-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtYhmHpXAlrHNHRBQDYqvlZNAzGUJs21OwiCiVDqnO1zQ1d0tMqX5T+FPRYUhhQT GFvH3+j4NYGHQMyd2rPeWQ== 0000950123-00-004940.txt : 20000515 0000950123-00-004940.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950123-00-004940 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENDRITE INTERNATIONAL INC CENTRAL INDEX KEY: 0000880321 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222786386 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-92434 FILM NUMBER: 628699 BUSINESS ADDRESS: STREET 1: 1200 MOUNT KEMBLE AVE CITY: MORRISTOWN STATE: NJ ZIP: 07960 BUSINESS PHONE: 2014251200 MAIL ADDRESS: STREET 1: 1200 MOUNT KEMBLE AVE CITY: MORRISTOWN STATE: NJ ZIP: 07960-6797 10-Q 1 DENDRITE INTERNATIONAL, INC. 1 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. 2 INDEX
PAGE NO 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
2 3 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, ---------------------------- 1999 2000 -------- -------- Revenues: 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 -------- -------- 16,901 20,329 -------- -------- Gross margin 20,733 26,733 -------- -------- 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 ======== ======== Net income per share: Basic $ .11 $ .16 ======== ======== Diluted $ .11 $ .15 ======== ======== Shares used in computing net income per share: Basic 37,026 38,816 ======== ======== Diluted 39,690 41,210 ======== ========
The accompanying notes are an integral part of these statements. 3 4 DENDRITE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
December 31, March 31, 1999 2000 --------- --------- Assets Current Assets: 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 --------- --------- $ 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 ========= =========
The accompanying notes are an integral part of these statements. 4 5 DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, --------------------------- 1999 2000 -------- -------- Operating activities: 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) -------- -------- 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 ======== ========
The accompanying notes are an integral part of these statements. 5 6 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. 6 7 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 7 8 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. 8 9 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 9 10 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 10 11 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. 11 12 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; 12 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 13 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 14 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. 15 16 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 63,901 0 33,605 0 0 103,696 11,063 0 140,108 21,490 0 0 0 71,183 45,512 0 0 47,062 0 20,329 18,077 0 (760) 9,416 3,390 6,026 0 0 0 6,026 .16 .15
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