company. There can be no assurance that the Company will be able to
compete successfully or that competition will not have a material adverse effect
on the Company's business, operating results or financial condition.
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Reliance on competitors for market data. Current market data on the
sales of ethical pharmaceutical products is an important element for the
operation of Company ETM systems, which the Company's customers use to guide and
organize their sales forces and marketing efforts. There are currently few
sources of such data in the United States, Europe and the Pacific Rim. Two of
the leading purveyors of such market information in the United States or
elsewhere compete with the Company either directly or through affiliates in the
market for ETM systems. Were these purveyors of market information to require
that pharmaceutical companies also utilize their ETM systems (or those of their
affiliates) instead of the Company's, the Company's business, operating results
and financial condition would be materially and adversely affected.
International operations. Currently, the Company expects the portion of
its business located outside of the United States to continue to account for a
material part of its revenues. Licensing software and providing services in many
foreign countries is subject to risks inherent in international business
activities. Risks include general economic conditions in each such country, the
effect of applicable foreign tax structures, tariff and trade regulations,
difficulties in obtaining local licenses, the difficulty of managing an
organization spread over various jurisdictions, unexpected changes in regulatory
environments, complying with a variety of foreign laws and regulations and any
adverse changes in the political environments in any such countries. In
addition, laws in foreign countries may not always provide protection for the
Company's proprietary rights in its software products. Providing specialized
system support services outside the United States paid for in local currencies
carries the additional risk of currency fluctuation and may also affect the net
income, if any, reported by the Company.
Dependence on key personnel, management of growth. The success of the
Company depends to a significant extent upon the contributions of its executive
officers and key sales, technical and customer service personnel. The Company
maintains a $3 million key man insurance policy on Mr. John Bailye, its
Chairman, President and Chief Executive Officer, the proceeds of which are
payable to the Company. The Company's future success also depends on its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense. The Company has
at times experienced difficulty in recruiting qualified personnel and there can
be no assurance that the Company will not experience such difficulties in the
future. Any such difficulties could adversely affect the Company's business,
operating results and financial condition. All of the Company's executive
officers, technical employees and sales employees have entered into
non-competition agreements with the Company. The laws governing such
non-competition agreements vary in different jurisdictions and are evolving. The
enforceability of such agreements in any case will depend upon all of the facts
and circumstances, including the jurisdiction in which enforcement is sought. In
some cases these agreements might be unenforceable, a result that could have a
material adverse effect on the Company.
To manage its growth effectively, the Company must continue to
strengthen its operational, financial and management information systems, and
expand, train and manage its work force. There can be no assurance that the
Company will be able to do so on a timely basis. Failure to do so effectively
and on a timely basis could have a material adverse effect upon the Company's
business, operating results or financial condition.
Dependence on proprietary technology. The Company relies on a
combination of trade secret, copyright and trademark laws, non-disclosure and
other contractual agreements, and technical measures to protect its proprietary
rights in its products. There can be no assurance that the steps taken by the
Company will prevent misappropriation of this technology. Further, there can be
no assurance that such protective steps will preclude competitors from
developing products with features similar to the Company's products. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties. There
can be no assurance, however, that third parties will not assert infringement
claims against the Company in the future or that any such claims will not
require the Company to enter into royalty arrangements or result in costly
litigation involving the imposition of damages or injunctive relief against the
Company, any of which could materially and adversely affect the Company's
business, operating results and financial condition.
Risks to the Company relating to the Year 2000. A substantial amount of
current demand for applications software may be generated by customers in the
process of replacing and upgrading applications in order to accommodate the
change in date to the year 2000. Once such customers have completed such
activities, the Company may experience a significant deceleration in this source
of revenue which is expected to contribute to its 1999 annual growth. In
addition, the expense and time associated with remediation efforts by customers
to address Year 2000 compliance problems for software products other than the
Company's, may cause such customers to delay the purchase of, or reduce the
amount spent on the Company's products and services, both before and after
January 1, 2000. Such a reduction, if it occurs, could have a material adverse
effect on the Company's business, operating results or financial condition.
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As part of its Year 2000 compliance plan, the Company has assessed both
the readiness of its Internal Systems and Programs for handling the Year 2000 as
well as the compliance of products sold or licensed by the Company. With respect
to its Internal Programs and Systems, the Company believes that it will be able
to achieve Year 2000 compliance through a modification of some existing Internal
Programs and Systems and the replacement of other Internal Programs and Systems
with new programs and systems that are already Year 2000 compliant. However, if
defects are not timely identified and if continued modifications and conversions
are not made, or not timely completed, the Year 2000 problem could have a
material adverse effect on the Company's operating results and financial
condition.
The Company has designed and tested the most current version of its
products to be Year 2000 compliant. No assurance can be given, however, that the
Company's current products do not contain undetected errors or defects
associated with Year 2000 date functionality that may result in material costs
to the Company. Dendrite defines "Year 2000 compliant" to mean that the
applicable Dendrite product is capable of recognizing and processing date data
beyond the Year 2000 as belonging to the correct century provided all products
(for example, hardware, firmware, and software including interfacing programs,
operating systems, and database engines) used with the software are Year 2000
compliant and properly exchange date data with it. Dendrite uses an
industry-recognized methodology known as "windowing" for Year 2000 compliance
for its current software products.
Some of the Company's older products, however, will not, and some may
not accurately process dates after the date December 31, 1999. To the extent any
of these products are still in use in 1999, the Company will continue to attempt
to migrate these customers to products which are Year 2000 compliant, although
there can be no assurance that this will occur. A failure to migrate any such
customer to a product which is Year 2000 compliant could adversely affect the
Company's business, operating results or financial condition. In addition, the
Company may experience increased expenses which it cannot recoup from customers
in addressing the migration of current customers and introduction of prospective
customers to software that is Year 2000 compliant.
In addition, some customers may attempt to hold the Company responsible
for Year 2000 compliance for hardware or software not supplied or created by the
Company, but used in conjunction with one or more of the Company's products. For
example, the computer systems and software products of other customers with
which the Company's computer systems, software, databases or other technology
interface may not accept input of, store, manipulate and output dates after the
Year 2000 without error or interruption. To the extent any such allegation is
made, the Company intends to defend itself vigorously.
Finally, there can be no assurance that the Company will not incur
material expenses in connection with any claim relating to Year 2000 compliance
of its own products or the products of third parties.
Consumer Business Division. The Company is currently engaged in the
marketing and selling of ETM systems to companies in the over-the-counter
pharmaceutical and consumer packaged goods ("CPG") vertical markets. The selling
environment in this vertical market has competitive and other characteristics
that are unique to it. In addition, the Company believes that the CPG vertical
market is composed of sub-markets each of which may have characteristics unique
to such sub-market. Accordingly, there can be no assurance that the Company will
be able to achieve in these markets the success it has attained in the ethical
pharmaceutical market.
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PART II OTHER INFORMATION
Item 5. Other Information
On October 28, 1998, the Company entered into indemnification agreements with
each of its directors (John Bailye, Bernard Goldsmith, Edward Kfoury, John
Martinson and Terence Osborne), other than Paul Margolis (who already has an
indemnification agreement with the Company), and executive officers (Mark
Cieplik, Thierry Durand, Christopher French, John LaHaye, George Robson, Bruce
Savage and Teresa Winslow). Each such indemnification agreement, is
substantially in the form of the indemnification agreement attached as an
Exhibit to this Form 10-Q.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The Company is furnishing the following exhibits in connection with
this report:
10.1 Form of Indemnification Agreement *
27 Financial Data Schedule *
(b) The Company did not file any Reports on Form 8-K during the quarter
for which this report is filed.
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: November 14, 1998
By:/s/ John E. Bailye
-----------------------------
John E. Bailye, President and
Chief Executive Officer
By: /s/ George T. Robson
-----------------------------
George T. Robson, Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Exhibit
10.1 Form of Indemnification Agreement *
27 Financial Data Schedule *
* Previously filed.
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