SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
Commission File Number 0-26138
Dendrite International, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-2786386
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Mt. Kemble Avenue
Morristown, NJ 07960-6797
973-425-1200
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(Address, including zip code, and telephone number (including area code) of
registrant's principal executive office)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
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Common Stock, no par value
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 time period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ]
Indicate 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. [ ]
The aggregate market value of the shares of the common stock held by
non-affiliates of the registrant was approximately $476,657,215 based upon the
closing price of the common stock, which was $13.1875 on March 15, 2001. The
number of shares of common stock outstanding as of March 15, 2001 was
40,281,002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III.
Note: Dendrite(R), Catalyst(TM), ForceAnalyzeRx(R), ForceMobile(TM),
ForceKnowledge(TM), PharmaRep.com(TM), CoachMe(TM),
WebSessionManager(TM), ForceOne(R), ForcePharma(TM), WebForce(TM),
j-forceWEB(TM), Medicheck(TM), SalesPlus(TM) and ScripMax(TM) are
either trademarks or registered trademarks of Dendrite International,
Inc. All other service marks, trademarks and trade names referred to
in this document are the property of their respective owners. The
Company and any of its US or international subsidiaries are sometimes
collectively referred to as "Dendrite", "we", "our" or "the Company".
TABLE OF CONTENTS
PART I.............................................................................................................................4
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ITEM 1. BUSINESS...........................................................................................................4
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ITEM 2. PROPERTIES........................................................................................................13
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ITEM 3. LEGAL PROCEEDINGS.................................................................................................14
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................................14
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PART II...........................................................................................................................14
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................14
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA..............................................................................15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................15
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................28
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................................28
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................28
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PART III..........................................................................................................................28
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................................28
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ITEM 11. EXECUTIVE COMPENSATION............................................................................................28
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................29
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................................29
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PART IV...........................................................................................................................29
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................................29
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PART I
ITEM 1. BUSINESS.
GENERAL
Dendrite International, Inc. is a leading global provider of a comprehensive
range of customer relationship management (sometimes called CRM) software
products and support services to the pharmaceutical industry. Our customer
relationship management solutions enable our customers to effectively manage the
activities of large sales forces in complex selling environments. These
solutions also permit pharmaceutical companies to create a central repository of
information about each of their customers which is integrated and analyzed so as
to maximize the value derived from each such customer.
Historically, we have focused our solutions on large sales forces within the
prescription-only pharmaceutical industry. We believe that our extensive
knowledge of the complex and unique selling processes in this industry and our
demonstrated ability to meet our customers' business needs have given us a
commanding position in this portion of our target market. We are presently the
world's largest supplier of customer relationship management solutions to the
prescription-only pharmaceutical industry based on the number of sales
representatives supported. Our global reach strategy has expanded our target
market to mid-size pharmaceutical companies as well as to subsidiaries in
emerging markets. Our customers' sales forces now range in size from as few as
50 representatives in smaller European countries to several thousand
representatives in the United States.
Our CRM solutions are highly configurable and are designed to interface with
other customer-facing software utilized by pharmaceutical manufacturers. Our
solutions ultimately enable our pharmaceutical customers to maximize the return
on investment related to sales and promotional activities and to improve
profitability of their operations by allowing them to:
o analyze prescriber patterns to ensure delivery of the right message at
the right time;
o coordinate the activities and sales call content of multiple sales
forces calling on the same customers;
o provide integrated data from multiple sources quickly to direct
individual sales representatives;
o provide technical and support services to maximize the selling time of
the sales representatives; and
o provide Internet-based training and meetings to minimize out of
territory time of sales representatives.
Dendrite also supplies CRM solutions to manufacturers of consumer packaged
goods. Our consumer packaged goods or CPG products are targeted at manufacturers
whose sales representatives call on retail outlets and enable sales
representatives to manage all aspects of their call reporting obligations,
including the collection of pricing, promotions and product placement
information. In addition, our products also integrate sales information from a
number of data sources. By using our products, consumer packaged goods
manufacturers can measure the effect of their promotions activities and can
effectively plan and execute sales strategies in ways that bring them
significant competitive benefits.
The broad range of support services we offer are intended to enable our
customers to maximize the effectiveness of our software products. These services
include software configuration and implementation, technical and hardware
support, sales force support and data integration and analysis. We typically
provide these services under multi-year agreements.
Dendrite develops and markets a comprehensive range of customer relationship
management solutions consisting of software products and a wide range of support
services. These solutions, among other benefits, synchronize a pharmaceutical
customer's interactions with its customers across all customer-facing
departments within the organization, enabling them to:
o centralize data to maintain a history of all contacts with each
physician;
o target specific physicians with specific messages;
o realign sales territories;
o reallocate sales personnel on a customer or formulary basis;
o share data among sales representatives calling on the same physician;
and
o redeploy sales and marketing resources more rapidly and more precisely.
Our CRM software products integrate and process large volumes of
time-sensitive, sales-related data for use in developing sales strategies and
campaigns. Our current product offerings allow customers to select many
different combinations of features for different types of sales forces. These
software products typically do not require customization (i.e., modification of
source code) in order to be implemented; however, generally they are
significantly configured to address data, market and other customer
requirements. Our current product offering also includes configuration and
administration tools which enable customers to configure and administer certain
of our software products.
We price our CRM software products based on the geographic area in which a
customer uses them, on its chosen configuration, and on the total number of
users. We charge additional up-front fees to configure and install the software
and to train the sales representatives, as well as annual fees for continuing
services and fees for specific projects.
PHARMACEUTICAL SOFTWARE PRODUCTS
Our pharmaceutical software products are designed to provide information to
personnel involved in sales and sales management and also to other levels within
each client's organization, including senior management. For example,
information directly related to sales, such as travel and expense reports, may
be channeled to the finance and personnel departments. In addition, field
representatives can directly input information concerning a particular physician
that may assist a client's managed care sales personnel. These systems
effectively link a customer's sales and management functions with other business
departments.
We currently offer our pharmaceutical customers four primary software
products: WebForce, Catalyst, SalesPlus, and j-forceWEB. We also offer our
pharmaceutical customers two additional Windows CE(TM)-based software products:
ForceMobile and Medicheck. In addition, we offer our managed care account-based
pharmaceutical customers ForceMC.
WEBFORCE. WebForce is a comprehensive suite of sales force automation or SFA
tools with data sharing, analysis and interfacing capabilities intended to serve
as the basis of the CRM environment for our large multinational pharmaceutical
customers. The WebForce product suite includes the following components:
WebForce, our web-enabled CRM software product for large-scale pharmaceutical
sales organizations; PharmaRep.com, a customizable portal designed to deliver
company directives, industry news and other customer specific content to a sales
force; ForceKnowledge, a knowledge management tool; an embedded version of
ForceAnalyzeRx (which is described below); WebSessionManager, a distance
learning tool; and CoachMe, which provides on-demand training and technical
support for sales representatives in the field. The core WebForce software
product can be configured to support sales representatives and managers at all
levels within a sales organization and can also be configured to address a
customer's specific business requirements.
New functions, which integrate fully with an existing configuration, can be
added over time, allowing the customer to acquire a system that is capable of
evolving as business requirements change. A typical major pharmaceutical
customer will select the components and a configuration that reflect the
structure of the sales force, the geographic region involved, and the type of
pharmaceutical sales data available. Each component is offered with specific
continuing support services.
CATALYST. Our Catalyst product provides a suite of comprehensive tools
tailored to the specific needs of mid-size pharmaceutical, medical device,
biopharmaceutical, biotechnology, and contract sales organizations. Catalyst's
flexible architecture and application development tools permit extensive
configuration to meet a customer's unique business requirements and subsequent
implementation within condensed time frames. Through the integration of
third-party sales data, comprehensive opportunity and contact management
functionality and sophisticated targeting capabilities, Catalyst empowers
healthcare product sales organizations with critical customer intelligence. Like
WebForce, Catalyst uses object-oriented programming technology and can be
configured for all user levels within a sales organization.
SALESPLUS. SalesPlus is marketed to mid-tier European pharmaceutical
companies. We configure SalesPlus prior to sale, which saves our customers the
time and costs associated with configuration. This product is offered to those
pharmaceutical customers whose business needs do not require all of the features
of the WebForce product. As with WebForce and Catalyst, SalesPlus is capable of
supporting all levels within a sales organization.
j-forceWEB. Our j-forceWEB solution was specifically developed for the
Japanese market and contains functionality similar to the WebForce product. The
j-forceWEB solution is web-enabled and provides all of the functionality offered
in its predecessor product, J-Force. The solution is highly configured to meet
local market requirements that reflect the unique characteristics of the
Japanese prescription-only pharmaceutical market.
FORCEMOBILE, a Windows CE(TM)-based handheld application, provides
functionality comparable to many laptop applications at a reduced cost.
ForceMobile is optimized for growth-focused organizations of all sizes that
require greater portability, instant data access and lower cost of hardware
ownership. The product provides comprehensive functionality, two-tier
synchronization capabilities, and common enterprise architecture with WebForce.
ForceMobile enables organizations to increase sales effectiveness by delivering
and capturing information at the customer point of contact, enabling sales
representatives to effectively and timely target customers.
MEDICHECK. Medicheck, a Windows CE(TM)-based palmtop solution, is used by
pharmaceutical company sales representatives in emerging markets where highly
portable, lower cost hardware is essential. The multiple module palm-top system
replaces paper-based systems and permits information sharing among multiple
levels within a sales organization.
FORCEMC. ForceMC is our comprehensive managed care CRM solution. The ForceMC
solution was specifically designed for managed care account-based pharmaceutical
sales forces and addresses a variety of business issues specific to such field
forces. ForceMC is web-enabled, highly configurable and can be fully integrated
with other field force solutions (such as WebForce) being utilized by the
client.
CPG INDUSTRY PRODUCTS
Our CPG software products are generally configured in a manner similar to our
pharmaceutical software products. We currently offer our CPG customers ForceOne
software.
FORCEONE. ForceOne is our sales force software product for the CPG markets
and is sold in Europe, the United States and Canada. ForceOne contains most of
the same basic features as our base WebForce product, as well as features
specifically created for the CPG industry. ForceOne can be configured to support
field sales representatives, their managers and key account managers. The
structure of our license, implementation and any ongoing service fees for our
CPG customers is similar to that of our pharmaceutical customers; however, to
date this market segment has outsourced very few ongoing support services.
ANALYTICAL TOOLS
The Company currently offers certain analytical software and reporting tools
under the ForceAnalyzeRx and ScripMax product names, which may be used either
with our sales force software products or on a stand-alone basis. These software
products analyze data and produce reports based on the results of these
analyses. These products also provide customers with timely information for use
in developing sales strategies and measuring performance. The custom
applications that we design with these products address a wide variety of client
business needs including sales, market research, clinical trials, new product
launch analyses and sales reporting.
Additional capabilities of these analytical products include the ability to
predict prescriber brand switches, allowing early intervention to encourage or
forestall a change in prescribing behavior. These tools also provide a detailed
analysis of the effectiveness of various promotional activities, and offer
promotional activity optimization solutions. Dendrite delivers results of the
analysis to the user via e-mail or over the Internet.
Dendrite has developed strategic partnerships with a consortium of
demographically and geographically diverse chain and independent retail
pharmacies throughout the U.S. These pharmacy data partners deliver a new level
of timely, accurate and unique data for incorporation into Dendrite's analytical
tools. Through this alliance, Dendrite offers its clients unique prescription
dispensing data, which combined with our advanced analytics and predictive
modeling capabilities, provides our clients with revolutionary information
regarding prescriber behavior.
SERVICES
In addition to its product offerings, Dendrite provides services to its
customers, including software implementation, technical and hardware support and
sales force support services. We also provide data-related services, including
data scrubbing, match, merge and purge activities, and a variety of data
analysis services. Virtually all customers engage Dendrite to provide all or
some of these services, including software defect resolution.
For the year ended December 31, 2000, service revenues represented
approximately 89% of our total revenues. As a result of providing these ongoing
services, we have developed long-term strategic relationships with our
customers. Once we begin supplying CRM solutions to our larger customers, we
generally continue to provide support services to them beyond the expiration of
the initial service agreement. As these relationships develop, our customers
typically increase the amount and variety of support services they purchase from
us. These relationships have accounted for some of our increase in
service-related revenues.
The complexity and size of the sales and market research databases being
integrated and manipulated by our software products require highly specialized
information systems skills, particularly as new sources of data must be
integrated. The creation of a customer's database requires loading third party
data onto a central server or servers and encoding that data with proprietary
Dendrite data links. This encoding process allows the data to be integrated into
a functional sales-related database used by Dendrite's CRM software products. We
initially perform these services during installation and, if requested, may
continue to manage these information systems over time. Many companies choose
not to employ the information systems staff needed to manage these large,
complex databases and consider the outsourcing of these tasks to us or other
third parties as both economically and operationally advantageous to their
business.
Dendrite offers a full range of support services to all of our customers.
However, customers of our SalesPlus, Medicheck, and ForceOne products often
require less functionality and support services than customers of some of our
other products. We therefore generally expect the amount of support services for
these customers to be less than that provided to customers of our other
products.
The principal categories of services we offer are implementation services,
technical and hardware support services, sales force support services and
analytical services.
IMPLEMENTATION SERVICES. Our implementation services include: the
configuration, if applicable, and implementation of a Dendrite CRM software
product to meet customer requirements; creation of the customer's specific
version of the Dendrite data model; creation of the customer's integrated
database; the loading of data onto the customer's remote computer hardware; and
training customer employees on use and capabilities of Dendrite sales force
software products.
TECHNICAL AND HARDWARE SUPPORT SERVICES. Our technical and hardware support
service offerings consist of management of technical support for Dendrite sales
force software products, customization of source code (if applicable) to meet
the customer's needs and continued support of the customer's database. These
services include loading and linking new releases of third party data purchased
by the customer; identifying new functional segments for data analysis;
providing software defect resolution and issuing performance enhancements,
feature changes and, in certain circumstances, new versions of products,
operation and maintenance of server computers; providing asset control and
maintaining remote computer hardware, including recapture of data on defective
equipment and replacement of defective equipment; and developing business
interruption plans for management of any unforeseen interference with Dendrite's
provision of ongoing support services, including coordinating the retention of a
disaster recovery provider for the customer's servers.
SALES FORCE SUPPORT SERVICES. Our sales force support services include
project management; ongoing training on use and capabilities of Dendrite sales
force software products; assistance to the customer in planning and executing
realignments of sales territories or functional (e.g., formulary-based) segments
to allow more effective resource allocation; direct customer service telephone
support for Dendrite sales force and certain third party software products
(available seven days a week and in many foreign languages); pro-active
prescription data analysis at a territory and physician level to a customer's
sales representatives to improve sales and promotional campaigns; and data
integration and data management services with data our customers obtain from
third party sources.
When a major customer licenses a Dendrite sales force software product, the
Company typically establishes an implementation services group for that
customer, as well as a separate support service group composed of both customer
support and technical support personnel who are dedicated to servicing that
customer. For customers with smaller sales forces or sales forces with
specialized needs, such as non-home country language capability, the service
group may have responsibility for more than one client.
Typically, we provide services under a multi-year contract. In North
America, we enter into service agreements directly with our customers. Outside
North America, we enter into service agreements through our local wholly-owned
subsidiary or branch. Depending upon the size of the customer and the scope of
services to be performed, a dedicated service group may be comprised of five to
100 persons.
ANALYTICAL SERVICES. The Company provides analytical services as an integral
part of its comprehensive CRM solutions. The results of these analytical
services provide our customers with valuable measures, insights and predictions
about prescriber behavior, which are typically not available from standard forms
of analyses. Dendrite utilizes advanced modeling and data mining techniques to
generate these results, which are stored in a common customer database, and are
available for use in connection with our analytical tools.
Our approach to advanced analytics recognizes that each customer's portfolio
of products possesses unique characteristics that must be represented in the
analysis in order to produce meaningful and actionable results. As a result,
when a customer chooses to implement modeling for one or more of its brands, our
consultants work together with the customer's managers and analysts to identify
and quantify those aspects of the market conditions that need to be represented
in the analyses. We then tailor the models to the client's specific business and
marketing needs. Once this tailoring has been completed, the resulting models
and tools can be incorporated into the client's overall CRM system for on-going
use.
SOFTWARE CONFIGURATION
Our pharmaceutical software products are configured to allow information
access and communication among geographically dispersed sales and marketing
personnel and regional and home offices. The core of the configuration is a
central database server, which stores the customer information and integrates
and controls all data flow from external points. Most of the servers used by our
customers are manufactured by IBM, Compaq, Hewlett-Packard or Sun Microsystems
and run on UNIX(TM) or Windows NT(R) operating systems. Servers are purchased or
leased by Dendrite's customers or leased for them by Dendrite. Some smaller
customers lease space on our servers located in various offices worldwide.
Remote databases are stored on laptop and palmtop computers used by sales
representatives in the field and are updated regularly via modem. Regional sales
managers using personal computers may access the server via wide area networks.
Our customers are responsible for selecting computer equipment and for deciding
when to upgrade or replace it.
Our pharmaceutical software products permit a sales representative to send
updated information to the central database server. Similarly, the sales
representative can receive information concerning upcoming calls as well as
additional sales efforts planned by other sales representatives within the same
company. This server, in most cases located at one of our facilities, contains
the customer's own database of sales-related information which is generally
maintained and operated for the customer by us.
CUSTOMERS
Our major customers consist of large, multinational pharmaceutical
companies, including: Abbott; Allergan; AstraZeneca; Aventis; Bristol-Myers
Squibb; Dai-nippon; Eli Lilly; Kissei; Johnson & Johnson; Mitsubishi Tokyo;
Novartis; Ono Pharmaceuticals; Pfizer; Proctor & Gamble; Schering Plough;
SmithKline Beecham; Solvay; Takeda Pharma; Teijin; Tokyo Tanabe; Torii; Tsumura;
and Wyeth Lederle. In addition, in the CPG market, our major customers include:
Gillette; RJR MacDonald; Rayovac; Ralston-Purina; and Wells Dairy.
Approximately 52% of our total revenues in 2000 came from our three largest
clients: Pfizer (which includes the former Parke-Davis division of Warner
Lambert), Johnson & Johnson and Bristol-Myers Squibb. Approximately 37% of our
total revenues in 1999 came from Pfizer and Johnson & Johnson. Approximately 42%
of our total revenues in 1998 came from Pfizer and Johnson & Johnson. The loss
of all or a significant part of the business of any of these customers could
have a material adverse effect on us.
SALES AND MARKETING
Dendrite actively markets its CRM solutions to companies worldwide using
regional and local sales and marketing personnel. Sales presentations are
typically made to the customer's management information services department or
sales department. The selection of a sales force software product often entails
an extended decision-making process that typically takes nine to eighteen
months. This process may involve senior levels of management and, in some cases,
the board of directors.
The Company works with a potential customer to identify its business
requirements in light of its markets, sales organization and operating
structure. We draw upon our broad product functionality and experience in the
applicable vertical market to provide a comprehensive yet highly targeted CRM
solution.
The positive response of our customers' sales representatives can influence
the decisions of those customers to license additional functionality and/or to
contract for expanded support services. Accordingly, we try to address the
concerns of sales personnel during the training portion of our implementation
services. We also promptly respond to customer communications and evaluate them
for indications of potential systemic problems or changing market trends.
Our relationships with existing customers have been shown to create
additional sales and marketing opportunities. Further, our network of
international offices allows us to serve our existing customers in new
locations. Many of our prescription-only pharmaceutical customers have
over-the-counter operations as well, which provide us with additional sales
opportunities.
Occasionally, we have entered into arrangements with business partners to
market our products and/or services jointly. In addition, at the request of
certain customers, we may resell computer hardware and third-party software.
COMPETITION
The current market for customer relationship management products and support
services is highly competitive and rapidly changing. Many companies offer SFA
and CRM products and/or services in the prescription-only pharmaceutical and CPG
industries. In addition, we also compete with many companies that provide
support services similar to our services.
Although there are a number of other companies that sell CRM and SFA
products, both within and without the pharmaceutical industry (including Siebel,
Synavant, Stay-in Front and TVF (Cegedim)), many companies, such as Siebel,
endeavor to adapt their products across a broad number of industries and uses.
Dendrite, however, believes that it has distinguished itself and is well
positioned in the CRM pharmaceutical market by reason of its unique combination
of deep pharmaceutical market knowledge, recognized technical support and depth
of personnel experienced in the pharmaceutical industry, and proprietary CRM
products and product architecture uniquely suited to the pharmaceutical
industry.
Our sales force products and services compete with others principally on the
basis of the following factors:
o product flexibility and configuration;
o platform configuration;
o name recognition;
o global competence;
o service standards;
o cost;
o breadth of customer base; and
o technical support and service.
The Company believes that our solutions compete favorably with respect to
these factors, and that we are particularly well positioned to maintain strong
market leadership through innovative new product and application developments,
and with continued focus on support services.
The Company expects competition to increase as new competitors enter the
market to supply CRM software products and/or services and as existing
competitors expand their product lines or, consolidate or offer more compelling
solutions. Some of our competitors and potential competitors are part of large
corporate groups and significantly greater financial, sales, marketing,
technology and other resources than Dendrite. We also expect to encounter
additional competition in the future from firms offering outsourcing of
information technology services and from vendors of software products providing
specialized applications not offered by us, including enterprise resource
planning vendors and database vendors. The Company may also face competition
from CRM vendors who do not currently compete within our vertical markets. In
addition, we face potential competition from our current customers and potential
customers who may elect to design and install or to operate their own CRM
systems.
RESEARCH AND DEVELOPMENT
Dendrite continues to take advantage of new technologies in developing new
products and services. We charged to expense approximately $10,875,000,
$7,669,000 and $4,584,000 of research and development in the years ended
December 31, 2000, 1999 and 1998, respectively.
We have 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 $4,392,000 at
December 31, 2000 and $3,666,000 at December 31, 1999.
These amounts exclude $4,144,000 as of December 31, 2000, and $2,399,000 as
of December 31, 1999 of purchased software associated with the acquisitions of
Associated Business Computing, N.V., Marketing Management International, Inc.,
and Analytika, Inc. See Note 2 to the Company's Consolidated Financial
Statements.
PROPRIETARY RIGHTS
Dendrite relies on a combination of methods to protect our proprietary
intellectual technology, including:
o trade secret, copyright and trademark laws;
o license agreements with customers containing confidentiality
provisions;
o confidentiality agreements with consultants, vendors and suppliers; and
o non-disclosure agreements with each of our executive officers and
technical employees.
Existing United States copyright laws provide only limited protection and
even less protection may be available under foreign laws.
EMPLOYEES
As of December 31, 2000, the Company employed 1,559 employees: 1,162 in the
United States and Canada; 224 in Europe; 100 in the Pacific Rim; and 73 in Latin
America.
We believe that relations with our employees are good. Our employees
generally are not part of any collective bargaining unit except for our
employees in France who are subject to a national collective bargaining
agreement. We believe that our future growth and success will depend upon our
ability to attract and retain skilled and motivated personnel, which is becoming
progressively more difficult for many technology and services companies.
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
Name Age Capacities in Which Served
---- --- --------------------------
John E. Bailye............... 47 Chairman of the Board and Chief
Executive Officer
R. Bruce Savage.............. 52 Executive Vice President and Chief
Operating Officer
George T. Robson............. 53 Executive Vice President
Michael G. Atieh............. 47 Senior Vice President and Chief
Financial Officer
Teresa F. Winslow............ 45 Senior Vice President and President,
Americas Division
Mark H. Cieplik.............. 46 Senior Vice President, Worldwide Sales
Christopher J. French........ 41 Senior Vice President, Product Innovation
Marc Kustoff................. 45 Senior Vice President and Chief
Technology Officer
Christine A. Pellizzari...... 33 Vice President, General Counsel and
Secretary
Kathleen E. Donovan.......... 40 Vice President and Corporate Controller
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 as
Chairman of the Board. Prior to 1987, Mr. Bailye served as a market researcher
at Foresearch Pty., Limited ("Foresearch"), a consulting company to the
pharmaceutical industry in Australia. In 1976, Mr. Bailye acquired Foresearch
and served as its Managing Director until he sold the company in 1986. Mr.
Bailye holds a Bachelor of Commerce in Finance, Marketing and Business from the
University of New South Wales.
R. Bruce Savage has served as Executive Vice President and Chief
Operating Officer since 1994. From 1993 until 1994, Mr. Savage was Vice
President, Europe/Asia and from 1988 to 1993, Vice President, Europe. He also
served as General Manager for Dendrite New Zealand from 1986 to 1987, and served
as the General Manager of Dendrite Australia and Dendrite New Zealand from 1987
until 1988. Prior to joining the Company, Mr. Savage spent 15 years in the
pharmaceutical industry working for Ciba Geigy (NZ) Limited as Manager of Sales
and Marketing.
George T. Robson has served as Executive Vice President since February
1999, and as Chief Financial Officer from June 1997 to October 2000. Prior to
joining the Company, Mr. Robson served as Senior Vice President, Chief Financial
Officer and Treasurer of H&R Block, Inc. from 1996 to 1997. In addition, Mr.
Robson served as Senior Vice President of Unisys Corporation from 1991 to 1996,
and as Chief Financial Officer of Unisys from 1990 until 1996. Mr. Robson holds
a Bachelor of Science in Economics from the Wharton School of the University of
Pennsylvania and an M.S. in Management Science from the State University of New
York at Binghamton.
Michael G. Atieh has served as Senior Vice President and Chief
Financial Officer since October 2000. Prior to joining the Company, Mr. Atieh
served in various positions at Merck & Co., most recently as Vice President and
Executive Leader for the Medicare Business Initiative. At Merck & Co., Mr. Atieh
served as Senior Vice President, Sales for Merck-Medco Managed Care from 1994 to
1998, as Vice President, Public Affairs in 1994, as Corporate Treasurer from
1990 to 1993, as Vice President, Government Relations from 1988 to 1990, as
Director of Investor Relations from 1986 to 1988, and as Director of Accounting
from 1983 to 1986. Mr. Atieh is also a Director of Ace Limited. Mr. Atieh is a
Certified Public Accountant and holds a Bachelor of Arts in Accounting from
Upsala College.
Teresa F. Winslow has served as President, Americas Division since July
1999 and Senior Vice President since June 1997. Ms. Winslow served as Senior
Vice President for the Company's Pfizer Pharmaceutical Global Account Group from
1996 to 1997, as Vice President, Sales and Business Development from 1994 to
1996, as Executive Director, International Sales from 1993 to 1994 and as
Director of Marketing and Sales for Dendrite Americas from 1991 to 1993. Prior
to joining the Company, Ms. Winslow served in various positions at Schering
Laboratories, a division of Schering-Plough Corporation, most recently as
National Sales Director. Ms. Winslow is a registered pharmacist and holds a
Bachelor of Science in Pharmacy from the University of the Sciences, previously
known as Philadelphia College of Pharmacy and Science.
Mark H. Cieplik has served as Senior Vice President, Worldwide Sales
since June 1997. Prior to joining the Company, Mr. Cieplik served as Vice
President of Americas of Interleaf, Inc. from 1995 to 1997. In addition, Mr.
Cieplik served as Director of North America Major Accounts for System Software
Associates from 1991 to 1995, and served in various capacities for IBM from 1976
until 1991. Mr. Cieplik holds a Bachelor of Science in Marketing from Millikin
University.
Christopher J. French has served as Senior Vice President, Product
Innovation since April 2000. Mr. French served as Vice President, General
Counsel and Secretary from 1996 to 2000. Prior to joining the Company, Mr.
French was an Associate at Skadden, Arps, Slate, Meagher & Flom from 1987 to
1996. Mr. French holds a Bachelor of Science in Economics from the Wharton
School of the University of Pennsylvania and a Juris Doctorate from Fordham
University School of Law.
Marc Kustoff has served as Senior Vice President and Chief Technology
Officer since November 2000. Prior to joining the Company, Mr. Kustoff served as
Vice President, Information Systems at Parke-Davis Pharmaceutical Co. from
October 1996 to November 2000. In addition, Mr. Kustoff has held key management
positions at Corning Life Sciences, Inc. and Rhone-Poulenc Rorer, Inc. Mr.
Kustoff holds a Bachelor of Arts in Philosophy from the State University of New
York, a Master's degree from Michigan State University in Human Resource
Management, and Master's degree in Information Systems from Long Island
University.
Christine A. Pellizzari has served as Vice President, General Counsel
and Secretary since August 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 was a 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.
Kathleen E. Donovan has served as Vice President and Corporate
Controller since March 1999. Ms. Donovan served as Vice President of Financial
Operations from 1997 to 1999. Prior to joining the Company, Ms. Donovan spent 14
years at Unisys Corporation, most recently as Director of Corporate Financial
Planning. Ms. Donovan holds a Bachelor of Science in Finance from Georgetown
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."
ITEM 2. PROPERTIES.
The Company leases a 101,500 square foot building, which serves as our
corporate headquarters in Morristown, New Jersey; a 31,575 square foot building
in Stroudsburg, Pennsylvania, which houses customer support personnel; a 26,280
square foot building in Basking Ridge, New Jersey, which houses customer support
personnel; a 26,500 square foot office in Liberty Corner, New Jersey; a 10,000
square foot building in Stroudsburg, Pennsylvania which serves as a hardware
repair and maintenance facility; a 10,000 square foot warehouse in Somerset, New
Jersey; a 9,490 square foot office in Durham, North Carolina; and a 120 square
foot office in Newark, Delaware. We also lease a total of 57,670 square feet in
fifteen foreign locations in Australia, Belgium, Brazil, Canada, Ecuador,
France, Germany, Hungary, Italy, Japan, Mexico, New Zealand, Spain and the
United Kingdom for local management, sales offices and customer support
operations. We have entered into a lease prior to December 31, 2000, for a
100,000 square foot facility in Chesapeake, Virginia. Subsequent to December 31,
2000, the Company entered into a lease for 33,000 square feet of office space in
New Jersey; and an agreement to purchase a 145,000 square foot building in New
Jersey and plans to relocate our principal facilities in the summer of 2001. See
Note 8 to the Company's Consolidated Financial Statements.
Servers located at our facilities are commonly maintained in a secured area
and are often subject to regular audit and inspection by our customers. The
Company maintains database servers located at our facilities for substantially
all of our U.S. customers and for a substantial majority of our international
customers. For these customers, we offer a business interruption service, which
is intended to protect these customers' businesses in the event of any
unforeseen interruption, interference or disruption of the Company's provision
of customer support services. As part of this offering, we will assist a
customer in developing a business interruption plan, which will include the
coordination of the customer's retention of a disaster recovery provider.
ITEM 3. LEGAL PROCEEDINGS.
Dendrite is occasionally involved in litigation relating to personnel and
other claims arising in the ordinary course of business. The Company is not
currently engaged in any legal proceedings that are expected, individually or in
the aggregate, to have a materially adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, no par value, is quoted on the Nasdaq National
Market under the symbol "DRTE". As of March 1, 2001, there were approximately
188 holders of record of our common stock.
The following table sets forth for the periods indicated the high and low
sale prices for our common stock as reported by the Nasdaq National Market
System.
Period High Low
------ ---- ---
Quarter Ended March 31, 2000.................... $35.00 $17.19
Quarter Ended June 30, 2000..................... 33.56 14.00
Quarter Ended September 30, 2000................ 33.38 21.38
Quarter Ended December 31, 2000................. 27.88 10.63
Quarter Ended March 31, 1999.................... 21.17 13.63
Quarter Ended June 30, 1999..................... 25.33 13.17
Quarter Ended September 30, 1999................ 33.67 19.25
Quarter Ended December 31, 1999................. 39.00 25.00
The Company has never paid any cash dividends on its common stock and does
not intend to pay any cash dividends on common stock in the foreseeable future.
The Company's line of credit agreement with The Chase Manhattan Bank, N.A.
requires that we maintain a minimum net worth measured quarterly which is equal
to our net worth as of December 31, 1997 plus 50% of our net income earned after
January 1, 1998 and 75% of the net proceeds to us of any stock offerings. This
covenant effectively limits the amount of cash dividends we may pay. See Note 4
of "Notes to Consolidated Financial Statements" for a discussion of our line of
credit agreement.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------- --------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees..................... $ 23,966 $ 24,244 $ 14,955 $ 9,074 $ 10,310
Services........................ 190,360 148,441 115,678 82,248 66,573
-------- --------- -------- ------- --------
214,326 172,685 130,633 91,322 76,883
Costs of revenues:
Cost of license fees............. 3,420 2,360 2,314 1,758 832
Cost of services................. 88,234 72,380 57,887 45,078 37,771
-------- --------- -------- ------- --------
91,654 74,740 60,201 46,836 38,603
-------- --------- -------- ------- --------
Gross margin..................... 122,672 97,945 70,432 44,486 38,280
Operating expenses:
Selling, general and administrative 67,884 56,927 44,046 33,305 28,519
Research and development......... 10,875 7,669 4,584 3,674 7,361
Mergers and acquisitions......... -- 3,466 -- -- --
Write-off of in-process research and
development.................... -- -- 1,230 -- 2,640
-------- --------- -------- ------- --------
78,759 68,062 49,860 36,979 38,520
-------- --------- -------- ------- --------
Operating income (loss).......... 43,913 29,883 20,572 7,507 (240)
Interest income....................... 3,541 1,880 1,099 531 1,168
Other income (expense)................ 5 (189) (466) (261) (240)
-------- --------- -------- ------- ---------
Income before income taxes....... 47,459 31,574 21,205 7,777 688
Income taxes.......................... 16,848 12,234 8,446 3,002 1,467
-------- --------- -------- ------- --------
Net income (loss)..................... $ 30,611 $ 19,340 $12,759 $ 4,775 $ (779)
======== ========= ======== ======= =========
Net income (loss) per share:
Basic............................ $ 0.78 $ 0.51 $ 0.35 $ 0.13 $ (0.02)
======== ========= ======== ======= =========
Diluted.......................... $ 0.74 $ 0.48 $ 0.32 $ 0.13 $ (0.02)
======== ========= ======== ======= =========
Shares used in computing net income
(loss) per share:
Basic............................ 39,354 37,725 36,080 35,601 35,370
======== ========= ======== ======= =======
Diluted.......................... 41,344 40,599 39,392 36,870 35,370
======== ========= ======== ======= =======
DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- ----------- ----------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................... $113,738 $78,131 $50,608 $34,813 $31,530
Total assets.............................. 175,903 124,720 81,831 57,876 54,176
Capital lease obligation, less current
portion................................... -- 285 544 353 201
Stockholders' equity...................... 153,298 101,116 61,049 40,672 37,511
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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" and "Business" regarding our
strategy, future operations, future expectations or future estimates, financial
position 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 risks and uncertainties,
including those risks identified under "Factors That May Affect Future Operating
Results," many of which are beyond our control. Although we believe that the
assumptions underlying our forward-looking statements are reasonable, any of the
assumptions could be inaccurate and actual results may differ from those
indicated by the forward-looking statements included in this Form 10-K, as more
fully described under "Factors That May Affect Future Operating Results". In
light of the significant uncertainties inherent in the forward-looking
statements included in this Form 10-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 obligations to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
OVERVIEW
In 1991, Dendrite was the successor to a business co-founded in 1986 by John
E. Bailye, the Company's Chairman and Chief Executive Officer. The business was
established to provide Sales Force Effectiveness or SFE solutions, which have
evolved into what is commonly referred to as CRM solutions, that enable
companies to manage, coordinate and control the activities of large sales forces
in complex selling environments, primarily in the prescription-only
pharmaceutical industry. Today, our CRM solutions combine software products with
a wide range of specialized support services. These services include software
implementation, technical and hardware support and sales force support. We
develop, implement and service sales force software products through our own
sales, support and technical personnel located in 21 offices worldwide.
The Company generates revenues from both services and licenses. Service
revenues, which account for a substantial majority of our revenues, consist of
fees from a wide variety of contracted services which we make available to our
customers, generally under multi-year contracts. We generate implementation fees
from services provided to configure and implement the CRM software products for
our customers. We receive technical and hardware support fees for services
related to, among other things, ongoing technical support, maintenance of our
customers' databases, operations of our customers' server computers, maintenance
for our customers' remote hardware and asset control. Technical and hardware
support fees also include fees for software maintenance services such as
software defect resolution and performance enhancements. We generally charge
fees for these maintenance services based on a percentage of total license fees.
We receive sales force support fees for organizing and managing support of our
customers' sales force, including training, telephone support and data analysis
services. It is our experience that our larger customers increase the amount of
services they purchase from us over time. Fees for these additional services are
typically based on the labor and materials used to provide the applicable
service.
We charge our customers license fees to use our proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, the territory covered and the particular software licensed by
the customer.
The Company generally recognizes license fees as revenue using the
percentage-of-completion method over a period of time that commences with the
execution of the license agreement and ends when the product configuration is
complete and it is ready for use in the field. This period of time usually
includes initial customization or configuration and concludes with quality
assurance and testing. When there is no initial customization or configuration,
the Company generally recognizes the license fees from those products upon
delivery if any services to be provided are not essential to the functionality
of the software. Additionally, license revenues are recognized immediately when
the user count for previously delivered software increases. Historically, the
Company's software licensing agreements provide for a warranty period (typically
180 days from the date of execution of the agreement). The Company's software
maintenance period usually begins immediately after the warranty period. The
portion of the license fee associated with the warranty period is unbundled from
the license fee and is recognized ratably over the warranty period. The Company
does not recognize any license fees unless persuasive evidence of an arrangement
exists, delivery has occurred, the license amount is fixed or determinable and
collectability is probable.
The United States, the United Kingdom, France and Japan are currently our
main markets. We bill services provided by our foreign branches and subsidiaries
in local currencies. Operating results generated in local currencies are
translated into U.S. dollars at the average exchange rate in effect for the
reporting period. We generated approximately 23% of our total revenues outside
the United States during the year ended December 31, 2000; approximately 24%
during the year ended December 31, 1999; and approximately 24% during the year
ended December 31, 1998. Our operating profits by geographic segment are shown
in Note 10 of "Notes to Consolidated Financial Statements".
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 or equity instruments.
The Company has made the following acquisitions over the last three years:
On January 6, 2000, the Company purchased all of the assets and assumed
certain liabilities of Analytika, Inc. ("Analytika"), a provider of advanced
analytical products, consulting services and outsourced operations services to
the pharmaceutical industry. Under the terms of the acquisition agreement, the
Company paid $2,318,000 in cash, which includes transaction costs, and
$6,506,000 in Dendrite common stock. The acquisition has been accounted for
using the purchase method with the purchase price allocated to the fair value of
the assets acquired and liabilities assumed based on their respective fair
market values at the acquisition date. Of the purchase price, $2,890,000 was
allocated to purchased capitalized software development costs. The excess of the
purchase price over the fair value of the net assets acquired has been allocated
to goodwill ($5,979,000) based upon an independent appraisal. Analytika's
results of operations have been included in the Company's consolidated financial
statements from the date of acquisition.
On June 30, 1999, the Company purchased all of the assets and assumed
certain liabilities (as defined) of Marketing Management International, Inc. and
certain affiliated companies (collectively, "MMI"), providers of palm-top
software and paper-based sales force effectiveness solutions and consulting
services to subsidiaries of multinational pharmaceutical companies operating in
emerging markets, such as Latin America, Eastern Europe and Southeast Asia.
Under the terms of the acquisition agreement, the Company paid $6,640,000 in
cash, which includes transaction costs, and $3,435,000 in Dendrite common stock.
The acquisition has been accounted for using the purchase method with the
purchase price allocated to the fair value of the assets acquired and
liabilities assumed based on their respective fair market values at the
acquisition date. The excess of the purchase price over the fair value of the
net assets acquired, which included purchased capitalized software development
costs ($1,989,000) has been allocated to goodwill ($7,235,000) based upon an
independent appraisal. MMI's results of operations have been included in the
Company's consolidated financial statements from the date of acquisition.
On May 27, 1999, the Company exchanged 2,220,807 shares of its common stock
for all the outstanding shares of common stock of CorNet International, Ltd.
("CorNet"), a provider of sales force effectiveness solutions for the U.S.
pharmaceutical, consumer and business to business markets. The merger has been
accounted for under the pooling of interests method. Accordingly, all prior
historical consolidated financial statements contained herein have been restated
to reflect the acquisition of CorNet.
On July 24, 1998, the Company acquired 100% of the capital stock of
Associated Business Computing, N.V. and an affiliated company (collectively,
"ABC") for approximately $4,013,000 and transaction costs of $150,000. The
acquisition was accounted for under the purchase method of accounting, with the
purchase price allocated to the assets acquired and liabilities assumed based on
their respective fair market values at the acquisition date. The excess of the
purchase price over the fair value of net assets acquired was assigned to
identifiable intangibles. The Company recorded $1,230,000 of the purchase price
as a charge in the consolidated statement of operations on the acquisition date
as it was related to the fair value of in process research and development
projects. The remaining amount by which the purchase price exceeded the net
assets acquired, which included purchased software ($850,000), was allocated to
goodwill ($2,226,000). ABC's results of operations have been included in the
Company's consolidated financial statements from the date of acquisition.
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,
----------------------------
2000 1999 1998
--------- --------- -------
Revenues:
License fees........................... 11% 14% 11%
Services............................... 89 86 89
--- --- ---
100 100 100
Costs of Revenues:
Cost of license fees................... 2 2 2
Cost of services....................... 41 42 44
--- --- ---
43 44 46
--- --- ---
Gross Margin........................... 57 56 54
Operating Expenses:
Selling, general and administrative.... 32 33 33
Research and development............... 5 4 4
Mergers and acquisitions............... -- 2 --
Write-off in-process research and
development.......................... -- -- 1
--- --- ---
37 39 38
--- --- ---
Operating income ..................... 20 17 16
Interest and other income.................. 2 1 --
--- --- ---
Income before income taxes............ 22 18 16
Income taxes............................... 8 7 6
--- --- ---
Net Income ................................ 14% 11% 10%
=== === ====
Certain reclassifications have been made to prior year amounts to conform
with current year presentations. During the second quarter of 1998, we
determined that costs associated with certain activities that were previously
classified as research and development expense should have been classified as
cost of services as these expenditures related to client-specific activities.
For consistency of presentation, all prior periods have been reclassified.
YEAR ENDED DECEMBER 31, 2000
REVENUES. Total revenues increased $41,641,000 to $214,326,000 in 2000, up
24% from $172,685,000 in 1999.
License fee revenues decreased $278,000 to $23,966,000 in 2000, down 1% from
$24,244,000 in 1999. License fee revenues as a percentage of total revenues were
11% in 2000 as compared to 14% in 1999 due in part to the 28% growth in service
revenues, as discussed below. The lack of change in license fee revenue was the
result of fewer sales to new pharmaceutical customers in the U.S.
Service revenues increased $41,919,000 to $190,360,000 in 2000, up 28% from
$148,441,000 in 1999. Service revenues as a percentage of total revenues were
89% in 2000 as compared to 86% in 1999. The increase in service revenues was
primarily the result of an increase in the number of installed users of Dendrite
sales force software products at both new and existing customers, as well as the
provision of additional services for our existing customers.
COST OF REVENUES. Cost of revenues increased $16,914,000 to $91,654,000 in
2000, up 23% from $74,740,000 in 1999.
Cost of license fees increased $1,060,000 to $3,420,000 in 2000, up 45% from
$2,360,000 in 1999. Cost of license fees, as a percentage of license revenues,
were 14% in 2000 as compared to 10% in 1999. Cost of license fees includes the
amortization of capitalized software development costs and third party vendor
license fees. The increase in the costs in 2000 was primarily due to the
increase in purchased capitalized software associated with the acquisitions of
MMI in May 1999 and Analytika in January 2000.
Cost of services increased $15,854,000 to $88,234,000 in 2000, up 22% from
$72,380,000 in 1999. This increase was primarily due to an increase in staff
required to support greater client activity. As a percentage of service
revenues, cost of services decreased from 49% of service revenues in 1999 to 46%
in 2000. This decrease was primarily the result of increased operational
efficiencies in 2000.
Total gross margin remained relatively consistent at 57% in 2000 and 56% in
1999.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
$10,957,000 to $67,884,000 in 2000, up 19% from $56,927,000 in 1999. As a
percentage of revenues, SG&A expenses decreased to 32% in 2000 from 33% in 1999.
The increase in SG&A expenses was primarily attributable to an increase in sales
and marketing expenses from both our existing businesses and our newly acquired
businesses, due in part to an increase in the number of worldwide employees.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES. R&D expenses increased $3,206,000
to $10,875,000 in 2000, up 42% from $7,669,000 in 1999. The increase in research
and development expenses was primarily attributable to increased spending on
development of internet initiatives, along with R&D spending from acquisitions.
As a percentage of revenues, R&D expenses increased to 5% in 2000 from 4% in
1999. With respect to future research and development expenses, subject to
market conditions, we currently anticipate that such expenses will be
approximately 4% to 6% of revenues.
MERGERS AND ACQUISITIONS. During the second quarter of 1999, the Company
acquired CorNet in a transaction accounted for as a pooling of interests and
incurred a one-time expense for the costs related to the acquisition and the
cancellation of a proposed common stock offering.
PROVISION FOR INCOME TAXES. The effective tax rate was reduced to 35.5% in
2000 as compared to 36%, excluding one-time charges, in 1999. This slight
decrease was the result of historical tax planning strategies. We anticipate the
effective tax rate to be approximately 36% in 2001.
YEAR ENDED DECEMBER 31, 1999
REVENUES. Total revenues increased $42,052,000 to $172,685,000 in 1999, up
32% from $130,633,000 in 1998.
License fee revenues increased $9,289,000 to $24,244,000 in 1999, up 62%
from $14,955,000 in 1998. License fee revenues as a percentage of total revenues
were 14% in 1999 as compared to 11% in 1998. This increase was attributable
primarily to sales to new pharmaceutical customers, sales force expansions and
software upgrades by existing pharmaceutical customers.
Service revenues increased $32,763,000 to $148,441,000 in 1999, up 28% from
$115,678,000 in 1998. Service revenues as a percentage of total revenues were
86% in 1999 as compared to 89% in 1998. The increase in service revenues was
primarily the result of an increase in the number of installed users of Dendrite
sales force software products at both new and existing customers, as well as the
provision of additional services for our existing customers.
COST OF REVENUES. Cost of revenues increased $14,539,000 to $74,740,000 in
1999, up 24% from $60,201,000 in 1998.
Cost of license fees increased $46,000 to $2,360,000 in 1999, up 2% from
$2,314,000 in 1998. Cost of license fees includes the amortization of
capitalized software development costs and third party vendor license fees. The
increase in the amortization of capitalized software development costs in 1999
was primarily due to the increase in purchased capitalized software associated
with the acquisitions of ABC and MMI in 1999.
Cost of services increased $14,493,000 to $72,380,000 in 1999, up 25% from
$57,887,000 in 1998. This increase was primarily due to an increase in staff
required to support greater client activity including the use of higher cost
consultants and contractors. As a percentage of service revenues, however, cost
of services decreased from 50% of service revenues in 1998 to 49% in 1999. This
decrease was primarily the result of increased operational efficiencies in 1999.
Total gross margin for 1999 rose to nearly 57%, up from 54% in 1998. This
increase is due to the improvement in both service and license margins as
described above, as well as the higher proportion of license to service revenues
in 1999. This is due to the launch of several new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$12,881,000 to $56,927,000 in 1999, up 29% from $44,046,000 in 1998. As a
percentage of revenues, SG&A expenses remained constant at 33% for the years
ended 1999 and 1998. The increase in SG&A expenses was primarily attributable to
an increase in sales and marketing expenses from both our existing businesses
and our newly acquired businesses, as well as increases related to additional
leased facilities in Morristown, New Jersey.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $3,085,000 to $7,669,000 in 1999, up 67% from $4,584,000 in 1998. The
increase in research and development expenses during 1999 was primarily
attributable to increased spending on development of our laptop pharmaceutical
sales force software products and a new version of our palmtop pharmaceutical
sales force software product.
MERGERS AND ACQUISITIONS. During the second quarter of 1999, the Company
acquired CorNet in a transaction accounted for as a pooling of interests and
incurred a one-time expense for the costs related to the acquisition and the
cancellation of a proposed common stock offering.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. On July 24, 1998,
the Company acquired 100% of the capital stock of ABC. We assigned $1,230,000 of
the purchase price to in-process research and development and such amount was
expensed in the statement of operations.
PROVISION FOR INCOME TAXES. The effective rate decreased to 39% in 1999 from
40% in 1998. The effective rate for both 1999 and 1998 included one-time
charges, which are not deductible for tax purposes. Excluding the effect of
these charges, the effective rate would have been 36% in 1999 from 38% in 1998.
This decrease was due to the continued implementation of global tax planning
strategies.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data expressed in U.S. dollars for 2000 and 1999. Our quarterly
results have varied considerably in the past and are likely to vary from quarter
to quarter in the future.
QUARTERS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000 1999 1999 1999 1999
----------- --------- ----------- ----------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues:
License fees............ $ 5,609 $ 6,050 $ 8,599 $ 3,708 $ 4,054 $ 6,747 $ 6,891 $ 6,552
Services................ 41,453 45,681 47,434 55,792 33,580 35,104 38,855 40,902
-------- -------- -------- -------- -------- -------- -------- --------
47,062 51,731 56,033 59,500 37,634 41,851 45,746 47,454
Costs of Revenues:
Cost of license fees.... 745 1,130 835 710 398 592 535 835
Cost of services........ 19,584 20,950 21,701 25,999 16,503 17,722 18,847 19,307
-------- -------- -------- -------- -------- -------- -------- --------
20,329 22,080 22,536 26,709 16,901 18,314 19,382 20,142
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin............ 26,733 29,651 33,497 32,791 20,733 23,537 26,364 27,312
Operating Expenses:
Selling, general, and
administrative....... 15,438 16,146 18,752 17,548 12,627 14,397 14,716 15,186
Research and development 2,639 2,701 2,703 2,832 1,638 1,835 2,393 1,803
Mergers and
acquisitions......... -- -- -- -- -- 3,466 -- --
-------- -------- -------- -------- -------- -------- -------- --------
18,077 18,847 21,455 20,380 14,265 19,698 17,109 16,989
-------- -------- -------- -------- -------- -------- -------- --------
Operating income...... 8,656 10,804 12,042 12,411 6,468 3,839 9,255 10,323
Interest income............. 760 757 917 1,107 418 440 408 613
Other income (expense)...... -- (25) (17) 47 (125) 43 (10) (97)
-------- --------- --------- -------- --------- -------- --------- ---------
Income before
income taxes............ 9,416 11,536 12,942 13,565 6,761 4,322 9,653 10,839
Income taxes................ 3,390 4,153 4,660 4,645 2,562 2,296 3,475 3,901
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................. $ 6,026 $ 7,383 $ 8,282 $ 8,920 $ 4,199 $ 2,026 $ 6,178 $ 6,938
======== ======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic................... $ 0.16 $ 0.19 $ 0.21 $ 0.22 $ 0.11 $ 0.05 $ 0.16 $ 0.18
======== ======== ======== ======== ======== ======== ======== ========
Diluted................. $ 0.15 $ 0.18 $ 0.20 $ 0.22 $ 0.11 $ 0.05 $ 0.15 $ 0.17
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing
net income per share:
Basic................... 38,818 39,137 39,509 39,934 37,026 37,545 38,025 38,305
======== ======== ======== ======== ======== ======== ======== ========
Diluted................. 41,210 41,151 41,638 41,355 39,690 40,104 41,012 41,527
======== ======== ======== ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations primarily through cash generated by operating
activities. Net cash provided by operating activities was $23,262,000 for 2000,
compared to $31,811,000 for 1999. This decrease was due primarily to an increase
in accounts receivable at December 31, 2000. The increase in accounts receivable
was due to an increase in revenues and a delay in payments relating to certain
accounts receivable balances, which were expected by December 31, 2000, but were
not received until 2001. This decrease was partially offset by increased net
income during 2000 as compared to 1999.
Cash used in investing activities was $8,798,000 for 2000 as compared to
$21,916,000 in 1999. This decrease was due primarily to increased sales of
short-term investments, partially offset by an increase in purchases of property
and equipment.
We obtained $8,828,000 of cash from financing activities in 2000 as compared
to $7,903,000 in 1999. This increase was due primarily to an increase in the
issuance of common stock, which resulted from the exercise of employee stock
options during the year, as well as lower payments on capital lease obligations.
We maintain a $15.0 million revolving line of credit agreement with The
Chase Manhattan Bank, N.A. The agreement is available to finance working capital
needs and possible future acquisitions. The terms of this agreement require us
to maintain a minimum consolidated net worth, among other covenants, measured
quarterly, which is equal to our net worth as of December 31, 1997, plus 50% of
our net income earned after January 1, 1998 and 75% of the net proceeds to us of
any stock offerings (as defined in the agreement). This covenant effectively
limits the amount of cash dividends we may pay. At December 31, 2000, there were
no borrowings outstanding under the agreement and we satisfied all of our
covenant obligations.
Our working capital was approximately $113,738,000 at December 31, 2000 and
$78,132,000 at December 31, 1999. We believe that available funds, anticipated
cash flows from operations and our line of credit will satisfy our currently
projected working capital and capital expenditure requirements, exclusive of
cash required for possible acquisitions of businesses, products and
technologies, for the foreseeable future.
The Company is committed to spend approximately $11,000,000 to purchase a
facility in the second quarter of 2001. We recently entered into a lease
agreement for a new facility in Chesapeake, Virginia, with future minimum rental
payments of approximately $15,000,000 over the next 11 years. The two building
facility is comprised of approximately 100,000 total square feet. We expect
capital expenditures in connection with tenant improvements, furniture and
fixtures and other capital costs to be incurred through 2001. Funding for these
expenditures is expected to be from operating cash flows and existing cash
balances.
On January 31, 2001, the Company announced a stock repurchase program of up
to $20,000,000 of its outstanding common stock over a two-year period. The
Company will repurchase shares on the open market or in privately negotiated
transactions from time to time. Repurchases of stock will be at management's
discretion, depending upon price and availability. The repurchased shares will
be held as treasury stock, which may be used to satisfy the Company's current
and near term requirements under its equity incentive and other benefit plans
and for corporate purposes. As of March 28, 2001, the Company has repurchased a
total of 630,400 shares under the program for a total value of $8,806,074.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to recognition, presentation and
disclosure of revenue in financial statements. Management of the Company
believes that its accounting policies for revenue recognition are in compliance
with the provisions of SAB No. 101.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities and is
effective for all fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 will have no impact on operating
results or financial position.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY
Most of our customer relationship management products and services are
currently used in connection with the marketing and sale of prescription-only
drugs. This market is undergoing a number of significant changes. These include:
o the significant consolidation of the pharmaceutical industry as well as
the timing and sequencing of sales to our customers may reduce the
number of our existing and potential customers;
o regulatory changes that permit the over-the-counter sale of formerly
prescription-only drugs; and
o competitive pressure on the pharmaceutical industry resulting from the
continuing shift to delivery of healthcare through managed care
organizations.
We cannot assure you that we can respond effectively to any or all of these
and other changes in the marketplace. Our failure to do so could have a material
adverse effect on our business, operating results or financial condition.
OUR QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY AND MAY NOT MEET
MARKET EXPECTATIONS
Our results of operations may vary from quarter to quarter due to lengthy
sales and implementation cycles for our products, our fixed expenses in relation
to our fluctuating revenues and variations in our customers' budget cycles, each
of which is discussed below. As a result, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. It is also possible that in some future period our results
of operations may be below our targeted goals and the expectations of the public
market analysts and investors. If this happens, the price of our common stock
may decline.
OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OUR
QUARTERLY REVENUES
The selection of a CRM solution generally entails an extended
decision-making process because of the strategic implications and substantial
costs associated with a customer's license of the solution. Given the importance
of the decision, senior levels of management often are involved and, in some
instances, its board of directors may be involved in this process. As a result,
the decision-making process typically takes nine to eighteen months, and in
certain cases even longer. Accordingly, we cannot control or predict the timing
of our execution of contracts with customers.
In addition, an implementation process of three to six or more months before
the software is rolled out to a customer's sales force is customary. However, if
a customer were to delay or extend its implementation process, our quarterly
revenues may decline below expected levels and could adversely affect our
results of operations.
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS IF
REVENUES FALL BELOW EXPECTATIONS
We establish our expenditure levels for product development, sales and
marketing and some of our other operating expenses based in large part on our
expected future revenues and anticipated competitive conditions. In particular,
we frequently add staff in advance of new business to permit adequate time for
training. If the new business is subsequently delayed or canceled, we will have
incurred expenses without the associated revenues. In addition, we may increase
sales and marketing expenses if competitive pressures become greater than
originally anticipated. Since only a small portion of our expenses varies
directly with our actual revenues, our operating results and profitability are
likely to be adversely and disproportionately affected if our revenues fall
below our targeted goals or expectations.
OUR BUSINESS IS AFFECTED BY VARIATIONS IN OUR CUSTOMERS' BUDGET CYCLES
We have historically realized a greater percentage of our license fees and
service revenues in the second half of the year than in the first half because,
among other things, our customers typically spend more of their annual budget
authorization for CRM solutions in the second half of the year. However, the
relationship between the amounts spent in the first and second halves of a year
may vary from year to year and from customer to customer. In addition, changes
in our customers' budget authorizations may reduce the amount of revenues we
receive from the license of additional software or the provision of additional
services. As a result, our operating results could be adversely affected.
WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES
We derive a significant portion of our revenues from a limited number of
customers (considering all affiliates of each customer as part of that
customer). Approximately 52% of our total revenues in 2000 came from Pfizer
(which includes the former Parke-Davis division of Warner Lambert), Johnson &
Johnson and Bristol-Myers Squibb. Approximately 37% of our total revenues in
1999 came from Pfizer and Johnson & Johnson. Approximately 42% of our total
revenues in 1998 came from Pfizer and Johnson & Johnson. We believe that the
costs to our customers of switching to a competitor's software product, or of
taking significant system management functions in-house, are substantial.
Nevertheless, some of our customers have switched, and in the future other
customers may switch, to software products and/or services offered by our
competitors or by in-house staff. If any of our major customers were to make
such a change, our business, operating results or financial condition would be
materially and adversely affected.
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO
TECHNOLOGICAL CHANGE
The market for CRM products changes rapidly because of frequent improvements
in computer hardware and software technology. Our future success will depend, in
part, on our ability to:
o use available technologies and data sources to develop new products and
services and to enhance our current products and services;
o introduce new solutions that keep pace with developments in our target
markets; and
o address the changing and increasingly sophisticated needs of our
customers.
We cannot assure you that we will successfully develop and market new
products or product enhancements that respond to technological advances in the
marketplace, or that we will do so in a timely fashion. We also cannot assure
you that our products will adequately and competitively address the needs of the
changing marketplace.
Competition for software products has been characterized by shortening
product cycles. We may be materially and adversely affected by this trend if the
product cycles for our products prove to be shorter than we anticipate. If that
happens, our business, operating results or financial condition could be
adversely affected.
To remain competitive, we also may have to spend more of our revenues on
product research and development than we have in the past. As a result, our
results of operations could be materially and adversely affected.
Further, our software products are technologically complex and may contain
previously undetected errors or failures. Such errors have occurred in the past
and we cannot assure you that, despite our testing, our new products will be
free from errors. Errors that result in losses or delays could have a material
adverse effect on our business, operating results or financial condition.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES
We believe there are a number of other companies that sell CRM products and
related services that specifically target the pharmaceutical industry,
including:
o certain competitors that are actively selling CRM software products in
more than one country; and
o certain competitors that also offer CRM support services.
We believe the SFA and CRM software products and/or services offered by most
of our competitors do not address the variety of pharmaceutical customer needs
that our solutions address. We also face competition from many vendors that
market and sell SFA and CRM solutions in the CPG market. In addition, we also
compete with various companies that provide support services similar to our
services. We believe our ability to compete depends on many factors, some of
which are beyond our control, including:
o the number and success of new market entrants supplying competing CRM
products or support services;
o expansion of product lines by, or consolidation among, our existing
competitors; and
o development and/or operation of in-house CRM software products or
services by our customers and potential customers.
Some of our competitors and potential competitors are part of large
corporate groups and significantly greater financial, sales, marketing,
technology and other resources than we have. We cannot assure you that we will
be able to compete successfully with these companies or that competition will
not have a material adverse effect on our business, operating results or
financial condition.
OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT
The sale of our products and services in foreign countries accounts for, and
is expected in the future to account for, a material part of our revenues. These
sales are subject to risks inherent in international business activities,
including:
o any adverse change in the political or economic environments in these
countries;
o any adverse change in tax, tariff and trade or other regulations;
o the absence or significant lack of legal protection for intellectual
property rights;
o exposure to exchange rate risk for service revenues which are
denominated in currencies other than U.S. dollars; and
o difficulties in managing an organization spread over various
jurisdictions.
WE MAY FACE RISKS ASSOCIATED WITH ACQUISITIONS
Our business could be materially and adversely affected as a result of the
risks associated with acquisitions. As part of our business strategy, we have
acquired businesses that offer complementary products, services or technologies.
These acquisitions are accompanied by the risks commonly encountered in an
acquisition of a business, including:
o the effect of the acquisition on our financial and strategic position;
o the failure of an acquired business to further our strategies;
o the difficulty of integrating the acquired business;
o the diversion of our management's attention from other business
concerns;
o the impairment of relationships with customers of the acquired
business;
o the potential loss of key employees of the acquired company; and
o the maintenance of uniform, company-wide standards, procedures and
policies.
These factors could have a material adverse effect on our revenues and
earnings. We expect that the consideration paid for future acquisitions, if any,
could be in the form of cash, stock, rights to purchase stock, or a combination
of these. To the extent that we issue shares of stock or other rights to
purchase stock in connection with any future acquisition, existing shareholders
will experience dilution and potentially decreased earnings per share.
OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON
ATTRACTING AND RETAINING QUALIFIED PERSONNEL
Our future success depends, to a significant extent, upon the contributions
of our executive officers and key sales, technical and customer service
personnel. Our future success also depends on our continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense. We have at times experienced difficulties in
recruiting qualified personnel and we may experience such difficulties in the
future. Any such difficulties could adversely affect our business, operating
results or financial condition.
OUR INABILITY TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
To manage our growth effectively we must continue to strengthen our
operational, financial and management information systems and expand, train and
manage our work force. However, we may not be able to do so effectively or on a
timely basis. Failure to do so could have a material adverse effect upon our
business, operating results or financial condition.
OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO
PROTECT COMPLETELY
We rely on a combination of trade secret, copyright and trademark laws,
non-disclosure and other contractual agreements and technical measures to
protect our proprietary technology. We cannot assure you that the steps we take
will prevent misappropriation of this technology. Further, protective actions we
have taken or will take in the future may not prevent competitors from
developing products with features similar to our products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. We have, on occasion, in response to a request by our
customer, entered into agreements which require us to place our source code in
escrow to secure our service and maintenance obligations.
Further, we believe that our products and trademarks do not infringe upon
the proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future that may result in the imposition
of damages or injunctive relief against us. In addition, any such claims may
require us to enter into royalty arrangements. Any of these results could
materially and adversely affect our business, operating results or financial
condition.
THERE ARE CHARACTERISTICS IN THE CONSUMER PACKAGED GOODS MARKET THAT DIFFER FROM
THE PHARMACEUTICAL MARKET
We market and sell CRM solutions to companies in the CPG market. The selling
environment in this market has unique characteristics that differentiate it from
the pharmaceutical market. In addition, we believe that the CPG market is
composed of sub-markets, each of which may have unique characteristics.
Accordingly, we cannot assure you that we will be able to replicate in this
market the success we have achieved in the ethical pharmaceutical market.
PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN
ACQUISITION OF DENDRITE
Provisions of our Restated Certificate of Incorporation, as amended, our
By-laws, as amended, and New Jersey law may make it more difficult for a third
party to acquire us. For example, the Board of Directors may, without the
consent of the stockholders, issue preferred stock with rights senior to those
of the common stock. In addition, the Company has a shareholder rights plan
which may limit the ability of a third party to attempt a hostile acquisition of
the Company.
OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS
The market price of our common stock may be significantly affected by the
following factors:
o the announcement or the introduction of new products by us or our
competitors;
o quarter-to-quarter variations in our operating results or changes in
earnings estimates or failure to meet or exceed earnings estimates;
o market conditions in the technology, healthcare and other growth
sectors; and
o general consolidation in the healthcare information industry which may
result in the market perceiving us or other comparable companies as
potential acquisition targets.
Further, the stock market has experienced on occasion extreme price and
volume fluctuations. The market prices of the equity securities of many
technology companies have been especially volatile and often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may have a material adverse effect on the market price of our common stock.
ITEM 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 year-over-year comparability of
operating results. We do not hedge translation risks because we generally
reinvest the cash flows from international operations.
Management estimates that a 10% change in foreign exchange rates would
impact reported operating profit by less than $500,000. This sensitivity
analysis disregards the possibility that rates can move in opposite directions
and that losses from one area may be offset by gains from another area.
The introduction of the Euro as a common currency for members of the
European Monetary Union took place on January 1, 1999. The eleven participating
countries will issue sovereign debt exclusively in Euro and will redenominate
outstanding sovereign debt. The legal currencies will continue to be used as
legal tender through January 1, 2002, at which point the legacy currencies will
be canceled and Euro bills and coins will be used for cash transactions in the
participating countries. There can be no assurance that such Euro conversion
will not adversely affect our business, financial condition, results of
operations or cash flows. We have not determined what impact, if any, the Euro
has on our foreign exchange exposure.
INTEREST RATE RISK
We earn interest income from our balances of cash and short-term
investments. This interest income is subject to market risk related to changes
in interest rates, which primarily affects our investment portfolio. We invest
in instruments that meet high credit quality standards, as specified in our
investment policy. The policy also limits the amount of credit exposure to any
one issue, issuer and type of investment.
As of December 31, 2000, our short-term investments consisted primarily of
commercial paper maturing over the following three months. Due to the average
maturity and conservative nature of our investment portfolio, a sudden change in
interest rates would not have a material effect on the value of the portfolio.
Management estimates that if the average yield of the Company's investments
decreased by 100 basis points, our interest income for the year ended December
31, 2000 would have decreased by less than $700,000. This estimate assumes that
the decrease occurred on the first day of 2000 and reduced the yield of each
investment instrument by 100 basis points. The impact on our future interest
income, of future changes in investment yields will depend largely on the gross
amount of our investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 2000 Financial Statements, together with the report thereon of
Arthur Andersen LLP, are included in Item 14. The supplementary financial
information required by this Item is included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included under Item 7
above.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of the Company will be set forth in the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders, which
information is incorporated herein by reference. Information regarding executive
officers of the Company are set forth under Item 1 herein.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the Company's compensation of its directors and
executive officers will be set forth in the Company's Proxy Statement for the
2001 Annual Meeting, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's Proxy Statement for the 2001
Annual Meeting, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding transactions with the Company's directors and
executive officers will be set forth in the Company's Proxy Statement for the
2001 Annual Meeting, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements:
Report of Independent Public Accountants
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:
None.
3. Exhibits:
Articles of Incorporation and By-Laws:
--------------------------------------
3.1 Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Securities and Exchange Commission (the "Commission") on
August 14, 1996)
3.1 (a) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated herein by reference
to Exhibit 3.1(a) to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 30,
2001)
3.1 (b) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated herein by reference
to Exhibit 3.1 (b) to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on
March 30, 2001)
3.1 (c) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company Setting Forth the Terms of Series
A Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 3.1 (c) to the Company's Current Report
on Form 8-K, filed with the Securities and Exchange Commission
on March 30, 2001)
3.2 Amended and Restated By-laws of the Company (incorporated
herein by reference to Exhibit 3 to the Company's Current
Report on Form 8-K, filed with the Commission on February 21,
2001)
Instruments Defining Rights of Security Holders, including Indentures:
---------------------------------------------------------------------
4.1 Specimen of Stock Certificate (incorporated herein 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 herein 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 herein 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)
4.4 Rights Agreement dated as of February 20, 2001 between
Dendrite International, Inc. and Registrar and Transfer
Company, as Rights Agent, which includes, as Exhibit A the
Form of Certificate of Amendment to Restated Certificate of
Incorporation, as Exhibit B the Form of Rights Certificate and
as Exhibit C the Form of Summary of Rights (incorporated
herein by reference to Exhibit 4 of the Company's Current
Report on Form 8-K, filed with the Commission on February 21,
2001)
Material Contracts and Compensatory Plans and Arrangements:
----------------------------------------------------------
10.1 1992 Stock Plan, as amended (incorporated herein by reference
to Exhibit 10.36 to the Company's Registration Statement on
Form S-1, filed with the Commission on May 17, 1995)*
10.2 1992 Senior Management Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-1, filed with the
Commission on May 17, 1995)*
10.3 1997 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 14, 1997;
Exhibit 4.2 to the Company's Post Effective Amendment No. 2 to
Registration Statement on Form S-8 filed with the Commission
on April 21, 1998; and Exhibit A to the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders
filed with the Commission on April 16, 1999)*
10.4 1997 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8, filed with the Commission on April 1,
1997)*
10.5 Lease of 1200 Mount Kemble Avenue, Morristown, New Jersey
(incorporated herein by reference to Exhibit 10.40 to the
Company's Registration Statement on Form S-1, filed with the
Commission on May 17, 1995)
10.6 Form of Indemnification Agreement dated as of October 28, 1998
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 18, 1998)*
10.7 Amended and Restated Credit Agreement, entered into as of
November 30, 1998, between the Company and The Chase Manhattan
Bank, N.A. (incorporated herein by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K, filed with the
Commission on March 26, 1999)
10.8 Employment Agreement dated March 25, 1997 with John E. Bailye
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q/A, filed with the
Commission on May 16, 1997)*
10.9 Employment Agreement dated June 2, 1997 with George T. Robson
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1997)*
10.10 Employment Agreement dated June 9, 1997 with Mark Cieplik
incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1997)*
10.11 Employment Agreement dated July 24, 1997 with R. Bruce Savage
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 14, 1997)*
10.12 Employment Agreement dated October 1, 1991 with Teresa F.
Winslow (incorporated herein by reference to Exhibit 10.50 to
the Company's Registration Statement on Form S-1, filed with
the Commission on February 5, 1996)*
10.13 Consulting Agreement dated as of January 5, 1998 with Edward
Kfoury (incorporated herein by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q, filed with the
Commission on May 15, 1998)
10.14 Deferred Compensation Plan dated as of September 1, 1998
(incorporated herein by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1998)
10.15 Deferred Compensation Plan Trust Agreement dated as of
September 1, 1998 (incorporated herein by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q, filed
with the Commission on August 14, 1998)
10.16 Employment Agreement dated January 22, 1996 with Christopher
J. French (incorporated herein by reference to Exhibit 10.51
of the Company's Annual Report on Form 10-K, filed with the
Commission on March 31, 1997)*
10.17 Employment Agreement dated September 20, 2000 with Michael G.
Atieh (incorporated herein by reference to Exhibit 10.12 of
the Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 14, 2000) *
10.18 Employment Agreement dated August 7, 1997 with Kathleen
Donovan (incorporated herein by reference to Exhibit 10.17 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.19 Employment Agreement dated September 8, 1998 with Christine
Pellizzari (incorporated herein by reference to Exhibit 10.18
of the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.20 Amendment to Employment Agreement dated May 26, 1999 with Mark
Cieplik (incorporated herein by reference to Exhibit 10.19 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.21 Amendment to Employment Agreement dated May 26, 1999 with
Teresa Winslow (incorporated herein by reference to Exhibit
10.20 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.22 Amendment to Employment Agreement dated May 26, 1999 with
Christopher French (incorporated herein by reference to
Exhibit 10.21 of the Company's Current Report on Form 8-K,
filed with the Commission on March 30, 2001)*
10.23 Amendment to Employment Agreement dated May 26, 1999 with
George T. Robson (incorporated herein by reference to Exhibit
10.22 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.24 Amendment to Employment Agreement dated January 25, 2000 with
Kathleen Donovan (incorporated herein by reference to Exhibit
10.23 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.25 Amendment to Employment Agreement dated August 1, 2000 with
Christine Pellizzari (incorporated herein by reference to
Exhibit 10.24 of the Company's Current Report on Form 8-K,
filed with the Commission on March 30, 2001)*
10.26 Employment Agreement dated as of August 7, 2000 with Marc
Kustoff (incorporated herein by reference to Exhibit 10.25 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.27 Agreement of Purchase and Sale between Dendrite International,
Inc. and Townsend Property Trust Limited Partnership dated
January 5, 2001 (incorporated herein by reference to Exhibit
10.26 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.28 Deed of Lease between Liberty Property Limited Partnership and
Dendrite International, Inc. for Dendrite Building I of the
Liberty Executive Park in Chesapeake, Virginia (incorporated
herein by reference to Exhibit 10.27 of the Company's Current
Report on Form 8-K, filed with the Commission on March 30,
2001)
10.29 Deed of Lease between Liberty Property Limited Partnership and
Dendrite International, Inc. for Dendrite Building II of the
Liberty Executive Park in Chesapeake, Virginia (incorporated
herein by reference to Exhibit 10.28 of the Company's Current
Report on Form 8-K, filed with the Commission on March 30,
2001)
Subsidiaries:
------------
21 Subsidiaries of the Registrant
Consent of Independent Public Accountants:
------------------------------------------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
* Management contract or compensatory plan.
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K with the Commission on
February 1, 2001, concerning the authorization of the Company's stock
repurchase program.
2. The Company filed a Current Report on Form 8-K with the Commission on
February 21, 2001, concerning the declaration of a dividend
distribution pursuant to a Rights Agreement between the Company and
Registrar and Transfer Company.
3. The Company filed a Current Report on Form 8-K with the Commission on
March 21, 2001, concerning the exercise of options (and holding of the
purchased shares) for 200,000 shares of the Company's common stock by
John E. Bailye.
4. The Company filed a Current Report on Form 8-K with the Commission on
March 30, 2001, concerning various amendments to the Company's Restated
Certificate of Incorporation and employment agreements of certain
executive officers of the Company, leases for two buildings at the
Liberty Executive Park in Chesapeake, Virginia and an agreement of
purchase and sale of real property located in Piscataway, New Jersey.
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.
JOHN E. BAILYE
Date: March 30, 2001 By:
-------------------------------------
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
---- ----- ----
Chairman of the Board and March 30, 2001
JOHN E. BAILYE Chief Executive Officer
--------------------- (Principal Executive
John E. Bailye Officer)
MICHAEL G. ATIEH
--------------------- Senior Vice President March 30, 2001
Michael G. Atieh and Chief Financial Officer
(Principal Financial Officer)
KATHLEEN E. DONOVAN Vice President and March 30, 2001
--------------------- Corporate Controller
Kathleen E. Donovan (Principal Accounting Officer)
BERNARD M. GOLDSMITH Director March 30, 2001
---------------------
Bernard M. Goldsmith
EDWARD J. KFOURY Director March 30, 2001
---------------------
Edward J. Kfoury
PAUL A. MARGOLIS Director March 30, 2001
---------------------
Paul A. Margolis
JOHN H. MARTINSON Director March 30, 2001
---------------------
John H. Martinson
TERENCE H. OSBORNE Director March 30, 2001
---------------------
Terence H. Osborne
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dendrite International, Inc.:
We have audited the accompanying consolidated balance sheets of Dendrite
International, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of CorNet International, Ltd., a company acquired during 1999 in a
transaction accounted for as a pooling of interests, as discussed in Note 2, as
of December 31, 1998 or for the year ended December 31, 1998. Such statements
are included in the consolidated financial statements of Dendrite International,
Inc. and reflect total assets and total revenues of 9 percent and 14 percent,
respectively, of the related 1998 consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for CorNet International, Ltd., is
based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Dendrite International, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 16, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CorNet International, Ltd.:
We have audited the accompanying consolidated balance sheet of CorNet
International, Ltd. (a Pennsylvania Corporation) as of December 31, 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1998, which are not presented herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, which are not
presented herein, present fairly, in all material respects, the financial
position of CorNet International, Ltd. as of December 31, 1998, and the results
of its operations and its cash flows for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Allentown, Pa.,
February 16, 1999
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
2000 1999
---------------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 73,230 $ 50,024
Short-term investments................................. 4,143 15,151
Accounts receivable, net............................... 48,182 28,274
Prepaid expenses and other............................. 6,987 4,759
Prepaid taxes.......................................... 1,564 114
Deferred tax asset..................................... 1,160 1,368
-------- --------
Total current assets.............................. 135,266 99,690
PROPERTY AND EQUIPMENT, net................................. 15,924 10,249
OTHER ASSETS................................................ 3,872 --
GOODWILL, net............................................... 12,305 8,716
PURCHASED CAPITALIZED SOFTWARE, net......................... 4,144 2,399
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net................. 4,392 3,666
-------- --------
$175,903 $124,720
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 5,120 $ 3,735
Accrued compensation and benefits...................... 4,271 6,000
Other accrued expenses................................. 8,085 8,001
Deferred revenues...................................... 4,052 3,822
-------- --------
Total current liabilities......................... 21,528 21,558
-------- --------
DEFERRED RENT............................................... 25 --
CAPITALIZED LEASE OBLIGATION................................ -- 285
DEFERRED TAXES.............................................. 1,052 1,761
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued.............................. -- --
Common stock, no par value, 150,000,000 shares
authorized; 40,729,212 and 39,042,606 shares issued;
40,127,712 and 38,441,106 shares outstanding......... 83,370 61,550
Retained earnings...................................... 73,949 43,338
Deferred compensation.................................. (405) (777)
Accumulated other comprehensive income................. (1,689) (1,068)
Less treasury stock, at cost........................... (1,927) (1,927)
--------- --------
Total stockholders' equity........................ 153,298 101,116
-------- --------
$175,903 $124,720
======== ========
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
------------------ ------------------ -----------
REVENUES:
License fees.............................................. $ 23,966 $ 24,244 $ 14,955
Services.................................................. 190,360 148,441 115,678
--------- -------- --------
214,326 172,685 130,633
--------- -------- --------
COSTS OF REVENUES:
Cost of license fees...................................... 3,420 2,360 2,314
Cost of services.......................................... 88,234 72,380 57,887
--------- -------- --------
91,654 74,740 60,201
--------- -------- --------
Gross margin......................................... 122,672 97,945 70,432
--------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative....................... 67,884 56,927 44,046
Research and development.................................. 10,875 7,669 4,584
Write-off of in-process research and development.......... -- -- 1,230
Mergers and acquisitions.................................. -- 3,466 --
--------- -------- --------
78,759 68,062 49,860
--------- -------- --------
Operating income..................................... 43,913 29,883 20,572
INTEREST INCOME................................................ 3,541 1,880 1,099
OTHER (EXPENSE)/INCOME......................................... 5 (189) (466)
--------- -------- --------
Income before income taxes........................... 47,459 31,574 21,205
INCOME TAXES................................................... 16,848 12,234 8,446
--------- -------- --------
NET INCOME .................................................... $ 30,611 $ 19,340 $ 12,759
========= ======== ========
NET INCOME PER SHARE:
Basic..................................................... $ 0.78 $ 0.51 $ 0.35
========= ======== ========
Diluted................................................... $ 0.74 $ 0.48 $ 0.32
========= ======== ========
SHARES USED IN COMPUTING NET INCOME PER SHARE:
Basic..................................................... 39,354 37,725 36,080
========= ======== ========
Diluted................................................... 41,344 40,599 39,392
========= ======== ========
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Accumulated
Common Stock Other Total
---------------- Retained Deferred Comprehensive Comprehensive Treasury Stockholders'
Shares Dollars Earnings Compensation Income Income Stock Equity
------ ------- -------- ------------ ------------- ------------- --------- -------------
BALANCE, JANUARY 1, 1998....... 35,597 $33,342 $11,239 $(1,141) $(841) __ $ (1,927) $40,672
Issuance of common stock... 1,047 6,740 __ (1,257) __ __ __ 5,483
Amortization of deferred
compensation............. __ __ __ 428 __ __ __ 428
Stock option income
tax benefits............. __ 1,360 __ __ __ __ __ 1,360
Comprehensive income:
Net income................. __ __ 12,759 __ __ 12,759 __ 12,759
Other comprehensive income:
Currency translation
adjustment............... __ __ __ __ 347 347 __ 347
Comprehensive income....... __ __ __ __ __ 13,106 __ __
BALANCE, DECEMBER 31, 1998..... 36,644 41,442 23,998 (1,970) (494) __ $ (1,927) 61,049
Issuance of common stock... 1,797 11,621 __ 899 __ __ __ 12,520
Amortization of deferred
compensation............. __ __ __ 294 __ __ __ 294
Stock option income
tax benefits............. __ 8,487 __ __ __ __ __ 8,487
Comprehensive income:
Net income................. __ __ 19,340 __ __ 19,340 __ 19,340
Currency translation
adjustment............... __ __ __ __ (574) (574) __ (574)
Comprehensive income....... __ __ __ __ __ 18,766 __ __
BALANCE, DECEMBER 31, 1999..... 38,441 61,550 43,338 (777) (1,068) __ $ (1,927) 101,116
Acquisition of Analytika..... 216 6,506 __ __ __ __ __ 6,506
Issuance of common stock.... 1,471 9,050 __ 209 __ __ __ 9,259
Amortization of deferred
compensation............. __ __ __ 163 __ __ __ 163
Stock option income
tax benefits............. __ 6,264 __ __ __ __ __ 6,264
Comprehensive income:
Net income................. __ __ 30,611 __ __ 30,611 __ 30,611
Currency translation
adjustment............... __ __ __ __ (621) (621) __ (621)
Comprehensive income....... __ __ __ __ __ 29,990 __ __
BALANCE, DECEMBER 31, 2000..... 40,128 $83,370 $73,949 $ (405) $ (1,689) __ $ (1,927) $153,298
====== ======= ======= ======== ========= ============ =============
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------
OPERATING ACTIVITIES:
Net income.................................................. $ 30,611 $ 19,340 $ 12,759
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 11,060 6,118 4,197
Compensation expense..................................... 309 688 --
Deferred income taxes (benefit).......................... (501) 24 25
Tax benefit from exercise of employee stock options...... 6,264 8,487 1,360
Write-off of in-process research and development......... -- -- 1,230
Changes in assets and liabilities, net of effect from acquisition:
(Increase) decrease in accounts receivable............. (20,058) (4,947) 6,099
Increase in prepaid expenses and other................. (2,250) (1,471) (870)
Increase in other assets............................... (76) -- --
(Increase) decrease in prepaid income taxes............ (1,481) 1,052 (921)
Increase (decrease) in accounts payable and accrued
expenses............................................. (752) 3,136 3,335
Increase (decrease) in deferred rent................... 25 (392) (206)
Increase (decrease) in income taxes payable............ - (2,219) 22
Increase in deferred revenues.......................... 111 1,995 357
---------- ---------- ---------
Net cash provided by operating activities........... 23,262 31,811 27,387
---------- ---------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments......................... (19,840) (39,341) (13,552)
Sales of short-term investments............................. 30,920 33,804 6,893
Acquisitions, net of cash acquired.......................... (2,318) (6,640) (2,295)
Increase in other non-current assets........................ (3,550) -- --
Purchases of property and equipment......................... (11,656) (7,512) (2,779)
Additions to capitalized software development costs......... (2,354) (2,227) (1,637)
---------- ----------- ----------
Net cash used in investing activities............... (8,798) (21,916) (13,370)
---------- ----------- ----------
FINANCING ACTIVITIES:
Payments on capital lease obligations....................... (285) (788) (302)
Issuance of common stock.................................... 9,113 8,691 3,703
Proceeds from bank loan..................................... -- -- 4,625
Repayments from bank loan................................... -- -- (5,555)
--------- ---------- ----------
Net cash provided by financing activities........... 8,828 7,903 2,471
--------- ---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....................... (86) (329) 130
--------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... 23,206 17,469 16,618
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................. 50,024 32,555 15,937
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR........................ $ 73,230 $ 50,024 $ 32,555
========= ========== =========
The accompanying notes are an integral part of these statements.
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Dendrite International, Inc. and its subsidiaries (the "Company") provides a
comprehensive range of customer relationship management software products and
support services to the pharmaceutical industry. The Company also markets its
products to the consumer packaged goods industry. The Company's solutions
combine proprietary software products with extensive system support services,
sales force support services and analytical services.
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.
Foreign Currency
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 translation adjustments are included as "Other
Comprehensive Income" and are reflected as a separate component of stockholders'
equity. All foreign currency transaction gains and losses are included in other
expense on the accompanying statements of operations and are immaterial in each
year.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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. Actual results could differ from those estimates.
Revenue Recognition
The Company generally recognizes license fees as revenue using the
percentage-of-completion method over a period of time that commences with the
execution of the license agreement and ends when the product configuration is
complete and it is ready for use in the field. This period of time usually
includes initial customization or configuration and concludes with quality
assurance and testing. When there is no initial customization or configuration,
the Company generally recognizes the license fees from those products upon
delivery if any services to be provided are not essential to the functionality
of the software. Additionally, license revenues will be recognized immediately
when the user count for previously delivered software increases. Historically,
the Company's software licensing agreements provide for a warranty period
(typically 180 days from the date of execution of the agreement). The Company's
software maintenance period usually begins immediately after the warranty
period. The portion of the license fee associated with the warranty period is
unbundled from the license fee and is recognized ratably over the warranty
period. The Company does not recognize any license fees unless persuasive
evidence of an arrangement exists, delivery has occurred, the license amount is
fixed or determinable and collectability is probable.
The Company recognizes license fees from certain third party software
products, which are embedded into the Company's products. The cost of third
party software is included in cost of license fees in the accompanying
consolidated statements of operations.
Revenues from implementation and customization services are recognized as
the services are performed. Revenues from customer maintenance, support and data
server rental agreements are recognized over the term of the agreements.
Sales force support services are generally provided under multi-year
contracts. The contracts specify the payment terms, which are generally over the
term of the contract and generally provide for termination in the event of
breach, as defined in the contract.
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) upfront billings of license
fees that are recognized over time. The value of deferred revenue will increase
and decrease based on the timing of invoices and recognition of license
revenues.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
For the years ended December 31, 2000, 1999 and 1998, the Company paid
interest of $13,000, $42,000 and $86,000, respectively. For the years ended
December 31, 2000, 1999 and 1998, the Company paid income taxes of $11,840,000,
$5,828,000 and $7,776,000 respectively.
The following table lists noncash assets that were acquired and liabilities
that were assumed as a result of the acquisitions discussed in Note 2:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
Noncash assets:
Accounts receivable...................... $ 396,000 $ 1,826,000 $ 301,000
Prepaid expenses......................... 381,000 -- 59,000
Property and equipment................... 410,000 -- 408,000
Capitalized software development costs... 2,890,000 1,989,000 850,000
Goodwill................................. 5,979,000 7,235,000 2,226,000
------------ ----------- -----------
10,056,000 11,050,000 3,844,000
Assumed liabilities:
Accounts payable......................... (656,000) (243,000) (294,000)
Income taxes payable..................... -- (39,000) (121,000)
Other accrued expenses................... (400,000) (300,000) (396,000)
Deferred revenues........................ (176,000) (393,000) (107,000)
Deferred taxes........................... -- -- (323,000)
------------ ------------ ------------
Net noncash assets acquired........... 8,824,000 10,075,000 2,603,000
Write-off of in-process research and
development................................ -- -- 1,230,000
Purchase price paid in stock............... (6,506,000) (3,435,000) (1,538,000)
------------ ----------- ------------
Cash paid, net of cash acquired............ $ 2,318,000 $ 6,640,000 $ 2,295,000
============ =========== ============
Short-Term Investments
The Company invests in highly rated corporate and municipal bonds.
Property and Equipment
Fixed assets are stated at cost. Depreciation and amortization are provided
on a straight-line basis over the estimated useful lives of the respective
assets, which range from three to fifteen years. Leasehold improvements are
amortized on a straight-line basis over the estimated useful life of the asset
or the lease term, whichever is shorter. Maintenance, repairs and minor
replacements are charged to expense as incurred.
Capitalized Software Development Costs
In accordance with SFAS No. 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 development costs are amortized over the
greater of the ratio of current revenues to total anticipated revenues or on a
straight-line basis over the estimated economic lives of the products (no longer
than four years), beginning with the release to the customer. 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 continually 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, 2000,
management believes that no revisions to the remaining useful lives or
write-down of capitalized development costs is required.
Capitalized software development costs are net of accumulated amortization
of $7,275,000 and $5,647,000 at December 31, 2000 and 1999, respectively.
Amortization of capitalized software development costs for the years ended
December 31, 2000, 1999 and 1998 was $1,627,000, $1,285,000 and $1,321,000,
respectively, and is included in cost of license fees in the accompanying
consolidated statements of operations.
In connection with certain business acquisitions (see Note 2), the Company
has purchased software that was determined to have reached technological
feasibility. During 2000, the Company purchased $2,890,000 of capitalized
software in connection with the acquisition of Analytika, Inc. ("Analytika").
During 1999, the Company purchased $1,989,000 of capitalized software in
connection with the acquisition of Marketing Management International, Inc. and
subsidiaries (collectively, "MMI"). During 1998, the Company purchased $850,000
of capitalized software in connection with the acquisition of Associated
Business Computing N.V. and an affiliated company (collectively, "ABC").
Purchased capitalized software is net of accumulated amortization of
$1,585,000 and $440,000 at December 31, 2000 and 1999, respectively. Purchased
capitalized software is being amortized on a straight-line basis over a period
ranging from five to seven years. Amortization of purchased capitalized software
for the years ended December 31, 2000, 1999 and 1998 was $1,145,000, $369,000
and $71,000, respectively, and is included in cost of license fees in the
accompanying consolidated statement of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized on a straight-line basis over five to
seven years (see Note 2). As of December 31, 2000 and 1999, goodwill was
$16,302,000 and $10,323,000, respectively. Accumulated amortization, as of
December 31, 2000 and 1999, was $3,997,000 and $1,607,000, respectively.
Amortization of goodwill for the years ended December 31, 2000, 1999 and 1998
was $2,390,000, $1,015,000 and $305,000, respectively.
Impairment of Long-Lived Assets
The Company follows SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
reviews its long-lived assets, including property and equipment, capitalized
software development costs, and goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
that are expected to be in effect when the differences reverse.
At December 31, 2000, there were approximately $2,134,000 of accumulated
undistributed earnings of non-U.S. subsidiaries that are considered to be
reinvested indefinitely. If such earnings were remitted to the Company,
applicable U.S. Federal income and foreign withholding taxes may be 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 balances and trade receivables. The
Company invests its excess cash with large banks. The Company's customer base
principally comprises companies within the ethical pharmaceutical industry. The
Company does not require collateral from its customers. See Note 10 to the
Company's Consolidated Financial Statements.
Net Income Per Share
The Company has presented net income per share pursuant to SFAS No. 128,
"Earnings Per Share".
Basic net income per share was computed by dividing the net income for each
year by the weighted average number of shares of common stock outstanding for
each year. Diluted net income per share was computed by dividing net income for
each year by the weighted average number of shares of common stock and common
stock equivalents outstanding during each year.
The computation of shares used for basic and diluted net income per share is
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------- -------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ ------------- --------------- ------------------ ----------
(In Thousands, Except Per Share Data)
Net income...... $ 30,611 $19,340
Basic net income
per share..... 39,354 $ 0.78 37,725 $ 0.51
====== ======
Effect of dilutive
securities
stock options. 1,990 2,874
------ ------
Diluted net income 41,344 $ 0.74 40,599 $ 0.48
per share..... ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ ----------
(In Thousands, Except Per Share Data)
Net income.......... $ 12,759
Basic net income
per share......... 36,080 $0.35
=====
Effect of dilutive
securities
stock options..... 3,312
------
Diluted net
income per share.. 39,392 $0.32
====== ====
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to recognition, presentation and
disclosure of revenue in financial statements. Management of the Company
believes that its accounting policies for revenue recognition are in compliance
with the provisions of SAB No. 101.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities and is
effective for all fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS 133 will have no impact on operating results
or financial position.
Recapitalization
In October 1999, the Company amended its certificate of incorporation to
change the number of authorized common shares to 150,000,000 and in August 1998
and October 1999, the Company effected a 2-for-1 and 3-for-2 stock split,
respectively, of its common stock. All share and stock option data in these
consolidated financial statements have been restated to reflect the stock
splits.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
2. ACQUISITIONS:
On January 6, 2000, the Company purchased all of the assets and assumed
certain liabilities of Analytika, Inc., a provider of advanced analytical
products, consulting services and outsourced operations services to the
pharmaceutical industry. Under the terms of the acquisition agreement, the
Company paid $2,318,000 in cash, which includes transaction costs, and
$6,506,000 in the Company's common stock. The acquisition has been accounted for
using the purchase method with the purchase price allocated to the fair value of
the assets acquired and liabilities assumed based on their respective fair
market values at the acquisition date. Of the purchase price, $2,890,000 was
allocated to purchased capitalized software development costs. The excess of the
purchase price over the fair value of the net assets acquired has been allocated
to goodwill ($5,979,000) based upon an independent appraisal. Analytika's
results of operations have been included in the Company's consolidated financial
statements from the date of acquisition.
On June 30, 1999, the Company purchased all of the assets and assumed
certain liabilities of MMI, providers of palm-top software and paper-based sales
force effectiveness solutions and consulting services to subsidiaries of
multinational pharmaceutical companies operating in emerging markets, such as
Latin America, Eastern Europe and Southeast Asia. Under the terms of the
acquisition agreement, the Company paid $6,640,000 in cash, which includes
transaction costs, and $3,435,000 in Dendrite common stock. The acquisition has
been accounted for using the purchase method with the purchase price allocated
to the fair value of the assets acquired and liabilities assumed based on their
respective fair market values at the acquisition date. The excess of the
purchase price over the fair value of the net assets acquired, which included
purchased capitalized software development costs ($1,989,000) has been allocated
to goodwill ($7,235,000) based upon an independent appraisal. MMI's results of
operations have been included in the Company's consolidated financial statements
from the date of acquisition.
On May 27, 1999, the Company exchanged 2,220,807 shares of its common stock
for all the outstanding shares of common stock of CorNet International, Ltd.
("CorNet"). The merger has been accounted for under the pooling-of-interests
method. Accordingly, all prior historical consolidated financial statements have
been restated to reflect the acquisition of CorNet.
Separate results of the Company and CorNet for the periods prior to the
consummation of the merger are as follows:
Dendrite Cornet Combined
------------------- ---------------- -----------------
Three months ended March 31, 1999 (unaudited)
Total revenue $ 32,402,000 $ 5,232,000 $ 37,634,000
Net income
Year ended December 31, 1998 $ 3,688,000 $ 511,000 $ 4,199,000
Total revenue $ 112,518,000 $ 18,155,000 $ 130,633,000
Net income $ 11,267,000 $ 1,492,000 $ 12,759,000
On July 24, 1998, the Company acquired 100% of the capital stock of ABC for
approximately $4,013,000 and transaction costs of $150,000. The acquisition was
accounted for under the purchase method of accounting, whereby the purchase
price is allocated to the assets acquired and liabilities assumed of ABC based
on their respective fair market values at the acquisition date. The excess of
the purchase price over the fair value of net assets acquired was assigned to
identifiable intangibles. The Company recorded $1,230,000 of the purchase price
as a charge in the consolidated statement of operations on the acquisition date
as it was related to the fair value of in process research and development
projects. The remaining amount by which the purchase price exceeded the net
assets acquired, which included purchased software ($850,000), was allocated to
goodwill ($2,226,000). ABC's results of operations have been included in the
Company's consolidated financial statements from the date of acquisition.
3. PROPERTY AND EQUIPMENT:
DECEMBER 31,
---------------------------------
2000 1999
----------------- --------------
Computer hardware and other equipment $25,716,000 $15,312,000
Furniture and fixtures.............. 3,863,000 2,590,000
Leasehold improvements.............. 3,727,000 2,420,000
----------- -----------
33,306,000 20,322,000
Less -- Accumulated depreciation and
amortization...................... (17,382,000) (10,073,000)
------------ -----------
$15,924,000 $10,249,000
4. REVOLVING LINE OF CREDIT:
In 1998, the Company amended its revolving line of credit agreement with a
bank, which provides for borrowings of up to $15,000,000 and is available to
finance working capital needs and possible future acquisitions. The agreement
requires, among other covenants, that the Company maintain a minimum
consolidated net worth, measured quarterly, which is equal to the Company's net
worth as of December 31, 1997 plus 50% of the Company's net income earned after
January 1, 1998, and 75% of the net proceeds of any stock offerings. This
covenant has the effect of limiting the amount of cash dividends the Company may
pay. As of December 31, 2000, approximately $87,072,000 was available for the
payment of dividends under this covenant. The line of credit expires on November
30, 2001. The Company has never had any borrowings under this revolving line of
credit.
In addition, CorNet maintained a line of credit with a bank, which
permitted short-term borrowings up to $1,500,000. Interest expense for this line
of credit for the years ended December 31, 1999 and 1998 was $42,000 and
$35,000, respectively. This line of credit expired on June 30, 1999 and was not
renewed.
5. INCOME TAXES:
The components of income before income taxes were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -----------------
Domestic... $ 46,227,000 $ 29,663,000 $20,765,000
Foreign.... 1,232,000 1,911,000 440,000
------------ ------------ ----------
$ 47,459,000 $ 31,574,000 $21,205,000
============ ============ ===========
The components of income taxes were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998
-------------------- -------------------- ---------------
Current Provision:
Federal................. $14,588,000 $ 9,528,000 $ 7,797,000
State................... 1,453,000 1,612,000 295,000
Foreign................. 1,075,000 1,070,000 329,000
---------- ---------- ----------
17,116,000 12,210,000 8,421,000
Deferred Provision
(Benefit):
Federal................. (777,000) 524,000 (301,000)
State................... (307,000) (8,000) 366,000
Foreign................. 816,000 (492,000) (40,000)
----------- ----------- -----------
(268,000) 24,000 25,000
----------- ----------- -----------
$16,848,000 $12,234,000 $ 8,446,000
=========== =========== ===========
The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
------------- ------------- ---------
Federal statutory tax rate........................ 35.0% 35.0% 34.0%
Impact of foreign subsidiaries subject to higher
(lower) tax rates................................. 0.8 (0.3) --
State income taxes, net of Federal tax benefit.... 1.6 2.4 3.8
Nondeductible expenses............................ 0.7 0.8 0.8
Write-off of in-process research and development.. -- -- 2.2
Nondeductible pooling costs....................... -- 2.2 --
Tax credits utilized.............................. (1.3) (1.7) (1.0)
Other............................................. (1.3) 0.3 --
----- ---- -----
35.5% 38.7% 39.8%
==== ==== ====
In the fourth quarter of 2000, the Company lowered its effective income tax
rate to 35.5% for the year ended December 31, 2000 as a result of certain
historical tax planning strategies. The Company anticipates the effective tax
rate to be approximately 36% in 2001.
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred income taxes is as follows:
DECEMBER 31,
--------------------------------
2000 1999
---------------- --------------
Gross deferred tax asset:
Depreciation and amortization..... $ 1,343,000 $ 377,000
Foreign net operating loss........ 1,278,000 1,894,000
Accruals and revenues not currently
deductible..................... 1,297,000 1,026,000
Other............................. 165,000 145,000
----------- -----------
$ 4,083,000 $ 3,442,000
=========== ===========
Gross deferred tax liability:
Capitalized software development
costs............................. $(1,809,000) $(1,857,000)
Other............................. (2,166,000) (1,978,000)
------------ -----------
$(3,975,000) $(3,835,000)
============ ===========
The Company has recorded a deferred tax asset of $1,278,000 reflecting the
benefit of approximately $3,407,000 in foreign loss carryforwards, which expire
in varying amounts commencing in 2003. Realization is dependent on generating
sufficient foreign taxable income prior to the expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
6. STOCKHOLDERS' EQUITY:
STOCK OPTION PLANS
The Company has three stock option plans that provide for the granting of
options, the awarding of stock and the purchase of stock. Under the plans, the
total number of shares of common stock that may be granted is 14,050,002.
Options granted under the three stock option plans generally vest over a
four-year period and are exercisable over a period not to exceed ten years both
as determined by the Board of Directors. Incentive stock options are granted at
fair value. Nonqualified options are granted at exercise prices determined by
the Board of Directors.
Information with respect to the options under the three stock option plans
is as follows:
WEIGHTED
EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------ --------- --------------
Outstanding December 31, 1997 5,485,462 $0.14 - $10.50 $ 4.57
Granted................... 1,888,620 $2.09 - $15.15 10.26
Exercised................. (837,579) $0.14 - $10.50 (3.73)
Canceled.................. (564,841) $0.14 - $10.50 (4.38)
--------- -------------- --------
Outstanding December 31, 1998 5,971,662 $0.14 - $15.15 6.51
Granted................... 2,116,202 $10.97 - $27.88 17.52
Exercised................. (1,551,242) $0.14 - $14.92 (4.70)
Canceled.................. (278,467) $1.45 - $19.79 (9.13)
--------- --------------- --------
Outstanding December 31, 1999 6,258,155 $0.98 - $27.88 10.56
Granted................... 2,531,396 $12.06 - $33.88 24.91
Exercised................. (1,569,016) $1.45 - $23.33 (7.10)
Canceled.................. (671,509) $2.09 - $33.19 (16.72)
--------- --------------- --------
Outstanding December 31, 2000 6,549,026 $0.98 - $33.88 $ 16.54
========== =============== ========
At December 31, 2000, there were 2,325,272 options exercisable at
$0.98-$27.88 per share. The aggregate exercise price of these options was
$23,136,183 as of December 31, 2000.
The Company has adopted the disclosure requirement of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, compensation cost has been computed for the stock option
plans based on the intrinsic value of the stock option at the date of grant,
which represents the difference between the exercise price and the fair value of
the Company's stock. As the exercise price of the stock options equaled the fair
value of the Company's stock at the date of option issuance, no compensation
cost has been recorded in the accompanying statements of operations. Had
compensation cost for the three option plans and the employee stock purchase
plan been determined consistent with SFAS No. 123, the Company's net income and
net income per share would have been adjusted to the following pro forma
amounts:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- ----------------
Net income:
As reported............... $30,611,000 $19,340,000 $12,759,000
Pro forma................. $22,552,000 $11,483,000 $ 6,545,000
Basic net income per share:
As reported............... $ .78 $ .51 $ .35
Pro forma................. $ .57 $ .30 $ .18
Diluted net income per share:
As reported............... $ .74 $ .48 $ .33
Pro forma................. $ .55 $ .28 $ .17
Because the SFAS No. 123 method of accounting is not required to be applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The weighted average fair value of options granted was $17.26, $12.01 and
$11.35 for the years ended December 31, 2000, 1999 and 1998, respectively.
Information with respect to the options outstanding under the three stock
option plans at December 31, 2000 is as follows:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING NUMBER
EXERCISE PRICE EXERCISE CONTRACTUAL OF VESTED
PER SHARE SHARES PRICE LIFE SHARES
- ------------------ --------- ------------ ----------------- ---------
$0.98-$2.65 237,326 $ 2.38 4.1 149,915
$3.48-$6.42 1,391,998 $ 5.51 6.6 995,611
$7.83-$12.06 742,095 $ 9.80 6.8 380,806
$13.83-$14.92 393,650 $ 14.28 7.8 206,765
$15.08-$18.38 1,323,262 $ 16.77 8.5 441,834
$19.50-$27.88 1,721,825 $ 23.52 9.4 150,341
$29.38-$33.88 738,870 $ 33.11 9.2 0
--------- ------- --- ---------
6,549,026 $ 16.54 8.0 2,325,272
========= ======= === =========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 2000, 1999 and 1998: risk-free interest rates ranging from 5.4% to
6.9% based on the rate in effect on the date of grant; no expected dividend
yield; expected lives of 4.0 to 6.0 years for the options; and expected
volatility of 70%.
EMPLOYEE STOCK PURCHASE PLAN
In 1997, the Company established an employee stock purchase plan that
provides full-time employees the opportunity to purchase shares at 85% of fair
value on dates determined by the Board of Directors, up to a maximum 10% of
their eligible compensation or $21,250, whichever is less. There were 450,000
shares available for purchase under this plan, of which 93,687, 72,122 and
83,787 were purchased in 2000, 1999 and 1998, respectively.
ANNIVERSARY STOCK PLAN
The Company grants 200 shares of the Company's common stock to all employees
who commenced employment prior to December 31, 1998 in July following their
fifth anniversary of employment. The cost of the anniversary stock plan is
accrued over the employment period of the employees.
COMMON STOCK REPURCHASE PROGRAM
On January 31, 2001, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to $20,000,000 of its outstanding
common stock over a two-year period. The Company will repurchase shares on the
open market or in privately negotiated transactions from time to time.
Repurchases of stock will be at management's discretion, depending upon price
and availability. The repurchased shares will be held as treasury stock, which
may be used to satisfy the Company's current and near term requirements under
its equity incentive and other benefit plans and for corporate purposes. As of
March 28, 2001, the Company has repurchased a total of 630,400 shares under the
program for a total value of $8,806,074.
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 will
receive a distribution of one Right for each share of common stock of the
Company ("Rights"). Initially, the Rights will be represented by the Company's
common stock certificates, will not be traded separately from the common stock
and will not be exercisable. The Rights will become exercisable only if a person
acquires, or announces a tender offer that would result in ownership of 15% or
more of the Company's common stock, at which time each Right would enable the
holder to buy one one-hundredth of a share of the Company's Series A preferred
stock at an exercise price of $120, subject to adjustment. Following the
acquisition of 15% or more of the Company's common stock, the holders of Rights
(other than the acquiring person or group) will be entitled to purchase shares
of the Company's common stock at half-price, and in the event of a subsequent
merger or other acquisition of the Company, to buy shares of common stock of the
acquiring entity at one-half of the market price of those shares.
The Company may redeem the Rights for $0.01 per Right, subject to
adjustment, at any time before the acquisition by a person or group of 15% or
more of the Company's ordinary shares. The Rights will expire on February 20,
2011.
7. SAVINGS AND DEFERRED COMPENSATION PLANS:
The Company maintains Employee Savings Plans (the "Plans") that cover
substantially all of its full-time U.S. and U.K. employees. All eligible
employees may elect to contribute a portion of their wages to the Plans, subject
to certain limitations. In addition, the Company contributes to the plans at the
rate of 50% of the employee's contributions up to a maximum of 3% of the
employee's salary. The Company's contributions to the Plans were $773,000,
$492,000 and $416,000 in the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company also maintains a noncontributory pension plan that covers
substantially all of its full-time Japanese employees. All contributions to this
pension plan are made by the Company in accordance with prescribed statutory
requirements. The Company's contributions to the plan were $421,000, $41,000 and
$74,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
In 1998, the Company created a deferred compensation plan. Under the plan,
eligible, highly compensated employees (as defined) can elect to defer a portion
of their compensation and determine the nature of the investments, which will be
used to calculate earnings on the deferred amounts. The Company will record the
deferrals as a liability and intends to place a corresponding amount into a
trust fund.
8. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities and equipment under various operating
leases with remaining noncancelable lease terms generally in excess of one year.
Rent expense was $8,410,000, $7,390,000 and $5,992,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. Future minimum rental payments
on these leases are as follows:
2001...... $ 6,775,000
2002...... 5,556,000
2003...... 4,171,000
2004...... 3,322,000
2005...... 2,847,000
Thereafter 15,293,000
------------
$ 37,964,000
============
Included in these amounts is a lease that was entered into subsequent to
December 31, 2000. The Company has entered into a lease prior to December 31,
2000, for a 100,000 square foot facility in Chesapeake, Virginia. Subsequent to
December 31, 2000, the Company entered into a lease for 33,000 square feet of
office space in New Jersey; and an agreement to purchase a 145,000 square foot
building for approximately $11,000,000 in New Jersey and plans to relocate our
principal facilities in the summer of 2001.
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 financial
position or results of operations.
9. RELATED-PARTY TRANSACTION:
For the years ended December 31, 2000 and 1999, the Company paid
approximately $337,467 and $15,000, respectively, to an entity owned by the
Chairman and Chief Executive Officer of the Company for rental and usage of an
aircraft. There were no payments made to this entity during 1998.
10. CUSTOMER AND GEOGRAPHIC INFORMATION:
In the year ended December 31, 2000, the Company derived approximately 31%,
11% and 10% of its revenues from its three largest customers. In the year ended
December 31, 1999, the Company derived approximately 26% and 11% of its revenues
from its two largest customers. In the year ended December 31, 1998, the Company
derived approximately 31% and 11% of its revenue from its two largest customers.
See Note 1 for a brief description of the Company's business. The Company
is organized by geographic locations and has one reportable segment. All
transfers between geographic areas have been eliminated from consolidated
revenues. Operating income consists of total revenues recorded in the location
less operating expenses and does not include interest income, other expense or
income taxes. This data is presented in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information".
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Revenues:
United States......... $ 165,455,000 $131,682,000 $ 99,754,000
All Other............. 48,871,000 41,003,000 30,879,000
---------------- ------------ -----------------
$ 214,326,000 $172,685,000 $ 130,633,000
================ ============ =================
Operating income:
United States......... $ 29,864,000 $ 20,223,000 $ 16,442,000
All Other............. 14,049,000 9,660,000 4,130,000
---------------- ------------ -----------------
$ 43,913,000 $ 29,883,000 $ 20,572,000
================ ============ =================
Identifiable assets:
United States......... $ 155,843,000 $ 94,805,000 $ 67,211,000
All Other............. 20,060,000 29,915,000 14,620,000
---------------- ------------ -----------------
$ 175,903,000 $124,720,000 $ 81,831,000
================ ============ =================
For segment reporting purposes, license revenues have been allocated to the
sales office of the respective country in which the sale is made, although the
actual contract is with the U.S. entity for legal and tax purposes.
3. Exhibits:
Articles of Incorporation and By-Laws:
--------------------------------------
3.1 Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Securities and Exchange Commission (the "Commission") on
August 14, 1996) Articles of Incorporation and By-Laws:
3.1 (a) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated herein by reference
to Exhibit 3.1(a) to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 30,
2001)
3.1 (b) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated herein by reference
to Exhibit 3.1 (b) to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on
March 30, 2001)
3.1 (c) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company Setting Forth the Terms of Series
A Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 3.1 (c) to the Company's Current Report
on Form 8-K, filed with the Securities and Exchange Commission
on March 30, 2001)
3.2 Amended and Restated By-laws of the Company (incorporated
herein by reference to Exhibit 3 to the Company's Current
Report on Form 8-K, filed with the Commission on February 21,
2001)
Instruments Defining Rights of Security Holders, including Indentures:
---------------------------------------------------------------------
4.1 Specimen of Stock Certificate (incorporated herein 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 herein 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 herein 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)
4.4 Rights Agreement dated as of February 20, 2001 between
Dendrite International, Inc. and Registrar and Transfer
Company, as Rights Agent, which includes, as Exhibit A the
Form of Certificate of Amendment to Restated Certificate of
Incorporation, as Exhibit B the Form of Rights Certificate and
as Exhibit C the Form of Summary of Rights (incorporated
herein by reference to Exhibit 4 of the Company's Current
Report on Form 8-K, filed with the Commission on February 21,
2001)
Material Contracts and Compensatory Plans and Arrangements:
----------------------------------------------------------
10.1 1992 Stock Plan, as amended (incorporated herein by reference
to Exhibit 10.36 to the Company's Registration Statement on
Form S-1, filed with the Commission on May 17, 1995)*
10.2 1992 Senior Management Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-1, filed with the
Commission on May 17, 1995)*
10.3 1997 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 14, 1997;
Exhibit 4.2 to the Company's Post Effective Amendment No. 2 to
Registration Statement on Form S-8 filed with the Commission
on April 21, 1998; and Exhibit A to the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders
filed with the Commission on April 16, 1999)*
10.4 1997 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8, filed with the Commission on April 1,
1997)*
10.5 Lease of 1200 Mount Kemble Avenue, Morristown, New Jersey
(incorporated herein by reference to Exhibit 10.40 to the
Company's Registration Statement on Form S-1, filed with the
Commission on May 17, 1995)
10.6 Form of Indemnification Agreement dated as of October 28, 1998
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 18, 1998)*
10.7 Amended and Restated Credit Agreement, entered into as of
November 30, 1998, between the Company and The Chase Manhattan
Bank, N.A. (incorporated herein by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K, filed with the
Commission on March 26, 1999)
10.8 Employment Agreement dated March 25, 1997 with John E. Bailye
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q/A, filed with the
Commission on May 16, 1997)*
10.9 Employment Agreement dated June 2, 1997 with George T. Robson
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1997)*
10.10 Employment Agreement dated June 9, 1997 with Mark Cieplik
incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1997)*
10.11 Employment Agreement dated July 24, 1997 with R. Bruce Savage
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 14, 1997)*
10.12 Employment Agreement dated October 1, 1991 with Teresa F.
Winslow (incorporated herein by reference to Exhibit 10.50 to
the Company's Registration Statement on Form S-1, filed with
the Commission on February 5, 1996)*
10.13 Consulting Agreement dated as of January 5, 1998 with Edward
Kfoury (incorporated herein by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q, filed with the
Commission on May 15, 1998)
10.14 Deferred Compensation Plan dated as of September 1, 1998
(incorporated herein by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 14, 1998)
10.15 Deferred Compensation Plan Trust Agreement dated as of
September 1, 1998 (incorporated herein by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q, filed
with the Commission on August 14, 1998)
10.16 Employment Agreement dated January 22, 1996 with Christopher
J. French (incorporated herein by reference to Exhibit 10.51
of the Company's Annual Report on Form 10-K, filed with the
Commission on March 31, 1997)*
10.17 Employment Agreement dated September 20, 2000 with Michael G.
Atieh (incorporated herein by reference to Exhibit 10.12 of
the Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 14, 2000) *
10.18 Employment Agreement dated August 7, 1997 with Kathleen
Donovan (incorporated herein by reference to Exhibit 10.17 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.19 Employment Agreement dated September 8, 1998 with Christine
Pellizzari (incorporated herein by reference to Exhibit 10.18
of the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.20 Amendment to Employment Agreement dated May 26, 1999 with Mark
Cieplik (incorporated herein by reference to Exhibit 10.19 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.21 Amendment to Employment Agreement dated May 26, 1999 with
Teresa Winslow (incorporated herein by reference to Exhibit
10.20 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.22 Amendment to Employment Agreement dated May 26, 1999 with
Christopher French (incorporated herein by reference to
Exhibit 10.21 of the Company's Current Report on Form 8-K,
filed with the Commission on March 30, 2001)*
10.23 Amendment to Employment Agreement dated May 26, 1999 with
George T. Robson (incorporated herein by reference to Exhibit
10.22 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.24 Amendment to Employment Agreement dated January 25, 2000 with
Kathleen Donovan (incorporated herein by reference to Exhibit
10.23 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.25 Amendment to Employment Agreement dated August 1, 2000 with
Christine Pellizzari (incorporated herein by reference to
Exhibit 10.24 of the Company's Current Report on Form 8-K,
filed with the Commission on March 30, 2001)*
10.26 Employment Agreement dated as of August 7, 2000 with Marc
Kustoff (incorporated herein by reference to Exhibit 10.25 of
the Company's Current Report on Form 8-K, filed with the
Commission on March 30, 2001)*
10.27 Agreement of Purchase and Sale between Dendrite International,
Inc. and Townsend Property Trust Limited Partnership dated
January 5, 2001 (incorporated herein by reference to Exhibit
10.26 of the Company's Current Report on Form 8-K, filed with
the Commission on March 30, 2001)*
10.28 Deed of Lease between Liberty Property Limited Partnership and
Dendrite International, Inc. for Dendrite Building I of the
Liberty Executive Park in Chesapeake, Virginia (incorporated
herein by reference to Exhibit 10.27 of the Company's Current
Report on Form 8-K, filed with the Commission on March 30,
2001)
10.29 Deed of Lease between Liberty Property Limited Partnership and
Dendrite International, Inc. for Dendrite Building II of the
Liberty Executive Park in Chesapeake, Virginia (incorporated
herein by reference to Exhibit 10.28 of the Company's Current
Report on Form 8-K, filed with the Commission on March 30,
2001)
Subsidiaries:
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21 Subsidiaries of the Registrant
Consent of Independent Public Accountants:
------------------------------------------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
* Management contract or compensatory plan.