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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 For the quarter ended SEPTEMBER 30, 1997 .
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.
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2786386
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
___________________________
1200 Mt. Kemble Avenue
Morristown, NJ 07960
973-425-1200
___________________________
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE
NUMBER (INCLUDING AREA CODE) OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days
Y X N
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
CLASS SHARES OUTSTANDING AT NOVEMBER 12, 1997
----- ---------------------------------------
Common Stock 11,122,344
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DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) PAGE NO.
--------
<S> <C>
Consolidated Statements of Operations
Three months and nine months ended September 30, 1997 and 1996.... 3
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996.......................... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996..................... 5
Notes to Consolidated Financial Statements............................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 7
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................................... 12
Signatures............................................................. 12
</TABLE>
2
<PAGE>
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
License fees $ 2,370 $ 3,532 $ 5,189 $ 7,646
Services 17,998 15,065 49,888 42,435
------- ------- ------- -------
20,368 18,597 55,077 50,081
------- ------- ------- -------
COST OF REVENUES:
Cost of license fees 729 185 1,393 554
Cost of services 8,132 7,112 24,994 19,904
------- ------- ------- -------
8,861 7,297 26,387 20,458
------- ------- ------- -------
Gross margin 11,507 11,300 28,690 29,623
------- ------- ------- -------
OPERATING EXPENSES:
Selling, general and administrative 7,678 6,817 21,688 18,816
Research and development 1,269 2,115 3,871 5,115
Write off of in-process
research and development - - - 2,640
------- ------- ------- -------
8,947 8,932 25,559 26,571
------- ------- ------- -------
Operating income 2,560 2,368 3,131 3,052
INTEREST INCOME (100) (386) (366) (896)
OTHER EXPENSE 21 3 180 106
------- ------- ------- -------
Income before income taxes 2,639 2,751 3,317 3,842
INCOME TAXES 1,047 1,066 1,344 2,491
------- ------- ------- -------
NET INCOME $ 1,592 $ 1,685 $ 1,973 $ 1,351
======= ======= ======= =======
NET INCOME PER SHARE $0.14 $0.15 $0.17 $0.12
======= ======= ======= =======
SHARES USED IN COMPUTING
NET INCOME PER SHARE 11,616 11,489 11,509 11,464
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
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DENDRITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,999 $10,912
Short-term investments 2,614 8,421
Accounts receivable 24,842 18,732
Prepaid expenses and other 2,260 1,569
Prepaid income taxes 1,397 1,397
Deferred tax assets 1,178 1,203
------- -------
Total current assets 42,290 42,234
PROPERTY AND EQUIPMENT, net 3,354 3,391
DEFERRED TAXES 254 254
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,468 2,589
GOODWILL, net 618 747
------- -------
$48,984 $49,215
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 1,493 $ 3,344
Income taxes payable 1,257 584
Accrued compensation and benefits 3,122 2,446
Other accrued expenses 3,834 3,329
Deferred revenues 1,588 2,099
------- -------
Total current liabilities 11,294 11,802
------- -------
DEFERRED RENT 598 726
------- -------
DEFERRED TAXES 1,559 1,511
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common stock, no par value, 50,000,000 shares
authorized: 11,322,844 and 11,163,631 shares issued
and 11,122,344 and 11,163,631 outstanding 32,516 32,198
Retained earnings 6,631 4,658
Unrealized gain on short-term investments 6 --
Deferred compensation (1,063) (1,227)
Cumulative translation adjustments (630) (453)
Less Treasury Stock (1,927) --
------- -------
Total stockholders' equity 35,533 35,176
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$48,984 $49,215
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,973 $ 1,351
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,018 2,162
Deferred income taxes (benefit) 73 0
Write off of in-process research and development -- 2,640
Changes in assets and liabilities:
Increase in accounts receivable (6,110) (8,001)
Increase in prepaid expenses and other (691) (481)
Increase (decrease) in accounts payable and accrued expenses (670) 2,760
Increase (decrease) in deferred rent (128) 268
Increase (decrease) in income taxes payable 673 (2,094)
Decrease in deferred revenues (511) (1,658)
------- -------
Net cash used in operating activities (3,373) (3,053)
------- -------
INVESTING ACTIVITIES:
Purchases of short-term investments (2,843) (6,040)
Sales of short-term investments 8,650 6,920
Payment for purchase of SRCI -- (3,500)
Purchases of property and equipment (918) (810)
Additions to capitalized software development costs (756) (1,082)
------- -------
Net cash provided by (used in) investing activities 4,133 (4,512)
------- -------
FINANCING ACTIVITIES:
Issuance of Common Stock from stock
offering, net -- 4,395
Purchase of treasury stock (1,927) --
Issuance of common stock 384 238
------- -------
Net cash provided by (used in) financing activities (1,543) 4,633
------- -------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (130) (553)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (913) (3,485)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,912 11,530
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,999 $ 8,045
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DENDRITE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Dendrite International, Inc. and
its subsidiaries (The "Company") included herein are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the three month period ended September 30,
1997. These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
The interim operating results of the Company may not be indicative of
operating results for the full year.
2. SALE OF COMMON STOCK
The Company consummated a public offering of 300,000 shares of its Common
Stock on March 13, 1996 at a public offering price of $18.25 per share. The
net proceeds to the Company from the public offering, after payment of
offering expenses, were approximately $4,282,000. An additional 2,805,000
shares of Common Stock (including 405,000 shares purchased by the underwriters
upon the exercise in full of over-allotment options) were offered and sold by
certain stockholders of the Company. The Company did not receive any proceeds
from the sale of shares by selling stockholders.
3. NET INCOME PER SHARE
Net income per share was calculated by dividing net income by the weighted
average number of common shares and dilutive common share equivalents
(computed using the treasury stock method) outstanding during the period,
except where anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, (SFAS) No. 128, "Earnings Per
Share", which the Company is required to adopt for both interim and annual
periods ending after December 5, 1997. SFAS No. 128 simplifies the EPS
calculation by replacing primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted
average shares outstanding. Fully diluted EPS, now called diluted EPS, is
still required. Early application is prohibited, although footnote disclosure
of proforma EPS amounts computed is required. The Company believes the
adoption of SFAS 128 will have no material impact on earnings per share for
the periods presented.
4. ACQUISITION OF SRCI
On May 1, 1996, the Company acquired 100% of the capital stock of SRCI,
S.A., ("SRCI") for approximately $3,198,000 and transaction costs of $302,000.
The purchase was accounted for under the purchase method of accounting,
whereby the purchase price is allocated to the assets acquired and liabilities
assumed of SRCI based on their fair market values at the acquisition date.
The excess of purchase price over the fair value of 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 nine
months ended September 30, 1996. 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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q 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 and under the section
entitled "Business - Certain Considerations" in the Company's Annual report on
Form 10-K for the year ended December 31, 1996. 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 President and Chief Executive Officer and others. That business was
organized 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, and Brazil through its own sales, support and technical
personnel located in twelve 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 design 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.
Currently, the Company's products are installed in over 16 countries. The
United States, the United Kingdom and France are the Company's main markets.
Approximately 52% and 42% of the Company's total revenues were generated
outside the United States during the three month periods ended September 30,
1996 and September 30, 1997 respectively. Services provided by Dendrite's
foreign branches and subsidiaries are billed in local currency. License fees
for Dendrite software products are billed in U.S. dollars regardless of the
licensee's country of origin. Operating results generated in local currencies
are translated into U.S. dollars at the average exchange rate in effect for
the reporting period.
7
<PAGE>
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES. Total revenues increased $1,771,000 or 10% from $18,597,000 in
the three months ended September 30, 1996 to $20,368,000 in the three months
ended September 30, 1997.
License fee revenues decreased by 33% or $1,162,000 to $2,370,000 in the
three months ended September 30, 1997 from $3,532,000 in the three months
ended September 30, 1996. This decrease was primarily attributable to the
recognition of revenue related to one time license fees for a major European
client during the period ending September 30, 1996, partially offset by the
inclusion of $540,000 in revenue associated with the resale of third party
software in the period ending September 30, 1997, and $830,000 of license fee
revenue related to a major U.S. client.
Service revenues increased 19% or $2,933,000 from $15,065,000 in the three
months ended September 30, 1996 to $17,998,000 in the three months ended
September 30, 1997. This quarterly increase in service revenues is primarily
the result of an increase in the Company's installed base of Dendrite ETM
systems with new and existing customers, which was mainly attributable to an
increase of U.S. service fees in the amount of $2,383,000 or 29%.
COST OF REVENUES. Cost of revenues increased 21% from $7,297,000 in the
three months ended September 30, 1996 to $8,861,000 in the three months ended
September 30, 1997.
Cost of license fees increased from $185,000 in the three months ended
September 30, 1996 to $729,000 in the three months ended September 30, 1997.
Cost of license fees for the most recent period represent the amortization of
capitalized software of $272,000, up $88,000 from the period ending September
30, 1996, and third party software license fees of $457,000. The increases
related to the third party software costs were primarily due to the increase
in client users of the Company's installed base of ETM systems.
Cost of services increased $1,020,000 from $7,112,000 in the three months
ended September 30, 1996 to $8,132,000 in the three months ended September 30,
1997. This is primarily due to an increase in the number of service
representatives and technical staff over last year's levels which was
necessary to support the increased client activity during such period and, to
a lesser extent, to maintain staffing requirements for expected client needs
for the remainder of the year. As a percentage of service revenues, cost of
services decreased from 47% of service revenues for the three months ended
September 30, 1996 to 45% of service revenues for the three months ended
September 30, 1997. This percentage decrease results from the fact that cost
of services do not rise proportionately with an increase in service revenues.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased
$861,000 or 13% from $6,817,000 in the three months ended September 30, 1996
to $7,678,000 in the three months ended September 30, 1997. As a percentage of
revenues, SG&A expenses increased from 37% for the three months ended
September 30, 1996 to 38% for the three months ended September 30, 1997. This
increase was attributable to the addition of staff members, specifically in
the administration and sales areas necessary to support the continued growth
in company operations.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 40%
from $2,115,000 in the three months ended September 30, 1996 to $1,269,000 in
the three months ended September 30, 1997, representing 6% as a percentage of
revenues in the current period. The decrease in research and development
expenses in 1997 is consistent with the Company's intentions, as peak
development efforts associated with several new software products wind down.
PROVISION FOR INCOME TAXES. The Company's effective tax rate of 40% for the
three months ended September 30, 1997 as compared to 39% for the three months
ended September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES. Total revenues increased $4,996,000 or 10% from $50,081,000 in
the nine months ended September 30, 1996 to $55,077,000 in the nine months
ended September 30, 1997.
8
<PAGE>
License fee revenues decreased 32% to $5,189,000 in the nine months ended
September 30, 1997 from $7,646,000 in the nine months ended September 30,
1996. This decrease was primarily attributable to the recognition of revenue
related to one time license fees for two major European clients and the
significant additional license revenue from existing worldwide clients during
the nine months ending September 30, 1996, offset by the increase in sales of
third party software.
Service revenues increased 18% from $42,435,000 in the nine months ended
September 30, 1996 to $49,888,000 in the nine months ended September 30, 1997.
This increase in service revenues is primarily the result of an increase in
the Company's installed base of Dendrite ETM systems with new and existing
customers and, to a lesser extent, the inclusion of SRCI financial results
for the nine months ending September 30, 1997 vs. five months in the period
ending September 30, 1996.
COST OF REVENUES. Cost of revenues increased 29% or $5,929,000 from
$20,458,000 in the nine months ended September 30, 1996 to $26,387,000 in the
nine months ended September 30, 1997.
Cost of license fees increased $839,000 from $554,000 in the nine months
ended September 30, 1996 to $1,393,000 in the nine months ended September 30,
1997. Cost of license fees for the most recent period represent the
amortization of capitalized software of $818,000 and third party software
license fees of $575,000. This increase was due to higher amortization of
capitalized software development costs and additional third party software
license fees that resulted from the increase in the company's installed base
of Dendrite ETM systems.
Cost of services increased $5,090,000 from $19,904,000 in the nine months
ended September 30, 1996 to $24,994,000 in the nine months ended September 30,
1997. This increase is primarily due to an increase in the resources necessary
to support client activity associated with customer delayed implementations
from 1996, and, to a lesser extent, maintaining core staffing levels to
accommodate the service requirements for existing and planned clients for the
remainder of this year. As a percentage of service revenues, cost of services
increased from 47% of service revenues for the nine months ended September 30,
1996 to 50% of service revenues for the nine months ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased 15% or
$2,872,000 from $18,816,000 in the nine months ended September 30, 1996 to
$21,688,000 in the nine months ended September 30, 1997. As a percentage of
revenues, SG&A expenses increased from 38% for the nine months ended September
30, 1996 to 39% for the nine months ended September 30, 1997. This increase
was primarily attributable to increased staffing levels necessary to support
the continued growth in Company operations.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 24%
or $1,244,000 from $5,115,000 in the nine months ended September 30, 1996 to
$3,871,000 in the nine months ended September 30, 1997, while it decreased
from 10% to 7% as a percentage of revenues. The decrease in research and
development expenses reflects the reduction of effort as peak development on
several new software products was completed in late 1996.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was
41% for the nine months ended September 30, 1997 as compared to 38% for the
nine months ended September 30, 1996. This increase is a result of the
distribution of income between subsidiaries with various tax rates.
9
<PAGE>
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. As of the nine month period
ending September 30, 1997, 200,500 shares of stock for a total value of
$1,927,000 have been repurchased. The Company did not repurchase any shares
during the three months ended September 30, 1997.
Net cash used in operating activities was $3,345,000 during the nine months
ended September 30, 1997 compared to net cash used in operating activities of
$3,053,000 during the nine months ended September 30, 1996. Cash used in
operating activities for the nine months ended September 30, 1997 increased
compared to the nine months ended September 30, 1996 primarily due to
decreases in accounts payable, deferred revenues and a slightly lower increase
in accounts receivable, partially offset by higher net income for the current
period excluding the write-off of in process research and development in the
nine months ending September 30, 1996.
The Company had $4,286,000 of cash provided by investing activities in the
first nine months of 1997 compared to $4,512,000 of cash used in investing
activities in the first nine months of 1996. The increase is primarily
attributable to a reduction in investment balances during the current year
and the payment for the acquisition of SRCI, S.A. which occurred in the second
quarter of 1996. The change in the Company's net cash provided by financing
activities is due to the March 1996 public offering, the stock buy-back during
the six months ending June 1997, and, to a lesser extent, the exercise of
stock options issued under the Company's existing options plans.
The Company maintains a $5,000,000 revolving line of credit agreement with
Chase Manhattan Bank N.A. The agreement provides for borrowings 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. This covenant has the effect of limiting the amount of cash dividends
the Company may pay. At September 30, 1997 there were no borrowings
outstanding under the agreement.
At September 30, 1997, the Company's working capital was approximately
$30,996,000. The Company has no significant capital spending or purchasing
commitments other than normal purchase commitments and commitments under
facility and capital leases.
10
<PAGE>
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 and (ii) the
increasing prescription of generic drugs, in substitution for branded drugs,
produced by manufacturers which have not acquired a Company ETM system. Both of
these trends may reduce the demand for the Company's pharmaceutical ETM products
and services. The trend toward the reclassification of formerly
prescription-only drugs to permit their over-the-counter sale, to the extent it
adversely affects pharmaceutical companies, may also have a negative impact on
the Company and its continued ability to increase revenues and profitability.
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 may also adversely affect the demand for the
Company's pharmaceutical ETM products and services, as may the current
consolidation of the managed care industry in the United States and other
changes in healthcare delivery systems occurring in other countries. 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.
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 acceptance 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, and the postponement of certain
post-production implementations for an existing client in seven country sites.
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 and cyclical 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. The
Company typically expects to realize a greater percentage of its license fees
and service revenues for the year in the second half of the year than it does in
the first half. However, the interplay between this seasonal pattern and the
long selling cycles for the Company's products means that actual results may
vary from this expectation for a given year. In the future, 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. The Company released its first Microsoft(R) Windows
TM based solution, Series 5, in late 1993, its second version, Series 6, in late
1994, and is preparing subsequent versions to meet anticipated operating system
upgrades. 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 undetected errors or
failures when first introduced or as new versions are released. 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 and financial condition.
The Company currently offers software products designed for markets other
than the ethical pharmaceutical market, including the consumer packaged goods
vertical market. The selling environment in each market has characteristics
that are unique to it. There can be no assurance that the Company will be able
to achieve in other markets the success it has attained in the ethical
pharmaceutical market.
DEPENDENCE ON MAJOR CUSTOMERS. The Company has approximately 26
pharmaceutical customers (considering all members of an affiliated group to be a
single customer). The Company derived approximately 54%, 56% and 58% of its
revenues in the aggregate in the years ended December 31, 1994, 1995 and 1996,
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 major
customers of switching to an ETM system offered by a competitor, or taking
significant system management functions in-house would be substantial. There can
be no assurance, however, that such a change will not be undertaken by one or
more 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 and
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,
although few focus on the pharmaceutical industry. 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
three 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 to the pharmaceutical industry and other vertical markets and as
existing competitors expand their product lines.
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 and from the development and/or operation of in-house systems by
pharmaceutical companies. Many of the Company's 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 are part of large corporate groups with significantly greater
resources and broader technology bases than those of the Company. For example,
Sales Technologies, Inc. is owned by Cognizant Corporation. 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 result or financial condition.
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. Where 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 and to continue to account
for a material part of its revenues. Licensing software 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, particularly its President and Chief Executive Officer, John E.
Bailye, 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 and 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 from the strong annual growth which it has historically
experienced. In addition, the Company may experience increased expenses in
addressing the migration of current and prospective customers to software that
is year 2000 compliant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company is furnishing the following exhibits in connection with
this report:
10.1 Employment Agreement dated as of July 24, 1997
with Richard Bruce Savage
10.2 1997 Stock Incentive Plan As Amended through October 21, 1997
(b) The Company did not file any Reports on Form 8-K during the quarter
for which this report is filed.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997
DENDRITE INTERNATIONAL, INC.
(REGISTRANT)
By: /s/ John E. Bailye
--------------------------------------------
John E. Bailye, President and
Chief Executive Officer
By: /s/ George Robson
--------------------------------------------
George Robson, Senior Vice President and
Chief Financial Officer
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<PAGE>
EMPLOYMENT AGREEMENT
---------------------
THIS AGREEMENT, dated as of July 24, 1997, between DENDRITE INTERNATIONAL,
INC., a New Jersey Corporation ("Dendrite"), having its principal place of
business at 1200 Mt. Kemble Avenue, Morristown, New Jersey 07960, and BRUCE
SAVAGE ("Employee"), having an address at 5 Westminster Drive, Annandale, New
Jersey 08801.
WHEREAS, Dendrite, its affiliates, and subsidiaries develop and own what is
referred to as Territory Management Systems and related hardware and equipment;
WHEREAS, Employee is or desires to be employed by Dendrite and Dendrite
desires to employ Employee; and
WHEREAS, Dendrite is willing to provide certain confidential and proprietary
information to Employee for the limited purpose of enabling Employee to carry
out duties in connection with his employment by Dendrite.
RECITAL:
NOW, THEREFORE, it is agreed as follows:
1. EMPLOYMENT
----------
(a) Term. Subject to Section 4 below and the other terms and conditions of
----
this Agreement, Employee's employment by the Company shall be for a term
commencing July 24, 1997 and expiring on the close of business on July 24, 2000
(the "Term"). In the event Employee's employment by Dendrite continues beyond
the expiration of the Term, the employment relationship shall be, by mutual
consent, an employment at-will. Accordingly, after July 24, 2000, this
employment may be terminated at any time for any reason with or without "Cause"
(as defined below) by Dendrite.
(b) Notice by Employee. In the event Employee desires to voluntarily
------------------
terminate his employment on or after July 24, 2000, he must provide Dendrite not
less than twelve (12) months advance written notice of such desire, to be
delivered at any time on or after July 24, 1999. The twelve-month period
commencing on the date of such delivery of notice is hereinafter referred to as
the "Notice Period". Employee's employment shall be extended by Dendrite through
the Notice Period; provided, however, that Dendrite shall have the right at any
time during the Notice Period to relieve Employee of his offices, duties and
responsibilities and to place him on a paid leave-of-absence status, provided
that during the Notice Period, Employee shall remain a full-time employee of
Dendrite and shall continue to receive his salary compensation and other
benefits as provided in this Agreement.
<PAGE>
Notwithstanding anything contained in this Agreement, in the event Employee
delivers notice of his desire to voluntarily terminate his employment, Employee
will not be entitled to any severance payments under Section 4 below.
2. POSITION; DUTIES
----------------
During the Term, Dendrite hereby employs Employee, and Employee hereby
accepts such employment, as Executive Vice President, President International of
Dendrite. During the Term, Employee shall perform those duties as may from time
to time be assigned to him and shall carry out any assignments related to
Dendrite or its affiliates as directed. With Employee's agreement, this may
involve rendering services at various locations throughout the world. Employee
shall devote his full time attention, energy, knowledge, skill and best efforts
solely and exclusively to the duties assigned to him which he shall faithfully
and diligently perform. Employee shall report to Dendrite as may be required and
will fully account for all records, data, materials or other property belonging
to Dendrite or its customers of which he is given custody. Dendrite may, from
time to time, establish rules and Employee shall faithfully observe these in the
performance of his duties. Employee shall further comply with all policies and
directives of Dendrite.
3. COMPENSATION
------------
(i) Base Salary. During the Term, Dendrite shall pay Employee for his
-----------
services a base salary at a rate of $290,000 per annum to be paid on a semi-
monthly basis in accordance with Dendrite's regular payroll practices. Such base
shall be increased on annual basis, commencing January 1, 1998, by the
percentage increase ("COLA") in the Consumer Price Index (the "CPI") during the
prior calendar year as published by the Bureau of Labor Statistics of the United
States Department of Labor for All Urban Consumers, New York Metropolitan Area
(the "Bureau"). If the Bureau discontinues the publication of the CPI, the best
available index or other information shall be substituted for it. A reference to
the CPI applicable to any date means the CPI published most recently prior to
such date.
All base salary payments, Bonus (as defined in clause (ii) below) payments
and any Severance Payment (as defined in Section 4(b) below) shall be reduced by
any and all applicable withholdings, contributions and payroll taxes.
(ii) Bonus. During the Term and commencing on the completion of Dendrite's
-----
fiscal year 1997, Employee shall be eligible to receive an annual bonus (the
"Bonus") of not less than 30% of Employee's annual rate of base salary as at the
completion of the corresponding year, payable in the next payroll period
occurring at least two weeks after Dendrite publicly discloses its financial
results for such fiscal year; provided, however, that the payment of the Bonus
-------- -------
is subject to: (a) Dendrite's achievement of financial goals as set forth in the
annual business plan approved by the Board of Directors of Dendrite (the
2
<PAGE>
"Board"), (b) such other objectives as mutually agreed upon, and (c) Employee
remaining in the employ of Dendrite as of the end of any such year.
(iii) Stock Options
-------------
(a) Pursuant to Dendrite's 1997 Incentive Stock Plan (the "Stock
Plan"), upon the execution of this Agreement, Dendrite shall give Employee an
option to purchase 40,000 shares of the common stock of Dendrite. Upon the first
anniversary of this Agreement, Dendrite shall give Employee an option to
purchase an additional 25,000 shares of the common stock of Dendrite, provided
that Employee remains in the full-time employment of Dendrite on such date. The
price for such options shall be determined by the committee of the Board that
administers the Stock Plan. Employee's entitlement to such options shall be
subject to (i) a four year vesting schedule, (ii) approval by the Board, (iii)
Employee's execution of a definitive option agreement in form and substance
satisfactory to Dendrite and (iv) in all instances subject to the terms and
conditions of the Stock Plan. Notwithstanding anything to the contrary, in the
event of (x) a "Change of Control" (as defined below), if Employee is not
retained in a similar position or no similar position is offered to Employee
following a Change of Control or (y) the termination of Employee's employment by
Dendrite without Cause (as defined below), all of Employee's options owned by
him at the time of such event shall immediately vest. It is understood and
agreed that in the event of a conflict or ambiguity between the provisions of
this Section 3(iii)(a) and any other agreement between Employee and Dendrite
relating to the potential acceleration of options owned by him, the provisions
of this Section 3(iii)(a) will control.
(b) For purposes of this Agreement, "Change in Control" means the
occurrence of any one of the following events:
(i) any "person" (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of Dendrite representing 33% or more of the combined voting power of
Dendrite's then outstanding securities eligible to vote for the election of the
Board (the "Dendrite Voting Securities"); provided, however, that the event
-------- -------
described in this paragraph (i) shall not be deemed to be a Change in Control by
virtue of any of the following acquisitions: (A) by Dendrite or any of its
subsidiaries, (B) by any employee benefit plan sponsored or maintained by
Dendrite or any of its subsidiaries, (C) by any underwriter temporarily holding
securities pursuant to an offering of such securities, (D) pursuant to a Non-
Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any
acquisition by Employee or any group of persons including Employee or any entity
controlled by Employee or such group ("Employee Holders"), or (F) a transaction
(other than one described in paragraph (iii) below) in which Dendrite
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<PAGE>
Voting Securities are acquired from Dendrite, if a majority of the Board
approves a resolution providing expressly that the acquisition pursuant to this
clause (F) does not constitute a Change in Control under this paragraph (i).
Notwithstanding the foregoing, a transaction that would otherwise be considered
a Change in Control but for the operation of clauses D or F of this paragraph
(i) will be deemed a Change in Control if John Bailye immediately after the
consummation of such a transaction is neither Chairman, President or Chief
Executive Officer (or holds a position comparable to the foregoing positions) of
Dendrite or any successor corporation to Dendrite as a result of such Change in
Control transaction;
(ii) individuals who, on July 24, 1997, constituted the Board (the
"Incumbent Directors") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to July 24,
1997, whose election or nomination for election was approved by a vote of at
least a majority of the Incumbent Directors then on the Board (either by a
specific vote or by approval of the proxy statement of Dendrite in which such
person is named as a nominee for director, without objection to such nomination)
shall be an Incumbent Director; provided, however, that no individual elected or
-------- -------
nominated as a director of Dendrite initially as a result of an actual or
threatened election contest with respect to directors or as a result of any
other actual or threatened solicitation of proxies or consents by or on behalf
of any person other than the Board shall be deemed to be an Incumbent Director;
(iii) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization (other than a transaction with
Employee, any group of persons including Employee or any entity controlled by
Employee or such a group of persons) involving Dendrite or any of its
subsidiaries that requires the approval of Dendrite's stockholders whether for
such transaction or the issuance of securities in connection with the
transaction or otherwise, (a "Business Combination"), unless immediately
following such Business Combination: (A) more than 50% of the total voting power
of (x) the corporation resulting from such Business Combination (the "Surviving
Corporation"), or (y) if applicable, the ultimate parent corporation that
directly or indirectly has beneficial ownership of 100% of the voting securities
eligible to elect directors of the Surviving Corporation (the "Parent
Corporation"), is represented by Dendrite Voting Securities that were
outstanding immediately prior to the consummation of such Business Combination
(or, if applicable, is represented by shares into which such Dendrite Voting
Securities were converted pursuant to such Business Combination), and such
voting power among the holders thereof is in substantially the same proportion
as the voting power of such Dendrite Voting Securities among the holders thereof
immediately prior to the Business Combination, (B) no person (other than the
Employee Holders or any employee benefit plan sponsored or maintained by the
Surviving Corporation or the Parent Corporation), is
4
<PAGE>
or becomes the beneficial owner, directly or indirectly, of 33% or more of the
total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) and (C) at least a majority of the members of the board
of directors of the Parent Corporation (or if there is no Parent Corporation,
the Surviving Corporation) were Incumbent Directors at the time of the Board's
approval of the execution of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying
Transaction"); or
(iv) the stockholders of Dendrite approve a sale of all or
substantially all of the Dendrite's assets.
Notwithstanding the foregoing, a Change in Control of Dendrite shall not be
deemed to occur solely because any person acquires beneficial ownership of more
than 33% of Dendrite Voting Securities as a result of the acquisition of
Dendrite Voting Securities by Dendrite which, by reducing the number of Dendrite
Voting Securities outstanding, increases the percentage of shares beneficially
owned by such person; provided that, if a Change in Control of Dendrite would
occur as a result of such an acquisition by Dendrite (if not for the operation
of this sentence), and after Dendrite's acquisition such person becomes the
beneficial owner of additional Dendrite Voting Securities that increase the
percentage of outstanding Dendrite Voting Securities beneficially owned by such
person, then a Change in Control of Dendrite shall occur.
4. TERMINATION; SEVERANCE
----------------------
(a) If at any time Employee's employment hereunder is terminated by
Dendrite for any reason other than death, Cause, or Disability prior to July 24,
2000, then Employee shall be entitled to receive (i) his base salary through the
date of his termination, (ii) payment for any unused but accrued vacation
through the date of termination and (iii) severance payments totalling an amount
equal to the sum of twenty-four (24) months base salary (calculated at the rate
of base salary then being paid to Employee as of the date of termination) and
(iv) solely for the calendar year in which the Employee is terminated, a pro
rata portion of the Bonus that Employee would have otherwise been entitled to
had he been in the employ of Dendrite for the entire year in which he was
terminated, the amount of any such Bonus corresponding to the portion of the
year to have elapsed through the termination date. The severance payments to be
paid to Employee under this Section 4(a) shall be referred to herein as the
"Severance Payment". Employee's Severance Payment in respect of base salary
shall be paid by Dendrite in twenty-four (24) consecutive equal monthly payments
commencing not later than thirty (30) days after the effective date of the
termination of Employee's employment. Any pro rata Bonus payment hereunder
shall be paid by Dendrite in a lump sum within sixty (60) days of the date of
termination. No interest shall
5
<PAGE>
accrue or be payable on or with respect to any Severance Payment or pro rata
Bonus payment hereunder. In the event of a termination of Employee's employment
described in this Section 4(a), Employee shall be provided continued "COBRA"
coverage pursuant to Sections 601 et seq. of ERISA under Dendrite's group
medical and dental plans. For the lesser of (x) the period for which Employee
receives the Severance Payment and (y) the period for which Employee is covered
under COBRA (the "Coverage Period"), Dendrite shall pay Employee the difference
between (i) the cost to Employee of obtaining COBRA coverage (during the
Coverage Period) and (ii) the total cost Employee would have incurred for his
premium contribution had he remained in the employ of Dendrite during the
Coverage Period. Notwithstanding the foregoing, in the event Employee becomes
re-employed with another employer and becomes eligible to receive health
coverage from such employer, the payment of COBRA coverage by Dendrite as
described herein shall cease.
(b) If at any time Employee's employment hereunder is terminated by
Dendrite for any reason other than death, Cause, or Disability on or after July
24, 2000, then Employee shall be entitled to receive (i) his base salary through
the date of his termination, (ii) payment for any unused but accrued vacation
through the date of termination and (iii) severance payments totalling an amount
equal to the sum of twelve (12) months base salary (calculated at the rate of
base salary then being paid to Employee as of the date of termination) and (iv)
solely for the calendar year in which the Employee is terminated, a pro rata
portion of the Bonus that Employee would have otherwise been entitled to had he
been in the employ of Dendrite for the entire year in which he was terminated,
the amount of any such Bonus corresponding to the portion of the year to have
elapsed through the termination date. The severance payments to be paid to
Employee under this Section 4(b) shall be referred to herein as the "Post-Term
Severance Payment". Employee's Post-Term Severance Payment in respect of base
salary shall be paid by Dendrite in twelve (12) consecutive equal monthly
payments commencing not later than thirty (30) days after the effective date of
the termination of Employee's employment. Any pro rata Bonus payment hereunder
shall be paid by Dendrite in a lump sum within sixty (60) days of the date of
termination. No interest shall accrue or be payable on or with respect to any
Post-Term Severance Payment or pro rata Bonus payment hereunder. In the event
of a termination of Employee's employment described in this Section 4(b),
Employee shall be provided continued "COBRA" coverage pursuant to Sections 601
et seq. of ERISA under Dendrite's group medical and dental plans. For the
lesser of (x) the period for which Employee receives the Post-Term Severance
Payment and (y) the period for which Employee is covered under COBRA (the
"Coverage Period"), Dendrite shall pay Employee the difference between (i) the
cost to Employee of obtaining COBRA coverage (during the Coverage Period) and
(ii) the total cost Employee would have incurred for his premium contribution
had he remained in the employ of Dendrite during the Coverage Period.
Notwithstanding the foregoing, in the event Employee becomes re-employed with
another employer and becomes eligible to receive health coverage from such
employer, the payment of COBRA coverage by Dendrite as described herein shall
cease.
6
<PAGE>
(c) The making of any Severance Payment , Post-Term Severance Payment or
pro rata Bonus payment under Section 4(a) or 4(b) hereunder is conditioned upon
the signing of a general release in form and substance satisfactory to Dendrite
under which Employee releases Dendrite and its affiliates together with their
respective officers, directors, shareholders, employees, agents and successors
and assigns from any and all claims he may have against them. In the event
Employee breaches Sections 7, 8, 9 or 11 of this Agreement, in addition to any
other remedies at law or in equity, Dendrite may cease making any Severance
Payment, Post-Term Severance Payment, pro rata Bonus payment, or any payments
for COBRA coverage otherwise due under Section 4(a) or 4(b). Nothing herein
shall affect any of Employee's obligations or Dendrite's rights under this
Agreement.
(d) For purposes of this Agreement, "Cause" as used herein shall mean (i)
any gross misconduct on the part of Employee with respect to his duties under
this Agreement, (ii) the engaging by Employee in an indictable offense which
relates to Employee's duties under this Agreement or which is likely to have a
material adverse effect on the business of Dendrite, (iii) the commission by
Employee of any willful or intentional act which injures in any material respect
or could reasonably be expected to injure in any material respect the
reputation, business or business relationships of Dendrite, including without
limitation, a breach of Sections 7, 8 or 11 of this Agreement, or (iv) the
engaging by Employee through gross negligence in conduct which injures
materially or could reasonably be expected to injure materially the business or
reputation of Dendrite.
(e) For purposes of this Agreement, "Disabled" as used herein shall have
the same meaning as that term, or such substantially equivalent term, has in any
group disability policy carried by Dendrite. If no such policy exists, the term
"Disabled" shall mean the occurrence of any physical or mental condition which
materially interferes with the performance of Employee's customary duties in his
capacity as an employee where such disability has been in effect for a period of
six (6) months (excluding permitted vacation time), which need not be
consecutive, during any single twelve (12) month period.
(f) In the event Employee terminates his employment with Dendrite or
Dendrite terminates Employee's employment with Dendrite for "Cause" or
Employee's employment ends as a result of his death or becoming "Disabled," it
is understood and agreed that Dendrite's only obligation is to pay Employee any
unused but accrued vacation days, his base salary through the date of his
termination, and any unpaid bonus otherwise payable under Section 3(ii) above.
5. BENEFITS
--------
Dendrite shall provide Employee:
(i) Vacation. Four weeks vacation per annum in accordance with Dendrite
--------
policy in effect from time to time.
7
<PAGE>
(ii) Business Expenses. Reimbursement for all reasonable travel,
-----------------
entertainment and other reasonable and necessary out-of-pocket expenses incurred
by Employee in connection with the performance of his duties. Reimbursement will
be made upon the submission by the Employee of appropriate documentation and
verification of the expenses.
(iii) Other. Dendrite will provide Employee other benefits to the same
-----
extent as may be provided to other employees generally in accordance with
Dendrite policy in effect from time to time and subject to the terms and
conditions of such benefit plans.
6. INFORMATION AND BUSINESS OPPORTUNITY
------------------------------------
During Employee's employment with Dendrite, Employee may acquire knowledge
of (i) information that is relevant to the business of Dendrite or its
affiliates or (ii) knowledge of business opportunities pertaining to the
business in which Dendrite or its affiliates are engaged. Employee shall
promptly disclose to Dendrite that information or business opportunity but shall
not disclose it to anyone else without Dendrite's written consent.
7. DENDRITE CONFIDENTIAL INFORMATION
---------------------------------
The Employee will, as a result of his employment with Dendrite, acquire
information which is proprietary and confidential to Dendrite. This information
includes, but is not limited to, technical and commercial information, customer
lists, financial arrangements, salary and compensation information, competitive
status, pricing policies, knowledge of suppliers, technical capabilities,
discoveries, algorithms, concepts, software in any stage of development,
designs, drawings, specifications, techniques, models, data, technical manuals,
research and development materials, processes procedures, know-how and other
business affairs relating to Dendrite. Confidential information also includes
any and all technical information involving Dendrite's work. Employee will keep
all such information confidential and will not reveal it at any time without the
express written consent of Dendrite. This obligation is to continue in force
after employment terminates for whatever reason.
8. CLIENT CONFIDENTIAL INFORMATION
-------------------------------
Dendrite may, from time to time, be furnished information and data which is
proprietary and confidential to its clients, customers or suppliers. Employee
will not, at any time for any reason, reveal any information provided by any of
Dendrite's clients, customers or suppliers to anyone, unless provided with prior
written consent by Dendrite or by the applicable client, customer or supplier.
This obligation is to continue in force after employment terminates for whatever
reason.
8
<PAGE>
9. RETURN OF PROPERTY
------------------
Upon termination of employment for any reason or upon the request of
Dendrite, Employee shall return to Dendrite all property which Employee received
or prepared or helped prepare in connection with his employment including, but
not limited to, all copies of any confidential information or material, disks,
notes, notebooks, blueprints, customer lists and any and all other papers or
material in any tangible media or computer readable form belonging to Dendrite
or to any of its customers, clients or suppliers, and Employee will not retain
any copies, duplicates, reproductions or excerpts thereof.
10. INVENTIONS
----------
All work performed by Employee and all materials, products, deliverables,
inventions, software, ideas, disclosures and improvements, whether patented or
unpatented, and copyrighted material made or conceived by Employee, solely or
jointly, in whole or in part, during the term of Employee's employment by
Dendrite which (i) relate to methods, apparatus, designs, products, processes or
devices sold, licensed, used or under development by Dendrite, (ii) otherwise
relate to or pertain to the present, proposed or contemplated business,
functions or operations of Dendrite, (iii) relate to Dendrite actual or
anticipated research or development, (iv) involve the use of Dendrite's
equipment, supplies or facilities, or (v) result from access to any Dendrite
assets, information, inventions or the like are confidential information, are
the property of Dendrite and shall be deemed to be a work made for hire. To the
extent that title to any of the foregoing shall not, by operation of law, vest
in Dendrite, all right, title and interest therein are hereby irrevocably
assigned to Dendrite. Employee agrees to give Dendrite or any person or entity
designated by Dendrite reasonable assistance required to perfect its rights
therein.
If Employee conceives any idea, makes any discovery or invention within one
(1) year after the termination of employment with Dendrite that relate to any
matters pertaining to the business of Dendrite, it shall be deemed that it was
conceived while in the employ of Dendrite.
11. RESTRICTION ON FUTURE EMPLOYMENT
--------------------------------
Employee agrees that in the event employment with Dendrite is terminated,
for any reason, with or without Cause, Employee shall not for two (2) years
after termination of employment:
(i) Perform services that compete with the business or businesses
conducted by Dendrite or any of its affiliates or render services to any
organization or entity which competes with the business or businesses conducted
by Dendrite or any
9
<PAGE>
of its affiliates in any area of the United States of America or elsewhere where
Dendrite or any of its affiliates do business;
(ii) Solicit any customers or potential customers of Dendrite with
whom Employee had contact while employed by Dendrite or who was a customer of
Dendrite at any time during the two (2) years immediately before termination;
(iii) Request that any of Dendrite's customers or suppliers
discontinue doing business with it;
(iv) Knowingly take any action which would disparage Dendrite or be
to its disadvantage; or
(v) Employ or attempt to employ or assist anyone else to employ any
employee or contractor of Dendrite or induce or attempt to induce any employee
or contractor of Dendrite to terminate their employment or engagement with
Dendrite.
For purposes of Section 11(i) "the business or businesses conducted by
Dendrite or any of its affiliates" means Electronic Territory Management Systems
used to manage, coordinate and control the activities of large sales forces and
complex selling environments and/or sales productivity tools of the type and
nature marketed by Dendrite or any of its affiliates and support services
related thereto as of the date of Employee's termination of employment (or which
Dendrite can at the time of Employee's termination of employment establish it
will likely market within one (1) year following the date of Employee's
termination).
12. OUTSIDE CONTRACTING
--------------------
Employee shall not enter into any agreements to provide programming or
other services to any company, person or organization outside of his employment
by Dendrite (an "Outside Agreement") without the prior written express consent
from Dendrite. Employee must notify Dendrite of his intent to enter into an
Outside Agreement specifying therein the other party to such Outside Agreement
and the type of programming and/or services to be provided by Employee.
Dendrite shall not unreasonably withhold permission to Employee to enter into
Outside Agreements unless such Outside Agreements (i) are with competitors or
potential competitors of Dendrite, or (ii) as determined in Dendrite's sole
discretion, shall substantially hamper or prohibit Employee from satisfactorily
carrying out all duties assigned to Employee by Dendrite.
10
<PAGE>
13. AFTER-HOURS DEVELOPMENT
-----------------------
In the event that Employee shall develop any software which, pursuant to
Section 10 herein, is not the property of Dendrite, Dendrite shall have a right
of first refusal to publish and/or purchase the rights to such software.
Employee shall notify Dendrite of any such After-Hours Development as soon as
reasonably possible before or during the development process including a
description of the intended functions of the After-Hours Development and the
estimated date of completion.
14. PRIOR EMPLOYMENT
----------------
Employee represents and warrants that Employee has not taken or otherwise
misappropriated and does not have in Employee's possession or control any
confidential and proprietary information belonging to any of Employee's prior
employers or connected with or derived from Employee's services to prior
employers. Employee represents and warrants that Employee has returned to all
prior employers any and all such confidential and proprietary information.
Employee further acknowledges, represents and warrants that Dendrite has
informed Employee that Employee is not to use or cause the use of such
confidential or proprietary information in any manner whatsoever in connection
with Employee's employment by Dendrite. Employee agrees, represents and
warrants that Employee will not use such information. Employee shall indemnify
and hold harmless Dendrite from any and all claims arising from any breach of
the representations and warranties in this Section.
15. REMEDIES
--------
The parties agree that in the event Employee breaches or threatens to
breach this Agreement, money damages may be an inadequate remedy for Dendrite
and that Dendrite will not have an adequate remedy at law. It is understood,
therefore, that in the event of a breach of this Agreement by Employee, Dendrite
shall have the right to obtain from a court of competent jurisdiction restraints
or injunctions prohibiting Employee from breaching or threatening to breach this
Agreement. In that event, the parties agree that Dendrite will not be required
to post bond or other security. It is also agreed that any restraints or
injunctions issued against Employee shall be in addition to any other remedies
which Dendrite may have available to it.
16. APPLICABLE LAW
--------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey.
11
<PAGE>
17. NOTICES
-------
In the event any notice is required to be given under the terms of this
Agreement, it shall be delivered in the English language, in writing, as
follows:
If to Employee: Bruce Savage
5 Westminster Drive
Annandale, New Jersey 08801
If to Dendrite: Christopher French, Vice President, General Counsel
Dendrite International, Inc.
1200 Mt. Kemble Avenue
Morristown, New Jersey 07960
18. NON-ASSIGNABILITY
-----------------
Employee's rights or obligations under the terms of this Agreement or of
any other agreement with Dendrite may not be assigned. Any attempted assignment
will be void as to Dendrite. Dendrite may, however, assign its rights to any
affiliated or successor entity.
19. BINDING AGREEMENT
-----------------
This Agreement shall be binding upon and inure to the benefit of Employee's
heirs and personal representatives and to the successors and assigns of
Dendrite.
20. INTEGRATION
-----------
This Agreement sets forth the entire agreement between the parties hereto
and fully supersedes any and all prior negotiations, discussions, agreements or
understandings between the parties hereto pertaining to the subject matter
hereof, except for any written non-disclosure agreements with Dendrite by which
Employee may be bound. No representations, oral or otherwise, with respect to
the subject matter of this Agreement have been made by either party.
21. WAIVER
------
This Agreement may not be modified or waived except by a writing signed by
both parties. No waiver by either party of any breach by the other shall be
considered a waiver of any subsequent breach of the Agreement.
12
<PAGE>
22. JURISDICTION
------------
The State of New Jersey shall have exclusive jurisdiction to entertain any
legal or equitable action with respect to this Agreement except that Dendrite
may institute suit against Employee in any jurisdiction in which Employee may be
at the time. In the event suit is instituted in New Jersey, it is agreed that
service of summons or other appropriate legal process may be effected upon any
party by delivering it to the address in this Agreement specified for that party
in Section 17.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the first
date written above.
DENDRITE INTERNATIONAL, INC.
/s/ John Bailye
_______________________
Name:
Title:
/s/ Bruce Savage
_______________________
Bruce Savage
13
<PAGE>
DENDRITE INTERNATIONAL, INC.
1997 STOCK INCENTIVE PLAN
(As amended through October 21, 1997)
1. Purpose. The purpose of the Dendrite International, Inc. 1997
-------
Stock Incentive Plan (the "Plan") is to enhance the ability of Dendrite
International, Inc. (the "Company") and its subsidiaries to attract and retain
employees, directors and consultants of outstanding ability and to provide
employees, directors and consultants with an interest in the Company parallel to
that of the Company's shareholders.
2. Definitions.
-----------
(a) "Award" shall mean an award determined in accordance with
the terms of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" shall mean the occurrence of any one of
the following events:
(i) any "person" (as such term is defined in Section 3(a)(9)
of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 33-1/3% or more of the combined
voting power of the Company's then outstanding securities eligible to
vote for the election of the Board (the "Company Voting Securities");
provided, however, that the event described in this paragraph (i)
-------- -------
shall not be deemed to be a Change in Control by virtue of any of the
following acquisitions: (A) by the Company or any subsidiary, (B) by
any employee benefit plan sponsored or maintained by the Company or
any subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a Non-
Control Transaction (as defined in paragraph (iii)), or (E) a
transaction (other than one described in (iii) below) in which Company
Voting Securities are acquired from the Company, if a majority of the
Incumbent Board (as defined below) approves a resolution providing
expressly that the acquisition pursuant to this clause (E) does not
constitute a Change in Control under this paragraph (i);
(ii) individuals who, on the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
<PAGE>
least a majority thereof, provided that any person becoming a director
subsequent to the Effective Date, whose election or nomination for
election was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such
nomination) shall be considered a member of the Incumbent Board;
provided, however, that no individual initially elected or nominated
-------- -------
as a director of the Company as a result of an actual or threatened
election contest with respect to directors or any other actual or
threatened solicitation of proxies or consents by or on behalf of any
person other than the Board shall be deemed to be a member of the
Incumbent Board;
(iii) the shareholders of the Company approve a merger,
consolidation, share exchange or similar form of corporate
reorganization of the Company or any such type of transaction
involving the Company or any of its subsidiaries (whether for such
transaction or the issuance of securities in the transaction or
otherwise) (a "Business Combination"), unless immediately following
such Business Combination: (A) more than 50% of the total voting power
of the publicly traded corporation resulting from such Business
Combination (including, without limitation, any corporation which
directly or indirectly has beneficial ownership of 100% of the Company
Voting Securities or all or substantially all of the assets of the
Company and its subsidiaries) eligible to elect directors of such
corporation would be represented by shares that were Company Voting
Securities immediately prior to such Business Combination (either by
remaining outstanding or being converted), and such voting power would
be in substantially the same proportion as the voting power of such
Company Voting Securities immediately prior to the Business
Combination, (B) no person (other than any publicly traded holding
company resulting from such Business Combination, any employee benefit
plan sponsored or maintained by the Company (or the corporation
resulting from such Business Combination), or any person which
beneficially owned, immediately prior to such Business Combination,
directly or indirectly, 33-1/3% or more of the Company Voting
Securities (a "Company 33-1/3% Stockholder")) would become the
beneficial owner, directly or indirectly, of 33-1/3% or more of the
total voting power of the outstanding voting securities eligible to
elect directors of the corporation resulting from such Business
Combination and no Company 33-1/3% Stockholder would increase its
percentage of such total voting power, and (C) at least a majority of
the members of the board of directors of the corporation resulting
from such Business Combination would be members of the Incumbent Board
at the time of the Board's approval of the
2
<PAGE>
execution of the initial agreement providing for such Business
Combination (a "Non-Control Transaction"); or
(iv) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or the sale or
disposition of all or substantially all of the Company's assets.
Notwithstanding the foregoing, a Change in Control of the Company
shall not be deemed to occur solely because any person acquires beneficial
ownership of more than 33-1/3% of the Company Voting Securities as a result of
the acquisition of Company Voting Securities by the Company which, by reducing
the number of Company Voting Securities outstanding, increases the percentage of
shares beneficially owned by such person; provided, that if a Change in Control
-------- ----
of the Company would occur as a result of such an acquisition by the Company (if
not for the operation of this sentence), and after the Company's acquisition
such person becomes the beneficial owner of additional Company Voting Securities
that increases the percentage of outstanding Company Voting Securities
beneficially owned by such person, then a Change in Control of the Company shall
occur.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean a committee of at least two members of
the Board appointed by the Board to administer the Plan and to perform the
functions set forth herein and who are "non-employee directors" within the
meaning of Rule 16b-3 as promulgated under Section 16 of the Exchange Act and
who are also "outside directors" within the meaning of Section 162(m) of the
Code.
(f) "Common Stock" shall mean the common stock, no par value per
share, of the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(h) "Fair Market Value" per share as of a particular date shall
mean the last reported sale price (on the day immediately preceding such date)
of the Common Stock on the NASDAQ National Market List.
(i) "Immediate Family Member" shall mean, except as otherwise
determined by the Committee, a Participant's children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings, in-laws and
persons related by reason of legal adoption.
3
<PAGE>
(j) "Incentive Stock Option" shall mean a stock option which is
intended to meet the requirements of Section 422 of the Code.
(k) "Non-Employee Director" shall mean a member of the Board who
is not an employee of the Company or any Subsidiary.
(l) "Nonqualified Stock Option" shall mean a stock option which
is not intended to be an Incentive Stock Option.
(m) "Option" shall mean either an Incentive Stock Option or a
Nonqualified Stock Option.
(n) "Participant" shall mean an employee, director or consultant
of the Company or its Subsidiaries who is selected to participate in the Plan in
accordance with Section 5.
(o) "Subsidiary" shall mean any subsidiary of the Company that is
a corporation and which at the time qualifies as a "subsidiary corporation"
within the meaning of Section 424(f) of the Code.
3. Shares Subject to the Plan. Subject to adjustment in accordance
--------------------------
with Section 16, the total of the number of shares of Common Stock which shall
be available for the grant of Awards under the Plan shall not exceed 750,000
shares; provided, that, for purposes of this limitation, any Option which is
-------- ----
canceled or expires without exercise shall again become available for Awards
under the Plan. Upon forfeiture of Awards in accordance with the provisions of
the Plan, and the terms and conditions of the Award, such shares shall no longer
be counted in any determination of the number of shares available under the Plan
and shall be available for subsequent Awards. Subject to adjustment in
accordance with Section 16, no employee shall be granted in any calendar year
Options to purchase more than 500,000 shares of Common Stock. Shares of Common
Stock available for issue or distribution under the Plan shall be authorized and
unissued shares or shares reacquired by the Company in any manner.
4. Administration. (a) The Plan shall be administered by the
--------------
Committee.
(b) The Committee shall (i) approve the selection of
Participants, (ii) determine the type of Awards to be made to Participants,
(iii) determine the number of shares of Common Stock subject to Awards, (iv)
determine the terms and conditions of any Award granted hereunder (including,
but not limited to, any restriction and forfeiture conditions on such Award) and
(v) have the authority to interpret the Plan, to establish, amend, and rescind
any rules and regulations relating to the Plan, to determine the terms and
provisions of any agreements entered into hereunder, and to make all other
determinations necessary or advisable for the administration of the Plan. The
Committee may correct any defect, supply any omission or reconcile any
4
<PAGE>
inconsistency in the Plan or in any Award in the manner and to the extent it
shall deem desirable to carry it into effect.
(c) Any action of the Committee shall be final, conclusive and
binding on all persons, including the Company and its Subsidiaries and
shareholders, Participants and persons claiming rights from or through a
Participant.
(d) The Committee may delegate to officers or employees of the
Company or any Subsidiary, and to service providers, the authority, subject to
such terms as the Committee shall determine, to perform administrative functions
with respect to the Plan and Award agreements.
(e) Members of the Committee and any officer or employee of the
Company or any Subsidiary acting at the direction of, or on behalf of, the
Committee shall not be personally liable for any action or determination taken
or made in good faith with respect to the Plan, and shall, to the extent
permitted by law, be fully indemnified by the Company with respect to any such
action or determination.
5. Eligibility. Individuals eligible to receive Awards under the
-----------
Plan shall be the officers, other key employees and selected consultants of the
Company and its Subsidiaries selected by the Committee. In addition, all Non-
Employee Directors shall be eligible to receive Options as provided in Section 9
hereof.
6. Awards. Awards under the Plan may consist of Options, stock
------
awards or other awards based on the value of the Common Stock. Awards shall be
subject to the terms and conditions of the Plan and shall be evidenced by an
agreement containing such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall deem desirable.
7. Options. Options may be granted under the Plan in such form as
-------
the Committee may from time to time approve pursuant to terms set forth in an
Option agreement. The Committee may alter or waive, at any time, any term or
condition of an Option that is not mandatory under the Plan.
(a) Types of Options. Each Option agreement shall state whether
----------------
or not the Option will be treated as an Incentive Stock Option or Nonqualified
Stock Option. Incentive Stock Options shall only be granted to employees of the
Company and its Subsidiaries.
(b) Option Price. The purchase price per share of the Common
------------
Stock purchasable under an Option shall be determined by the Committee, but in
the case of Incentive Stock Options, the Option price will be not less than 100%
of the Fair Market Value of the Common Stock on the date of the grant of the
Option and in the case
5
<PAGE>
of Incentive Stock Options granted to an employee owning stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company and its Subsidiaries (a "10% Shareholder") the price per share specified
in the agreement relating to such Option shall not be less than 110% of the Fair
Market Value per share of the Common Stock on the date of grant.
(c) Option Period. The term of each Option shall be fixed by
-------------
the Committee, but no Option shall be exercisable after the expiration of 10
years from the date the Option is granted, provided, however, that in the case
-------- -------
of Incentive Stock Options granted to 10% Shareholders, the term of such Option
shall not exceed 5 years from the date of grant.
(d) Exercisability. Each Option shall vest and become
--------------
exercisable at a rate determined by the Committee at or subsequent to grant;
provided, however, that no Option granted under this Section 7 shall become
- -------- -------
exercisable earlier than the time that the Plan is approved by the shareholders
of the Company in accordance with Section 21; provided, further, that upon the
-------- -------
occurrence of a Change in Control before such shareholder approval, all
Incentive Stock Options granted hereunder shall automatically become
Nonqualified Stock Options and all Options shall vest and become immediately
exercisable in accordance with Section 10.
(e) Method of Exercise. Options may be exercised, in whole or in
------------------
part, by giving written notice of exercise to the Company specifying the number
of shares of Common Stock to be purchased. Such notice shall be accompanied by
the payment in full of the Option purchase price. Such payment shall be made:
(a) in cash, or (b) to the extent authorized by the Committee, by surrender of
shares of Common Stock owned by the holder of the Option, or (c) through
simultaneous sale through a broker of shares acquired on exercise, as permitted
under Regulation T of the Federal Reserve Board, or (d) through additional
methods prescribed by the Committee, or (e) by a combination of any such
methods.
8. Stock Awards. Subject to such performance and employment conditions
------------
as the Committee may determine, awards of Common Stock or awards based on the
value of the Common Stock may be granted either alone or in addition to Options
granted under the Plan. Any Awards under this Section 8 and any Common Stock
covered by any such Award may be forfeited to the extent so provided in the
Award agreement, as determined by the Committee.
9. Non-Employee Director Stock Options.
-----------------------------------
(a) Initial Grant. Nonqualified Stock Options to purchase 30,000
-------------
shares of Common Stock shall be granted automatically to each Non-Employee
Director who is a Non-Employee Director on the day the Board approves the
adoption of
6
<PAGE>
the Plan. With respect to each person who becomes a Non-Employee Director after
such date, Nonqualified Stock Options to purchase 30,000 shares of Common Stock
shall be granted automatically to each such Non-Employee Director on the day he
or she first becomes a Non-Employee Director.
(b) Subsequent Options. In addition to the Nonqualified Stock
------------------
Options granted to Non-Employee Directors under Section 9(a), Nonqualified Stock
Options to purchase 10,000 shares of Common Stock shall be granted automatically
to each Non-Employee Director, effective on the third anniversary date on which
such director was granted an Initial Option under Section 9(a) and on each
anniversary date thereafter; provided, however, he or she continues to serve as
-------- -------
a Non-Employee Director on such date.
(c) Option Price. The purchase price for each Option granted
------------
under this Section 9 to a Non-Employee Director shall be the Fair Market Value
of the Common Stock on the date of grant of the Option.
(d) Exercisability. Each Initial Option granted under Section
--------------
9(a) shall become exercisable and vest on the first anniversary of the date of
grant of such Option; provided, however, that no Option shall become exercisable
-------- -------
earlier than the time that the Plan is approved by the shareholders of the
Company in accordance with Section 21; provided, further, that upon the
-------- -------
occurrence of a Change in Control before such shareholder approval, all Options
shall vest and become immediately exercisable in accordance with Section 10.
Subsequent Options granted under Section 9(b) shall become exercisable and vest
1 year from the date of the grant thereof.
(e) Method of Exercise. Each Option granted under this Section 9
------------------
may be exercised in the same manner as provided in Section 7(e).
(f) Option Period. Each Option granted under this Section 9 shall
-------------
terminate 10 years from the date of grant unless sooner terminated by reason of
termination of service as a director of the Company and its Subsidiaries.
(g) Termination of Director Status.
------------------------------
(i) In the event of termination of service as a director of
the Company and its Subsidiaries for any reason other than death or
permanent disability (as determined by the Committee), an Option
granted under this Section 9 (to the extent exercisable as of the date
of termination) shall be exercisable for 90 days following such
termination (but in no event beyond the term of the Option), and shall
thereafter terminate.
7
<PAGE>
(ii) In the event of the death of a Non-Employee Director
while a director of the Company or any Subsidiaries, the Option (to
the extent exercisable as of the date of death), shall be exercisable
by any prior transferee or by the Non-Employee Director's designated
beneficiary, or if none, the person(s) to whom such Non-Employee
Director's rights under the Option are transferred by will or the laws
of descent and distribution for 1 year following the date of death
(but in no event beyond the term of the Option), and shall thereafter
terminate.
(iii) In the event of the termination of service as a
director of the Company and its Subsidiaries due to permanent
disability (as determined by the Committee), the Option (to the extent
exercisable as of the date of termination), shall be exercisable for 3
years following such termination of service (but in no event beyond
the term of the Option), and shall thereafter terminate.
(h) Except as expressly provided in this Section 9, any Option
granted to a Non-Employee Director hereunder shall be subject to the terms and
conditions of the Plan.
10. Change in Control. Upon the occurrence of a Change in Control, all
-----------------
Options shall automatically become vested and exercisable in full and all
restrictions or conditions, if any, on any stock awards granted hereunder shall
automatically lapse. The Committee may, in its discretion, include such further
provisions and limitations in any agreement documenting such Options as it may
deem equitable and in the best interests of the Company.
11. Forfeiture. Notwithstanding anything in the Plan to the contrary,
----------
the Committee may provide in any Award agreement that in the event of a serious
breach of conduct by the person granted such Award (including, without
limitation, any conduct prejudicial to or in conflict with the Company or its
Subsidiaries), or any activity of any such person in competition with any of the
businesses of the Company or any Subsidiary, (a) cancel any outstanding Award
granted to such person, in whole or in part, whether or not vested, and/or (b)
if such conduct or activity occurs within 1 year following the exercise or
payment of an Award, require such person to repay to the Company any gain
realized or payment received upon the exercise or payment of such Award (with
such gain or payment valued as of the date of exercise or payment). Such
cancellation or repayment obligation shall be effective as of the date specified
by the Committee. Any repayment obligation may be satisfied in Common Stock or
cash or a combination thereof (based upon the Fair Market Value of Common Stock
on the day prior to the date of payment), and the Committee may provide for an
offset to any future payments owed by the Company or any Subsidiary to such
person if necessary to satisfy the repayment obligation. The determination of
whether any such person has engaged in a serious
8
<PAGE>
breach of conduct or any activity in competition with any of the businesses of
the Company or any Subsidiary shall be determined by the Committee in good faith
and in its sole discretion. This Section 11 shall have no application following
a Change in Control.
12. Withholding. The Company shall have the right to deduct from any
-----------
payment to be made pursuant to the Plan the amount of any taxes required by law
to be withheld therefrom, or to require a Participant to pay to the Company in
cash such amount required to be withheld prior to the issuance or delivery of
any shares of Common Stock or the payment of cash under the Plan. Such taxes may
be paid by (a) delivering previously owned shares of Common Stock or (b) having
the Company retain shares of Common Stock which would otherwise be delivered
upon exercise or payment of Awards or (c) any combination of a cash payment or
the methods set forth in (a) and (b) above. For purposes of (a) and (b) above,
shares of Common Stock shall be valued at Fair Market Value determined as of the
day immediately prior to exercise or payment. If and to the extent authorized by
the Committee, the Company may, upon election by a Participant, withhold from
any distribution of Common Stock hereunder shares of Common Stock with a Fair
Market Value in excess of the Participant's required withholding obligation.
13. Nontransferability, Beneficiaries. Unless otherwise determined by
---------------------------------
the Committee with respect to the transferability of Nonqualified Stock Options
by a Participant to his Immediate Family Members (or to trusts or partnerships
or limited liability companies established for such family members), no Award
shall be assignable or transferable by the Participant, otherwise than by will
or the laws of descent and distribution or pursuant to a beneficiary
designation, and Options shall be exercisable, during the Participant's
lifetime, only by the Participant (or by the Participant's legal representatives
in the event of the Participant's incapacity). Each Participant may designate a
beneficiary to exercise any Option held by the Participant at the time of the
Participant's death or to be assigned any other Award outstanding at the time of
the Participant's death. If no beneficiary has been named by a deceased
Participant, any Award held by the Participant at the time of death shall be
transferred as provided in his will or by the laws of descent and distribution.
Except in the case of the holder's incapacity, an Option may only be exercised
by the holder thereof.
14. No Right to Employment. Nothing contained in the Plan or in any
----------------------
Award under the Plan shall confer upon any employee any right with respect to
the continuation of employment with the Company or any of its Subsidiaries, or
interfere in any way with the right of the Company to terminate his or her
employment at any time. Nothing contained in the Plan shall confer upon any
employee or other person any claim or right to any Award under the Plan.
15. Governmental Compliance. Each Award under the Plan shall be
-----------------------
subject to the requirement that if at any time the Committee shall determine
that the
9
<PAGE>
listing, registration or qualification of any shares issuable or deliverable
thereunder upon any securities exchange or under any Federal or state law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition thereof, or in connection therewith, no such grant or
award may be exercised or shares issued or delivered unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
16. Adjustments. In the event of any change in the outstanding shares
-----------
of Common Stock by reason of any stock dividend or split, recapitalization,
merger, consolidation, spinoff, combination or exchange of shares or other
corporate change, or any distribution to holders of Common Stock other than
regular cash dividends, the number or kind of shares available for Options and
Awards under the Plan may be adjusted by the Committee as it shall in its sole
discretion deem equitable and the number and kind of shares subject to any
outstanding Awards granted under the Plan and the purchase price thereof may be
adjusted by the Committee as it shall in its sole discretion deem equitable to
preserve the value of such Awards.
17. Award Agreement. Each Award under the Plan shall be evidenced by
---------------
an agreement setting forth the terms and conditions, as determined by the
Committee, which shall apply to such Award, in addition to the terms and
conditions specified in the Plan.
18. Amendment. The Board may amend, suspend or terminate the Plan or
---------
any portion thereof at any time, provided that (a) no amendment shall be made
without shareholder approval if such approval is necessary to comply with any
applicable law, regulation or stock exchange rule and (b) except as provided in
Section 16, no amendment shall be made that would adversely affect the rights of
a Participant under an Award theretofore granted, without such Participant's
written consent.
19. General Provisions.
------------------
(a) The Committee may require each Participant purchasing or
acquiring shares pursuant to an Award under the Plan to represent to and agree
with the Company in writing that such Participant is acquiring the shares for
investment and without a view to distribution thereof.
(b) All certificates for shares of Common Stock delivered under
the Plan pursuant to any Award shall be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed, and any
applicable Federal or state securities law, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions. If the Committee determines that the
10
<PAGE>
issuance of shares of Common Stock hereunder is not in compliance with, or
subject to an exemption from, any applicable Federal or state securities laws,
such shares shall not be issued until such time as the Committee determines that
the issuance is permissible.
(c) It is the intent of the Company that the Plan satisfy, and be
interpreted in a manner that satisfies, the applicable requirements of Rule 16b-
3 as promulgated under Section 16 of the Exchange Act so that Participants will
be entitled to the benefit of Rule 16b-3, or any other rule promulgated under
Section 16 of the Exchange Act, and will not be subject to short-swing liability
under Section 16. Accordingly, if the operation of any provision of the Plan
would conflict with the intent expressed in this Section 19(c), such provision
to the extent possible shall be interpreted and/or deemed amended so as to avoid
such conflict.
(d) Except as otherwise provided by the Committee in the
applicable grant or Award agreement, a Participant shall have no rights as a
shareholder with respect to any shares of Common Stock subject to Options until
a certificate or certificates evidencing shares of Common Stock shall have been
issued to the Participant and, subject to Section 16, no adjustment shall be
made for dividends or distributions or other rights in respect of any share for
which the record date is prior to the date on which Participant shall become the
holder of record thereof.
(e) The law of the State of New Jersey shall apply to all Awards
and interpretations under the Plan regardless of the effect of such state's
conflict of laws principles.
(f) Where the context requires, words in any gender shall include
any other gender.
20. Term of Plan. Subject to earlier termination pursuant to Section
------------
18, the Plan shall have a term of 10 years from its Effective Date.
21. Effective Date; Approval of Shareholders. The Plan is effective as
----------------------------------------
of July 24, 1997. The Plan is conditioned upon the approval of the shareholders
of the Company, and failure to receive their approval shall render the Plan and
all outstanding Awards issued thereunder void and of no effect; provided,
--------
however, that this limitation shall have no effect upon the occurrence of a
- -------
Change in Control before such shareholder approval, and all Awards shall be
exercisable in accordance with their terms.
11
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 9,999 10,912
<SECURITIES> 2,614 8,421
<RECEIVABLES> 24,842 18,732
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,290 42,234
<PP&E> 3,354 3,391
<DEPRECIATION> 1,071 1,536
<TOTAL-ASSETS> 48,984 49,215
<CURRENT-LIABILITIES> 11,294 11,802
<BONDS> 0 0
0 0
0 0
<COMMON> 32,516 32,198
<OTHER-SE> 3,017 2,978
<TOTAL-LIABILITY-AND-EQUITY> 48,984 48,984
<SALES> 0 0
<TOTAL-REVENUES> 55,077 50,081
<CGS> 0 0
<TOTAL-COSTS> 28,690 29,623
<OTHER-EXPENSES> 25,559 26,571
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,317 3,842
<INCOME-TAX> 1,344 2,491
<INCOME-CONTINUING> 1,973 1,351
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,973 1,351
<EPS-PRIMARY> .17 .12
<EPS-DILUTED> .17 .12
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