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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended March 31, 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.
Class Shares Outstanding at April 27, 2000
Common Stock 39,080,525
DENDRITE INTERNATIONAL, INC.
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INDEX
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<CAPTION>
PAGE NO
<S> <C>
PART I FINANCIAL INFORMATION 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999 3
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows
Three months ended March 31, 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 14
PART II OTHER INFORMATION 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 5. Other Information 15
ITEM 6. Report on Form 8-K 15
Signatures 16
</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 March 31,
----------------------------
1999 2000
-------- --------
Revenues:
<S> <C> <C>
License fees $ 4,054 $ 5,609
Services 33,580 41,453
-------- --------
37,634 47,062
-------- --------
Cost of revenues:
Cost of license fees 398 745
Cost of services 16,503 19,584
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16,901 20,329
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Gross margin 20,733 26,733
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Operating expenses:
Selling, general and administrative 12,627 15,438
Research and development 1,638 2,639
-------- --------
14,265 18,077
-------- --------
Operating income 6,468 8,656
Interest income 418 760
Other expense (125) --
-------- --------
Income before income taxes 6,761 9,416
Income taxes 2,562 3,390
-------- --------
Net income $ 4,199 $ 6,026
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Net income per share:
Basic $ .11 $ .16
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Diluted $ .11 $ .15
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Shares used in computing net income per share:
Basic 37,026 38,816
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Diluted 39,690 41,210
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</TABLE>
The accompanying notes are an integral part of these statements.
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DENDRITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
--------- ---------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 50,024 $ 62,744
Short-term investments 15,151 1,157
Accounts receivable, net 29,374 33,605
Prepaid expenses and other 3,659 4,822
Prepaid taxes 114 --
Deferred tax asset 1,368 1,368
--------- ---------
Total current assets 99,690 103,696
Property and equipment, net 10,249 11,063
Other assets -- 2,809
Goodwill, net 8,716 13,851
Purchased capitalized software, net 2,399 5,001
Capitalized software development costs, net 3,666 3,688
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$ 124,720 $ 140,108
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 3,735 $ 2,989
Income taxes payable -- 1,307
Accrued compensation and benefits 6,000 5,204
Other accrued expenses 8,001 8,065
Deferred revenues 3,822 3,925
--------- ---------
Total current liabilities 21,558 21,490
--------- ---------
Capital lease obligations 285 170
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 39,589,032 shares issued as of
December 31, 1999 and March 31, 2000 respectively;
and 38,441,106 and 38,987,532 shares outstanding as of
December 31, 1999 and March 31, 2000 respectively. 61,550 71,183
Retained earnings 43,338 49,364
Deferred compensation (777) (663)
Accumulated other comprehensive income (1,068) (1,270)
Less treasury stock, at cost (1,927) (1,927)
--------- ---------
Total stockholders' equity
101,116 116,687
--------- ---------
$ 124,720 $ 140,108
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1999 2000
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Operating activities:
<S> <C> <C>
Net income $ 4,199 $ 6,026
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,123 2,632
Compensation expense 107 112
Tax benefit from employee stock plan 2,831 932
Changes in assets and liabilities:
Increase in accounts receivable (4,346) (3,812)
Increase in prepaid expenses and other (91) (1,146)
Increase in prepaid income taxes (1,215) (114)
Increase/(decrease) in accounts payable and accrued expenses 935 (2,118)
Decrease in deferred rent (64) --
Increase/(decrease) in income taxes payable (215) 1,360
Increase/(decrease) in deferred revenues 1,399 (21)
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Net cash provided by operating activities 4,663 3,851
-------- --------
Investing activities:
Purchases of short-term investments (10,014) (1,079)
Sales of short-term investments 8,901 15,145
Purchase of Analytika, net of cash acquired -- (2,172)
Investment in Skila, Inc. -- (2,500)
Purchases of property and equipment (1,315) (1,995)
Additions to capitalized software development costs (540) (465)
-------- --------
Net cash provided by (used in) investing activities (2,968) 6,934
-------- --------
Financing activities:
Net proceeds from borrowings 515 --
Payments on capital lease obligations (200) (115)
Issuance of Common Stock from exercise of Stock options 2,995 2,197
-------- --------
Net cash provided by financing activities 3,310 2,082
-------- --------
Effect of foreign exchange rate changes on cash (213) (147)
Net increase in cash and cash equivalents 4,792 12,720
Cash and cash equivalents, beginning of period 32,555 50,024
-------- --------
Cash and cash equivalents, end of period $ 37,347 $ 62,744
======== ========
</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 month period ended March
31, 2000. 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 March 31, 2000 and 1999, common stock
equivalents used in computing Diluted EPS were 2,394,000 and 2,664,000,
respectively.
3. Comprehensive Income
For the three months ended March 31, 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 March 31, 2000 and 1999 was $5,824,000 and $3,715,000, 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 of Marketing Management International, Inc. ("MMI") and
certain affiliated companies, for approximately $6,640,000 in cash, which
includes 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 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 design, develop and sell comprehensive customer
relationship management or CRM solutions that enable customers to effectively
manage the activities of large sales forces in complex selling environments.
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.
Historically, we have focused our solutions on large sales forces
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 European 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.
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
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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 configuration, 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 will be 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 MARCH 31, 2000 AND 1999
REVENUES. Total revenues increased $9,428,000 to $47,062,000 in the
three months ended March 31,2000, up 25% from $37,634,000 in the three months
ended March 31,1999.
License fee revenues increased $1,555,000 to $5,609,000 in the three
months ended March 31, 2000, up 38% from $4,054,000 in the three months ended
March 31,1999. License fee revenues as a percentage of total revenues were 12%
in the three months ended March 31,2000 as compared to 11% in the three months
ended March 31, 1999. This increase was attributable primarily to sales to new
pharmaceutical customers as a result of sales force expansions.
Service revenues increased $7,873,000 to $41,453,000 in the three
months ended March 31, 2000, up 23% from $33,580,000 in the three months ended
March 31, 1999. Service revenues as a percentage of total revenues were 88% in
the three months ended March 31, 2000, as compared to 89% in the three months
ended March 31, 1999. The increase in the absolute dollar amount of service
revenues was primarily the result of an increase in the number of installed
users of Dendrite sales force software products, as well as the provision of
additional services for our existing customers. The Company expects the ratio of
license to service revenues to fluctuate slightly by quarter but on an
annual basis, such ratio will continue to be approximately the same as total
1999, which was 86%.
COST OF REVENUES. Cost of revenues increased $3,428,000 to $20,329,000
in the three months ended March 31, 2000, up 20% from $16,901,000 in the three
months ended March 31, 1999.
Cost of license fees increased $347,000 to $745,000 in the three months
ended March 31,2000 up 87% from $398,000 in the three months ended March
31,1999. Cost of license fees for the three months ended March 31,2000
represents the amortization of purchased software and capitalized software
development costs of $731,000 and third party vendor license fees of $14,000.
Cost of license fees for the three months ended March 31,1999 represents the
amortization of capitalized software development costs of $387,000 and third
party vendor license fees of $11,000. The increase in the amortization of
capitalized software development costs in the three months ended March 31,2000,
was primarily due to the increase in purchased capitalized software associated
with the acquisitions of MMI and Analytika.
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Cost of services increased $3,081,000 to $19,584,000 in the three
months ended March 31,2000, up 19% from $16,503,000 in the three months ended
March 31,1999. 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 three
months ended March 31,2000 compared to 49% in the three months ended March
31,1999. This decrease was primarily the result of increased operational
efficiencies in 2000.
Total Gross Margin for the three months ended March 31, 2000 was 57%,
up from 55% for the three months ended March 31, 1999. This increase is due to
the improvement in service margins as described above, and from the introduction
of several new products. 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 $2,811,000 to $15,438,000 in the three months ended March 31,2000, up
22% from $12,627,000 in the three months ended March 31,1999. As a percentage of
revenues, SG&A expenses decreased to 33% in the three months ended March 31,
2000 down from 34% in the three months ended March 31, 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. 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 $1,001,000 to $2,639,000 in the three months ended March 31, 2000 up
61% from $1,638,000 in the three months ended March 31,1999. As a percentage of
revenues, R&D expenses increased to 6% in the three months ended March 31, 2000
from 4% in the three months ended March 31, 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. 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 decreased to 36% in the
three months ended March 31,2000 as compared to 38% for the three months ended
March 31, 1999. This decrease was due to the 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
$3,851,000 for the three months ended March 31, 2000, compared to cash provided
by operating activities of $4,663,000 for the three months ended March 31, 1999.
This decrease in cash provided by operating activities was due primarily to
smaller tax benefit from employee stock option exercises, a decrease in current
liabilities and an increase in other assets, offset by higher net income and an
increase in depreciation and amortization.
Cash provided by investing activities was $6,934,000 in the three
months ended March 31, 2000 compared to cash used in investing activities of
$2,968,000 in the three months ended March 31, 1999. The increase was due
primarily to sales of short-term investments offset by the purchase of
Analytika, as well as an investment in Skila, Inc.
We generated $2,082,000 of cash from financing activities in the three
months ended March 31, 2000 compared to $3,310,000 of cash from financing
activities in the three months ended March 31, 1999. The change in our cash
provided from financing activities was due to a decrease in the issuance of
common stock primarily from the exercise of employee stock options during the
three months ended March 31, 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
stock offerings. This covenant effectively limits the amount of cash dividends
we may pay. At March 31, 2000, there were no borrowings outstanding under the
agreement and we satisfied all of our covenant obligations.
At March 31, 2000, our working capital was approximately $82,206,000.
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
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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.
YEAR 2000 READINESS DISCLOSURE
To date, we have spent approximately $355,000 to evaluate, test and remediate,
if necessary, our internal computer software and operating systems,
collectively, our Internal Programs and Systems, for Year 2000 compliance
problems. These costs were funded with cash from our operations and such costs
were expensed or capitalized, depending on the nature of the expenditure. Since
January 1, 2000, the Company has not had any Year 2000-related problems
associated with its Internal Programs and Systems or software products licensed
to its customers, and is not aware of any Year 2000-related problems associated
with the systems or software of its vendors, distributors or suppliers. Although
the Company expects most material Year 2000 compliance problems to have arisen
or occurred on or after January 1, 2000, there can be no assurance, however,
that the Year 2000 problem will not adversely affect the Company's business,
financial condition, results of operations or cash flows.
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, 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
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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, 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.
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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.
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;
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<PAGE> 13
- - 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.
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
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<PAGE> 14
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
- - 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
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<PAGE> 15
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 March 31, 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 on our future
interest income, of future changes in investment yields will depend largely on
the gross amount of our investments. See Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PART II OTHER INFORMATION
ITEM 2. Changes in Securities and use of Proceeds.
Changes in Securities
On January 6, 2000, the Company issued approximately 215,500 shares
of restricted Common Stock to Analytika, Inc. ("Analytika"), as partial
consideration for the Company's acquisition of substantially all of the assets
of Analytika, Inc. The Company did not employ an underwriter in connection with
the issuance or sale of the securities described above. The Company claims that
the issuance or sale of the foregoing securities was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), as
transactions not involving any public offering and such securities having been
acquired for investment and not with a view to distribution. Appropriate legends
were affixed to the stock certificates issued in the Analytika Acquisition and
Analytika, Inc. had adequate access to information about the Company.
ITEM 5. Other Information
(a) None
ITEM 6. Report on Form 8-K
(a) The Company filed one Report on Form 8-K during the quarter for
which this report is filed. Such report was filed on January 27, 2000, pursuant
to a press release concerning the Company's 1999 results of operations.
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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: May 12, 2000
By: /s/ John E. Bailye
John E. Bailye, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ George T. Robson
George T. Robson, Executive Vice
President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
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