10-Q 1 form10-q_33101.txt FORM 10-Q FOR PERIOD ENDED 3/31/01 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, 2001 [ ] 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. ---------------------------- (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: at May 1, 2001 there were 39,573,596 shares of common stock outstanding.
DENDRITE INTERNATIONAL, INC. INDEX PAGE NO ------- PART I. FINANCIAL INFORMATION 3 ITEM 1. Financial Statements (Unaudited) 3 Consolidated Statements of Operations Three months ended March 31, 2001 and 2000 3 Consolidated Balance Sheets March 31, 2001 and December 31, 2000 4 Consolidated Statements of Cash Flows Three months ended March 31, 2001 and 2000 5 Notes to Unaudited Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION 15 ITEM 5. Other Information 15 ITEM 6. Reports on Form 8-K 15 Signatures 16
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements
DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended March 31, ----------------------------- 2001 2000 ---- ---- Revenues: License fees $ 3,003 $ 5,609 Services 48,876 41,453 ------------ ---------- 51,879 47,062 ------------ ---------- Cost of revenues: Cost of license fees 963 745 Cost of services 26,166 19,584 ------------ ---------- 27,129 20,329 ------------ ---------- Gross margin 24,750 26,733 ------------ ---------- Operating expenses: Selling, general and administrative 20,462 15,438 Research and development 2,867 2,639 ------------ ---------- 23,329 18,077 ------------ ---------- Operating income 1,421 8,656 Interest income 926 760 Other expense (26) - ------------ ---------- Income before income taxes 2,321 9,416 Income taxes 836 3,390 ------------ ---------- Net income $ 1,485 $ 6,026 ============ ========== Net income per share: Basic $ .04 $ .16 ============ ========== Diluted $ .04 $ .15 ============ ========== Shares used in computing net income per share: Basic 40,249 38,816 ============ ========== Diluted 41,159 41,210 ============ ==========
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) March 31, December 31, 2001 2000 ---- ---- Assets Current Assets: Cash and cash equivalents $ 79,696 $ 73,230 Short-term investments 7,434 4,143 Accounts receivable, net 33,393 48,182 Prepaid expenses and other 8,500 6,987 Prepaid taxes 5,022 1,564 Deferred taxes 1,160 1,160 ----------- ----------- Total current assets 135,205 135,266 Property and equipment, net 15,612 15,924 Other assets 3,867 3,872 Goodwill, net 11,710 12,305 Purchased capitalized software, net 3,857 4,144 Capitalized software development costs, net 4,691 4,392 ----------- ----------- $ 174,942 $ 175,903 =========== =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 5,940 $ 5,120 Accrued compensation and benefits 5,301 4,271 Other accrued expenses 8,181 8,085 Deferred revenues 6,601 4,052 ----------- ---------- Total current liabilities 26,023 21,528 ----------- ----------- Deferred rent - 25 Deferred taxes 1,052 1,052 Stockholders' Equity Preferred Stock, no par value, 10,000,000 shares authorized, none issued - - Common Stock, no par value, 150,000,000 shares authorized, 41,216,036 and 40,729,212 shares issued; 39,895,636 and 40,127,712 shares outstanding 86,886 83,370 Retained earnings 75,434 73,949 Deferred compensation (315) (405) Accumulated other comprehensive loss (2,215) (1,689) Less treasury stock, at cost (11,923) (1,927) ----------- ----------- Total stockholders' equity 147,867 153,298 ----------- ----------- $ 174,942 $ 175,903 =========== ===========
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, 2001 2000 ---- ---- Operating activities: Net income $ 1,485 $ 6,026 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,534 2,632 Amortization of deferred compensation 64 112 Tax benefit from exercise of employee stock options 1,563 932 Changes in assets and liabilities, net of effect from acquisition: (Increase) decrease in accounts receivable 14,560 (3,812) Increase in prepaid expenses and other (1,539) (1,146) Increase in other assets (17) - Increase in prepaid income taxes (3,479) (114) Increase (decrease) in accounts payable and accrued expenses 1,614 (2,118) Decrease in deferred rent (25) - Increase in income taxes payable - 1,360 Increase (decrease) in deferred revenues 2,472 (21) ---------- --------- Net cash provided by operating activities 20,232 3,851 ---------- --------- Investing activities: Purchases of short-term investments (10,876) (1,079) Sales of short-term investments 7,585 15,145 Acquisition, net of cash acquired - (2,172) Increase in other non-current assets - (2,500) Purchases of property and equipment (1,532) (1,995) Additions to capitalized software development costs (817) (465) ---------- --------- Net cash provided by (used in) investing activities (5,640) 6,934 ---------- --------- Financing activities: Purchase of treasury stock (9,996) - Payments on capital lease obligations - (115) Issuance of common stock 1,980 2,197 ---------- --------- Net cash provided by (used in) financing activities (8,016) 2,082 ---------- --------- Effect of exchange rate changes on cash (110) (147) Net increase in cash and cash equivalents 6,466 12,720 Cash and cash equivalents, beginning of period 73,230 50,024 ---------- --------- Cash and cash equivalents, end of period $ 79,696 $ 62,744 ========== =========
The accompanying notes are an integral part of these statements. DENDRITE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements of Dendrite International, Inc. (the "Company") and its subsidiaries included in this Form 10-Q are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the three month periods ended March 31, 2001 and 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, 2000. Our interim operating results may not be indicative of operating results for the full year. 2. Net Income 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 March 31, 2001 and 2000, common stock equivalents used in computing diluted net income per share were 910,000 and 2,394,000 shares, respectively. 3. Comprehensive Income Assets and liabilities of the Company's wholly-owned international subsidiaries are translated at their respective period-end exchange rates and revenues and expenses are translated at average currency exchange rates for the period. The resulting translation adjustments are included as "Accumulated other comprehensive loss" and are reflected as a separate component of stockholders' equity. Total after-tax comprehensive income for the three months ended March 31, 2001 and 2000 was $959,000 and $5,824,000, respectively. 4. Analytika, Inc. Acquisition On January 6, 2000, the Company purchased all of the assets and assumed certain liabilities of Analytika, Inc. ("Analytika"), a provider of advanced analytical products, consulting services and outsourced operations services to the pharmaceutical industry. Under the terms of the acquisition agreement, the Company paid $2,318,000 in cash, which included transaction costs, and $6,506,000 in the Company's common stock. The acquisition has been accounted for using the purchase method with the purchase price allocated to the fair value of the assets acquired and liabilities assumed based on their respective fair market value at the acquisition date. Of the purchase price, $2,890,000 was allocated to purchased capitalized software development costs. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill ($5,979,000) based upon an independent appraisal. Analytika's results of operations have been included in the Company's consolidated financial statements from the date of acquisition. 5. Customer and Geographic Segment Data In the three months ended March 31, 2001, the Company derived approximately 43% of its revenues from its two largest customers. In the three months ended March 31, 2000, the Company derived approximately 38% of its revenues from its two largest customers. The Company is organized by geographic locations and has one reportable segment. All transfers between geographic areas have been eliminated from consolidated revenues. Operating income consists of total revenues recorded in the location less operating expenses and does not include interest income, other expense or income taxes. This data is presented in accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information". For the Three Months Ended March 31, 2001 2000 ----------------- ----------------- Revenues: United States......... $ 41,028,000 $ 35,669,000 All Other............. 10,851,000 11,393,000 ---------------- ------------ $ 51,879,000 $ 47,062,000 ================ ============ Operating (loss) income: United States......... $ 2,709,000 $ 7,007,000 All Other............. (1,288,000) 1,649,000 ----------------- ------------ $ 1,421,000 $ 8,656,000 ================ ============ March 31, 2001 December 31, 2000 ----------------- ----------------- Identifiable assets: United States......... $ 155,601,000 $155,843,000 All Other............. 19,341,000 20,060,000 ---------------- ------------ $ 174,942,000 $175,903,000 ================ ============ For segment reporting purposes, license revenues have been allocated to the sales office of the respective country in which the sale is made, although the actual contract is with the U.S. entity for legal and tax purposes. 6. Recently Issued Accounting Pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to recognition, presentation and disclosure of revenue in financial statements. Management of the Company believes that its accounting policies for revenue recognition are in compliance with the provisions of SAB No. 101. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement established accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities and was effective January 1, 2001. The adoption of SFAS No. 133 did not have any impact on operating results or financial position. 7. Common Stock Repurchase Program On January 31, 2001, the Company announced that its Board of Directors had authorized the Company to repurchase up to $20,000,000 of its outstanding common stock over a two-year period. The Company repurchases shares on the open market or in privately negotiated transactions from time to time. Repurchases of stock are at management's discretion, depending upon price and availability. The repurchased shares are held as treasury stock, which may be used to satisfy the Company's current and near term requirements under its equity incentive and other benefit plans and for other corporate purposes. As of March 31, 2001, the Company repurchased 718,900 shares of Company common stock at a value of $9,996,000. Subsequent to March 31, 2001, the Company repurchased 361,800 shares of Company common stock at a value of $4,499,000. As of April 12, 2001, the Company repurchased a total of 1,080,700 shares under the program for a total value of $14,495,000. 8. Shareholder Rights Plan On February 16, 2001, the Company's Board of Directors adopted a shareholder rights plan (the "Rights Plan"). The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent a person or group from acquiring control of the Company without offering a fair price to all shareholders. The adoption of the Rights Plan was not in response to any known effort to acquire control of the Company. Under the Rights Plan, each shareholder of record on March 5, 2001 received a distribution of one Right for each share of common stock of the Company ("Rights"). Initially, the Rights will be represented by the Company's common stock certificates, will not be traded separately from the common stock and will not be exercisable. The Rights will become exercisable only if a person acquires, or announces a tender offer that would result in ownership of 15% or more of the Company's common stock, at which time each Right would enable the holder to buy one one-hundredth of a share of the Company's Series A preferred stock at an exercise price of $120, subject to adjustment. Following the acquisition of 15% or more of the Company's common stock, the holders of Rights (other than the acquiring person or group) will be entitled to purchase shares of the Company's common stock at half-price, and in the event of a subsequent merger or other acquisition of the Company, to buy shares of common stock of the acquiring entity at one-half of the market price of those shares. The Company may redeem the Rights for $0.01 per Right, subject to adjustment, at any time before the acquisition by a person or group of 15% or more of the Company's ordinary shares. The Rights will expire on February 20, 2011. 9. Commitments and Contingencies In April 2001, the Company spent approximately $10,800,000 to purchase a 145,000 square foot building in New Jersey. In addition, in the fourth quarter of 2000, the Company entered into a lease agreement for a new facility in Chesapeake, Virginia, with future minimum rental payments of approximately $15,000,000 over the next 11 years. The two building facility in Chesapeake 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 year-end 2002. Funding for these expenditures is expected to be from operating cash flows and existing cash balances. 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, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. 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 such 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 such results. 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. provides a comprehensive range of customer relationship management or CRM software products and support services to the pharmaceutical industry. The Company also markets its products to the consumer packaged goods industry. The Company's solutions combine proprietary software products with extensive system support services, sales force support services and analytical services. The Company generates revenues from both services and licenses. Service revenues, which account for a substantial portion 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 our CRM 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, operations of our customers' server computers, maintenance of 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 generally 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 forces, including training, telephone support and data analysis services. 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 the 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. When there is no initial customization or configuration, the Company generally recognizes the license fees from those products upon delivery if any services to be provided are not essential to the functionality of the software. Additionally, license revenues are recognized immediately when the user count for previously delivered software increases. Historically, the Company's software licensing agreements provide for a warranty period (typically 180 days from the date of execution of the agreement). The Company's software maintenance period usually begins immediately after the warranty period. 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, delivery has occurred, the license amount is fixed or determinable and collectability is probable. The United States, the United Kingdom, France and Japan are currently our main markets. We bill services provided by our foreign branches and subsidiaries in local currencies. Operating results generated in local currencies are translated into U.S. dollars at the average exchange rate in effect for the reporting period. We generated approximately 21% and 24% of our total revenues outside the United States during the three months ended March 31, 2001 and 2000, respectively. Our operating profits by geographic segment are shown in Note 5 of "Notes to Unaudited Consolidated Financial Statements." RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 REVENUES. Total revenues increased $4,817,000 to $51,879,000 in the three months ended March 31, 2001, up 10% from $47,062,000 in the three months ended March 31, 2000. License fee revenues decreased $2,606,000 to $3,003,000 in the three months ended March 31, 2001, down 46% from $5,609,000 in the three months ended March 31, 2000. License fee revenues as a percentage of total revenues were 6% in the three months ended March 31, 2001 as compared to 12% in the three months ended March 31, 2000. The decrease in license fee revenues was the result of fewer sales to new pharmaceutical customers and additional licenses for existing clients. Service revenues increased $7,423,000 to $48,876,000 in the three months ended March 31, 2001, up 18% from $41,453,000 in the three months ended March 31, 2000. Service revenues as a percentage of total revenues were 94% in the three months ended March 31, 2001, as compared to 88% in the three months ended March 31, 2000. The increase in service revenues was primarily the result of an increase in the number of installed users of Dendrite sales force software products at both new and existing customers, as well as the provision of additional services for our existing customers. Also contributing to the increase was a one-time payment relating to a contractual adjustment from an existing customer that recently merged with another company. COST OF REVENUES. Total cost of revenues increased $6,800,000 to $27,129,000 in the three months ended March 31, 2001, up 33% from $20,329,000 in the three months ended March 31, 2000. Cost of license fees increased $218,000 to $963,000 in the three months ended March 31, 2001 up 29% from $745,000 in the three months ended March 31, 2000. Cost of license fees for the three months ended March 31, 2001 is comprised of the amortization of purchased software and capitalized software development costs of $805,000 and third party vendor license fees of $158,000. Cost of license fees for the same period in 2000 is comprised of the amortization of purchased software and capitalized software development costs of $731,000 and third party vendor license fees of $14,000. The increase in the amortization of capitalized software development costs in the three months ended March 31, 2001 was primarily due to the increase in internally developed capitalized software. The costs associated with third party vendor licenses increased due to the increased number of third party software products embedded in our WebForce product. Cost of services increased $6,582,000 to $26,166,000 in the three months ended March 31, 2001, up 34% from $19,584,000 in the three months ended March 31, 2000. This increase was due to a combination of factors, including the mix of business and higher costs incurred to meet client demands for the configuration of software. Total gross margin for the three months ended March 31, 2001 was 48%, down from 57% for the three months ended March 31, 2000. The margin was clearly impacted by the mix of license and service revenue and the acceleration of software configuration, partially offset by the one-time contractual adjustment. Excluding this one-time contractual adjustment, total gross margin was 46% for the three months ended March 31, 2001. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $5,024,000 to $20,462,000 in the three months ended March 31, 2001, up 33% from $15,438,000 in the three months ended March 31, 2000. As a percentage of revenues, SG&A expenses increased to 39% in the three months ended March 31, 2001, up from 33% in the three months ended March 31, 2000, which was primarily attributable to the lower level of revenue growth for the quarter. The increase in SG&A expenses was also attributable to an increase in sales and marketing expenses from our existing businesses due in part to an increase in the number of worldwide employees and expenses associated with the beginning stages of our facilities move. RESEARCH AND DEVELOPMENT (R&D) EXPENSES. R&D expenses increased $228,000 to $2,867,000 in the three months ended March 31, 2001 up 9% from $2,639,000 in the three months ended March 31, 2000. As a percentage of revenues, R&D expenses remained relatively constant at 6% in the three months ended March 31, 2001 and 2000. 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 tax rate remained the same at 36% in the three months ended March 31, 2001 as compared to the three months ended March 31, 2000. We anticipate the effective tax rate to be approximately 36% throughout 2001. LIQUIDITY AND CAPITAL RESOURCES We finance our operations primarily through cash generated by operations. Net cash provided by operating activities was $20,232,000 for the three months ended March 31, 2001, compared to cash provided by operating activities of $3,851,000 for the three months ended March 31, 2000. This increase in cash provided by operating activities was due primarily to a decrease in accounts receivable, an increase in accounts payable and accrued expenses and an increase in deferred revenue, partially offset by lower net income. Cash used in investing activities was $5,640,000 in the three months ended March 31, 2001 compared to cash provided by investing activities of $6,934,000 in the three months ended March 31, 2000. The difference was due primarily to purchases of short-term investments in 2000, partially offset by cash used for acquisitions in 2000. Cash used in financing activities was $8,016,000 in the three months ended March 31, 2001 compared to cash provided by financing activities of $2,082,000 in the three months ended March 31, 2000. The difference of $10,098,000 was due to the purchase of stock under the stock repurchase program which was announced on January 31, 2001. We maintain a $15,000,000 revolving line of credit agreement with The Chase Manhattan Bank, N.A. The agreement is available to finance working capital needs and possible future acquisitions. The 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 (as defined in the agreement). This covenant effectively limits the amount of cash dividends we may pay. At March 31, 2001, there were no borrowings outstanding under the agreement and we satisfied all of our covenant obligations. At March 31, 2001, our working capital was approximately $109,182,000. We believe that available funds, anticipated cash flows from operations and our line of credit will satisfy our currently projected working capital and capital expenditure requirements, exclusive of cash required for possible acquisitions of businesses, products and technologies, for the foreseeable future. During the quarter, the Company purchased 718,900 shares of its common stock at a cost of $9,996,000 under the existing stock repurchase program. In April 2001, the Company purchased 361,800 shares of common stock at a value of $4,499,000. Additionally, in April 2001, the Company spent approximately $10,800,000 to purchase a 145,000 square foot building in New Jersey. During the fourth quarter of 2000, the Company entered into a lease agreement for a new facility in Chesapeake, Virginia, with future minimum rental payments of approximately $15,000,000 over the next 11 years. 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 year-end 2001. Funding for these expenditures is expected to be from operating cash flows and existing cash balances. We regularly evaluate opportunities to acquire products or businesses complementary to our operations. Such acquisition opportunities, if they arise, and are successfully completed, may involve the use of cash or equity instruments. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY Most of our customer relationship management 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: o the significant consolidation of the pharmaceutical industry as well as the timing and sequencing of sales to our customers may reduce the number of our existing and potential customers; o regulatory changes that permit the over-the-counter sale of formerly prescription-only drugs; and o competitive pressure on the pharmaceutical industry resulting from the continuing shift to delivery of healthcare through managed care organizations. 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 also possible that in some future period our results of operations may be below our targeted goals and 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 CRM solution generally entails an extended decision-making process because of the strategic implications and substantial costs associated with a customer's license of the solution. Given the importance of the decision, senior levels of management often are involved and, in some instances, its board of directors may be involved in this process. As a result, the decision-making process typically takes nine to eighteen months, and in certain cases 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 or more months before the software is rolled out to a customer's sales force is customary. 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 originally anticipated. 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 our targeted goals or 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 52% of our total revenues in 2000 came from Pfizer (which includes the former Parke-Davis division of Warner Lambert), Johnson & Johnson and Bristol-Myers Squibb. Approximately 37% of our total revenues in 1999 came from Pfizer and Johnson & Johnson. Approximately 42% of our total revenues in 1998 came from Pfizer and Johnson & Johnson. 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: o use available technologies and data sources to develop new products and services and to enhance our current products and services; o introduce new solutions that keep pace with developments in our target markets; and o address the changing and increasingly sophisticated needs of our customers. We cannot assure you that we will successfully develop and market new products or product enhancements that respond to technological advances in the marketplace, or that we will do so in a timely fashion. We also cannot assure you that our products will adequately and competitively address the needs of the changing marketplace. Competition for software products has been characterized by shortening product cycles. We may be materially and adversely affected by this trend if the product cycles for our products prove to be shorter than we anticipate. If that happens, our business, operating results or financial condition could be adversely affected. To remain competitive, we also may have to spend more of our revenues on product research and development than we have in the past. As a result, our results of operations could be materially and adversely affected. Further, our software products are technologically complex and may contain previously undetected errors or failures. Such errors have occurred in the past and we cannot assure you that, despite our testing, our new products will be free from errors. Errors that result in losses or delays could have a material adverse effect on our business, operating results or financial condition. INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES We believe there are a number of other companies that sell CRM products and related services that specifically target the pharmaceutical industry, including: o certain competitors that are actively selling CRM software products in more than one country; and o certain competitors that also offer CRM support services. We believe that sales force automation or SFA and CRM software products and/or services offered by most of our competitors do not address the variety of pharmaceutical customer needs that our solutions address. We also face competition from many vendors that market and sell SFA 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: o the number and success of new market entrants supplying competing CRM products or support services; o expansion of product lines by, or consolidation among, our existing competitors; and o development and/or operation of in-house CRM 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 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. 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: o any adverse change in the political or economic environments in these countries; o any adverse change in tax, tariff and trade or other regulations; o the absence or significant lack of legal protection for intellectual property rights; o exposure to exchange rate risk for service revenues which are denominated in currencies other than U.S. dollars; and o 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: o the effect of the acquisition on our financial and strategic position; o the failure of an acquired business to further our strategies; o the difficulty of integrating the acquired business; o the diversion of our management's attention from other business concerns; o the impairment of relationships with customers of the acquired business; o the potential loss of key employees of the acquired company; and o 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 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 adverse effect upon our business, operating results or financial condition. OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO PROTECT COMPLETELY We rely on a combination of trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary technology. We cannot assure you that the steps we take will prevent misappropriation of this technology. Further, protective actions we have taken or will take in the future may not prevent competitors from developing products with features similar to our products. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. We have, on occasion, in response to a request by our customer, entered into agreements which require us to place our source code in escrow to secure our service and maintenance obligations. Further, we believe that our products and trademarks do not infringe upon the proprietary rights of third parties. However, third parties may assert infringement claims against us in the future that may result in the imposition of damages or injunctive relief against us. In addition, any such claims may require us to enter into royalty arrangements. Any of these results could materially and adversely affect our business, operating results or financial condition. THERE ARE CHARACTERISTICS IN THE CONSUMER PACKAGED GOODS MARKET THAT DIFFER FROM THE PHARMACEUTICAL MARKET We market and sell CRM solutions to companies in the CPG market. The selling environment in this market has unique characteristics that differentiate it from the pharmaceutical market. In addition, we believe that the CPG market is composed of sub-markets, each of which may have unique characteristics. Accordingly, we cannot assure you that we will be able to replicate in this market the success we have achieved in the ethical pharmaceutical market. PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE Provisions of our Restated Certificate of Incorporation, as amended, our By-laws, as amended, 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. In addition, the Company has a shareholder rights plan which may limit the ability of a third party to attempt a hostile acquisition of the Company. OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS The market price of our common stock may be significantly affected by the following factors: o the announcement or the introduction of new products by us or our competitors; o quarter-to-quarter variations in our operating results or changes in earnings estimates or failure to meet or exceed earnings estimates; o market conditions in the technology, healthcare and other growth sectors; and o 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 and our service agreements in such countries are denominated in a foreign currency, 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. 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. The eleven participating countries will issue sovereign debt exclusively in Euros and will redenominate outstanding sovereign debt. The legal currencies will continue to be used as legal tender through January 1, 2002, at which point the legacy currencies will be canceled and Euro bills and coins will be used for cash transactions in the participating countries. There can be no assurance that such Euro conversion will not adversely affect our business, financial condition, results of operations or cash flows. We have not determined what impact, if any, the Euro has on our foreign exchange exposure. INTEREST RATE RISK We earn interest income from our balances of cash and short-term investments. This interest income is subject to market risk related to changes in interest rates, which primarily affects 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, 2001, our short-term investments consisted primarily of commercial paper maturing over the following three 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 if the average yield of the Company's investments decreased by 100 basis points, our interest income for the year ended December 31, 2000 would have decreased by less than $700,000. This estimate assumes that the decrease occurred on the first day of 2000 and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income, of future changes in investment yields will depend largely on the gross amount of our investments. PART II. OTHER INFORMATION Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (i) Exhibits None (ii) Reports on Form 8-K (a) The Company filed a Current Report on Form 8-K on January 31, 2001, pursuant to "Item 5. Other Events" relating to the announcement that the Company has authorized a stock repurchase program. (b) The Company filed a Current Report on Form 8-K on February 20, 2001, pursuant to "Item 5. Other Events" relating to the Company's shareholder rights plan. (c) The Company filed a Current Report on Form 8-K on March 20, 2001, pursuant to "Item 5. Other Events" relating to the exercise and "hold" of 200,000 stock options by John E. Bailye, Chairman of the Board and Chief Executive Officer. (d) The Company filed a Current Report on Form 8-K on March 30, 2001, pursuant to "Item 5. Other Events" relating to the Restated Certificate of Incorporation, employment agreements, leases, and the purchase of real property. 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 15, 2001 By: /s/ John E. Bailye -------------------------------------- John E. Bailye, Chairman and Chief Executive Officer (Principal Executive Officer) By: /s/ Michael G. Atieh ------------------------------------- Michael G. Atieh, Senior Vice President and Chief Financial Officer (Principal Financial Officer)