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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, 1997
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[ ] 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
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Dendrite International, Inc.
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(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.)
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1200 Mt. Kemble Avenue
Morristown, NJ 07960
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
nonaffiliates of the registrant was approximately $290,533,084 based upon the
average bid and ask price of the Common Stock, which was $29.25 on March 13,
1998. The number of shares of Common Stock outstanding on that date was
11,385,816.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
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Registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for the III
1998 fiscal year expected to be dated on or about April 18, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
Dendrite International, Inc. ("Dendrite" or the "Company") succeeded in 1991
to a business co-founded in 1986 by the Company's current President and Chief
Executive Officer, which was organized to provide comprehensive electronic
territory management ("ETM") solutions for managing, coordinating and
controlling the activities of large sales forces in complex selling
environments, primarily in the ethical pharmaceutical industry. Today, the
Company's solutions combine advanced software products with a wide range of
specialized support services including customization and implementation
services, technical and hardware support services and sales force support
services. The Company develops, implements and services advanced ETM systems in
the United States, Canada, Western Europe, Japan, Australia, New Zealand, Hong
Kong, and Brazil through its own sales, support and technical personnel located
in offices worldwide.
PRODUCTS AND SERVICES
The Company's ETM systems utilize proprietary software products coupled with
extensive system support services to provide its customers with the means for
more efficient management of their sales forces, sales and marketing decision
support tools, and operation and maintenance of their sales databases. As
software products become more complex and as the sources and size of data
available increase, there is a parallel need for specialized services and skills
to support these products.
Pharmaceutical Industry Products
The Company currently offers to its pharmaceutical customers one core software
product, Series 6(TM), which can be configured to support four functional areas:
sales representative, account manager (for institutional and managed care sales
forces), area manager and home office sales manager. The software is designed to
be modular, thereby allowing the customer to select a set of functions most
appropriate to its business requirements.
Set forth below is a summary description of the principal functions available
for the Series 6 product:
PRINCIPAL FUNCTIONS DESCRIPTION
- ------------------------------------------- -------------------------------------------------------------------
Bids & Contracts/Development & Enables pharmaceutical companies to administer and disseminate
Tracking contract information relating to managed care organizations and
other institutional entities
Call Reporting & Sampling/Customer Records Provides sales representatives with reporting tools and helps
enable pharmaceutical companies to control costs of complying with
applicable governmental regulations associated with product sample
distribution
Diary/Planner/Attendance Report Helps optimize sales representatives' time management
Electronic Documents/Mail/ Enables communication and facilitates coordination among
Admin/Reports/Host geographically dispersed business units and sales personnel
Communications
Strategic Selling for Institutional Sales Enables pharmaceutical companies' sales teams to plan and
Teams/Force Director(TM) coordinate institutional sales efforts and to deploy appropriate
resources
Sales & Activity Analysis/Target Analysis Addresses the individual representative and manager requirements
for review of local market potential to construct and execute
optimal sales plans
The Series 6 product can be configured to enable the customer to choose
appropriate functions to address its specific business requirements. New
functions which integrate fully with the existing configuration can be added
over time, therefore allowing the customer to acquire a system which evolves as
its business requirements change. A typical major pharmaceutical customer will
select a configuration depending on the structure of the customer's sales force,
the geographic region involved and the type of pharmaceutical sales data
available. Each function is offered with specific continuing support services.
The Series 6 system offers an enhanced user-friendly graphical user interface
through a Microsoft(R) Windows for Workgroups(TM) or Windows95(R) environment
and exploits object oriented programming technology to enhance the modular
properties of this system. Series 6 software utilizes territory-based (i.e. ZIP-
code or other local area) prescription sales data in providing performance
analysis reports and includes modules capable of analyzing both territory-based
and prescriber-level prescription sales data to permit priority targeting of
physicians and others who influence the pharmaceutical prescription process.
The Company also offers a version of its Series 6 product for license in
Japan. This product is substantially similiar to the core Series 6 product
except that its graphical user interface has been modified to reflect the
characteristics of the Japanese ethical pharmaceutical market.
The Company also has a significant installed base of Series 5(TM) and, to a
lesser extent, Series 4(TM) software products.
The Company's Series 5 product is similiar to its Series 6 product except that
it only allows presentation of physician level prescription sales data and does
not include the modules which permit analysis of both territory-based and
prescriber-level prescription sales data.
Customers using Series 5 and Series 6 products (including, the Japanese
version of the Series 6 product) accounted for approximately 91.7% of the sales
representatives licensed to use the Company's pharmaceutical ETM systems at
December 31, 1997.
The Company's Series 4 product is a DOS-based product. Customers using Series
4 accounted for approximately 8.3% of the sales representatives licensed to use
the Company's pharmaceutical ETM systems at December 31, 1997. This product
provides automated information concerning physician customers, sales call
records and distribution of samples, but does not have the capability to model
third-party territory-based prescription and sales data. An upgrade of a
customer's system from Series 4 to Series 6 requires extensive investment in
hardware and software and must be planned well in advance in order to minimize
disruption of sales and marketing activities. The Company has in the past
supported users of its Series 4 system, however, it now considers this product
mature and will not support it in the future.
The primary considerations for customers determining whether to upgrade
include the enhanced ability of Series 6 to address the customers' evolving
business needs, the significant cost of making the transition, and, to a lesser
extent, the desirability of moving to a Windows graphical user interface. In
addition, the Company's decision to no longer support its Series 4 product may
influence customers to upgrade to Series 6. Customers determining whether to
make the upgrade may consider competitors' systems. The Company is presently
offering to its Series 4 customers a migration path which will enable them to
upgrade to the Company's Series 6 product or, depending on the time at which
the customer makes its upgrade decision, the Company's next generation product.
There can be no assurance that any such migration will occur.
The Company prices its pharmaceutical ETM systems based on the geographic area
covered by the system, the system configuration and the total number of users.
For example, a major pharmaceutical company which elected to license the
Dendrite Series 6 software over a wide geographic area with a fairly typical
number of optional enhancements, would expect to pay $2 to $5 million in license
fees. The Company also charges additional one-time fees to implement the system
and annual fees for continuing services.
OTHER PRODUCTS
In addition, the Company also offers to its pharmaceutical customers the
following stand-alone products: (I) Force Companion(TM), a Windows CE(TM) -based
palmtop solution, which delivers critical customer information to sales
representatives operating remotely; (ii) Force MultiplieRx(TM), a software
product which delivers daily prescription data to sales representatives, thus
enabling them to evaluate the effectiveness of their promotion and modify
promotional messages according to physician needs; and (iii) Sentinel(TM), an
Internet-based information delivery solution, which immediately delivers to
sales organizations important information concerning key industry and
enterprise-wide developments, promotional activities and market activities.
In May 1996, Dendrite acquired SRCI S.A. ("SRCI"), France's largest provider
of custom-designed ETM systems for the over-the-counter pharmaceutical ("OTC")
and consumer packaged goods ("CPG") markets. SRCI's core product, NOMAD'S(TM),
was translated into the English language and the Company commenced marketing it
in the United States, United Kingdom and Canadian markets under the name
ForceOne(TM). ForceOne contains some of the same basic functionality as the
Series 6 product as well as functionality specifically created for the OTC and
CPG industries. Currently, the Company is licensing version 2 of ForceOne to its
customers. The structure of the Company's license and implementation fees for
its over-the-counter pharmaceutical ("OTC") and consumer packaged goods ("CPG")
customers are similar to those for its ethical pharmaceutical customers.
Services
For the year ended December 31, 1997, service revenues represented
approximately 90% of total Company revenues. The Company seeks to develop long-
term strategic relationships with its customers by providing value-added support
in the operation of installed software systems and assistance to the customer's
management in using the resulting information. To support this objective, the
Company offers a wide variety of specialized services from which customers can
choose, including customization and implementation services, technical and
hardware support services, sales force support services and Year 2000 compliance
testing services. Most customers enter into agreements covering technical
support, software customization and support services and also elect to have
their databases operated and maintained on a central server located at a local
Dendrite data center facility. Virtually all customers sign an extended
maintenance agreement which covers, among other things, software defect
resolution.
The complexity and size of the sales data and market research databases being
integrated and manipulated by the Company's systems requires highly specialized
information systems skills. The creation of a customer's database requires
loading third party data onto a central server 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 the Company's ETM
systems. Dendrite performs these services initially for its customers to install
the system, then usually continues to provide the services to manage these tasks
over time. Many companies choose not to employ the information systems staff
needed to manage these large, complex databases and consider the option of
outsourcing these tasks to Dendrite as both economically and operationally
advantageous.
Set forth below is a summary description of the principal services offered by
Dendrite:
PRINCIPAL SERVICES DESCRIPTION
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Implementation Services Project Management--planning the design and
implementation of the Dendrite system
Data Modeling--creation of the customer's specific
version of the Company's data model, which becomes the
Customer Requirements Definition
Customization--customization of software to meet the
Customer Requirements Definition for the software
components of the Dendrite ETM system
Database Design--creation of the customer's integrated
database, including:
--loading and linking third party prescription sales
data, market research and other materials
--identifying geographic and/or functional (e.g.;
formulary) segments
--allocating third party data by territory or other
functional segment
Mail Design--definition of e-mail structure to meet
the needs of the customer's organization
Laptop Preparation--loading data onto laptop computers
for training, testing and use
Training--training on use and capabilities of the
Dendrite system
Technical and Hardware
Support Services Project Management--designing, structuring and
managing technical support for the Dendrite system
Customization--as required following implementation to
meet customer's needs
Maintenance of Database--continued support of the
customer's database, including:
--loading and linking new releases of third party data
purchased by the customer
--identifying new functional segments for data
analysis
Maintenance of Code--maintenance and updating of
customized code on customer computers
Hardware Support--maintenance of servers and remote
computer hardware (e.g., laptops and notebooks)
including recapture of data on defective equipment and
replacement of defective equipment
Sales Force Support
Services Project Management--designing, organizing and
managing support for customer sales forces
Retraining--ongoing training on use and capabilities
of the system
Territory Realignment--assisting the customer in
planning and executing realignments of sales
territories or functional (e.g., formulary-based)
segments to allow more effective resource allocation
Support Services--providing first line customer
service telephone support for Dendrite's ETM systems
and certain third party software for seven days a
week, as many hours as requested and in the language
required
Data Specialists -- providing proactive prescription
data analysis at a territory and physician level to a
customer's sales representatives for the purpose of
improving sales and promotional campaigns
Year 2000 Compliance
Testing Services Testing of customer's sales force automation production
environment to determine whether it is Year 2000
compliant (i.e., accurately recognizes and processes
dates beyond December 31, 1999); This testing covers
not only the applicable Dendrite product, but also much
of the related hardware, third party software and
associated interfaces
When a customer licenses Dendrite ETM software, 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 generally dedicated to servicing only that customer.
However, for customers with smaller sales forces or sales forces with
specialized needs (e.g., non-home country language capability), the service
group which services these types of customer may service more than one client.
Dendrite's service groups are usually located at Dendrite's facility in the
country where a significant portion of the customer's sales force is located,
although the Company services its Canadian clients from its U.S. facility. This
allows the service group to provide assistance locally using a common language
with customer personnel. The Company provides services under contract, typically
a multi-year contract. In North America, the service agreement is between the
customer and Dendrite directly. Outside North America, contracts are entered
into between the local customer and the Company through its local wholly-owned
subsidiary or branch. Depending upon the size of the customer and the scope of
services to be performed, a Dendrite dedicated service group may comprise
between five and one hundred persons. The Company's relationships with its
pharmaceutical customers, which result from providing services to them, have led
to a growth in the range and scope of services provided to the customers and in
recent years have accounted for much of the increase in the Company's service-
related revenues.
As of December 31, 1997, substantially all of the Company's service agreements
were with its ethical pharmaceutical customers.
SYSTEM CONFIGURATION
Dendrite's pharmaceutical ETM system is configured to allow information
access and communication across geographically dispersed sales and marketing
personnel and regional and home offices. The core of the system configuration is
a central file server which stores the customer database and integrates and
controls all data flow from external points, including the remote databases of
the sales force and their management. Most of the servers used by Dendrite
customers are manufactured by IBM, Digital Equipment Corporation 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 Dendrite-owned servers located in various
Dendrite offices worldwide.
Remote databases are stored on laptop computers used by sales representatives
in the field and updated periodically over telephone lines via modem. Regional
sales managers using personal computers may access the server via wide area
networks. Dendrite customers are responsible for selecting computer equipment
and for deciding when to upgrade or replace it.
Most laptop computers and all of the desktop personal computers which access
Dendrite's pharmaceutical ETM system support a DOS operating system, with the
Microsoft Windows for Workgroups interface on the Company's newer products.
Data is managed in Series 4 using an Informix database server and a flat-file
Btrieve structure on the laptops. For laptops in Series 5 and Series 6 with
Microsoft Windows for Workgroups or Windows95, the Company has currently chosen
a PowerBuilder(TM) graphical user interface and a Sybase SQL Anywhere(TM)
relational database management system. Series 5 and Series 6 currently use an
Oracle(TM) database server.
Dendrite's pharmaceutical ETM system permits a pharmaceutical company's sales
representative to send the applicable customer's server information concerning
calls made and to receive information concerning upcoming calls and other sales
efforts to be made later by other sales personnel of that company who share
common or related customers. The server, in most cases located at one of
Dendrite's facilities, contains the customer's own database of sensitive sales
related information, which is maintained and operated for the customer by
Dendrite.
Dendrite's pharmaceutical ETM system is designed to provide information to
those involved in sales and sales management and also to a range of other
functional areas within each customer, including its senior management. For
example, information directly related to sales, such as travel and expense
reports, may be provided to the finance and personnel departments. Similarly,
representatives in the field can provide information concerning a physician that
can assist managed care sales personnel. These systems create the linkage which
connects a customer's sales and management functions with other business
departments.
Dendrite's OTC and CPG ETM system is generally configured in a manner similar
to Dendrite's pharmaceutical ETM system. However, OTC and CPG sales
representatives may use computer hardware other than laptop and desktop
personal computers to access such ETM system, such as handheld or palmtop
computing devices.
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."
MARKETING
Customers
The following is a list of substantially all of the Company's current
pharmaceutical customers (who either directly or through subsidiaries may be
customers in one or more countries served by the Company, not necessarily
including the United States):
Abbott Laboratories Novo Nordisk
Allergan Parke-Davis
Laboratorios Almirall Pfizer
Bayer Pharmacia/Upjohn
Boehringer Ingelheim Pharmaceutical Rhone-Poulenc Rorer
Boehringer Mannheim Sankyo/Parke-Davis
Bristol-Myers Squibb Schering A.G.
Chauvin Schering-Plough Corporation
Glaxo Wellcome 3M Pharmaceuticals
Hoechst Marion Roussell Servier
Johnson & Johnson SmithKline Beecham
Eli Lilly and Company Solvay Pharmaceuticals
Leo Laboratories Takeda Pharmaceuticals
Merck Sharp & Dohme Zeneca
Novartis
Revenues from Pfizer, Eli Lilly and Company and Rhone-Poulenc Rorer
in the aggregate accounted for 56% and 58% of the Company's revenues for the
years ended December 31, 1995 and December 31, 1996, respectively. Revenues from
Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer in the aggregate
accounted for 59% of the Company's revenues for the year ended December 31,
1997. Although, in certain circumstances, the Company has separately licensed
software to several affiliates of these companies and provides services to them
under separately negotiated and executed contracts with local Dendrite
subsidiaries and branches, the loss of all or a significant part of the business
of any of these customers would have a material adverse affect on the Company.
During 1997, the Company's consumer business group entered into customer
contracts with, among others, Ralston Purina Canada, RJR Macdonald, Eugene
Perma, DIM (Sara Lee), Moet & Chandon and Bacardi-Martini.
Sales and Marketing
The Company actively markets its ETM systems and services to major ethical
pharmaceutical, OTC and CPG companies in the United States, Western Europe and
the Pacific Rim using regional and local sales and marketing personnel operating
out of Dendrite's offices. Sales presentations are typically made to customer
personnel in its management information services department and in either its
sales management or sales administration department.
Selection of an ETM system entails an extended decision-making process for the
customer because of the substantial costs and strategic implications associated
with acquiring the system. Senior levels of management are often involved in
this process, given the importance of the decision as well as the risks faced by
the customer should a system fail or not perform as expected. Depending upon the
size of the system and the associated computer hardware and software costs,
senior corporate management or even the board of directors of a client may make
the final decision to license a Dendrite system. Therefore, decisions to acquire
a Dendrite ETM system involve long selling cycles, typically 12 to 18 months for
larger customers, although sometimes as long as 24 months, and usually require
lengthy periods of evaluation prior to full installation and roll-out.
The Company uses a business process analysis to facilitate the sales
process after obtaining information from a potential customer relating to its
market, its sales organization, its business plan and the identification of
significant costs and problems. Dendrite works with the potential customer to
identify needed product functionality, drawing upon the Company's available
modules and its experience with the applicable vertical market. If solutions are
not immediately available, Dendrite may offer a co-development partnership to
the potential customer in order to design product functionality to meet the
potential customer's needs. In this situation, Dendrite may not retain sole
ownership of the completed software solution.
The response of sales representative users of Dendrite systems is an important
aspect of the Company's on-going relationships with its customers and may
sometimes influence the decisions of those customers to license additional
modules and/or to contract for expanded support services. Dendrite endeavors to
address the concerns of sales personnel during the training portion of its
Implementation Services. In addition, the experience of customer
sales personnel with a Dendrite ETM system in actual use, together with
interactions with those personnel as part of the ongoing Sales Force Support
Services, provide positive reinforcement as to the ease of use and efficacy of
Dendrite ETM systems. In addition to its policy to respond as promptly as
possible in providing all contracted-for support services, the Company reviews
those communications and evaluates them for indications of systemic problems or
trends and provides monthly reports concerning them to the Company's customers.
Independent consultants are occasionally retained to advise pharmaceutical
and healthcare companies on their selection of an ETM system. Dendrite believes
that in a number of these situations consultants have recommended Dendrite ETM
systems to their clients, who subsequently became customers of the Company.
Dendrite does not reimburse expenses or pay any commissions to such firms in
such cases.
The Company believes that an important marketing opportunity is presented by
its relations with existing customers. Dendrite further believes that its
network of American, European and Pacific Rim offices gives it the potential for
expansion of license and service revenues from existing customers in countries
other than the ones in which such customers currently have a Dendrite licensed
ETM system. In addition, many of Dendrite's ethical pharmaceutical customers
also have OTC operations which Dendrite believes gives it a competitive
advantage when marketing its ETM system to such OTC operations.
Finally, the Company has entered into several joint marketing arrangements
whereby the Company and the applicable business partner have agreed to interface
with each other's products and/or services. Examples of these partners and their
respective products include: Proscape Technologies (multimedia detailing
software); Domain Solutions (clinical trial software); PCS Health Systems
(prescription data); and Source Informatics America (prescription data). In
particular, with respect to the Company's partners in the prescription data
business, the Company's joint marketing arrangements incentivize such partners
to sell the Company's Force MultiplieRx software by providing for the payment to
them of pre-determined royalties for any such sale.
COMPETITION
Globally, the current market for sales and marketing information management
systems is highly competitive. Many companies offer sales force automation and
ETM systems in the ethical pharmaceutical, OTC and CPG industries. In addition
to itself, the Company believes that there are approximately ten companies which
supply products automating sales, marketing and customer service functions and
specifically target the pharmaceutical industry. The Company believes that at
least four of these companies are actively selling in more than one country.
With respect to the OTC and CPG industries, there are numerous companies which
supply products automating sales, marketing, and customer service functions
including some companies in the customer information management business which
offer different types of products under the same "banner" as Dendrite does in
the ETM business. The Company believes that most of its competitors in the
ethical pharmaceutical, OTC and CPG industries offer a variety of less
customizable software products, which are typically available more rapidly than
Dendrite systems and often at a substantially lower price. Sales force
automation products differ greatly in terms of functionality, flexibility and
the type of hardware platform supported. Dendrite believes that potential
competitors must incur significant expense and product development time and must
acquire a skilled technical staff in order to develop an integrated,
customizable solution for the problems presented by complex multi-national
selling environments.
The Company estimates that in 1997 its ETM systems were licensed by
approximately 19% of sales representatives from the top 50 pharmaceutical
companies in the United States, Canada, Western Europe and the Pacific Rim.
Because its CPG and OTC business is presently concentrated in France, the
Company does not have significant worldwide market share in either of these
vertical markets.
The Company's products and services compete with others principally on the
basis of product flexibility and customization, platform configuration, name
recognition, global competence, service standards, breadth of customer base and
technical support and service. Management believes the Company's systems compete
favorably with respect to these factors, and that the Company is positioned to
maintain its market leadership position through innovative new product and
application developments and continued focus on support services. Some of the
Company's existing competitors, as well as a number of potential market
entrants, have larger technical staffs, larger marketing and sales organizations
and greater financial resources than the Company.
In the ethical pharmaceutical vertical market, two of the Company's
competitors, Sales Technologies and TVF (Cegedim), own and control, either
directly or through affiliated entities, some of the proprietary data collection
systems in some countries (including the United States) that provide the
prescription/sales data sold to the pharmaceutical companies and which
Dendrite's more recent ETM systems and related services are designed to process.
It may be possible for one or more of these competitors to gain a competitive
advantage in the pricing of its ETM systems for customers who are interested in
purchasing the data it or its affiliates collect. Furthermore, two of the
Company's competitors in the ethical pharmaceutical vertical market (Sales
Technologies and Walsh International) have recently agreed to combine.
Because neither of these companies individually has a geographic scope to their
business as great as Dendrite's, in the event such transaction is consummated,
the Company believes that the combined company may potentially be better able to
compete more equally with Dendrite on a world-wide basis.
The Company believes that competition will increase as new competitors enter
the market to supply ETM systems and as existing competitors expand their
product lines or consolidate. Dendrite also expects it may 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 the Company, including enterprise resource planning
vendors and data base vendors not currently in the market space to any
substantial degree. The Company also faces potential competition from its
customers and potential customers, which might elect to design and install or to
operate their own sales force management systems.
RESEARCH AND DEVELOPMENT
The Company's Product Development Group is responsible for the
conceptualization, development and implementation of new products
internationally. This group is also responsible for enhancements for existing
products, and the design of technical training and technical procedures
including quality control for core systems and maintenance operations for
existing customer ETM systems. The Company expended $3.8, $8.7 and $5.2 million
on research and development in the years ended December 31, 1995, 1996 and 1997,
respectively. The significant increase in research and development spending in
1996, particularly in the fourth quarter thereof, was attributable to, among
other things, the completion of certain new products by year end, including
adapting ForceOne and certain new software for the German and Japanese markets,
as well as integrating the Company's product and service support with the
products of its newest strategic partners. Dendrite regularly issues updated
releases for its software modules and maintains a schedule of anticipated
releases.
The Company has capitalized certain costs related to the development of new
software products and the enhancement of existing software products consistent
with Statement of Financial Accounting Standards No. 86, ''Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed''.
Capitalized software development costs net of accumulated amortization were
$2,589,000 and $2,408,000, at December 31, 1996 and 1997, respectively.
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, copyright and trademark
laws; license agreements with customers containing confidentiality and other
contractual protections; confidentiality agreements with consultants, vendors
and suppliers; and agreements with each of its executive officers and technical
employees worldwide containing confidentiality and non-disclosure provisions to
protect proprietary intellectual property rights in the Dendrite software
systems and services. Existing United States copyright laws provide only limited
protection and even less protection may be available under foreign laws.
EMPLOYEES
As of December 31, 1997, Dendrite employed 679 employees, 406 in the United
States, 230 in Europe, 33 in the Pacific Rim and 10 in Brazil.
The Company believes that relations with its employees are good. None of its
employees is part of any collective bargaining unit. The Company believes that
its future growth and success will depend upon its ability to attract and retain
skilled and motivated personnel which is becoming progressively more difficult
for many technology and services companies in many countries.
ITEM 2. PROPERTIES.
Dendrite leases a 101,500 square foot headquarters building in Morristown, New
Jersey and a 5,000 square foot warehouse in Somerset, New Jersey. The Company
also leases a total of 47,800 square feet in twelve locations in Australia,
Belgium, Brazil, France, Germany, Italy, Japan, New Zealand, Spain and the
United Kingdom for its full service sales offices, customer support and data
centers. The Company believes that existing facilities are adequate for its
current needs and that adequate space will be available as needed.
File servers located at Dendrite facilities are commonly maintained in a
secured area and are often subject to regular audit and inspection by the
customers. Except for their Dendrite file servers on which customers rent space,
most clients require that their file server be kept entirely network isolated
from the file servers of all other customers. All customers require that their
databases be kept strictly separate from the databases of all other customers.
ITEM 3. LEGAL PROCEEDINGS.
The Company is occasionally involved in litigation relating to personnel and
other claims arising in the ordinary course of business. Dendrite is not
currently engaged in any legal proceeding which is expected, individually or in
the aggregate, to have a materially adverse effect on the Company.
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 traded on the NASDAQ National
Market System (symbol-DRTE). As of March 13, 1998, there were 91 holders of
record of the Company's Common Stock.
The following table sets forth, for the periods indicated, the high and low
sale prices for the Common Stock as reported by the Nasdaq National Market
System.
Period High Low
- --------------------------------------------------------------------------------
Quarter Ended March 31, 1997................................. $11.375 $ 6.75
Quarter Ended June 30, 1997.................................. 17.25 8.125
Quarter Ended September 30, 1997............................. 21.50 14.625
Quarter Ended December 31, 1997.............................. 22.00 15.625
The Company has never paid cash dividends on the Common Stock and has no present
plans to do so.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data
Year Ended December 31,
- --------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees................... $ 4,814 $ 6,917 $ 6,042 $ 8,774 $ 7,707
Services....................... 22,578 32,509 48,080 57,472 70,739
--------------------------------------------
27,392 39,426 54,122 66,246 78,446
--------------------------------------------
Costs of revenues:
Cost of license fees........... 1,296 1,450 712 832 1,758
Cost of services............... 9,930 14,509 21,144 29,631 34,354
--------------------------------------------
11,226 15,959 21,856 30,463 36,112
--------------------------------------------
Gross margin................. 16,166 23,467 32,266 35,783 42,334
--------------------------------------------
Operating expenses:
Selling, general and
administrative................ 12,035 16,392 21,252 26,440 29,905
Research and development....... 2,560 2,846 3,844 8,747 5,216
Write-off of in-process
research and development...... -- -- -- 2,640 --
--------------------------------------------
14,595 19,238 25,096 37,827 35,121
--------------------------------------------
Operating income (loss)...... 1,571 4,229 7,170 (2,044) 7,213
Interest income.................. 114 37 544 1,167 529
Other expense.................... (216) (361) (33) (391) (201)
--------------------------------------------
Income (loss) before
income taxes................ 1,469 3,905 7,681 (1,268) 7,541
Income taxes..................... 778 1,578 2,987 644 2,931
--------------------------------------------
Net income (loss)................ $ 691 $ 2,327 $ 4,694 $(1,912) $ 4,610
============================================
Net income (loss) per share:/(1)/
Basic.......................... $ 0.20 $ 0.67 $ 0.66 $ (0.17) $ 0.41
============================================
Diluted........................ $ 0.08 $ 0.25 $ 0.45 $ (0.17) $ 0.40
============================================
Shares used in computing
net income (loss) per share:/(1)/
Basic.......................... 3,296 3,405 7,101 11,056 11,131
============================================
Diluted........................ 9,025 9,333 10,381 11,056 11,518
============================================
As of December 31,
- --------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------
(in thousands)
Balance Sheet Data:
Working capital................... $ 2,861 $ 5,008 $28,655 $30,432 $33,981
Total Assets...................... 11,666 20,480 45,267 49,215 53,019
Capital lease obligations, less
current portion.................. 39 33 -- -- --
Redeemable Series A convertible
preferred stock.................. 6,945 6,976 -- -- --
Stockholders' equity (deficit).... (711) 1,695 32,310 35,176 38,173
(1) Computed on the basis described in Note 1 of "Notes to Consolidated
Financial Statements".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
In addition to historical information, this Form 10-K contains forward looking
statements which are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's opinion
only as of the date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.
Overview
The Company succeeded in 1991 to a business co-founded in 1986 by the
Company's current President and Chief Executive Officer to provide comprehensive
Electronic Territory Management ("ETM") solutions to be used to manage,
coordinate and control the activities of large sales forces in complex selling
environments, primarily in the ethical pharmaceutical industry. Today, the
Company's solutions combine advanced software products with a wide range of
specialized support services including implementation services, technical and
hardware support services and sales force support services. The Company
develops, implements and services advanced ETM systems in the United States,
Canada, Western Europe, Japan, Australia, New Zealand, Hong Kong and Brazil
through its own sales, support and technical personnel located in offices
worldwide.
The Company generates revenues from two sources: fees from support services
and license fees. Service revenues, which account for a substantial majority of
the Company's revenues, consist of fees from a wide variety of contracted
services which the Company makes available to its customers, generally under
multi-year contracts. Customization and implementation fees are generated from
services provided to modify and implement the ETM solution for the customer.
Technical and hardware support fees are derived from services related to the
operation of the customer's server computers and from the provision of ongoing
technical and customer service support including customization of the software
following initial implementation. Sales force support fees are derived from
organizing and managing support for the customer's sales force.
License fees are charged by the Company for use of its proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, territory covered and the number of functions in the particular
system licensed by the customer. The Company recognizes one-time license fees as
revenue using the percentage of completion method over a period of time that
commences with execution of the license agreement and concludes with the
completion of initial customization. For license contracts that contain customer
acceptance provisions, revenue is not recognized until such time as the
acceptance provisions are satisfied. Additional license fees are recognized when
customers agree to license additional functions or enhancements, acquire an
upgraded version of the Company's software and/or when the maximum number of
users or initial geographic coverage is exceeded. The Company has, in the past,
made available an alternative license fee arrangement known as a "capitation"
agreement under which the customer licenses Dendrite software, software
maintenance and upgrades for all users in a geographic region for an increasing
preset annual charge over a specified term. All license fees, domestic and
export, are included under the heading "License Fees--United States" in Note 10
of "Notes to Consolidated Financial Statements".
The United States, the United Kingdom and France are the Company's main
markets. Approximately 48%, 52% and 42% of the Company's total revenues were
generated outside the United States during the years ended December 31, 1995,
1996, and 1997, respectively. Services provided by Dendrite's foreign branches
and subsidiaries are billed in local currency. License fees for Dendrite
products are billed in U.S. dollars regardless of where they originate. Foreign
license fees are shown as United States export revenues in Note 10 of "Notes to
Consolidated Financial Statements". Operating results generated in local
currencies are translated into United States dollars at the average exchange
rate in effect for the reporting period.
The Company's operating profits by geographic segments are shown in Note 10 of
"Notes to Consolidated Financial Statements". The geographic operating profits
are primarily affected by the utilization of technical and support personnel to
support service revenues, start-up costs associated with opening new operations
and the ability to increase service revenues faster than the growth in selling,
general and administrative expenses. In addition, operating profits in the
United States are affected by the fluctuation in total license fees since all
license fees are included in United States operating profits.
The efficient operation of the Company's business is dependent in part on
computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). The Company has been
evaluating its Internal Programs and Systems to identify potential Year 2000
compliance problems. These actions are necessary to ensure that the Internal
Programs and Systems will be Year 2000 compliant. It is anticipated that
modification or replacement of some of the Internal Programs and Systems may be
necessary to make such Programs and Systems Year 2000 compliant. The Company is
also communicating with its suppliers and others to coordinate Year 2000
conversion.
Based on present information, the Company believes that it will be able to
achieve such Year 2000 compliance through a combination of modification of some
existing Internal Programs and Systems and the replacement of other Internal
Programs and Systems with new programs and systems that are already Year 2000
compliant. However, no assurance can be given that these efforts will be
successful. The Company expects that the expenses and capital expenditures
associated with achieving Year 2000 compliance will not have a material effect
on its financial results in 1998 and 1999.
Results of Operations
The following table sets forth certain line items in the Company's
consolidated statements of operations as a percentage of total revenues for
the periods indicated:
Year Ended December 31,
-------------------------
1995 1996 1997
-------------------------
Revenues:
License fees.................................... 11% 13% 10%
Services........................................ 89 87 90
-------------------------
100 100 100
-------------------------
Costs of Revenues:
Cost of license fees............................ 1 1 2
Cost of services................................ 39 45 44
-------------------------
40 46 46
-------------------------
Gross Margin................................. 60 54 54
-------------------------
Operating Expenses:
Selling, general, and administrative............ 40 40 38
Write-off in-process research and development... -- 4 --
Research and development........................ 7 13 7
-------------------------
47 57 45
-------------------------
Operating income (loss)....................... 13 (3) 9
Other expense (income)............................ (1) (1) (1)
-------------------------
Income (loss) before income taxes............. 14 (2) 10
Income taxes...................................... 5 1 4
-------------------------
Net Income (loss)................................. 9% (3)% 6%
=========================
Years Ended December 31, 1996 and 1997
Revenues. Total revenues increased $12,200,000 or 18% from $66,246,000 in
1996 to $78,446,000 in 1997.
License fee revenues decreased 12% from $8,774,000 in 1996 to $7,707,000
in 1997. This decrease was primarily attributable to the recognition of
revenue related to license fees for a major European client during 1996,
partially offset by the inclusion of $796,000 in revenue associated with
the resale of third party software during 1997 versus $112,000 in revenue
associated with the resale of third party software during 1996.
Service revenues increased 23% from $57,472,000 in 1996 to $70,739,000 in
1997. This increase was primarily the result of an increase in the
Company's installed base of Dendrite ETM systems with new and existing
customers and the provision of additional services to the Company's
existing customers, largely in the U.S., where the service revenue increase
was $11,585,000 or 39%.
Revenues from Pfizer, Johnson and Johnson and Rhone-Poulenc Rorer, in the
aggregate, accounted for approximately 59% of the Company's revenues for
the year ended December 31, 1997. Revenues from Pfizer, Eli Lilly and
Company and Rhone-Poulenc Rorer, in the aggregate, accounted for
approximately 58% of the Company's revenues for the year ended December 31,
1996.
Cost of Revenues. Cost of revenues increased 19% from $30,463,000 in 1996
to $36,112,000 in 1997.
Cost of license fees increased 111% from $832,000 in 1996 to $1,758,000 in
1997. In 1997, the cost of license fees represents the amortization of
capitalized costs of $1,100,000 and third party vendor license fees of
$658,000. In 1996, the cost of license fees represents the amortization of
capitalized costs of $739,000 and third party vendor license fees of
$93,000.
Cost of services increased 16% from $29,631,000 in 1996 to $34,354,000 in
1997. This is primarily due to an increase in the number of service
representatives and technical staff over last year's levels which increase
was necessary to support the increased client activity during the year. As
a percentage of service revenues, cost of services decreased from 52% of
service revenues in 1996 to 49% of service revenues in 1997. This decrease
was due to certain 1996 events. In 1996, there were multiple customer
delayed implementations for which the Company had hired personnel for
training, customer service and technical support. Also in 1996, the Company
incurred costs associated with retaining a significant number of
independent contractors to complete client deliverables.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 13% from $26,440,000 in 1996 to $29,905,000 in 1997. As a
percentage of revenue, SG&A expenses decreased from 40% in 1996 to 38% in
1997. This decrease is attributable to the fixed nature of certain SG&A
costs (such as rent and corporate salaries) as revenues increase.
Research and Development. Research and development expenses decreased 40%
from $8,747,000 in 1996 to $5,216,000 in 1997. As a percentage of revenues,
research and development expenses decreased from 13% for the year ended
December 31, 1996 to 7% for the year ended December 31, 1997. The decrease
in research and development expenses in 1997 was consistent with the
Company's intentions, as peak development efforts associated with several
new software products decreased as these software products neared
completion. With respect to future research and development expenses,
subject to market conditions, the Company currently anticipates that such
expenses will be approximately 6% to 8% of revenues. See "Factors that May
Affect Future Operating Results" -- "New Products and Technological Change"
and "Risks from Competition."
Provision for Income Taxes. The effective tax rate was reduced from 51% for
the year ended December 31, 1996 to 39% for the year ended December 31,
1997. The tax rate in 1996 was primarily the result of the writeoff of in-
process research and development resulting from the acquisition of SRCI
S.A. in May 1996.
Years Ended December 31, 1995 and 1996
Revenues. Total revenues increased $12,124,000 or 22% from $54,122,000 in
1995 to $66,246,000 in 1996 as a result of an increase in the installed
base of Dendrite systems, both from new and existing customers for
Dendrite's pharmaceutical products and services and the acquisition of SRCI
S.A. in May 1996.
License fee revenues increased from $6,042,000 in 1995 to $8,774,000 in
1996. This increase was primarily attributable to several large contracts
where customization was completed during the year. Included in 1995 and
1996 revenues are license fees from a multi-year capitation agreement.
Service revenues increased 20% from $48,080,000 in 1995 to $57,472,000 in
1996 as a result of an increase in the Company's installed base of Dendrite
systems and implementation services provided to new and existing customers
and, to a lesser extent, the increased marketing of services to SRCI S.A.'s
customers in the consumer packaged goods market. Service revenues as a
percentage of the Company's total revenues decreased from 89% in 1995 to
87% in 1996. This percentage decrease was primarily attributable to a
deferral from 1996 to 1997 of a major customer implementation in seven
countries and to higher license fees in 1996.
Revenues from Pfizer, Eli Lilly and Company and Rhone-Poulenc Rorer, in
the aggregate, accounted for approximately 58% of the Company's
revenues for the year ended December 31, 1996 and approximately 56% of the
Company's revenues for the year ended December 31, 1995.
Cost of Revenues. Cost of revenues increased 39% from $21,856,000 in 1995
to $30,463,000 in 1996 primarily due to an increase in the number of
service representatives and technical staff and, to a lesser extent, an
increase in associated support costs. This support cost increase was
related to the increase in service revenues, incremental costs incurred
related to the hiring of personnel for the multiple customer delayed
implementations and the higher costs associated with utilizing independent
contractors.
Cost of license fees increased slightly from $712,000 in 1995 to $832,000
in 1996. In 1996, the cost of license fees represents the amortization of
capitalized costs of $739,000 and third party vendor license fees of
$93,000. In 1995, cost of license fees include amortization of capitalized
software costs of $410,000 and third party software vendor license fees of
$302,000.
Cost of services increased from $21,144,000 in 1995 to $29,631,000 in 1996.
As a percentage of service revenues, cost of services increased from 44% of
service revenues for the year ended December 31, 1995 to 52% of service
revenues for the year ended December 31, 1996. This increase was
attributable to hiring personnel for training, customer service and
technical support for the customer delayed implementations discussed above,
and to higher costs associated with retaining a significant number of
independent contractors to complete client deliverables.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 24% from $21,252,000 in 1995 to $26,440,000 in 1996. As a
percentage of revenue, SG&A expenses remained constant at 40% for the year
ended December 31, 1996 in comparison to the year ended December 31, 1995.
The increase in 1996 was primarily attributable to costs associated with
restructuring the Company's European service delivery organization and the
amortization of goodwill associated with the SRCI acquisition.
Acquisition of SRCI. On May 1, 1996, the Company acquired 100% of the
capital stock of SRCI S.A., a French company for 16,350,000 French Francs,
equivalent to U.S. $3,198,000 and transaction costs of $302,000. The
acquisition has been accounted for using the purchase method of accounting,
whereby the purchase price is allocated to the assets and liabilities of
SRCI based on their fair market values at the acquisition date. The excess
of the purchase price over the fair value of the net assets acquired was
assigned to identifiable intangibles. The Company assigned $2,640,000 to
in-process research and development and such amount was written off in the
accompanying statement of operations. The Company also recorded $860,000 as
goodwill. SRCI's results of operations have been included in the Company's
consolidated financial statements from the date of acquisition.
Research and Development. Research and development expenses increased 128%
from $3,844,000 in 1995 to $8,747,000 in 1996. As a percentage of revenues,
research and development expenses increased from 7% for the year ended
December 31, 1995 to 13% for the year ended December 31, 1996. The increase
in research and development expenses in 1996 was attributable to creating
country specific product for the German and Japanese market, to provide new
products for several joint ventures announced during the year and
completion of the ForceOne product for Dendrite's Consumer Business
Division.
Provision for Income Taxes. The effective tax expense of 51% for the year
ended December 31, 1996 was primarily the result of the writeoff of in-
process research and development resulting from the acquisition of SRCI
S.A. in May 1996. The effective tax rate for the year ended December 31,
1995 was 39%.
Liquidity and Capital Resources
On January 16, 1997 the Board of Directors approved a stock buy-back
program initially limited to $3,000,000, which subject to further Board
review and approval could be increased to a maximum of $10,000,000, but not
greater than 9% of the Company's outstanding shares of Common Stock. During
the twelve month period ending December 31, 1997, the Company repurchased
200,500 shares of Common Stock for a total value of $1,927,000.
The Company has historically financed its operations primarily through cash
generated by operations. Net cash provided by operating activities was
$3,318,000 for the year ended December 31, 1997 compared to cash used in
operating activities of $2,764,000 for the year ended December 31, 1996.
This increase is primarily due to higher net income, depreciation and
amortization and decreases in prepaid taxes and deferred tax assets in 1997
as compared to 1996, partially offset by a larger increase in accounts
receivable in 1997 as compared to 1996 and the non-cash expense caused by
write-off of in process research and development expenses in 1996.
Cash obtained from investing was $3,301,000 in 1997 compared to cash used
in investing of $2,499,000 in 1996. This increase was due to the
liquidation of short-term investments in 1997 as compared to 1996 and the
utilization of $2,965,000 of cash for the purchase of SRCI S.A. in 1996.
The Company utilized $1,331,000 of cash from financing activities in 1997
compared to providing $4,551,000 in cash from financing activities in 1996.
The change in the Company's cash provided from financing activities is due
primarily to the March 31, 1996 initial public offering and the stock buy-
back during the first half of 1997.
The Company maintains a $5,000,000 revolving line of credit agreement with
the Chase Manhattan Bank, N.A. The agreement provides for borrowing up to
$1,000,000 in local currencies directly by the Company or certain of its
overseas subsidiaries and is available to finance working capital needs and
possible future acquisitions. The $5,000,000 line of credit is secured by
substantially all of the Company's assets. The $5,000,000 line of credit
agreement requires the Company to maintain a minimum consolidated net
worth, among other covenants, measured quarterly, which is equal to the
Company's net worth as of December 31, 1994 plus 50% of net income earned
after December 31, 1994 and plus the net proceeds of any stock offering.
This covenant has the effect of limiting the amount of cash dividends the
Company may pay. At December 31, 1997, 1996 and 1995, there were no
borrowings outstanding under the agreement.
At December 31, 1997, the Company's working capital was approximately
$33,981,000. The Company has no significant capital spending or purchasing
commitments other than normal purchase commitments and commitments under
facility and capital leases.
Factors that May Affect Future Operating Results
Impact on Company of changes in ethical drug market. A majority of the
Company's ETM systems are currently used in connection with the marketing
and sale of prescription-only drugs ("ethical pharmaceutical products" or
"ethical drugs"). The market currently serviced by the Company is
undergoing a number of significant changes, including (i) consolidations
and mergers which may reduce the number of existing and potential customers
of the Company, (ii) the increasing prescription of generic drugs, in
substitution for ethical drugs, produced by manufacturers which do not use
a Company ETM system, (iii) the trend toward the reclassification of
formerly prescription-only drugs to permit their over-the-counter sale and
(iv) competitive pressures on the Company's pharmaceutical customers
resulting from the increasing emphasis in the United States on the delivery
of healthcare through managed care organizations such as health maintenance
organizations and preferred provider organizations, consolidation of the
managed care industry in the United States and other changes in healthcare
delivery systems occurring in other countries. Any one or more of these
changes may adversely affect the Company's business, operating results or
financial condition. The Company may also be materially affected by
legislative enactments which alter the structure of, or increase
regulations governing, the healthcare systems in any of the countries where
Company customers and potential customers are located, including, without
limitation, government mandated price reductions in the price of ethical
pharmaceutical products. There can be no assurance that the Company can
respond positively to all of these and other changes in the marketplace and
maintain profitability.
Potential for significant fluctuations in quarterly results; seasonality;
lengthy sales and implementation cycle. The Company's quarterly revenues,
expenses and operating results have varied considerably in the past and are
likely to vary from quarter to quarter in the future. Fluctuations in the
Company's revenues depend on a number of factors, some of which are beyond
the Company's control. These factors include, among others, the timing of
contracts, delays in customer installation of the Company's software, the
length of sales cycles, customer budget changes and changes in pricing
policy by the Company or its competitors. For example, the Company incurred
a net loss of $3.3 million in the fourth quarter of 1996, which loss was
attributable to, among other things, the delay of certain new license
purchases by an existing customer, the delay of an existing client's
upgrade decision, the postponement of certain post-production
implementations for an existing client in multiple country sites and
increased research and development spending. See "Item 1. Business --
Research and Development."
The Company establishes its expenditure levels for product development and
other operating expenses based in large part on its expected future
revenues. As a result, should revenues fall below expectations, operating
results are likely to be adversely and disproportionately affected because
only a small portion of the Company's expenses vary with its revenues.
In addition, the Company's quarterly license fees and service revenues may
vary due to seasonal, cyclical and other factors. Selection of an ETM
system often entails an extended decision-making process for the customer
because of the substantial costs and strategic implications associated with
acquiring the system. Senior levels of management are often involved in
this process, given the importance of the decision as well as the risks
faced by the customer should a system fail or not perform as expected.
Depending upon the size of the system and the associated computer hardware
and software costs, senior corporate management or even the board of
directors of a customer may make the final decision to license a Company
ETM system. Therefore, decisions to acquire a Company ETM system involve
long selling cycles, typically 12 to 18 months for larger customers,
although sometimes as long as 24 months, and usually require lengthy
periods of evaluation prior to full installation and roll-out. In addition,
the Company's ability to recognize license revenue is affected by the
duration of the customization process, if any. Finally, the Company has
historically realized a greater percentage of its license fees and service
revenues for a year in the second half of the year than it does in the
first half because, among other things, the Company's customers typically
spend more of their annual budget authorization for ETM products and
services in the second half of the year. The interplay among these factors
means that actual results for a given year may vary from this seasonal
expectation. In the future, because service revenues tend to be less
seasonal and cyclical than license fees, to the extent the percentage of
revenue from service revenues from existing customers of the Company
continues to increase, seasonal and cyclical trends in the Company's
revenues may be reduced.
New products and technological change. The market for ETM systems is
characterized by rapid change and improvements in computer hardware and
software technology. The Company's future success will depend in part on
its ability
to enhance its current products, to introduce new products that keep pace
with technological and market developments and to address the increasingly
sophisticated needs of its customers. There can be no assurance that the
Company will be successful in developing and marketing in a timely manner
product enhancements or new products that respond to the technological
advances by others, or that its products will adequately and competitively
address the needs of the changing marketplace. Competition with
respect to software products has been characterized by shortening product
cycles, and there can be no assurance that the Company will not be
adversely affected by this trend. If the product cycles for the Company's
systems prove to be shorter than management anticipates, the Company's
operating results could be adversely affected. In addition, in order to
remain competitive, the Company may be required to expend a greater
percentage of its revenues on product innovation and development than
historically has been the case, in which case, the Company's gross profit
margins and results of operations could be materially and adversely
affected. In addition, products as complex as those offered by the Company
may contain previously undetected errors or failures. Such errors have
occurred in the past and there can be no assurance that, despite testing by
the Company, errors will not be found in new products resulting in losses
or delays which could have a material adverse effect on the Company's
business, operating results or financial condition.
Dependence on major customers. The Company has approximately 29
pharmaceutical customers (considering all members of an affiliated group to
be a single customer). The Company derived approximately 56%, 58% and 59%
of its revenues in the aggregate in the years ended December 31, 1995, 1996
and 1997, respectively, from the three largest pharmaceutical customers,
two of which had been among the three largest customers of the Company in
terms of revenues in each of those periods. The Company believes that the
costs to its customers of switching to an ETM system offered by a
competitor, or taking significant system management functions in-house
would be substantial. Nevertheless, from time to time in the past, such a
change has been made by some of the Company's customers with respect to a
Company ETM system or to all or some of the services offered by the
Company. If such change is made by one or more of the Company's major
customers, the Company's business, operating results or financial condition
could be materially and adversely affected.
Risks from competition. Globally, the current market for sales and
marketing information management systems of the type sold by the Company is
highly competitive. Many companies offer sales force automation and ETM
systems. In addition to Dendrite, the Company believes that there are
approximately ten companies which supply products automating sales,
marketing and customer service functions and specifically target the
pharmaceutical industry. The Company believes at least four of these
companies are actively selling in more than one country. In addition, the
other vertical markets in which the Company markets its products possess
numerous vendors who market and sell sales force automation and ETM
systems. The Company believes that most of its competitors offer a variety
of less customizable software products, which are typically available more
rapidly than Company systems and often at a substantially lower price. In
addition, competition will increase as new competitors enter the market to
supply ETM systems and as existing competitors expand their product lines
or consolidate.
The Company expects it may encounter additional competition in the future
from firms offering outsourcing of information technology services, from
purveyors of software products providing specialized applications not
offered by the Company, including enterprise resource planning vendors and
database vendors not currently in this market space to any substantial
degree, and from the development and/or operation of in-house systems by
its customers and potential customers. Many of the Company's competitors
and potential competitors have longer operating histories and significantly
greater financial, technical, sales, marketing and other resources than
those of the Company. Some of the Company's competitors and potential
competitors are part of large corporate groups with significantly greater
resources and broader technology bases than those of the Company. There can
be no assurance that the Company will be able to compete successfully or
that competition will not have a material adverse effect on the Company's
business, operating results or financial condition. See "Item 1. Business
-- Competition."
Reliance on competitors for market data. Current market data on the sales
of ethical pharmaceutical products is an important element for the
operation of Company ETM systems, which the Company's customers use to
guide and organize their sales forces and marketing efforts. There are
currently few sources of such data in the United States, Europe and the
Pacific Rim. Two of the leading purveyors of such market information in the
United States or elsewhere compete with the Company either directly or
through affiliates in the market for ETM systems. Were these purveyors of
market information to require that pharmaceutical companies also utilize
their information management services (or those of their affiliates)
instead of the Company's, the Company's business, operating results and
financial condition would be materially and adversely affected.
International operations. Currently, the Company expects the portion of its
business located outside of the United States to grow as a percentage of
the Company's revenues and to continue to account for a material part of
its revenues. Licensing software and providing services in many foreign
countries is subject to risks inherent in international business
activities. Risks include general economic conditions in each such country,
the effect of applicable foreign tax structures, tariff and trade
regulations, difficulties in obtaining local licenses, the difficulty of
managing an organization spread over various jurisdictions, unexpected
changes in regulatory environments, complying with a variety of foreign
laws and regulations and any adverse changes in the political environments
in any such countries. In addition, laws in foreign countries may not
always provide protection for the Company's proprietary rights in its
software products. Providing specialized system support services outside
the United States paid for in local currencies carries the additional risk
of currency fluctuation and may also affect the net income, if any,
reported by the Company.
Dependence on key personnel, management of growth. The success of the
Company depends to a significant extent upon the contributions of its
executive officers and key sales, technical and customer service personnel.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense. The Company has at times
experienced difficulty in recruiting qualified personnel and there can be
no assurance that the Company will not experience such difficulties in the
future. Any such difficulties could adversely affect the Company's
business, operating results and financial condition. All of the Company's
executive officers and technical employees and a significant number of
sales employees have entered into non-competition agreements with the
Company. The laws governing such non-competition agreements vary in
different jurisdictions and are evolving. The enforceability of such
agreements in any case will depend upon all of the facts and circumstances,
including the jurisdiction in which enforcement is sought. In some cases
these agreements might be unenforceable, a result that could have a
material adverse effect on the Company.
To manage growth effectively, the Company must continue to strengthen its
operational, financial and management information systems, and expand,
train and manage its work force. There can be no assurance that the Company
will be able to do so on a timely basis. Failure to do so effectively and
on a timely basis could have a material adverse effect upon the Company's
business, operating results or financial condition.
Dependence on proprietary technology. The Company relies on a combination
of trade secret, copyright and trademark laws, non-disclosure and other
contractual agreements, and technical measures to protect its proprietary
rights in its products. There can be no assurance that the steps taken by
the Company will prevent misappropriation of this technology. Further,
there can be no assurance that such protective steps will preclude
competitors from developing products with features similar to the Company's
products. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. The Company
believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against the Company
in the future or that any such claims will not require the Company to enter
into royalty arrangements or result in costly litigation involving the
imposition of damages or injunctive relief against the Company, any of
which could materially and adversely affect the Company's business,
operating results and financial condition.
Year 2000. A substantial amount of current demand for applications software
may be generated by customers in the process of replacing and upgrading
applications in order to accommodate the change in date to the year 2000.
Once such customers have completed such activities, the Company may
experience a significant deceleration in this source of revenue which is
expected to contribute to its 1998 and 1999 annual growth.
Some of the Company's older products may not accurately process dates after
the date December 31, 1999. To the extent any of these products are still
in use in 1999, the Company will continue to attempt to migrate these
customers to products which are year 2000 compliant, although there can be
no assurance that this will occur. A failure to migrate any such customer
to a product which is Year 2000 compliant could adversely affect the
Company's business, operating results or financial condition. In addition,
the Company may experience increased expenses which it cannot recoup from
customers in addressing the migration of current and prospective customers
to software that is Year 2000 compliant.
Some customers may attempt to hold the Company responsible for Year 2000
compliance for hardware or software not supplied or created by Dendrite,
but used in conjunction with a Dendrite product. The Company intends to
defend itself vigorously against any such allegation.
Finally, there can be no assurance that the Company will not incur material
expenses in connection with any claim relating to Year 2000 compliance of
its own products or others.
Consumer Packaged Goods Business. The Company is currently engaged in the
marketing and selling of ETM systems to companies in the OTC and CPG
vertical markets. The selling environment in each vertical market has
competitive and other characteristics that are unique to it. In addition,
the Company believes that the CPG vertical market is composed of sub-
markets each of which may have characteristics unique to such sub-market.
Accordingly, there can be no assurance that the Company will be able to
achieve in these markets the success it has attained in the ethical
pharmaceutical market.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1997 Financial Statements, together with the report theron of
Arthur Andersen LLP are included elsewhere herein. See Item 14 for a list
of Financial Statements and Financial Statement Schedules.
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 and executive officers of the Company will be
set forth in the Registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement, expected to be dated on or about April 18, 1998 (the "Proxy
Statement"), which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the Company's compensation of its directors and
executive officers will be set forth in the Proxy Statement, 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 Proxy Statement, 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 Proxy Statement, 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 Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)........................................................
Consolidated Statements of Cash Flows.................................................
Notes to Consolidated Financial Statements............................................
Selected Quarterly Financial Data.....................................................
2. Financial Statement Schedules:
None.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as amended (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") June 30, 1996)
3.2 By-laws of the Company, as amended (incorporated herein by reference to the Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed with
the Commission November 13, 1995)
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 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 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 May 17, 1995)
10.1 January 1992 Stock Plan (incorporated herein by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, filed with the Commission May 17, 1995)
10.2 October 1992 Stock Option Plan for Senior Management (incorporated herein by reference to
Exhibit 10.37 to the Company's Registration Statement on Form S-1, filed with the Commission
May 17, 1995)
10.3 1997 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit
4.2 to the Company's Post-Effective Amendment No. 1 to its Registration Statement on Form
S-8, filed with the Commission November 10, 1997)
10.4 401(k) Retirement Savings Plan (incorporated herein by reference to Exhibit 10.51 to the
Company's Annual Report on Form 10-K, filed with the Commission March 13, 1997)
10.5 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 April 1, 1997)
10.6 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
May 17, 1995)
10.7 Indemnification Agreement of Paul A. Margolis dated as of January 1, 1992 (incorporated herein
by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1, filed with
the Commission May 17, 1995)
10.8 Credit Agreement with The Chase Manhattan Bank, N.A. dated as of May 5, 1995 (incorporated
herein by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1,
filed with the Commission May 17, 1995)
10.9 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 May 16, 1997)
10.10 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 August 14, 1997)
10.11 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 August
14, 1997)
10.12 Employment Agreement dated July 24, 1997 with Bruce Savage (incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission
November 14, 1997)
10.13 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 February 5, 1996)
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 1998 By: /s/ John E. Bailye
---------------------
John E. Bailye
Chief Executive Officer and President
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
- ----- ----- ----
/s/ John E. Bailye Chief Executive Officer, March 31, 1998
- ------------------ President and Director
John E. Bailye (Principal Executive Officer)
/s/ George T. Robson Senior Vice President March 31, 1998
- -------------------- and Chief Financial Officer
George T. Robson (Principal Financial Officer
and Principal Accounting Officer)
/s/ John H. Martinson Director March 31, 1998
- ---------------------
John H. Martinson
/s/ Bernard M. Goldsmith Director March 31, 1998
- ------------------------
Bernard M. Goldsmith
/s/ Paul A. Margolis Director March 31, 1998
- --------------------
Paul A. Margolis
/s/ Edward Kfoury Director March 31, 1998
- -----------------
Edward Kfoury
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
3.1 Restated Certificate of Incorporation of the Company, as amended (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") June 30, 1996)
3.2 By-laws of the Company, as amended (incorporated herein by reference to the Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed with
the Commission November 13, 1995)
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 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 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 May 17, 1995)
10.1 January 1992 Stock Plan (incorporated herein by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, filed with the Commission May 17, 1995)
10.2 October 1992 Stock Option Plan for Senior Management (incorporated herein by reference to
Exhibit 10.37 to the Company's Registration Statement on Form S-1, filed with the Commission
May 17, 1995)
10.3 1997 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit
4.2 to the Company's Post-Effective Amendment No. 1 to its Registration Statement on Form S-8,
filed with the Commission November 10, 1997)
10.4 401(k) Retirement Savings Plan (incorporated herein by reference to Exhibit 10.51 to the
Company's Annual Report on Form 10-K, filed with the Commission March 13, 1997)
10.5 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 April 1, 1997)
10.6 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
May 17, 1995)
10.7 Indemnification Agreement of Paul A. Margolis dated as of January 1, 1992 (incorporated herein
by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1, filed with
the Commission May 17, 1995)
10.8 Credit Agreement with The Chase Manhattan Bank, N.A. dated as of May 5, 1995 (incorporated
herein by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1,
filed with the Commission May 17, 1995)
10.9 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 May 16, 1997)
10.10 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 August 14, 1997)
10.11 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 August
14, 1997)
10.12 Employment Agreement dated July 24, 1997 with Bruce Savage (incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission
November 14, 1997)
10.13 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 February 5, 1996)
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
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, 1996 and 1997, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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 conducted our audits 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 audits
provide reasonable basis for our opinion.
In our opinion, 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, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
February 4, 1998
F-1
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
- ---------------------------------------------------------------------------
1996 1997
----------------------------
Assets
Current Assets:
Cash and cash equivalents.................. $10,912 $15,917
Short-term investments..................... 8,421 2,955
Accounts receivable........................ 18,732 24,724
Prepaid expenses and other................. 1,569 2,222
Prepaid taxes.............................. 1,397 --
Deferred tax asset......................... 1,203 441
-----------------------------
Total current assets................... 42,234 46,259
Property and equipment, net.................. 3,391 3,110
Deferred taxes............................... 254 667
Goodwill, net................................ 747 575
Capitalized software development costs, net.. 2,589 2,408
-----------------------------
$49,215 $53,019
=============================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable........................... $ 3,344 $ 2,211
Income taxes payable....................... 584 867
Accrued compensation and benefits.......... 2,446 3,439
Other accrued expenses..................... 3,329 4,352
Deferred revenues.......................... 2,099 1,409
-----------------------------
Total current liabilities.............. 11,802 12,278
-----------------------------
Deferred rent................................ 726 598
-----------------------------
Deferred taxes............................... 1,511 1,970
-----------------------------
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, no par value, 10,000,000
shares authorized, none issued........... -- --
Common stock, no par value, 50,000,000
shares authorized, 11,163,631 and
11,329,774 shares issued and 11,163,631
and 11,129,274 outstanding............... 32,198 32,814
Retained earnings.......................... 4,658 9,268
Deferred compensation...................... (1,227) (1,141)
Cumulative translation adjustment.......... (453) (841)
Less treasury stock, at cost............... -- (1,927)
-----------------------------
Total stockholders' equity............. 35,176 38,173
-----------------------------
$49,215 $53,019
=============================
The accompanying notes are an integral part of these statements.
F-2
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
- ------------------------------------------------------------------------------
1995 1996 1997
---------------------------
Revenues:
License fees................................... $ 6,042 $ 8,774 $ 7,707
Services....................................... 48,080 57,472 70,739
---------------------------
54,122 66,246 78,446
---------------------------
Costs of revenues:
Cost of license fees........................... 712 832 1,758
Cost of services............................... 21,144 29,631 34,354
---------------------------
21,856 30,463 36,112
---------------------------
Gross margin................................. 32,266 35,783 42,334
---------------------------
Operating expenses:
Selling, general and administrative............ 21,252 26,440 29,905
Research and development....................... 3,844 8,747 5,216
Write-off of in-process research and
development................................... -- 2,640 --
---------------------------
25,096 37,827 35,121
---------------------------
Operating income (loss)...................... 7,170 (2,044) 7,213
Interest income.................................. 544 1,167 529
Other expense.................................... (33) (391) (201)
---------------------------
Income (loss) before income taxes............ 7,681 (1,268) 7,541
Income taxes..................................... 2,987 644 2,931
---------------------------
Net income (loss)................................ $ 4,694 $(1,912) $ 4,610
===========================
Net Income (loss) per share:
Basic.......................................... $.66 $(0.17) $.41
===========================
Diluted........................................ $.45 $(0.17) $.40
===========================
Shares used in computing net income (loss) per
share:
Basic.......................................... 7,101 11,056 11,131
===========================
Diluted........................................ 10,381 11,056 11,518
===========================
The accompanying notes are an integral part of these statements.
F-3
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity
(in thousands)
Stockholders' Equity
--------------------------------------------------------------------------------------------
Redeemable Unrealized
Series A Holding
Convertible Common Stock Gain on Cumulative Treasury Stock
Preferred -------------- Retained Deferred Short-Term Translation ---------------
Stock Shares Amount Earnings Compensation Investments Adjustment Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 ........ $ 6,976 3,444 $ 432 $ 1,892 $ (124) $ -- $ (505) -- $ -- $ 1,695
Issuance of
common stock ......... -- 151 747 -- (425) -- -- -- -- 322
Amortization of deferred
compensation .......... -- -- -- -- 47 -- -- -- -- 47
Purchase and retirement
of common stock ....... -- (26) (132) -- -- -- -- -- -- (132)
Currency translation
adjustment ............ -- -- -- -- -- -- (76) -- -- (76)
Unrealized gain on short-
term investments ...... -- -- -- -- -- 14 -- -- -- 14
Accretion of redemption
premium on
preferred stock ....... 16 -- -- (16) -- -- -- -- -- (16)
Mandatory conversion
of Redeemable
Series A Convertible
Preferred Stock into
common stock .......... (6,992) 5,607 6,992 -- -- -- -- -- -- 6,992
Issuance of common stock
from consummation of
initial public offering,
net of offering costs . -- 1,500 18,770 -- -- -- -- -- -- 18,770
Net income .............. -- -- -- 4,694 -- -- -- -- -- 4,694
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 ........ -- 10,676 26,809 6,570 (502) 14 (581) -- -- 32,310
Issuance of
common stock .......... -- 188 1,094 -- (838) -- -- -- -- 256
Amortization of deferred
compensation .......... -- -- -- -- 113 -- -- -- -- 113
Currency translation
adjustment ............ -- -- -- -- -- -- 128 -- -- 128
Realization of gain on
short-term investments -- -- -- -- -- (14) -- -- -- (14)
Issuance of common stock
from consummation of
initial public offering,
net of offering costs . -- 300 4,295 -- -- -- -- -- -- 4,295
Net loss ................ -- -- -- (1,912) -- -- -- -- -- (1,912)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 ........ -- 11,164 32,198 4,658 (1,227) -- (453) -- -- 35,176
Issuance of
common stock .......... -- 166 616 -- (20) -- -- -- -- 596
Amortization of deferred
compensation .......... -- -- -- -- 106 -- -- -- -- 106
Currency translation
adjustment ............ -- -- -- -- -- -- (388) -- -- (388)
Purchase of
Treasury stock ........ -- -- -- -- -- -- -- (201) (1,927) (1,927)
Net income .............. -- -- -- 4,610 -- -- -- -- -- 4