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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 quarter ended March 31, 1999
[ ] 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.
Class Shares Outstanding at May 14,1999
Common Stock 23,506,053
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DENDRITE INTERNATIONAL, INC.
INDEX
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PAGE NO
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
Three months ended March 31, 1998 and 1999 3
Consolidated Balance Sheets
December 31, 1998 and March 31, 1999 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
ITEM 5. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
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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
Ended March 31,
------------------------------------------
1998 1999
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<S> <C> <C>
Revenues:
License fees $ 2,971 $3,369
Services 19,656 29,033
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22,627 32,402
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Cost of revenues:
Cost of license fees 361 398
Cost of services 9,894 13,869
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10,255 14,267
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Gross margin 12,372 18,135
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Operating expenses:
Selling, general and administrative 8,459 11,221
Research and development 899 1,354
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9,358 12,575
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Operating income 3,014 5,560
Interest income 196 409
Other income (expense) 321 115
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Income before income taxes 2,889 5,854
Income taxes 1,127 2,166
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=================== ===================
Net income $ 1,762 $ 3,688
=================== ===================
Net income per share:
Basic $.08 $.16
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Diluted $.07 $.15
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Shares used in computing net income per share:
Basic 22,324 23,209
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Diluted 23,900 25,159
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements
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DENDRITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
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<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $31,298 $37,347
Short-term investments 9,614 10,727
Accounts receivable, net 17,082 19,985
Prepaid expenses and other 3,090 2,070
Prepaid taxes 921 3,952
Deferred tax asset 467 467
-------------- --------------
Total current assets 62,472 74,548
Property and equipment, net 5,267 5,896
Deferred taxes 1,077 1,077
Goodwill, net 2,496 2,374
Capitalized software development costs, net 3,503 3,679
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$74,815 $87,574
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,002 $ 3,204
Income taxes payable 122 345
Accrued compensation and benefits 4,012 3,476
Other accrued expenses 6,953 7,669
Deferred revenues 1,420 3,323
-------------- --------------
Total current liabilities 14,509 18,017
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Deferred rent 392 484
Capital lease obligation 355 328
Deferred taxes 2,889 2,889
Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 100,000,000 shares
Authorized, 22,774,988 and 23,882,835 shares issued
and 22,373,988 and 23,481,835 outstanding 40,050 45,893
Retained earnings 20,535 24,223
Deferred compensation (1,494) (1,355)
Accumulated other comprehensive income (494) (978)
Less treasury stock, at cost (1,927) (1,927)
-------------- --------------
Total stockholder's equity 56,670 65,856
-------------- --------------
============== ==============
$74,815 $87,574
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
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DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
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<S> <C> <C>
Operating activities:
Net income $ 1,762 $ 3,688
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 714 880
Tax benefit from employee stock plan -- 2,831
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable 3,533 (3,198)
(Increase)/decrease in prepaid expenses and other (131) (138)
(Increase)/decrease in prepaid income taxes -- (1,149)
Increase/(decrease) in accounts payable and accrued expenses (992) 907
Increase/(decrease) in deferred rent (45) (64)
Increase/(decrease) in income taxes payable 249 434
Increase/(decrease) in deferred revenues (31) 1,888
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Net cash provided by (used in) operating activities 5,059 6,079
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Investing activities:
Purchases of short-term investments (1,488) (10,014)
Sales of short-term investments 111 8,901
Purchases of property and equipment (267) (1,022)
Additions to capitalized software development costs (284) (540)
------------ ------------
Net cash provided by (used in) investing activities (1,928) (2,675)
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Financing activities:
Payments on capital lease obligations -- (137)
Issuance of Common Stock 426 2,995
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Net cash provided by (used in) financing activities 426 2,858
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Effect of foreign exchange rate changes on cash (40) (213)
Net increase/(decrease) in cash and cash equivalents 3,517 6,049
Cash and cash equivalents, beginning of period 15,917 31,298
------------ ------------
Cash and cash equivalents, end of period $19,434 $ 37,347
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
5
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DENDRITE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Dendrite International, Inc. and
its subsidiaries included in this Form 10-Q 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 month periods ended March 31, 1999.
These consolidated financial statements should be read in conjunction with the
financial statements and notes contained in our Annual Report on Form 10-K for
the year ended December 31, 1998.
Our interim operating results may not be indicative of operating results
for the full year.
2. Net Income Per Share
We have 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 March 31, 1998 and 1999, common stock
equivalents used in computing Diluted EPS were 1,576,000 and 1,950,000,
respectively.
3. Recently Adopted Accounting Pronouncements
Effective January 1, 1998, we 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 months ended March 31, 1998 and 1999, we engaged in numerous
transactions involving foreign currency, which resulted in unrealized gains and
losses. Total after-tax comprehensive income for the quarters ended March 31,
1998 and 1999 was $766,000 and $3.204 million, respectively.
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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 that we believe
are within the meaning of Section 27A of the Securities Act of 1933 and Section
21-E of the Securities Exchange Act of 1934, which are intended to be covered by
the safe harbors created by such acts. For this purpose, any statements that are
not statements of historical fact may be deemed to be forward-looking
statements. Those statements in this Form 10-Q containing the words "believes",
"anticipates", "plans", "expects" and similar expressions constitute
forward-looking statements, although not all forward-looking statements contain
such identifying words. These forward-looking statements are based on our
current expectations, assumptions, estimates and projections about our company
and the pharmaceutical and consumer packaged goods industries. All
forward-looking statements involve risks and uncertainties, including those
risks identified under "Factors That May Affect Future Operating Results", many
of which are beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could be inaccurate and actual results may differ from those indicated by the
forward-looking statements included in this Form 10-Q, as more fully described
under "Factors That May Affect Future Operating Results". In light of the
significant uncertainties inherent in the forward-looking statements included in
this Form 10-Q, you should not consider the inclusion of such information as a
representation by us or anyone else that we will achieve our objectives and
plans. Moreover, we assume 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
We succeeded in 1991 to a business co-founded in 1986 by John Bailye, our
current President and Chief Executive Officer. The business was established to
provide sales force software products and support services that would enable
companies to manage, coordinate and control the activities of large sales
forces in complex selling environments, primarily in the prescription-only
pharmaceutical industry. Today, our solutions combine advanced software
products with a wide range of specialized support services. These services
include software implementation, technical and hardware support and sales force
support. We develop, implement and service sales force software products in the
United States, Canada, Western Europe, Japan, Australia, New Zealand and Brazil
through our own sales, support and technical personnel located in 13 offices
worldwide.
We generate revenues from two sources: fees from support services and
license fees. Service revenues, which account for a substantial majority of our
revenues, consist of fees from a wide variety of contracted services which we
make available to our customers, generally under multi-year contracts. We
generate implementation fees from services provided to configure and implement
sales force software products for our customers. We receive technical and
hardware support fees for services related to, among other things, the operation
of our customers' server computers, maintenance of our customers' databases,
asset control and maintenance for our customers' remote hardware and ongoing
technical support. Technical and hardware support fees also include fees for
software maintenance services such as software defect resolution, performance
enhancements and, in some cases, product upgrades. We charge fees for these
maintenance services based on a percentage of applicable license fees, plus any
customization fees. We receive sales force support fees for organizing and
managing support of our customers' sales force, including training, telephone
support and data analysis services. Ongoing support fees are generally
negotiated at the commencement of a contract. However, it is our experience that
our larger customers increase the amount of services they purchase from us over
time. Fees for these additional services are typically based on the labor and
materials used to provide the applicable service.
We charge our customers license fees to use our proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, the territory covered and the number of modules, or features,
in the particular software licensed by the customer.
Historically, we have generally recognized license fees as revenue using
the percentage of completion method over a period of time that begins with
execution of the license agreement and ends with the completion of initial
customization and installation, if any. However, we believe that with some of
our newer sales force software products, such as, ForcePharma and SalesPlus, our
customers will not require customization and therefore we may be able to
recognize license fees from these products upon delivery.
We recognize additional license fees when customers agree to license
additional functions or enhancements, acquire an upgraded version of Dendrite's
software and/or when the maximum permitted number of users or initial geographic
coverage is exceeded.
The United States, the United Kingdom, France and Japan are our main
markets. We generated approximately 34% of our total revenues outside the United
States during the quarter ended March 31, 1998; and approximately 28% during the
quarter ended March 31, 1999. This decrease in the percentage of revenues
generated outside the United States was principally due to very strong revenue
growth in our pharmaceutical and consumer packaged goods businesses in the
United States.
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We bill services provided by our foreign branches and subsidiaries in local
currency. License fees for our products are generally billed in U.S. dollars
regardless of where they originate. Operating results generated in local
currencies are translated into U.S. dollars at the average exchange rate in
effect for the reporting period.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1999
REVENUES. Total revenues increased $9.775 million or 43% from $22.627
million in the three months ended March 31, 1998 to $32.402 million in the three
months ended March 31, 1999.
License fee revenues increased 13% from $2.971 million in the three months
ended March 31, 1998 to $3.369 million in the three months ended March 31, 1999.
License fee revenues as a percentage of total revenues were 13% in the three
months ended March 31, 1998 as compared to 10% in the three months ended March
31, 1999. The increase in the absolute dollar amount of license fee revenues was
primarily attributable to an increase of license revenues from our European
pharmaceutical customers.
Service revenues increased 48% from $19.656 million in the three months
ended March 31, 1998 to $29.033 million in the three months ended March 31,
1999. Service revenues as a percentage of total revenues were 87% in the three
months ended March 31, 1998 as compared to 90% in the three months ended March
31, 1999. The increase in the absolute dollar amount of service revenues was
primarily the result of an increase in our installed base of Dendrite sales
force software products at both new and existing customers, the commencement of
new customer product rollouts, as well as the provision of additional services
to our existing customers.
COST OF REVENUES. Cost of revenues increased $4.012 million or 39% from
$10.255 million in the three months ended March 31, 1998 to $14.267 million in
the three months ended March 31, 1999.
Cost of license fees increased 10% from $361,000 in the three months ended
March 31, 1998 to $398,000 in the three months ended March 31, 1999. Cost of
license fees in the three months ended March 31, 1999 represents the
amortization of capitalized software development costs of $322,000 and third
party vendor license fees of $76,000. Cost of license fees in the three months
ended March 31, 1998 represents the amortization of capitalized software
development costs of $332,000 and third party license fees of $29,000. The
absolute dollar amount increase in third party vendor license fees in 1999 was
attributable to the increase in third party software sales in 1999.
Cost of services increased 40% from $9.894 million in the three months
ended March 31, 1998 to $13.869 million in the three months ended March 31,
1999. Cost of services as a percentage of total revenue was 44% in the three
months ended March 31, 1998 as compared to 43% in the three months ended March
31, 1999. The absolute dollar amount increase in cost of services was primarily
due to an increase in staff required to support higher client activity. As a
percentage of service revenues, however, cost of services decreased from 50% of
service revenues in the three months ended March 31, 1998 to 48% in the three
months ended March 31, 1999. This decrease was primarily the result of increased
operational efficiencies in 1999.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses
increased 33% from $8.459 million in the three months ended March 31, 1998 to
$11.221 million in the three months ended March 31, 1999. This increase was
primarily attributable to the increased staff required for sales and support
operations and higher costs associated with expanded facilities in the United
States. As a percentage of revenue, SG&A expenses decreased from 37% in the
three months ended March 31, 1998 to 35% in the three months ended March 31,
1999. This decrease was attributable to the fixed nature of certain SG&A costs,
such as rent, as revenues increase.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 51% from $899,000 in the three months ended March 31, 1998 to $1.354
million in the three months ended March 31, 1999. As a percentage of revenues,
research and development expenses remained relatively constant at 4%. The
increase in research and development expenses during the most recent period was
primarily attributable to increased spending on development of our
consumer packaged goods sales force software products and the continued
development of our pharmaceutical sales force software product, known as Force
Pharma(TM).
PROVISION FOR INCOME TAXES. The effective rate decreased from 39% in the
three months ended March 31, 1998 to 37% in the three months ended March 31,
1999. This decrease was due primarily to the implementation of tax minimization
strategies throughout the world.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through cash
generated by operations. Net cash provided by operating activities was $5.059
million for the three months ended March 31, 1998 compared to cash provided in
operating activities of $6.079 million for the three months ended March 31,
1999. This increase was due primarily to a higher net income, as well as an
identified tax benefit from the Company's employee stock option plans.
Cash used in investing activities was $1.928 million in the three months
ended March 31, 1998 compared to cash used in investing activities of $2.675
million in the three months ended March 31, 1999. This change was due primarily
to net purchases of short-term investments, as well as increased purchases of
property and equipment in the three months ended March 31, 1999 as compared to
the three months ended March 31, 1998 .
We obtained $426,000 of cash from financing activities in the three months
ended March 31, 1998 compared to $2.858 million in cash from financing
activities in the three months ended March 31, 1999. The change in our cash
provided from financing activities was due to an increase in the issuance of
common stock primarily from the exercise of employee stock options, as well as
the purchase of stock through our Employee Stock Purchase Plan, during the three
months ended March 31, 1999.
We maintain a $15.0 million revolving line of credit agreement with the
Chase Manhattan Bank, N.A. The agreement is available to finance working capital
needs and possible future acquisitions. The $15.0 million line of credit
agreement requires us to maintain a minimum consolidated net worth, among other
covenants, measured quarterly, which is equal to our net worth as of December
31, 1997 plus 50% of net income earned after March 31, 1998 plus 75 % of the net
proceeds of any stock offering. This covenant effectively limits the amount of
cash dividends we may pay. At March 31, 1999, there were no borrowings
outstanding under the agreement.
At March 31, 1999, our working capital was approximately $56.531 million.
We had no significant capital spending or purchasing commitments other than
normal purchase commitments and commitments under facility and capital leases.
We believe that available funds, anticipated cash flows from operations and our
line of credit will satisfy our 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.
On January 28, 1999, Dendrite filed a Registration Statement on Form S-3
(the "Registration Statement") with the Securities and Exchange Commission to
register a proposed offering of 2,750,000 shares of common stock by the Company
and an additional 500,000 shares of common stock by certain selling stockholders
named in the Registration Statement. Due to unfavorable market conditions, we
have elected not to proceed with this offering at this time.
We regularly evaluate opportunities to acquire products or businesses
complementary to our operations. Such acquisition opportunities, if they arise,
and are successfully completed, may involve the use of cash or equity
instruments.
RECENT DEVELOPMENTS
On May 12, 1999, we announced that we have agreed to acquire CorNet
International Ltd., a leader of sales force effectiveness solutions for the U.S.
pharmaceutical, consumer and business to business markets. The transaction,
valued at approximately $40 million, will be structured as a pooling of
interests. The acquisition is accretvie to Dendrite in 1999.
OUTLOOK
Due to evidence of overall stronger sales and increased operating profit,
we announced on April 26, 1999 that we are comfortable we will be at or above
the high-end of the then current analyst's estimates for the second
quarter of 1999. Higher revenue is the primary cause of this increased
expectation. The Company's actual results may vary from this expectation. See
"Factors That May Affect Future Operating Results".
YEAR 2000 READINESS DISCLOSURE
The efficient operation of our business is dependent in part on our
internal computer software and operating systems (collectively, our "Internal
Programs and Systems"). Since 1997, as part of our Year 2000 compliance plan, we
have been evaluating our Internal Programs and Systems to identify potential
Year 2000 compliance problems. We have tested our Internal Programs and Systems
to verify Year 2000 compliance. As a result of the testing, we have determined
that some of our Internal Programs and Systems are not Year 2000 compliant. We
have begun and will continue to modify or replace some of our Internal Programs
and Systems to make them Year 2000 compliant. We are also communicating with our
suppliers and others to coordinate Year 2000 conversion and are requesting
assurances from all software vendors from which we may purchase or license
software that such software will correctly process all date information at all
times.
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To date, we have spent approximately $191,000 to evaluate, test and
remediate, if necessary, our Internal Programs and Systems for Year 2000
compliance problems and expect to spend up to an additional $50,000 through the
end of second quarter of 1999. We will fund these costs with cash from our
operations. To date, we have not spent any material amount on evaluating the
Year 2000 compliance status of our sales force software products licensed to
customers. Although we do not anticipate any future material expenditures, our
customers may require us to incur additional expenses associated with
remediating their software products. We expect that the expenses and capital
expenditures associated with achieving Year 2000 compliance will not have a
material adverse effect on our business, results of operations or financial
condition.
We believe that we will be able to achieve 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. We expect to have our Year 2000
compliance program substantially completed by the end of the second quarter of
1999. However, we cannot assure you that these efforts will be successful or
completed in a timely manner.
We believe that the sales force software products that we currently offer
to customers are Year 2000 compliant. We define "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, so long as
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 our
products.
Some of our older products will not, and some may not, accurately process
dates beyond December 31, 1999. To the extent any of these products are still in
use in 1999, we will continue to attempt to migrate our customers to products
which are Year 2000 compliant. We cannot assure you that this will occur. A
failure to migrate any such customer to a product which is Year 2000 compliant
could adversely affect our business, operating results or financial condition.
We may also experience increased expenses which we cannot recoup from current
customers in addressing their migration to software that is Year 2000 compliant.
We have strongly encouraged each customer to have its product tested by them for
Year 2000 compliance.
Because of our relatively advanced state of readiness, we have not yet
formulated a reasonably likely worst case scenario. During the second quarter of
1999, as we assess the state of readiness for January 1, 2000, we expect to
formulate such a scenario and to prepare a contingency plan, if warranted. For a
discussion of the risks associated with the Year 2000, please see the heading
under "Factors that May Affect Future Operating Results" entitled "We are
exposed to risks associated with the Year 2000".
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY
Most of our sales force software products and support services are
currently used in connection with the marketing and sale of prescription-only
drugs. This market is undergoing a number of significant changes. These include:
- consolidations and mergers which may reduce the number of our existing
and potential customers;
- reclassification of formerly prescription-only drugs to permit their
over-the-counter sale;
- competitive pressures on our pharmaceutical customers resulting from
the continuing shift to delivery of healthcare through managed care
organizations; and
- changes in law, such as government mandated price reductions for
perscription-only drugs, that affect the healthcare systems in the
countries where our customers and potential customers are located.
We cannot assure you that we can respond effectively to any or all of these
and other changes in the marketplace. Our failure to do so could have a material
adverse effect on our business, operating results or financial condition.
OUR QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY AND MAY NOT MEET
MARKET EXPECTATIONS.
Our results of operations may vary from quarter to quarter due to lengthy
sales and implementation cycles for our products, our fixed expenses in relation
to our fluctuating revenues and variations in our customers' budget cycles, each
of which is discussed below. As a result, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. It is possible that in some future period our results of
operations may be below the expectations of the public market analysts and
investors. If this happens, the price of our common stock may decline.
OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT
OUR QUARTERLY REVENUES. The selection of a sales force software product often
entails an extended decision-making process because of the strategic
implications and substantial costs associated with a customer's license of the
software. Given the importance of the decision, senior levels of management
often are involved and, in some instances, the board of directors may be
involved in this process. As a result, the decision-making process typically
takes nine to twelve months, although in some cases it may take even longer.
Accordingly, we cannot control or predict the timing of our execution of
contracts with customers.
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In addition, an implementation process of three to six months is customary
before the software is rolled out to a customer's sales force. However, if a
customer were to delay or extend its implementation process, our quarterly
revenue may decline below expected levels and could adversely affect our results
of operations.
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
IF RESULTS OF REVENUE FALL BELOW EXPECTATIONS. We establish our expenditure
levels for product development, sales and marketing and some of our other
operating expenses based in large part on our expected future revenues and
anticipated competitive conditions. In particular, we frequently add staff in
advance of new business to permit adequate time for training. If the new
business is subsequently delayed or canceled, we will have incurred expenses
without the associated revenue. In addition, we may increase sales and marketing
expenses if competitive pressures become greater than we currently anticipate.
Since only a small portion of our expenses varies directly with our actual
revenues, our operating results and profitability are likely to be adversely and
disproportionately affected if our revenues fall below expectations.
OUR BUSINESS IS AFFECTED BY VARIATIONS IN OUR CUSTOMERS' BUDGET CYCLES. We
have historically realized a greater percentage of our license fees and service
revenues in the second half of the year than in the first half because, among
other things, our customers typically spend more of their annual budget
authorization for sales force software products and support services in the
second half of the year. However, the relationship between the amounts spent in
the first and second halves of a year may vary from year to year and from
customer to customer. In addition, changes in our customers' budget
authorizations may reduce the amount of revenues we receive from the license of
additional software or the provision of additional services. As a result, our
operating results could be adversely affected.
OUR REVENUES WOULD DECLINE AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED BY THE
LOSS ON ONE OF OUR CUSTOMERS.
We derive a significant portion of our revenues from a limited number of
customers (considering all affiliates of each customer as part of that
customer). Approximately 56% of our total revenues in 1998 came from Pfizer,
Johnson & Johnson and Parke-Davis. Approximately 59% of our total revenues in
1997 came from Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer. Approximately
58% of our total revenues in 1996 came from Pfizer, Eli Lilly and Rhone-Poulenc
Rorer. We believe that the costs to our customers of switching to a competitor's
software product, or of taking significant system management functions in-house,
are substantial. Nevertheless, some of our customers have switched, and in the
future other customers may switch, to software products and/or services offered
by our competitors. If any of our major customers were to make such a change,
our business, operating results or financial condition would be materially and
adversely affected.
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO
TECHNOLOGICAL CHANGE.
The market for sales force software products changes rapidly because of
frequent improvements in computer hardware and software technology. Our future
success will depend, in part, on our ability to:
- - use available technologies and data sources to develop new products and
services and to enhance our current products and services;
- - introduce new solutions that keep pace with developments in our target
markets; and
- - address the changing and increasingly sophisticated needs of our customers.
We cannot assure you that we will successfully develop and market new
products or product enhancements that respond to technological advances in the
marketplace, or that we will do so in a timely fashion. We also cannot assure
you that our products will adequately and competitively address the needs of the
changing marketplace.
Competition for software products has been characterized by shortening
product cycles. We may be materially and adversely affected by this trend if the
product cycles for our products prove to be shorter than we anticipate. If that
happens, our business, operating results or financial condition could be
adversely affected.
To remain competitive, we also may have to spend more of our revenues on
product research and development than we have in the past. As a result, our
results of operations could be materially and adversely affected.
Further, our software products are technologically complex and may contain
previously undetected errors or failures. Such errors have occurred in the past
and we cannot assure you that, despite our testing, our new products will be
free from errors. Errors that result in losses or delays could have a material
adverse effect on our business, operating results or financial condition.
11
<PAGE> 12
WE ARE EXPOSED TO RISKS ASSOCIATED WITH THE YEAR 2000-YEAR 2000 READINESS
DISCLOSURE.
DEMAND FOR OUR SOFTWARE PRODUCTS AND SERVICES MAY DECLINE BEFORE AND AFTER
THE YEAR 2000. A substantial amount of demand for our software may come from
customers in the process of replacing and upgrading software applications to
accommodate the change in date to the Year 2000. This demand has contributed to
our 1998 sales growth and we expect it to contribute to our 1999 sales growth.
Once customers have completed these activities, we may experience a deceleration
in revenue growth. In addition, the expense and time associated with remediation
efforts by customers to address Year 2000 compliance problems for software
products other than ours may cause our customers to delay the purchase of, or
reduce the amount they spend on, our products and services, both before and
after January 1, 2000. Such reductions could have a material adverse effect on
our business, operating results or financial condition.
OUR YEAR 2000 REMEDIATION EFFORTS MAY NOT BE SUCCESSFUL. As part of our
Year 2000 compliance plan, we have assessed the readiness of our internal
computer software programs and operating systems. We believe our programs and
systems will be substantially Year 2000 compliant by the end of the second
quarter of 1999. However, if additional defects, including defects in hardware,
are identified or if necessary modifications and conversions are not made, or
are not completed in a timely manner, the Year 2000 problem could have a
material adverse effect on our business, operating results or financial
condition.
WE MAY INCUR MATERIAL EXPENSES IN CONNECTION WITH ANY CLAIM RELATING TO
YEAR 2000 COMPLIANCE OF OUR OWN PRODUCTS OR PRODUCTS OF THIRD PARTIES. We
believe most of the sales force software products that we currently offer to our
customers, prior to any customization, are Year 2000 compliant. We cannot assure
you, however, that our current products do not contain undetected errors or
defects associated with the Year 2000 date functionality that may result in
material costs to us.
Some of our older products will not, and some may not accurately process
dates after December 31, 1999. To the extent any of these products are still in
use in 1999, we will continue to attempt to migrate our customers to products
that are Year 2000 compliant. We cannot assure you that this will occur. A
failure to migrate any customer to a product that is Year 2000 compliant could
adversely affect our business, operating results or financial condition. We may
also experience increased expenses which we cannot recoup from current customers
in addressing their migration to software that is Year 2000 compliant. We may
also incur additional expenses associated with remediating software products of
our current customers.
In addition, some of our customers may attempt to hold us responsible for
Year 2000 compliance of hardware or software not supplied or created by us, but
used in conjunction with one or more of our products. For example, our
customers' computer hardware and software, with which our software must
interface, may not properly handle date information after the Year 2000 without
error or interruption.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES.
We believe there are approximately ten other companies that sell sales
force software products and specifically target the pharmaceutical industry,
including;
- - four competitors that are actively selling sales force software products in
more than one country; and
- - three competitors that also offer sales force support services.
We believe that most of our competitors offer sales force software products
and/or services that do not address the variety of customer needs that our
solutions address. However, these competing solutions may cost less than our
solutions. We also face competition from many vendors that market and sell sales
force software products in the consumer packaged goods market. In addition, we
also compete with various companies that provide support services similar to our
services. We believe our ability to compete depends on many factors, some of
which are beyond our control, including:
- - the number and success of new market entrants supplying competing sales
force products or support services;
- - expansion of product lines by, or consolidation among, our existing
competitors; and
- - development and/or operation of in-house sales force software products or
services by our customers and potential customers.
Some of our competitors and potential competitors are part of large
corporate groups and have longer operating histories and significantly greater
financial, sales, marketing, technology and other resources than we have. We
cannot assure you that we will be able to compete successfully with these
companies or that competition will not have a material adverse effect on our
business, operating results or financial condition.
12
<PAGE> 13
SOME OF OUR CUSTOMERS RELY ON OUR COMPETITORS FOR MARKET DATA.
Current market data on the sales of prescription-only pharmaceutical
products is an important element for the operation of our sales force software
products in the prescription-only pharmaceutical industry. Our customers use
this data to guide and organize their sales forces and marketing efforts. Some
of the leading purveyors of this market information compete with us either
directly or through affiliates or may compete with us in the future. If these
purveyors of market information require pharmaceutical companies to use their
sales force products and/or services, our business, operating results and
financial condition may be materially and adversely affected.
OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT.
The sale of our products and services in foreign countries accounts for,
and is expected in the future to account for, a material part of our revenues.
These sales are subject to risks inherent in international business activities,
including:
- - any adverse change in the political or economic environments in these
countries;
- - economic instability;
- - any adverse change in tax, tariff, trade or other regulations;
- - the absence or significant lack of legal protection for intellectual
property rights;
- - exposure to exchange rate risk for service revenues which are denominated
in currencies other than U.S. Dollars; and
- - difficulties in managing an organization spread over various jurisdictions.
OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ATTRACTING
AND RETAINING QUALIFIED PERSONNEL.
Our future success depends, to a significant extent, upon the contributions
of our executive officers and key sales, technical and customer service
personnel. We maintain a $3 million key man insurance policy on John E. Bailye,
our President and Chief Executive Officer, the proceeds of which are payable to
Dendrite. Our future success also depends on our continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense. We have at times experienced difficulties in
recruiting qualified personnel and we may experience such difficulties in the
future. Any such difficulties could adversely affect our business, operating
results or financial condition.
OUR INABILITY TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
To manage our growth effectively, we must continue to strengthen our
operational, financial and management information systems and expand, train and
manage our work force. However, we may not be able to do so effectively or on a
timely basis. Failure to do so could have a material adverse effect upon our
business, operating results or financial condition.
OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO
PROTECT COMPLETELY.
We rely on a combination of trade secret, copyright and trademark laws,
non-disclosure and other contractual agreements and technical measures to
protect our proprietary technology. We cannot assure you that the steps we take
will prevent misappropriation of this technology. Further, protective actions we
have taken or will take in the future may not prevent competitors from
developing products with features similar to our products. In addition effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. We have, on occasion, in response to a request by our
customer, entered into agreements which require us to place our source code in
escrow to secure our service and maintenance obligations.
Further, we believe that our products and trademarks do not infringe upon
the proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future that may result in the imposition
of damages or injunctive relief against us. In addition, any such claims may
require us to enter into royalty arrangements. Any of these results could
materially and adversely affect our business, operating results or financial
condition.
WE HAVE LIMITED EXPERIENCE IN MARKETING TO THE CONSUMER PACKAGED GOODS MARKET.
We market and sell sales force software products and support services
companies in the consumer packaged goods market. The selling environment
in this market has unique characteristics that differentiate it from the
pharmaceutical market. In addition, we believe that the consumer packaged
goods market is composed of sub-markets, each of which may have unique
characteristics. Accordingly, we cannot assure you that we will be able to
replicate in this market the success we have achieved in the ethical
pharmaceutical market.
13
<PAGE> 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
FOREIGN CURRENCY RISK
Because we have operations in a number of countries, we face exposure to
adverse movements in foreign currency exchange rates. As currency rates
change, translation of the income statements of our international entities from
local currencies to U.S. dollars affects year-over-year comparability of
operating results. We do not hedge translation risks because we generally
reinvest the cash flows from the international operations.
Management estimates that a 10% change in foreign exchange rates would
impact reported operating profit by less than $500,000. This sensitivity
analysis disregards the possibility that rates can move in opposite directions
and that losses from one area may be offset by gains from another area.
The introduction of the Euro as a common currency for members of the
European Monetary Union took place on January 1, 1999. We have not determined
what impact, if any, the Euro has on our foreign exchange exposure.
INTEREST RATE RISK
Our exposure to market risk related to changes in interest rates primarily
to our investment portfolio. We invest in instruments that meet high credit
quality standards, as specified in our investment policy. The policy also
limits the amount of credit exposure to any one issue, issuer and type of
investments.
As of December 31, 1998, our investments consisted primarily of commercial
paper maturing in the first four months of 1999. Due to the average maturity
and conservative nature of our investment portfolio, a sudden change in
interest rates would not have a material effect on the value of the portfolio.
Management estimates that had the average yield of our investments decreased by
100 basis points, our interest income for the year ended December 31, 1998
would have decreased by less than $150,000. This estimate assumes that the
decrease occurred on the first day of 1998 and reduced the yield of each
investment instrument by 100 basis points. The impact on our future interest
income, of future changes in investment yields will depend largely on the gross
amount of our investments. See Item 2- "Managements's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources".
14
<PAGE> 15
PART II OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K
(a) The Company is furnishing the following exhibits in connection with
this report:
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: May 17, 1999
By:/s/ John E. Bailye
John E. Bailye, President and
Chief Executive Officer
By: /s/ George T. Robson
George T. Robson, Executive Vice President
and Chief Financial Officer
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 48,074
<SECURITIES> 0
<RECEIVABLES> 19,985
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,548
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,574
<CURRENT-LIABILITIES> 18,017
<BONDS> 0
0
0
<COMMON> 43,966
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 87,574
<SALES> 0
<TOTAL-REVENUES> 32,402
<CGS> 14,267
<TOTAL-COSTS> 26,842
<OTHER-EXPENSES> 524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,854
<INCOME-TAX> 2,166
<INCOME-CONTINUING> 3,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,688
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
