UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission file number 001-16379
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.) |
1405/1425 Route 206 South
Bedminster, NJ 07921
(Address of Principal Executive Offices)
(908) 443-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | | Name of Exchange on Which Listed |
Common Stock, no par value | | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of shares of common stock held by non-affiliates of the registrant as of June 30, 2006 was $326,241,000 based upon the June 30, 2006 closing price of $9.22 per share.
The number of shares of common stock outstanding as of March 22, 2007 was 44,559,874.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is omitted for this Report. This Registrant will file an amendment to this Report on Form 10-K/A containing such information not later than 120 days after the end of the fiscal year covered by the Report in accordance with General Instruction G(3) of Form 10-K.
TABLE OF CONTENTS
Note: Dendrite, Mobile Intelligence and the other Dendrite product and service names mentioned herein are trademarks or registered trademarks of Dendrite in the United States (“U.S.”) and in several other countries world-wide. All other product and service names referred to in this document are or may be the trademarks of their respective owners.
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PART I
ITEM 1. Business
Potential Sale of the Company
On March 1, 2007, Dendrite International, Inc. (collectively, with its subsidiaries, the “Company,” “Dendrite,” “we,” and “our”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cegedim SA and Dogwood Enterprises, Inc., an indirect subsidiary of Cegedim (“MergerCo”). Pursuant to the Merger Agreement, MergerCo will be merged with and into Dendrite (the “Merger”), with Dendrite continuing as the surviving corporation. Under the Merger Agreement, at the effective time of the Merger (i) each outstanding share of common stock of Dendrite will be converted into the right to receive $16.00 per share in cash; (ii) each vested and unvested option to purchase Dendrite common stock that is outstanding and unexercised shall become fully vested and exercisable and, if not exercised prior to the effective time of the merger, shall be cancelled in exchange for the right to receive a cash payment per option equal to the excess of (a) $16.00 over (b) the exercise price of such option, less any applicable and required withholding taxes; and (iii) all unvested restricted stock unit awards will be cancelled and the holder will be entitled to receive a cash payment equal to $16.00 in cash, without interest and less any applicable withholding taxes, for each share of common stock underlying the restricted stock unit award. Each of Dendrite and Cegedim has made customary representations, warranties and covenants in the Merger Agreement. The completion of the Merger is subject to various closing conditions, including obtaining the approval of Dendrite’s shareholders, antitrust approvals and other customary closing conditions. The Merger Agreement contains certain termination rights for both Dendrite and Cegedim. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, Dendrite will be required to pay to Cegedim a termination fee of $22.2 million. The Merger Agreement also requires Dendrite to reimburse up to $5 million of Cegedim’s reasonable expenses if the Merger Agreement is terminated under certain specified circumstances.
In connection with the Merger Agreement, on March 1, 2007, Dendrite and Registrar and Transfer Company, as Rights Agent, entered into Amendment No. 1 (the “Rights Amendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “Rights Agreement”). The effect of the Rights Amendment is to permit the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including the Merger, without triggering the separation or exercise of the Rights (as defined in the Rights Agreement) or any adverse event under the Rights Agreement.
General
Dendrite was incorporated in 1987 with a mission to improve sales and marketing productivity for pharmaceutical and other life sciences companies. Dendrite pioneered and quickly became the standard for pharmaceutical sales force automation, enabling transparency between the home office and its sales force—a relationship that was formerly detached and paper-based.
Although considered a pioneer in sales force automation for the pharmaceutical industry, we also provide products and services at nearly every stage of the drug lifecycle, including, product marketing, regulatory compliance, and clinical trials. Our products and services are deployed in each of the world’s top 20 pharmaceutical companies; in hundreds of large, mid-tier, and emerging life sciences companies; and in more than 50 countries. Every year, millions of interactions are made using our products and services, which are closely aligned with the growing needs of the pharmaceutical industry.
At a company’s home office, for instance, we offer applications to manage sales territories and drug sample allocation. We offer more precise prescriber targeting methodologies that use longitudinal patient data to measure new brand starts and prescriber behavior, rather than just total prescriptions. To
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supplement the activity of sales representatives, we offer various direct-to-prescriber marketing products, such as direct mail, sample fulfillment, and peer-to-peer outreach. We solve patient persistence issues through integrated marketing programs that prospectively and retrospectively remind patients to fill their prescriptions. In the compliance area, we help clients adhere to state and federal regulations, validate computer systems, and audit sample inventories.
In 2006, we introduced several noteworthy products and services:
· In the U.S. market, we launched Dendrite MICROÔ, which is the industry’s first smartphone-based, cost-effective Sales Force Effectiveness (“SFE”) application. Primarily for emerging pharmaceutical companies with smaller sales forces, Dendrite MICRO is our first smartphone-based pharmaceutical industry solution.
· In the Asian pharmaceutical market, we launched j-forceWirelessÔ, a mobile phone-based SFE solution.
· Early in the year, we delivered a complete solution to help U.S. pharmaceutical companies comply with increased reporting and disclosure requirements at the state level.
· Dendrite acquired certain assets of Opus Health LLC to bolster its Marketing Solutions business, specifically to provide patient discount card adjudication for use in Dendrite’s persistence programs.
Global product teams were created in 2006 to better coordinate R&D efforts. We also embarked on a series of Customer Advisory Board meetings to partner with customers, seeking their input on current and future products.
Dendrite’s Products and Services
We deliver leading and adaptive products and services that help our customers become more efficient in spending their sales and marketing dollars in an increasingly competitive business environment. Our products and services are grouped into three operating segments: Sales Solutions; Marketing Solutions; and Emerging Solutions, which include compliance and clinical solutions.
I. Sales Solutions
With more than 100,000 sales representatives and district managers using our SFE solutions throughout the world, we have become a global leader in providing sales solutions to the life sciences industry. Our flagship product, Mobile Intelligence, enables sales representatives to be productive and efficient. We also provide organization alignment tools, sample management tools, geographic targeting tools for the European Union, and fully integrated support services.
The full suite of software and services in this category are grouped into three areas:
A. Sales Force Management
A broad field and home-office product suite that helps pharmaceutical companies manage sales force activities and includes both software licensing and maintenance. Products and services include sales force effectiveness, territory alignment and sample management.
Field
1. Mobile IntelligenceÔ (Version 4.2)—This succeeded WebForceÔ as our flagship SFE solution, and it enables sales representatives in the life sciences industry to deliver timely and pertinent information to their customers—the prescribers—and provide visibility between
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the pharmaceutical home office and the field. Mobile Intelligence is the first-ever sales force management product designed to mirror the way that pharmaceutical sales representatives think and act in the field. Built on the Microsoft® .NET framework, the platform is open, extensible and configurable and can easily be integrated into a sales and marketing system environment.
2. J-forceÔ—A suite of SFE tools specifically developed for the Asian pharmaceutical market. In Japan, approximately 25,000 life sciences sales representatives use the j-force suite of products.
a. J-forceNETÔ—A web-based product that integrates all major sales and support functions within a single SFE system. Designed specifically for the Japanese market, it enables pharmaceutical companies to manage all aspects of their customer relationships; view sales data; enter call information; update client profiles; access corporate resources; and effectively communicate with the home office.
b. J-forceWIRELESSÔ—A new mobile-phone solution fully integrated with j-forceNET to further increase sales representatives mobility. This is especially useful in emerging markets, where up-front equipment costs must be kept low. Because sales representatives already own mobile phones, they simply download our proprietary software, visit prescribers, and enter information directly with the phone, which is transmitted to the home office.
3. �� J-centreSYNERGYԗA solution that enables information exchange between pharmaceutical manufacturers and drug wholesalers.
4. VisiForceÔ—An SFE tool specifically for life science and pharmaceutical companies in emerging international markets where organizing, targeting, and evaluating potential prescribers is essential for the commercial success of sales forces.
5. Dendrite MICROÔ—Our latest SFE solution using smartphones, designed for emerging life science companies with growing sales forces. Dendrite MICRO is preconfigured specifically for the needs of this market and is available on a monthly subscription basis to mitigate upfront investment costs for training and implementation. This solution boasts smartphone specific features such as “Near Me” which enables the sales representative to seek the closest prescriber to his or her exact location.
6. ForceMobileÔ—A PDA based solution that is highly configurable, highly functional, and easy-to-use, ForceMobile is designed specifically for organizations requiring portability and instant data access.
Home-Office Suite
7. Application Integration Server (“AIS”)—The AIS is the integration hub for our entire technology solution suite. It is a cost-effective, flexible, and practical architecture that provides pre-built integration between our products and allows our customers to integrate our solutions within their own environment. The AIS uses universal integration technologies (XML, Web Services), which promotes the integration of existing sales and marketing infrastructure investments and standards.
8. AnalyzerÔ—A flexible, easy-to-use data analysis tool that standardizes the decision support and reporting processes for all levels of a pharmaceutical sales organization. Analyzer is available integrated with our .NET framework through Mobile Intelligence or as a standalone solution.
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9. IntelliGEOÔ—IntelliGEO, available in the European region, allows sales management to determine geographical penetration in specific sales regions, known as bricks, with an interactive visual interface.
10. Organization Manager®—A sales force resource management solution to eliminate interruption to the sales process as pharmaceutical companies redeploy and reorganize their sales force. The solution manages complex field sales alignments, linking sales representatives and managers to customers, geographies, products, territories, and teams to promote an efficient and productive sales environment.
11. Sample GuardianÔ—A drug sample management tool used to track, analyze and store all drug sample related activity. Sample Guardian enables pharmaceutical companies to comply with government regulations, specifically in the United States, but with potential applicability in other countries.
B. Sales Support Services
Pharmaceutical companies are challenged to increase their productivity through improved business process support, a robust technical infrastructure, and systems integration. We offer a suite of solutions that enable clients to meet these goals.
1. Integrated Support Center—Support services that enhance the productivity and success of mobile field sales professionals and home-office personnel, including support for Dendrite business applications, third-party software, custom applications, and communications. Unlike a traditional help desk, Dendrite’s Integrated Support Center is pharma-focused for greater depth of knowledge and uses multiple, integrated channels to create a complete view of support issues and allow for efficient resolution. It is a single-site solution center for sales representatives when they encounter challenges.
2. Hardware & Asset Management Services—This service focuses on minimizing pharmaceutical sales representative downtime by quickly repairing and/or replacing non-functioning field-based hardware, such as laptop computers, tablets, slates, desktops, or handheld devices. In addition, this service focuses on tracking client assets and performing inventory management functions.
3. Implementation Services—With two decades of delivering customer relationship management (“CRM”) and SFE solutions, Dendrite provides pharmaceutical and life sciences companies with unique industry insight, expertise and technical capabilities for implementing today’s business application software solutions that best reflect the customer’s current or desired future practices.
4. Learning Solutions—Customized training programs that are designed to fully integrate into a company’s business needs. Our Learning Solutions may act as the total outsource provider or collaborate with a company’s existing training organization to deliver programs across a wide range of subject areas, including product education, compliance issues, corporate policy education, and soft skills.
5. Managed Hosting Services—Provides a total outsourcing alternative for customer system, software, and business application components, including servers, databases, communication networks, and data processes, which are housed within Dendrite’s state-of-the art Data Center facilities, or with Mobile Intelligence technology, available for on-site support.
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C. Customer Data Management
Our Customer Data Management solutions are aimed at providing an accurate view of customers by enabling precision-based sales and marketing efforts that open up new opportunities for more efficient and effective selling.
1. Nucleus Pharma®—An end-to-end customer information management solution that enables users to capture, centralize and manage customer-related information from multiple data sources across the enterprise and use this focused customer view to make critical business decisions. Creating this “single view of the customer” enables the pharmaceutical companies to leverage up-to-date information for improved sales rep targeting and to achieve more efficient selling.
2. Business Intelligence DataMart—A comprehensive solution that enables the integration of sales and marketing data into a centralized repository to provide the ability to drive focused sales and marketing business decisions based on a 360-degree view of customers, brands, campaigns, programs, and events.
3. Validator—A tool that takes a company’s existing customer data, and returns it cleaned and verified against the industry’s most accurate reference database to ensure accuracy for sampling compliance.
II. Marketing Solutions
With increasing industry pressure for brand performance, the pharmaceutical industry has sought more efficient ways to reach its prescribers and patients versus traditional mass marketing techniques.
Our objective is to drive brand growth throughout its lifecycle. Through Dendrite’s unique methodology for driving behavioral change, we can help increase dialogue about the brand and connect their primary customers—the sales rep, the prescriber, the patient and ultimately the pharmacy where they fill prescriptions. Our unique methodology starts with more precise targeting based not only on prescriber volume but also on behavior and spheres of influence; execution through a series of behavioral changing outreach tools to professionals and patients; and measurement of results using robust Return-on-Investment (“ROI”) data analysis. This complete process is managed by Dendrite’s proprietary campaign management tools acquired through the Optas, Inc. (“Optas”) acquisition in 2005.
Our products are grouped in four areas: Targeting, Driving Behavior, Measurement and Campaign Management.
A. Targeting
1. Data & Analytics—Longitudinal Prescription Data (“LPD”) uses prescription data to track physicians’ prescribing patterns and their patients’ adherence. By partnering with Verispan LLC, which supplies the raw data, Dendrite has access to the most comprehensive pharmacy-linked prescription dataset. Dendrite has a team of industry specialists and analysts that are pioneers in the area of pharmaceutical data analysis and interpretation.
a. LPD helps to provide a thorough understanding of a client’s goals and barriers, performs extensive study of current and ongoing market positioning, and provides clients with insightful observations and points of interest.
i. With LPD, we can identify true new brand starts because they are not masked by refill data. By tracking a patient’s prescription history over time, we can distinguish between a true new prescription in a brand versus traditional sales data that cannot distinguish between a prescription being renewed or truly written for the first time.
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ii. Using LPD, we can identify patients’ persistence and link those to their prescribers by looking at the prescribing and adherence behavior of each over time. We can identify competitive switching behavior by showing a prescriber’s tendency to be influenced by early adopters, or slow adopters, to specific program messaging and tactics.
b. Dendrite provides targeting and segmentation at the start of any promotional program, with tracking and ROI reporting during and after a program’s execution. Reporting includes transactional and behavioral, observations; recommendations for going forward with any given program; and suggestions for future programs that may increase product awareness and market share.
2. Physician ConnectSM—A tool that offers the pharmaceutical industry an advanced solution for identifying prescribers who influence peers’ script writing behavior. Unlike traditional key opinion leader solutions, Physician Connect identifies local and regional influencers within the social or professional networks of trust. By targeting these influencers with specific marketing and sales messaging, the rapid adoption of a new or mature product by these leaders can catalyze its adoption in localized markets.
3. ValidatorÔ—This solution reconciles physician data by standardizing, matching, and purging out duplicate information. Dendrite clients build a solid foundation of reliable, practitioner-specific data, which is the prerequisite for targeted integrated marketing and sales activity. For Marketing Solutions validation is done as an integrated part of direct-to-prescriber marketing programs.
4. PharbaseÔ—A prescriber database service in the European region that provides a source of intelligence to pharmaceutical companies. Powerful marketing programs can be developed with precise targeting characteristics based on various elements, such as doctor profile data, response to previous promotional approaches, specialty, interests, areas of influence, and socio-demographic data contained in Pharbase.
5. Docscan®—A European, regional and country based physician profiling service that enables pharmaceutical customers to analyze physician behavior, market trends, and demographics. Docscan provides customers with business intelligence for a broad range of strategic sales and marketing actions, including projecting prescriber product acceptance, predicting consumer utilization and preparing subsequent promotional initiatives.
6. CME Marketing—A service that allows a continuing medical education provider’s message to reach its key target audience through proprietary lists.
7. Publication Circulation Management—Expert services to support paid, controlled, and single-sponsored publications. Dendrite’s extensive database resources make it possible to customize the profiling and targeting of prescribers and healthcare professionals to meet a customer’s brand objectives.
B . Driving Behavior
1. Dendrite Sampling and Fulfillment—Dendrite’s fulfillment solution provides ordering, distribution, tracking, compliance and reporting. Clients can ship directly to individual prescribers, to patients, or to sales representatives in bulk. The service includes prescription drugs, controlled drugs, over-the-counter (“OTC”) medications, premium materials and literature. We have a 137,000 square-foot, climate-controlled facility, which is fully licensed to distribute prescription and controlled (Schedule II-V) drugs, medical devices, and OTC
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products to physicians, patients, and pharmaceutical representatives throughout the U.S. We ship about 1.4 million drug samples per year.
2. Medical DialogueSM—A pharmaceutical industry-specific peer-to-peer outreach that provides targeted telephone-based, interactive discussions between our on-staff physicians and targeted prescribing decision-makers for specific promotions by our customers. This service help builds product awareness and credibility.
3. Patient Persistence Cards—These cards can be redeemed by patients of participating brands at pharmacies to receive discounts on medication to encourage first fill and subsequent refills (using prospective and retrospective communication). Together, using our Campaign Management platform, prescriber data analysis and our fulfillment and telecommunication services, our Patient Persistence programs are now deployed for over 40 brands with over 25 million cards in circulation.
4. Dendrite E-Marketing
a. Dendrite E-Mail—The only privacy-safe software solution designed specifically for pharmaceutical companies to create and deploy personalized high volume customized messaging e-mail campaigns to a targeted audience.
b. E-Detailing (Provided by Lathium)—Targeted programs that create an interaction between the pharmaceutical company and physician. For instance, using the Internet to create a relationship with each physician, generating an educated dialogue about a pharmaceutical product and then capturing the user’s insights and opinions helps marketers refine product selling strategies.
c. E-Sampling (Provided by Medmanage)—Samples empower physicians to prescribe a certain brand. E-Sampling allows a physician to request a shipment of samples directly from the manufacturers through their fulfillment vendor without the need for a representative’s visit. Dendrite provides this capability to physicians via a simple, convenient, and user-friendly web-based process.
5. Direct Mail—Dendrite’s direct mail services range from personalized Direct-to-Physicians and Direct-to-Patients mail creation and distribution. This is widely used in our European business.
6. STAT/GRAM®—An effective branded communication service that is both well recognized by physicians, secondary prescribers, pharmacists, and other health care professionals. Pharmaceutical companies use this service to distribute important medical news, such as product launches, labeling changes and product safety recalls.
7. Telecommunications/Call Center—A rapidly deployed service that enables interactive communications in reaching targeted prescribers and health care professionals via leading-edge call services that deliver the marketers’ product messages. Dendrite customizes programs and offers live operator or interactive voice response (“IVR”) systems.
C. Measurement—We measure campaign performance through operational reports for products. Our programs can be reported via an online dashboard, and our programs include return on investment measurement to track performance and to inform future campaign waves.
D. Dendrite Campaign Management Solution (OptasTM)—A platform built for the pharmaceutical industry for designing, executing and managing pharmaceutical marketing campaigns. The campaign management suite incorporates several components of the marketing process, including segmentation, message management, timed communications, response management,
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and program registration and privacy protection as per the Health Insurance Portability and Accountability Act (“HIPAA”). The suite is delivered in a hosted, online format and consists of campaign planning tools, an online survey tool, an email deployment tool and a reporting tool for tracking and measuring the progress and return of a campaign.
III. Emerging Solutions
Dendrite’s Emerging Solutions business includes compliance solutions and clinical solutions. While these businesses are smaller relative to the Company’s total revenues today, they service additional functional areas within our customer organizations, where Dendrite’s core competencies provide opportunities for future growth.
A. Regulatory Compliance Solutions
Dendrite’s Regulatory Compliance Solutions provide the resources and specialized guidance needed to cost-effectively comply with the policies and regulatory requirements of the Food and Drug Administration (“FDA”), the Drug Enforcement Administration (“DEA”), and state agencies (including registration processes). These solutions unite market-leading software tools with consulting and professional services and support the pharmaceutical product lifecycle through the following components:
1. Regulatory Consulting—Services to help pharmaceutical companies overcome challenges and meet the provisions of the DEA, FDA, Prescription Drug Marketing Act (“PDMA”) and the Controlled Substances Act (“CSA”). These services are designed to help pharmaceutical companies streamline compliance activities and reduce costs.
a. Off-Label Promotion Auditing—A documentation program that enables pharmaceutical companies to show how all promotional messaging falls within the guidelines of FDA-approved use.
b. DEA Solutions—These encompass the regulatory requirements of the CSA and the DEA policies pertaining to controlled substances and List I chemicals. These reviews provide an in-depth insight into a pharmaceutical company’s level of compliance with DEA regulations and in assessing the well being of its overall compliance program.
c. FDA Solutions—These include Standard Operating Procedures (“SOPs”), inventory and reconciliation process, and drug sample labeling to help pharmaceutical companies comply with FDA regulations.
2. Sample Management—Dendrite provides a single source for all of a pharmaceutical company’s sample management needs—either as a complete outsourcing solution or components to address specific needs, including program design, management, automation, and logistics.
a. Sample GuardianÔ—A management tool used to track, analyze and store all drug sample activity. Sample Guardian helps enable pharmaceutical companies to comply with government regulations, specifically in the United States, but with growing applicability in other countries.
b. Sample Reconciliation Services—Services designed to provide reconciliation of prescription drug samples along with the evaluation of potential significant loss of field sales representatives’ drug sample inventories. These services are guided by client-specific procedures and by regulatory requirements, such as PDMA in the U.S.
c. Sales Rep Close Outs—A service that is guided by client-specific procedures and by the regulatory requirements of the PDMA. We work with pharmaceutical companies to gather corporate equipment (phones, car, laptop, etc.) from field sales representatives
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whose jobs are eliminated or are leaving the company. This service is available in all 50 states.
d. PDMA Training—Designed to address the needs of pharmaceutical and life sciences companies in the design or redesign of their sample, regulatory and compliance programs to provide solutions such as business rules definition, SOP generation, drug sample program design, and process flows to ensure compliance with PDMA regulations.
3. Auditing and Inventory Services—A full set of services to help pharmaceutical companies identify potential issues and track progress toward resolving them. Using experienced and professional field inventory specialists and auditors, Dendrite conducts annual inventories, random audits, and For-Cause audits of field sales representatives. Additional Auditing and Inventory Services include practitioner office visits, Signature Verification programs, and sales representative close outs.
a. Signature Verification—A service that enables pharmaceutical companies to maintain accurate PDMA records. Dendrite’s professional field inventory specialists and auditors are responsible for the Signature Verification programs, helping clients detect potential PDMA record falsification. Dendrite designs programs for specific needs, including a Signature Verification Letter component and/or a formalized program for performing practitioner office visits.
b. For-Cause Audits—A service involving independent personnel outside of field sales to conduct a thorough and timely For-Cause Audit that can be completed within the required reporting window when it comes to reporting issues, such as significant loss, theft, and falsification of records to the FDA. Dendrite’s team of former state and federal investigators is strategically located throughout the United States. This allows them too quickly and cost effectively audit for drug accountability, perform document reviews, and conduct interviews with a pharmaceutical company’s sales representatives, practitioners and/or pharmacists. At the conclusion of every assignment, Dendrite provides a detailed audit report that helps facilitate development of a FDA-required written report.
c. Validator—Designed to take a company’s existing customer data, and return it cleaned and verified, using the industry’s most accurate reference database to ensure validation for sampling.
4. State Services—From Vermont to California, inconsistencies in state regulations are contributing to a confusing regulatory landscape and making in-house compliance efforts increasingly expensive and impractical to oversee. Dendrite’s suite of State Services enable pharmaceutical companies to improve their understanding of regulatory trends.
a. State MonitorÔ—To keep compliance costs manageable while staying ahead of current and pending state regulations, Dendrite provides a monitoring service that improves a pharmaceutical company’s understanding of the state regulatory requirements and registration processes related to the research, manufacturing and distribution of pharmaceutical products, controlled substances, over-the counter products, and medical devices.
b. Custom State Research—For those regulatory challenges that require in-depth information and analysis to adequately frame and address a specific compliance issue, Dendrite offers experts who are continuously monitoring the regulatory compliance situation as it develops.
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c. State GuardianÔ—Dendrite’s State GuardianÔ provides a safe and efficient way to ensure uniform compliance with the state laws and regulations that govern marketing and advertising expenses, as well as sales promotion and expenses. This comprehensive data management and reporting service collects all the necessary compliance data, rationalizes that data for one view of the customer and then generates reports for state compliance requirements. State GuardianÔ integrates with a wide range of enterprise applications and scales to grow with changing needs.
d. State Licensing—Dendrite provides the knowledge and resources required for the in-state and out-of-state licensing and renewals process as it pertains to pharmaceutical research, distribution, manufacturing, and corporate locations, with the guidance that enables pharmaceutical companies to understanding the state regulatory requirements and registration processes. This includes the research, manufacturing and distribution of pharmaceutical products, controlled substances, OTC products, and medical devices.
e. VAWD Consulting and Auditing—Through its Verified-Accredited Wholesale Distribution™ (“VAWDÔ”) Consulting and Auditing program, Dendrite helps pharmaceutical companies take a proactive approach to addressing the current drug counterfeiting issue. Dendrite enables companies to pass the accreditation process and thereby remain compliant with this FDA supported voluntary program.
5. Computer Systems Validation Services—Services to validate clients’ systems to ensure compliance with FDA / PDMA regulations and client business process by utilizing a formalized, risk-based methodology. This does not apply to sampling solutions alone, but also to solutions to support marketing, clinical, and sales.
a. Training—Complete regulation and compliance-specific training and collaborative educational solutions delivered through traditional, web-based or blended training methods. Dendrite develops and delivers training program content, tailored to specific requirements.
b. Revalidation—When a client’s regulated systems undergo changes, it’s not always easy to determine the extent to which re-validation measures are required. Our risk-based revalidation methodology helps ensure the client’s continued regulatory compliance, while remaining focused on an efficient revalidation execution that avoids over-testing.
c. Documentation—An optical scanning, imaging, character-recognition, and retrieval system designed for efficient, economical sample accountability and management of samples distributed utilizing paper (versus electronic signature capture).
d. Validation Gap Analysis—The Dendrite computer systems validation service enables pharmaceutical clients to quickly remediate any validation shortcomings, starting with a thorough evaluation of current system validation suitability and ending with reporting on the existing gaps and actionable recommendations for alleviating them.
e. Validation Staffing—For life science companies performing Computer System Validations, those skills are highly specialized and in short supply. Dendrite provides experienced staff with deep knowledge and practical experience to help fill those capability gaps, as needed or on a scheduled recurring basis.
f. 21 CFR Part 11—A service provided by Dendrite’s seasoned team of compliance professionals consisting of onsite assessment audits and reviews to identify any gaps or potential issues that affect a client’s existing Part 11 compliance status along with recommended action plans.
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B. Clinical Solutions
Dendrite offers a set of cost-effective solutions designed to benefit the clinical trial process by assisting in effectively initiating studies, identifying potential investigators and patients, providing ongoing support and training to investigators, conducting pre- and post-marketing risk assessments, facilitating safety reporting, and providing data analysis of trial and competitive drugs. Dendrite helps pharmaceutical companies find high-value investigators and keep them satisfied, by providing the comprehensive Investigator Relationship Management (“IRM”) capabilities necessary. This includes the tools to bring communications, collaboration, metrics and benchmarks to customer studies, the data management services to keep practitioner data clean, up-to-date and verified, and the trial support services to ensure that processes are running smoothly.
1. Clinical Data—Old data and unmanageable lists can make the search for new investigators difficult. As a one-stop shop for trial-related data services, Dendrite enables pharmaceutical companies to optimize the investigator search process.
a. Clinical Validator—A customer information management service to the pharmaceutical industry. Clinical Validator processes ensure practitioner data is clean, up-to-date, and verified, allowing every practitioner to be standardized, augmented, and verified against the Universal Master Prescriber database (“UMP”). This service supports both one-time data scrubbing needs and ongoing periodic data validation programs, such as those required by PDMA legislation. Clinical Validator helps pharmaceutical companies build a solid information foundation on which to base strategic business decisions and support critical business processes.
b. Protocol/Investigator Identification Feasibility—Dendrite provides clients with clinical trial services utilizing a global, strategic approach that multiplies pool size at the onset and then, through a series of client-defined filters, produces a verified and ranked listing of investigators.
c. Patient Recruitment—A service designed to help clients alleviate a key operational burden of the trial process—patient recruiting. Dendrite enables clients to create a strong foundation for their patient recruitment through a relationship marketing program that delivers educational messaging to keep patients invested in the study and thereby reduce turnover.
2. Applications Technology—Dendrite’s Applications Technology provides the tools to help Investigators collaborate more effectively on a clinical study. Dendrite also helps improve the performance of site monitors through access to the Monitor Contact Management System fully configured to the needs of the user.
3. Support Services—Dendrite’s clinical trial support services, include technical help desk, site assessments, hardware provisioning, and connectivity facilitation. Dendrite’s experience with clinical trials and their infrastructure provides access to full-service support for even large global studies.
Services include:
· Technical help desk
· Site assessments
· Hardware provisioning
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· Connectivity facilitation
a. Investigator Meeting/Training—We help clients efficiently train investigators and site study staff and can also develop custom e-learning/training courses to match client needs.
b. Help Desk and Hardware—We provide a single-vendor service that helps uninterrupted site productivity for a client’s clinical trials. As part of this service, we provide technical help desk, site assessments, hardware provisioning, and connectivity facilitation.
c. Managed Hosting—We provide pharmaceutical and life science clients with a secure disaster recovery or backup site for mission critical applications and databases to their primary data center along with a full range of customized services, featuring the latest in technology innovation.
Customers
Our solutions are deployed in each of the world’s top 20 pharmaceutical companies, in hundreds of large, mid-tier, and emerging manufacturers, and in more than 50 countries around the globe.
Approximately 18% and 12% of our total revenues in 2006 and approximately 24% and 10% of our total revenues in 2005 came from our two largest customers, Pfizer and Sanofi-Aventis, respectively. Approximately 28% of our total revenues in 2004 came from our largest client, Pfizer.
The Company’s largest customer plans to transition U.S. sales effectiveness services from Dendrite to one or more third-party vendors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for more information on this transition and its expected impact on the Company.
Competition
Our solutions compete with others principally on the basis of industry applicability and product flexibility. They also compete on the basis of name recognition, global competence, service standards, cost, breadth of customer base and technical support and service. We believe that our solutions compete favorably with respect to these factors and that we are positioned to maintain strong market leadership through innovative new product and application developments and continued focus on support services.
While we face a number of significant competitors in each of our specific market areas, we believe that there is no single competitor that currently offers our breadth of solutions in the pharmaceutical and life sciences industries on a worldwide basis. We expect competition to increase as new competitors enter our markets and as existing competitors expand their product lines, consolidate or offer more compelling solutions. We believe that we have distinguished ourselves and are well positioned in the pharmaceutical market due to our combination of deep pharmaceutical business knowledge, recognized technical support, depth of personnel experienced in the pharmaceutical industry and the quality of our proprietary products and product architecture which is uniquely suited to the pharmaceutical industry. In addition, we face competition from current customers and potential customers who may elect to design and install or operate their own systems.
Research and Development
We continue to take advantage of new technologies in developing new products and services. We work closely with our customers to develop new products designed directly for their business needs. We recorded approximately $7,580,000, $6,094,000, and $9,316,000 of research and development expense for
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the years ended December 31, 2006, 2005 and 2004, respectively. Our research and development expense plus additions to capitalized software development costs, was approximately $12,159,000, $10,958,000 and $15,202,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We capitalized less costs in the year ended December 31, 2006 than in 2005 due to development of our next generation SFE solution, released in 2005.
Dendrite has capitalized certain costs related to the development of new software products and the enhancement of existing software products consistent with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Capitalized software development costs, net of accumulated amortization, were $9,952,000 and $10,341,000 at December 31, 2006 and 2005, respectively.
Seasonality
Historically, we have experienced lower spending from our customers in the first and third quarters as compared to other quarters. Due to our international operations, we have been impacted by lower third quarter spending by our customers outside the United States.
Proprietary Rights
Dendrite relies on a combination of methods to protect our proprietary rights, including:
· trade secret, copyright and trademark laws;
· non-disclosure and other restrictive covenants with our customers, vendors and strategic partners; and
· non-disclosure and other restrictive covenants with our executive officers and other key and technical employees and consultants.
Existing U.S. trade secret and copyright and trademark laws provide only limited protection for our proprietary rights, and even less protection may be available under foreign laws.
Employees
As of December 31, 2006, the Company employed 2,534 employees: 1,292 in the U.S. and Canada; 729 in Europe; 301 in the Pacific Rim; and 212 in Latin America.
Operating Segments
In the second quarter of 2006, the Company changed its operating segments to reflect its reorganized business. The Company has expanded its segments into three operating segments: Sales solutions, Marketing solutions, Emerging solutions as well as a corporate segment. For more information with respect to the financial results and conditions of our operating segments, see Note 14 to our consolidated financial statements.
In 2004, the Company did not have the necessary systems in place to track global information needed to consolidate revenue, operating (loss) profit, depreciation and amortization expense and capital expenditures between the new operating segments. As such, the 2004 amounts have not been presented, as to do so would be impracticable. Our 2005 segment results have been restated to conform to the current year presentation.
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Geographical Areas
See Note 14 of the Notes to Consolidated Financial Statements concerning information relating to the Company’s geographic areas.
Executive Officers
The following table identifies the current executive officers of the Company:
Name | | | | Age | | | Capacities in Which They Serve | |
John E. Bailye | | 53 | | Chairman of the Board and Chief Executive Officer |
Joseph A. Ripp | | 54 | | President and Chief Operating Officer |
Jeffrey J. Bairstow | | 48 | | Executive Vice President and Chief Financial Officer |
Christine A. Pellizzari | | 39 | | Senior Vice President, General Counsel and Secretary |
Carl L. Cohen | | 47 | | President, Marketing Solutions |
Natasha Giordano | | 46 | | President, Global Business Unit |
Garry D. Johnson | | 55 | | Senior Vice President and Chief Technology Officer |
Mario Mauri | | 41 | | President, Europe |
Jean-Paul Modde | | 42 | | President, Asia-Pacific |
Mark Theilken | | 56 | | President, Sales Solutions |
James Young | | 48 | | Senior Vice President and Chief Human Resource Officer |
Each executive officer serves at the discretion of the Board of Directors.
John E. Bailye has served as Chief Executive Officer and Director since the Company’s founding in 1987 and since 1991 in the additional position of Chairman of the Board. Prior to 1987, Mr. Bailye served as Managing Director of Foresearch Pty., Limited (“Foresearch”), a consulting company to the pharmaceutical industry in Australia. Mr. Bailye served in that capacity from the time he acquired Foresearch in 1976 until he sold the company in 1986. Mr. Bailye served as a market researcher for Foresearch prior to 1976. Mr. Bailye holds a Bachelor of Commerce degree in Finance, Marketing and Business from the University of New South Wales.
Joseph A. Ripp has served as President and Chief Operating Officer since he joined Dendrite in November 2005. Prior to joining the Company, Mr. Ripp held several senior positions within Time Warner, Inc., most recently serving as Senior Vice President of the Media & Communications Group. Prior to that position, Mr. Ripp served as Vice Chairman of America Online, Inc. from 2002 to 2004. Mr. Ripp also served as Chief Financial Officer of America Online, Inc.; Executive Vice President and Chief Financial Officer of Time Warner, Inc.; and Executive Vice President, Chief Financial Officer of Time, Inc. Mr. Ripp is on the Board of Directors of Greenfield Online, Inc. He is on the Board of Trustees at Manhattan College and the Board of Directors of the Advertising Educational Foundation. He also serves on the Board of Directors and Executive Committee of the Ad Council and is Chairman of its Finance Committee. Mr. Ripp holds a Bachelor of Arts degree from Manhattan College and Master of Business Administration from the Bernard M. Baruch College of the City University of New York.
Jeffrey J. Bairstow has served as Executive Vice President and Chief Financial Officer since he joined Dendrite in December 2005. Prior to joining Dendrite, Mr. Bairstow served as Chief Operating Officer of RelayHealth Corporation from 2004 to 2005 and Senior Vice President and Chief Financial Officer of Vitria Technology, Inc. from 2003 to 2004. From 1997 to 2002, Mr. Bairstow held senior management positions within Health Net, Inc. including Executive Vice President and Chief Financial Officer of Health Net-California and President of Health Net’s Government and Specialty Services Division. Mr. Bairstow has also previously served as Chief Operating Officer of America Service Group; President of Managed Health Network, a subsidiary of Health Net, Inc.; Chief Financial Officer and then President of Vendell Healthcare; and Vice President of Finance and Corporate Controller and then Chief Operating Officer of
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Park Healthcare Company. Mr. Bairstow holds a Bachelor of Arts degree from Vanderbilt University and Master of Business Administration from Vanderbilt’s Owen School of Business.
Christine A. Pellizzari has served as Senior Vice President, General Counsel and Secretary since 2000. Ms. Pellizzari served as Associate Counsel from 1998 to 2000. Prior to joining the Company, Ms. Pellizzari was an Associate at Wilentz, Goldman & Spitzer, P.A. from 1995 to 1998 and law clerk to the Honorable Reginald Stanton, Superior Court of New Jersey, from 1994 to 1995. Ms. Pellizzari holds a Bachelor of Arts in Legal Studies from the University of Massachusetts at Amherst and a Juris Doctorate from the University of Colorado School of Law.
Carl L. Cohen has served as President, Marketing Solutions since joining Dendrite in June 2006. Prior to joining Dendrite, he spent more than six years with Starwood Hotels and Resorts Worldwide where he held senior executive positions, he most recently serving as Senior Vice President, Marketing and Customer Technology. Prior to Starwood, Mr. Cohen served in other senior executive roles including Chief Marketing Officer for Wrenchhead.com and Executive Vice President of Marketing for Indy League Racing. Mr. Cohen has also held senior marketing and brand management leadership positions at Philip Morris, Colgate Palmolive and Reckitt & Coleman. Mr. Cohen holds a Bachelor of Science degree in Accounting from the University of Albany, State University of New York, and Master of Business Administration from the Wharton School of the University of Pennsylvania.
Natasha Giordano has served as President, Global Business Unit responsible for global pharmaceutical company business and Canadian and Latin American sales and operations since January 2005. Ms. Giordano has additionally been responsible for company-wide sales strategy and North American Integrated Services since March 2006. Ms. Giordano has been with Dendrite since 2000 and has previously served as Group President, Global Business Unit for major customers, and Vice President, Global Accounts. Prior to joining Dendrite, Ms. Giordano spent 10 years at Parke-Davis/Warner Lambert in various sales and sales leadership positions, most recently managing Strategic Alliances. Ms. Giordano holds a Bachelor of Science degree from Wagner College in New York.
Garry D. Johnson has served as Senior Vice President and Chief Technology Officer since 2003. Mr. Johnson has been with Dendrite since 2000 and has previously served as Vice President of North American Technical Operations. Prior to joining the Company, Mr. Johnson served as Vice President of Information Technology at Boron Lepore and, prior to that, as Director, IT Strategy & Quality, at Allied Signal. Mr. Johnson holds a Bachelor of Arts degree in Management from Fairfield University.
Mario Mauri has served as President, Europe responsible for European sales, marketing and operations since March 2006 and has previously served as Vice President, Europe; Vice President, Southern Europe; and Vice President, European Operations. Mr. Mauri joined Dendrite in 2003 when Dendrite acquired SYNAVANT, Inc. Mr. Mauri worked at SYNAVANT and its predecessor companies, WALSH International and IMS Health Strategic Technologies, for eleven years and held several key senior sales and marketing positions, including General Manager, Italy, Greece and Turkey and Sales Solutions Director, Europe. Mr. Mauri holds a University Master Degree in Computer Science from the University of Milan, Italy.
Jean-Paul Modde has served as President, Asia-Pacific responsible for Asia-Pacific sales, marketing and operations since March 2006. Mr. Modde has been with Dendrite since 1988 and has previously served in other key senior executive positions including: Senior Vice President, International; Vice President, Asia/Pacific and Latin America; Regional Director, Latin America; and Sales Director, Europe. Mr. Modde holds a Bachelor of Science degree in Computer Science from Macquarie University, Australia.
Mark S. Theilken has served as President, Sales Solutions since March 2006 and is responsible for the U.S. sales solutions business and North American Implementation Services. Mr. Theilken has been with
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Dendrite since 2004 and has previously served as Senior Vice President responsible for North American sales, marketing services, and BuzzeoPDMA sales and operations, and Senior Vice President responsible for integrated marketing, data management and Dendrite’s CRM Effectiveness unit. Prior to joining Dendrite, Mr. Theilken served as President and Chief Executive Officer of Fuego, Inc. from March 2000 to January 2004. Prior to Fuego Mr. Theilken spent 5 years at Acxiom Corporation serving as Group Leader, InfoBase Products, and Senior Vice President, marketing information services. Prior to Acxiom, Mr. Theilken spent 22 years at IBM Corporation. Mr. Theilken holds a Bachelor of Science degree in Mathematics from the University of Illinois.
James E. Young has served as Senior Vice President and Chief Human Resources Officer since September 2006. Prior to joining Dendrite, Mr. Young served as Senior Vice President, Human Resources at WebMD Corporation from 2001 to 2005. Mr. Young also served for five years as Senior Vice President, Human Resources, at Simon & Schuster; the publishing division of Viacom Inc. Before Simon & Shuster, Mr. Young held several key senior human resources and business leadership positions at General Electric’s NBC division where he worked for eleven years. Mr. Young holds Bachelor of Arts degrees in Philosophy & Political Science from Fairleigh Dickinson University.
Additional Information
For additional information regarding the Company’s business, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Available Information
We make available free of charge through our website, www.dendrite.com, all materials that we file electronically with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC.
You may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, and you may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements and other information which the Company files electronically with the SEC.
ITEM 1A. Risk Factors
Incorporated by reference to “FACTORS THAT MAY AFFECT FUTURE RESULTS” included in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” included in Item 7 below.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
We lease the following facilities in the United States: a 233,000 square foot facility in Bedminster, New Jersey, which serves as our corporate headquarters; a 137,000 square foot facility in Totowa, New Jersey, which houses a distribution center, warehouse, call center and administrative offices for our integrated marketing business; a 100,000 square foot facility in Chesapeake, Virginia, which houses our data and integrated support centers; a 86,000 square foot facility in Duluth, Georgia, which houses our
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hardware repair, maintenance and asset management center; a 6,700 square foot office in Durham, North Carolina, which houses employees and operations in our data and analytics business; a 14,000 square foot facility in Woburn, Massachusetts which houses employees and operations for our Optas division; a 2,500 square foot facility in Hauppuage, New York which houses employees and operations for our OPUS Health division; and a 4,400 square foot office in Fort Mitchell, Kentucky, a 2,100 square foot office in Mount Laurel, New Jersey and 11,000 square foot facility in Richmond, Virginia which house employees and operations for our BuzzeoPDMA division. The Bedminster facility is subleased from Pharmacia & Upjohn Company, a subsidiary of Pfizer, Inc.
We also lease a total of approximately 353,000 square feet for local management, sales offices and operations in the following countries: Australia, Belgium, Brazil, Canada, China, Colombia, France, Germany, Greece, India, Italy, Japan, Mexico, New Zealand, Poland, Portugal, Russia, Singapore (Asia-Pacific regional headquarters), South Korea, Spain and The Netherlands. We also own a 10,000 square foot facility in Leicestershire, United Kingdom, which is utilized for local management, sales offices and operations.
The Company also owns a 145,000 square foot facility in Piscataway, New Jersey which does not currently house any operations and is being held for sale.
ITEM 3. Legal Proceedings
Dendrite is from time to time involved in litigation relating to personnel and other claims arising in the ordinary course of business. On or about March 13, 2007, plaintiff Albert Oldham commenced a purported class action against Dendrite, its directors and Cegedim alleging that Cegedim’s pending acquisition of Dendrite is unfair to Dendrite’s shareholders, and purporting to assert claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty. In the lawsuit, captioned Albert Oldham v. Dendrite International, Inc., et al., plaintiff asks the court to (i) declare that the action is properly maintainable as a class action, and certify the named plaintiff as class representative and its counsel as class counsel; (ii) declare and decree that the merger agreement between Dendrite and entities affiliated with Cegedim was entered into in breach of the fiduciary duties of the members of the Board and is therefore unlawful and unenforceable; (iv) rescind and invalidate the merger agreement; (v) enjoin Dendrite and the Board from consummating the merger unless and until procedures are implemented to obtain the highest possible price for the shareholders; (vi) direct the Board to exercise its fiduciary duties to obtain a transaction which is in the best interests of the shareholders and in which the highest possible price is obtained; (viii) impose a constructive trust on any benefits improperly received by the Board as a result of wrongful conduct; and (viii) award plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees. Based on the facts known to date, Dendrite believes that the claims asserted by the plaintiff are without merit and intends to defend itself vigorously.
The Company is not currently engaged in any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock, no par value, is quoted on the NASDAQ Global Select Market under the symbol “DRTE.”
The following table sets forth for the periods indicated the high and low sale prices for our common stock as reported by the NASDAQ Global Select Market.
Period | | | | High | | Low | |
Quarter Ended December 31, 2006 | | $ | 11.99 | | $ | 9.34 | |
Quarter Ended September 30, 2006 | | $ | 10.50 | | $ | 8.48 | |
Quarter Ended June 30, 2006 | | $ | 13.57 | | $ | 9.14 | |
Quarter Ended March 31, 2006 | | $ | 14.92 | | $ | 12.28 | |
Quarter Ended December 31, 2005 | | $ | 19.96 | | $ | 13.60 | |
Quarter Ended September 30, 2005 | | $ | 20.05 | | $ | 13.88 | |
Quarter Ended June 30, 2005 | | $ | 16.21 | | $ | 13.75 | |
Quarter Ended March 31, 2005 | | $ | 18.64 | | $ | 13.79 | |
Approximate Number of Equity Security Holders
As of March 22, 2007, there were approximately 289 holders of record of our common stock.
Dividends
The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends on common stock in the foreseeable future. If the Company were to consider paying cash dividends, certain of the covenants of the Company’s line of credit and its merger agreement with Cegedim, SA and Dogwood Enterprise, Inc. may limit the amount or restrict the payment of any such dividends we may pay. See Note 8 of the Notes to Consolidated Financial Statements and “Liquidity and Capital Resources” in Item 7 for a discussion of our credit agreement.
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ITEM 6. Selected Financial Data
| | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | | 2003(a) | | 2002 | |
| | (in thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | |
Revenues | | $ | 423,958 | | $ | 437,240 | | $ | 399,197 | | $ | 321,107 | | $ | 225,756 | |
Operating costs & expenses: | | | | | | | | | | | |
Operating costs | | 236,046 | | 236,230 | | 205,896 | | 162,481 | | 111,381 | |
Selling, general and administrative | | 166,857 | | 144,931 | | 132,016 | | 107,862 | | 77,132 | |
Research and development | | 7,580 | | 6,094 | | 9,316 | | 11,633 | | 10,396 | |
Restructuring and other charges(b)(c)(d) | | 29,744 | | 9,372 | | — | | — | | 1,785 | |
Amortization of acquired intangible assets | | 4,140 | | 4,431 | | 4,851 | | 4,308 | | 335 | |
Other operating (income)(f) | | — | | — | | (707 | ) | — | | — | |
Total operating costs & expenses(e) | | 444,367 | | 401,058 | | 351,372 | | 286,284 | | 201,029 | |
Operating (loss) income | | (20,409 | ) | 36,182 | | 47,825 | | 34,823 | | 24,727 | |
Interest (income), net | | (2,310 | ) | (625 | ) | (64 | ) | (731 | ) | (1,085 | ) |
Other expense (income), net | | 315 | | 20 | | 277 | | (560 | ) | 149 | |
(Loss) income before income tax expense | | (18,414 | ) | 36,787 | | 47,612 | | 36,114 | | 25,663 | |
Income tax expense | | 8,331 | | 15,340 | | 18,047 | | 15,054 | | 10,265 | |
Net (loss) income | | $ | (26,745 | ) | $ | 21,447 | | $ | 29,565 | | $ | 21,060 | | $ | 15,398 | |
Net (loss) income per share: | | | | | | | | | | | |
Basic | | $ | (0.61 | ) | $ | 0.50 | | $ | 0.71 | | $ | 0.52 | | $ | 0.39 | |
Diluted | | $ | (0.61 | ) | $ | 0.48 | | $ | 0.69 | | $ | 0.51 | | $ | 0.38 | |
Shares used in computing net (loss) income per share: | | | | | | | | | | | |
Basic | | 43,692 | | 42,861 | | 41,503 | | 40,340 | | 39,872 | |
Diluted | | 43,692 | | 44,223 | | 43,075 | | 41,415 | | 40,127 | |
| | As of December 31, | |
| | 2006 | | 2005 | | 2004 | | 2003(a) | | 2002 | |
| | (in thousands) | |
Balance Sheet Data: | | | | | | | | | | | |
Working capital | | $ | 68,951 | | $ | 82,247 | | $ | 68,058 | | $ | 47,176 | | $ | 86,037 | |
Total assets | | 374,671 | | 363,007 | | 322,569 | | 262,457 | | 188,476 | |
Capital lease obligation, less current portion | | 71 | | 1,648 | | 3,036 | | 187 | | 275 | |
Stockholders’ equity | | 248,060 | | 261,415 | | 227,589 | | 176,135 | | 146,759 | |
| | | | | | | | | | | | | | | | |
(a) Includes the operating results of Synavant Inc. for the period from June 16, 2003 through December 31, 2003.
(b) 2006 restructuring and other charges relates to $21,312 of severance expense, $4,454 of an asset impairment charge and $3,978 of facility and other charges.
(c) 2005 restructuring and other charges relates to $7,649 of facility related charges and $1,723 of severance
(d) 2002 restructuring and other charges relates to write-down of a facility then held for sale.
(e) 2006 includes $4,367 of total stock-based compensation expense from the adoption of SFAS 123 (R).
(f) Insurance proceeds related to the recovery of costs of certain losses.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands)
Forward-Looking Statements
This Form 10-K may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations or future estimates, future financial position or results and future plans and objectives of management. Those statements in this Form 10-K containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and the pharmaceutical and consumer packaged goods industries. All such forward-looking statements involve significant risks and uncertainties, including those risks identified in this Form 10-K under “Factors That May Affect Future 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 materially from those indicated by the forward-looking statements included in this Form 10-K, as more fully described under “Factors That May Affect Future Results.” In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-K, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results or changes in assumptions, expectations or projections.
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of our operations and financial condition. MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes to consolidated financial statements. Enterprise-wide disclosure information appearing in Note 14 of the Notes to Consolidated Financial Statements are presented in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”
Potential Sale of the Company
On March 2, 2007, Dendrite entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cegedim S.A. (“Cegedim”) and Dogwood Enterprises, Inc., a wholly-owned subsidiary of Cegedim (“Merger Sub”). Pursuant to the Merger Agreement, Cegedim will acquire Dendrite in a taxable all-cash transaction whereby Merger Sub will merge with and into Dendrite (the “Merger”). Dendrite will continue as the corporation surviving the Merger and will become a wholly-owned subsidiary of Cegedim. The Merger Agreement provides, upon consummation of the Merger, for Dendrite’s stockholders to receive $16.00 in cash, without interest, for each share of common stock of Dendrite. The Merger Agreement is subject to adoption by Dendrite’s stockholders, as well as the satisfaction or waiver of other conditions, including, among others, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Merger Agreement contains certain termination rights and provides that, upon the termination of the Merger Agreement under specified circumstances, Dendrite will be required to pay Cegedim a termination fee of $22,200 and reimburse Cegedim up to $5,000 of Cegedim’s reasonable expenses.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
In connection with the Merger Agreement, on March 1, 2007, Dendrite and Registrar and Transfer Company, as Rights Agent, entered into Amendment No. 1 (the “Rights Amendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “Rights Agreement”). The effect of the Rights Amendment is to permit the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including the Merger, without triggering the separation or exercise of the Rights (as defined in the Rights Agreement) or any adverse event under the Rights Agreement.
EXECUTIVE OVERVIEW
We provide a broad array of solutions worldwide that enable pharmaceutical and other life science companies to strategically optimize their sales and marketing channels, clinical resources and compliance initiatives. Our plan is to continue to diversify and expand our solutions portfolio, customer base and geographic reach by leveraging our extensive knowledge of the pharmaceutical and life sciences industries and capitalizing upon our deep relationships in these industries. Our strategy continues to rely on both internal growth and acquisitions to meet our growth objectives.
We have expanded both our portfolio of solutions and customer base and believe that this combination presents significant opportunity for future growth. In January and September 2005, we broadened and enhanced our service portfolio with our acquisitions of BuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”), respectively. The Buzzeo acquisition expanded our sample and compliance management solution offerings. The Optas acquisition enhanced our portfolio of marketing solutions services by expanding our privacy-safe relationship marketing solutions for patients and physicians. We believe our acquisitions complement our existing business operations by enhancing our solutions portfolio, increasing our access to new customers and allowing deeper penetration into our current markets. We have also committed to investing in key initiatives to help drive future growth. Our future growth is dependent on our ability to further penetrate the markets in which we operate and increase the adoption rate of our expanded portfolio of solutions.
We evaluate our performance based upon a number of operating metrics. Key metrics are revenues, operating income, diluted net income per share, operating cash flow and days sales outstanding. Our goal is to execute our strategy to yield growth in revenues, operating income and diluted net income per share.
In 2006, we announced an Operational Effectiveness (“OE”) program to streamline our cost structure and realign the Company to drive efficiency and support our growth objectives. The OE program involved an extensive review of the entire Company from which we identified $20 million of annualized cost savings over our 2005 cost base. Our execution of the necessary cost saving actions resulted in additional severance and other associated costs during 2006. As of December 31, 2006, we have identified all significant cost savings, and significant actions have been taken, which resulted in restructuring and other charges of approximately $29.7 million. We expect to incur approximately $1 to $2 million of additional restructuring and other charges during first quarter of 2007.
In previous years, we presented a breakout of our revenues into the three categories of sales solutions, marketing solutions and shipping. These categories were reflective of how our service offerings were marketed to and viewed by our customers, and we believe they provided useful information to understand the changes in our revenues across periods. They were not reflective of the way we managed our business, and therefore associated operating costs and assets by revenue category were not available on a global basis. Based upon these factors, we operated under one reportable segment for disclosure purposes under Statement of Financial Accounting Standards 131, “Disclosure About Segments of an Enterprise and
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
Related Information” (“SFAS 131”) through March 31, 2006. As of June 30, 2006, we completed a process to reorganize our business and to capture transactional data in a format that will enable the reporting of various financial information broken into three new discrete operating segments as well as a corporate segment. We have reclassified our 2006 and 2005 historical revenues, operating income, assets and other select data into these new groupings which management is now utilizing to manage the business. Our three operating segments are sales solutions, marketing solutions, emerging solutions as well as a corporate segment. Below is a description of these operating segments:
Sales solutions business includes products and sales support services which are used by, or provided to, the sales force of our customers.
Marketing solutions business primarily includes interactive marketing, data and analytics, campaign management, and shipping fees. Our shipping fees, which are pass-through costs that bear little to no margin, are required to be included in revenues and costs based upon Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees and Costs.” These billable shipping transactions are primarily related to our interactive marketing activities.
Emerging solutions business includes compliance solutions, clinical solutions, and contract sales force services. While these businesses are not individually significant to our total revenues today, we believe they represent significant growth opportunities in the future.
Corporate includes costs and assets which are not representative of the results of the Company’s individual operating segments. The Company does allocate a significant portion of its gross corporate costs to the respective operating segments, to reflect the approximate value which has been incurred relating to services provided by the corporate entity. In addition, certain gross costs are considered to be overhead not attributable to any segment and as such, remain unallocated in Corporate. Included among the unallocated overhead remaining within Corporate are costs for equity based compensation, audit and tax fees, excess facilities, certain administrative staff, and other ancillary costs.
In 2004, the Company did not have the necessary systems in place to track global information needed to consolidate revenue, operating (loss) profit, depreciation and amortization expense and capital expenditures between the new operating segments. As such, the 2004 amounts have not been presented, as to do so would be impracticable.
CUSTOMER UPDATE
In the fourth quarter 2006, the Company’s largest customer extended its contract with Dendrite for sales force effectiveness services in the United States through 2007, at current pricing, but advised the Company that as part of the previously described RFP process initiated by the customer, it plans to transition such services, with the exception of support, maintenance and enhancements of Dendrite’s sales force effectiveness software, in-house and to one or more third-party vendors. The customer currently intends to continue with support, maintenance and enhancements of Dendrite’s sales force effectiveness software up to 2011 under a separate contract, which the Company expects to generate revenue of at least approximately $7 million in 2008, plus work orders and special projects. Contracts with this customer outside of the United States are not affected.
Dendrite estimates the value of revenues associated with the services that are expected to terminate at the end of 2007 to be approximately $41 million, excluding work orders and special projects. Approximately 5% of these revenues are attributed to the Marketing Solutions segment for reporting purposes. Although estimating segment operating income is difficult due to complexities associated with
24
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
allocations, the segment operating income margin associated with these services is estimated to be in the range of 45% to 50%, excluding Corporate segment unallocated expense.
The extension of the contract into 2007 (approximately $48 million in contracted services as compared to $51 million in 2006) plus anticipated one-time revenue from transition services and other work orders are expected to have a positive impact on 2007 results. The Company noted that (1) anticipated additional cost reductions during the 12-14 month transition period, (2) potential investments in new and complementary business lines and (3) future new business are planned to help mitigate the overall impact of the contract loss beyond 2007. Further, there is no assurance that the current expectation for contract expiration by the end of 2007 would not be delayed or otherwise adjusted due to the complex and important nature of the services covered by the scope of the contract.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
A critical accounting policy is one that is both very important to the portrayal of a company’s financial position and results of operations and requires management’s most difficult, subjective or complex judgments. We believe that our critical accounting policies are revenue recognition, acquisitions and related accruals, impairments, income taxes and capitalized software.
Revenue Recognition
The area of revenue recognition requires management’s to make significant judgments and estimates. AICPA Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” “SOP 97-2”, governs revenue recognition for arrangements that include software which is more than incidental to the arrangement. Under SOP 97-2, if a sale of software includes services that are essential to the functionality of the software, then the software and essential services are to be accounted for using contract accounting as described in Accounting Research Bulletin 45, “Long-Term Construction-Type Contracts,” and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” “SOP 81-1.” The determination of whether or not services are essential to the functionality of the software can differ from arrangement-to-arrangement and requires the use of significant judgment by management. Factors used in determining whether or not services are essential to the functionality may include: whether or not physical changes are being made to the software’s underlying source code; the complexity of software configuration services; the level of effort required to build interfaces; the overall relationship of the service fees to the license fees; the length of time expected to complete the services; and whether or not the services can be obtained by a customer from their internal resources or another third-party vendor. If services are not considered to be essential to the functionality of the software, SOP 97-2 generally allows companies to recognize revenue for software licenses upon delivery of the licenses, prior to configuration or implementation services, provided that the other requirements of the SOP are met. In management’s judgment, our configuration and implementation services generally are essential to the functionality of our software. Therefore, we typically recognize revenue using the percentage-of-completion method as detailed in SOP 81-1.
The percentage-of-completion method of revenue recognition requires us to use significant estimates in measuring the progress-to-completion for each project. For our license fee and implementation service projects, we use the input measure of labor incurred as compared with total expected labor for the entire project. The determination of total project labor requires the use of significant judgment and estimates. We review these estimates on a monthly basis. Actual results could differ from these estimates, which would impact the amount of revenue previously recognized, had better estimates been available at the time.
25
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
Many of our arrangements include multiple deliverables. In the absence of higher-level specific authoritative guidance, we determine the units of accounting for multiple element arrangements in accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Specifically, we will consider a delivered item as a separate unit of accounting if it has value to the customer on a stand-alone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and if the arrangement includes a general right of return relative to the delivered element, delivery or performance of the undelivered element is considered probable and is substantially within our control. The determination of whether or not arrangements meet these criteria requires significant judgment on the part of the management. If our arrangements did not meet the separation criteria of EITF 00-21, the timing of revenue recognition could be delayed.
Accounting for Acquisitions
The accounting related to business combinations requires us to estimate the fair value and useful life of the assets acquired and the fair value of the liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. We typically analyze a number of factors such as valuation or appraisal reports when determining the estimates of fair value. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values, useful lives, or both, would be required.
Accounting for Restructuring Activities
Upon approval of a restructuring plan by management with the appropriate level of authority, we record restructuring liabilities in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 112, “Employers’ Accounting for Postemployment Benefits,” and SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” resulting in the recognition of employee severance and related termination benefits for recurring arrangements when they become probable and estimable and on the accrual basis for one-time benefit arrangements. We record other costs associated with exit activities as they are incurred. Employee severance and termination benefit costs reflect estimates based on agreements with relevant statutory requirements or plans adopted by us. These costs are not associated with nor do they benefit continuing activities. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. We review the status of restructuring activities on a quarterly basis and, if appropriate, record changes based on updated estimates.
Accounting for Impairments
We review long-lived assets for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Other than goodwill and indefinite-lived intangibles, if indicators of impairment are present, we evaluate the recoverability of the long-lived assets by estimating future undiscounted cash flows that are directly associated with and expected to arise as a direct result of the use and eventual disposition of the long-lived asset. If this estimate of future undiscounted cash flows demonstrates that recoverability is not probable, an impairment loss would be calculated and recognized based on the excess carrying value of the long-lived asset over the long-lived asset’s fair value. The estimate of the fair value and the future undiscounted cash flows of the underlying long-lived assets are based on significant judgments and assumptions.
We review capitalized software development costs and purchased capitalized software development costs for impairment at each balance sheet date to determine if the unamortized capitalized costs of a computer software product is greater than the net realizable value of that product. In instances where the
26
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
unamortized capitalized costs are greater than the net realizable value, we would record an impairment loss.
We assess goodwill and indefinite-lived intangibles for the possibility of impairment on an annual basis (as of October 1 of each year), and whenever events or changes in circumstances indicate that the carrying values may not be recoverable. Some factors we consider important which could trigger an impairment review include the following:
· Significant underperformance relative to historical or projected future operating results;
· Significant changes in our use of acquired assets or the strategy for our overall business; and
· Significant negative industry or economic trends.
On an annual basis, or when we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we calculate and compare the fair value of our reporting unit to its carrying value. We currently have three reporting units as well as a corporate unit. If the carrying value exceeds the fair value, we calculate the implied fair value of the goodwill for the reporting unit and compare it to the carrying value of the goodwill for the reporting unit. If the implied fair value of the goodwill was less than the carrying value of the goodwill, we would recognize an impairment loss, (not to exceed the carrying value of the reporting unit) in our consolidated statement of operations.
On an annual basis, or when we determine that the carrying value of an indefinite-lived intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we calculate and compare the fair value of the indefinite-lived intangible asset to its carrying value. If the carrying value exceeds the fair value, an impairment loss would be recognized. If we deem the useful life to be no longer indefinite, after testing for impairment in accordance with the applicable rules stated above, we amortize the intangible asset over its remaining estimated useful life, following the pattern in which the expected benefits will be consumed or otherwise used up and we would continue to review for impairment in the future on an annual basis.
Accounting for Income Taxes
Deferred tax assets and liabilities represent the differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences, all of which require significant judgment. We must believe it is more likely than not that the recorded net deferred tax asset will be realized. Realization is dependent on generating sufficient taxable income of a specific nature prior to the expiration of the loss carryforwards, capital loss and foreign tax credit carryforwards. The asset may be reduced if estimates of future taxable income during the carryforward period are reduced.
In addition, we maintain reserves for uncertain income tax positions, which are included in income taxes payable on the consolidated balance sheet. As a result of its multinational operations, we are subject to examination by various federal, state, and local tax authorities throughout the world. We establish liabilities for actual and probable assessments by tax authorities resulting from known tax exposures. Such liabilities represent an estimate for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known.
27
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
Accounting for Capitalized Software
We account for research and development costs in accordance with applicable accounting pronouncements, including SFAS 2, “Accounting for Research and Development Costs,” and SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”). SFAS 86 specifies that costs incurred internally in researching and developing a computer software product to be sold should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs, which includes directs costs of developing the product, should be capitalized until the product is available for general release to customers. Technological feasibility is considered to be reached when a product and program design has been completed or a working model of the software product has been completed. Our application engineering group reviews each project to determine when technological feasibility of a product is established.
Accounting for Stock Based Compensation
In December 2004, the FASB issued SFAS No. 123(R), “Shared Based Payment” (“SFAS 123(R)”). SFAS 123(R) is a revision of SFAS No. 123, as amended, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of stock options or shares issued under the Company’s Employee Stock Purchase Plan (“ESPP”). SFAS 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees.
We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of stock options, the weighted-average expected stock price volatility and weight-average risk-free interest rate. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our Consolidated Financial Statements. See Notes 1 and 10 of the Notes to the consolidated financial statements for additional information regarding our adoption of SFAS 123(R).
In addition, existing valuation models, including Black-Scholes, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a significant risk that our estimates of the fair values of share-base compensation awards on the grant dates may not reflect the actual values realized upon the vesting, exercise, expiration, early termination or forfeiture of those share-based payments in the future. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models. Further, the future impact of the cost of share-based compensation on our results of operations, including net income and earnings per diluted share, will depend on, among other factors, the level of our equity awards as well as the market price of our shares at the time of award as well as various other assumptions used in valuing such awards.
28
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
MERGERS AND ACQUISITIONS
We regularly evaluate opportunities to acquire products or businesses that represent strategic enhancements to our operations. Such acquisition opportunities, if they arise, may involve the use of cash, equity and/or debt instruments. We have made the following acquisitions over the last three years:
Opus
On September 1, 2006, we completed the acquisition of substantially all the assets of Opus Heath LLC (“Opus”). Based in Long Island, New York, Opus provided direct-to-patient persistence solutions. Opus’ results of operations have been included in the accompanying financial statements since the date of acquisition. Opus revenues are presented within our marketing solutions segment.
The aggregate purchase price of Opus was $7,378, including $379 of legal and professional fees. In accordance with the purchase agreement $2,000 of the purchase price was held in escrow as of December 31, 2006. The $2,000 held in escrow together with any additional amounts to be added to escrow, less amounts claimed against escrow, if any, is payable upon certain milestones relating to the representations, warranties and in connection with a certain patent application acquired as part of the acquisition. In addition, there is $3,000 contingent consideration based on Opus obtaining certain financial measures over the next three years, which will be paid if earned. As of December 31, 2006, nothing had been earned or accrued for the contingent consideration. The $3,000 contingent consideration, if earned, will be accounted for as compensation expense. There is an additional $1,000 of contingent consideration based on the successful outcome of a certain patent application acquired as part of the acquisition. The $1,000 of additional contingent consideration would be accounted for as additional purchase price, if earned. The valuation of certain intangible assets was finalized in the fourth quarter of 2006. The assets and liabilities acquired in connection with the Opus acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
Optas
On September 12, 2005, we completed the acquisition of Optas. Based in Woburn, Massachusetts, Optas provided privacy-safe relationship marketing solutions for patients and physicians. Optas’ results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Optas revenues are presented within our marketing solutions segment.
The aggregate purchase price for Optas was approximately $13,188, including $349 of legal and professional fees. In accordance with the purchase agreement, approximately $1,200 of the purchase price was held in escrow as of December 31, 2006. Approximately $1,200, representing the balance of escrow, less amounts claimed against escrow, is scheduled to be released from escrow in accordance with the purchase agreement in April 2007. The valuation of certain intangibles assets was finalized in the second quarter of 2006. The assets acquired and liabilities assumed in connection with the Optas acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
Buzzeo
On January 4, 2005, we completed the acquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provided compliance, auditing, consulting and reconciliation outsourcing services to the pharmaceutical and life sciences industry. This acquisition further expands our sample and compliance management solution offerings. Buzzeo’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Buzzeo revenues are characterized as compliance solutions within our emerging solutions segment.
29
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
The aggregate purchase price for Buzzeo was approximately $10,759, including $33 of legal and professional fees. Approximately $487 of the remaining purchase price was paid in April 2006. In accordance with the purchase agreement, $1,025 was released from escrow in the first quarter of 2006. The valuation of certain intangibles assets was finalized in the fourth quarter of 2005. The assets acquired and liabilities assumed in connection with the Buzzeo acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
Schwarzeck
On July 20, 2004, we completed the strategic acquisition of the capital stock of Schwarzeck-Verlag GmbH (“Schwarzeck”). Schwarzeck was a provider of physician databases, direct marketing services and sample fulfillment services to pharmaceutical companies in Germany. This acquisition accelerated our expansion in Europe and increases our integrated marketing solutions and services to the German pharmaceutical industry. In connection with the acquisition, we restructured the combined operations by eliminating certain former Schwarzeck positions. Schwarzeck’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. We have allocated the entire purchase price of approximately $800 to purchased database. The valuation of certain intangibles assets was finalized in the second quarter of 2005. The assets acquired and liabilities assumed in connection with the Schwarzeck acquisition, the aggregate purchase price and pro forma results of operations are not deemed material to the consolidated financial statements.
MDM
On April 6, 2004, we completed the strategic acquisition of the capital stock of the Medical Data Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.
The aggregate purchase price for MDM was approximately $9,290 and consisted of approximately $5,700 in cash payments, approximately $3,320 in restricted stock and approximately $270 of legal and professional fees. The valuation of certain intangible assets was finalized in the fourth quarter of 2004. The assets acquired and liabilities assumed in connection with the MDM acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
Uto Brain
On January 5, 2004, we completed the strategic acquisition of the capital stock of Uto Brain Co., Ltd. (“Uto Brain”). Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceutical companies with data, analytics, publishing and advisory services. The combining of resources of Uto Brain with our existing resources creates comprehensive information, software and services company dedicated to the Japanese pharmaceutical industry and further enhances our ability to provide solutions to enhance sales, marketing and clinical functions of pharmaceutical companies in the Japanese market. Uto Brain’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.
30
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
The aggregate purchase price for Uto Brain was approximately $4,900 (498,270 Yen), including approximately $100 of legal and professional fees. We paid approximately $1,400 and $3,400 of the purchase price during the years ended December 31, 2005 and 2004, respectively. In addition, we assumed approximately $3,800 in bank debt and an acquired loan, all of which was repaid during the year ended December 31, 2004. The valuation of certain intangible assets was finalized in the fourth quarter of 2004. The assets acquired and liabilities assumed in connection with the Uto Brain acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a percentage of total revenues for the periods indicated:
| | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % | |
Operating Costs & Expenses: | | | | | | | | | | | | | |
Operating costs | | | 56 | | | | 54 | | | | 52 | | |
Selling, general and administrative | | | 39 | | | | 33 | | | | 33 | | |
Research and development | | | 2 | | | | 1 | | | | 2 | | |
Restructuring and other charges | | | 7 | | | | 2 | | | | — | | |
Amortization of acquired intangible assets | | | 1 | | | | 1 | | | | 1 | | |
Total operating costs & expenses | | | 105 | | | | 91 | | | | 88 | | |
Operating (loss) income | | | (5) | | | | 9 | | | | 12 | | |
Interest and other (income), net | | | — | | | | — | | | | — | | |
(Loss) income before income tax expense | | | (5) | | | | 9 | | | | 12 | | |
Income tax expense | | | 2 | | | | 4 | | | | 5 | | |
Net (loss) income | | | (7 | )% | | | 5 | % | | | 7 | % | |
YEARS ENDED DECEMBER 31, 2006 AND 2005
REVENUES
| | | | | | $ | | % | | 2006 % | | 2005 % | |
| | Year Ended December 31, | | Increase / | | Increase / | | of Total | | of Total | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | | Revenues | | Revenues | |
Revenues: | | | | | | | | | | | | | | | | | | | | | |
Sales solutions | | $ | 274,257 | | $ | 300,624 | | | $ | (26,367 | ) | | | (9 | )% | | | 65 | % | | | 69 | % | |
Marketing solutions | | 123,034 | | 112,049 | | | 10,985 | | | | 10 | % | | | 29 | % | | | 26 | % | |
Emerging solutions | | 26,667 | | 24,567 | | | 2,100 | | | | 9 | % | | | 6 | % | | | 5 | % | |
Total revenues | | $ | 423,958 | | $ | 437,240 | | | $ | (13,282 | ) | | | (3 | )% | | | 100 | % | | | 100 | % | |
Total revenues decreased by 3% for the year ended December 31, 2006, compared with the year ended December 31, 2005. Total revenues in the United States decreased by 7% from the year ended December 31, 2005, and were $255,417, or approximately 60%, of total revenues. This decrease in the United States was primarily due to reduced spending by our largest customer for the year ended
31
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
December 31, 2006, compounded by the absence of 2005 revenue associated with a non-recurring project for our two largest customers and a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market. These decreases were partially offset by revenue from the 2005 acquisition of Optas, a $3,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market, as well as growth in our marketing solutions business. Our international revenues were $168,541, or approximately 40% of total revenues for the year ended December 31, 2006, which increased 3% from 2005 primarily from growth in marketing solutions.
OPERATING COSTS & EXPENSES
| | | | $ | | % | | 2006 % | | 2005 % | |
| | Year Ended December 31, | | Increase / | | Increase / | | of Total | | of Total | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | | Revenues | | Revenues | |
Operating costs (including shipping) | | $ | 236,046 | | $ | 236,230 | | | $ | (184 | ) | | | 0 | % | | | 56 | % | | | 54 | % | |
Selling, general and administrative | | 166,857 | | 144,931 | | | 21,926 | | | | 15 | % | | | 39 | % | | | 33 | % | |
Research and development | | 7,580 | | 6,094 | | | 1,486 | | | | 24 | % | | | 2 | % | | | 1 | % | |
Restructuring and other charges | | 29,744 | | 9,372 | | | 20,372 | | | | 217 | % | | | 7 | % | | | 2 | % | |
Amortization of acquired intangible assets | | 4,140 | | 4,431 | | | (291 | ) | | | (7 | )% | | | 1 | % | | | 1 | % | |
Total operating costs & expenses | | $ | 444,367 | | $ | 401,058 | | | 43,309 | | | | 11 | % | | | 105 | % | | | 92 | % | |
OPERATING COSTS (including shipping). Operating costs remained flat for the year ended December 31, 2006 compared with the year ended December 31, 2005. As a percentage of revenues, operating costs increased to 56% for the year ended December 31, 2006 versus 54% for the year ended December 31, 2005. This increase was due to a full year costs from our September 2005 acquisition of Optas versus approximately four months in 2005, increased marketing and compliance solutions business, which require higher incremental costs to deliver, and $2,820 of costs related to implementing our OE program.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased 15% for the year ended December 31, 2006 compared with the year ended December 31, 2005. As a percentage of revenues, SG&A increased to 39% for the year ended December 31, 2006, up from 33% compared with the year ended December 31, 2005. SG&A cost increased due to strategic consulting costs related to our effort to realign the Company of approximately $9,600, stock based compensation expense of $7,499 and $984 of costs related to implementing our OE program and increased other compensation expense.
RESEARCH AND DEVELOPMENT (R&D). R&D expenses increased 24% for the year ended December 31, 2006 compared with the year ended December 31, 2005. As a percentage of revenues, R&D expenses increased 1% for the year ended December 31, 2006 compared with the year ended December 31, 2005. R&D expenses plus additions to capitalized software development costs, increased 11% from $10,958 for the year ended December 31, 2005, to $12,159 for the year ended December 31, 2006. This increase in gross R&D was primarily due to development of our new clinical products.
RESTRUCTURING AND OTHER CHARGES. For the year ended December 31, 2006, we recorded $29,744 of restructuring and other charges. The charges include approximately $21,313 of severance, $4,454 of an asset impairment related to an owned facility and $3,977 of facility and other charges. We made the decision to consolidate our hardware support function in Georgia and therefore decided to sell a
32
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
New Jersey facility. This facility was adjusted to its fair value less cost to sell. The facility and other charges primarily relate to a lump sum early termination payment charge of $1,539 for a leased facility in New Jersey, additional facility charges of $1,456 in New Jersey and the United Kingdom, $536 of costs related to re-focusing of our Japanese data business, and $447 of other charges.
For the year ended December 31, 2005, we recorded $7,649 of facility-related charges and a severance charge of $1,723. The facility charges consisted of $6,619 related to vacating a New Jersey facility and for additional facilities vacated in previous periods due to changes in market conditions, as well as $1,030 related to the write-off of leasehold improvements associated with the exit of our New Jersey facility. The $1,723 severance charge related to the elimination of certain senior and mid-level management positions.
AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 7% over the year ended December 31, 2005. The decrease primarily reflects certain intangibles assets acquired as part of the Software Associates International (“SAI”) and Synavant acquisitions, which were fully amortized as of June 30, 2005, partially offset by additional amortization of intangibles acquired as part of the Optas and Opus acquisitions.
NON-OPERATING (INCOME) EXPENSE, NET
| | Year Ended | | $ | | % | | 2006 % | | 2005 % | |
| | December 31, | | Increase / | | Increase / | | of Total | | of Total | |
| | 2006 | | 2005 | | Decrease | | Decrease | | Revenues | | Revenues | |
Interest (income), net | | (2,310 | ) | (625 | ) | | $ | 1,685 | | | | 270 | % | | | (1 | )% | | | 0 | % | |
Other expense, net | | 315 | | 20 | | | 295 | | | | 1475 | % | | | 0 | % | | | 0 | % | |
INTEREST (INCOME), NET. Interest income increased $1,685 from $625 to $2,310 for the year ended December 31, 2006 due to higher average cash balances, higher interest rates and investing of surplus cash in 2006 offset by interest expense related to capital leases.
OTHER EXPENSE, NET. Other expense increased by $295 from $20 to $315 for the year ended December 31, 2006 primarily due to a $171 impairment charge related to our investment in a venture capital fund.
INCOME TAX EXPENSE
| | Year Ended | | $ | | % | | 2006 % | | 2005 % | |
| | December 31, | | Increase / | | Increase / | | of Total | | of Total | |
| | 2006 | | 2005 | | Decrease | | Decrease | | Revenues | | Revenues | |
(Loss) income before income tax expense | | (18,414 | ) | 36,787 | | | $ | 55,201 | | | | (150 | )% | | | (4 | )% | | | 8 | % | |
Income tax expense | | 8,331 | | 15,340 | | | (7,009 | ) | | | (46 | )% | | | 2 | % | | | 4 | % | |
PROVISION FOR INCOME TAXES. Our estimated effective income tax rate was (45.2%) for the year ended December 31, 2006 compared to 41.7% in the prior year.
We conduct business in various countries throughout the world and are subject to tax in numerous jurisdictions. As a result of our multinational operations, we are subject to examination by various federal, state, and local tax authorities throughout the world. We establish liabilities for actual and probable assessments by tax authorities resulting from known tax exposures. Such liabilities represents an estimate for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known.
33
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
The 2006 effective tax rate was unfavorably affected primarily by valuation allowances and tax reserves attributable to our international subsidiaries. Valuation allowances recorded in 2006 of approximately $5,800 are attributable to international subsidiaries generating taxable losses for which we were unable to take a benefit. We recorded income tax reserves related to tax exposures identified at some of our international subsidiaries of approximately $4,800, of which $600 related to prior periods. In addition, the rate was also adversely affected by certain non-deductible expenses and foreign earnings taxed at different tax rates.
During 2006, we completed a restructuring of our Asia Pacific operations whereby a regional headquarter office was established in Singapore. As a result of committing to certain spending and employment levels, income from operations in Singapore will be subject to a reduced tax rate of 10%. We expect to benefit from this reduced tax rate for 7 years effective January 1, 2007. In connection with this restructuring, we transferred certain intangible assets from existing operations in the Asia Pacific region and the United States to Singapore. We recorded a current year tax expense of approximately $2,700 associated with this restructuring.
At December 31, 2006 and 2005, there were approximately $17,410 and $21,383, respectively, of undistributed earnings of non-U.S. subsidiaries that are considered to be reinvested indefinitely. If such earnings were remitted to us, the applicable United States federal income and foreign withholding taxes may be wholly or partially offset by foreign tax credits. As a result, the determination of potential U.S. income taxes on these undistributed earnings is not practicable at December 31, 2006 or 2005.
SEGMENT REVENUE AND OPERATING INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2006 AND 2005
Sales Solutions
| | | | | | $ | | % | |
| | Year Ended December 31, | | Increase / | | Increase / | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | |
Revenue | | $ | 274,257 | | $ | 300,624 | | | $ | (26,367 | ) | | | (9 | )% | |
Restructuring and other charges | | $ | 13,712 | | $ | — | | | $ | 13,712 | | | | N/A | | |
Operating income | | $ | 40,521 | | $ | 65,578 | | | $ | (25,057 | ) | | | (38 | )% | |
Sales Solutions revenues accounted for approximately 65% of total Company revenues for the year ended December 31, 2006, which decreased by approximately 9% or $26,367 compared with the year ended December 31, 2005. Revenues in the United States decreased by 11% or $22,236, due to reduced spending by our largest customer for the year ended December 31, 2006 compounded by the absence of 2005 revenue associated with non-recurring projects for our two largest customers and a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States. These decreases were partially offset by revenue of $3,000 associated with one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States in 2006. International sales decreased by approximately $2,998 or 1%, primarily due to the roll-off of a larger European customer during the second quarter of 2005 and reduced European license fees, which was partially offset by growth in license revenues in Asia and increased ongoing service fees resulting from regional deals in Latin America.
Operating income decreased by 38% compared with the year ended December 31, 2005. This decrease was primarily due to reduced revenues, severance costs related to our OE program, $2,757 of
34
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
other non-restructuring costs related to implementing our OE program for the year ended December 31, 2006 and the absence of a large client rollout project which occurred during the year ended December 31, 2005.
Marketing Solutions
| | | | | | $ | | % | |
| | Year Ended December 31, | | Increase / | | Increase / | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | |
Revenue | | $ | 123,034 | | $ | 112,049 | | | $ | 10,985 | | | | 10 | % | |
Restructuring and other charges | | $ | 6,221 | | $ | — | | | $ | 6,221 | | | | N/A | | |
Operating loss | | $ | (13,162 | ) | $ | (2,484 | ) | | $ | (10,678 | ) | | | 430 | % | |
Marketing solutions revenues accounted for approximately 29% of total Company revenues for the year ended December 31, 2006, which increased by approximately 10% or $10,985 compared with the year ended December 31, 2005. This increase was primarily due to growth in our United States business, which increased by approximately 27% or $9,218 over the prior year, primarily from growth in our interactive marketing business and added revenue from our September 2005 acquisition of Optas. Growth in United States interactive marketing revenues resulted from increased services to one of our larger customers and other new business. Our international marketing solution revenues increased by approximately 2% or $1,358 compared to the year ended December 31, 2005, due to increases in consulting and data, partially offset by a decrease in transactional interactive marketing revenues.
Marketing solutions includes low gross margin revenue consisting primarily of shipping fees which accounted for approximately $21,517 or 5% of total revenues for the year ended December 31, 2006, which increased by approximately 2% compared with approximately $21,109 for the year ended December 31, 2005. Shipping revenues contribute little to no margin and result from pass-through shipping costs associated with our global integrated marketing business.
Operating loss increased from $2,484 for the year ended December 31, 2005 to $13,162 for the year ended December 31, 2006. This increase was primarily due to severance costs, approximately $1,300 of strategic consulting costs and $522 of other costs related to implementing our OE program recorded for the year ended December 31, 2006 and higher incremental costs to deliver various marketing solutions offerings for the year ended December 31, 2006 as compared with the year ended December 31, 2005.
Emerging Solutions
| | Year Ended | | $ | | % | |
| | December 31, | | Increase / | | Increase / | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | |
Revenue | | $ | 26,667 | | $ | 24,567 | | | $ | 2,100 | | | | 9 | % | |
Restructuring and other charges | | $ | 113 | | $ | — | | | $ | 113 | | | | N/A | | |
Operating (loss) income | | $ | (1,070 | ) | $ | 522 | | | $ | (1,592 | ) | | | (305 | )% | |
Emerging solution revenues accounted for approximately 6% of total Company revenues for the year ended December 31, 2006, which increased by $2,100 or 9% compared with the year ended December 31, 2005. This increase was due to growth in revenues from our compliance solution services of approximately 16% or $2,024 and our European contract sales force business of 68%, partially offset by decreased revenue in our clinical business due to two large projects that were completed for the during the year ended December 31, 2005.
35
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
Operating loss increased by $1,592 from income of $522 to a loss of $1,070 for the year ended December 31, 2006. This operating loss increase was primarily due to the loss of ongoing clinical solution services with our largest customer.
Corporate
| | | | | | $ | | % | |
| | Year Ended December 31, | | Increase / | | Increase / | |
| | 2006 | | 2005 | | (Decrease) | | (Decrease) | |
Restructuring and other charges | | $ | 9,698 | | $ | 9,372 | | | $ | 326 | | | | 3 | % | |
Operating loss | | $ | (46,698 | ) | $ | (27,434 | ) | | $ | (19,264 | ) | | | 70 | % | |
Operating expenses increased by $19,264 from $27,434 to $46,698 for the year ended December 31, 2006. This increase was primarily due to higher costs related to stock based compensation expense of $7,499, approximately $7,500 of strategic consulting costs related to our effort to realign the Company, increased other compensation expenses, an asset impairment charge related to an owned facility of $4,454 and severance costs recorded related to our OE program.
YEARS ENDED DECEMBER 31, 2005 AND 2004
REVENUES
| | Year Ended December 31, | | $ | | % | | 2005 %
of Total | | 2004 %
of Total | |
| | 2005 | | 2004 | | Increase | | Increase | | Revenues | | Revenues | |
Services & Technology: | | | | | | | | | | | | | | | | | | | |
Sales solutions | | $ | 311,157 | | $ | 286,544 | | $ | 24,613 | | | 9 | % | | | 71 | % | | | 72 | % | |
Marketing solutions | | 107,120 | | 95,292 | | 11,828 | | | 12 | % | | | 25 | % | | | 24 | % | |
Shipping | | 18,963 | | 17,361 | | 1,602 | | | 9 | % | | | 4 | % | | | 4 | % | |
Total revenues | | $ | 437,240 | | $ | 399,197 | | $ | 38,043 | | | 10 | % | | | 100 | % | | | 100 | % | |
Total revenues for the year ended December 31, 2005 increased 10% compared with the year ended December 31, 2004. Our international revenues were $164,010, or approximately 38% of total revenues, and increased by 4% over 2004, due to our recent acquisitions and organic growth which was offset by a reduction in ongoing services and license fees in Asia. Total revenues in the United States were $273,230, or approximately 62% of total revenues, and increased by 13% from the year ended December 31, 2004. The increase in revenues is primarily due to our current year acquisitions, a non-recurring project at our largest customer, and increased services at our second largest customer which was partially offset by a reduction of work orders and ongoing services with our largest customer resulting from its cost containment initiatives.
Sales Solutions
Sales solutions revenues accounted for approximately 71% of total revenues during the year ended December 31, 2005, and increased 9% compared with the year ended December 31, 2004. Sales solutions services in the United States increased by 14%, which included $4,000 associated with the early termination of a contract with Odyssey, as well as an increase in integrated support center, asset management, and implementation services which were primarily driven by non-recurring projects, and the addition of sales support services from our Buzzeo acquisition. Our international sales solutions decreased by 4%, with sales solutions decreasing by 1% and license fees decreasing by 28% versus the year ended
36
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
December 31, 2004. International sales solutions decreased due to the loss of a European customer in 2005 and license fees decreased due to a sale of third-party licenses to an international customer in 2004, which did not occur in 2005.
Marketing Solutions
Marketing solutions revenues accounted for approximately 25% of total revenues during the year ended December 31, 2005, and increased by approximately 12% compared with the year ended December 31, 2004. The increase was mostly due to growth in our international marketing solutions business, which increased by 18% over the prior year, including 22% growth in our integrated marketing services. The growth in international integrated marketing included the additional revenues from our 2004 acquisitions as well as organic growth. In the United States, marketing solutions increased by approximately 6% compared with the year ended December 31, 2004, due to increases in integrated marketing revenues and the inclusion of marketing services from our 2005 acquisitions, which was partially offset by a decrease in our domestic clinical, data and consulting revenues.
Shipping
Shipping fees accounted for approximately 4% of total revenues during the year ended December 31, 2005, and increased by approximately 9% compared with the year ended December 31, 2004. Shipping revenues contribute little to no margin and result from pass-through shipping costs associated with our global integrated marketing business.
OPERATING COSTS & EXPENSES
| | Year Ended December 31, | | $
Increase / | | %
Increase / | | 2005 %
of Total | | 2004 %
of Total | |
| | 2005 | | 2004 | | (Decrease) | | (Decrease) | | Revenues | | Revenues | |
Operating costs (including shipping) | | $ | 236,230 | | $ | 205,896 | | | $ | 30,334 | | | | 15 | % | | | 54 | % | | | 52 | % | |
Selling, general and administrative | | 144,931 | | 132,016 | | | 12,915 | | | | 10 | % | | | 33 | % | | | 33 | % | |
Research and development | | 6,094 | | 9,316 | | | (3,222 | ) | | | (35 | )% | | | 1 | % | | | 2 | % | |
Restructuring and other charges | | 9,372 | | — | | | 9,372 | | | | N/A | | | | 2 | % | | | 0 | % | |
Amortization of acquired intangible assets | | 4,431 | | 4,851 | | | (420 | ) | | | (9 | )% | | | 1 | % | | | 1 | % | |
Other operating (income) | | — | | (707 | ) | | 707 | | | | (100 | )% | | | — | | | | — | | |
Total operating costs & expenses | | $ | 401,058 | | $ | 351,372 | | | $ | 49,686 | | | | 14 | % | | | 92 | % | | | 88 | % | |
OPERATING COSTS (including shipping). Operating costs increased 15% for the year ended December 31, 2005, compared with the year ended December 31, 2004. This increase was due to additional costs from our 2005 acquisitions and a full year of costs related to our 2004 acquisitions, higher pass-through postage costs and our overall increase in revenues. These increases were partially offset by savings related to our offshore initiatives. As a percentage of revenues, operating costs increased to 54% for the year ended December 31, 2005 versus 52% for the year ended December 31, 2004 due to our revenue growth in lower margin solutions.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased 10% for the year ended December 31, 2005, compared with the year ended December 31, 2004. SG&A costs increased due to additional costs from our 2005 acquisitions and a full year of costs related to our 2004 acquisitions, severance, as well as increased expenses as a result of our efforts to recruit and hire executive officers. As a percentage of revenues, SG&A remained flat at 33% for the years ended December 31, 2005 and 2004. We have and expect to continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures in other elements of SG&A.
37
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
RESEARCH AND DEVELOPMENT (R&D). R&D expenses decreased 35% for the year ended December 31, 2005, compared with the year ended December 31, 2004. As a percentage of revenues, R&D expenses decreased to 1% for the year ended December 31, 2005, from 2% for the year ended December 31, 2004. This decrease was due to decreased R&D spending and a higher capitalization rate during the year ended December 31, 2005. We capitalized more costs in the year ended December 31, 2004 than in 2005 due to the development for the release of our next generation SFE solution. Gross R&D spending (R&D expenses plus additions to capitalized software development costs) decreased 28% from $15,202 for the year ended December 31, 2004, to $10,958 for the year ended December 31, 2005. Gross R&D decreased due to the deployment of resources to revenue-generating projects and the savings related to our offshore initiative.
RESTRUCTURING AND OTHER CHARGES. During the year ended December 31, 2005, we recorded $7,649 of facility-related charges and a severance charge of $1,723. The facility charges consist of $6,619 related to vacating a New Jersey facility and for additional facilities vacated in previous periods due to changes in current market conditions, as well as $1,030 related to the write-off of leasehold improvements associated with the exit of our New Jersey facility. The $1,723 severance charge relates to the elimination of certain senior and mid-level management positions. No such charges were incurred in 2004.
AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 9% compared with the year ended December 31, 2004. The decrease primarily reflects certain intangibles assets acquired in the Software Associates International (“SAI”) and Synavant acquisitions, which were fully amortized as of June 30, 2005, partially offset by additional amortization of intangibles related to the Schwarzeck, Buzzeo and Optas acquisitions.
OTHER OPERATING (INCOME). We received insurance proceeds in the year ended December 31, 2004 related to the recovery of costs of certain losses.
NON-OPERATING (INCOME) EXPENSE, NET
| | Year Ended
December 31, | | $
Increase / | | %
Increase / | |
| | 2005 | | 2004 | | Decrease | | Decrease | |
Interest (income), net | | (625 | ) | | (64 | ) | | | $ | 561 | | | | 877 | % | |
Other expense, net | | 20 | | | 277 | | | | (257 | ) | | | (93 | )% | |
INTEREST (INCOME), NET. Interest income increased 877% for the year ended December 31, 2005 due to higher average cash balances, higher interest rates and investing of surplus cash in 2005 offset by interest expense related to capital leases.
OTHER EXPENSE, NET. Other expense decreased 93% for the year ended December 31, 2005 due to decreased foreign exchange losses on intercompany loans.
PROVISION FOR INCOME TAXES. Our estimated effective income tax rate increased to 41.7% for the year ended December 31, 2005 compared to 37.9% in prior year. The increase in our effective tax rate is primarily attributable to international subsidiaries generating taxable losses for which we were unable to take a benefit, the distribution of profits among countries with higher tax rates, and a reduction in the utilization of federal and state credits for which we had previously generated. These increases were partially offset as we determined it was more likely than not that some of our state and foreign deferred tax assets, which had previously been reserved for, would be utilized prior to expiration and accordingly, we released a valuation allowance reserve associated with these deferred tax assets.
38
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
At December 31, 2005 and 2004, there were approximately $21,383 and $25,211, respectively, of undistributed earnings of non-U.S. subsidiaries that are considered to be reinvested indefinitely. If such earnings were remitted to us, the applicable United States federal income and foreign withholding taxes may be wholly or partially offset by foreign tax credits. As a result, the determination of potential U.S. income taxes on these undistributed earnings is not practicable at December 31, 2005 or 2004.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated statement of operations data for 2006 and 2005. Our quarterly results have varied considerably in the past and are likely to vary from quarter-to-quarter in the future.
| | Dec. 31, | | Sept. 30, | | June 30, | | Mar. 31, | | Dec. 31, | | Sept. 30, | | June 30, | | Mar. 31, | |
| | 2006 | | 2006 | | 2006 | | 2006 | | 2005 | | 2005 | | 2005 | | 2005 | |
| | (in thousands, except per share data) | |
| | (unaudited) | |
Revenues: | | $ | 111,474 | | $ | 102,973 | | $ | 106,381 | | $ | 103,129 | | $ | 108,367 | | $ | 114,360 | | $ | 115,066 | | $ | 99,447 | |
Operating costs & expenses: | | | | | | | | | | | | | | | | | |
Operating costs | | 60,725 | | 56,172 | | 59,398 | | 59,751 | | 62,498 | | 61,252 | | 58,829 | | 53,651 | |
Selling, general and administrative | | 45,150 | | 39,816 | | 42,095 | | 39,796 | | 41,673 | | 33,395 | | 34,075 | | 35,788 | |
Research and development | | 2,745 | | 1,607 | | 1,494 | | 1,734 | | 1,479 | | 1,343 | | 1,454 | | 1,818 | |
Restructuring and other charges | | 14,506 | | 12,660 | | 2,578 | | — | | — | | — | | — | | 9,372 | |
Amortization of acquired intangible assets | | 1,010 | | 1,074 | | 1,035 | | 1,022 | | 1,091 | | 960 | | 1,130 | | 1,250 | |
Total operating costs & expenses | | 124,136 | | 111,329 | | 106,600 | | 102,303 | | 106,741 | | 96,950 | | 95,488 | | 101,879 | |
Operating (loss) income: | | (12,662 | ) | (8,356 | ) | (219 | ) | 826 | | 1,626 | | 17,410 | | 19,578 | | (2,432 | ) |
Interest (income) expense, net | | (708 | ) | (644 | ) | (504 | ) | (454 | ) | (310 | ) | (150 | ) | (24 | ) | (141 | ) |
Other expense (income), net | | 237 | | 31 | | 71 | | (25 | ) | (12 | ) | 35 | | 20 | | (23 | ) |
(Loss) income before income tax expense (benefit) | | (12,191 | ) | (7,743 | ) | 214 | | 1,305 | | 1,948 | | 17,525 | | 19,582 | | (2,268 | ) |
Income tax expense (benefit) | | 8,505 | | (1,698 | ) | 927 | | 596 | | 1,927 | | 6,747 | | 7,539 | | (873 | ) |
Net (loss) income | | $ | (20,696 | ) | $ | (6,045 | ) | $ | (713 | ) | $ | 709 | | $ | 21 | | $ | 10,778 | | $ | 12,043 | | $ | (1,395 | ) |
Net (loss) income per share: | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.47 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | 0.02 | | $ | — | | $ | 0.25 | | $ | 0.28 | | $ | (0.03 | ) |
Diluted | | $ | (0.47 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | 0.02 | | $ | — | | $ | 0.24 | | $ | 0.28 | | $ | (0.03 | ) |
Shares used in computing net (loss) income per share: | | | | | | | | | | | | | | | | | |
Basic | | 43,852 | | 43,713 | | 43,650 | | 43,548 | | 43,427 | | 42,944 | | 42,592 | | 42,470 | |
Diluted | | 43,852 | | 43,713 | | 43,650 | | 44,279 | | 45,175 | | 44,331 | | 43,630 | | 42,470 | |
Liquidity and Capital Resources
At December 31, 2006, working capital was $69,153 compared to $82,247 as of December 31, 2005. Cash and cash equivalents were $78,355 as of December 31, 2006, compared to $66,145 as of December 31, 2005. This increase in cash and cash equivalents was primarily attributable to cash generated by operating activities offset by payments made in connection with our acquisition of Opus, purchases of property and equipment, severance payments and other OE related payments.
We finance our business primarily through cash generated by operations. Net cash provided by operating activities was $36,528 and $44,126 for the years ended December 31, 2006 and 2005, respectively. The decrease was primarily related to the net loss adjusted for changes in assets and liabilities, net of effects from our 2006 acquisition of Opus. During the three months ended December 31, 2006, our accounts receivable days sales outstanding decreased to 58, from 67 days for the three months ended December 31, 2005, due to the 2006 collections of 2005 advanced billings and improvements in
39
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
our collection process during the year ended December 31, 2006. Our restructuring and other charges resulted in a net loss for the year ended December 31, 2006, however, it had a minimal effect on our operating cash flows. Future payments of these accruals will have a negative impact on future operating cash flows. Our operating cash flows were affected by payments of income taxes, purchase accounting restructuring charges, accounts payable and accrued expenses.
Cash used in investing activities was $27,652 for the year ended December 31, 2006, which was primarily attributable to purchases of property and equipment, our acquisition of Opus and additions to capitalized software development costs. Cash used in investing activities was $51,196 for the year ended December 31, 2005, which included payments for the Optas, Buzzeo and Uto Brain acquisitions as well as additions to capitalized software development costs and purchases of property and equipment. Additions of property and equipment in 2005 primarily related to our facilities in New Jersey, as well as investing in our help desk automation process.
As anticipated, purchases of property and equipment decreased for the year ended December 31, 2006, versus the comparable prior year period. During 2007, excluding expenditures related to the OE initiative, we expect capital spending in the range of approximately $17,000 to $20,000 primarily to support the Company’s infrastructure and productivity initiatives. We expect capital spending related to the OE initiative in the range of $4,000 to $7,000 in 2007. We expect this spending to be offset by the future sales of owned facilities. We review our capital expenditure program periodically and adjust it as required to meet current needs.
Cash provided by financing activities was $2,305 for the year ended December 31, 2006, compared to $10,062 for the year ended December 31, 2005. The decrease of $7,757 was primarily attributed to lower proceeds from the issuance of common stock.
We believe that available funds, anticipated cash flows from operations and the availability of our revolving line of credit will satisfy our currently projected working capital and currently expected capital expenditure requirements, exclusive of cash required for possible future acquisitions of businesses, products and technologies, during the next twelve to eighteen months. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. Our ability to generate future cash flows depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the pharmaceutical and life sciences industry and to general economic, political, financial, competitive and regulatory factors beyond our control.
Contractual Obligations and Commitments
On December 14, 2006, we amended our line-of-credit agreement with JPMorgan Chase, dated as of July 25, 2005, (the “Agreement”) in the amount of $30,000, redefining the maturity date from June 30, 2008 to June 30, 2007 and redefining earnings before interest and taxes for purposes of the Agreement. The Agreement is available to finance working capital needs and possible future acquisitions. The Agreement contains customary affirmative and negative covenants and also contains certain financial covenants, including those related to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) a minimum interest coverage ratio at the end of any fiscal quarter and (c) a minimum fixed charge coverage ratio at the end of any fiscal quarter. The Agreement also restricts our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of December 31, 2006, we were in compliance with all covenants and did not have any amounts outstanding under the Agreement.
40
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
Our principal commitments at December 31, 2006 consisted primarily of obligations under operating and capital leases as well as future minimum guarantees to certain vendors. Future minimum payments on these obligations are as follows:
| | Payments Due by Period | |
Contractual Obligations | | Total | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | |
Capital leases | | $ | 1,424 | | $ | 1,352 | | $ | 72 | | $ | — | | $ | — | | $ | — | | | $ | — | | |
Minimum guarantees | | 4,000 | | 2,000 | | 2,000 | | — | | — | | — | | | — | | |
Operating leases(1) | | 82,194 | | 17,128 | | 13,229 | | 11,514 | | 10,018 | | 7,417 | | | 22,888 | | |
Total | | $ | 87,618 | | $ | 20,480 | | $ | 15,301 | | $ | 11,514 | | $ | 10,018 | | $ | 7,417 | | | $ | 22,888 | | |
(1) Operating lease amounts disclosed above include $7,677 of future operating lease costs, excluding estimated future sublease income, accrued for in the purchase accounting restructuring and accrued restructuring and other charges accruals.
As of December 31, 2006, letters of credit for approximately $5,337 were outstanding related to deposits on certain facilities.
We have an agreement with a venture capital fund with a commitment to contribute $1,000 to the fund, callable at the discretion of the general partner in $100 increments. As of December 31, 2006, $700 has been paid, with $300 of the commitment remaining. The agreement has a termination date of December 11, 2010, subject to extension with the consent of a majority in interest of the limited partners. During the fourth quarter of 2006, we determined that our investment in the venture capital fund was impaired, therefore we recorded an impairment charge of $171 to write the venture capital fund down to its fair market value of $529, which is included in other assets in the accompanying consolidated balance sheet.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends SFAS 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this Statement provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. We have not completed our assessment of SFAS 159 and the impact, if any, on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands fair value measurement disclosures. SFAS 157 does not require new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of adopting SFAS 157 on our consolidated financial statements.
41
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. Our analysis of the impact of this Interpretation is not yet complete.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Set forth in this Form 10-K are certain risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-K. You are strongly urged to carefully consider the cautionary language and risks set forth below.
POTENTIAL SALE OF THE COMPANY
For additional information with respect to the potential Merger with Cegedim, see “Item 1. Business.”
A significant delay in consummating or a failure to consummate the proposed Merger with Cegedim could have a material adverse effect on our stock price and operating results.
If the proposed Merger with Cegedim is materially delayed or not completed, it could have a material adverse effect on our stock price. In addition, any significant delay in consummating the Merger could have a material adverse effect on our operating results, adversely affect our vendor and customer relationships and would likely lead to significant diversion of management and employee attention and potential employee attrition.
Expenses related to the proposed Merger with Cegedim are significant and will adversely affect our operating results in 2007.
We have incurred and expect to incur significant expenses in connection with the proposed Merger with Cegedim, including legal and investment banker fees. We expect these costs to have an adverse effect on our operating results in 2007.
Restrictions on the conduct of our business prior to the completion of the proposed Merger with Cegedim may have a negative impact on our operating results.
We have agreed to certain restrictions on the conduct of our business in connection with the proposed Merger with Cegedim, that require us to conduct our business only in the ordinary course, subject to specific limitations. These restrictions may delay or prevent us from undertaking business opportunities that may arise pending completion of the transaction.
42
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES
Historically, a limited number of our customers have contributed a significant percentage of our revenues. We anticipate that our operating results in any given period will continue to depend significantly upon revenues from a small number of customers. The loss of any of these customers (which could include loss through mergers and acquisitions) could have a materially adverse effect on our business, operating results or financial condition. We cannot make any assurances that we will retain our existing customers or attract new customers that would replace the revenue that could be lost if one or more of these customers failed to renew its agreement(s) with us.
OUR LARGEST CUSTOMER PLANS A TRANSITION OF A SIGNIFICANT PORTION OF THEIR SERVICES
The Company’s largest customer has extended its contract with Dendrite for sales force effectiveness services in the United States through 2007, at current pricing, but has advised the Company that as part of the previously described RFP process initiated by the customer, it plans to transition such services, with the exception of support, maintenance and enhancements of Dendrite’s sales force effectiveness software, in-house and to one or more third-party vendors. The customer currently intends to continue with support, maintenance and enhancements of Dendrite’s sales force effectiveness software up to 2011 under a separate contract, which the Company expects to generate revenue of at least approximately $7 million in 2008, plus work orders and special projects.
As discussed above in Management’s Discussion and Analysis, Dendrite estimates the value of revenues associated with the services that are expected to terminate at the end of 2007 to be approximately $41 million, excluding work orders and special projects, and estimates the segment operating income margin associated with these services to be in the range of 45% to 50%, excluding Corporate segment unallocated expense.
While the extension of the contract into 2007 plus anticipated one-time revenue from transition services and other work orders are expected to have a positive impact on 2007 results, and additional cost reductions, potential investments in new and complementary business lines and future new business are planned to help mitigate the impact of the contract loss, there can be no assurance that such cost savings will be achieved in the amounts or at the times we are targeting or that we will be able to generate sufficient additional revenues from new and complementary business lines and future new business.
Any failure to achieve such additional cost savings in the amounts and at the times we are targeting and to adequately increase revenues from investments in new and complementary business lines and future new business can be expected to have a material adverse effect on our revenues, profitability and financial condition.
OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY
Most of our solutions are currently used in connection with the marketing and sale of prescription-only drugs. This market is undergoing a number of significant changes. These changes include:
· the significant and continuing consolidation of the pharmaceutical industry which may reduce the number of our existing and potential customers;
· regulatory changes that permit the over-the-counter sale of formerly prescription-only drugs;
· U.S. and international governmental regulations mandating price controls;
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
· increasing Food and Drug Administration activism; and
· competitive pressure on the pharmaceutical industry resulting from the continuing shift to delivery of healthcare and pharmaceuticals through managed care organizations.
We cannot assure you that we can respond effectively to any or all of these and other changes in the marketplace. Our failure to do so could have a material adverse effect on our business, operating results or financial condition, as our business depends, in large part, on the business conditions within this marketplace.
OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS
Our customers often implement our products in stages and our products are often utilized by a large number of our customers’ personnel. In the event that our customers have difficulties implementing our products and services or are not satisfied with the implementation or operation of our products and services, our business, operating results and financial condition could be materially and adversely affected.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS
As part of our business strategy, we have acquired, and in the future may acquire, businesses that offer complementary products, services or technologies. These acquisitions are accompanied by substantial risks, including:
· unexpected problems, liabilities, risks or costs associated with the acquired business;
· the effect of the acquisitions on our financial and strategic position;
· our inability to successfully integrate the acquired business;
· the failure of an acquired business to further our strategies;
· our inability to achieve expected cost and business synergies;
· the significant strain on our operating systems;
· the diversion of our management’s attention from other business concerns;
· the impairment or loss of relationships with customers of the acquired business;
· the negative impact of the combination of different corporate cultures;
· the loss of key employees of the acquired company;
· regulatory or compliance issues existing in the acquired organization;
· undetected problems within the acquired organization; and
· the integration and maintenance of uniform, company-wide standards, procedures and policies.
Any of 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, equity, debt 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.
44
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES
Business and economic pressures on our major customers may result in budget constraints that directly impact their ability to purchase our new products and services offerings. We cannot assure you that any decrease in demand caused by these pressures will not have a material adverse effect on our business, operating results or financial condition.
THE LENGTHY SALES AND IMPLEMENTATION CYCLES FOR SFE SOLUTIONS MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES
The selection of a sales force effectiveness (SFE) solution generally entails an extended decision-making process by our customers because of the strategic implications, substantial costs and significant commitment of resources associated with a customer’s license or implementation of the solution. Given the importance of the decision, senior levels of management of our customers are often involved in the process and, in some instances, their board of directors may also be involved. As a result, the decision-making process typically takes nine to eighteen months, and in certain cases longer. In addition, other factors, unrelated to our product and services, such as acquisitions, product delays, or other issues, may also significantly impact the timing and amounts of buying decisions. Accordingly, we cannot fully control or predict the timing of our execution of contracts with customers. Prior sales and implementation cycles cannot be relied upon as any indication of future cycles.
In addition, an implementation process of three to six or more months before the software is rolled out to a customer’s sales force is customary. However, if a customer were to delay or extend its implementation process, our quarterly revenues may decline below expected levels and could adversely affect our results of operations.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
Our total revenue and operating results may vary significantly from quarter-to-quarter. The main factors that could cause these fluctuations are:
· the discretionary nature of our customers’ purchase and budget cycles;
· potential delays in recognizing revenue from license and other transactions;
· seasonal variations in operating results, including the increased seasonality associated with our international growth; and
· variations in the fiscal or quarterly cycles of our customers.
In addition, 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, canceled or not awarded, we will have incurred expenses without the associated revenues. We also may increase sales and marketing expenses if competitive pressures become greater than originally anticipated. Since only a small portion of our expenses varies directly with our actual revenues, our operating results and profitability are likely to be adversely and disproportionately affected if our revenues fall below our targeted goals or expectations.
As a result of these and other factors, revenues for any quarter may be subject to fluctuation. You should not rely on our period-to-period comparisons of our results of operations as indications of future
45
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
performance. Our future quarterly results may from time to time not meet the expectations of market analysts or investors, which could have a materially adverse effect on the price of our common stock.
AN UNFAVORABLE GOVERNMENT REVIEW OF OUR INCOME AND PAYROLL TAX RETURNS AND CHANGES IN OUR EFFECTIVE TAX RATES COULD ADVERSELY AFFECT OUR OPERATING RESULTS
We are subject to income, payroll and indirect taxes in the United States and in multiple foreign jurisdictions. We exercise judgment in determining our worldwide provision for these taxes, and in the ordinary course of our business there may be transactions and calculations where the ultimate tax determination is uncertain.
We are regularly subjected to routine audits by various tax authorities. Any such audit may result in a determination that our tax obligations exceed the amounts provided for by us in our financial statements. Such additional tax obligations and any related penalties could adversely impact our business, operating results and financial condition for current, future and prior periods.
Additionally, for a variety of reasons, we may not in the future be able to successfully maintain our historic effective tax rates.
FUTURE RESTRUCTURING MAY ADVERSELY IMPACT OUR OPERATIONS
We have announced and are executing plans to identify and reduce costs in our business. As a result, we expect to incur severance and other associated costs for these actions which may adversely affect our future operating results.
Furthermore, delays or increased costs in implementing any restructuring plans or cost savings initiatives or opportunities could delay or adversely affect the anticipated financial benefits of any such restructuring.
Additionally, any restructuring or cost savings initiatives may be disruptive to our employees who are transitioning to different roles or responsibilities in restructured areas of our business. Such disruptions may cumulatively adversely impact future operating results.
There also can be no assurance that such savings initiatives or opportunities will be achieved in the time periods or amounts planned.
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE
The market for SFE 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.
46
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
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 resources on product research and development than we have in the past. As a result, our results of operations could be materially and adversely affected.
SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES
Our software products are technologically complex and may contain previously undetected errors or failures or errors when products are first introduced or when updated versions are released. We cannot assure you that, despite our testing, our new products will be free from significant errors. Software errors could cause delays in the commercial release of products until the errors have been corrected. Software errors may cause us to be in breach of our agreements with customers, which could result in termination of the agreements and monetary damages. Software errors may cause damage to our reputation and cause us to commit significant resources to their correction. Errors that result in termination of agreements, monetary damages, 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 SOLUTIONS
There are a number of other companies that sell CRM and SFE products and related services that specifically target the pharmaceutical industry, including competitors that are actively selling CRM and SFE software products in more than one country and competitors that also offer CRM and SFE support services. Some of our competitors and potential competitors are part of large corporate groups and have significantly greater financial, sales, marketing, technology and other resources than we have.
While we believe that the CRM and SFE software products and/or services offered by most of our competitors do not address the variety of pharmaceutical customer needs that our solutions address, increased competition may require us to reduce the prices for our products and services. Increased competition may also result in decreased demand for our products and 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 CRM and SFE products or support services;
· alliances among existing competitors;
· technological changes or changes in the our customers’ use of the Internet;
· expansion of product lines by, or consolidation among, our existing competitors; and
47
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
· development and/or operation of in-house CRM or SFE software products or services by our customers and potential customers.
Any one of these factors can lead to price reductions and/or decreased demand and we cannot assure you that we will be able to continue to compete successfully or that competition will not have a material adverse effect on our business, operating results or financial condition.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCES THAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE
The success of parts of our business will depend, in part, on our ability to continue developing Internet-related products, modifying and improving our existing products and responding to technological advances and changing commercial uses of the Internet. We cannot assure you that our Internet-related products and services will adequately respond to such technological advances and changing uses. Nor can we assure you that the demand for our Internet-related products and services will increase.
Commercial use of the Internet raises potential problems with security, privacy, reliability, accessibility, quality of service and government regulation. These issues, if unresolved, may affect the use of our Internet-related products. If these potential problems arise, our business, financial condition or results of operations could be materially and adversely affected.
OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT
We have recently significantly expanded and may in the future further expand our international operations and enter additional international markets. This expansion would require significant management attention and financial resources that could adversely affect operating margins and earnings. We may not be able to maintain or increase international market demand for our products and services. If we do not, our international sales will be limited and our business, financial condition or results of operations could be materially and adversely affected.
The sale of our products and services in foreign countries accounts for, and is expected in the future to account for, an increasing material part of our revenues. These sales are subject to substantial risks inherent in international business activities, including:
· adverse changes in the political stability and economic environments in these countries and regions;
· adverse changes in tax, tariff and trade and other regulations;
· the absence or significant lack of legal protection for intellectual property rights in certain of these countries; and
· difficulties in managing an organization spread on a global basis.
Each of the above risks could have a significant impact on our revenues, profitability and our ability to deliver products on a competitive and timely basis, which could materially and adversely affect our business, financial condition or operating results.
Since we have operations in a number of countries and our service agreements in such countries are denominated in foreign currencies, 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 period-over-period comparability of operating results. Historically,
48
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
we have not hedged these translation risks because we generally reinvest our cash flows from international operations. However, we continue to evaluate foreign currency translation risk exposure. As we continue to grow our international business, the risks associated with foreign currency translation will also grow.
CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE
The efficient operation of our business, and ultimately our operating performance, depends on the uninterrupted use of our critical business and information technology systems. Many of these systems require the use of specialized hardware and other equipment that is not readily available in the marketplace. Although we maintain these systems at more than one location, a natural disaster, a fire or other catastrophic event at any of these locations could result in the destruction of these systems. In such an event, the replacement of these systems and restoration of archived data and normal operation of our business could take several days to several weeks, or more. During the intervening period when our critical business and information technology systems are fully or partially inoperable, our ability to conduct normal business operations could be significantly and adversely impacted and as a result our business, operating results and financial condition could be adversely affected.
OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM, ENSURING EFFECTIVE TRANSITION FOR KEY POSITIONS 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. While we believe that we have implemented effective succession plans, we can make no assurance that the loss of key personnel and transitions to new key personnel would not adversely impact our business or result in less effective management or technical teams.
Our future success also depends on our continuing ability to attract and retain highly qualified technical and managerial personnel. Due to competition for such personnel, we have at times experienced difficulties in recruiting and retaining qualified personnel and we may experience such difficulties in the future. Our ability to expand and increase revenue growth in the future will depend, in part, on our success in recruiting and training such qualified personnel. We may not always be able to expand our personnel in these areas as necessary to support our operations. Any recruiting or retention difficulties could adversely affect our business, operating results or financial condition.
In addition, during the period prior to shareholder consideration of our proposed merger with Cegedim S.A. we may be at increased risk for the loss of key executives due to the uncertainty associated with such proposed transaction.
IF OUR SECURITY MEASURES ARE BREACHED AND AN UNAUTHORIZED PARTY OBTAINS ACCESS TO A CUSTOMER’S DATA, CERTAIN OF OUR SOLUTIONS MAY BE PERCEIVED AS BEING INSECURE AND CUSTOMERS MAY CURTAIL OR STOP USING OUR SERVICE
Certain of our solutions involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and potential liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our
49
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose existing customers and our ability to obtain new customers.
OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECT COMPLETELY
We rely on a combination of trade secret, copyright and trademark laws, non-disclosure, license and other contractual agreements and technical measures to protect our proprietary rights. We cannot assure you that the steps we take will prevent misappropriation of these rights. 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. In response to customer requests, we have also on occasion entered into agreements which require us to place our source code in escrow to secure our service and maintenance obligations.
THIRD PARTIES MAY CLAIM THAT OUR SOLUTIONS INFRINGE ON THEIR PROPRIETARY RIGHTS
As a company offering technology solutions, there can be no assurance that third parties also offering technology solutions will not assert infringement claims against us in the future. While we believe that our solutions do not infringe upon proprietary rights of other parties, there can be no assurance that the Company would not be found to infringe on the proprietary rights of others. Any such finding could have a material adverse impact on our operating results or financial condition.
IF OUR THIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLY RESPOND TO TECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITH THIRD-PARTY VENDORS, INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTS MAY RESULT
Some of our software is provided by third-party vendors. If our third-party vendors are unable to successfully respond to technological change or if our relationships with certain third-party vendors are terminated, we may experience difficulty in replacing the functionality provided by the third-party software currently offered with our products. Although we believe there are other sources for all of our third-party software, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source. The absence of or any significant delay in the replacement of functionality provided by third-party software in our products could materially and adversely affect our sales.
THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED
We are involved in a number of strategic relationships with third parties and are frequently pursuing others. Should these relationships, or any of them, prove to be more costly than anticipated or fail to meet revenue expectations or other anticipated synergies, we cannot guarantee that such events will not have a material impact upon our business, operating results or financial condition.
50
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
OUR DATA AND ANALYTICS SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS
Our data and analytics solutions are sourced, in part, from data provided through strategic relationships. Although we believe there are other sources for such data, the termination of any of these relationships could diminish the breadth or depth of our data and analytics solutions. This termination or our failure to establish new strategic relationships in the future could negatively impact our business, operating results or financial condition.
FEDERAL AND STATE LAWS AND REGULATIONS AND THE LAWS OF VARIOUS FOREIGN JURISDICTIONS COULD DEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS
While we believe our data and analytics solutions are not in violation of current federal or state laws and regulations or the laws of foreign jurisdictions pertaining to patient privacy, health information or personal information, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), we cannot guarantee that future laws or regulations or interpretations of existing laws and statutes will not impact negatively upon our ability to market these solutions or cause a decrease in demand for such solutions from customers that see an increased risk in any such new laws or regulations.
GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL
Through our interactive marketing business, we may distribute controlled substances to doctors’ offices through the mail as part of certain interactive marketing programs provided on behalf of pharmaceutical manufacturers. It is important to the business that this practice of distributing prescription-only drugs continues. Future legislation may restrict our ability to provide these types of services. If any such legislation is enacted, it could have a material and adverse effect on our business, operating results and financial condition.
DIFFICULTIES IN SUBLEASING OR OTHERWISE DISPOSING OF CERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS
We expect to sublease all or a portion of certain of our facilities and sell our facility in Piscataway, New Jersey. An inability to successfully dispose of or sublet, as applicable, any of these facilities or to obtain favorable pricing or sublease terms could negatively impact our earnings.
UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS
In reporting our financial results we rely upon the accounting policies and standards then in effect at the time of our report. Future regulations, standards or interpretations may require us to adjust or restate financial results previously reported. A required restatement could have a material impact upon past financial results or current comparison to previous results.
WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY
World events such as terrorist attacks, the current military action in the Middle East and elsewhere, and hostilities in the Middle East, Asia and other geographical areas, have and may in the future weaken
51
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
the U.S. and world economies. Any resultant weaknesses in these economies may adversely affect our business, financial condition or results of operations or the businesses of our customers.
WE FACE RISKS IN CONNECTION WITH IMPLEMENTING THE REQUIREMENTS OF SECTION 404 OF THE SARBANES OXLEY ACT
We continue to be involved in the process of evaluating our internal control over financial reporting in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. This is a continuing process and we cannot be certain as to the timing of completion of our future reviews, evaluation, testing and remediation actions or the impact of the same on our operations or the results of the required testing and required attestation report by us and also by our registered independent public accounting firm. If at any time we are unable to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ. Any such actions could have a material adverse effect on our financial results and the price of our common stock.
PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE
Provisions of our Restated Certificate of Incorporation, as amended, our By-laws, as amended, and New Jersey law may make it more difficult for a third-party to acquire us. For example, the Board of Directors may, without the consent of the stockholders, issue preferred stock with rights senior to those of the common stock. In addition, we have a Shareholder Rights Plan which may limit the ability of a third-party to attempt a hostile acquisition of the Company.
In connection with the Merger Agreement, on March 1, 2007, Dendrite and Registrar and Transfer Company, as Rights Agent, entered into Amendment No. 1 (the “Rights Amendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “Rights Agreement”). The effect of the Rights Amendment is to permit the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including specifically the merger transaction with Cegedim, without triggering the separation or exercise of the Rights (as defined in the Rights Agreement) or any adverse event under the Rights Agreement.
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 and services by us or our competitors;
· quarter-to-quarter variations in our operating results or changes in revenue or earnings estimates or failure to meet or exceed revenue or earnings estimates;
· market conditions in the technology, healthcare and other growth sectors;
· general consolidation in the healthcare information industry which may result in the market perceiving us or other comparable companies as potential acquisition targets;
· the gain or loss of significant customers, orders or other business with significant customers;
· changes in the domestic and international economic, political and business conditions; and
· future acquisitions.
52
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands) (Continued)
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Because we have operations in a number of countries and our service agreements in such countries are denominated in a foreign currency, we face exposure to adverse movements in foreign currency exchange rates. As currency rates change, translation of the income statements of our international entities from local currencies to U.S. dollars affects period-over-period comparability of operating results. Historically, we have not hedged translation risks because we generally reinvest our cash flows from international operations. However, we continue to evaluate foreign currency translation risk exposure.
Management estimates that a 10% change in foreign exchange rates would have impacted 2006 reported operating profit by approximately $895. 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. As we continue to grow our international businesses, the risks associated with foreign currency translation will also grow.
Interest Rate Risk
We earn interest income from our balances of cash and short-term investments. This interest income is subject to market risk related to changes in interest rates, which primarily affects our investment portfolio. We invest in instruments that meet high credit quality standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issue, issuer and type of investment.
Due to the average maturity and conservative nature of our investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio. Management estimates that if the average yield of the Company’s investments decreased by 100 basis points, our interest income for the year ended December 31, 2006 would have decreased approximately $773. This estimate assumes that the decrease occurred on the first day of 2006 and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income will depend largely on the gross amount of our investments and future changes in investment yields.
ITEM 8. Financial Statements and Supplementary Data
The Company’s 2006 Consolidated Financial Statements, together with the report thereon of Deloitte & Touche LLP the Company’s Independent Registered Public Accounting Firm, are included in Item 15. The supplementary financial information required by this Item 8 is included in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in Item 7.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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ITEM 9A. Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosures controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosures.
During the third quarter of 2006, we undertook certain improvements to remediate a material weakness related to our internal controls at Optas, Inc. which was identified in the second quarter of 2006 over revenue recognition in the appropriate accounting period. The remedial actions were as follows:
1. The Company appointed new operational and financial management over the business unit.
2. The Company documented formal policies and procedures on revenue recognition for the Optas, Inc. business.
3. Management conducted formal training regarding revenue recognition at the Optas, Inc. business location.
During the fourth quarter of 2006, we took the actions necessary to fully remediate this material weakness in our internal control over financial reporting. There were no other changes in our internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) as of the period covered by this report. Based on their evaluation as of December 31, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosures controls and procedures were not effective as of December 31, 2006 because of a material weakness in internal control over financial reporting related to our accounting for tax contingencies and reserves.
Subsequent to the filing of the Form 10-Q for the quarterly period ended September 30, 2006, management identified a material weakness in the design and operating effectiveness of the Company’s internal control over financial reporting related to its tax contingencies and reserves. The material weakness related to the lack of effective controls to timely identify and properly account for tax items at certain non U.S subsidiaries. The material weakness resulted in immaterial misstatements to prior period financial statements and created a more than remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.
Based on the material weakness discussed above, management has determined that the Company did not maintain effective internal control over financial reporting as of December 31, 2006, based on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
54
ITEM 9A. Controls and Procedures (Continued)
During the year ended December 31, 2006, we acquired substantially all the assets of Opus Heath LLC. Management has excluded this acquisition from our assessment of the effectiveness of our internal control over financial reporting. As of and for the year ended December 31, 2006, this acquisition contributed approximately 2% to total assets and less than 1% of revenues, respectively.
Deloitte & Touche LLP, our independent registered public accounting firm, who audited and reported on the consolidated financial statements of the Company included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dendrite International, Inc.
Bedminster, New Jersey
We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”, included in Item 9A, that Dendrite International, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As described in “Management’s Report on Internal Control Over Financial Reporting”, management excluded from their assessment the internal control over financial reporting at Opus Health LLC., which was acquired in September 2006, and whose financial statements reflect total assets and revenues constituting 2 and less than 1 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at Opus Health LLC. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial
56
statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment: management identified a material weakness in the design and operating effectiveness of its internal controls over the financial reporting related to the lack of effective controls to timely identify and properly account for tax contingencies and reserves. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the accompanying consolidated balance sheets of the Company as of December 31, 2006 and 2005, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006, and the financial statement schedule listed in the Index at Item 15 for each of the three years in the period ended December 31, 2006 and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the COSO. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated March 30, 2007 expressed an unqualified opinion and included an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 30, 2007
57
ITEM 9B. Other Information
None.
PART III
Certain information required by PART III is omitted from this Report. The Company plans to file an amendment to this Report on a Form 10-K/A (the “Form 10-K/A”) containing such information not later than 120 days after the end of the fiscal year covered by this Report in accordance with General Instruction G(3) of Form 10-K.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be set forth in Item 10 of the Form 10-K/A which will be filed with the Securities and Exchange Commission.
We have adopted a Code of Ethics and Standards of Business Conduct (“Code of Ethics”) within the meaning of Item 406(b) of SEC Regulation S-K that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to all other officers, employees and directors of the Company. Our Code of Ethics is publicly available on our website at www.dendrite.com. If we make substantive amendments to our Code of Ethics or grant any waiver in favor of a director or executive officer, we will publicly disclose the nature of such amendment or waiver on our website and to the extent required by NASDAQ and SEC rules in a current report on Form 8-K.
ITEM 11. Executive Compensation
The information required by this Item will be set forth in Item 11 of the Form 10-K/A which will be filed with the Securities and Exchange Commission.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be set forth in Item 12 of the Form 10-K/A which will be filed with the Securities and Exchange Commission.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item will be set forth in Item 13 of the Form 10-K/A which will be filed with the Securities and Exchange Commission.
ITEM 14. Principal Accountant Fees and Services
The information required by this Item will be set forth in Item 14 of the Form 10-K/A which will be filed with the Securities and Exchange Commission.
58
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
i. Schedule II—Valuation and Qualifying Accounts
3. Exhibits. The exhibits in the accompanying “Exhibit Index” are incorporated herein by reference.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | DENDRITE INTERNATIONAL, INC. |
| | By: | | JOHN E. BAILYE |
Date: March 30, 2007 | | | | John E. Bailye |
| | | | Chairman of the Board and Chief Executive Officer |
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
| Name | | | | Title | | | | Date | |
JOHN E. BAILYE | | Chairman of the Board and Chief Executive Officer | | March 30, 2007 |
John E. Bailye | | (Principal Executive Officer) | | |
JEFFREY J. BAIRSTOW | | Executive Vice President and Chief Financial | | March 30, 2007 |
Jeffrey J. Bairstow | | Officer (Principal Financial Officer) | | |
RONALD W. PEARCE | | Vice President and Corporate Controller | | March 30, 2007 |
Ronald W. Pearce | | (Principal Accounting Officer) | | |
JOHN A. FAZIO | | Director | | March 30, 2007 |
John A. Fazio | | | | |
BERNARD M. GOLDSMITH | | Director | | March 30, 2007 |
Bernard M. Goldsmith | | | | |
EDWARD J. KFOURY | | Director | | March 30, 2007 |
Edward J. Kfoury | | | | |
PETER W. LADELL | | Director | | March 30, 2007 |
Peter W. Ladell | | | | |
CLAY LIFFLANDER | | Director | | March 30, 2007 |
Clay Lifflander | | | | |
PAUL A. MARGOLIS | | Director | | March 30, 2007 |
Paul A. Margolis | | | | |
JOHN H. MARTINSON | | Director | | March 30, 2007 |
John H. Martinson | | | | |
PETER G. TOMBROS | | Director | | March 30, 2007 |
Peter G. Tombros | | | | |
PATRICK J. ZENNER | | Director | | March 30, 2007 |
Patrick J. Zenner | | | | |
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dendrite International, Inc.
Bedminster, New Jersey
We have audited the accompanying consolidated balance sheets of Dendrite International, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dendrite International, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 30, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 30, 2007
61
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
| | December 31, | | December 31, | |
| | 2006 | | 2005 | |
Assets | |
Current Assets: | | | | | | | | | |
Cash and cash equivalents | | | $ | 78,355 | | | | $ | 66,145 | | |
Accounts receivable, net of allowance for doubtful accounts of $1,744 and $1,000, respectively | | | 71,154 | | | | 80,167 | | |
Prepaid expenses and other current assets | | | 10,733 | | | | 8,544 | | |
Asset held for sale | | | 8,545 | | | | — | | |
Deferred income taxes | | | 7,860 | | | | 8,848 | | |
Total current assets | | | 176,647 | | | | 163,704 | | |
Property and equipment, net of accumulated depreciation of $75,287 and $61,019, respectively | | | 43,483 | | | | 52,592 | | |
Other assets | | | 9,476 | | | | 8,856 | | |
Goodwill | | | 95,624 | | | | 90,440 | | |
Intangible assets, net | | | 24,154 | | | | 25,083 | | |
Capitalized software development costs, net | | | 9,952 | | | | 10,341 | | |
Deferred income taxes | | | 15,335 | | | | 11,991 | | |
| | | $ | 374,671 | | | | $ | 363,007 | | |
Liabilities and Stockholders’ Equity | |
Current Liabilities: | | | | | | | | | |
Accounts payable | | | $ | 9,442 | | | | $ | 7,677 | | |
Income taxes payable | | | 16,363 | | | | 9,518 | | |
Capital lease obligations | | | 1,318 | | | | 1,383 | | |
Accrued compensation and benefits | | | 19,052 | | | | 17,950 | | |
Accrued professional and consulting fees | | | 8,260 | | | | 5,690 | | |
Accrued restructuring and other charges | | | 11,853 | | | | 1,490 | | |
Other accrued expenses | | | 24,025 | | | | 17,468 | | |
Purchase accounting restructuring accrual | | | 351 | | | | 1,601 | | |
Deferred revenues | | | 17,032 | | | | 18,680 | | |
Total current liabilities | | | 107,696 | | | | 81,457 | | |
Capital lease obligations | | | 71 | | | | 1,648 | | |
Purchase accounting restructuring accrual | | | — | | | | 3,009 | | |
Accrued restructuring and other charges | | | 5,690 | | | | 4,143 | | |
Deferred rent | | | 7,306 | | | | 5,740 | | |
Other non-current liabilities | | | 5,848 | | | | 5,595 | | |
Stockholders’ Equity: | | | | | | | | | |
Preferred stock, no par value, 15,000,000 shares authorized, none issued | | | — | | | | — | | |
Common stock, no par value, 150,000,000 shares authorized, 46,832,347 and 46,353,252 shares issued; 43,971,044 and 43,491,949 shares outstanding at December 31, 2006 and December 31, 2005, respectively | | | 156,611 | | | | 149,947 | | |
Retained earnings | | | 122,203 | | | | 148,948 | | |
Deferred compensation | | | — | | | | (4,419 | ) | |
Accumulated other comprehensive income (loss) | | | 983 | | | | (1,324 | ) | |
Less treasury stock, at cost | | | (31,737 | ) | | | (31,737 | ) | |
Total stockholders’ equity | | | 248,060 | | | | 261,415 | | |
| | | $ | 374,671 | | | | $ | 363,007 | | |
The accompanying notes are an integral part of these consolidated financial statements.
62
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
| | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | |
Revenues | | $ | 423,958 | | $ | 437,240 | | $ | 399,197 | |
Operating Costs & Expenses: | | | | | | | |
Operating costs | | 236,046 | | 236,230 | | 205,896 | |
Selling, general and administrative | | 166,857 | | 144,931 | | 132,016 | |
Research and development | | 7,580 | | 6,094 | | 9,316 | |
Restructuring and other charges | | 29,744 | | 9,372 | | — | |
Amortization of acquired intangible assets | | 4,140 | | 4,431 | | 4,851 | |
Other operating (income) | | — | | — | | (707 | ) |
Total operating costs & expenses | | 444,367 | | 401,058 | | 351,372 | |
Operating (loss) income | | (20,409 | ) | 36,182 | | 47,825 | |
Interest income, net | | (2,310 | ) | (625 | ) | (64 | ) |
Other expense, net | | 315 | | 20 | | 277 | |
(Loss) income before income tax expense | | (18,414 | ) | 36,787 | | 47,612 | |
Income tax expense | | 8,331 | | 15,340 | | 18,047 | |
Net (loss) income | | $ | (26,745 | ) | $ | 21,447 | | $ | 29,565 | |
Net (loss) income per share: | | | | | | | |
Basic | | $ | (0.61 | ) | $ | 0.50 | | $ | 0.71 | |
Diluted | | $ | (0.61 | ) | $ | 0.48 | | $ | 0.69 | |
The accompanying notes are an integral part of these consolidated financial statements.
63
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
| | Common Stock | | Retained | | Deferred | | Accumulated
Other
Comprehensive
Income | | Comprehensive
Income | | Treasur | | Total
Stockholders’ | |
| | Shares | | Dollars | | Earnings | | Compensation | | (Loss) | | (Loss) | | Stock | | Equity | |
BALANCE, JANUARY 1, 2004 | | | 40,791 | | | $ | 100,448 | | $ | 97,936 | | | $ | (56 | ) | | | $ | (1,317 | ) | | | | | | $ | (20,876 | ) | | $ | 176,135 | | |
Common stock issued under replacement option program | | | 71 | | | 4,696 | | — | | | — | | | | — | | | | | | | (5,389 | ) | | (693 | ) | |
Issuance of common stock | | | 1,305 | | | 13,363 | | — | | | — | | | | — | | | | | | | — | | | 13,363 | | |
Changes in deferred compensation | | | 14 | | | 335 | | — | | | (67 | ) | | | — | | | | | | | — | | | 268 | | |
Stock option tax benefits | | | — | | | 3,078 | | — | | | — | | | | — | | | | | | | — | | | 3,078 | | |
Shares issued in connection with acquisition | | | 194 | | | 3,317 | | — | | | — | | | | — | | | | | | | — | | | 3,317 | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | 29,565 | | | — | | | | — | | | | $ | 29,565 | | | — | | | 29,565 | | |
Currency translation adjustment | | | — | | | — | | — | | | — | | | | 2,556 | | | | 2,556 | | | — | | | 2,556 | | |
Comprehensive income | | | — | | | — | | — | | | — | | | | — | | | | $ | 32,121 | | | — | | | — | | |
BALANCE, DECEMBER 31, 2004 | | | 42,375 | | | 125,237 | | 127,501 | | | (123 | ) | | | 1,239 | | | | | | | (26,265 | ) | | 227,589 | | |
Common stock issued under replacement option program | | | 28 | | | 4,798 | | — | | | — | | | | — | | | | | | | (5,472 | ) | | (674 | ) | |
Issuance of common stock | | | 1,086 | | | 12,480 | | — | | | — | | | | — | | | | | | | — | | | 12,480 | | |
Changes in deferred compensation | | | 3 | | | 4,736 | | — | | | (4,296 | ) | | | — | | | | | | | — | | | 440 | | |
Stock option tax benefits | | | — | | | 2,696 | | — | | | — | | | | — | | | | | | | — | | | 2,696 | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | 21,447 | | | — | | | | — | | | | $ | 21,447 | | | — | | | 21,447 | | |
Currency translation adjustment | | | — | | | — | | — | | | — | | | | (2,563 | ) | | | (2,563 | ) | | — | | | (2,563 | ) | |
Comprehensive income | | | — | | | — | | — | | | — | | | | — | | | | $ | 18,884 | | | — | | | — | | |
BALANCE, DECEMBER 31, 2005 | | | 43,492 | | | 149,947 | | 148,948 | | | (4,419 | ) | | | (1,324 | ) | | | | | | (31,737 | ) | | 261,415 | | |
Issuance of common stock | | | 479 | | | 3,169 | | — | | | — | | | | — | | | | | | | — | | | 3,169 | | |
Changes in deferred compensation | | | — | | | (4,419 | ) | — | | | 4,419 | | | | — | | | | | | | — | | | — | | |
Stock-based compensation expense | | | — | | | 7,499 | | — | | | — | | | | — | | | | | | | — | | | 7,499 | | |
Stock option tax benefits | | | — | | | 415 | | — | | | — | | | | — | | | | | | | — | | | 415 | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | (26,745 | ) | | — | | | | — | | | | $ | (26,745 | ) | | — | | | (26,745 | ) | |
Currency translation adjustment | | | — | | | — | | — | | | — | | | | 2,307 | | | | 2,307 | | | — | | | 2,307 | | |
Comprehensive income | | | — | | | — | | — | | | — | | | | — | | | | $ | (24,438 | ) | | — | | | — | | |
BALANCE, DECEMBER 31, 2006 | | | 43,971 | | | $ | 156,611 | | $ | 122,203 | | | $ | — | | | | $ | 983 | | | | | | | $ | (31,737 | ) | | $ | 248,060 | | |
The accompanying notes are an integral part of these consolidated financial statements.
64
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | 2006 | | 2005 | | 2004 | |
Operating activities: | | | | | | | |
Net (loss) income | | $ | (26,745) | | $ | 21,447 | | $ | 29,565 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | | 26,305 | | 24,161 | | 21,589 | |
Asset impairment | | 4,454 | | 1,030 | | — | |
Stock-based compensation | | 7,499 | | 440 | | 268 | |
Deferred income taxes | | (1,917 | ) | (5,260 | ) | 2,699 | |
Excess tax benefits from stock-based awards | | (444 | ) | — | | — | |
Changes in assets and liabilities, net of effects from acquisitions: | | | | | | | |
Decrease (increase) in accounts receivable | | 11,483 | | (6,785 | ) | 7,472 | |
(Increase) decrease in prepaid expenses and other current assets | | (1,783 | ) | (1,321 | ) | 585 | |
(Increase) decrease in other assets | | (465 | ) | (1,239 | ) | 622 | |
Increase (decrease) in accounts payable and accrued expenses | | 5,507 | | 3,467 | | (6,389 | ) |
Increase in accrued restructuring and other charges | | 11,848 | | 5,641 | | — | |
Decrease in purchase accounting restructuring accrual | | (3,996 | ) | (2,523 | ) | (6,612 | ) |
(Decrease) increase in income taxes payable | | 6,627 | | 131 | | 8,518 | |
(Decrease) increase in deferred revenue | | (2,062 | ) | 5,272 | | (4,076 | ) |
Increase (decrease) in other non-current liabilities | | 217 | | (335 | ) | 1,451 | |
Net cash provided by operating activities | | 36,528 | | 44,126 | | 55,692 | |
Investing activities: | | | | | | | |
Proceeds from sale-leaseback of furniture and equipment | | — | | — | | 2,162 | |
Acquisitions, net of cash acquired | | (5,731 | ) | (21,813 | ) | (8,375 | ) |
Purchases of property and equipment | | (17,342 | ) | (24,519 | ) | (19,881 | ) |
Additions to capitalized software development costs | | (4,579 | ) | (4,864 | ) | (5,886 | ) |
Other, net | | — | | — | | (100 | ) |
Net cash used in investing activities | | (27,652 | ) | (51,196 | ) | (32,080 | ) |
Financing activities: | | | | | | | |
Repayments of long-term debt | | — | | — | | (3,344 | ) |
Repayments of acquired loan | | — | | — | | (624 | ) |
Payments on capital lease obligations | | (1,642 | ) | (1,744 | ) | (1,147 | ) |
Excess tax benefits from stock-based awards | | 444 | | — | | — | |
Issuance of common stock | | 3,503 | | 11,806 | | 13,363 | |
Net cash provided by financing activities | | 2,305 | | 10,062 | | 8,248 | |
Effect of foreign exchange rate changes on cash | | 1,029 | | (867 | ) | 1,755 | |
Net increase in cash and cash equivalents | | 12,210 | | 2,125 | | 33,615 | |
Cash and cash equivalents, beginning of year | | 66,145 | | 64,020 | | 30,405 | |
Cash and cash equivalents, end of period | | $ | 78,355 | | $ | 66,145 | | $ | 64,020 | |
The accompanying notes are an integral part of these consolidated financial statements.
65
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Dendrite International, Inc. and its subsidiaries (the “Company”) provide a broad array of solutions worldwide focused primarily on improving the sales and marketing productivity of the pharmaceutical and other life sciences industries. The Company’s solutions span the pharmaceutical commercialization process including clinical development, brand marketing, customer management, sales effectiveness and compliance management.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Dendrite International, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation related to the classification of purchased capitalized software, which is now included in intangible assets, net.
Foreign Currency
The functional currencies of the Company’s foreign operations have been deemed to be the local country’s currency. As a result, the assets and liabilities of the Company’s wholly-owned international subsidiaries are translated at their respective year-end exchange rates and revenues and expenses are translated at average currency exchange rates for the period. The resulting balance sheet translations adjustments are included in “Accumulated other comprehensive income (loss)” and are reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are immaterial in each year. To date, the Company has not engaged in any foreign currency hedging activities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The Company believes its critical accounting policies to be revenue recognition, acquisitions and related accruals, impairments, income taxes, capitalized software development costs and stock based compensation.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Revenue Recognition
The Company provides a comprehensive range of Sales Force Effectiveness (“SFE”) software products, technology support services and various marketing, compliance and clinical services to the pharmaceutical industry. New customers that purchase software products from the Company generally enter into a license contract and a services contract with the Company. The Company’s software licenses typically provide for a perpetual right to use the Company’s software and are contracted for within a license agreement that provides for license fees billable upon contract execution. When purchasing new software, customers often also purchase implementation services, which are essential to the functionality of the Company’s software. These services are contracted for in a services contract, which generally provides for payment terms over the course of the implementation project. This contract also covers the specific ongoing support services that may have been purchased by the customer, which typically begin after the completion of the software implementation. Certain customers who have not purchased software from the Company will also enter into services contracts, and the Company will provide services that may include technology solutions services and/or marketing, compliance or clinical services.
Many of the Company’s arrangements include multiple deliverables. In the absence of higher-level specific authoritative guidance, the Company determines the units of accounting for multiple element arrangements in accordance with Emerging Issues Task Force Issue (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Specifically, the Company will consider a delivered item as a separate unit of accounting if it has value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and, if the arrangement includes a general right of return relative to the delivered element, delivery or performance of the undelivered element is considered probable and is substantially within the Company’s control.
Revenues for the Company’s software licenses and related implementation fees are considered one accounting unit, and are recognized using the percentage-of-completion method as prescribed by AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” (“SOP 81-1”) and pursuant to paragraph 7 of AICPA Statement of Position 97-2 (“SOP 97-2”). The Company has not historically deferred performance costs related to its software and implementation arrangements, as revenues are generally recognized as the associated costs are incurred. The Company uses the input measure of labor incurred to monitor progress-to-completion on its software and implementation projects. Under the terms of its contracts with customers, the Company does not have the right to invoice for claims relating to overruns in its fixed fee implementation projects. To the extent that a customer submits a properly authorized change of scope document, the Company will add the budgeted revenues and costs to its existing percentage-of-completion model, as a change in estimate, for that particular project. The expected gross margin for changes of scope generally approximates that for the overall project, and therefore project revenue recognition has not historically been impacted significantly by the addition of change of scope work orders. The Company evaluates its contract accounting projects for expected losses. If it becomes evident that a project will result in a loss, the Company will provide for this loss in the period that such loss becomes evident. Contract profitability is measured at the gross margin level, with no allocation of overhead or other inclusion of indirect costs.
The remaining service elements within the Company’s arrangements, which are not related to software implementation, are evaluated using the separation criteria of EITF 00-21. This typically results in separate accounting units for initial training and hardware services that often occur during the roll out of
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
the configured software to end users. Revenues for these services are recognized as delivered, provided all other criteria for revenue recognition have been met. In addition to the initial training and hardware services, the Company also performs various ongoing services such as integrated support center, data center, asset management, production services and operations management. These ongoing services are selected and negotiated individually by customers based upon their business needs and are generally recognized as delivered over the respective contractual term. Revenues related to the Company’s distribution and marketing services are generally recognized as items are shipped or service obligations have been fulfilled. The Company has offered limited price protection under services agreements. Any right to a future refund from such price protection is entirely within the Company’s control. It is estimated that the likelihood of a future payout due to price protection is remote.
From time-to-time, the Company’s customers will expand their field sales force, and consequently, purchase additional user licenses from the Company. The customer generally has the ability to create its own copies of the software for the new users, and therefore, there is no need for the Company to deliver anything further. Based upon this, the related revenue is recognized at the time of the customer order, in accordance with SOP 97-2. The Company has historically utilizes distributors to resell certain of its software products internationally, on a limited basis. Revenues related to sales to distributors are recognized as the licenses are sold through to end-users.
The Company utilizes vendor specific objective evidence of fair value (“VSOE”) to allocate the portion of the arrangement fee that relates to post-contract customer support (“PCS”). The PCS-related services offered consist only of software maintenance and warranty services. The Company’s maintenance services consist primarily of the correction of errors in the software and the delivery of unspecified upgrades and enhancements, on a when-and-if available basis, over the maintenance term. The Company establishes VSOE of fair value for PCS using the maintenance renewal rate that is present in each of its services contracts. The Company’s maintenance is offered at a fee that is based upon a percentage of license fees. The PCS element of the Company’s arrangements is accounted for under SOP 97-2.
The Company will sometimes provide for a warranty period within its arrangements. The services provided during the warranty period are the same as those provided under software maintenance. These activities include correcting errors or bugs in the software, ensuring that the software complies with defined specifications and providing unspecified upgrades or enhancements on a when-and-if-available basis, during the term of the warranty period. The warranties included in the Company’s arrangements generally coincide with the length of the projected software implementation period, typically 180 days from the execution of the license contract and always end on a specific date. The Company allocates a portion of the related license fee revenues to the value of services during the warranty period and recognizes such amounts ratably over the warranty period. VSOE for the Company’s warranty services is established using the maintenance renewal rate that is present in each of the Company’s services contracts.
License revenues were less than 10% of total revenues for all years presented within the consolidated statements of operations.
Accounting for Restructuring Activities
Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring liabilities in compliance with Statement of Financial Accounting Standards (“SFAS”) 112, “Employers’ Accounting for Postemployment Benefits,” and SFAS 146 “Accounting for
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Costs Associated with Exit or Disposal Activities,” resulting in the recognition of employee severance and related termination benefits for recurring arrangements when they become probable and estimable and on the accrual basis for one-time benefit arrangements. The Company records other costs associated with exit activities as they are incurred. Employee severance and termination benefit costs reflect estimates based on agreements with relevant statutory requirements or plans adopted by us. These costs are not associated with nor do they benefit continuing activities. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. The Company reviews the status of restructuring activities on a quarterly basis and, if appropriate, record changes based on updated estimates.
Shipping and Handling Fees
Shipping and handling fees billed to customers are recorded as revenue and shipping and handling costs paid to vendors are recorded as operating costs in accordance with EITF 00-01, “Accounting for Shipping and Handling Fees and Costs.” Shipping and handling fees recorded as revenues and operating costs for the year ended December 31, 2006, 2005 and 2004 were $19,984, $18,963 and $17,361, respectively.
Stock Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R) “Share Based Payment” (“SFAS 123(R)”) using the modified prospective application method, as permitted under SFAS 123(R), which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation over the respective service periods for awards expected to vest. Under this method, compensation cost in 2006 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Accordingly, prior periods amounts have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The Company recognizes the cost of all employee stock awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures.
Prior to the adoption of SFAS 123(R), the Company applied Accounting Principles Board Opinion No. 25 (“APB 25”) to account for its stock-based awards. Under APB 25, the Company generally only recorded stock-based compensation expense for restricted stock units, which amounted to $440 and $46 for the years ended December 31, 2005 and 2004. Under the provisions of APB 25, the Company was not required to recognize compensation expense for the cost of stock options issued under its equity compensation plans or of shares issued under its Employee Stock Purchase Plan (“ESPP”). With the adoption of SFAS 123(R), the Company recorded stock-based compensation expense for the cost of stock options, restricted stock units and shares issued under the ESPP (collectively, “Employee Stock-Based Awards”). Stock-based compensation expense for the year ended December 31, 2006, was $7,499. The Company has not changed its valuation model used for estimating the fair value of options granted after January 1, 2006, from the Black-Scholes option-pricing model previously used for pro forma presentation purposes.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The following table details the pro forma effect on net (loss) income and (loss) income per share had stock based-compensation expense for the Employee Stock-Based Awards been recorded for the years ended December 31, 2005 and 2004, based on the fair value method under SFAS 123:
| | For the Year Ended | |
| | December 31, | |
| | 2005 | | 2004 | |
Net income as reported | | $ | 21,447 | | $ | 29,565 | |
Add: Total stock-based expense included in reported net income, net of related tax effects | | 257 | | 26 | |
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related taxeffects | | (21,805 | ) | (21,967 | ) |
Pro forma net (loss) income | | $ | (101 | ) | $ | 7,624 | |
Basic (loss) income per share: | | | | | |
As reported | | $ | 0.50 | | $ | 0.71 | |
Pro forma | | $ | (0.00 | ) | $ | 0.18 | |
Diluted (loss) income per share: | | | | | |
As reported | | $ | 0.48 | | $ | 0.69 | |
Pro forma | | $ | (0.00 | ) | $ | 0.18 | |
For the year ended December 31, 2006, the adoption of SFAS 123(R) resulted in incremental stock-based compensation expense causing the loss before income tax expense to increase by $4,367, net loss to increase by $2,904 and basic and diluted loss per share to increase by $.07 per share. Stock-based compensation expense for the year ended December 31, 2006, of $3,132 relating to restricted stock units would have been recognized in 2006 regardless of the adoption of SFAS 123(R). In addition, in connection with the adoption of SFAS 123(R), net cash provided by operating activities decreased and net cash provided by financing activities increased for the year ended December 31, 2006 by $444 related to tax benefits from stock-based payments arrangements.
The fair value for these options were estimated at the date of grant for all periods presented using the Black-Scholes option pricing model with the following assumptions:
| | For the Year Ended
December 31, | |
| | 2006 | | 2005 | | 2004 | |
Expected dividend yield | | 0.0 | % | 0.0 | % | 0.0 | % |
Weighted-average expected stock price volatility | | 50.0 | % | 50.0 | % | 67.4 | % |
Weighted-average risk-free interest rate | | 4.8 | % | 4.1 | % | 3.2 | % |
Expected life of the option (years) | | 5.00 | | 5.25 | | 5.25 | |
The weighted-average expected stock price volatility was estimated based on historical volatility for a period equal to the stock option’s expected life, estimated on the date of grant, and calculated on a quarterly basis. The weighted-average risk-free interest rate is based on the U. S. Treasury yield curve in effect at the time of grant for the expected life of the option. The expected life (estimated period of time outstanding) of stock options granted was estimated using the historical exercise experience.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Deferred Revenues
Deferred revenues represent amounts collected from, or invoiced to, customers in excess of revenues recognized. This predominantly occurs in two situations: a) annual billings of software maintenance fees; and b) other upfront billings of fees that are recognized over time.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
For the years ended December 31, 2006, 2005 and 2004, the Company paid interest of approximately $434, $462 and $420, respectively. For the years ended December 31, 2006, 2005 and 2004, the Company paid income taxes of approximately $4,630, $13,331, and $8,864, respectively.
As of December 31, 2006 and 2005, the Company had $2,030 and $373 of property and equipment additions which had not yet been paid, respectively.
In 2006, the Company entered into a lease arrangement for a facility in Georgia with a tenant improvement allowance of $2,100. As a result, we have recorded additional leasehold improvements of $2,100 which will be amortized over the life of the lease arrangement and deferred rent of $2,100 which will reduce rent expense over the life of the lease arrangement.
In 2005, pursuant to the terms of its replacement option program, the Company accepted 319,848 shares of its common stock from an executive, in lieu of cash, for the exercise of approximately 347,957 stock options. The shares delivered were valued at approximately $5,432 on the dates of exercise, which value was equal to the number of options exercised multiplied by the exercise price.
In 2005, the Company accepted 2,707 shares of its common stock from an executive, in lieu of cash, for the exercise of approximately 3,000 stock options. The shares delivered were valued at approximately $40 on the dates of exercise, which value was equal to the exercise price of the options exercised and applicable tax withholdings.
In 2004, the Company entered into new capital lease arrangements for computer hardware and other equipment of approximately $2,400 expiring in November 2007.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The following table lists assets (other than cash) that were acquired and liabilities that were assumed in connection with the acquisitions in 2006, 2005 and 2004 as discussed in Note 2:
| | 2006 | | 2005 | | 2004 | |
Assets Acquired | | | | | | | |
Accounts receivable | | $ | 19 | | $ | 4,351 | | $ | 2,867 | |
Other current assets | | 4 | | 378 | | 1,901 | |
Property and equipment | | 37 | | 451 | | 736 | |
Other assets | | — | | 1,287 | | 458 | |
Intangibles | | 3,329 | | 8,900 | | 5,444 | |
Goodwill | | 4,021 | | 11,164 | | 10,112 | |
Total assets acquired | | 7,410 | | 26,531 | | 21,518 | |
Liabilities Assumed | | | | | | | |
Restructuring reserve—current | | — | | — | | (322 | ) |
Deferred revenue | | — | | (618 | ) | (709 | ) |
Other current liabilities | | (1,679 | ) | (2,102 | ) | (7,833 | ) |
Restructuring reserve—long-term | | — | | — | | — | |
Other liabilities | | — | | (1,998 | ) | — | |
Total liabilities assumed | | (1,679 | ) | (4,718 | ) | (8,864 | ) |
Net assets acquired, net of cash | | 5,731 | | 21,813 | | 12,654 | |
Unpaid purchase price and professional fees incurred in connection with the acquisitions | | — | | — | | (962 | ) |
Value of stock options issued | | — | | — | | (3,317 | ) |
Cash paid, net of cash acquired | | $ | 5,731 | | $ | 21,813 | | $ | 8,375 | |
Receivables and Allowance for Doubtful Accounts
Receivables consist of amounts billed and currently due to the Company from normal business activities and unbilled costs primarily related to revenues on long-term contracts that have been recognized for accounting purposes, but not yet billed to customers. The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the estimated future undiscounted cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the long-lived asset. If the estimated future undiscounted cash flows demonstrate that recoverability is not probable, an impairment loss would be recognized. An impairment loss would be calculated based on the excess carrying amount of the long-lived asset over the long-lived asset’s fair value. As of December 31, 2006 and 2005, there was no evidence of impairment.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Property and Equipment
Property and equipment, including software developed for internal use, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis. Maintenance, repairs and minor replacements that do not extend the life or functionality of the related assets are charged to expense as incurred; renewals and betterments are capitalized.
Capitalized Software Development Costs
In accordance with SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products for sale or license. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or a detailed working program design, to the point in time that the product is available for general release to customers. Capitalized software costs are amortized on a product-by-product basis. Capitalized software amortization is the greater of the ratio of current revenues for a product to the total of current and anticipated future gross revenues for that product or on a straight-line basis over the remaining estimated economic life of the product, including the current reporting period (not to exceed four years). Amortization of capitalized software begins with the general release of a product to customers. Research and development costs incurred prior to establishing technological feasibility and costs incurred subsequent to general product release to customers are charged to expense as incurred. The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. As of December 31, 2006, management believes that no revisions to the remaining useful lives or write-down of capitalized development costs are required. The amount of capitalized software development related to the development of new software products or the enhancement of existing software products from sale of licenses as of December 31, 2006 and 2005 was as follows:
| | December 31, | |
| | 2006 | | 2005 | |
Capitalized software development costs | | $ | 36,050 | | $ | 31,471 | |
Less: Accumulated amortization | | (26,098 | ) | (21,130 | ) |
Capitalized software development costs, net | | $ | 9,952 | | $ | 10,341 | |
Amortization of capitalized software development costs for the years ended December 31, 2006, 2005 and 2004 was $4,968, $3,693 and $2,842, respectively, and is included in operating costs in the accompanying consolidated statements of operations.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
In connection with certain business acquisitions, the Company purchased software that was determined to have reached technological feasibility. The amount of purchased capitalized software remaining as of December 31, 2006 and 2005 was as follows:
| | December 31, | |
| | 2006 | | 2005 | |
Capitalized software development costs | | $ | 2,441 | | $ | 2,441 | |
Less: Accumulated amortization | | (2,441 | ) | (1,996 | ) |
Capitalized software development costs, net | | $ | — | | $ | 445 | |
Amortization expense of purchased capitalized software for the years ended December 31, 2006, 2005 and 2004 was $445, $611 and $610, respectively, and is included in amortization of acquired intangible assets in the accompanying consolidated statements of operations.
Impairment of Goodwill and Intangible Assets
The Company assesses the recoverability of the carrying value of its goodwill and other intangible assets with indefinite useful lives annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Recoverability of goodwill is measured at the reporting unit level based on a two-step approach. First, the carrying amount of the reporting unit is compared to the fair value as estimated by the future net discounted cash flows expected to be generated by the reporting unit. To the extent that the carrying value of the reporting unit exceeds the fair value of the reporting unit, a second step is performed, wherein the reporting unit’s assets and liabilities are fair valued. To the extent that the reporting unit’s carrying value of goodwill exceeds its implied fair value of goodwill, impairment exists and must be recognized. The implied fair value of goodwill is calculated as the fair value of the reporting unit in excess of the fair value of all non-goodwill assets and liabilities allocated to the reporting unit. The estimate of fair value may be determined as the amount at which the asset could be bought or sold in a current transaction between willing parties. If this information is not available, fair value is determined based on the best information available in the circumstances. This frequently involves the use of a valuation technique including the present value of expected future cash flows, discounted at a rate commensurate with the risk involved, or other acceptable valuation techniques.
Recoverability of other intangible assets with indefinite useful lives is measured by a comparison of the carrying amount of the intangible assets to the fair value of the respective intangible assets. Any excess of the carrying value of the intangible assets over the fair value of the intangible assets is recognized as an impairment loss. The estimate of fair value is determined similar to that for goodwill outlined above.
The Company assesses the recoverability of intangible assets with finite lives in the same manner as for long-lived assets. See “Impairment of Long-Lived Assets”.
The Company conducts its annual impairment testing of goodwill and indefinite—lived assets as of October 1 each year. Based on the impairment tests performed, there was no impairment of goodwill or indefinite—lived assets in 2006, 2005 or 2004; however, there can be no assurance that future goodwill or indefinite—lived assets impairment tests will not result in a charge to earnings.
Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to thirteen years.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Guarantees
The Company provides certain indemnification provisions within its software licensing agreements, to protect its customers from any liabilities or damages resulting from a claim of misappropriation or infringement by third parties relating to its software. These provisions continue in perpetuity, along with the Company’s software licensing agreements. The Company has never incurred a liability relating to one of these indemnification provisions in the past and management believes that the likelihood of any future payout relating to these provisions is remote. Therefore, the Company has not recorded a liability during any period for these indemnification provisions.
Deferred Rent
The Company has leases for its facilities, which include escalation clauses and concessions as well as tenant improvement allowances. In accordance with accounting principles generally accepted in the United States of America, the Company recognizes rental expense, including tenant improvement allowances, on a straight-line basis over the life of the leases, irrespective of the timing of payments to or from the lessor.
Asset Retirement Obligations
The Company accrues for asset retirement obligations over the period in which the obligations are incurred. These costs consist primarily of retro-fit costs related to leasehold improvements required at lease termination and are accrued at the estimated fair value. When the related liability is initially recorded, the Company capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company recognizes a gain or loss for any difference between the settlement amount and the liability recorded. As of December 31, 2006 and 2005, the Company has approximately $607 and $514 accrued for asset retirement obligations, respectively.
Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” (“SFAS 109”) Under SFAS 109, deferred tax assets and liabilities reflect the differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. In addition, in accordance with SFAS 109, a valuation allowance is required to be recognized if it is not believed to be “more likely than not” that a deferred tax asset will be realized.
At December 31, 2006 and 2005, there were approximately $17,410 and $21,383, respectively, of undistributed earnings of non-U.S. subsidiaries that have not been taxed in the United States and are considered to be permanently reinvested indefinitely. If such earnings were remitted to the Company, the applicable United States federal income and foreign withholding taxes may be wholly or partially offset by foreign tax credits.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and trade accounts receivable. The Company invests its excess cash with large banks
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
which may at times exceed the Federal Deposit Insurance Corporation of $100. The Company has not experienced any losses to date on the invested cash. The Company’s customer base principally comprises companies within the pharmaceutical industry. As a result, the Company derives its revenues from a limited number of large pharmaceutical companies. As of December 31, 2006, approximately 8% and 11% of our receivable balance was due from our two largest customers, respectively. As of December 31, 2005, approximately 15% and 10% of our receivables balance was due from our two largest customers, respectively. The Company monitors its customers’ financial condition and does not require collateral from its customers.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $3,567, $2,643 and $2,547 for the years ended December 31, 2006, 2005 and 2004, respectively.
Net (Loss) Income Per Share
The Company calculates net (loss) income per share pursuant to SFAS 128, “Earnings Per Share.” The following table presents the computation of basic and diluted net income per share for the years ended:
| | December 31, | |
| | 2006 | | 2005 | | 2004 | |
Basic net (loss) income per share computation: | | | | | | | |
Net (loss) income | | $ | (26,745 | ) | $ | 21,447 | | $ | 29,565 | |
Weighted-average common shares outstanding | | 43,692 | | 42,861 | | 41,503 | |
Basic net (loss) income per share | | $ | (0.61 | ) | $ | 0.50 | | $ | 0.71 | |
Diluted net (loss) income per share computation: | | | | | | | |
Net (loss) income | | $ | (26,745 | ) | $ | 21,447 | | $ | 29,565 | |
Diluted common shares outstanding: | | | | | | | |
Weighted-average common shares outstanding | | 43,692 | | 42,861 | | 41,503 | |
Impact of dilutive stock options | | — | | 1,362 | | 1,572 | |
Diluted common shares outstanding | | 43,692 | | 44,223 | | 43,075 | |
Diluted net (loss) income per share | | $ | (0.61 | ) | $ | 0.48 | | $ | 0.69 | |
For the year ended December 31, 2006, 374,000 stock options that could potentially dilute net (loss) income per share in the future are not included in the calculation of diluted net (loss) income per share as they would have been antidilutive. The difference between basic and diluted shares for the years ended December 31, 2005 and 2004 is primarily due to the assumed exercise of stock options included in the diluted earnings per share computation.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
instruments and certain other items at fair value and amends SFAS 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this Statement provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Company has not completed its assessment of SFAS 159 and the impact, if any, on the Company’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands fair value measurement disclosures. SFAS 157 does not require new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company’s analysis of the impact of this Interpretation is not yet complete.
2. ACQUISITIONS
Opus
On September 1, 2006, the Company completed the acquisition of substantially all the assets of Opus Health LLC (“Opus”). Based in Long Island, New York, Opus provided direct-to-patient persistence solutions. Opus’ results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Opus revenues are presented within the marketing solutions segment.
The aggregate purchase price of Opus was $7,378, including $379 of legal and professional fees. In accordance with the purchase agreement, $2,000 of the purchase price was held in escrow as of December 31, 2006. The $2,000 held in escrow together with any additional amounts to be added to escrow, less amounts claimed against escrow, if any, is payable upon certain milestones relating to the representations, warranties and in connection with a certain patent application acquired as part of the
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
acquisition. In addition, there is $3,000 of contingent consideration based on Opus obtaining certain financial measures over the next three years and will be paid if earned. The $3,000 of contingent consideration will be accounted for as compensation expense if earned. There is an additional $1,000 of contingent consideration based on the successful outcome of a certain patent application acquired as part of the acquisition. The $1,000 of additional contingent consideration would be accounted for as additional purchase price, if earned. As of December 31, 2006, nothing had been earned or accrued for the contingent consideration. The valuation of certain intangible assets was finalized in the fourth quarter of 2006. The assets and liabilities acquired in connection with the Opus acquisition and pro forma results of operations are not deemed material to the accompanying consolidated financial statements.
The allocation of purchase price, including the net assets acquired of approximately $28, to intangible assets and goodwill acquired in connection with the Opus acquisition is as follows:
| | Weighted-Average | | | |
| | Estimated Useful | | Acquired Intangible | |
| | Life (Years) | | Asset Value | |
Intangible Assets Subject to Amortization: | | | | | | | | | |
Acquired technology | | | 5.3 | | | | $ | 1,930 | | |
Customer relationship assets | | | 7 | | | | 1,089 | | |
Trademarks | | | 10 | | | | 310 | | |
Total Intangible Assets Subject to Amortization | | | | | | | 3,329 | | |
Intangible Asset Not Subject to Amortization: | | | | | | | | | |
Goodwill | | | N/A | | | | 4,021 | | |
Total Intangible Assets | | | | | | | $ | 7,350 | | |
The goodwill and intangible assets recorded for financial statement purposes are deductible for tax purposes.
Optas
On September 12, 2005, the Company completed the acquisition of Optas. Based in Woburn, Massachusetts, Optas provided privacy-safe relationship marketing solutions for patients and physicians. Optas’ results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Optas revenues are presented within the marketing solutions segment.
The aggregate purchase price for Optas was approximately $13,188, including $349 of legal and professional fees. In accordance with the purchase agreement, approximately $1,200 of the purchase price was held in escrow as of December 31, 2006. Approximately $1,200, representing the balance of escrow, less amounts claimed against escrow, is scheduled to be released from escrow in accordance with the purchase agreement in April 2007. The valuation of certain intangibles assets was finalized in the second quarter of 2006. The assets acquired and liabilities assumed in connection with the Optas acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The allocation of purchase price, including the net assets acquired of approximately $736, to intangible assets and goodwill acquired in connection with the Optas acquisition is as follows:
| | Weighted-Average | | | |
| | Estimated Useful | | Acquired Intangible | |
| | Life (Years) | | Asset Value | |
Intangible Assets Subject to Amortization: | | | | | | | | | |
Customer relationship assets | | | 10 | | | | $ | 2,590 | | |
Acquired technology | | | 5 | | | | 1,390 | | |
Backlog | | | 0.33 | | | | 100 | | |
Trademarks | | | 2 | | | | 70 | | |
Total Intangible Assets Subject to Amortization | | | | | | | 4,150 | | |
Intangible Asset Not Subject to Amortization: | | | | | | | | | |
Goodwill | | | N/A | | | | 8,302 | | |
Total Intangible Assets | | | | | | | $ | 12,452 | | |
The goodwill and intangible assets recorded for financial statement purposes are not deductible for tax purposes.
Buzzeo
On January 4, 2005, the Company completed the acquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provided compliance, auditing, consulting and reconciliation outsourcing services to the pharmaceutical and life sciences industry. This acquisition further expanded our sample and compliance management solution offerings. Buzzeo’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Buzzeo revenues are characterized as compliance solutions within the emerging solutions segment.
The aggregate purchase price for Buzzeo was approximately $10,759, including $33 of legal and professional fees. Approximately $487 of the remaining purchase price was paid in April 2006. In accordance with the purchase agreement, $1,025 was released from escrow in the first quarter of 2006. The valuation of certain intangibles assets was finalized in the fourth quarter of 2005. The assets acquired and liabilities assumed in connection with the Buzzeo acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The allocation of purchase price, including the net assets acquired of approximately $3,606, to intangible assets and goodwill acquired in connection with the Buzzeo acquisition is as follows:
| | Weighted-Average | | | |
| | Estimated Useful | | Acquired Intangible | |
| | Life (Years) | | Asset Value | |
Intangible Assets Subject to Amortization: | | | | | | | | | |
Customer relationship assets | | | 10 | | | | $ | 4,390 | | |
Trademark | | | 7 | | | | 290 | | |
Other | | | 0.25 | | | | 70 | | |
Total Intangible Assets Subject to Amortization | | | | | | | 4,750 | | |
Intangible Asset Not Subject to Amortization: | | | | | | | | | |
Goodwill | | | N/A | | | | 2,403 | | |
Total Intangible Assets | | | | | | | $ | 7,153 | | |
The goodwill and intangible assets recorded for financial statement purposes are deductible for tax purposes.
Schwarzeck
On July 20, 2004, the Company completed the acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”). Schwarzeck was a provider of physician databases, direct marketing services and sample fulfillment services to pharmaceutical companies in Germany. This acquisition accelerated the Company’s expansion in Europe and increased its integrated marketing solutions and services to the German pharmaceutical industry. In connection with the acquisition, the Company restructured the combined operations by eliminating certain former Schwarzeck positions. Schwarzeck’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. The Company has allocated the entire purchase price of approximately $800 to purchased database. The purchased database asset recorded for financial statement purposes is not deductible for tax purposes. The valuation of certain intangibles assets was finalized in the second quarter of 2005. The assets acquired and liabilities assumed in connection with the Schwarzeck acquisition, the aggregate purchase price and pro forma results of operations are not deemed material to the consolidated financial statements.
MDM
On April 6, 2004, the Company completed the acquisition of the capital stock of the Medical Data Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.
The aggregate purchase price for MDM was approximately $9,290 and consisted of approximately $5,700 in cash payments, approximately $3,320 in restricted stock and approximately $270 of legal and professional fees. The valuation of certain intangible assets was finalized in the fourth quarter of 2004. The
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
assets acquired and liabilities assumed in connection with the MDM acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
The allocation of purchase price, including the net assets acquired of approximately $370, to intangible assets acquired in connection with the MDM acquisition is as follows:
| | Weighted-Average
Estimated Useful
Life (Years) | | Acquired Intangible
Asset Value | |
Intangible Assets Subject to Amortization: | | | | | | | | | |
Purchased database | | | 3 | | | | $ | 1,700 | | |
Customer relationship assets | | | 7 | | | | 690 | | |
Other | | | 4 | | | | 240 | | |
Total Intangible Assets Subject to Amortization | | | | | | | 2,630 | | |
Intangible Asset Not Subject to Amortization: | | | | | | | | | |
Goodwill | | | N/A | | | | 6,283 | | |
Total Intangible Assets | | | | | | | $ | 8,913 | | |
The goodwill and intangible assets recorded for financial statement purposes are not deductible for tax purposes.
Uto Brain
On January 5, 2004, the Company completed its acquisition of the capital stock of Uto Brain Co., Ltd. (“Uto Brain”). Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceutical companies with data, analytics, publishing and advisory services. The combining of resources of Uto Brain with the existing resources of Dendrite created comprehensive information, software and services company dedicated to the Japanese pharmaceutical industry and further enhanced Dendrite’s ability to provide solutions to enhance sales, marketing and clinical functions of pharmaceutical companies in the Japanese market. Uto Brain’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.
The aggregate purchase price for Uto Brain was approximately $4,900 (498,270 Yen), including approximately $100 of legal and professional fees. The Company paid approximately $1,400 and $3,400 of the purchase price during the years ended December 31, 2005 and 2004, respectively. In addition, the Company assumed approximately $3,800 in bank debt and an acquired loan, all of which were repaid during the year ended December 31, 2004. The valuation of certain intangible assets was finalized in the fourth quarter of 2004. The assets acquired and liabilities assumed in connection with the Uto Brain acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The allocation of purchase price, including net liabilities acquired of approximately $1,100, to intangible assets acquired in connection with the Uto Brain acquisition is as follows:
| | Weighted Average
Estimated Useful
Life (Years) | | Acquired Intangible
Asset Value | |
Intangible Assets Subject to Amortization: | | | | | | | | | |
Customer relationship assets | | | 10 | | | | $ | 1,870 | | |
Trademarks | | | 10 | | | | 150 | | |
Total Intangible Assets Subject to Amortization | | | | | | | 2,020 | | |
Intangible Asset Not Subject to Amortization: | | | | | | | | | |
Goodwill | | | N/A | | | | 3,912 | | |
Total Intangible Assets | | | | | | | $ | 5,932 | | |
The goodwill and intangible assets recorded for financial statement purposes are not deductible for tax purposes.
3. PURCHASE ACCOUNTING RESTRUCTURING ACCRUAL
In December 2006, the Company amended the termination date of the lease agreement of one of the remaining Synavant facilities to December 31, 2006 and paid the landlord a single lump sum payment of $4,500 in lieu of the remaining payment obligations under the lease agreement. As a result, we applied a portion of the payment previously accrued for to the purchase accounting and the restructuring and other charges accruals in the amount of $2,651 and $310, respectively, and recorded an additional $1,539 restructuring charge related to the lease buyout.
In connection with the June 2003 acquisition of Synavant, the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. The Company anticipates that the remaining accrued restructuring balance related to the facility exit costs will be paid over the life of the facility lease, ending in August 2007.
In connection with the September 2002 acquisition of Software Associates International (“SAI”), the Company developed an exit plan to close the facility in Mt. Arlington, New Jersey, and relocated the operations to the Company’s other facilities in New Jersey. The Company accrued, as part of the acquisition costs, the costs to terminate certain leases amounting to $3,252. The Company closed the facility during the first quarter of 2003.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The activity related to purchase accounting restructuring accruals for the years ended December 31, 2006 and 2005 is summarized in the tables below:
| | Purchase
Accounting
Restructuring
Accrual as of
December 31, 2005 | | 2006
Adjustments to
Goodwill | | 2006
Payments | | Purchase
Accounting
Restructuring
Accrual as of
December 31, 2006 | |
Synavant | | | | | | | | | | | | | | | | | |
Facility exit costs | | | $ | 4,289 | | | | $ | — | | | | $ | (3,938 | ) | | | $ | 351 | | |
SAI | | | | | | | | | | | | | | | | | |
Lease termination costs | | | 321 | | | | (66 | ) | | | (255 | ) | | | — | | |
Total | | | $ | 4,610 | | | | $(66 | ) | | | $ | (4,193 | ) | | | $ | 351 | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Purchase
Accounting
Restructuring
Accrual as of
December 31, 2004 | | 2005
Adjustments to
Goodwill | | 2005
Payments | | Currency
Translation
Adjustments | | Purchase
Accounting
Restructuring
Accrual as of
December 31, 2005 | |
Synavant | | | | | | | | | | | | | | | | | | | | | |
Termination payments to employees | | | $ | 23 | | | | $ | — | | | | $ | (23 | ) | | | $ | — | | | | $ | — | | |
Facility exit costs | | | 5,926 | | | | — | | | | (1,637 | ) | | | — | | | | 4,289 | | |
Total Synavant | | | 5,949 | | | | — | | | | (1,660 | ) | | | — | | | | 4,289 | | |
SAI | | | | | | | | | | | | | | | | | | | | | |
Lease termination costs | | | 947 | | | | — | | | | (626 | ) | | | — | | | | 321 | | |
Schwarzeck | | | | | | | | | | | | | | | | | | | | | |
Termination payments to employees | | | 247 | | | | — | | | | (233 | ) | | | (14 | ) | | | — | | |
Buzzeo | | | | | | | | | | | | | | | | | | | | | |
Termination payments to employees | | | — | | | | 4 | | | | (4 | ) | | | — | | | | — | | |
Total | | | $ | 7,143 | | | | $ | 4 | | | | $ | (2,523 | ) | | | $ | (14 | ) | | | $ | 4,610 | | |
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
4. PROPERTY AND EQUIPMENT
Property and equipment is as follows:
| | Estimated Useful Life | | December 31, | |
| | (Years) | | 2006 | | 2005 | |
Land | | n/a | | $ | 121 | | $ | 2,338 | |
Building and building improvements | | 40 | | 841 | | 11,813 | |
Computer hardware, software and other equipment | | 2 - 10 | | 73,407 | | 59,589 | |
Furniture and fixtures | | 3 - 5 | | 9,649 | | 8,584 | |
Leasehold improvements | | Shorter of estimated
useful life or lease term | | 29,615 | | 26,111 | |
Capital lease furniture and equipment | | 2 - 10 | | 5,137 | | 5,176 | |
| | | | 118,770 | | 113,611 | |
Less: Accumulated depreciation and amortization | | | | (75,287 | ) | (61,019 | ) |
| | | | $ | 43,483 | | $ | 52,592 | |
Depreciation expense, including amortization expense of capital leases, for the years ended December 31, 2006, 2005 and 2004 was $17,196, $16,037 and $13,791, respectively
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
5. GOODWILL AND INTANGIBLE ASSETS
The total gross carrying amount and accumulated amortization for goodwill and intangible assets are as follows:
| | As of December 31, 2006 | | As of December 31, 2005 | |
| | | | Accumulated | | | | | | Accumulated | | | |
| | Gross | | Amortization | | Net | | Gross | | Amortization | | Net | |
Intangible Assets Subject To Amortization: | | | | | | | | | | | | | | | | | |
Purchased capitalized software | | $ | 2,441 | | | $ | (2,441 | ) | | $ | — | | $ | 2,441 | | | $ | (1,996 | ) | | $ | 445 | |
Capitalized software development costs | | 36,050 | | | (26,098 | ) | | 9,952 | | 31,471 | | | (21,130 | ) | | 10,341 | |
Customer relationship assets | | 17,320 | | | (5,425 | ) | | 11,895 | | 16,397 | | | (3,696 | ) | | 12,701 | |
Backlog | | — | | | — | | | — | | 2,500 | | | (2,491 | ) | | 9 | |
Non-compete covenants | | — | | | — | | | — | | 3,718 | | | (3,464 | ) | | 254 | |
Purchased database | | 5,185 | | | (3,186 | ) | | 1,999 | | 5,151 | | | (2,082 | ) | | 3,069 | |
Acquired technology | | 3,320 | | | (507 | ) | | 2,813 | | 1,390 | | | (84 | ) | | 1,306 | |
Trademarks | | 808 | | | (182 | ) | | 626 | | 500 | | | (82 | ) | | 418 | |
Other intangibles | | 474 | | | (385 | ) | | 89 | | 474 | | | (325 | ) | | 149 | |
Total | | 65,598 | | | (38,224 | ) | | 27,374 | | 64,042 | | | (35,350 | ) | | 28,692 | |
Intangible Assets Not Subject to Amortization: | | | | | | | | | | | | | | | | | |
Goodwill | | 95,624 | | | — | | | 95,624 | | 90,440 | | | — | | | 90,440 | |
Trademarks | | 6,732 | | | — | | | 6,732 | | 6,732 | | | — | | | 6,732 | |
Total | | 102,356 | | | — | | | 102,356 | | 97,172 | | | — | | | 97,172 | |
Total Goodwill and Intangible Assets | | $ | 167,954 | | | $ | (38,224 | ) | | $ | 129,730 | | $ | 161,214 | | | $ | (35,350 | ) | | $ | 125,864 | |
The changes in the carrying amount of intangible assets not subject to amortization for the years ended December 31, 2006 and 2005 are as follows:
| | | | Acquisitions / | | | | | |
| | | | Purchase | | Currency | | | |
| | Balance as of | | Accounting | | Translation | | Balance as of | |
| | December 31, 2005 | | Adjustments | | Adjustments | | December 31, 2006 | |
Goodwill | | | $ | 90,440 | | | | $ | 5,228 | | | | $ | (44 | ) | | | $ | 95,624 | | |
Trademarks | | | 6,732 | | | | — | | | | — | | | | 6,732 | | |
Total | | | $ | 97,172 | | | | $ | 5,228 | | | | $ | (44 | ) | | | $ | 102,356 | | |
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
| | Balance as of
December 31, 2004 | | Acquisitions /
Purchase
Accounting
Adjustments | | Currency
Translation
Adjustments | | Balance as of
December 31, 2005 | |
Goodwill | | | $ | 80,963 | | | | $ | 9,919 | | | | $ | (442 | ) | | | $ | 90,440 | | |
Trademarks | | | 6,732 | | | | — | | | | — | | | | 6,732 | | |
Total | | | $ | 87,695 | | | | $ | 9,919 | | | | $ | (442 | ) | | | $ | 97,172 | | |
The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 for each business segment are as follows:
| | Sales | | Marketing | | Emerging | | | |
| | Solutions | | Solutions | | Solutions | | Total | |
Balance as of December 31, 2004 | | | $ | 51,900 | | | | $ | 22,440 | | | | $ | 6,623 | | | $ | 80,963 | |
Acquisition of Buzzeo | | | — | | | | — | | | | 2,548 | | | 2,548 | |
Acquisition of Optas | | | — | | | | 8,616 | | | | — | | | 8,616 | |
Acquisition of Synavant—adjustments | | | (1,247 | ) | | | — | | | | — | | | (1,247 | ) |
Exchange rate changes | | | — | | | | (440 | ) | | | — | | | (440 | ) |
Balance as of December 31, 2005 | | | 50,653 | | | | 30,616 | | | | 9,171 | | | 90,440 | |
Acquisition of Buzzeo—adjustments | | | — | | | | — | | | | (145 | ) | | (145 | ) |
Acquisition of Optas—adjustments | | | — | | | | (314 | ) | | | — | | | (314 | ) |
Acquisition of Opus | | | — | | | | 4,021 | | | | — | | | 4,021 | |
Acquisition of SAI—adjustment | | | (109 | ) | | | — | | | | — | | | (109 | ) |
Acquisition of Synavant—adjustments | | | 994 | | | | 604 | | | | 177 | | | 1,775 | |
Exchange rate changes | | | — | | | | (44 | ) | | | — | | | (44 | ) |
Balance as of December 31, 2006 | | | $ | 51,538 | | | | $ | 34,883 | | | | $ | 9,203 | | | $ | 95,624 | |
During the year ended December 31, 2006, the Company increased goodwill by $4,021 as a result of the acquisition of Opus (see Note 2). The $1,207 of adjustments recorded during the year ended December 31, 2006, relate to Synavant, Software Associates International (“SAI”), and Buzzeo, consist primarily of the resolution of uncertainties and the recording of exposure related to pre-acquisition tax uncertainties.
During the year ended December 31, 2005, the Company increased goodwill by $11,164 as a result of the acquisitions of Buzzeo and Optas (see Note 2). The $1,247 of adjustments recorded during the year ended December 31, 2005, related to Synavant, consist primarily of the reversals of certain pre-acquisition tax valuation allowances and resolution of uncertainties.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The following table reconciles net intangible assets subject to amortization for the period from December 31, 2005 to December 31, 2006:
| | Net Intangibles | | 2006 Year-to-Date Activity | | Net Intangibles | |
| | as of | | | | | | Translation | | as of | |
| | December 31, 2005 | | Additions | | Amortization | | and Other | | December 31, 2006 | |
Purchased capitalized software | | | $ | 445 | | | | $ | — | | | | $ | (445 | ) | | | $ | — | | | | $ | — | | |
Capitalized software development costs | | | 10,341 | | | | 4,579 | | | | (4,968 | ) | | | — | | | | 9,952 | | |
Customer relationship assets | | | 12,701 | | | | 1,089 | | | | (1,729 | ) | | | (166 | ) | | | 11,895 | | |
Backlog | | | 9 | | | | — | | | | (9 | ) | | | — | | | | — | | |
Non-compete covenants | | | 254 | | | | — | | | | (271 | ) | | | 17 | | | | — | | |
Purchased database | | | 3,069 | | | | — | | | | (1,104 | ) | | | 34 | | | | 1,999 | | |
Acquired technology | | | 1,306 | | | | 1,930 | | | | (423 | ) | | | — | | | | 2,813 | | |
Trademarks | | | 418 | | | | 310 | | | | (100 | ) | | | (2 | ) | | | 626 | | |
Other intangibles | | | 149 | | | | — | | | | (60 | ) | | | — | | | | 89 | | |
Total | | | $ | 28,692 | | | | $ | 7,908 | | | | $ | (9,109 | ) | | | $ | (117 | ) | | | $ | 27,374 | | |
Amortization expense related to intangible assets, including internally developed capitalized software costs, for the years ended December 31, 2006, 2005 and 2004 was $9,109, $8,124 and $7,798, respectively. Aggregate future annual amortization expense of intangible assets is estimated to be:
Year Ending December 31, | | | |
2007 | | $ | 8,564 | |
2008 | | 5,862 | |
2009 | | 3,913 | |
2010 | | 2,111 | |
2011 | | 1,790 | |
Thereafter | | 5,134 | |
| | $ | 27,374 | |
6. RESTRUCTURING AND OTHER CHARGES
In the first quarter of 2006, the Company announced an Operational Effectiveness (“OE”) program, which is expected to reduce costs and increase profitability by a minimum of $20,000 on an annual basis. As a result, the Company re-examined its cost structure and has presently identified areas of opportunity in facilities consolidation, optimizing of delivery organizations and process automation and improvement. Specifically, the Company’s plans include the following initiatives:
· Consolidation of our United States hardware service operations. A decision was made to move the New Jersey portion of our hardware operations to a new combined hardware services facility in Georgia.
· Consolidation of our United States integrated support center operations. A decision was made to move the Georgia portion of our integrated support center operations to our existing facility in Virginia.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
· Rationalization of our European operations, including a reduction of our facilities and personnel to align our cost structure to our existing revenue base.
For the year ended December 31, 2006, the Company recorded restructuring charges of $27,731 associated with the OE program. The restructuring charges included approximately $19,300 of severance, $4,454 of an asset impairment charge (see Note 7 for further discussion of the impairment charge), $3,441 of a surplus facility and other charges and $536 of costs related to the refocusing of the Japanese data business.
In addition to the OE program, for the year ended December 31, 2006, the Company recorded other severance charges of $2,013 associated with certain of the Company’s largest customer sale force effectiveness services in the United States which are expected to transition away in 2007.
During the three month period ended March 31, 2005, the Company initiated and completed a plan to exit a facility in New Jersey for which it has an operating lease expiring in September 2011. The accrued facility charge relates to vacating a New Jersey facility and for additional facilities vacated and accrued for in previous periods, for which it had operating leases expiring through February 2012, due to changes in market conditions at that time. The Company accrued for the present value of these costs, net of estimated future sublease income. The Company also accrued for severance charges related to the elimination of certain senior and mid-level management positions. These charges are included within accrued restructuring and other charges on the consolidated balance sheets as of December 31, 2006 and December 31, 2005, and in restructuring and other charges on the consolidated statement of operations during the year ended December 31, 2005.
The activity related to accrued restructuring and other charges for the year ended December 31, 2006 is summarized in the table below:
| | Accrued | | 2006 | | | | | | Accrued | |
| | Restructuring and | | Restructuring | | | | Currency | | Restructuring and | |
| | Other Charges as of | | and Other | | 2006 | | Translation | | Other Charges as of | |
| | December 31, 2005 | | Charges | | Payments | | Adjustments | | December 31, 2006 | |
Facility exit costs | | | $ | 5,332 | | | | $ | 2,995 | | | $ | (3,281 | ) | | $ | — | | | | $ | 5,046 | | |
Severance | | | 301 | | | | 21,313 | | | (9,289 | ) | | 172 | | | | 12,497 | | |
Other | | | — | | | | 982 | | | (982 | ) | | | | | | — | | |
| | | $ | 5,633 | | | | $ | 25,290 | | | $ | (13,552 | ) | | $ | 172 | | | | $ | 17,543 | | |
In connection with the plan initiated and completed during the three months ended March 31, 2005, the Company also wrote-off $1,030 of leasehold improvements included within facility and other charges in the consolidated statement of operations for the year ended December 31, 2005.
7. ASSET HELD FOR SALE
In connection with the OE program, the Company made the decision to consolidate its hardware support function in Georgia and therefore decided to sell a New Jersey facility. This facility is classified as asset held for sale in the accompanying consolidated balance sheet and is included within our Corporate segment. Accordingly, the carrying value of the facility held for sale was adjusted to the new fair value less costs to sell of approximately $8,545. The resulting $4,454 impairment loss is included in the restructuring
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
and other charges within the accompanying consolidated statement of operations for the year ended December 31, 2006 and is included within our Corporate segment.
8. REVOLVING CREDIT
On December 14, 2006, the Company amended the line-of-credit agreement with JPMorgan Chase, dated as of July 25, 2005, (the “Agreement”) in the amount of $30,000, redefining the maturity date from June 30, 2008 to June 30, 2007 and redefining earnings before interest and taxes for purposes of the Agreement. The Agreement is available to finance working capital needs and possible future acquisitions. The Agreement contains customary affirmative and negative covenants and also contains certain financial covenants, including those related to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) a minimum interest coverage ratio at the end of any fiscal quarter and (c) a minimum fixed charge coverage ratio at the end of any fiscal quarter. The Agreement also restricts the Company’s ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of December 31, 2006, the Company was in compliance with all covenants and did not have any amounts outstanding under the Agreement.
As of December 31, 2006, the Company had outstanding letters-of-credit of approximately $5,337.
9. INCOME TAXES
The components of (loss) income before income tax expense were as follows:
| | December 31, | |
| | 2006 | | 2005 | | 2004 | |
Domestic | | $ | (9,161 | ) | $ | 32,336 | | $ | 29,982 | |
Foreign | | (9,253 | ) | 4,451 | | 17,630 | |
(Loss) income before income tax expense | | $ | (18,414 | ) | $ | 36,787 | | $ | 47,612 | |
The components of income tax expense were as follows:
| | December 31, | |
| | 2006 | | 2005 | | 2004 | |
Current Provision: | | | | | | | |
Federal | | $ | (1,816 | ) | $ | 14,032 | | $ | 8,035 | |
State | | 631 | | 1,576 | | 1,071 | |
Foreign | | 11,674 | | 4,578 | | 6,242 | |
| | 10,489 | | 20,186 | | 15,348 | |
Deferred Provision (Benefit): | | | | | | | |
Federal | | (2,097 | ) | (811 | ) | 1,861 | |
State | | 166 | | (1,239 | ) | (2,194 | ) |
Foreign | | (227 | ) | (2,796 | ) | 3,032 | |
| | (2,158 | ) | (4,846 | ) | 2,699 | |
Total income tax expense | | $ | 8,331 | | $ | 15,340 | | $ | 18,047 | |
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The reconciliation of the Federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| | December 31, | |
| | 2006 | | 2005 | | 2004 | |
Federal statutory income tax rate | | 35.0 | % | 35.0 | % | 35.0 | % |
Difference between U.S. and non-U.S. rates | | (7.3 | )% | 2.5 | % | 2.6 | % |
State income taxes, net of federal tax benefit | | (3.2 | )% | 2.8 | % | 1.7 | % |
Nondeductible compensation | | (5.1 | )% | 0.0 | % | 0.0 | % |
Nondeductible expenses | | (8.5 | )% | 0.4 | % | 0.4 | % |
Benefit from excess foreign tax credits | | 3.4 | % | 0.0 | % | (0.6 | )% |
Valuation allowances | | (31.9 | )% | 0.0 | % | 0.0 | % |
Increase in tax reserves | | (24.6 | )% | 0.0 | % | 0.0 | % |
Other | | (3.0 | )% | 1.0 | % | (1.2 | )% |
| | (45.2 | )% | 41.7 | % | 37.9 | % |
Valuation allowances recorded in 2006 of approximately $5,800 relate to international subsidiaries generating taxable losses for which no benefit was recorded as realization is not deemed more likely than not. In addition, we recorded approximately $4,800 of income tax reserves for tax exposures identified at certain international subsidiaries, of which $600 related to prior periods. The effective tax rate was also adversely affected by certain non-deductible expenses and foreign earnings taxed at different tax rates.
During 2006, the Company completed a restructuring of its Asia Pacific operations whereby a regional headquarter office was established in Singapore. As a result of committing to certain spending and employment levels, income from operations in Singapore will be subject to a reduced tax rate of 10%. In connection with this restructuring, the Company transferred certain intangible assets from existing operations in the Asia Pacific region and the United States to Singapore. The Company recorded a current year tax expense of approximately $2,700 associated with this restructuring.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
The tax effect of temporary differences that give rise to deferred income tax assets and liabilities is as follows:
| | December 31, | |
| | 2006 | | 2005 | |
Gross Deferred Tax Asset: | | | | | |
Federal net operating losses | | $ | 4,613 | | $ | 5,418 | |
Foreign net operating losses | | 12,680 | | 9,822 | |
State credits and net operating losses | | 4,095 | | 3,919 | |
Federal capital loss carryover | | 1,008 | | 1,994 | |
Accruals and reserves not currently deductible | | 13,875 | | 11,681 | |
Depreciation and amortization | | 4,498 | | 1,376 | |
Asset held for sale | | 3,419 | | 1,595 | |
Other | | 1,721 | | 1,237 | |
| | 45,909 | | 37,042 | |
Less valuation allowance: | | (15,456 | ) | (10,827 | ) |
| | $ | 30,453 | | $ | 26,215 | |
Gross Deferred Tax Liability: | | | | | |
Depreciation and amortization | | $ | — | | $ | — | |
Capitalized software development costs | | (7,541 | ) | (5,649 | ) |
| | $ | (7,541 | ) | $ | (5,649 | ) |
As of December 31, 2006 and 2005, the Company has recorded a valuation allowance against its net deferred tax assets of approximately $15,456 and $10,827, respectively. The change in the valuation allowance relates primarily to the realizability of state and foreign net operating losses as realization is not deemed more likely than not likely.
At the point in time that the Company is able to recognize tax benefits related to deferred tax assets, for which valuation allowances have been provided as of December 31, 2006, the benefit would be allocated as follows:
Income tax benefit | | $ | 9,172 | |
Goodwill | | 6,284 | |
| | $ | 15,456 | |
As of December 31, 2006, the Company has available federal net operating loss carry forwards of approximately $13,181 resulting from its acquisition of Synavant. These losses begin to expire in varying amounts from 2019 through 2023. Utilization of these losses are subject to annual limitations under section 382 of the Internal Revenue Code. Realization of these loss carry forwards, either through the reduction of valuation allowance or deferred tax assets, will not affect the Company’s future provision for income taxes due to the effects of purchase accounting. Additionally, the Company has state net operating loss carry forwards of approximately $41,664 and foreign net operating loss carry forwards of approximately $36,765 that expire in varying amounts from 2007 through 2024. In certain foreign jurisdictions, net operating losses may be carried forward indefinitely.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
10. STOCKHOLDERS’ EQUITY
EQUITY COMPENSATION PLANS
The Company has various equity compensation plans (the “Plans”) that provide for the granting of options to purchase the Company’s common stock and other equity-based awards. Under the Plans, the total number of shares of common stock that may be granted is 15,750,000.
Options
Options granted under the Plans generally vest over a four-year period and are exercisable over a period not to exceed ten years as determined by the Compensation Committee of the Board of Directors. During the years ended December 31, 2005 and 2004, certain options were granted that vested during the year of grant but were subject to a restriction (of up to four years) on the sale of any shares acquired upon option exercise in the period of restriction. Incentive stock options are granted with exercise prices equal to fair value of the Company’s common stock using the closing price from the prior trading day. Nonqualified options are granted at exercise prices determined by the Compensation Committee of the Board of Directors, but not below fair market value of common stock at the date of grant.
A summary of award activity under the Plans and changes are as follows:
| | | | | | Weighted-Average | | | |
| | | | Weighted-Average | | Remaining | | Aggregate | |
| | Shares | | Exercise Price | | Contractual Term | | Intrinsic Value | |
Outstanding December 31, 2005 | | 10,067,978 | | | 15.04 | | | | | | | | | | |
Granted | | 310,300 | | | 10.28 | | | | | | | | | | |
Exercised | | (278,750 | ) | | 8.32 | | | | | | | | | | |
Canceled | | (1,191,591 | ) | | 15.23 | | | | | | | | | | |
Outstanding December 31, 2006 | | 8,907,937 | | | $ | 15.04 | | | | 5.3 | | | | $ | 4,947 | | |
Vested and expected to vest at December 31, 2006(1) | | 8,842,783 | | | $ | 15.08 | | | | 5.2 | | | | $ | 4,832 | | |
Exercisable December 31, 2006 | | 8,069,494 | | | $ | 15.67 | | | | 5.1 | | | | $ | 3,255 | | |
(1) The expected to vest options are the results of applying the pre-vesting forfeiture rate assumption to total outstanding options.
At December 31, 2006, 2005 and 2004, there were 8,069,494, 8,818,196 and 6,347,979 options exercisable with a weighted average exercise price of $15.67, $15.63 and $15.98, respectively. As of December 31, 2006, there were 1,953,556 shares available for future grants under the Plans.
The weighted average fair value of options granted, determined using the Black-Scholes option valuation method, was $5.07, $7.87 and $9.32 for the years ended December, 2006, 2005 and 2004, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was $1,119, $6,134 and $9,971, respectively. As of December 31, 2006, there was $1,766 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.5 years.
In 2006, the Company adopted FASB Staff Position FAS 123(R)-3 (“FSP 123 (R)-3”). FSP 123 (R)-3 allows a “short cut” method of calculating its pool of excess tax benefits (“APIC Pool”) available to absorb
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
tax deficiencies recognized subsequent to the adoption of FAS 123-(R). The Company calculated its APIC Pool utilizing the short cut method under FSP 123 (R)-3. As of the adoption date, the Company did not have any excess tax benefits to calculate the initial pool.
The actual tax benefit realized for the tax deduction from options exercised of the share-based payment arrangement for the year ended December 31 2006 totaled $444.
Information with respect to the options outstanding under the Plans at December 31, 2006 is as follows:
| | | | | | Weighted-Average | | | |
| | | | | | Remaining | | | |
| | | | Weighted-Average | | Contractual Life | | Number of | |
Exercise Price Per Share | | Shares | | Exercise Price | | (Years) | | Vested Shares | |
$0.00 - $3.32 | | 5,950 | | | $ | 2.65 | | | | 0.1 | | | | 5,950 | | |
$3.33 - $6.64 | | 222,792 | | | 6.27 | | | | 0.7 | | | | 222,792 | | |
$6.65 - $9.95 | | 1,664,562 | | | 8.37 | | | | 4.4 | | | | 978,542 | | |
$9.96 - $13.27 | | 708,358 | | | 12.11 | | | | 5.4 | | | | 581,519 | | |
$13.28 - $16.59 | | 2,965,016 | | | 14.64 | | | | 6.4 | | | | 2,939,432 | | |
$16.60 - $19.91 | | 2,641,489 | | | 17.86 | | | | 5.5 | | | | 2,641,489 | | |
$19.92 - $23.23 | | 190,000 | | | 22.78 | | | | 1.9 | | | | 190,000 | | |
$23.24 - $26.55 | | 129,070 | | | 23.63 | | | | 3.1 | | | | 129,070 | | |
$26.56 - $29.87 | | 97,200 | | | 27.42 | | | | 3.1 | | | | 97,200 | | |
$29.88 - $33.19 | | 283,500 | | | 33.15 | | | | 2.7 | | | | 283,500 | | |
| | 8,907,937 | | | 15.04 | | | | 5.3 | | | | 8,069,494 | | |
Restricted Stock Units
The Plans also allow for the granting of restricted stock units. Generally, the Company grants restricted stock units that vest in three equal increments on each of the first three anniversaries of the date of grant. The fair value of restricted stock is the most recent closing market price of common stock at the date of grant.
In 2006, 2005 and 2004, the Company granted 541,500, 269,000 and 7,619 units representing shares of the Company’s common stock, respectively, under the Plans. As of December 31, 2006, there was $9,466 of total unrecognized compensation costs related to unvested restricted stock units. These costs are expected to be recognized over a weighted average period of 2.6 years. For 2006, 2005 and 2004, the total value at the date of grant of such units was $6,800, $4,736 and $115, respectively.
Changes in the Company restricted stock units for the year ended December 31, 2006, were as follows:
| | | | Weighted-Average | |
| | | | Grant Date | |
| | Shares | | Fair Value | |
Unvested restricted stock at December 31, 2005 | | 280,599 | | | $ | 17.22 | | |
Granted | | 541,500 | | | 12.56 | | |
Vested | | (107,611 | ) | | 16.82 | | |
Canceled | | (27,824 | ) | | 12.75 | | |
Unvested restricted stock at December 31, 2006 | | 686,664 | | | $ | 13.79 | | |
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Under the provisions of SFAS 123(R), the recognition of deferred compensation, a contra-equity account representing the amount of unrecognized restricted stock unit expense that is reduced as expense is recognized at the date the restricted stock unit is granted, is no longer required. Therefore, in the first quarter of 2006, the amount that had been in deferred compensation was reversed to zero through common stock in the Company’s consolidated balance sheet.
EMPLOYEE STOCK PURCHASE PLAN
In 1997, the Company established an employee stock purchase plan (“ESPP”) that provides full-time employees the opportunity to purchase shares, at 85% of the fair value on dates determined by the Board of Directors, up to a maximum of 10% of their eligible compensation or $21,250, whichever is less. During 2002, the Company obtained shareholder approval to increase the number of authorized shares available for purchase under this plan from 450,000 to 900,000, of which 122,317, 86,960 and 79,367 were purchased in 2006, 2005 and 2004, respectively. There were 18,292 and 140,609 available for future issuance under the plan as of December 31, 2006 and 2005, respectively.
In connection with the Merger Agreement dated as of March 1, 2007 with Cegedim S.A. (“Cegedim”), the Company committed to pay, at the closing of the merger transaction with Cegedim, to each participant in the ESPP who had elected to participate in and to purchase shares of the Company’s common stock under the ESPP in the offering period relating to the Company’s 2006 fourth quarter, (i) an amount equal to the amount actually deferred by each such participant in the 4Q offering period which has not been converted into shares pursuant to the ESPP, with interest at a rate reasonably determined by the Company, plus (ii) an amount equal to: (x) the per share merger consideration, less (y) the discounted purchase price applicable under the ESPP for the 4Q offering period, times (z) the number of shares which the participant would have acquired under the ESPP in the 4Q offering period using the cash actually deferred by the participant for the 4Q offering period which has not been converted into shares pursuant to the ESPP. A similar arrangement was established for participants in the 2007 first quarter ESPP offering period.
REPLACEMENT OPTION PROGRAM
In December 1999, the Company’s Board of Directors approved a replacement option program under which a designated executive may tender shares of the Company’s common stock owned by the executive in order to pay the exercise price of vested options and applicable withholdings. The designated executive receives replacement options in an amount equal to the number of shares tendered. Each replacement option expires on the expiration date of the original exercised option to which it relates and the exercised options must be held for a period of a least one year or the replacement options will be forfeited.
SHAREHOLDER RIGHTS PLAN
On February 16, 2001, the Company’s Board of Directors adopted a shareholder rights plan (the “Rights Plan”). The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent a person or group from acquiring control of the Company without offering a fair price to all shareholders. The adoption of the Rights Plan was not in response to any known effort to acquire control of the Company.
Under the Rights Plan, each shareholder of record on March 5, 2001 received a distribution of one right for each share of common stock of the Company (“Rights”). At present, the Rights are represented by the Company’s common stock certificates, are not traded separately from the common stock and are not
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
exercisable. The Rights will become exercisable only if a person acquires, or announces a tender offer that would result in ownership of 15% or more of the Company’s common stock, at which time each Right would enable the holder to buy one one-hundredth of a share of the Company’s Series A preferred stock at an exercise price of $120, subject to adjustment. Following the acquisition of 15% or more of the Company’s common stock, the holders of Rights (other than the acquiring person or group) will be entitled to purchase shares of the Company’s common stock at one-half of the market price, and in the event of a subsequent merger or other acquisition of the Company, to buy shares of common stock of the acquiring entity at one-half of the market price of those shares.
The Company may redeem the Rights for $0.01 each, subject to adjustment, at any time before the acquisition by a person or group of 15% or more of the Company’s common shares. The Rights will expire on February 20, 2011.
In connection with the Merger Agreement with Cegedim, on March 1, 2007, Dendrite and Registrar and Transfer Company, as Rights Agent, entered into Amendment No. 1 (the “Rights Amendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “Rights Agreement”). The effect of the Rights Amendment is to permit the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including specifically the merger transaction with Cegedim, without triggering the separation or exercise of the Rights (as defined in the Rights Agreement) or any adverse event under the Rights Agreement (see Note 15).
11. SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains Employee Savings Plans (the “Savings Plans”) that cover substantially all of its full-time U.S., U.K., Italy, Japan, Korea and Netherlands employees. All eligible employees may elect to contribute a portion of their wages to the Savings Plans, subject to certain limitations. The Company contributes to the Savings Plans at a certain rate of the participant’s contribution based on their location. The Company’s contribution to the Savings Plans ranges from approximately 1% of a participant’s annual salary to 10% of the participant’s annual salary. The Company’s contributions to the Plans were $3,076, $3,042 and $3,049 in the years ended December 31, 2006, 2005 and 2004, respectively.
The Company also maintains a noncontributory defined contribution retirement plan that covers substantially all of its full-time employees in Japan and Australia. All contributions to these pension plans are made by the Company in accordance with prescribed statutory requirements. The Company’s contributions to the plan were $594, $757 and $657 for the years ended December 31, 2006, 2005 and 2004, respectively.
The Company has supplemental deferred compensation arrangements for the benefit of certain officers, directors and certain key executives. In connection with these plans the Company maintains life insurance contracts, which have been purchased by the Company. The arrangements permit the participants to diversify their investments, which are funded, unsecured general obligations of the Company. The value of the assets held, managed and invested, pursuant to the agreements was approximately $4,834 and $4,000 as of December 31, 2006 and 2005, respectively, and is included in other assets in the accompanying consolidated balance sheets. The corresponding deferred compensation liability of approximately $3,982 and $3,900 as of December 31, 2006 and 2005, respectively, is recorded at the fair market value of the assets held in a rabbi trust and adjusted to reflect the fair value of the amount owed to certain officers, directors and certain key executives and is included in other non-current liabilities in the accompanying consolidated balance sheets.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
12. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and equipment under various capital and operating leases with remaining lease terms generally in excess of one year. Rent expense was $17,173, $23,767 and $16,035 for the years ended December 31, 2006, 2005 and 2004, respectively. Future minimum rental payments on these leases, including leases accrued for in purchase accounting restructuring accruals and excluding estimated future sublease income, are as follows:
| | Capital Lease | | Operating Lease | |
2007 | | | $ | 1,352 | | | | $ | 17,128 | | |
2008 | | | 72 | | | | 13,229 | | |
2009 | | | — | | | | 11,514 | | |
2010 | | | — | | | | 10,018 | | |
2011 | | | — | | | | 7,417 | | |
Thereafter | | | — | | | | 22,888 | | |
Total | | | 1,424 | | | | $ | 82,194 | | |
Less: Amount representing interest | | | 35 | | | | | | |
Present value of net minimum lease payments | | | 1,389 | | | | | | |
Less: Current portion of capital lease obligations | | | 1,318 | | | | | | |
Capital lease obligations, excluding current portion | | | $ | 71 | | | | | | |
In connection with certain leasing arrangements, the Company entered into a sale-leaseback of furniture and equipment of approximately $2,200 expiring in November 2007. In addition, the Company also entered into new capital lease arrangements for computer hardware and other equipment of approximately $2,400 expiring through January 2008.
In addition to the capital and operating leases disclosed above, the Company also has certain purchase commitments of approximately $2,000 each for 2007 and 2008, respectively.
From time-to-time, the Company is involved in certain legal actions arising in the ordinary course of business. In the Company’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations, liquidity or cash flows.
The Company has employment agreements with certain officers that provide for, among other things, salary, bonus, severance and change in control provisions.
The Company has an agreement with a venture capital fund with a commitment to contribute $1,000 to the fund, callable in $100 increments. As of December 31, 2006, $700 has been paid with $300 of commitment remaining. The agreement has a termination date of December 11, 2010, subject to extension by the limited partners. During the fourth quarter of 2006, we determined that our investment in the venture capital fund was impaired, therefore we recorded an impairment charge of $171 to other expense, net to write the venture capital fund down to its fair market value.
13. RELATED-PARTY TRANSACTIONS
For the years ended December 31, 2006, 2005 and 2004, the Company incurred approximately $97, $158 and $289, respectively, of costs for rental and use of aircraft for Company business payable to certain
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
third-party charter companies. While none of these third-party charter companies are affiliated with the Company or any of its officers or directors, in some instances, the aircraft provided by these third-party companies was leased from an entity whose owners are the Company’s Chairman and Chief Executive Officer and his spouse. As of December 31, 2006 and 2005, there were no rental charges included in other accrued expenses.
For the years ended December 31, 2006, 2005 and 2004, the Company also incurred approximately $0, $0 and $1, respectively, of costs for air travel for Company business payable to the entity owned by the Chairman and Chief Executive Officer and his spouse. As of December 31, 2006 and 2005, there was no air travel costs included in other accrued expenses.
14. SEGMENT INFORMAITON
Information about Business Segments:
In the second quarter of 2006, the Company changed its operating segments to reflect the reorganized business. The Company has expanded its segments into three operating segments: sales solutions, marketing solutions, emerging solutions as well as a corporate segment. The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is now utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considered the nature of services provided by its operating segments.
The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of certain administrative expenses. Information about interest income and expense and income taxes is not provided on a segment level. In addition, equity-based compensation is not allocated to the segments. See Note 10 above for further discussion of the Company’s equity-based compensation. The accounting policies of the segments are the same as the Company’s. Information with respect to the Company’s segments are as follows:
Sales solutions includes products and sales support services which are used by, or provided to, the sales forces of our customers.
Marketing solutions primarily includes interactive marketing, data & analytics, consulting, and shipping fees. Shipping fees, which are pass-through costs that bear little to no margin, are required to be included in revenues and costs based upon EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.” These billable shipping transactions are primarily related to our interactive marketing activities.
Emerging solutions includes compliance solutions, clinical solutions, and contract sales force services.
Corporate includes costs and assets which are not representative of the results of the Company’s individual operating segments. The Company allocates a significant portion of its gross corporate costs to the respective operating segments, to reflect the approximate value which has been incurred relating to services provided by the corporate entity. In addition, certain gross costs are considered to be overhead not attributable to any segment and as such, remain unallocated in Corporate. Included among the unallocated overhead remaining within Corporate are costs for equity based compensation, audit and tax fees, excess facilities, certain administrative staff, and other ancillary costs.
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DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
In 2004, the Company did not have the necessary systems in place to track the global information needed to consolidate revenue, operating (loss) income, depreciation and amortization expense and capital expenditures between the new operating segments. As such, the 2004 amounts have not been presented below for 2004, as to do so would be impracticable. Our 2005 segments results have been restated to conform to current year presentation.
The following tables include revenue and operating (loss) income for each reportable segment for the years ended December 31, 2006 and 2005.
| | For the Years Ended
December 31, | |
| | 2006 | | 2005 | |
Revenue: | | | | | |
Sales solutions | | $ | 274,257 | | $ | 300,624 | |
Marketing solutions | | 123,034 | | 112,049 | |
Emerging solutions | | 26,667 | | 24,567 | |
Total revenue | | $ | 423,958 | | $ | 437,240 | |
| | For the Years Ended
December 31, | |
| | 2006 | | 2005 | |
Operating (loss) income: | | | | | |
Sales solutions | | $ | 40,521 | | $ | 65,578 | |
Marketing solutions | | (13,162 | ) | (2,484 | ) |
Emerging solutions | | (1,070 | ) | 522 | |
Corporate | | (46,698 | ) | (27,434 | ) |
Total operating (loss) income | | $ | (20,409 | ) | $ | 36,182 | |
The following tables include depreciation and amortization expense, capital expenditures and restructuring and other charges for each business segment for the years ended December 31, 2006 and 2005.
| | For the Years Ended
December 31, | |
| | 2006 | | 2005 | |
Depreciation and amortization expense: | | | | | |
Sales solutions | | $ | 16,063 | | $ | 12,641 | |
Marketing solutions | | 4,121 | | 3,019 | |
Emerging solutions | | 1,375 | | 1,002 | |
Corporate | | 4,746 | | 7,499 | |
Total depreciation and amortization expense | | $ | 26,305 | | $ | 24,161 | |
98
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
| | For the Years Ended
December 31, | |
| | 2006 | | 2005 | |
Capital expenditures: | | | | | |
Sales solutions | | $ | 10,394 | | $ | 12,069 | |
Marketing solutions | | 4,108 | | 1,978 | |
Emerging solutions | | 106 | | 342 | |
Corporate | | 2,734 | | 10,130 | |
Total capital expenditures | | $ | 17,342 | | $ | 24,519 | |
| | For the Years Ended
December 31, | |
| | 2006 | | 2005 | |
Restructuring and other charges: | | | | | |
Sales solutions | | $ | 13,712 | | $ | — | |
Marketing solutions | | 6,221 | | — | |
Emerging solutions | | 113 | | — | |
Corporate | | 9,698 | | 9,372 | |
Total restructuring and other charges(1) | | $ | 29,744 | | $ | 9,372 | |
(1) See Note 6 for further discussion of restructuring and other charges.
The following table includes total assets at December 31, 2006 and 2005 for each business segment.
| | December 31, | |
| | 2006 | | 2005 | |
Assets: | | | | | |
Sales solutions | | $ | 128,581 | | $ | 149,920 | |
Marketing solutions | | 96,905 | | 87,642 | |
Emerging solutions | | 15,060 | | 16,515 | |
Corporate(2) | | 134,125 | | 108,930 | |
Total assets(3) | | $ | 374,671 | | $ | 363,007 | |
(2) Corporate assets consist primarily of cash, property and equipment, prepaid taxes, deferred tax assets and asset held for sale.
(3) Goodwill was allocated to the business segments on the basis of relative fair value, determined as of June 30, 2006.
99
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
Information about Geographic Areas:
Revenue is classified by the major geographic areas in which we operate. All transfers between geographic areas have been eliminated from consolidated revenues. The following table presents revenues by geographic area:
| | December 31 | |
| | 2006 | | 2005 | | 2004 | |
United States | | $ | 255,417 | | $ | 276,282 | | $ | 247,437 | |
Europe | | 112,602 | | 107,307 | | 98,368 | |
All other | | 55,939 | | 53,651 | | 53,392 | |
| | $ | 423,958 | | $ | 437,240 | | $ | 399,197 | |
The table above allocates license revenues on a legal basis. On a legal basis, license revenues have been allocated using the geographic location where the intellectual property is owned.
The following table presents long-lived assets by geographic area:
| | December 31, | |
| | 2006 | | 2005 | |
United States | | $ | 164,875 | | $ | 167,459 | |
Europe | | 8,332 | | 9,267 | |
All other | | 9,482 | | 10,586 | |
| | $ | 182,689 | | $ | 187,312 | |
Information about Major Customers:
For the year ended December 31, 2006, the Company derived approximately 18% and 12% of its total revenues from its two largest customers. For the year ended December 31, 2005, the Company derived approximately 24% and 10% of its total revenues from its two largest customers. For the year ended December 31, 2004, the Company derived approximately 28% of total revenues from its largest client. The Company’s largest customer has indicated that it plans to transfer certain domestic services performed by the Company to one or more third party vendors in the future.
15. SUBSEQUENT EVENTS
On March 1, 2007, Dendrite entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cegedim SA and Dogwood Enterprises, Inc., an indirect subsidiary of Cegedim (“MergerCo”). Pursuant to the Merger Agreement, MergerCo will be merged with and into Dendrite (the “Merger”), with Dendrite continuing as the surviving corporation. Under the Merger Agreement, at the effective time of the Merger (i) each outstanding share of common stock of Dendrite will be converted into the right to receive $16.00 per share in cash; (ii) each vested and unvested option to purchase Dendrite common stock that is outstanding and unexercised shall become fully vested and exercisable and, if not exercised prior to the effective time of the merger, shall be cancelled in exchange for the right to receive a cash payment per option equal to the excess of (a) $16.00 over (b) the exercise price of such option, less any applicable and required withholding taxes; and (iii) all unvested restricted stock unit awards will be cancelled and the holder will be entitled to receive a cash payment equal to $16.00 in cash, without interest
100
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
and less any applicable withholding taxes, for each share of common stock underlying the restricted stock unit award. Each of Dendrite and Cegedim has made customary representations, warranties and covenants in the Merger Agreement. The completion of the Merger is subject to various closing conditions, including obtaining the approval of Dendrite’s shareholders, antitrust approvals and other customary closing conditions. The Merger Agreement contains certain termination rights for both Dendrite and Cegedim. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, Dendrite will be required to pay to Cegedim a termination fee of $22.2 million. The Merger Agreement also requires Dendrite to reimburse up to $5 million of Cegedim’s reasonable expenses if the Merger Agreement is terminated under certain specified circumstances.
On or about March 13, 2007, plaintiff Albert Oldham commenced a purported class action against Dendrite, its directors and Cegedim alleging that Cegedim’s pending acquisition of Dendrite is unfair to Dendrite’s shareholders, and purporting to assert claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty. In the lawsuit, captioned Albert Oldham v. Dendrite International, Inc., et al., plaintiff asks the court to (i) declare that the action is properly maintainable as a class action, and certify the named plaintiff as class representative and its counsel as class counsel; (ii) declare and decree that the merger agreement between Dendrite and entities affiliated with Cegedim was entered into in breach of the fiduciary duties of the members of the Board and is therefore unlawful and unenforceable; (iv) rescind and invalidate the merger agreement; (v) enjoin Dendrite and the Board from consummating the merger unless and until procedures are implemented to obtain the highest possible price for the shareholders; (vi) direct the Board to exercise its fiduciary duties to obtain a transaction which is in the best interests of the shareholders and in which the highest possible price is obtained; (viii) impose a constructive trust on any benefits improperly received by the Board as a result of wrongful conduct; and (viii) award plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees. Based on the facts known to date, Dendrite believes that the claims asserted by the plaintiff are without merit and intends to defend itself vigorously.
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DENDRITE INTERNATIONAL, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
| | Balance at
the
Beginning
of the Year | | Additions
charged to
expense or
other accounts | | Acquisition
related
additions | | Deductions
from
reserves | | Acquisition
related
deductions
from reserves | | Balance at
the End of
year | |
Year Ended December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 1,000 | | | | $ | 1,112 | | | | $ | — | | | | $ | (368 | ) | | | $ | — | | | | $ | 1,744 | | |
Deferred tax valuation allowance | | | $ | 10,827 | | | | $ | 6,890 | | | | $ | 115 | | | | $ | (1,784 | ) | | | $ | (592 | ) | | | $15,456 | | |
Year Ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 2,034 | | | | $ | 76 | | | | $ | 50 | | | | $ | (1,127 | ) | | | $ | (33 | ) | | | $ | 1,000 | | |
Deferred tax valuation allowance | | | $ | 15,987 | | | | $ | 520 | | | | $ | 903 | | | | $ | (2,553 | ) | | | $ | (4,030 | ) | | | $ | 10,827 | | |
Year Ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 1,595 | | | | $ | 1,088 | | | | $ | 13 | | | | $ | (662 | ) | | | $ | — | | | | $ | 2,034 | | |
Deferred tax valuation allowance | | | $ | 15,215 | | | | $ | 2,200 | | | | $ | 1,355 | | | | $ | (2,162 | ) | | | $ | (621 | ) | | | $ | 15,987 | | |
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EXHIBIT INDEX
| | Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: | |
2.1 | | Agreement and Plan of Merger, dated March 1, 2007, by and among the Company, Cegedim SA and Dogwood Enterprises, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “Commission”) on March 2, 2007) | |
2.2 | | Agreement and Plan of Merger, dated as of May 9, 2003, among the Company, Amgis Acquisition Co., and Synavant Inc. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 12, 2003) | |
2.3 | | Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 16, 2003, by and among the Company, Amgis Acquisition Co., and Synavant Inc. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 20, 2003) | |
| | Articles of Incorporation and By-Laws: | |
3.1 | | Restated Certificate of Incorporation of Dendrite International, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 14, 1996) | |
3.1 | (a) | Certificate of Amendment to the Restated Certificate of Incorporation of Dendrite International, Inc. (incorporated by reference to Exhibit 3.1(a) to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001) | |
3.1 | (b) | Certificate of Amendment to the Restated Certificate of Incorporation of Dendrite International, Inc. (incorporated by reference to Exhibit 3.1(b) to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001) | |
3.1 | (c) | Certificate of Amendment of the Restated Certificate of Incorporation of Dendrite International, Inc. Setting Forth the Terms of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1(c) to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001) | |
3.2 | | Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed with the Commission on October 21, 2005) | |
| | Instruments Defining Rights of Security Holders, including Indentures: | |
4.1 | | Specimen of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, filed with the Commission on May 17, 1995) | |
4.2 | | Registration Rights Agreement dated October 2, 1991 between the several purchasers named therein and the Company (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1, filed with the Commission on May 17, 1995) | |
4.3 | | Amendment to Registration Rights Agreement dated April 23, 1992 between the Company and the parties named therein as shareholders of the Company (incorporated by reference to Exhibit 4.3 of Amendment 1 to the Company’s Registration Statement on Form S-1, filed with the Commission on May 17, 1995) | |
103
4.4 | | Rights Agreement dated as of February 20, 2001 between the Company and Registrar and Transfer Company, as Rights Agent, which includes, as Exhibit A the Form of Certificate of Amendment of the Restated Certificate of Incorporation of the Company Setting Forth the Terms of Series A Junior Participating Preferred Stock, as Exhibit B the Form of Rights Certificate and as Exhibit C Summary of Rights to Purchase Preferred Stock (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K, filed with the Commission on February 21, 2001) | |
4.5 | | Amendment No. 1, dated as of March 1, 2007, to Rights Agreement, dated as of February 20, 2001, by and between the Company and Registrar and Transfer Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the Commission on March 2, 2007) | |
| | Material Contracts and Compensatory Plans and Arrangements: | |
10.1 | | 1992 Stock Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 30, 2000, File No. 033-92434)* | |
10.2 | | 1997 Stock Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders, filed with the Commission on April 26, 2005)* | |
10.3 | | 1997 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders, filed with the Commission on April 19, 2002)* | |
10.4 | | Resolution amending 1997 Employee Stock Purchase Plan | |
10.5 | | Restated Employment Agreement dated May 16, 2006 between the Company and John E. Bailye (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006)* | |
10.6 | | Amendment to Restated Employment Agreement dated March 1, 2007 between the Company and John E. Bailye* | |
10.7 | | Dendrite International, Inc. Deferred Compensation Plan effective as of September 1, 1998 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 14, 1998, File No. 033-92434)* | |
10.8 | | Deferred Compensation Plan Trust Agreement effective as of September 1, 1998 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 14, 1998, File No. 033-92434)* | |
10.9 | | Employment Agreement dated September 8, 1998, between the Company and Christine Pellizzari (incorporated by reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001, File No. 001-16379)* | |
10.10 | | Amendment to Employment Agreement dated August 1, 2000 between the Company and Christine Pellizzari (incorporated by reference to Exhibit 10.24 to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001, File No. 001-16379)* | |
10.11 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Christine Pellizzari (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
104
10.12 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Christine Pellizzari* | |
10.13 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Christine Pellizzari* | |
10.14 | | Separation Agreement of Marc Kustoff dated February 16, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on February 23, 2005)*(2) | |
10.15 | | Agreement of Purchase and Sale between the Company and Townsend Property Trust Limited Partnership dated January 5, 2001 (incorporated by reference to Exhibit 10.26 to the Company’s Current Report on Form 8-K, filed with the Commission on March 30, 2001, File No. 001-16379) | |
10.16 | | Employment Agreement (including Amendment), dated May 16, 2001, between the Company and Paul Zaffaroni (incorporated by reference to Exhibit 10.29 to the Company’s Current Report on Form 8-K, filed with the Commission on March 19, 2002)*(3) | |
10.17 | | Retirement Agreement and General Release of Paul L. Zaffaroni dated November 4, 2005 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 7, 2005)*(3) | |
10.18 | | Dendrite International, Inc. New Hire Authorization, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on September 21, 2005)* | |
10.19 | | New Hire Authorization—Updated Appendix (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.20 | | New Hire Authorization—Updated Appendix (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006)* | |
10.21 | | New Hire Authorization—Updated Appendix (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 2, 2006)* | |
10.22 | | New Hire Authorization—Updated Appendix* | |
10.23 | | Credit Agreement, dated as of July 25, 2005, among the Company, the Lenders party thereto, and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on July 29, 2005) | |
10.24 | | December 2006 Amendment to Credit Agreement, dated December 14, 2006, among the Company, the Lenders referred to therein, and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on December 20, 2006) | |
10.25 | | Sublease dated as of September 17, 2003 between Pharmacia & Upjohn Company and the Company (incorporated by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 14, 2003) | |
10.26 | | New Hire Authorization—Form of Notice of Stock Option Award and Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on September 21, 2005)* | |
105
10.27 | | New Hire Authorization—Form of Notice of Restricted Stock Agreement and Form of Notice of Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the Commission on September 21, 2005)* | |
10.28 | | Employment Agreement as amended on May 26, 1999, between the Company and Mark H. Cieplik (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 15, 2004)* (5) | |
10.29 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Mark H. Cieplik (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* (5) | |
10.30 | | Transition Agreement and General Release dated June 6, 2006 between the Company and Mark H. Cieplik (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006)* (5) | |
10.31 | | Employment Agreement dated as of June 9, 1983, between the Company and Jean-Paul Modde (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 15, 2004) * | |
10.32 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Jean-Paul Modde (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.33 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Jean-Paul Modde* | |
10.34 | | Amendment to Employment Agreement dated as February 21, 2007 between the Company and Jean-Paul Modde* | |
10.35 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Jean-Paul Modde* | |
10.36 | | Employment Agreement dated as of November 10, 2000, between the Company and Garry D. Johnson (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 15, 2004)* | |
10.37 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Garry D. Johnson (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.38 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Garry D. Johnson | |
10.39 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Garry D. Johnson* | |
10.40 | | Form of Indemnification Agreement between the Company and its directors and executive officers (incorporated by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2004)* | |
10.41 | | Master Lease Agreement and Master Lease Agreement Addendum, each dated as of September 20, 2004, as executed on September 29, 2004, between the Company and BNY Leasing Edge Corporation (incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K, filed with the Commission on October 5, 2004) | |
106
10.42 | | Form of Dendrite International, Inc. 1997 Stock Incentive Plan Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.40 to the Company’s Current Report on Form 8-K, filed with the Commission on October 7, 2004)* | |
10.43 | | Dendrite International, Inc. 1997 Stock Incentive Plan—Form of Notice of Stock Option Award and Stock Option Agreement (incorporated by reference to Exhibit 10.42 to the Company’s Current Report on Form 8-K, filed with the Commission on November 29, 2004)* | |
10.44 | | Performance criteria for the Company’s executive bonus plan for 2006 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on March 10, 2006)* | |
10.45 | | Performance criteria for the Company’s executive bonus plan for 2007 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on January 31, 2007)* | |
10.46 | | Employment Agreement dated September 26, 2000 between the Company and Natasha Giordano (incorporated by reference to Exhibit 10.33 of the Company’s Annual Report on Form 10-K filed with the Commission on March 16, 2005)* | |
10.47 | | Change in Control agreement dated February 25, 2005 between the Company and Natasha Giordano (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on March 3, 2005)* | |
10.48 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Natasha Giordano (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.49 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Natasha Giordano* | |
10.50 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Natasha Giordano* | |
10.51 | | Employment Agreement of George T. Robson dated June 6, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on June 10, 2005)*(1)(4) | |
10.52 | | Letter Amendment to Employment Agreement of George T. Robson dated September 27, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on October 3, 2005)*(1)(4) | |
10.53 | | Employment Agreement of Joseph A. Ripp dated October 5, 2005 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 7, 2005)* | |
10.54 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Joseph A. Ripp (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.55 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Joseph A. Ripp* | |
10.56 | | Employment Agreement dated November 28, 2005 between the Company and Jeffrey J. Bairstow (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on December 8, 2005)* | |
107
10.57 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Jeffrey Bairstow (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.58 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Jeffrey Bairstow* | |
10.59 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Jeffrey Bairstow* | |
10.60 | | Cash Incentive Bonus Arrangement between the Company and Joseph Ripp, President and Chief Operating Officer, and Jeffrey Bairstow, Executive Vice President and Chief Financial Officer (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on March 2, 2006)* | |
10.61 | | Dendrite International Director Compensation Program (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on October 21, 2005)* | |
10.62 | | Employment Agreement of Mark Theilken dated April 2, 2004 (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K. filed with the Commission on March 16, 2006)* | |
10.63 | | Cash Bonus for Mark Theilken (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on February 9, 2006)* | |
10.64 | | Amendment to Employment Agreement dated February 13, 2006 between the Company and Mark Theilken (incorporated by reference to Exhibit 10. 8 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006)* | |
10.65 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Mark Theilken* | |
10.66 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Mark Theilken* | |
10.67 | | Employment Agreement dated September 19, 2006 between the Company and James Young* | |
10.68 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and James Young* | |
10.69 | | Employment Agreement dated June 28, 2006 between the Company and Carl L. Cohen (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006)* | |
10.70 | | Amendment to Employment Agreement dated October 23, 2006 between the Company and Carl L. Cohen* | |
10.71 | | Amendment to Employment Agreement dated March 1, 2007 between the Company and Carl L. Cohen* | |
10.72 | | Employment Agreement dated June 15, 1995 between the Company (Walsh Italia, Srl. predecessor in interest) and Mario Mauri* | |
10.73 | | Amendment to Employment Agreement dated March 2, 1998 between the Company (Walsh Italia, Srl) and Mario Mauri* | |
10.74 | | Amendment to Employment Agreement dated February 28, 2007 between the Company and Mario Mauri* | |
108
10.75 | | Standstill and Support Agreement, dated as of October 20, 2006, by and between the Company and MMI Investments, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on October 23, 2006) | |
10.76 | | Letter dated March 1, 2007 between Cegedim, S.A. and John Bailye regarding John Bailye’s employment* | |
| | Letter re Change in Certifying Accountant: | |
16. | | Letter of BDO Seidman regarding change in certifying accountant for the Dendrite 401(k) Plan dated March 9, 2006 (incorporated by reference to Exhibit 16 to the Company’s Current Report on Form 8-K/A, filed with the Commission on March 31, 2006) | |
| | Subsidiaries: | |
21. | | Subsidiaries of the Company | |
| | Consents of Independent Registered Public Accounting Firms: | |
23.1 | | Consent of Deloitte & Touche LLP | |
| | Certifications: | |
31.1 | | Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | | Certification of Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | | Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company and Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
* Management contract or compensatory plan.
(1) Ceased as executive officer effective June 7, 2005
(2) Ceased employment with the Company effective February 25, 2005
(3) Ceased employment with the Company effective November 1, 2005
(4) Ceased employment with the Company effective November 11, 2005
(5) Ceased as executive officer effective July 31, 2006 and ceased employment with the Company effective October 31, 2006
109
