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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 JUNE 30, 2000
[ ] 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 July 25, 2000
<S> <C>
Common Stock 39,578,624
</TABLE>
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DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
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<S> <C>
PART I FINANCIAL INFORMATION 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Statements of Operations
Three months and six months ended June 30, 2000 and 1999 3
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION 16
ITEM 6. Report on Form 8-K 16
Signatures 17
</TABLE>
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PART I 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 2000 1999 2000
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
License fees $ 6,747 $ 6,050 $ 10,801 $ 11,659
Services 35,104 45,681 68,684 87,134
-------- -------- -------- --------
41,851 51,731 79,485 98,793
-------- -------- -------- --------
Cost of revenues:
Cost of license fees 592 1,130 990 1,875
Cost of services 17,722 20,950 34,225 40,534
-------- -------- -------- --------
18,314 22,080 35,215 42,409
-------- -------- -------- --------
Gross margin 23,537 29,651 44,270 56,384
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 14,397 16,146 27,024 31,584
Research and development 1,835 2,701 3,473 5,340
Mergers and acquisitions 3,466 -- 3,466 --
-------- -------- -------- --------
19,698 18,847 33,963 36,924
Operating income 3,839 10,804 10,307 19,460
Interest income 440 757 858 1,519
Other income/(expense) 43 (25) (82) (28)
-------- -------- -------- --------
Income before income taxes 4,322 11,536 11,083 20,951
Income taxes 2,296 4,153 4,858 7,542
-------- -------- -------- --------
Net income $ 2,026 $ 7,383 $ 6,225 $ 13,409
======== ======== ======== ========
Net income per share
Basic $ 0.05 $ 0.19 $ 0.17 $ 0.34
======== ======== ======== ========
Diluted $ 0.05 $ 0.18 $ 0.16 $ 0.33
======== ======== ======== ========
Shares used in computing
net income per share
Basic 37,545 39,137 37,286 38,977
======== ======== ======== ========
Diluted 40,104 41,151 39,897 41,181
======== ======== ======== ========
</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, June 30,
1999 2000
------------ ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 50,024 $ 59,877
Short-term investments 15,151 7,957
Accounts receivable, net 29,374 36,373
Prepaid expenses and other 3,659 4,847
Prepaid taxes 114 376
Deferred tax asset 1,368 1,368
--------- ---------
Total current assets 99,690 110,798
Property and equipment, net 10,249 12,285
Other assets -- 3,851
Goodwill, net 8,716 13,253
Purchased capitalized software, net 2,399 4,717
Capitalized software development costs, net 3,666 3,920
--------- ---------
$ 124,720 $ 148,824
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 3,735 $ 2,979
Income taxes payable -- --
Accrued compensation and benefits 6,000 4,297
Other accrued expenses 8,001 7,383
Deferred revenues 3,822 3,314
--------- ---------
Total current liabilities 21,558 17,973
--------- ---------
Capital lease obligation 285 109
Deferred Rent -- 42
Deferred taxes 1,761 1,761
Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 150,000,000 shares
authorized; 39,042,606 and 40,031,398 shares issued as of December 31,
1999 and June 30, 2000, respectively;
and 38,441,106 and 39,429,898 shares outstanding as of
December 31, 1999 and June 30, 2000, respectively 61,550 75,954
Retained earnings 43,338 56,747
Deferred compensation (777) (550)
Accumulated other comprehensive income (1,068) (1,285)
Less treasury stock, at cost (1,927) (1,927)
--------- ---------
Total stockholders' equity 101,116 128,939
--------- ---------
$ 124,720 $ 148,824
========= =========
</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>
Six Months Ended June
30
-----------------------
1999 2000
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 6,225 $ 13,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,354 5,251
Compensation expense 407 187
Tax benefit from employee stock plan 3,913 2,495
Changes in assets and liabilities:
Increase in accounts receivable (7,863) (6,603)
Increase in prepaid expenses and other (520) (1,268)
Increase in prepaid income taxes (1,216) (262)
Increase/(decrease) in accounts payable and accrued expenses 2,337 (3,686)
Increase/(decrease) in deferred rent (128) 42
Increase/(decrease) in income taxes payable 61 --
Increase/(decrease) in deferred revenues 661 (679)
-------- --------
Net cash provided by operating activities 6,231 8,886
-------- --------
Investing activities:
Purchases and sales of short-term investments, net 1,280 7,266
Acquisitions, net of cash acquired (6,640) (2,318)
Investments -- (3,450)
Purchases of property and equipment (2,855) (4,563)
Additions to capitalized software development costs (1,270) (1,110)
-------- --------
Net cash used in investing activities (9,485) (4,175)
-------- --------
Financing activities:
Payments on capital lease obligations (288) (176)
Issuance of Common Stock 4,703 5,443
-------- --------
Net cash provided by financing activities 4,415 5,267
-------- --------
Effect of foreign exchange rate changes on cash (409) (125)
Net increase in cash and cash equivalents 752 9,853
Cash and cash equivalents, beginning of period 32,555 50,024
-------- --------
Cash and cash equivalents, end of period $ 33,307 $ 59,877
======== ========
</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 (the "Company") 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 six month periods ended June
30, 2000 and 1999. For further information, refer to the consolidated financial
statements and notes thereto, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
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."
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 June 30, 2000 and 1999, common stock
equivalents used in computing Diluted EPS were 2,014,000 and 2,559,000
respectively. For the six months ended June 30, 2000 and 1999, common stock
equivalents used in computing Diluted EPS were 2,204,000 and 2,611,000,
respectively.
3. Comprehensive Income
For the six months ended June 30, 2000 and 1999, we engaged in numerous
transactions involving foreign currency, which resulted in unrealized gains and
losses. Total after-tax comprehensive income for the six months ended June 30,
2000 and 1999 was $13,192,000 and $5,277,000, respectively. Total after-tax
comprehensive income for the three months ended June 30, 2000 and 1999 was
$7,358,000 and $3,224,000, respectively.
4. Merger with CorNet International, Ltd.
On May 27, 1999, the Company acquired CorNet International, Ltd., ("CorNet")
in a transaction accounted for as a pooling of interests. The Company exchanged
2,220,807 of its shares for all outstanding shares of CorNet's common stock.
All prior historical consolidated financial statements contained herein have
been restated to reflect the acquisition of CorNet.
5. Marketing Management International, Inc. Acquisition
On June 30, 1999, the Company purchased all of the assets and assumed certain
liabilities (as defined) of Marketing Management International, Inc. ("MMI")
and certain affiliated companies, for approximately $6,640,000 in cash, which
includes estimated transaction costs, and $3,435,000 in stock. The acquisition
has been accounted for using the purchase method with the purchase price
allocated to the fair value of the acquired assets and liabilities. The excess
purchase price over the fair value of the net assets acquired was allocated
between capitalized software development costs and goodwill based upon an
independent appraisal.
6. Analytika, Inc. Acquisition
On January 6, 2000, the Company purchased all of the assets and assumed
certain liabilities (as defined) of Analytika, Inc. ("Analytika"), for
approximately $2,718,000 in cash, which includes transaction costs, and
$6,506,000 in stock. The acquisition has been accounted for using the purchase
method with the purchase price allocated to the fair value of the acquired
assets and liabilities. The excess purchase price over the fair value of the
net assets acquired was allocated between capitalized software development
costs and goodwill based upon an independent appraisal.
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7. Changes in Securities
On September 14, 1999 the Company's board of directors declared a three for
two forward common stock split. The stock split was distributed in the form of
a stock dividend to stockholders of record as of September 23, 1999. The
dividend was paid on October 7, 1999. Share and per share information included
in the accompanying consolidated financial statements, notes thereto and the
accompanying text of this Form 10-Q have been restated to reflect the stock
split.
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
Dendrite International, Inc. is a leading worldwide supplier of a
comprehensive range of sales force software products and support services to
the pharmaceutical industry. We provide E-pharma solutions and data management
offerings, as well as design, develop and sell comprehensive customer
relationship offerings. These solutions also permit customers to coordinate
diverse home office functions, such as distribution of product literature,
sales call follow-up activities and organization of educational programs.
We have focused our solutions on sales and marketing organizations within
the prescription-only pharmaceutical industry. We believe that our extensive
knowledge of the complex and unique selling processes in this industry and our
demonstrated ability to meet our customers' business needs have given us a
commanding position in this portion of our target market. We are presently the
world's largest supplier of customer relationship management solutions to the
prescription-only pharmaceutical industry based on the number of sales
representatives we support. In the fourth quarter of 1998 we announced our
global reach strategy which expanded our target market to mid-size
pharmaceutical companies as well as to subsidiaries in emerging markets. Our
customers' sales forces now range in size from as few as 50 representatives in
smaller countries to several thousand representatives in the United States. We
also supply our solutions to manufacturers of consumer packaged goods or CPG
products.
Today, our solutions combine software products with a broad range of
support services that enable our customers to maximize the effectiveness of our
software products. These services include software configuration and
implementation, technical and hardware support, sales force support and data
integration and analysis. We develop, implement and service sales force
software products through our own sales, support and technical personnel
located in 22 offices worldwide.
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We generate revenues from both services and licenses. 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 the sales force software products
for our customers, sometimes as part of longer projects when enhancing customer
relationships is our goal. We receive technical and hardware support fees for
services related to, among other things, ongoing technical support, maintenance
of our customers' databases, operation of our customers' server computers,
maintenance for our customers' remote hardware and asset control. Technical and
hardware support fees also include fees for software maintenance services such
as software defect resolution and performance enhancements. We charge fees for
these maintenance services based on a percentage of total license fees plus
configuration fees, if any. 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 particular software licensed by the
customer.
The Company generally recognizes license fees as revenue using the percentage
of completion method over a period of time that commences with the execution of
a license agreement and ends when the product configuration is complete and it
is ready for use in the field. This period of time usually includes initial
customization or configuration and concludes with quality assurance and testing.
In those historically rare cases when there is no initial customization or
configurations the Company generally recognizes the license fees from those
products upon delivery assuming any services to be provided are not essential to
the functionality of the software. Additionally, license revenues are recognized
immediately when user count for previously delivered software increases and/or a
third party is used for implementation and configuration. The Company's software
licensing agreements provide for a warranty period (typically 180 days from the
date of execution of the agreement). The portion of the license fee associated
with the warranty period is unbundled from the license fee and is recognized
ratably over the warranty period. The Company does not recognize any license
fees unless persuasive evidence of an arrangement exists, the license amount is
fixed and determinable and collectability is probable.
The United States, the United Kingdom, France and Japan are our main markets.
We generated approximately 36% of our total revenues outside the United States
during the year ended December 31, 1997; approximately 23% during the year ended
December 31, 1998; and approximately 24% during the year ended December 31,
1999.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues increased $9,880,000 to $51,731,000 in the three
months ended June 30, 2000, up 24% from $41,851,000 in the three months ended
June 30, 1999.
License fee revenues decreased $697,000 to $6,050,000 in the three months
ended June 30, 2000, down 10% from $6,747,000 in the three months ended June
30, 1999. This decrease was attributable primarily to a reduction in our
European consumer business. License fee revenues as a percentage of total
revenues were 12% in the three months ended June 30, 2000, as compared to 16%
in the three months ended June 30, 1999.
Service revenues increased $10,577,000 to $45,681,000 in the three months
ended June 30, 2000, up 30% from $35,104,000 in the three months ended June 30,
1999. The increase in absolute dollars was primarily the result of an increase
in the number of installed users of Dendrite sales force software products, as
well as the provision of additional services for our existing customers.
Service revenues as a percentage of total revenues were 88% in the three months
ended June 30, 2000, as compared to 84% in the three months ended June 30,
1999. The Company expects the relationship of license to service revenues to
fluctuate slightly by quarter but that on an annual basis it will continue to
be approximately the same as total 1999, which was 86%.
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COST OF REVENUES. Cost of revenues increased $3,766,000 to $22,080,000 in the
three months ended June 30, 2000, up 21% from $18,314,000 in the three months
ended June 30, 1999.
Cost of license fees increased $539,000 to $1,130,000 in the three months
ended June 30, 2000, up 91% from $591,000 in the three months ended June 30,
1999. Cost of license fees for the three months ended June 30, 2000 represents
the amortization of purchased software and capitalized software development
costs of $697,000 and third party vendor license fees of $433,000. Cost of
license fees for the three months ended June 30, 1999 represents the
amortization of capitalized software development costs of $363,000 and third
party vendor license fees of $229,000. The increase in the amortization of
capitalized software development costs in the three months ended June 30, 2000,
was primarily due to the increase in purchased capitalized software associated
with the acquisitions of MMI and Analytika. The increase in third party
software costs was primarily due to the increased sales of our products that
include imbedded third party products.
Cost of services increased $3,228,000 to $20,950,000 in the three months
ended June 30, 2000, up 18% from $17,722,000 in the three months ended June 30,
1999. This increase was primarily due to an increase in staff required to
support greater client activity. As a percentage of service revenues however,
cost of services decreased to 46% of service revenues in the three months ended
June 30, 2000 compared to 50% in the three months ended June 30, 1999. This
decrease was primarily the result of increased operational efficiencies in 2000.
Total Gross Margin for the three months ended June 30, 2000 was 57%, up from
56% for the three months ended June 30, 1999. This increase is due to the
improvement in service margins as described above. The Company believes that the
appropriate targeted gross margin rate should be between 58%-60%.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses increased
$1,749,000 to $16,147,000 in the three months ended June 30, 2000, up 12% from
$14,396,000 in the three months ended June 30, 1999. The increase in the
absolute dollar amount of SG&A expenses was primarily attributable to an
increase in sales and marketing expenses from both our existing businesses and
our newly acquired businesses. As a percentage of revenues, SG&A expenses
decreased to 31% in the three months ended June 30, 2000 down from 34% in the
three months ended June 30, 1999. The Company's annual targeted SG&A expenses,
as a percentage of total revenues, are 30-32%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $866,000 to $2,701,000 in the three months ended June 30, 2000, up
47% from $1,835,000 in the three months ended June 30, 1999. The increase in
research and development expenses during the most recent period was
attributable primarily to increased spending on development of internet
initiatives along with R&D spending from acquisitions. As a percentage of
revenues, R&D expenses increased to 5% in the three months ended June 30, 2000
from 4% in the three months ended June 30, 1999. With respect to future
research and development expenses, subject to market conditions, we currently
anticipate that such expenses will be approximately 4% to 6% of revenues.
MERGERS AND ACQUISITIONS. During the second quarter of 1999, the Company
acquired CorNet in a transaction accounted for as a pooling of interests and
incurred a one time expense for the costs related to the merger and the
cancellation of a proposed common stock offering.
PROVISION FOR INCOME TAXES. The effective rate decreased to 36% in the three
months ended June 30, 2000 as compared to 53% for the three months ended June
30, 1999. This decrease was due to the non-deductibility of certain merger and
acquisition expenses in the second quarter of 1999, as well as continued
implementation of tax planning strategies throughout the world.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues increased $19,308,000 to $98,793,000 in the six
months ended June 30, 2000, up 24% from $79,485,000 in the six months ended June
30, 1999.
License fee revenues increased $858,000 to $11,659,000 in the six months
ended June 30, 2000, up 8% from $10,801,000 in the six months ended June 30,
1999. This decrease was attributable primarily to a reduction in our European
consumer business. License fee revenues as a percentage of total revenues were
12% in the six months ended June 30, 2000, as compared to 14% in the six months
ended June 30, 1999.
Service revenues increased $18,450,000 to $87,134,000 in the six months ended
June 30, 2000, up 27% from $68,684,000 in the six months ended June 30, 1999.
The increase in absolute dollars was primarily the result of an increase in the
number of installed users of Dendrite sales force software products, as well as
the provision of additional services for our existing customers. Service
revenues as a percentage of total revenues were 88% in the six months ended
June 30, 2000, as compared to 86% in the six months ended June 30, 1999.
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The Company expects the relationship of license to service revenues to
fluctuate slightly by quarter but that on an annual basis it will continue to
be approximately the same as total 1999, which was 86%.
COST OF REVENUES. Cost of revenues increased $7,194,000 to $42,409,000 in the
six months ended June 30, 2000, up 20% from $35,215,000 in the six months ended
June 30, 1999.
Cost of license fees increased $885,000 to $1,875,000 in the six months ended
June 30, 2000 up 89% from $990,000 in the six months ended June 30, 1999. Cost
of license fees for the six months ended June 30, 2000, represents the
amortization of purchased software and capitalized software development costs of
$1,428,000 and third party vendor license fees of $447,000. Cost of license fees
for the six months ended June 30, 1999 represents the amortization of
capitalized software development costs of $749,000 and third party vendor
license fees of $241,000. The increase in the amortization of capitalized
software development costs in the six months ended June 30, 2000, was primarily
due to the increase in purchased capitalized software associated with the
acquisitions of MMI and Analytika. The increase in third party software costs
was primarily due to the increased sales of our products that include imbedded
third party products.
Cost of services increased $6,309,000 to $40,534,000 in the six months ended
June 30, 2000, up 18% from $34,225,000 in the six months ended June 30, 1999.
This increase was primarily due to an increase in staff required to support
greater client activity. As a percentage of service revenues however, cost of
services decreased to 47% of service revenues in the six months ended June 30,
2000 compared to 50% in the six months ended June 30, 1999. This decrease was
primarily the result of increased operational efficiencies in 2000.
Total Gross Margin for the six months ended June 30, 2000 was 57%, up from 56%
for the six months ended June 30, 1999. This increase is due to the improvement
in service margins as described above. The Company believes that the appropriate
targeted gross margin rate should be between 58%-60%.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
$4,561,000 to $31,584,000 in the six months ended June 30, 2000, up 17% from
$27,023,000 in the six months ended June 30, 1999. The increase in the absolute
dollar amount of SG&A expenses was primarily attributable to an increase in
sales and marketing expenses from both our existing businesses and our newly
acquired businesses. As a percentage of revenues, SG&A expenses decreased to
32% in the six months ended June 30, 2000 down from 34% in the six months ended
June 30, 1999. The Company's annual targeted SG&A expenses, as a percentage of
total revenues, are 30-32%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $1,867,000 to $5,340,000 in the six months ended June 30, 2000, up
54% from $3,473,000 in the six months ended June 30, 1999. The increase in
research and development expenses during the most recent period was
attributable primarily to increased spending on development of internet
initiatives along with R&D spending from acquisitions. As a percentage of
revenues, R&D expenses increased to 5% in the six months ended June 30, 2000
from 4% in the six months ended June 30, 1999. With respect to future research
and development expenses, subject to market conditions, we currently anticipate
that such expenses will be approximately 4% to 6% of revenues.
MERGERS AND ACQUISITIONS. During the second quarter of 1999, the Company
acquired CorNet in a transaction accounted for as a pooling of interests and
incurred a one time expense for the costs related to the acquisition and the
cancellation of a proposed common stock offering.
PROVISION FOR INCOME TAXES. The effective rate decreased to 36% in the six
months ended June 30, 2000 as compared to 44% for the six months ended June 30,
1999. This decrease was due to the non-deductibility of certain merger and
acquisition expenses during in the second quarter of 1999, as well as continued
implementation of tax planning strategies throughout the world.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through cash generated
by operations. Net cash provided by operating activities was $8,886,000 for the
six months ended June 30, 2000, compared to cash provided by operating
activities of $6,231,000 for the six months ended June 30, 1999. This increase
in cash provided by operating activities was due primarily to higher net income,
partially offset by a decrease in accounts payable and accrued expenses.
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Cash used in investing activities was $4,175,000 in the six months ended June
30, 2000, compared to cash used in investing activities of $9,485,000 in the six
months ended June 30, 1999. The decrease was due primarily to increased sales of
short-term investments in 2000, offset by an increase in purchases of property
and equipment.
We generated $5,267,000 of cash from financing activities in the six months
ended June 30, 2000 compared to $4,415,000 of cash from financing activities in
the six months ended June 30, 1999. The change in our cash provided from
financing activities was due primarily to an increase in the issuance of common
stock, primarily from the exercise of employee stock options during the six
months ended June 30, 2000.
We maintain a $15,000,000 revolving line of credit agreement with The Chase
Manhattan Bank. The agreement is available to finance working capital needs and
possible future acquisitions. The terms of this agreement require 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 January 1, 1998 plus 75% of the net proceeds of any offerings of
any Stock Offerings. This covenant effectively limits the amount of cash
dividends we may pay. At June 30, 2000, there were no borrowings outstanding
under the agreement and we satisfied all of our covenant obligations.
At June 30, 2000, our working capital was approximately $92,825,000. 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.
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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY
Most of our sales force software products and 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, also could alter implementation or purchase cycles;
- 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 prescription-
only drugs, that affect the healthcare systems in the countries where our
customers and potential customers are located.
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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 eighteen 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.
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
revenues 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 REVENUES 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 revenues. 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 CRM solutions 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.
WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES
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 36% of our total revenues in 1999 came from Pfizer and
Johnson & Johnson. Approximately 49% of our total revenues in 1998 came from
Pfizer, Johnson & Johnson and Parke-Davis. Approximately 51% of our total
revenues in 1997 came from Pfizer, Johnson & Johnson 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,
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other customers may switch to software products and/or services offered by our
competitors or by in-house staff. 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 CRM 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.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES
We believe there are eight other companies that sell sales force software
products that specifically target the pharmaceutical industry, including:
- Three competitors that are actively selling sales force software products in
more than one country; and
- Two competitors that also offer sales force support services.
We believe the sales force software products and/or services offered by most
of our competitors do not address the variety of Pharmaceutical and CPG 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 automation and CRM solutions in the consumer packaged goods
or CPG 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.
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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.
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;
- any adverse change in tax, tariff and 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.
WE MAY FACE RISKS ASSOCIATED WITH ACQUISITIONS
Our business could be materially and adversely affected as a result of the
risks associated with acquisitions. As part of our business strategy, we have
acquired businesses that offer complementary products, services, or
technologies. These acquisitions are accompanied by the risks commonly
encountered in an acquisition of a business, including:
- the effect of the acquisition on our financial and strategic position;
- the failure of an acquired business to further our strategies;
- the difficulty of integrating the acquired business;
- the diversion of our management's attention from other business concerns;
- the impairment of relationships with customers of the acquired business;
- the potential loss of key employees of the acquired company; and
- the maintenance of uniform company-wide standards, procedures and policies.
These factors could have a material adverse effect on our revenues and
earnings. We expect that the consideration paid for future acquisitions, if any,
could be in the form of cash, stock, rights to purchase a stock or a combination
of these. To the extent that we issue shares of stock or other rights to
purchase stock in connection with any future acquisition, existing shareholders
will experience dilution and potentially decreased earnings per share.
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OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON
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.
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 and 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.
THERE ARE CHARACTERISTICS IN THE CONSUMER PACKAGED GOODS MARKET THAT DIFFER
FROM THE PHARMACEUTICAL MARKET
We market and sell CRM solutions to companies in the CPG market. The selling
environment in this market has unique characteristics that differentiate it from
the pharmaceutical market. In addition, we believe that the CPG 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.
PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN
ACQUISITION OF DENDRITE
Provisions of our Restated Certificate of Incorporation, our By-laws and New
Jersey law may make it more difficult for a third party to acquire us. For
example, the Board of Directors may, without the consent of the stockholders,
issue preferred stock with rights senior to those of the common stock.
OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS
The market price of our common stock may be significantly affected by the
following factors:
- the announcement or the introduction of new products by us or our competitors;
- quarter-to-quarter variations in our operating results and changes in earnings
estimates by analysts;
- market conditions in the technology, healthcare and other growth sectors; and
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- general consolidation in the healthcare information industry which may result
in the market perceiving us or other comparable companies as potential
acquisition targets.
Further, the stock market has experienced on occasion extreme price and volume
fluctuations. The market prices of the equity securities of many technology
companies have been especially volatile and often have been unrelated to the
operating performance of such companies. These broad market fluctuations may
have a material adverse effect on the market price of our common stock.
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 international operations in the country where they originate.
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 believe that this event has had
minimal impact on our foreign exchange exposure.
INTEREST RATE RISK
Our exposure to market risk is related to changes in interest rates which
primarily applies 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 investment.
As of June 30, 2000, our investments consisted primarily of commercial paper
maturing over the following four months. 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, 1999
would have decreased by less than $150,000. This estimate assumes that the
decrease occurred on the first day of 1999 and reduced the yield of each
investment instrument by 100 basis points throughout the year. The impact of
future changes in investment yields on our future interest income, will depend
largely on the gross amount of our investments.
PART II OTHER INFORMATION
Item 6. Report on Form 8-K
(a) The Company did not file any reports on Form 8-K during the
period for which this Form 10-Q is filed.
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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: August 14, 2000
By: /s/ John E. Bailye
----------------------------------
John E. Bailye, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ George T. Robson
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George T. Robson, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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