-----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, ONNA5pDbR+LX2/yfQFy5Qn3rGSgKnbtRVDFsYhwfxEB5h6Tu/WYrlCCC06y7r2uu fAEnBh3Kzlm008JUdXxxcQ== 0000950123-99-010264.txt : 19991117 0000950123-99-010264.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010264 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755665 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 September 30, 1999 [ ] 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 November 12,1999 Common Stock 39,143,667 2 DENDRITE INTERNATIONAL, INC. INDEX
PAGE NO PART I FINANCIAL INFORMATION 3 ITEM 1. Financial Statements (Unaudited) 3 Consolidated Statements of Operations Three months and nine months ended Sept 30, 1999 and 1998 3 Consolidated Balance Sheets Sept 30, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows Nine months ended Sept 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II OTHER INFORMATION 16 ITEM 2. Changes in Securities and Use of Proceeds 16 ITEM 5. Other Information 17 ITEM 6. Report on Form 8-K 17 Signatures 18
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 Nine Months Ended September 30, September 30, ------------------------------------------ ----------------------------------------- 1999 1998 1999 1998 ------------------- ------------------- ------------------- ------------------- Revenues: License fees $ 6,891 $ 1,621 $17,692 $9,629 Services 38,855 33,314 107,539 84,808 ------------------- ------------------- ------------------- ------------------ 45,746 34,935 125,231 94,437 ------------------- ------------------- ------------------- ------------------ Cost of revenues: Cost of license fees 535 379 1,525 1,764 Cost of services 18,847 16,248 53,072 43,269 ------------------- ------------------- ------------------- ------------------ 19,382 16,627 54,597 45,033 ------------------- ------------------- ------------------- ------------------ Gross margin 26,364 18,308 70,634 49,404 ------------------- ------------------- ------------------- ------------------ Operating expenses: Selling, general and administrative 14,716 11,254 41,740 31,454 Research and development 2,393 1,059 5,866 3,264 Write-off of in-process Research And Development - 1,230 - 1,230 Mergers and acquisitions - - 3,466 - ------------------- ------------------- ------------------- ------------------ 17,109 13,543 51,072 35,948 ------------------- ------------------- ------------------- ------------------ Operating income 9,255 4,765 19,562 13,456 Interest income 408 283 1,266 694 Other income (expense) (10) 120 (92) (254) ------------------- ------------------- ------------------- ------------------ Income before income taxes 9,653 5,168 20,736 13,896 Income taxes 3,475 2,320 8,333 5,677 ------------------- ------------------- ------------------ ------------------- Net income $6,178 $2,848 $12,403 $8,219 =================== =================== =================== ================== Net income per share: Basic $.16 $.08 $.33 $.23 =================== =================== ================== =================== Diluted $.15 $.07 $.31 $.21 =================== =================== =================== ================== Shares used in computing net income per share: Basic 38,025 36,265 37,532 35,931 =================== =================== =================== ================== Diluted 41,012 39,702 40,269 38,983 =================== =================== =================== ==================
The accompanying notes are an integral part of these statements. 3 4 DENDRITE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1999 1998 -------------- -------------- Assets Current Assets: Cash and cash equivalents $37,664 $32,555 Short-term investments 15,056 9,614 Accounts receivable, net 30,688 20,378 Prepaid expenses and other 2,886 3,391 Prepaid taxes 2,462 921 Deferred tax asset 675 675 -------------- -------------- Total current assets 89,431 67,534 Property and equipment, net 9,553 7,221 Deferred taxes 1,077 1,077 Goodwill, net 9,893 2,496 Purchased capitalized software, net 2,695 1,099 Capitalized software development costs, net 3,452 2,404 -------------- -------------- $116,101 $81,831 ============== ============== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 3,212 $ 2,249 Income taxes payable 1,868 1,036 Accrued compensation and benefits 6,144 4,321 Other accrued expenses 9,406 7,493 Deferred revenues 1,227 1,827 -------------- -------------- Total current liabilities 21,857 16,926 -------------- -------------- Deferred rent 200 392 Capital lease obligation 232 544 Deferred taxes 3,717 2,920 Stockholders' Equity Preferred Stock, no par value, 10,000,000 shares authorized, none issued -- -- Common Stock, no par value, 150,000,000 shares authorized, 39,589,032 and 37,245,675 shares issued as of September 30, 1999 and December 31, 1998, respectively and 38,987,532 and 36,644,175 outstanding as of September 30, 1999 and December 31, 1998, respectively 58,037 41,442 Retained earnings 36,400 23,998 Deferred compensation (1,378) (1,970) Accumulated other comprehensive income (1,037) (494) Less treasury stock, at cost (1,927) (1,927) -------------- -------------- Total stockholders' equity 90,095 61,049 -------------- -------------- $116,101 $81,831 ============== ==============
The accompanying notes are an integral part of these statements. 4 5 DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30 ------------------------------- 1999 1998 ---- ----- Operating activities: Net income $ 12,402 $ 8,219 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,009 2,464 Compensation expense 663 226 Tax benefit from employee stock plan 5,869 -- Write-off in-process research and development -- 1,230 Changes in assets and liabilities: (Increase)/decrease in accounts receivable (7,998) (4,948) (Increase)/decrease in prepaid expenses and other 681 (543) (Increase)/decrease in prepaid income taxes (1,426) -- Increase/(decrease) in accounts payable and accrued expenses 3,614 4,032 Increase/(decrease) in deferred rent (192) (142) Increase/(decrease) in income taxes payable 535 816 Increase/(decrease) in deferred revenues (725) 498 ------------ ------------ Net cash provided by operating activities 17,432 11,852 ------------ ------------ Investing activities: Purchases of short-term investments (24,916) (3,942) Sales of short-term investments 19,474 5,513 Purchase of MMI, net of cash acquired (6,640) -- Purchase of ABC and ADEM, net of cash acquired -- (2,295) Purchases of property and equipment (4,513) (1,752) Additions to capitalized software development costs (1,835) (1,067) ------------ ------------ Net cash used in investing activities (18,430) (3,543) ------------ ------------ Financing activities: Net proceeds from borrowings -- (930) Payments on capital lease obligations (772) (159) Issuance of Common Stock 7,220 2,594 ------------ ------------ Net cash provided by financing activities 6,448 1,505 ------------ ------------ Effect of foreign exchange rate changes on cash (341) -- Net increase/(decrease) in cash and cash equivalents 5,109 9,814 Cash and cash equivalents, beginning of period 32,555 15,937 ------------ ------------ Cash and cash equivalents, end of period $37,664 $ 25,751 ============ ============
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 included in this Form 10-Q are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the three and nine month periods ended September 30, 1999. For further information, refer to the consolidated financial statements and notes thereto, included in the company's current report on item 5 of Form 10-Q filed on August 16, 1999 and the Annual Report on Form 10-K for the year ended December 31, 1998. 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," and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. 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 September 30, 1999 and 1998, common stock equivalents used in computing Diluted EPS were 2,987,000 and 3,437,000, respectively. For the nine months ended September 30, 1999 and 1998, common stock equivalents used in computing Diluted EPS were 2,737,000 and 3,052,000, respectively. 3. Comprehensive Income For the three and nine months ended September 30, 1999 and 1998, we engaged in numerous transactions involving foreign currency, which resulted in unrealized gains and losses. Total after-tax comprehensive income for the three months ended September 30, 1999 and 1998 was $6,583,000 and $3,041,000, respectively. Total after-tax comprehensive income for the nine months ended September 30, 1999 and 1998 was $11,847,000 and $8,172,000, respectively. 4. Merger with CorNet International, Ltd. On May 26, 1999, the Company acquired CorNet International, Ltd., ("CorNet") in a transaction accounted for as a pooling of interests. The Company exchanged 1,480,538 of its shares for all outstanding shares of CorNet's common stock. All prior historical consolidated financial statements contained herein have been restated to include the financial positions, results of operations and cash flows 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 $7,300,000 in cash, which includes estimated transaction costs, and $3,400,000 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. Changes in Securities On Sept 14, 1999 the Company's board of directors declared a three for two common stock split. The stock split was distributed in the form of a 100% 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 have been restated to reflect the stock split. 6 7 7. Recently Issued Accounting Pronouncements In December 1998, the Accounting Standards Executive Committee (AcSEC) of the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions", which address software revenue recognition as it applies to multiple element arrangements when one or more of the elements has not been delivered. Management does not believe the adoption of SOP 98-9 will have a material effect on the Company's consolidated financial position or results of operations. SOP 98-9 will be effective for all transactions entered into on or after January 1, 2000. 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 We succeeded in 1991 to a business co-founded in 1986 by John Bailye, our current President and Chief Executive Officer. The business was established to provide sales force software products and support services that would enable companies to manage, coordinate and control the activities of large sales forces in complex selling environments, primarily in the prescription-only pharmaceutical industry. Today, our solutions combine advanced software products with a wide range of specialized support services. These services include software implementation, technical and hardware support and sales force support. We develop, implement and service sales force software products worldwide through our own sales, support and technical personnel located in 17 offices as well as through agents in certain countries where we do not have offices. We generate revenues from two sources: support services and license fees. Support services, 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 customize, configure and implement sales force software products for our customers. We receive technical and hardware support fees for services related to, among other things, the operation of our customers' server computers, maintenance of our customers' databases, asset control and maintenance for our customers' remote hardware and ongoing technical support. Service revenues also include fees for software maintenance services such as software defect resolution, performance enhancements and, in some cases, product upgrades. We charge fees for these maintenance services based on a percentage of applicable license fees, plus any customization fees. We receive sales force support fees for organizing and managing support of our customers' sales force, including training, telephone support and data analysis services. Ongoing support fees are generally negotiated at the commencement of a contract. However, it is our experience that our larger customers increase the amount of services they purchase from us over time. Fees for these additional services are typically based on the labor and materials used to provide the applicable service. We charge our customers license fees to use our proprietary computer software. Customers generally pay one-time perpetual license fees based upon the number of users, the territory covered and the particular software product licensed by the customer. 7 8 License revenue is recognized under SOP 97-2 (see notes to the Financial Statements No. 7). When the Company enters into a license agreement with a customer requiring significant customization of its software products, the Company recognizes revenues related to the license agreement using contract accounting. Historically, most of our customers have requested significant software customization. Management believes that with our newer generation of products some customers will not require customization and therefore we may be able to recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is probable. We recognize additional license fees when some customers agree to license additional products or functionality, acquire an upgraded version of Dendrite's software and/or when the maximum permitted number of users or initial geographic coverage is exceeded. The United States, the United Kingdom, France and Japan are our main markets. We generated approximately 21% and 19% of our total revenues outside the United States during the three months ended September 30, 1999 and 1998, respectively, and approximately 24% and 23% during the nine months ended September 30, 1999 and 1998, respectively. The Company expects international revenues will continue to account for a substantial portion of total revenues in the future. 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. Operating results generated in local currencies are translated into U.S. dollars at the average exchange rate in effect for the reporting period. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 and 1998 REVENUES. Total revenues increased $10.811 million to $45.746 million in the three months ended September 30 1999, up 31% from $34.935 million in the three months ended September 30, 1998. License fee revenues increased $5.270 million to $6.891 million in the three months ended September 30, 1999 up 325% from $1.621 million in the three months ended September 30, 1998. License fee revenues as a percentage of total revenues were 15% in the three months ended September 30, 1999 as compared to 5% in the three months ended September 30, 1998. Sales to new pharmaceutical customers, sales force expansions and software upgrades by existing pharmaceutical customers drove the increase in license fee revenues across all regions. The level of license fee revenues in the third quarter of 1998 was unusual because a major client contract expected to be awarded in the third quarter was actually award in the second quarter and usually high service revenues recognized from multiple significant client rollouts. Service revenues increased $5.541 million to $38.855 million in the three months ended September 30, 1999 up 17% from $33.314 million in the three months ended September 30, 1998. Service revenues as a percentage of total revenues were 85% in the three months ended September 30, 1999 as compared to 95% in the three months ended September 30, 1998. 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 at both new and existing customers, as well as the provision of additional services for our existing customers. The decrease on a percentage basis reflects the unusually high volume of services performed in the third quarter of 1998 and unusually low volumes of licenses during the same period. The Company expects the approximate current relationship of license to service revenues to continue in the future. COST OF REVENUES. Cost of revenues increased $2.755 million to $19.382 million in the three months ended September 30, 1999 up 17% from $16.627 million in the three months ended September 30, 1998. Cost of license fees increased $.156 million to $.535 million in the three months ended September 30, 1999 up 41% from $.379 million in the three months ended September 30, 1998. Cost of license fees in the three months ended September 30, 1999 represents the amortization of capitalized software development costs of $.463 million and third party vendor license fees of $.072 million. Cost of license fees in the three months ended September 30, 1998 represents the amortization of capitalized software development costs of $.332 million and third party license fees of $.047 million. Cost of services increased $2.599 million to $18.847 million in the three months ended September 30, 1999 up 16% from $16.248 million in the three months ended September 30, 1998. The absolute dollar amount increase in cost of services was primarily due to an increase in staff required to support higher client activity. As a percentage of service revenues, cost of services remained constant at 49% during both the three months ended September 30, 1999 and 1998. The Gross Margin for the three months ended September 30, 1999 was 58%, which is at the low end of the Company's annual targeted Gross Margin. The Company believes that the appropriate targeted gross margins should be between 58%-60%. 8 9 SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $3.462 million to $14.716 million in the three months ended September 30, 1999 up 31% from $ 11.254 million in the three months ended September 30, 1998. As a percentage of revenue, SG&A expenses were constant at 32% during both the three months ended September 30, 1999 and 1998. The increase in the absolute dollar amount of SG&A expenses was primarily attributable to an increase in sales and marketing expenses from both our existing businesses and newly acquired businesses, as well as increases related to additional leased facilities in Morristown, New Jersey. The Company's annual targeted SG&A expenses, as a percentage of total revenues, are 30-32%. The Company is currently within these targets and expects to remain there. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased $1.334 million to $2.393 million in the three months ended September 30, 1999 up 126% from $1.059 in the three months ended September 30, 1998. As a percentage of revenues, research and development expenses increased to 5% in the three months ended September 30, 1999 up from 3% in the three months ended September 30, 1998. The increase in research and development expenses during the most recent period was primarily attributable to increased spending on continued development of our laptop pharmaceutical sales force software product. The Company's annual targeted research and development expenses, as a percentage of total revenues, are 4-6%. The Company is currently in the middle range of these targets and expects to remain there. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. On July 24, 1998, the company acquired 100% of the capital stock of Associated Business Computing, N.V. and an affiliated company (collectively, "ABC"). The company assigned $1,230,000 to in-process research and development and such amount was written-off in the accompanying statement of operations for the three months ended September 30, 1998. PROVISION FOR INCOME TAXES. The effective tax rate for the three months ended September 30, 1999 was 36% compared to 45% for the same period of 1998. The reduction is due to the non-deductible nature of the write-off of in-process research and development, which took place in the third quarter 1998, as well as better tax planning strategies in 1999. NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998 REVENUES. Total revenues increased $30.794 million to $125.231 million in the nine months ended September 30, 1999 up 33% from $94.437 million in the nine months ended September 30, 1998. License fee revenues increased $8.063 million to $17.692 million in the nine months ended September 30, 1999 up 84% from $9.629 million in the nine months ended September 30, 1998. License fee revenues as a percentage of total revenues were 14% in the nine months ended September 30, 1999 as compared to 10% in the nine months ended September 30, 1998. The increase in license fee revenues spanned all geographies and was primarily driven by pharmaceutical customers. Service revenues increased $22.731 million to $107.539 million in the nine months ended September 30, 1999 up 27% from $84.808 million in the nine months ended September 30, 1998. Service revenues as a percentage of total revenues were 86% in the nine months ended September 30, 1999 as compared to 90% in the nine months ended September 30, 1998. The increase in the absolute dollar amount of service revenues was primarily the result of the addition of several new customers, rapid acceptance of the Company's new software products, as well as the provision of additional services to our existing customers. COST OF REVENUES. Cost of revenues increased $9.564 million to $54.597 million in the nine months ended September 30, 1999 up 21% from $45.033 million in the nine months ended September 30, 1998. Cost of license fees decreased $.239 million to $1.525 million in the nine months ended September 30, 1999 down 14% from $1.764 million in the nine months ended September 30, 1998. The decrease is attributable to a decline of third party license fees of $.448 million partially offset by the increased amortization of capitalized software of $.195 million. Cost of license fees in the nine months ended September 30, 1999 represents the amortization of capitalized software development costs of $1.191 million and third party vendor license fees of $.334 million. Cost of license fees in the nine months ended September 30, 1998 represents the amortization of capitalized software development costs of $.996 million and third party license fees of $.768 million. Cost of services increased $9.803 million to $53.072 million in the nine months ended September 30, 1999 up 23% from $43.269 million in the nine months ended September 30, 1998. The absolute dollar amount increase in cost of services was primarily due to an increase in staff required to support higher client activity. As a percentage of service revenues, however, cost of services decreased to 49% in the nine months ended September 30, 1999 down from 51% in the nine months ended September 30, 1998. This decrease was primarily the result of increased operational efficiencies in 1999. 9 10 SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $10.286 million to $41.740 million in the nine months ended September 30, 1999 up 33% from $31.454 million in the nine months ended September 30, 1998. This increase was primarily attributable to an increased investment in sales and marketing staff from both existing businesses and newly acquired businesses, as well as increases related to additional leased facilities in Morristown, New Jersey. As a percentage of revenue, SG&A expenses remained relatively constant at 33%. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased $2.602 million to $5.866 million in the nine months ended September 30, 1999 up 80% from $3.264 million in the nine months ended September 30, 1998. As a percentage of revenues, research and development expenses increased to 4.7% for the nine months ended September 30, 1999 up from 3.5% for the nine months ended September 30, 1998. The increase in research and development expenses during the most recent period was attributable to increased spending on continued development of our laptop pharmaceutical sales force software products and a new version of our palmtop pharmaceutical sales force software product. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. On July 24, 1998, the company acquired 100% of the capital stock of Associated Business Computing, N.V. and an affiliated company (collectively, "ABC"). The company assigned $1,230,000 to in-process research and development and such amount was written-off in the accompanying statement of operations for the nine months ended September 30, 1998. MERGERS AND ACQUISITIONS. During the second quarter 1999, The Company took a one time expense for the costs related to the acquisition of CorNet and the cancellation of a proposed common stock offering. PROVISION FOR INCOME TAXES. The effective rate decreased to 40% in the nine months ended September 30, 1999 from 41% in the nine months ended September 30, 1998. The effective rate for both the nine months ended September 30, 1999 and 1998 include one-time non-deductible charges for tax purposes. Excluding the effect of tax charges, the effective rate decreased to 36% in the nine months ended September 30, 1999 from 37% in the nine months ended September 30, 1998. This decrease is the result of tax planning strategies. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through cash generated by operations. Net cash provided by operating activities was $17.432 million for the nine months ended September 30, 1999 compared to cash provided by operating activities of $11.852 million for the nine months ended September 30, 1998. This increase in cash provided by operating activities was due primarily to higher net income and lower tax payments due to improved tax planning offset by certain other operating activities. Cash used in investing activities was $18.430 million in the nine months ended September 30, 1999 compared to cash used in investing activities of $3.543 million, in the nine months ended September 30, 1998. The increase was due primarily to the purchases of additional short-term investments offset by the purchase of MMI, as well as increased purchases of fixed assets. We obtained $6.448 million of cash from financing activities in the nine months ended September 30, 1999 compared to $1.505 million of cash from financing activities in the nine months ended September 30, 1998. The change in our cash provided from financing activities was due to an increase in the issuance of common stock primarily from the exercise of employee stock options, during the nine months ended September 30, 1999. We maintain a $15.0 million 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 March 31, 1998 plus 75 % of the net proceeds of any offerings of new equity interests. This covenant effectively limits the amount of cash dividends we may pay. At September 30, 1999, there were no borrowings outstanding under the agreement and we satisfied all of our covenant obligations. At September 30, 1999, our working capital was approximately $67.574 million. We had no significant capital spending or purchasing commitments other than normal purchase commitments and commitments under facility and capital leases. We believe that available funds, anticipated cash flows from operations and our line of credit will satisfy our projected working capital and capital expenditure requirements, exclusive of cash required for possible acquisitions of businesses, products and technologies, through at least the next two years. 10 11 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 The efficient operation of our business is dependent in part on our internal computer software and operating systems (collectively, our "Internal Programs and Systems"). Since 1997, as part of our Year 2000 compliance plan, we have been evaluating our Internal Programs and Systems to identify potential Year 2000 compliance problems. We have tested our Internal Programs and Systems to verify Year 2000 compliance. As a result of the testing, we have determined that some of our Internal Programs and Systems were not Year 2000 compliant. Accordingly, we have modified or replaced these Internal Programs and Systems to make them Year 2000 compliant. Although we believe our internal Year 2000 compliance program has been completed, we are actively monitoring our Internal Program and Systems to determine whether any further modification or replacement of these systems is necessary. We cannot assure that our efforts in this regard have been or will be successful. We are also communicating with our suppliers and others to coordinate Year 2000 conversion and are requesting assurances from all software vendors from which we may purchase or license software that such software will correctly process all date information at all times. To date, we have spent approximately $309,830 to evaluate, test and remediate, if necessary, our Internal Programs and Systems for Year 2000 compliance problems. These costs have been funded with cash from our operations. To date, we have not spent any material amount on evaluating the Year 2000 compliance status of our sales force software products licensed to customers. Although we do not anticipate any future material expenditures, our customers may require us to incur additional expenses associated with remediating their software products. We expect that the expenses and capital expenditures associated with achieving Year 2000 compliance will not have a material adverse effect on our business, results of operations or financial condition. We believe that the sales force software products that we currently offer to customers are Year 2000 compliant. We define "Year 2000 compliant" to mean that the applicable Dendrite product is capable of recognizing and processing date data beyond the Year 2000 as belonging to the correct century, so long as all products (for example, hardware, firmware, and software including interfacing programs, operating systems, and database engines) used with the software are Year 2000 compliant and properly exchange date data with our products. Some of our older products will not, and some may not, accurately process dates beyond December 31, 1999. To the extent any of these products are still in use in 1999, we will continue to attempt to migrate our customers to products which are Year 2000 compliant. We cannot assure you that this will occur. A failure to migrate any such customer to a product which is Year 2000 compliant could adversely affect our business, operating results or financial condition. We may also experience increased expenses which we cannot recoup from current customers in addressing their migration to software that is Year 2000 compliant. We have strongly encouraged each customer to have its product tested by them for Year 2000 compliance. As we continue to assess our state of readiness for January 1, 2000, we are working to formulate a reasonably likely worst case scenario, and to prepare contingency plans, as warranted. In this regard, we expect to spend up to an additional $73,500 through the end of the year in order to purchase generators to provide electrical power in the event of any interruption in the power supply to our facilities throughout the world. For a discussion of the risks associated with the Year 2000, please see the heading under "Factors that May Affect Future Operating Results" entitled "We are exposed to risks associated with the Year 2000." FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY. Most of our sales force software products and support 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 existing and potential customers; - 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 the delivery of healthcare through managed care organizations; and 11 12 - 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 for some of our larger customers can take from nine to twelve months, although in some cases it may take even longer. Accordingly, we cannot control or predict the timing of our execution of contracts with customers. In addition, for customers with large sales forces, an implementation process of three to nine months is customary before the software is rolled out to its sales force. However, if a customer were to delay or extend its implementation process, our quarterly revenue 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 results of revenue fall above or 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 revenue. 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 sales force software products and support services 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. OUR REVENUES WOULD DECLINE AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED BY THE LOSS OF ONE OF OUR CUSTOMERS. 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 49%, 51% and 50% of our total revenues in 1998, 1997 and 1996, respectively, came from our top three customers, and the company believes that the relationship will remain relatively consistent in the future. 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. 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. 12 13 WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE. The market for sales force software products changes rapidly because of frequent improvements in computer hardware and software technology. Our future success will depend, in part, on our ability to: - use available technologies and data sources to develop new products and services and to enhance our current products and services; - introduce new solutions that keep pace with developments in our target markets; and - address the changing and increasingly sophisticated needs of our customers. We cannot assure you that we will successfully develop and market new products or product enhancements that respond to technological advances in the marketplace, or that we will do so in a timely fashion. We also cannot assure you that our products will adequately and competitively address the needs of the changing marketplace. Competition for software products has been characterized by shortening product cycles. We may be materially and adversely affected by this trend if the product cycles for our products prove to be shorter than we anticipate. If that happens, our business, operating results or financial condition could be adversely affected. To remain competitive, we also may have to spend more of our revenues on product research and development than we have in the past. As a result, our results of operations could be materially and adversely affected. Further, our software products are technologically complex and may contain previously undetected errors or failures. Such errors have occurred in the past and we cannot assure you that, despite our testing, our new products will be free from errors. Errors that result in losses or delays could have a material adverse effect on our business, operating results or financial condition. WE ARE EXPOSED TO RISKS ASSOCIATED WITH THE YEAR 2000-YEAR 2000 READINESS DISCLOSURE. - Demand for our software products and services may decline before and after the Year 2000. A substantial amount of demand for our software may come from customers in the process of replacing and upgrading software applications to accommodate the change in date to the year 2000. This demand contributed to our 1998 sales growth and as well as our 1999 sales growth. Once customers have completed these activities, we may experience a deceleration in revenue growth. In addition, the expense and time associated with remediation efforts by customers to address Year 2000 compliance problems for software products other than ours may cause our customers to delay the purchase of, or reduce the amount they spend on, our products and services, both before and after January 1, 2000. Such reductions could have a material adverse effect on our business, operating results or financial condition. - Our Year 2000 remediation efforts may not be successful. As part of our Year 2000 compliance plan, we have assessed the readiness of our Internal Programs and Systems. We believe our Internal Programs and Systems are substantially Year 2000 compliant. However, if additional defects, including defects in hardware, are identified and if the necessary modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 problem could have a material adverse effect on our business, operating results or financial condition. - We may incur material expenses in connection with any claim relating to Year 2000 compliance of our own products or products of third parties. We believe the sales force software products that we currently offer to our customers, prior to any customization, are Year 2000 compliant. We cannot assure you, however, that our current products do not contain undetected errors or defects associated with the Year 2000 date functionality that may result in material costs to us. Some of our older products will not, and some may not accurately process dates after December 31, 1999. To the extent any of these products are still in use in 1999, we will continue to attempt to migrate our customers to products that are Year 2000 compliant. We cannot assure you that this will occur. A failure to migrate any customer to a product that is Year 2000 compliant could adversely affect our business, operating results or financial condition. We may also experience increased expenses which we cannot recoup from current customers in 13 14 addressing their migration to software that is Year 2000 compliant. We may also incur additional expenses associated with remediating software products of our current customers. In addition, some of our customers may attempt to hold us responsible for Year 2000 compliance of hardware or software not supplied or created by us, but used in conjunction with one or more of our products. For example, our customers' computer hardware and software, with which our software must interface, may not properly handle date information after the Year 2000 without error or interruption. INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES. We believe there are approximately ten other companies that sell sales force software products and specifically target the pharmaceutical industry, including; - - four competitors that are actively selling sales force software products in more than one country; and - - three competitors that also offer sales force support services. We believe that most of our competitors offer sales force software products and/or services that do not address the variety of 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 software products in the consumer packaged goods 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; - - economic instability; - - any adverse change in tax, tariff, trade or other regulations; - - the absence or significant lack of legal protection for intellectual property rights; - - exposure to exchange rate risk for service revenues which are denominated in currencies other than U.S. Dollars; and - - difficulties in managing an organization spread over various jurisdictions. 14 15 OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND 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. In addition, we have historically pursued and will continue to pursue acquisitions of companies with complementary businesses or products. We also have entered and will continue to enter into strategic joint ventures and alliances. There can be no assurance, however, that we will be able to identify attractive opportunities or enter into any such transactions in the future. In addition, as to completed acquisitions, there can be no assurance that we will be able to integrate successfully the acquired entity into our operations. 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, 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. UNIQUE CHARACTERISTICS OF THE CONSUMER PACKAGED GOODS MARKET. We market and sell sales force software products and support services to companies in the consumer packaged goods market. The selling environment in this market has unique characteristics that differentiate it from the pharmaceutical market. In addition, we believe that the consumer packaged goods market is composed of sub-markets, each of which has 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. 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. 15 16 The introduction of the Euro as a common currency for members of the European Monetary Union took place on January 1, 1999. We believe that this event has had minimal impact on our foreign exchange exposure. INTEREST RATE RISK Our exposure to market risk is related to changes in interest rates which primarily applies to our investment portfolio. We invest in instruments that meet high credit quality standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issue, issuer and type of investment. As of September 30, 1999, 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, 1998 would have decreased by less than $150,000. This estimate assumes that the decrease occurred on the first day of 1998 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 Sept 14, 1999 the Company's board of directors declared a three for two common stock split. The stock split was distributed in the form of a 100% 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 have been restated to reflect the stock split. On June 30, 1999, the Company issued 105,660 shares of restricted Common Stock to MMI Holdings, Inc. ("MMI Holdings") as partial consideration for the Company's acquisition of substantially all of the assets of certain direct and indirect subsidiaries of MMI Holdings (the "MMI Acquisition"). 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 MMI Acquisition and MMI Holdings had adequate access to information about the Company. On May 26, 1999, the Company issued 1,480,538 shares of restricted Common Stock to the shareholders of CorNet International, Ltd. ("CorNet") in exchange for all of the outstanding capital stock of CorNet in a merger transaction (the "CorNet Merger"). 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 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 connection with the CorNet Merger and all recipients had adequate access to information about the Company. On July 24, 1998, the Company issued 67,692 shares of restricted Common Stock to the owners of Associated Business Computing N.V. and an associated company (collectively, "ABC") as partial consideration for the Company's acquisition of all of the outstanding capital stock of ABC (the "ABC Acquisition"). 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 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 connection with the ABC Acquisition and all recipients had adequate access to information about the Company. 16 17 Item 5. Other Information (a) None Item 6. Report on Form 8-K (a) The Company did not file any Reports on Form 8-K during the quarter for which this report is filed. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act Of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 15, 1999 By: /s/ John E. Bailye ---------------------- John E. Bailye, President and Chief Executive Officer By: /s/ George T. Robson ---------------------- George T. Robson, Executive Vice President and Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS 3-MOS DEC-31-1998 JUL-01-1999 SEP-30-1999 1 37,664 15,056 30,688 0 0 89,431 9,553 0 116,101 21,857 0 0 0 58,037 32,058 90,095 0 125,231 54,597 41,740 9,332 0 (1174) 20,736 8,333 12,403 0 0 0 12,403 .33 .31
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