UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC  20549

 

Form 10-Q

 

ý        Quarterly Report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

 

For the quarterly period ended March 31, 2004

 

o        Transition Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

 

For the transition period from           to          

 

Commission File Number   0-26138

 

Dendrite International, Inc.

(Exact name of registrant as specified in its charter)

 

 

1200 Mount Kemble Avenue

Morristown, NJ  07960

(Address, including zip code, of

principal executive offices)

 

(973) 425-1200

(Registrant’s telephone number, including area code)

 

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, and (2) has been subject to such filing requirements for the past 90 days. ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): ý

 

As of May 3, 2004, 41,489,754 shares of Dendrite International, Inc. no par value common stock were outstanding.

 

 

DENDRITE INTERNATIONAL, INC.

INDEX TO QUARTELY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2004

 

PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Statements of Operations (unaudited)
	Three months ended March 31, 2004 and 2003
	Consolidated Balance Sheets
	March 31, 2004 (unaudited) and December 31, 2003
	Consolidated Statements of Cash Flows (unaudited)
	Three months ended March 31, 2004 and 2003
	Notes to Unaudited Consolidated Financial Statements
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 4.	Controls and Procedures
PART II.	OTHER INFORMATION
ITEM 6.	Exhibits and Reports on Form 8-K
Signatures

 

2

 

PART I.                             FINANCIAL INFORMATION

 

ITEM 1.                             Financial Statements

 

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

		THREE MONTHS ENDED MARCH 31,
		2004			2003
Revenues:
License fees		$	3,346		$	2,562
Services		91,718			57,148
		$	95,064		$	59,710
Cost of revenues:
Cost of license fees		989			1,079
Cost of services		49,036			28,741
		50,025			29,820
Gross margin		45,039			29,890
Operating expense (income):
Selling, general and administrative		32,966			20,239
Research and development		3,022			2,698
Other operating (income)		(339		)	—
		35,649			22,937
Operating income		9,390			6,953
Interest income, net		7			243
Other income		43			9
Income before income tax expense		9,440			7,205
Income tax expense		3,776			2,882
Net income		$	5,664		$	4,323
Net income per share:
Basic		$	0.14		$	0.11
Diluted		$	0.13		$	0.11

 

The accompanying notes are an integral part of these statements.

 

3

 

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

		March 31, 2004			December 31, 2003
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	41,396		$	30,405
Accounts receivable, net		62,239			71,383
Prepaid expenses and other current assets		8,555			8,483
Deferred taxes		8,844			8,844
Facility held for sale		6,900			6,900
Total current assets		127,934			126,015
Property and equipment, net of accumulated amortization of $47,063 and $43,946		28,019			28,140
Other assets		2,120			2,004
Long-term receivable		—			3,157
Goodwill		76,666			70,403
Intangible assets, net		19,672			18,574
Purchased capitalized software, net		1,513			1,666
Capitalized software development costs, net		6,240			6,126
Deferred taxes		6,372			6,372
		$	268,536		$	262,457
Liabilities and Stockholders’ Equity
Current Liabilities:
Current installments of long-term debt		$	834		$	—
Accounts payable		7,983			4,990
Income taxes payable		4,694			6,194
Capital lease obligations		722			1,033
Accrued compensation and benefits		15,810			16,104
Accrued professional and consulting fees		7,238			7,842
Other accrued expenses		18,330			21,038
Purchase accounting restructuring accrual		4,328			3,203
Deferred revenues		14,528			16,379
Total current liabilities		74,467			76,783
Capital lease obligations		102			187
Purchase accounting restructuring accrual		6,678			8,627
Deferred rent		447			369
Long-term debt, excluding current installments		1,405			—
Other non-current liabilities		69			356
Stockholders’ Equity:
Preferred stock, no par value, 15,000,000 shares authorized, none issued		—			—
Common stock, no par value, 150,000,000 shares authorized, 43,288,902 and 43,013,428 shares issued; 41,066,202 and 40,790,728 shares outstanding		103,577			100,448
Retained earnings		103,600			97,936
Deferred compensation		(70		)	(56		)
Accumulated other comprehensive loss		(863		)	(1,317		)
Less treasury stock, at cost		(20,876		)	(20,876		)
Total stockholders’ equity		185,368			176,135
		$	268,536		$	262,457

 

The accompanying notes are an integral part of these statements.

 

4

 

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

		For the Three Months Ended March 31,
		2004			2003
Operating activities:
Net income		$	5,664		$	4,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,196			4,031
Amortization of deferred compensation, net of forfeitures		109			(50		)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable		13,671			4,857
Decrease in prepaid expenses and other		737			1,927
Decrease (increase) in other non-current assets		254			(181		)
Decrease in accounts payable and accrued expenses		(4,027		)	(3,534		)
Decrease in purchase accounting restructuring accrual		(2,615		)	(190		)
Decrease in income taxes payable		(1,007		)	(3,399		)
(Decrease) increase in deferred revenue		(2,575		)	681
Increase in other non-current liabilities		114			27
Net cash provided by operating activities		15,521			8,492
Investing activities:
Sales of short-term investments		—			796
Acquisitions, net of cash acquired		(1,990		)	—
Purchases of property and equipment		(2,530		)	(2,545		)
Additions to capitalized software development costs		(770		)	(664		)
Net cash used in investing activities		(5,290		)	(2,413		)
Financing activities:
Repayments of long-term debt		(1,120		)	—
Repayments of acquired loan		(624		)	—
Payments on capital lease obligations		(405		)	(125		)
Issuance of common stock		2,514			1,266
Net cash provided by financing activities		365			1,141
Effect of foreign exchange rate changes on cash		395			37
Net increase in cash and cash equivalents		10,991			7,257
Cash and cash equivalents, beginning of year		30,405			68,308
Cash and cash equivalents, end of period		$	41,396		$	75,565

 

The accompanying notes are an integral part of these statements.

 

5

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

1.  Basis of Presentation

 

The consolidated financial statements of Dendrite International, Inc. and its subsidiaries (the “Company”) included in this Form 10-Q are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results as of and for the three month periods ended March 31, 2004 and 2003.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Our interim operating results may not be indicative of operating results for the full year.

 

2.  Certain Significant Accounting Policies

 

Stock Based Compensation  The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”  The Company applies Accounting Principles Board (“APB”) 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options granted under the Company’s stock option plans (the “Plans”). Accordingly, compensation cost has been computed for the Plans based on the intrinsic value of the stock option at the date of grant, which represents the difference between the exercise price and the fair value of the Company’s stock. As the exercise price of substantially all stock options granted equaled the fair value of the Company’s stock at the date of option issuance, no compensation cost related to stock options has been recorded in the accompanying statements of operations. Had compensation cost for the Plans and the employee stock purchase plan been determined consistent with SFAS 123, the Company’s net income and net income per share would have been adjusted to the following pro forma amounts:

 

 

The fair value for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

		For the Three Months Ended March 31,
		2004		2003
Expected dividend yield		0.0	%	0.0	%
Expected stock price volatility		70.0	%	70.0	%
Weighted-average risk-free interest rate		1.0	%	3.2	%
Expected life of the option (years)		5.25		6.00

 

6

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

The stock-based employee compensation expense determined under the fair value based methods for all awards, net of related tax effects, disclosed herein is determined based upon the number and fair value of options granted and an estimate of forfeitures.  The expense is recognized over the vesting period of the options.  Under SFAS 123, compensation expense is not recognized for options that are forfeited due to the employee’s failure to fulfill service requirements.  Therefore, while the fair value per option is not recalculated, the number of options vesting would change, thus requiring recalculation of the aggregate compensation expense.  The Company accounts for forfeitures by estimating the total number of awards that will vest and adjusting that estimate if evidence becomes available that a different number of awards is expected to vest.

 

The Black-Scholes valuation model was developed for use in estimating the fair market value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of the highly subjective assumptions disclosed above.  Since the Company’s employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

Guarantees The Company provides certain indemnification provisions within its software licensing agreements to protect its customers from any liabilities or damages resulting from a claim of misappropriation or infringement by third parties relating to its software.  These provisions continue in perpetuity, along with the Company’s software licensing agreements.  The Company has never incurred a liability relating to one of these indemnification provisions in the past and management believes that the likelihood of any future payout relating to these provisions is unlikely.  Therefore, the Company has not recorded a liability during any period for these indemnification provisions.

 

Reclassifications Certain prior period balances have been reclassified to conform to current period presentation.

 

3.  Net Income Per Share

 

The following table presents the computation of basic and diluted net income per share for the three month periods ended March 31, 2004 and 2003:

 

 

4.  Comprehensive Income

 

The components of comprehensive income for the three month periods ended March 31, 2004 and 2003, consisted of the following:

 

7

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

 

5.  Acquisitions

 

Uto Brain

 

On January 5, 2004, the Company completed its acquisition of Uto Brain Co., Ltd. (“Uto Brain”).  Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceutical companies with data, analytics, publishing and advisory services.  The combining of resources of Uto Brain with the existing resources of Dendrite creates a comprehensive information, software and services company dedicated to the Japanese pharmaceutical industry and further enhances Dendrite’s ability to provide solutions to enhance sales, marketing and clinical functions of pharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Uto Brain was approximately $4,665 (498,270 Yen) and approximately $73 of legal and professional fees were incurred in connection with the transaction as well as the assumption of approximately $3,800 of bank debt and acquired loan.  As of March 31, 2004, the Company paid approximately $2,242 of the purchase price with approximately $2,423 still outstanding and included within accrued other on the March 31, 2004 consolidated balance sheet.  The outstanding balance is payable as follows: approximately $1,077 on September 30, 2004; $449 on January 5, 2005; and $897 on March 31, 2005. The Company is in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment.  The preliminary allocation of purchase price to intangible assets acquired in connection with the Uto Brain acquisition is as follows:

 

 

Synavant

 

On June 16, 2003, we completed our acquisition of Synavant Inc. (“Synavant”). Synavant provided a broad range of knowledge-based services to pharmaceutical and other life science companies around the world. Its comprehensive global solutions included pharmaceutical CRM applications, interactive marketing, server and database management, dedicated local help-line support, training, telemarketing, sample management and product recall services. Synavant was headquartered in Atlanta, Georgia, and had offices in 21 countries. The combining of resources of Synavant with the existing resources of Dendrite creates a more comprehensive information, software and services company dedicated to the global life sciences industry, and further enhances Dendrite’s ability to provide solutions to the sales, marketing and clinical functions of pharmaceutical and other life science companies. Synavant’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price was approximately $55,130, including consideration paid for the common stock and approximately $3,445 of legal and professional fees incurred in connection with the transaction.

 

The pro forma results of operations of the Company as if the Synavant acquisition had occurred as of January 1, 2003 are as follows:

 

8

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

 

(A)      Net loss includes approximately $500 of historical restructuring charges from Synavant.

 

6.  Purchase Accounting Restructuring Accrual

 

In connection with the June 2003 acquisition of Synavant, the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. During the first quarter of 2004, the Company’s management increased its restructuring accrual by approximately $1,791 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to goodwill in the accompanying consolidated balance sheet. The Company anticipates that the balance related to the termination of employees will be paid during the current year and the remaining accrued restructuring balance related to the facility exit costs will be paid over the life of the leases, ending in February 2012. The Company’s management believes the accrued liability as of March 31, 2004 will be adequate to cover the costs incurred related to the restructuring.

 

The liability accrues for expenses to be incurred in exiting certain Synavant facilities, including assumptions related to sublease income which offsets future lease obligations. The underlying subleases are not in place for all facilities and the future placement of subleases, including the timing and terms and conditions of subleases, could be different than the assumptions.

 

The activity related to the Synavant and Software Associates International (“SAI”) purchase accounting restructuring accruals for the three month period ended March 31, 2004 is summarized in the table below:

 

		Purchase Accounting Restructuring Accrual as of December 31, 2003			2004 Year-to-Date Adjustments			2004 Year-to-Date Payments			Purchase Accounting Restructuring Accrual as of March 31, 2004
Synavant
Termination payments to employees		$	2,378		$	—		$	(1,304	)	$	1,074
Facility exit costs		7,187			1,791			(913		)	8,065
Total Synavant		9,565			1,791			(2,217		)	9,139
SAI
Lease termination costs		2,265			—			(398		)	1,867
Total		$	11,830		$	1,791		$	(2,615	)	$	11,006

 

7.  Goodwill and Intangible Assets

 

Effective July 1, 2001, the Company adopted SFAS 141, “Business Combinations,” and effective January 1, 2002, the Company adopted SFAS 142, “Goodwill and other Intangible Assets.” SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” which was superceded by SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company conducts its annual impairment testing of goodwill as of October 1 of each year. For the quarter ended March 31, 2004 no impairment was recorded.

 

The total gross carrying amount and accumulated amortization for goodwill and intangible assets are as follows:

 

9

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

		As of March 31, 2004									As of December 31, 2003
		Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
Intangible Assets Subject To Amortization:
Purchased capitalized software		$	2,441		$	928		$	1,513		$	2,441		$	775		$	1,666
Capitalized software development costs		21,491			15,251			6,240			20,721			14,595			6,126
Customer relationship assets		8,863			1,209			7,654			6,993			904			6,089
Backlog		2,400			1,927			473			2,400			1,798			602
Non-compete covenants		3,709			1,543			2,166			3,730			1,170			2,560
Purchased database		2,600			205			2,395			2,600			140			2,460
Other intangibles		177			73			104			177			46			131
Total		41,681			21,136			20,545			39,062			19,428			19,634
Intangible Assets Not Subject to Amortization:
Goodwill		76,666			—			76,666			70,403			—			70,403
Trademarks		6,880			—			6,880			6,732			—			6,732
Total		83,546			—			83,546			77,135			—			77,135
Total Goodwill and Intangible Assets		$	125,227		$	21,136		$	104,091		$	116,197		$	19,428		$	96,769

 

The changes in the carrying amount of goodwill for the period ended March 31, 2004 are as follow:

 

 

Aggregate annual amortization expense of intangible assets is estimated to be:

 

Year Ending December 31,
2004		$	7,287
2005		4,278
2006		2,755
2007		889
2008		882
Thereafter		5,413
		$	21,504

 

8. Line-of-Credit

 

The Company entered into a credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement replaced the Company’s then existing $15,000 credit facility. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the Agreement requires the Company to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003 and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of March 31, 2004, our consolidated net worth was $185,368. The Agreement contains certain restrictions on our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of March 31, 2004, the Company was in compliance with all covenants.  As of March 31, 2004, the Company did not have any amounts outstanding under the line of credit.

 

As of March 31, 2004 and 2003, the Company had letters of credit of approximately $921 and $475 outstanding, respectively.

 

9. Long-Term Debt

 

In connection with the Uto Brain acquisition, the Company assumed bank debt of approximately $3,155, with a weighted-average interest rate of 2.10%, and acquired a loan of approximately $627 with an interest rate of 1.80%.  As of March 31, 2004, $2,239 of the bank debt related to this transaction was outstanding.  The acquired loan balance was paid in full during the quarter ended March 31, 2004.

 

10

 

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

 

As of March 31, 2004, future payments related to the acquired bank debt are as follows:

 

Year Ending December 31,
2004		$	749
2005		440
2006		321
2007		262
2008		93
Thereafter		374
		$	2,239

 

10.  Customer and Geographic Segment Data

 

For the three months ended March 31, 2004 and 2003, the Company derived approximately 27% and 45% of its revenues from its largest customer, respectively.

 

The Company is organized by geographic locations and has one reportable segment. All transfers between geographic areas have been eliminated from consolidated revenues. Operating income consists of total revenues recorded in the location less operating expenses and does not include interest income, other expense or income tax expense. This data is presented in accordance with SFAS 131, “Disclosure About Segments of an Enterprise and Related Information.”

 

 

11.  Subsequent Events

 

On April 6, 2004, the Company completed the strategic acquisition of Medical Data Management (“MDM”) for approximately $8,000, including approximately $3,000 in restricted stock.  Primarily based in Warsaw, Poland, the MDM group of companies is a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine.

 

The Company entered into an agreement, dated April 6, 2004, to sell its facility in Piscataway, New Jersey.  The agreement is subject to termination by the purchaser during a due diligence period which has not yet expired as well as certain other stated closing conditions.

 

11

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations and future estimates, future financial position or results and future plans and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and the pharmaceutical and consumer packaged goods industries. All such forward-looking statements involve significant risks and uncertainties, including those risks identified in this Form 10-Q under “Factors That May Affect Future Results,” many of which are beyond our control. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ materially from those indicated by the forward-looking statements included in this Form 10-Q, as more fully described under “Factors That May Affect Future Results.” In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results or changes in assumptions, expectations or projections. In addition, our financial and performance outlook concerning future revenues, margins, earnings, earnings per share and other operating or performance results does not include the impact of any future acquisitions, future acquisition-related expenses or any future restructuring or other charges that may occur from time-to-time due to management decisions and changing business circumstances and conditions.

 

EXECUTIVE OVERVIEW

 

We provide a broad array of solutions worldwide that enable pharmaceutical and other life science companies to strategically optimize their sales, marketing and clinical resources. Our strategy is to continue to diversify and expand our solutions portfolio, customer base and geographic reach by leveraging our extensive knowledge and deep relationships with the pharmaceutical and life sciences industries and capitalizing upon our deep relationships in these industries. We have and will continue to rely on both internal growth and acquisitions to meet to our growth objectives.

 

 Our acquisition of Synavant Inc. (“Synavant”) in 2003 diversified and expanded our solutions portfolio, particularly as it relates to the pharmaceutical marketing channel, by adding interactive marketing services in the U.S. and abroad, as well as new data and services solutions in Europe. In January 2004, we further broadened and enhanced our product and service portfolio in the Japanese pharmaceutical industry as well as extended our leadership position in Japan with our acquisition of Uto Brain Co. Ltd. (“Uto Brain”). Additionally, in April 2004, subsequent to the close of the first quarter, we acquired Medical Data Management, increasing our ability to provide leading solutions that drive promotional and sales effectiveness in Central and Eastern Europe.  We believe these acquisitions complement our current business operations by enhancing our solutions portfolio and increasing our access into new customers and markets.

 

We have increased both our solutions and customer base and believe that this combination presents significant opportunity for future growth.  We have also committed to investing in key initiatives to help drive future growth.  We believe increased investments in marketing and sales resources and programs will help us more effectively sell and market the diversity of solutions we now offer.  Our future growth is dependent on our ability to further penetrate the markets in which we operate and increase the adoption rate of our expanded portfolio of solutions.

 

We evaluate our performance based upon a number of operating metrics. Chief among these are revenues, services gross margin percent, operating margins, earnings per diluted share, operating cash flow and days sales outstanding. In the first quarter of 2004, we saw the execution of our strategy yield growth in revenues, operating margin and earnings per share. We also continued to exhibit strong cash generation attributes, improving days sales outstanding from the prior year and generating strong positive operating cash flow even as we continued to pay off some of the remaining liabilities associated with our acquisitions.

 

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

 

There have been no material changes to our critical accounting policies, judgments and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on form 10-K for the year ended December 31, 2003.

 

12

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

MERGERS AND ACQUISITIONS

 

We regularly evaluate opportunities to acquire products or businesses that represent strategic enhancements to our operations. Such acquisition opportunities, if they arise, may involve the use of cash or equity instruments.

 

Uto Brain Co., Ltd.

On January 5, 2004, the Company completed the acquisition of Uto Brain.  Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceutical companies with data, analytics, publishing and advisory services.  The combining of resources of Uto Brain with the existing resources of Dendrite creates a comprehensive information, software and services company dedicated to the Japanese pharmaceutical industry and further enhances Dendrite’s ability to provide solutions to enhance sales, marketing and clinical functions of pharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Uto Brain was approximately $4,665 (498,270 Yen) and approximately $73 of legal and professional fees were incurred in connection with the transaction as well as the assumption of approximately $3,800 of bank debt and acquired loan.  As of March 31, 2004, the Company paid approximately $2,242 of the purchase price with approximately $2,423 still outstanding and included within accrued other on the March 31, 2004 consolidated balance sheet.  The outstanding balance is payable as follows: approximately $1,077 on September 30, 2004; $449 on January 5, 2005; and $897 on March 31, 2005. The Company is in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment.

 

Synavant Inc.

On June 16, 2003, we completed our acquisition of Synavant. Synavant provided a broad range of knowledge-based services to pharmaceutical and other life science companies around the world. Its comprehensive global solutions included pharmaceutical CRM applications, interactive marketing, server and database management, dedicated local help-line support, training, telemarketing, sample management and product recall services. Synavant was headquartered in Atlanta, Georgia, and had offices in 21 countries. We believe that combining Synavant’s resources with the existing resources of Dendrite creates a more comprehensive information, software and services company dedicated to the global life sciences industry, and further enhances our ability to provide market leading solutions to the sales, marketing and clinical functions of pharmaceutical and other life science companies. Synavant’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Synavant was approximately $55,130, including consideration paid for the common stock and approximately $3,445 of legal and professional fees incurred in connection with the transaction.

 

In connection with the June 2003 acquisition of Synavant, the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions.  During the first quarter of 2004, the Company’s management increased its restructuring accrual estimate by approximately $1,791 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to goodwill in the accompanying consolidated balance sheet. The Company’s management believes the accrued liability as of March 31, 2004 will be adequate to cover the costs incurred related to the restructuring.

 

The liability accrues for expenses incurred in exiting certain Synavant facilities, including assumptions related to sublease income which offsets future lease obligations. The underlying subleases are not in place for all facilities and the future placement of subleases, including the timing and terms and conditions of subleases, could be different than the assumptions and impact future results of operations.

 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2004 AND 2003

 

REVENUES. Total revenues increased to $95,064 for the three months ended March 31, 2004, up $35,354, or 59%, from $59,710 for the three months ended March 31, 2003.  The primary driver of the increase was the June 2003 Synavant acquisition.

 

License fee revenues increased to $3,346 for the three months ended March 31, 2004, up $784, or 31%, from $2,562 for the three months ended March 31, 2003. This increase is primarily related to a large sale of licenses to a client in Japan and from sales to clients, of former Synavant companies, that expanded their European sales forces.  License fees are, by nature, non-recurring items and fluctuate from period-to-period.

 

Service revenues increased to $91,718 for the three months ended March 31, 2004, up $34,570, or 60%, from $57,148 for the three months ended March 31, 2003. This increase was primarily driven by the June 2003 acquisition of Synavant.  Including the acquired revenue, the Company experienced growth of approximately 9% in domestic technical services, 39% in domestic sales

 

13

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

support services and 47% in low gross margin and pass-through postage services.  In addition, our domestic data and consulting business as well as our international services increased more than 150% versus the comparable prior year period.

 

COST OF REVENUES. Total cost of revenues increased to $50,025 for the three months ended March 31, 2004, an increase of $20,205, or 68%, from $29,820 for the three months ended March 31, 2003. The primary driver of the increase in cost of revenues was attributable to the acquisition of Synavant.

 

Cost of license fees decreased to $989 for the three months ended March 31, 2004, down $90, or 8%, from $1,079 for the three months ended March 31, 2003. Cost of license fees for the three months ended March 31, 2004 is comprised of the amortization of capitalized software development costs and purchased software costs of $656 and $153, respectively, and third-party vendor license fees of $180. Cost of license fees for the comparable period in 2003 is comprised of the amortization of capitalized software development costs and purchased software costs of $686 and $153, respectively, and third-party vendor license fees of $240.

 

Cost of services increased to $49,036 for the three months ended March 31, 2004, up $20,295, or 71%, from $28,741 for the three months ended March 31, 2003. The increase in cost of services is primarily a result of the additional costs due to the increase in headcount and associated costs from the Synavant and Uto Brain acquisitions, as well as an increase in pass-through postage costs of approximately $4,500 and start-up costs related to our off-shore outsourcing initiative.

 

GROSS MARGIN. Total gross margin for the three months ended March 31, 2004 and 2003 was 47% and 50%, respectively.

 

Gross margin for license fees was 70% for the three months ended March 31, 2004, up from 58% for the three months ended March 31, 2003. The increase in gross margin was primarily attributable to the 31% increase in license fee revenues, including increased international sales, which generally contain less third-party imbedded software costs, over a relatively constant cost basis.

 

Gross margin for services was 47% and 50% for the three month periods ended March 31, 2004 and 2003, respectively. This decrease in gross margin for services is attributable to the inclusion of certain Synavant lower margin business, including approximately $4,500 of pass-through postage as well as the start-up costs of our off-shore outsourcing initiative.

 

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased to $32,966 for the three months ended March 31, 2004, up $12,727, or 63%, from $20,239 for the three months ended March 31, 2003. This increase reflects the additional operating costs and amortization expense related to the Synavant and Uto Brain acquisitions. As a percentage of revenues, SG&A increased to 35% for the three months ended March 31, 2004, up from 34% for the three months ended March 31, 2003.  The Company has and will continue to invest in sales and marketing initiatives in order to drive its top-line growth while continuing to focus on cost containment measures.

 

RESEARCH AND DEVELOPMENT (R&D) EXPENSES. R&D expenses increased to $3,022 for the three months ended March 31, 2004, up $324, or 12%, from $2,698 for the three months ended March 31, 2003. As a percentage of revenues, R&D expenses decreased to 3% for the three months ended March 31, 2004 from 5% for the three months ended March 31, 2003 due primarily to the significant increase in revenues.

 

OTHER OPERATING (INCOME). The Company received proceeds from an insurance claim of $339 during the quarter ended March 31, 2004.

 

PROVISION FOR INCOME TAXES. The annual estimated effective income tax expense rate for the three month periods ended March 31, 2004 and 2003 was approximately 40%.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2004, working capital was approximately $53,467 compared to $49,232 as of December 31, 2003. Cash and investments were $41,396 as of March 31, 2004, compared to $30,405 as of December 31, 2003. This increase was primarily attributable to the cash generated by operating activities partially offset by payments made in connection with the Synavant and Uto Brain acquisitions.

 

We finance our business primarily through cash generated by operations. Net cash provided by operating activities was $15,521 and $8,492 for the periods ended March 31, 2004 and 2003, respectively.  Our accounts receivable days sales outstanding decreased from 68 days for the quarter ended December 31, 2003 to 59 days for the quarter ended March 31, 2004 partially due to the receipt of approximately $3,300 of a long term contracted receivable.  We also generated operating cash from our considerable growth in net income adjusted for changes in assets and liabilities, net of effects from acquisitions.  These increases in operating cash flow were partially offset by $2,615 of payments related to accrued purchase accounting charges incurred in connection the Synavant acquisition as well as increased payments of accounts payable and accrued expenses.

 

Cash used in investing activities was $5,290 for the three months ended March 31, 2004, compared to $2,413 for the three months ended March 31, 2003. The increase of $2,877 was primarily attributable to the cash used in connection with the Uto Brain

 

14

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

acquisition. This increase was partially offset by a decrease in sales of short-term investments during the three months ended March 31, 2004, compared to the corresponding prior year period.

 

Although purchases of property and equipment were flat for the quarter ended March 31, 2004 versus the comparable prior year period, the Company anticipates an increase in its capital expenditures for 2004. The increase is primarily due to the capital requirements of the new corporate headquarters and the need to adjust going-forward capital requirements for a larger combined Company reflecting the acquisition of Synavant. The Company currently expects that it will incur approximately $8,000 of capital expenditures in connection with the headquarters relocation. In addition, the Company also expects capital spending in the range of approximately $8,000 to $12,000 to support the infrastructure associated with a full year of combined Dendrite and Synavant operations. We review our capital expenditure program periodically and adjust it as required to meet current needs. The foregoing amounts are based on current assumptions and are subject to change during the course of 2004.

 

Cash provided by financing activities was $365 for the three months ended March 31, 2004, compared to $1,141 for the three months ended March 31, 2003. The decrease of $776 was primarily attributable to repayments of long-term debt and acquired loans in connection with the Uto Brain acquisition offset, in part, by an increase in stock option exercises during the three months ended March 31, 2004.

 

The Company regularly evaluates opportunities to acquire products or businesses complementary to our operations. Such acquisition opportunities, if they arise and are successfully completed, may involve the use of cash or equity instruments. The Company believes that available funds, anticipated cash flows from operations and the availability of our revolving line of credit will satisfy our current projected working capital and capital expenditure requirements, exclusive of cash required for possible future acquisitions of businesses, products and technologies, during the next twelve to eighteen months. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. Our ability to generate future cash flows depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or effecting the pharmaceutical industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

Contractual Obligations and Commitments

 

The Company entered into a credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement replaced the Company’s then existing $15,000 credit facility. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the agreement requires the Company to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003 and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of March 31, 2004, our consolidated net worth was $185,368. The Agreement contains certain restrictions on our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of March 31, 2004, there were no borrowings outstanding under the Agreement and the Company was in compliance with all covenants.

 

In connection with the Uto Brain acquisition, the Company assumed bank debt of approximately $3,155, with a weighted-average interest rate of 2.10% and acquired a loan of approximately $627, with an interest rate of 1.80%.  As of March 31, 2004, $2,239 of the bank debt related to this transaction was outstanding.  The acquired loan balance was paid in full during the quarter ended March 31, 2004.

 

Our principal commitments at March 31, 2004 consisted primarily of obligations under operating and capital leases as well as future minimum guarantees to certain vendors. Future minimum payments on these obligations are as follows:

 

		Payments Due by Period
Contractual Obligations		Total			2004			2005			2006			2007			2008			Thereafter
Capital leases		$	824		$	629		$	195		$	—		$	—		$	—		$	—
Minimum guarantees		441			441			—			—			—			—			—
Uto Brain purchase price		2,423			1,077			1,346			—			—			—			—
Long-term debt		2,239			749			440			321			262			93			374
Operating leases (1)		104,335			11,827			14,995			12,644			11,595			9,413			43,861
Total		$	110,262		$	14,723		$	16,976		$	12,965		$	11,857		$	9,506		$	44,235

 

(1) Operating lease amounts disclosed above include $16,458 of future operating lease costs, excluding estimated future sublease income, accrued for in the purchase accounting restructuring accruals related to the Synavant and SAI acquisitions.

 

15

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

In addition to the contractual obligations disclosed above, the Company is currently in negotiations with several vendors for net capital expenditures of approximately $8,000 in connection with the headquarters relocation.

 

As of March 31, 2004, letters of credit for approximately $921 were outstanding related to deposits on certain facilities.

 

The Company has an agreement with a venture capital fund with a commitment to contribute $1,000 to the fund, callable at the discretion of the general partner in $100 increments. As of March 31, 2004, $600 of the commitment remains. The agreement has a termination date of December 11, 2010, subject to extension with the consent of a majority in interest of the limited partners. This asset is recorded within Other Assets in the March 31, 2004 and December 31, 2003 consolidated balance sheets.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

Set forth in this Quarterly Report on Form 10-Q are certain risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. You are strongly urged to carefully consider the cautionary language and risks set forth below.

 

WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES

 

Historically, a limited number of our customers have contributed a significant percentage of our revenues. We anticipate that our operating results in any given period will continue to depend significantly upon revenues from a small number of customers. The loss of any of these customers (which could include loss through mergers and acquisitions) could have a materially adverse effect on our business, operating results or financial condition. We cannot make any assurances that we will retain our existing customers or attract new customers that would replace the revenue that could be lost if one or more of these customers failed to renew its agreement(s) with us.

 

OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY

 

Many of our solutions are currently used in connection with the marketing and sale of prescription-only drugs. This market is undergoing a number of significant changes. These include:

 

• the significant and continuing consolidation of the pharmaceutical industry which may reduce the number of our existing and potential customers;

• regulatory changes that permit the over-the-counter sale of formerly prescription-only drugs;

• increasing Food and Drug Administration activism; and

• competitive pressure on the pharmaceutical industry resulting from the continuing shift to delivery of healthcare through managed care organizations.

 

We cannot assure you that we can respond effectively to any or all of these and other changes in the marketplace. Our failure to do so could have a material adverse effect on our business, operating results or financial condition, as our business depends, in large part, on the business conditions within this marketplace.

 

OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS

 

Our customers often implement our products in stages and our products are often utilized by a large number of our customers’ personnel. In the event that our customers have difficulties implementing our products and services or are not fully satisfied with our products and services, our business, operating results and financial condition could be materially and adversely affected.

 

WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS

 

Our business may be materially and adversely affected as a result of the significant risks associated with our acquisitions, including our recent acquisitions of Synavant, SAI, Uto Brain and the MDM group of companies. As part of our business strategy, we have acquired, and in the future may acquire, businesses that offer complementary products, services or technologies. These acquisitions are accompanied by substantial risks, including:

 

• unexpected problems, liabilities, risks or costs associated with the acquired business;

• the effect of the acquisitions on our financial and strategic position;

• our inability to successfully integrate the acquired business;

• the failure of an acquired business to further our strategies;

• our inability to achieve the expected cost and business synergies;

 

16

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

• the significant strain on our operating systems;

• the diversion of our management’s attention from other business concerns;

• the impairment or loss of relationships with customers of the acquired business;

• the negative impact of the combination of different corporate cultures;

• the loss of key employees of the acquired company; and

• the maintenance of uniform, company-wide standards, procedures and policies.

 

Any of these factors could have a material adverse effect on our revenues and earnings. We expect that the consideration paid for future acquisitions, if any, could be in the form of cash, stock, rights to purchase stock, or a combination of these. To the extent that we issue shares of stock or other rights to purchase stock in connection with any future acquisition, existing shareholders will experience dilution and potentially decreased earnings per share.

 

While to date we have had success integrating acquired entities into our operations, we can not guarantee that we will successfully integrate these new businesses into our operations or achieve all of the expected cost synergies.

 

We may in the future acquire additional complementary companies, products or technologies. If we do so, we may face the same risks, uncertainties and disruptions discussed above. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired intangible assets.

 

BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES

 

Business and economic pressures on our major customers may result in budget constraints that directly impact their ability to purchase the Company’s new products and services offerings. We cannot assure you that any decrease in demand caused by these pressures will not have a material adverse effect on our business, operating results or financial condition.

 

OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES

 

The selection of a CRM or SFA solution generally entails an extended decision-making process by our customers because of the strategic implications, substantial costs and significant commitment of resources associated with a customer’s license or implementation of the solution. Given the importance of the decision, senior levels of management of our customers are often involved in the process and, in some instances, their board of directors may also be involved. As a result, the lengthy decision-making process typically takes nine to eighteen months, and in certain cases longer. Accordingly, we cannot fully control or predict the timing of our execution of contracts with customers. Prior sales and implementation cycles should not be relied upon as any indication of future cycles.

 

In addition, an implementation process of three to six or more months before the software is rolled out to a customer’s sales force is customary. However, if a customer were to delay or extend its implementation process, our quarterly revenues may decline below expected levels and could adversely affect our results of operations.

 

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE

 

Our total revenue and operating results may vary significantly from quarter to quarter. The main factors that could cause these fluctuations are:

 

• the discretionary nature of our customers’ purchase and budget cycles;

• potential delays in recognizing revenue from license transactions;

• seasonal variations in operating results; and

• variations in the fiscal or quarterly cycles of our customers.

 

In addition, we establish our expenditure levels for product development, sales and marketing and some of our other operating expenses based in large part on our expected future revenues and anticipated competitive conditions. In particular, we frequently add staff in advance of new business to permit adequate time for training. If the new business is subsequently delayed, canceled or not awarded, we will have incurred expenses without the associated revenues. We also may increase sales and marketing expenses if competitive pressures become greater than originally anticipated. Since only a small portion of our expenses varies directly with our actual revenues, our operating results and profitability are likely to be adversely and disproportionately affected if our revenues fall below our targeted goals or expectations.

 

17

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

As a result of these and other factors, revenues for any quarter may be subject to fluctuation. You should not rely on our period-to-period comparisons of our results of operations as indications of future performance. Our future quarterly results may from time to time not meet the expectations of market analysts or investors, which could have a materially adverse effect on the price of our common stock.

 

WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE

 

The market for CRM and SFA products changes rapidly because of frequent improvements in computer hardware and software technology. Our future success will depend, in part, on our ability to:

 

• use available technologies and data sources to develop new products and services and to enhance our current products and services;

• introduce new solutions that keep pace with developments in our target markets; and

• address the changing and increasingly sophisticated needs of our customers.

 

We cannot assure you that we will successfully develop and market new products or product enhancements that respond to technological advances in the marketplace, or that we will do so in a timely fashion. We also cannot assure you that our products will adequately and competitively address the needs of the changing marketplace.

 

Competition for software products has been characterized by shortening product cycles. We may be materially and adversely affected by this trend if the product cycles for our products prove to be shorter than we anticipate. If that happens, our business, operating results or financial condition could be adversely affected.

 

To remain competitive, we also may have to spend more of our revenues on product research and development than we have in the past. As a result, our results of operations could be materially and adversely affected.

 

SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES

 

Our software products are technologically complex and may contain previously undetected errors or failures or errors when products are first introduced or when updated versions are released. We cannot assure you that, despite our testing, our new products will be free from significant errors. Software errors could cause delays in the commercial release of products until the errors have been corrected. Software errors may cause us to be in breach of our agreements with customers, which could result in termination of the agreements and monetary damages. Software errors may cause damage to our reputation and cause us to commit significant resources to their correction. Errors that result in termination of agreements, monetary damages, losses or delays could have a material adverse effect on our business, operating results or financial condition.

 

INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES SOLUTIONS

 

There are a number of other companies that sell CRM and SFA products and related services that specifically target the pharmaceutical industry, including competitors that are actively selling CRM and SFA software products in more than one country and competitors that also offer CRM and SFA support services. Some of our competitors and potential competitors are part of large corporate groups and have significantly greater financial, sales, marketing, technology and other resources than we have.

 

While we believe that the CRM and SFA software products and/or services offered by most of our competitors do not address the variety of pharmaceutical customer needs that our solutions address, increased competition may require us to reduce the prices for our products and services. Increased competition may also result in decreased demand for our products and services.

 

We believe our ability to compete depends on many factors, some of which are beyond our control, including:

 

• the number and success of new market entrants supplying competing CRM and SFA products or support services;

• alliances among existing competitors;

• technological changes or changes in the our customers’ use of the Internet;

• expansion of product lines by, or consolidation among, our existing competitors; and

• development and/or operation of in-house CRM or SFA software products or services by our customers and potential customers.

 

Any one of these factors can lead to price reductions and/or decreased demand and we cannot assure you that we will be able to continue to compete successfully or that competition will not have a material adverse effect on our business, operating results or financial condition.

 

18

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCES THAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE

 

The success of parts of our business will depend, in part, on our ability to continue developing Internet-related products, modifying and improving our existing products and responding to technological advances and changing commercial uses of the Internet. We cannot assure you that our Internet-related products and services will adequately respond to such technological advances and changing uses. Nor can we assure you that the demand for Internet-related products and services will increase.

 

Commercial use of the Internet raises potential problems with security, privacy, reliability, accessibility, quality of service and government regulation. These issues, if unresolved, may affect the use of our Internet-related products. If these potential problems arise, our business, financial condition or results of operations could be materially and adversely affected.

 

OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT

 

We have expanded and may in the future expand our international operations and enter additional international markets. This expansion would require significant management attention and financial resources that could adversely affect operating margins and earnings. We may not be able to maintain or increase international market demand for our products and services. If we do not, our international sales will be limited and our business, financial condition or results of operations could be materially and adversely affected.

 

The sale of our products and services in foreign countries accounts for, and is expected in the future to account for, a material part of our revenues. These sales are subject to risks inherent in international business activities, including:

 

• any adverse change in the political stability or economic environments in these countries or regions;

• any adverse change in tax, tariff and trade or other regulations;

• the absence or significant lack of legal protection for intellectual property rights;

• exposure to exchange rate risk for service revenues and expenses which are denominated in currencies other than U.S. dollars; and

• difficulties in managing an organization spread over various jurisdictions.

 

Any of the above risks could have a significant impact on our ability to deliver products on a competitive and timely basis, which could materially and adversely affect our financial condition or operating results.

 

Since we have operations in a number of countries and our service agreements in such countries are denominated in foreign currencies, we face exposure to adverse movements in foreign currency exchange rates.  As currency rates change, translation of the income statements of our international entities from local currencies to U.S. dollars affects period-over-period comparability of operating results. Historically we have not hedged these translation risks because we generally reinvest our cash flows from international operations, however, we continue to evaluate foreign currency translation risk exposure.  As we continue to grow our business, the risks associated with foreign currency translation will also grow.

 

AN INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS

 

To manage our growth effectively we must continue to strengthen our operational, financial and management information systems; ensure that we have the appropriate infrastructure in place; and expand, train and manage our work force. However, we may not be able to do so effectively or on a timely basis. Failure to do so could have a material adverse effect upon our business, operating results or financial condition.

 

CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE

 

The efficient operation of our business, and ultimately our operating performance, depends on the uninterrupted use of our critical business and information technology systems. Many of these systems require the use of specialized hardware and other equipment that is not readily available in the marketplace. Although we maintain these systems at more than one location, a natural disaster, a fire or other catastrophic event at any of these locations could result in the destruction of these systems. In such an event, the replacement of these systems and restoration of archived data and normal operation of our business could take several days to several weeks, or more. During the intervening period when our critical business and information technology systems are fully or partially inoperable, our ability to conduct normal business operations could be significantly and adversely impacted and as a result our business, operating results and financial condition could be adversely affected.

 

19

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL

 

Our future success depends, to a significant extent, upon the contributions of our executive officers and key sales, technical and customer service personnel.

 

Our future success also depends on our continuing ability to attract and retain highly qualified technical and managerial personnel. Due to competition for such personnel, we have at times experienced difficulties in recruiting and retaining qualified personnel and we may experience such difficulties in the future. Our ability to expand and increase revenue growth in the future will depend, in part, on our success in recruiting and training such qualified personnel. We may not always be able to expand our personnel in these areas as necessary to support our operations. Any recruiting or retention difficulties could adversely affect our business, operating results or financial condition.

 

OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECT COMPLETELY

 

We rely on a combination of trade secret, copyright and trademark laws, non-disclosure, license and other contractual agreements and technical measures to protect our proprietary rights. We cannot assure you that the steps we take will prevent misappropriation of these rights. Further, protective actions we have taken or will take in the future may not prevent competitors from developing products with features similar to our products. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. In response to customer requests, we have also on occasion entered into agreements which require us to place our source code in escrow to secure our service and maintenance obligations.

 

Further, while we believe that our products and trademarks do not infringe upon the proprietary rights of any third parties, third parties may assert infringement claims against us in the future that may result in costly litigation, diversion of management’s attention, the imposition of monetary damages or injunctive relief against us. In addition, any such claims may require us to enter into royalty arrangements. Any of these results could materially and adversely affect our business, operating results or financial condition.

 

IF OUR THIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLY RESPOND TO TECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITH THIRD- PARTY VENDORS, INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTS MAY RESULT

 

Some of our software is provided by third-party vendors. If our third-party vendors are unable to successfully respond to technological change or if our relationships with certain third-party vendors are terminated, we may experience difficulty in replacing the functionality provided by the third-party software currently offered with our products. Although we believe there are other sources for all of our third-party software, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source. The absence of or any significant delay in the replacement of functionality provided by third-party software in our products could materially and adversely affect our sales.

 

THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED

 

We are involved in a number of strategic relationships with third parties and are frequently pursuing others. Should these relationships, or any of them, prove to be more costly than anticipated or fail to meet revenue expectations or other anticipated synergies, we cannot guarantee that such events will not have a material impact upon our business, operating results or financial condition.

 

OUR DATA SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS

 

Our data and analytics solutions are sourced, in part, from data provided through strategic relationships. Although we believe there are other sources for such data, the termination of any of these relationships could diminish the breadth or depth of our data. This termination or our failure to establish new strategic relationships in the future could negatively impact our business, operating results or financial condition.

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS

 

While we believe our data and analytics solutions are not violative of current federal or state laws and regulations pertaining to patient privacy or health information, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), we cannot guarantee that future laws or regulations or interpretations of existing laws and statutes will not impact negatively upon our ability to market these solutions or cause a decrease in demand for such solutions from customers that see an increased risk in any such new laws or regulations.

 

GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL

 

Through the interactive marketing business we acquired in the Synavant acquisition, we may distribute controlled substances to doctors’ offices through the mail as part of certain interactive marketing programs provided on behalf of pharmaceutical manufacturers. It is important to the business that this practice of distributing prescription-only drugs continues. Future legislation may restrict our ability to provide these types of services. If any such legislation is enacted, it could have a material and adverse effect on our business, operating results and financial condition.

 

DIFFICULTIES IN SUBLEASING, SELLING OR OTHERWISE DISPOSING OF CERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS

 

We expect to sublease all or a portion of certain facilities, including facilities acquired as part of the Synavant acquisition. If the recent real estate downturn continues, it could negatively impact upon our ability to effectively market these facilities. We are also currently selling our Piscataway, New Jersey, facility.  An inability to successfully dispose of or sublet, as applicable, any of these facilities or to obtain favorable pricing or sublease terms could negatively impact our earnings.

 

UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS

 

In reporting our financial results we rely upon the accounting policies and standards then in effect at the time of our report. Future regulations, standards or interpretations may require us to adjust or restate financial results previously reported. A required restatement could have an unfavorable impact upon past financial results or current comparison to previous results.

 

WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY

 

World events such as terrorist attacks, the current U.S. military action in the Middle East and elsewhere, and hostilities in the Middle East, Asia and other geographical areas, have and may continue to weaken the U.S. and world economies.  We can not guarantee that any resultant weaknesses in these economies will not adversely affect our business, financial condition or results of operations or the businesses of our customers.

 

PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE

 

Provisions of our Restated Certificate of Incorporation, as amended, our By-laws, as amended, and New Jersey law may make it more difficult for a third-party to acquire us. For example, the Board of Directors may, without the consent of the stockholders, issue preferred stock with rights senior to those of the common stock. In addition, we have a Shareholder Rights Plan which may limit the ability of a third-party to attempt a hostile acquisition of the Company.

 

OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS

 

The market price of our common stock may be significantly affected by the following factors:

 

• the announcement or the introduction of new products and services by us or our competitors;

• quarter-to-quarter variations in our operating results or changes in revenue or earnings estimates or failure to meet or exceed revenue or earnings estimates;

• market conditions in the technology, healthcare and other growth sectors;

• general consolidation in the healthcare information industry which may result in the market perceiving us or other comparable companies as potential acquisition targets;

• the gain or loss of significant orders;

• changes in the domestic and international economic, political and business conditions; and

• future acquisitions.

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

($ IN THOUSANDS)

 

Further, the stock market has experienced on occasion extreme price and volume fluctuations. The market prices of the equity securities of many technology companies have been especially volatile and often have been unrelated to the operating performance of such companies. These broad market fluctuations may have a material adverse effect on the market price of our common stock.

 

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ITEM 4.  Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

 

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

ITEM 6.                             Exhibits and Reports on Form 8-K

 

(i)  Exhibits

 

31.1     Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).

 

31.2     Certification of Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).

 

32        Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, and Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company.

 

(ii)  Reports on Form 8-K

 

(a)          The Company furnished a Current Report on Form 8-K on January 29, 2004, pursuant to “Item 12. Results of Operations and Financial Condition” relating to its results for the fourth quarter and full year 2003.

 

(b)         The Company furnished a Current Report on Form 8-K/A on January 30, 2004, pursuant to “Item 12. Results of Operations and Financial Condition” relating to its results for the fourth quarter and full year 2003.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date: May 7, 2004

 

 

	By:	/s/ John E. Bailye
	John E. Bailye, Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ Kathleen E. Donovan
	Kathleen E. Donovan, Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

 

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EXHIBIT INDEX

 

Number		Description
10.31		New Hire Option Grant Authorization – Updated Appendix.
31.1		Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2		Certification of Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).
32		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company and Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company.

 

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