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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-26138
DENDRITE INTERNATIONAL, INC.
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(Exact name of registrant as specified in its Charter)
NEW JERSEY 22-2786386
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(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. Yes [X] or No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AT NOVEMBER 7, 2000
<S> <C>
Common Stock 39,946,530
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DENDRITE INTERNATIONAL, INC. INDEX
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PAGE NO.
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PART I FINANCIAL INFORMATION ........................................................................................ 3
ITEM 1. Financial Statements (Unaudited) ............................................................................. 3
Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 1999 .......... 3
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ............................................ 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 ........................... 5
Notes to Unaudited 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 ............................................................................................ 17
ITEM 5 Other Information ............................................................................................ 17
ITEM 6. Exhibits and Reports on Form 8-K ............................................................................. 17
Signatures ............................................................................................................... 18
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees .............................. $ 8,599 $ 6,891 $ 20,258 $ 17,692
Services .................................. 47,434 38,855 134,569 107,539
--------- --------- --------- ---------
56,033 45,746 154,827 125,231
--------- --------- --------- ---------
Cost of revenues:
Cost of license fees ...................... 835 535 2,710 1,525
Cost of services .......................... 21,701 18,847 62,236 53,072
--------- --------- --------- ---------
22,536 19,382 64,946 54,597
--------- --------- --------- ---------
Gross margin ................................. 33,497 26,364 89,881 70,634
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ....... 18,752 14,716 50,336 41,740
Research and development .................. 2,703 2,393 8,043 5,866
Mergers and acquisitions .................. -- -- -- 3,466
--------- --------- --------- ---------
21,455 17,109 58,379 51,072
--------- --------- --------- ---------
Operating income .......................... 12,042 9,255 31,502 19,562
Interest income .............................. 917 408 2,437 1,266
Other expense ................................ (17) (10) (45) (92)
--------- --------- --------- ---------
Income before income taxes ................... 12,942 9,653 33,894 20,736
Income taxes .............................. 4,660 3,475 12,202 8,333
--------- --------- --------- ---------
Net income ................................... $ 8,282 $ 6,178 $ 21,692 $ 12,403
========= ========= ========= =========
Net income per share:
Basic ..................................... $ 0.21 $ 0.16 $ 0.55 $ 0.33
========= ========= ========= =========
Diluted ................................... $ 0.20 $ 0.15 $ 0.52 $ 0.31
========= ========= ========= =========
Shares used in computing net income per share:
Basic ..................................... 39,509 38,025 39,155 37,532
========= ========= ========= =========
Diluted ................................... 41,638 41,012 41,333 40,269
========= ========= ========= =========
</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)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................... $ 72,974 $ 50,024
Short-term investments .................................. 4,044 15,151
Accounts receivable, net ................................ 41,993 29,374
Prepaid expenses and other .............................. 3,682 3,659
Prepaid taxes ........................................... 845 114
Deferred tax asset ...................................... 1,368 1,368
--------- ---------
Total current assets ............................... 124,906 99,690
--------- ---------
Property and equipment, net .................................. 12,885 10,249
Other assets ................................................. 3,798 --
Goodwill, net ................................................ 12,929 8,716
Purchased capitalized software, net .......................... 4,430 2,399
Capitalized software development costs, net .................. 4,002 3,666
--------- ---------
$ 162,950 $ 124,720
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ........................................ $ 3,475 $ 3,735
Accrued compensation and benefits ....................... 5,231 6,000
Other accrued expenses .................................. 8,714 8,001
Deferred revenues ....................................... 2,802 3,822
--------- ---------
Total current liabilities .......................... 20,222 21,558
--------- ---------
Capital lease obligations .................................... -- 285
Deferred rent ................................................ 26 --
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; 40,503,063 and 39,042,606 shares issued as
of September 30, 2000 and December 31, 1999, respectively;
and 39,901,563 and 38,441,106 shares outstanding as of
September 30, 2000 and December 31, 1999, respectively.... 79,856 61,550
Retained earnings ............................................ 65,030 43,338
Deferred compensation ........................................ (454) (777)
Accumulated other comprehensive income ....................... (1,564) (1,068)
Less treasury stock, at cost ................................. (1,927) (1,927)
--------- ---------
Total stockholders' equity ......................... 140,941 101,116
--------- ---------
$ 162,950 $ 124,720
========= =========
</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)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
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Operating activities:
Net income .......................................................... $ 21,692 $ 12,403
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 8,076 4,008
Compensation expense ................................................ 282 663
Tax benefit from employee stock options ............................. 3,868 5,869
Changes in assets and liabilities:
Increase in accounts receivable .................................. (12,919) (7,998)
(Increase)/decrease in prepaid expenses and other ................ (25) 681
Increase in other assets ......................................... (90) --
Increase in prepaid taxes ........................................ (780) (1,426)
Increase/(decrease) in accounts payable and other accrued expenses (528) 3,614
Increase/(decrease) in deferred rent ............................. 26 (192)
Increase in income taxes payable ................................. -- 535
Decrease in deferred revenues .................................... (1,107) (725)
-------- --------
Net cash provided by operating activities ...................... 18,495 17,432
-------- --------
Investing activities:
Purchases and sales of short-term investments, net .................. 11,178 (5,442)
Acquisitions, net of cash acquired .................................. (2,318) (6,640)
Investments ......................................................... (3,450) --
Purchases of property and equipment ................................. (6,812) (4,513)
Additions to capitalized software development costs ................. (1,578) (1,835)
-------- --------
Net cash used in investing activities ........................ (2,980) (18,430)
-------- --------
Financing activities:
Payments on capital lease obligations ............................... (285) (772)
Issuance of Common Stock ............................................ 7,973 7,220
-------- --------
Net cash provided by financing activities .................... 7,688 6,448
-------- --------
Effect of foreign exchange rate changes on cash .......................... (253) (341)
Net increase in cash and cash equivalents ................................ 22,950 5,109
Cash and cash equivalents, beginning of period ........................... 50,024 32,555
-------- --------
Cash and cash equivalents, end of period ................................. $ 72,974 $ 37,664
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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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 three and nine month periods
ended September 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 net income per share 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 net income per share was computed by dividing net
income for each period by the weighted average number of shares of common stock
and common stock equivalents outstanding during each period. For the three
months ended September 30, 2000 and 1999, common stock equivalents used in
computing Diluted net income per share were 2,129,000 and 2,987,000,
respectively. For the nine months ended September 30, 2000 and 1999, common
stock equivalents used in computing Diluted net income per share were 2,178,000
and 2,737,000, respectively.
3. COMPREHENSIVE INCOME
For the three months and nine months ended September 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
three months ended September 30, 2000 and 1999 was $8,003,000 and $6,583,000,
respectively. Total after-tax comprehensive income for the nine months ended
September 30, 2000 and 1999 was $21,196,000 and $11,860,000, 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
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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.
7. CHANGES IN SECURITIES
On September 14, 1999, the Company's board of directors declared a
three-for-two 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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101 summarizes certain of the Staff's views in
applying generally accepted accounting principles to recognition, presentation
and disclosure of revenue in financial statements. Implementation of SAB No.
101 is required in the fourth quarter of fiscal year 2000. Management of the
Company believes that its accounting policies for revenue recognition are in
compliance with the provisions of SAB No. 101.
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 ("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. We generally make contract services
available to our customers, under multi-year contracts. We generate
implementation fees from services provided to configure and implement the sales
force software products for our customers. 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. 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.
We generally recognize 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 configuration, we generally recognize 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.
Our software license 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. We do 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 SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Revenues. Total revenues increased $10,287,000 to $56,033,000 in the
three months ended September 30, 2000, up 22% from $45,746,000 in the three
months ended September 30, 1999.
License fee revenues increased $1,708,000 to $8,599,000 in the three
months ended September 30, 2000, up 25% from $6,891,000 in the three months
ended September 30, 1999. This increase was attributable primarily to sales
growth in Japan, as well as new pharmaceutical customers. License fee revenues
as a percentage of total revenues were 15% in both the three months ended
September 30, 2000 and the three months ended September 30, 1999.
Service revenues increased $8,579,000 to $47,434,000 in the three months
ended September 30, 2000, up 22% from $38,855,000 in the three months ended
September 30, 1999. The increase in absolute dollars was primarily the result of
an increase in the number of installed users of our 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 85% in both
the three months ended September
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30, 2000 and 1999. The Company expects the relationship of license to service
revenues to fluctuate slightly by quarter, but that on an annual basis it should
continue to be approximately the same as the total for the year ended December
31, 1999, which was 86%.
Cost of Revenues. Cost of revenues increased $3,154,000 to $22,536,000 in
the three months ended September 30, 2000, up 16% from $19,382,000 in the three
months ended September 30, 1999.
Cost of license fees increased $300,000 to $835,000 in the three months
ended September 30, 2000, up 56% from $535,000 in the three months ended
September 30, 1999. Cost of license fees for the three months ended September
30, 2000 represents the amortization of purchased software and capitalized
software development costs of $672,000 and third party vendor license fees of
$163,000. Cost of license fees for the three months ended September 30, 1999
represents the amortization of capitalized software development costs of
$397,000 and third party vendor license fees of $138,000. The increase in the
amortization of capitalized software development costs in the three months ended
September 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 $2,854,000 to $21,701,000 in the three months
ended September 30, 2000, up 15% from $18,847,000 in the three months ended
September 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 September 30, 2000, compared to 49% in the three months ended
September 30, 1999. This decrease was primarily the result of increased
operational efficiencies in the nine months ended September 30, 2000.
Total gross margin for the three months ended September 30, 2000 was 60%,
up from 58% for the three months ended September 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 58% to 60%.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $4,036,000 to $18,752,000 in the three months ended September 30,
2000, up 27% from $14,716,000 in the three months ended September 30, 1999. The
increase in the absolute dollar amount of SG&A expenses was attributable
primarily 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 increased to 33% in the three months ended September 30, 2000, up from
32% in the three months ended September 30, 1999. The Company's annual targeted
SG&A expenses, as a percentage of total revenues, are 30% to 32%.
Research and Development ("R&D") Expenses. R&D expenses increased
$310,000 to $2,703,000 in the three months ended September 30, 2000, up 13%
from $2,393,000 in the three months ended September 30, 1999. The increase in
R&D expenses 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 were 5% in both the three months ended
September 30, 2000 and the three months ended September 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.
Provision for Income Taxes. The effective rate remained unchanged at 36%
in the three months ended September 30, 2000 compared to the three months ended
September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Revenues. Total revenues increased $29,596,000 to $154,827,000 in the
nine months ended September 30, 2000 up 24% from $125,231,000 in the nine months
ended September 30, 1999.
License fee revenues increased $2,566,000 to $20,258,000 in the nine
months ended September 30, 2000, up 15% from $17,692,000 in the nine months
ended September 30, 1999. This increase was attributable primarily to sales
growth in Japan, as well as new
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pharmaceutical customers. License fee revenues as a percentage of total
revenues were 13% in the nine months ended September 30, 2000, as compared to
14% in the nine months ended September 30, 1999.
Service revenues increased $27,030,000 to $134,569,000 in the nine months
ended September 30, 2000, up 25% from $107,539,000 in the nine months ended
September 30, 1999. The increase in absolute dollars was primarily the result of
an increase in the number of installed users of our 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 87% in the
nine months ended September 30, 2000, as compared to 86% in the nine months
ended September 30, 1999. The Company expects the relationship of license to
service revenues to fluctuate slightly by quarter but on an annual basis it
should continue to be approximately the same as the total for the year ending
December 31, 1999, which was 86%.
Cost of Revenues. Cost of revenues increased $10,349,000 to $64,946,000
in the nine months ended September 30, 2000, up 19% from $54,597,000 in the nine
months ended September 30, 1999.
Cost of license fees increased $1,185,000 to $2,710,000 in the nine
months ended September 30, 2000, up 78% from $1,525,000 in the nine months
ended September 30, 1999. Cost of license fees for the nine months ended
September 30, 2000 represents the amortization of purchased software and
capitalized software development costs of $2,101,000 and third party vendor
license fees of $609,000. Cost of license fees for the nine months ended
September 30, 1999 represents the amortization of capitalized software
development costs of $1,146,000 and third party vendor license fees of
$379,000. The increase in the amortization of capitalized software development
costs in the nine months ended September 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 $9,164,000 to $62,236,000 in the nine months
ended September 30, 2000, up 17% from $53,072,000 in the nine months ended
September 30, 1999. This increase was primarily due to an increase in staff
required to support greater client activity. As a percentage of service
revenues, cost of services decreased to 46% of service revenues in the nine
months ended September 30, 2000, compared to 49% in the nine months ended
September 30, 1999. This is primarily the result of increased operational
efficiencies in the nine months ended September 30, 2000.
Total gross margin for the nine months ended September 30, 2000 was 58%,
up from 56% for the nine months ended September 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 58% to 60%.
SG&A Expenses. SG&A expenses increased $8,596,000 to $50,336,000 in the
nine months ended September 30, 2000, up 21% from $41,740,000 in the nine
months ended September 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 were 33% in both the nine months
ended September 30, 2000 and nine months ended September 30, 1999. The
Company's annual targeted SG&A expenses, as a percentage of total revenues, are
30 to 32%.
R&D Expenses. R&D expenses increased $2,177,000 to $8,043,000 in the
nine months ended September 30, 2000, up 37% from $5,866,000 in the nine months
ended September 30, 1999. The increase in R&D expenses was attributable
primarily to increased spending on development of internet initiatives along
with R&D spending from acquisitions. As a percentage of total revenues, R&D
expenses were 5% in both the nine months ended September 30, 2000 and the nine
months ended September 30, 1999. With respect to future R&D 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
nine months ended September 30, 2000 as compared to 40% for the nine months
ended September 30, 1999. This decrease was due to the non-deductibility of
certain
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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
$18,495,000 in the nine months ended September 30, 2000, compared to $17,432,000
in the nine months ended September 30, 1999. This increase in cash provided by
operating activities was due primarily to higher net income, an increase in
depreciation and amortization, partially offset by a increase in accounts
receivable and a decrease in accounts payable and accrued expenses.
Cash used in investing activities was $2,980,000 in the nine months ended
September 30, 2000 compared to $18,430,000 in the nine months ended September
30, 1999. The decrease was due primarily to increased sales of short-term
investments in the nine months ended September 30, 2000, partially offset by an
increase in purchases of property and equipment.
We generated $7,688,000 of cash from financing activities in the nine
months ended September 30, 2000 compared to $6,448,000 in the nine months ended
September 30, 1999. The increase in our cash provided from financing activities
was due primarily to an increase in the issuance of common stock, which resulted
from the exercise of employee stock options during the nine months ended
September 30, 2000, as well as lower payments on capital lease obligations in
2000.
We maintain a $15,000,000 revolving line of credit agreement with The
Chase Manhattan Bank (the "Credit Agreement"). The Credit Agreement is
available to finance working capital needs and possible future acquisitions.
The terms of this Credit 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 stock offerings (as
defined in the Credit Agreement). This covenant effectively limits the amount
of cash dividends we may pay. At September 30, 2000, there were no borrowings
outstanding under the Credit Agreement, and we satisfied all of our covenant
obligations.
At September 30, 2000, our working capital was approximately
$104,684,000. We had no significant capital spending or purchasing commitments
other than normal purchase commitments and commitments under facility and
capital leases.
We recently entered into a lease agreement for a new facility in
Chesapeake, Virginia, at market rate rent. The two building facility is
comprised of approximately 100,000 total square feet. We expect capital
expenditures in connection with tenant improvements, furniture and fixtures and
other capital costs to be incurred through 2001. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101 summarizes certain of the Staff's views in
applying generally accepted accounting principles to recognition, presentation
and disclosure of revenue in financial statements. Implementation of SAB No.
101 is required in the fourth quarter of fiscal year 2000. Management of the
Company believes that its accounting policies for revenue recognition are in
compliance with the provisions of SAB No. 101.
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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.
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, our customers' senior levels of management often are involved
and, in some instances, their 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 introduced 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.
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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 customer relationship management ("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, 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 or financial condition 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.
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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 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.
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.
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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.
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
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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
- 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.
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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 September 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
1000 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 1000 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 5. Other Information
On September 25, 2000, the Company entered into an Employment Agreement
with Michael G. Atieh, to serve as the Company's Senior Vice President and
Chief Financial Officer. Mr. Atieh will report to George Robson, who will
remain in his role as Executive Vice President.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Exhibits:
10.1 Employment Agreement dated September 25, 2000 between the
Company and Michael G. Atieh.
27.1 Financial Data Schedule
(b) 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: November 14, 2000
By: /s/ JOHN E. BAILYE
--------------------------------
John E. Bailye, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL G. ATIEH
--------------------------------
Michael G. Atieh, Senior Vice President
and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
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