<PAGE> 1
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, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from
Commission File Number 0-26138
DENDRITE INTERNATIONAL, INC.
(Exact name of registrant as specified in its Charter)
New Jersey 22-2786386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Mount Kemble Avenue
Morristown, NJ 07960
973-425-1200
(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
Class Shares Outstanding at November 4, 1998
----- --------------------------------------
<S> <C>
Common Stock 23,241,612
</TABLE>
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DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Statements of Operations
Three months and nine months ended September 30, 1998 and 1997 3
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
2
<PAGE> 3
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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 1,116 $ 2,370 $ 8,386 $ 5,189
Services 29,352 17,998 73,036 49,888
-------- -------- -------- --------
30,468 20,368 81,422 55,077
-------- -------- -------- --------
Cost of revenues:
Cost of license fees 379 729 1,764 1,393
Cost of services 13,645 8,795 35,941 26,923
-------- -------- -------- --------
14,024 9,524 37,705 28,316
-------- -------- -------- --------
Gross margin 16,444 10,844 43,717 26,761
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 10,280 7,678 28,701 21,688
Research and development 847 606 2,617 1,942
Write-off of in-process research
and development 1,230 -- 1,230 --
-------- -------- -------- --------
12,357 8,284 32,548 23,630
-------- -------- -------- --------
Operating income 4,087 2,560 11,169 3,131
Interest income 280 100 690 366
Other income (expense) 117 (21) (248) (180)
-------- -------- -------- --------
Income before income taxes 4,484 2,639 11,611 3,317
Income taxes 2,043 1,047 4,751 1,344
-------- -------- -------- --------
Net income $ 2,441 $ 1,592 $ 6,860 $ 1,973
======== ======== ======== ========
Net income per share:
Basic $ .11 $ .07 $ .31 $ .09
======== ======== ======== ========
Diluted $ .10 $ .07 $ .28 $ .09
======== ======== ======== ========
Shares used in computing net income per share:
Basic 22,705 22,201 22,475 22,265
======== ======== ======== ========
Diluted 24,818 23,226 24,437 22,942
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 24,929 $ 15,917
Short-term investments 1,384 2,955
Accounts receivable, net 28,306 24,724
Prepaid expenses and other 2,771 2,222
Deferred tax asset 441 441
-------- --------
Total current assets 57,831 46,259
Property and equipment, net 3,957 3,110
Deferred taxes 667 667
Goodwill, net 2,619 575
Capitalized software development costs, net 3,304 2,408
-------- --------
$ 68,378 $ 53,019
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,796 $ 2,211
Income taxes payable 997 867
Accrued compensation and benefits 3,943 3,439
Other accrued expenses 7,424 4,352
Deferred revenues 1,346 1,409
-------- --------
Total current liabilities 16,506 12,278
-------- --------
Deferred rent 456 598
-------- --------
Deferred taxes 2,293 1,970
-------- --------
Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 100,000,000 shares
authorized, 23,209,612 and 22,659,548 shares issued
and 22,808,612 and 22,258,548 outstanding 36,965 32,814
Retained earnings 16,128 9,268
Deferred compensation (1,160) (1,141)
Cumulative translation adjustment (883) (841)
Less treasury stock, at cost (1,927) (1,927)
-------- --------
49,123 38,173
-------- --------
$ 68,378 $ 53,019
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income $ 6,860 $ 1,973
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,116 2,018
Deferred income taxes -- 73
Write-off of in-process research and development 1,230 --
Changes in assets and liabilities:
Increase in accounts receivable (3,859) (6,110)
Increase in prepaid expenses and other (536) (691)
Increase (decrease) in accounts payable and accrued expenses 3,708 (670)
Decrease in deferred rent (142) (128)
Increase in income taxes payable 130 673
Decrease in deferred revenues (37) (511)
-------- --------
Net cash provided by (used in) operating activities 9,470 (3,373)
-------- --------
Investing activities:
Purchases of short-term investments (3,942) (2,843)
Sales of short-term investments 5,513 8,650
Purchase of ABC, net of cash acquired (2,295) --
Purchases of property and equipment (1,261) (918)
Additions to capitalized software development costs (1,067) (756)
-------- --------
Net cash provided by (used in) investing activities (3,052) 4,133
-------- --------
Financing activities:
Purchase of Treasury Stock -- (1,927)
Issuance of Common Stock 2,594 384
-------- --------
Net cash provided by (used in) financing activities 2,594 (1,543)
-------- --------
Effect of foreign exchange rate changes on cash -- (130)
-------- --------
Net increase (decrease) in cash and cash equivalents 9,012 (913)
Cash and cash equivalents, beginning of period 15,917 10,912
-------- --------
Cash and cash equivalents, end of period $ 24,929 $ 9,999
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE> 6
DENDRITE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Dendrite International, Inc. and its
subsidiaries (collectively, 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 and nine month periods
ended September 30, 1998. 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, 1997.
The interim operating results of the Company may not be indicative of
operating results for the full year.
2. Net Income Per Share
The Company has presented net income per share pursuant to Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98.
Basic income per share ("Basic EPS") was computed by dividing the net income
for each period by the weighted average number of shares of Common Stock
outstanding for each period. Diluted income per share ("Diluted EPS") was
computed by dividing net income for each period by the weighted average number
of shares of Common Stock and Common Stock equivalents outstanding during each
period. For the three months ended September 30, 1998 and 1997, Common Stock
equivalents used in computing Diluted EPS were 2,113,000 and 1,025,000,
respectively. For the nine months ended September 30, 1998 and 1997, Common
Stock equivalents used in computing Diluted EPS were 1,962,000 and 677,000,
respectively.
3. Recently Adopted Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS No. 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income.
For the three and nine months ended September 30, 1998 and 1997, the Company
engaged in numerous transactions involving foreign currency, which resulted in
unrealized gains and losses. Total after-tax comprehensive income for the
quarters ended September 30, 1998 and 1997 was $2.564 million and $1.484 million
respectively. Total after-tax comprehensive income for the nine months ended
September 30, 1998 and 1997 was $6.835 million and $1.868 million, respectively.
4. Stock Split
On July 21, 1998, the Company's Board of Directors declared a two-for-one
common stock split. The stock split was distributed in the form of a 100% stock
dividend on August 21, 1998 to stockholders of record as of August 11, 1998. All
share and per share information have been retroactively adjusted to reflect the
stock split.
5. Certain Reclassifications
During the second quarter of 1998, the Company determined that costs
associated with certain activities that were previously classified as research
and development expense, should be classified as cost of services, as these
expenditures relate to client specific activities. For consistency of
presentation, prior periods have been reclassified. The reclassification for the
nine months ended September 30, 1998 and 1997 was $2.189 million and $1.929
million, respectively. The reclassification for the three months ended September
30, 1998 and 1997 was $790,000 and $663,000, respectively.
6
<PAGE> 7
6. Acquisition
On July 24, 1998, the Company acquired 100% of the capital stock of Associated
Business Computing N.V. and an affiliated company (collectively, "ABC") for
approximately $4,013,000 and transaction costs of $150,000. The purchase was
accounted for under the purchase method of accounting, whereby the purchase
price is allocated to the assets and liabilities assumed of ABC based on their
respective 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 $1,230,000 to in-process research and
development and such amount was written-off in the accompanying statement of
operations. The Company also recorded $2,226,000 as goodwill. ABC's results of
operations have been included in the Company's financial statements from the
date of acquisition.
7
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of section 27A of the Securities Act of 1933, as amended, and Section
21-E of the Securities Exchange Act of 1934, as amended, which are intended to
be covered by the safe harbors created thereby. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Investors are cautioned that
all forward-looking statements involve risks and uncertainties, including the
factors set forth under "Factors that May Affect Future Operating Results", many
of which are beyond the Company's control. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate and there can be no
assurance that actual results will be the same as those indicated by the
forward-looking statements included in this Form 10-Q. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Moreover, the Company assumes no obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
Overview
The Company succeeded in 1991 to a business co-founded in 1986 by the
Company's current Chairman, President and Chief Executive Officer to provide
comprehensive Electronic Territory Management ("ETM") solutions to be used to
manage, coordinate and control the activities of large sales forces in complex
selling environments, primarily in the ethical pharmaceutical industry. Today,
the Company's solutions combine advanced software products with a wide range of
specialized support services including implementation services, technical and
hardware support services and sales force support services. The Company
develops, implements and services advanced ETM systems in the United States,
Canada, Western Europe, Japan, Australia, New Zealand and Brazil through its own
sales, support and technical personnel located in offices worldwide.
The Company generates revenues from two sources: service and license
fees. Service revenues, which account for a substantial majority of the
Company's revenues, consist of fees from a wide variety of contracted services
which the Company makes available to its customers, generally under multi-year
contracts. Customization and implementation fees are generated from services
provided to modify and implement the ETM solution for the customer. Technical
and hardware support fees are derived from services related to the operation of
the customer's server computers and from the provision of ongoing technical and
customer service support including customization of the software following
initial implementation. Sales force support fees are derived from organizing and
managing support for the customer's sales force.
License fees are charged by the Company for use of its proprietary
computer software. Customers generally pay one-time perpetual license fees based
upon the number of users, territory covered and the number of modules in the
particular system licensed by the customer. The Company generally 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, if any. For license
contracts that contain customer acceptance provisions, revenue is not recognized
until such time as the acceptance provisions are satisfied. Certain license
revenue relates to software which the Company considers to be off-the-shelf.
These revenues are generally recognized upon delivery of the software.
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 United States, the United Kingdom, France and Japan are the
Company's main markets. Approximately 42% and 22% of the Company's total
revenues were generated outside the United States during the three month periods
ended September 30, 1997 and 1998, respectively. Approximately 46% and 27% of
the Company's total revenues were generated outside the United States during the
nine month periods ended September 30, 1997 and 1998, respectively. This
decrease in the percentage of revenues generated outside the United States was
principally due to very strong revenue growth in the United States
pharmaceutical and consumer packaged goods businesses, in addition to a modest
revenue decline outside the United States, concentrated in Europe. Services
provided by Dendrite's foreign branches and subsidiaries are billed in local
currency. License fees for Dendrite products are billed in U.S. dollars
regardless of where they originate. Operating results generated in local
currencies are translated into United States dollars at the average exchange
rate in effect for the reporting period.
8
<PAGE> 9
Results of Operations
Three Months Ended September 30, 1997 and 1998
Revenues. Total revenues increased $10.100 million or 50% from $20.368
million in the three months ended September 30, 1997 to $30.468 million in the
three months ended September 30, 1998.
License fee revenues decreased 53% from $2.370 million in the three
months ended September 30, 1997 to $1.116 million in the three months ended
September 30, 1998. This decrease was primarily attributable to the acceleration
of anticipated license revenues into the first half of the year as a result of
efficiencies realized during the implementation process for significant new
licencees, as well as the absence of significant third party software resales.
Service revenues increased 63% from $17.998 million in the three months
ended September 30, 1997 to $29.352 million in the three months ended September
30, 1998. This increase was primarily the result of an increase in the Company's
installed base of Dendrite ETM systems at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to the Company's existing customers.
Cost of Revenues. Cost of revenues increased $4.500 million or 47% from
$9.524 million in the three months ended September 30, 1997 to $14.024 million
in the three months ended September 30, 1998.
Cost of license fees decreased 48% from $729,000 in the three months
ended September 30, 1997 to $379,000 in the three months ended September 30,
1998. Cost of license fees for the three months ended September 30, 1998
represents the amortization of capitalized software development costs of
$332,000 and third party vendor license fees of $47,000. Cost of license fees
for the three months ended September 30, 1997 represents the amortization of
capitalized software development costs of $272,000 and third party license fees
of $457,000. The increase in the amortization of capitalized software
development costs is due to the increase in capitalized software development
costs during 1997 associated with the Company's development efforts in
conjunction with new products. The decline in cost of third party vendor license
fees is attributable to the absence of significant third party software sales.
Cost of services increased 55% from $8.795 million in the three months
ended September 30, 1997 to $13.645 million in the three months ended September
30, 1998. This increase was primarily due to an increase in staff required to
support higher client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 49% of service revenues in the three months ended September 30,
1997 to 46% in the three months ended September 30, 1998. This decrease was
primarily the result of increased operational efficiencies in 1998.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 34% from $7.678 million in the three months ended September 30, 1997
to $10.280 million in the three months ended September 30, 1998. This increase
was primarily attributable to increased staff required for sales and support
operations, severance costs associated with the Company's European business and
significantly higher incentive compensation expense for its United States
business. As a percentage of revenue, SG&A expenses decreased from 38% in
the three months ended September 30, 1997 to 34% in the three months ended
September 30, 1998, due to leveraging the fixed cost elements in general and
administrative expenses over a higher revenue base.
Research and Development Expenses. Research and development expenses
increased 40% from $606,000 in the three months ended September 30, 1997 to
$847,000 in the three months ended September 30, 1998. As a percentage of
revenues, research and development expenses remained relatively constant at 3%.
The increase in research and development expenses during the most recent period
was primarily attributable to increased spending on development of the Company's
Consumer Packaged Goods products, the continued development of Force
MultiplieRx(TM) and the development of the next generation pharmaceutical ETM
system, Force Pharma(TM).
Write-off of in-process research and development costs. The Company
incurred a one-time charge of $1.230 million to record the write-off of
in-process research and development costs resulting from the acquisition of
Associated Business Computing N.V. and an affiliated company ("ABC"). This
amount represents the estimated fair values, based on an independent appraisal,
related to in-process research and development projects that were acquired. The
technology acquired will require substantial additional development by the
Company.
Provision for Income Taxes. The effective tax rate, excluding the
write-off of the in-process research and development which is not tax
deductible, was reduced to 37%, retroactive to the first quarter, during the
three months ended September 30, 1998 as opposed to 40% during the three months
ended September 30, 1997. This decrease was due primarily to the implementation
of tax minimization strategies throughout the world.
9
<PAGE> 10
Nine months Ended September 30, 1997 and 1998
Revenues. Total revenues increased $26.345 million or 48% from $55.077
million in the nine months ended September 30, 1997 to $81.422 million in the
nine months ended September 30, 1998.
License fee revenues increased 62% from $5.189 million in the nine
months ended September 30, 1997 to $8.386 million in the nine months ended
September 30, 1998. This increase was primarily attributable to the recognition
of revenue related to license fees from several significant contracts, new
customer wins for the Company's consumer business division and increased sales
of third party software.
Service revenues increased 46% from $49.888 million in the nine months
ended September 30, 1997 to $73.036 million in the nine months ended September
30, 1998. This increase was primarily the result of an increase in the Company's
installed base of Dendrite ETM systems at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to the Company's existing customers.
Cost of Revenues. Cost of revenues increased $9.389 million or 33% from
$28.316 million in the nine months ended September 30, 1997 to $37.705 million
in the nine months ended September 30, 1998.
Cost of license fees increased 27% from $1.393 million in the nine
months ended September 30, 1997 to $1.764 million in the nine months ended
September 30, 1998. Cost of license fees for the nine months ended September 30,
1998 represents the amortization of capitalized software development costs of
$996,000 and third party vendor license fees of $768,000. Cost of license fees
for the nine months ended September 30, 1997 represents the amortization of
capitalized software development costs of $818,000 and third party vendor
license fees of $575,000. The increase in the amortization of capitalized
software development costs is due to the increase in capitalized software
development costs during 1997 associated with the Company's development efforts
in conjunction with new products. The increase in third party vendor license
fees is attributable to the increase in third party software sales.
Cost of services increased 33% from $26.923 million in the nine months
ended September 30, 1997 to $35.941 million in the nine months ended September
30, 1998. This increase was primarily due to an increase in staff required to
support higher client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 54% of service revenues in the nine months ended September 30,
1997 to 49% in the nine months ended September 30, 1998. This decrease was
primarily the result of increased operational efficiencies in 1998 as well as
unusually high costs in the first quarter of 1997.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 32% from $21.688 million in the nine months ended September 30, 1997
to $28.701 million in the nine months ended September 30, 1998. This increase is
primarily attributable to increased staff required for sales and support
operations. As a percentage of revenue, SG&A expenses decreased from 39% in the
nine months ended September 30, 1997 to 35% in the nine months ended September
30, 1998, due to leveraging the fixed cost elements in general and
administrative expenses over a higher revenue base.
Research and Development Expenses. Research and development expenses
increased 35% from $1.942 million in the nine months ended September 30, 1997 to
$2.617 million in the nine months ended September 30, 1998. As a percentage of
revenues, research and development expenses remained relatively constant at 3%.
The increase in research and development expenses during the most recent period
was primarily attributable to increased spending on development of the Company's
Consumer Packaged Goods products, the continued development of Force
MultiplieRx(TM) and the development of the next generation pharmaceutical ETM
system, Force Pharma(TM).
Write-off of in-process research and development costs. The Company
incurred a one-time charge of $1.230 million to record the write-off of
in-process research and development costs resulting from the acquisition of ABC.
This amount represents the estimated fair values, based on an independent
appraisal, related to in-process research and development projects that were
acquired. The technology acquired will require substantial additional
development by the Company.
Provision for Income Taxes. The effective tax rate, excluding the
write-off of the in-process research and development which is not tax
deductible, was reduced to 37% during the nine months ended September 30, 1998
as opposed to 41% during the nine months ended September 30, 1997. This decrease
was due primarily to the implementation of tax minimization strategies
throughout the world.
10
<PAGE> 11
Liquidity and Capital Resources
On January 16, 1997 the Board of Directors approved a stock buy-back
program initially limited to $3,000,000, which subject to further Board review
and approval could be increased to a maximum of $10,000,000, but not greater
than 9% of the Company's outstanding shares of Common Stock. During the nine
months ended September 30, 1997, the Company repurchased 401,000 shares of
Common Stock for a total value of $1,927,000.
The Company has historically financed its operations primarily through
cash generated by operations. Net cash provided by operating activities was
$9.470 million for the nine months ended September 30, 1998 compared to cash
used in operating activities of $3.373 million for the nine months ended
September 30, 1997. This increase is due primarily to higher net income, as well
as more efficient accounts receivable and liability management during the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997.
Cash used in investing activities was $3.052 million in the nine months
ended September 30, 1998 compared to cash obtained from investing activities of
$4.133 million in the nine months ended September 30, 1997. This change was due
primarily to the decreased sales of short-term investments as well as the
purchase of ABC in the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997.
The Company obtained $2.594 million of cash from financing activities
in the nine months ended September 30, 1998 compared to the utilization of
$1.543 million in cash from financing activities in the nine months ended
September 30, 1997. The change in the Company's cash provided from financing
activities is due an increase in the issuance of common stock primarily from the
exercise of employee stock options during the nine months ended September 30,
1998 and open-market purchases of its common stock during the nine months ended
September 30, 1997.
The Company maintains a $5.0 million revolving line of credit agreement
with the Chase Manhattan Bank, N.A. The agreement provides for borrowing up to
$1.0 million 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 $5.0 million line of credit is secured by
substantially all of the Company's assets. The $5.0 million line of credit
agreement requires the Company to maintain a minimum consolidated net worth,
among other covenants, measured quarterly, which is equal to the Company's net
worth as of December 31, 1994 plus 50% of net income earned after December 31,
1994 and plus the net proceeds of any stock offering. This covenant has the
effect of limiting the amount of cash dividends the Company may pay. At
September 30, 1998, there were no borrowings outstanding under the agreement.
At September 30, 1998, the Company's working capital was approximately
$41.325 million. The Company has no significant capital spending or purchasing
commitments other than normal purchase commitments and commitments under
facility and capital leases. The Company believes that available funds,
anticipated cash flows from operations and its line of credit will satisfy the
Company's projected working capital and capital expenditure requirements,
exclusive of cash required for possible acquisitions of businesses, products
and technologies, through at least the next two years.
Management regularly evaluates opportunities to acquire products or
businesses complementary to the Company's operations. Such acquisition
opportunities, if they arise, and are successfully completed, may involve the
use of cash or equity instruments.
Year 2000
The year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a loss of data or temporary inability to process data or transactions.
The efficient operation of the Company's business is dependent in part
on computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). Since 1997, as part of its
Year 2000 compliance program, the Company has been evaluating its Internal
Programs and Systems to identify potential Year 2000 compliance problems. To the
extent practicable, the Company has completed testing of the Internal Programs
and Systems. As a result of the testing, the Company has determined that some of
its Internal Programs and Systems are not Year 2000 compliant. The Company has
begun and will continue to modify or replace some of its Internal Programs and
Systems to make such Internal Programs and Systems Year 2000 compliant. The
Company is also communicating with its suppliers and others to coordinate Year
2000 conversion and is requesting assurances from all software vendors from
which it may purchase or license software that such software will correctly
process all date information at all times.
11
<PAGE> 12
Based on present information, the Company believes that it will be able
to achieve such Year 2000 compliance through a combination of modification of
some existing Internal Programs and Systems and the replacement of other
Internal Programs and Systems with new programs and systems that are already
Year 2000 compliant. Dendrite expects to have its Year 2000 compliance program
substantially completed by the end of the first quarter of 1999. However, no
assurance can be given that these efforts will be successful or completed in a
timely manner.
The Company believes most of its ETM systems and other software
products (in base line form) which it licenses to customers (collectively, its
"External Programs and Systems") will be Year 2000 compliant. Dendrite defines
"Year 2000 compliant" to mean that the applicable Dendrite product is capable of
recognizing and processing date data beyond the Year 2000 as belonging to the
correct century provided all products (for example, hardware, firmware, and
software including interfacing programs, operating systems and database engines)
used with the software are Year 2000 compliant and properly exchange data with
it. Dendrite uses an industry-recognized methodology known as "windowing" for
Year 2000 compliance for its current software products.
The Company, however, has identified the products that will not process
dates beyond December 31, 1999. Such older products are mature products and will
not be supported by Dendrite. In addition, as a result of certain products being
customized in the process of installation, it is possible that dates were
hardcoded to "19xx" during such process. In order to determine whether any such
hardcoding has occurred, the Company has strongly encouraged each customer to
have its product tested by Dendrite for Year 2000 compliance.
To date, the Company has spent approximately $100,000 to evaluate, test
and remediate, if necessary, its Internal Programs and Systems for Year 2000
compliance problems and expects to spend up to an additional $50,000 through
2000. These costs will be funded through cash flows from operations. To date,
the Company has not spent any material amount on evaluating the Year 2000
compliance status of its ETM systems and software products licensed to customers
and does not anticipate any future material expenditures. The Company expects
that the expenses and capital expenditures associated with achieving Year 2000
compliance will not have a material adverse effect on its results of operations
or financial condition. For a discussion of the risks associated with the Year
2000, see "Factors that May Affect Future Operating Results - Risks to the
Company Relating to the Year 2000".
Because of the Company's relatively advanced state of readiness, the
Company has not yet formulated a reasonably likely worst case scenario. During
the first quarter of 1999, as the Company assesses the state of readiness for
January 1, 2000, the Company expects to formulate such a scenario and to
prepare a contingency plan, if the reasonably likely worst case scenario
warrants such a contingency plan.
Factors that May Affect Future Operating Results
Impact on Company of changes in ethical drug market. A majority of the
Company's ETM systems are currently used in connection with the marketing and
sale of prescription-only drugs ("ethical pharmaceutical products" or "ethical
drugs"). The market currently serviced by the Company is undergoing a number of
significant changes, including (i) consolidations and mergers which may reduce
the number of existing and potential customers of the Company, (ii) the
increasing prescription of generic drugs, in substitution for ethical drugs,
produced by manufacturers which do not use a Company ETM system, (iii) the trend
toward the reclassification of formerly prescription-only drugs to permit their
over-the-counter sale and (iv) competitive pressures on the Company's
pharmaceutical customers resulting from the increasing emphasis in the United
States on the delivery of healthcare through managed care organizations such as
health maintenance organizations and preferred provider organizations,
consolidation of the managed care industry in the United States and other
changes in healthcare delivery systems occurring in other countries. Any one or
more of these changes may adversely affect the Company's business, operating
results or financial condition. The Company may also be materially affected by
legislative enactments which alter the structure of, or increase regulations
governing, the healthcare systems in any of the countries where Company
customers and potential customers are located, including, without limitation,
government mandated price reductions in the price of ethical pharmaceutical
products. There can be no assurance that the Company can respond positively to
all of these and other changes in the marketplace and maintain profitability.
Potential for significant fluctuations in quarterly results;
seasonality; lengthy sales and implementation cycle. The Company's quarterly
revenues, expenses and operating results have varied considerably in the past
and are likely to vary from quarter to quarter in the future. Fluctuations in
the Company's revenues depend on a number of factors, some of which are beyond
the Company's control. These factors include, among others, the timing of
contracts, delays in customer installation of the Company's software, the length
of sales cycles, customer budget changes and changes in pricing policy by the
Company or its competitors. For example, the Company incurred a net loss of $3.3
million in the fourth quarter of 1996, which loss was attributable to, among
other things, the delay of certain new license purchases by an existing
customer, the delay of an existing client's upgrade decision, the postponement
of certain post-production implementations for an existing client in multiple
country sites and increased research and development spending.
The Company establishes its expenditure levels for product development,
personnel 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 a
significant portion of the Company's expenses do not vary with its revenues.
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<PAGE> 13
In addition, the Company's quarterly license fees and service revenues
may vary due to seasonal, cyclical and other factors. Selection of an ETM system
often entails an extended decision-making process for the customer because of
the substantial costs and strategic implications associated with acquiring the
system. Senior levels of management are often involved in this process, given
the importance of the decision as well as the risks faced by the customer should
a system fail or not perform as expected. Depending upon the size of the system
and the associated computer hardware and software costs, senior corporate
management or even the board of directors of a customer may make the final
decision to license a Company ETM system. Therefore, decisions to acquire a
Company ETM system involve long selling cycles, typically 12 to 18 months for
larger customers, although sometimes as long as 24 months, and usually require
lengthy periods of evaluation prior to full installation and roll-out. In
addition, the Company's ability to recognize license revenue is affected by the
duration of the customization process, if any. Finally, the Company has
historically realized a greater percentage of its annual license fees and
service revenues in the second half of the year than it does in the first half
because, among other things, the Company's customers typically spend more of
their annual budget authorization for ETM products and services in the second
half of the year. However, the interplay among the foregoing factors means that
actual results for a given year may vary from this seasonal expectation. In the
future, because service revenues tend to be less seasonal and cyclical than
license fees, to the extent the percentage of revenue from service revenues from
existing customers of the Company continues to increase, seasonal and cyclical
trends in the Company's revenues may change.
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. While the Company expects to continue
doing so, there can be no assurance that the Company will be successful in
developing and marketing in a timely manner product enhancements or new products
that respond to the technological advances by others, or that its products will
adequately and competitively address the needs of the changing marketplace.
Competition with respect to software products has been characterized by
shortening product cycles, and there can be no assurance that the Company will
not be adversely affected by this trend. If the product cycles for the Company's
systems prove to be shorter than management anticipates, the Company's operating
results could be adversely affected. In addition, in order to remain
competitive, the Company may be required to expend a greater percentage of its
revenues on product innovation and development than historically has been the
case, in which case, the Company's gross profit margins and results of
operations could be materially and adversely affected. In addition, products as
complex as those offered by the Company may contain previously undetected errors
or failures. Such errors have occurred in the past and there can be no assurance
that, despite testing by the Company, errors will not be found in new products
resulting in losses or delays which could have a material adverse effect on the
Company's business, operating results or financial condition.
Recent ETM product offerings by the Company include, and future ETM
product offerings may include, ETM products designed for markets other than the
ethical pharmaceutical market. Recent product offerings also include products
that can be used by customers independently of ETM systems, such as the
analytical tools the Company has recently introduced that permit managers to
analyze data collected by their sales representatives. 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 such markets or with new
products the success it has attained in the ethical pharmaceutical market.
Dependence on major customers. The Company has approximately 77
pharmaceutical customers. Considering all members of an affiliated group to be a
single customer, the Company derived approximately 56%, 58% and 59% of its
revenues in the aggregate in the years ended December 31, 1995, 1996 and 1997,
respectively, from its three largest pharmaceutical customers, two of which had
been among the three largest customers of the Company in terms of revenues in
each of those periods. The Company believes that the costs to its customers of
switching to an ETM system offered by a competitor, or taking significant system
management functions in-house would be substantial. Nevertheless, from time to
time in the past, such a change has been made by some of the Company's customers
with respect to a Company ETM system or all or some of the services offered by
the Company. If such change is made by one or more of the Company's major
customers, the Company's business, operating results or financial condition
could be materially and adversely affected.
Risks from competition. Globally, the current market for sales and
marketing information management systems of the type sold by the Company is
highly competitive. Many companies offer sales force automation and ETM systems.
In addition to Dendrite, the Company believes that there are several companies
which supply products automating sales, marketing and customer service functions
and specifically target the pharmaceutical industry. The Company believes at
least four of these companies are actively selling in more than one country. In
addition, the other vertical markets in which the Company markets its products
possess numerous vendors who market and sell sales force automation and ETM
systems. The Company believes that most of its competitors offer a variety of
less configurable software products, which are typically available more rapidly
than Company systems and often at a substantially lower price. In addition,
competition will increase as new competitors enter the market to supply ETM
systems and as existing competitors expand their product lines or consolidate.
The Company expects it may encounter additional competition in the
future from firms offering outsourcing of information technology services, from
purveyors of software products providing specialized applications not offered by
the Company, including enterprise resource planning vendors and database vendors
not currently in this market space to any substantial degree, and from the
development and/or operation of in-house systems by its customers and potential
customers. Many of the Company's competitors and potential competitors have
longer operating histories and significantly greater financial, technical,
sales, marketing and other resources than those of the Company. Some of the
Company's competitors and potential competitors are part of large corporate
groups with significantly greater resources and broader technology bases than
those of the Company. There can be no assurance that the Company will be able to
compete successfully or that competition will not have a material adverse effect
on the Company's business, operating results or financial condition.
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<PAGE> 14
Reliance on competitors for market data. Current market data on the
sales of ethical pharmaceutical products is an important element for the
operation of Company ETM systems, which the Company's customers use to guide and
organize their sales forces and marketing efforts. There are currently few
sources of such data in the United States, Europe and the Pacific Rim. Two of
the leading purveyors of such market information in the United States or
elsewhere compete with the Company either directly or through affiliates in the
market for ETM systems. Were these purveyors of market information to require
that pharmaceutical companies also utilize their ETM systems (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 continue to account for a
material part of its revenues. Licensing software and providing services in many
foreign countries is subject to risks inherent in international business
activities. Risks include general economic conditions in each such country, the
effect of applicable foreign tax structures, tariff and trade regulations,
difficulties in obtaining local licenses, the difficulty of managing an
organization spread over various jurisdictions, unexpected changes in regulatory
environments, complying with a variety of foreign laws and regulations and any
adverse changes in the political environments in any such countries. In
addition, laws in foreign countries may not always provide protection for the
Company's proprietary rights in its software products. Providing specialized
system support services outside the United States paid for in local currencies
carries the additional risk of currency fluctuation and may also affect the net
income, if any, reported by the Company.
Dependence on key personnel, management of growth. The success of the
Company depends to a significant extent upon the contributions of its executive
officers and key sales, technical and customer service personnel. The Company
maintains a $3 million key man insurance policy on Mr. John Bailye, its
Chairman, President and Chief Executive Officer, the proceeds of which are
payable to the Company. 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, technical employees and 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 its growth effectively, the Company must continue to
strengthen its operational, financial and management information systems, and
expand, train and manage its work force. There can be no assurance that the
Company will be able to do so on a timely basis. Failure to do so effectively
and on a timely basis could have a material adverse effect upon the Company's
business, operating results or financial condition.
Dependence on proprietary technology. The Company relies on a
combination of trade secret, copyright and trademark laws, non-disclosure and
other contractual agreements, and technical measures to protect its proprietary
rights in its products. There can be no assurance that the steps taken by the
Company will prevent misappropriation of this technology. Further, there can be
no assurance that such protective steps will preclude competitors from
developing products with features similar to the Company's products. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties. There
can be no assurance, however, that third parties will not assert infringement
claims against the Company in the future or that any such claims will not
require the Company to enter into royalty arrangements or result in costly
litigation involving the imposition of damages or injunctive relief against the
Company, any of which could materially and adversely affect the Company's
business, operating results and financial condition.
Risks to the Company relating to the Year 2000. A substantial amount of
current demand for applications software may be generated by customers in the
process of replacing and upgrading applications in order to accommodate the
change in date to the year 2000. Once such customers have completed such
activities, the Company may experience a significant deceleration in this source
of revenue which is expected to contribute to its 1999 annual growth. In
addition, the expense and time associated with remediation efforts by customers
to address Year 2000 compliance problems for software products other than the
Company's, may cause such customers to delay the purchase of, or reduce the
amount spent on the Company's products and services, both before and after
January 1, 2000. Such a reduction, if it occurs, could have a material adverse
effect on the Company's business, operating results or financial condition.
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<PAGE> 15
As part of its Year 2000 compliance plan, the Company has assessed both
the readiness of its Internal Systems and Programs for handling the Year 2000 as
well as the compliance of products sold or licensed by the Company. With respect
to its Internal Programs and Systems, the Company believes that it will be able
to achieve Year 2000 compliance through a modification of some existing Internal
Programs and Systems and the replacement of other Internal Programs and Systems
with new programs and systems that are already Year 2000 compliant. However, if
defects are not timely identified and if continued modifications and conversions
are not made, or not timely completed, the Year 2000 problem could have a
material adverse effect on the Company's operating results and financial
condition.
The Company has designed and tested the most current version of its
products to be Year 2000 compliant. No assurance can be given, however, that the
Company's current products do not contain undetected errors or defects
associated with Year 2000 date functionality that may result in material costs
to the Company. Dendrite defines "Year 2000 compliant" to mean that the
applicable Dendrite product is capable of recognizing and processing date data
beyond the Year 2000 as belonging to the correct century provided all products
(for example, hardware, firmware, and software including interfacing programs,
operating systems, and database engines) used with the software are Year 2000
compliant and properly exchange date data with it. Dendrite uses an
industry-recognized methodology known as "windowing" for Year 2000 compliance
for its current software products.
Some of the Company's older products, however, will not, and some may
not accurately process dates after the date December 31, 1999. To the extent any
of these products are still in use in 1999, the Company will continue to attempt
to migrate these customers to products which are Year 2000 compliant, although
there can be no assurance that this will occur. A failure to migrate any such
customer to a product which is Year 2000 compliant could adversely affect the
Company's business, operating results or financial condition. In addition, the
Company may experience increased expenses which it cannot recoup from customers
in addressing the migration of current customers and introduction of prospective
customers to software that is Year 2000 compliant.
In addition, some customers may attempt to hold the Company responsible
for Year 2000 compliance for hardware or software not supplied or created by the
Company, but used in conjunction with one or more of the Company's products. For
example, the computer systems and software products of other customers with
which the Company's computer systems, software, databases or other technology
interface may not accept input of, store, manipulate and output dates after the
Year 2000 without error or interruption. To the extent any such allegation is
made, the Company intends to defend itself vigorously.
Finally, there can be no assurance that the Company will not incur
material expenses in connection with any claim relating to Year 2000 compliance
of its own products or the products of third parties.
Consumer Business Division. The Company is currently engaged in the
marketing and selling of ETM systems to companies in the over-the-counter
pharmaceutical and consumer packaged goods ("CPG") vertical markets. The selling
environment in this vertical market has competitive and other characteristics
that are unique to it. In addition, the Company believes that the CPG vertical
market is composed of sub-markets each of which may have characteristics unique
to such sub-market. Accordingly, there can be no assurance that the Company will
be able to achieve in these markets the success it has attained in the ethical
pharmaceutical market.
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<PAGE> 1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") dated as of October 28,
1998, by and between Dendrite International Inc. a New Jersey corporation (the
"Company"), and _________, a _________ of the Company (the "Indemnitee"):
WITNESSETH:
WHEREAS, the Indemnitee is presently serving as a __________ of the
Company, and the Company desires the Indemnitee to continue in such capacity;
WHEREAS, the Indemnitee is willing, subject to certain conditions
(including the execution and performance of this Agreement by the Company), to
continue in that capacity;
WHEREAS, in addition to the indemnification to which the Indemnitee is
entitled under the Company's certificate of incorporation (the "Certificate"),
the Company maintains at its sole expense insurance protecting its officers and
directors (including the Indemnitee) against certain losses arising out of
actual or threatened actions, suits or proceedings to which such persons may be
made or threatened to be made parties; and
WHEREAS, as a result of circumstances having no relation to, and beyond the
control of, the Company and the Indemnitee, there can be no assurance of the
continuation or renewal of that insurance;
NOW, THEREFORE, to induce the Indemnitee to continue to serve in his
present capacity and in consideration of these premises and the mutual
agreements set forth in this Agreement, the Company and the Indemnitee agree as
follows:
1. Continued Service. The Indemnitee will continue to serve as [a director
of the Company so long as he is duly elected and qualified in accordance with
the Company's by-laws (the "By-Laws") or until he resigns in writing in
accordance with applicable law] [an executive officer of the Company until
removal by the Board of Directors in accordance with the Company's by-laws (the
"By-Laws") or he resigns in writing in accordance with applicable law].
2. Initial Indemnity. (a) The Company shall indemnify the Indemnitee who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, administrative,
investigative or criminal (other than an action by or in the right of the
Company), by reason of the fact that he is or was or had agreed to become a
[director] [executive officer] of the Company, or is or was serving or had
agreed to serve at the request of the Company as a director, officer, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and expenses
(including attorneys, and others' fees and expenses), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the Indemnitee in
connection therewith and any appeal therefrom if the Indemnitee acted in good
faith and in a manner he reasonably believed to
<PAGE> 2
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendre or its
equivalent shall not, of itself, create a presumption that the Indemnitee did
not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b) The Company shall indemnify the Indemnitee who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by or in the right of the Company to procure a
judgment in its favor by reason of the fact that he is or was or had agreed to
become a [director] [executive officer] of the Company, or is or was serving or
had agreed to serve at the request of the Company as a director, officer,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against costs, charges and expenses (including
attorneys' and others' fees and expenses) actually and reasonably incurred by
him in connection with the defense or settlement thereof or any appeal therefrom
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and except that no indemnification
shall be made in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to the Company unless and only
to the extent that the Superior Court or the court in which such action, suit or
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, the
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the Superior Court or such other court shall deem proper.
(c) To the extent that the Indemnitee has been successful on the
merits or otherwise, including without limitation the dismissal of an action
without prejudice, in any action, suit or proceeding referred to in Sections
2(a) or 2(b) or in defense of any claim, issue or matter therein, he shall be
indemnified against costs, charges and expenses (including attorneys' and
others' fees and expenses) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under Sections 2(a) or 2(b) (unless ordered
by a court) shall be made by the Company only as authorized in the specific case
upon a determination in accordance with Section 4 or any applicable provision of
the Certificate, By-Laws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board of Directors of the Company (the
"Board") by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, (ii) if such a quorum of
disinterested directors is not available or so directs, by independent legal
counsel (designated in the manner provided below in this subsection (d)) in a
written opinion or (iii) by a majority vote of a quorum of the stockholders of
the Company at a meeting duly called and held present (the "Stockholders").
Independent legal counsel shall be designated by vote of a majority of the
disinterested directors; provided, however, that if the Board is unable or fails
to so designate, such designation shall be made by the Indemnitee subject to the
approval of the Company (which approval shall not be unreasonably withheld).
Independent legal counsel shall not be any person or firm who, under the
applicable standards professional conduct then prevailing, would have a conflict
of interest in representing either the Company or the Indemnitee in an action to
2
<PAGE> 3
determine the Indemnitee's rights under this Agreement. The Company agrees to
pay the reasonable fees and expenses of such independent legal counsel and to
indemnify fully such counsel against costs, charges and expenses (including
attorneys' and others fees and expenses) actually and reasonably incurred by
such counsel in connection with this Agreement or the opinion of such counsel
pursuant hereto.
(e) A11 expenses (including attorneys' and others', fees and
expenses) incurred by the Indemnitee in his capacity as a [director] [executive
officer] of the Company in defending an actual or threatened civil or criminal
action, suit or proceeding shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding in the manner prescribed by
Section 4(b).
(f) The Company shall not adopt any amendment to the Certificate or
By-Laws the effect of which would be to deny, diminish or encumber the
Indemnitee's rights to indemnity or encumber the Indemnitee's rights to
indemnity pursuant to the Certificate, By-Laws, the New Jersey Business
Corporation Act (the "Corporation Act") or any other applicable law as applied
to any act or failure to act occurring in whole or in part prior to the date
(the "Effective Date") upon which the amendment was approved by the Board of
Stockholders, as the case may be. If the Company shall adopt any amendment to
the Certificate or By-Laws the effect of which would be to so deny, diminish or
encumber the Indemnitee's rights to indemnity, such amendment shall apply only
to acts or failures to act occurring entirely after the Effective Date thereof.
3. Additional Indemnification. (a) Pursuant to Section 14A:3-5 of the
Corporation Act, without limiting any right which the Indemnitee may have
pursuant to Section 2, the Certificate, the By-Laws, the Corporation Act, any
policy of insurance or otherwise, but subject to the limitations on the maximum
permissible indemnity which may exist under applicable law at the time of any
request for indemnity hereunder determined as contemplated by Section 3(a), the
Company shall indemnify the Indemnitee against any amount which he is or becomes
legally obligated to pay relating to or arising out of any claim made against
him because of any act, failure to act or neglect or breach of duty, including
any actual or alleged error, misstatement or misleading statement, which he
commits, suffers, permits or acquiesces in while acting in his capacity as a
[director] [executive officer] of the Company, or, at the request of the
Company, as a director, officer, trustee, employee or agent of another
corporations partnership, joint venture, trust or other enterprise. The payments
which the Company is obligated to make pursuant to this Section 3 shall include
without limitation damages, judgments, settlements and charges, costs, expenses,
expenses of investigation and expenses of defense of legal actions, suits,
proceedings or claims and appeals therefrom, and expenses of appeal, attachment
or similar bonds; provided, however, that the Company shall not be obligated
under this Section 3(a) to make any payment in connection with any claim against
the Indemnitee if a judgment or other final adjudication adverse to the
Indemnitee establishes that his acts or omissions (i) were in breach of his duty
of loyalty to the Company or the Stockholders, (ii) were not in good faith or
involved a knowing violation of law, or (iii) resulted in receipt by the
Indemnitee of an improper personal benefit. The determination of whether the
Indemnitee shall be entitled to indemnification under this
3
<PAGE> 4
Section 3(a) may be, but shall not be required to, be made in accordance with
Section 4(a). If that determination is so made, it shall be binding upon the
Company and the Indemnitee for all, purposes.
(b) Expenses (including without limitation attorneys' and others'
fees and expenses) incurred by Indemnitee in defending any actual or threatened
civil or criminal action, suit, proceeding or claim shall be paid by the Company
in advance of the final disposition thereof as authorized in accordance with
Section 4(b).
4. Certain Procedures Relating to Indemnification and Advancement of
Expenses. (a) Except as otherwise permitted or required by the Corporation Act,
for purposes of pursuing his rights to indemnification under Sections 2(a), 2(b)
or 3(a), as the case may be, the Indemnitee may, but shall not be required to,
(i) submit to the Board a sworn statement of request for indemnification
substantially in the form of Exhibit A attached hereto and made a part hereof
(the "Indemnification Statement") averring that he is entitled to
indemnification hereunder; and (ii) present to the Company reasonable evidence
of all expenses for which payment is requested, including appropriate invoices.
Submission of an Indemnification Statement to the Board shall create a
presumption that the Indemnitee is entitled to indemnification under Sections
2(a), 2(b) or 3(a), as the case may be, and the Board shall be deemed to have
determined that the Indemnitee is entitled to such indemnification unless within
30 calendar days after submission of the Indemnification Statement the Board
shall determine by vote of a majority of the directors at a meeting at which a
quorum is present, based upon clear and convincing evidence (sufficient to rebut
the foregoing presumption), and the Indemnitee shall have received notice within
such period in writing of such determination, that the Indemnitee is not so
entitled to indemnification, which notice shall disclose with particularity the
evidence in support of the Board's determination. The foregoing notice shall be
signed by the director presiding as chairman at the meeting at which the vote to
deny indemnification was taken or, if the action to deny indemnification was by
written consent without a meeting, signed by all persons who participated in the
determination and voted to deny indemnification. The provisions of this Section
4(a) are intended to be procedural only and shall not affect the right of the
Indemnitee to indemnification under this Agreement, and any determination by the
Board that the Indemnitee is not entitled to the indemnification and any failure
to make the payments requested in the Indemnification Statement shall be subject
to judicial review as provided in Section 7.
(b) For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e), the Indemnitee shall submit to the Board a
sworn statement of request for advancement of expenses substantially in the form
of Exhibit B attached hereto and made a part hereof (the "Undertaking"),
averring that (i) he has reasonably incurred or will reasonably incur actual
expenses in defending an actual or threatened civil or criminal action, suit,
proceeding or claim and (ii) he undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company under this Agreement or otherwise, which repayment shall be made within
180 days of a written request therefor by the Company. For purposes of
requesting advancement of expenses pursuant to Section 3(b), the Indemnitee may,
but shall not be required to, submit an Undertaking or such other form of
4
<PAGE> 5
request, as he determines to be appropriate (an "Expense Request"). Upon receipt
of an Undertaking or Expense Request, as the case may be, the Board may make
reasonable inquiries to determine whether such expenses relate to an action,
suit, proceeding or claim the subject matter of which is of the type for which
the Indemnitee may make a claim for indemnification under this Agreement. Unless
the Board determines within 10 calendar days after receipt of such Undertaking
or Expense Request that such expenses relate to an action, suit, proceeding or
claim the subject matter of which is not of the type for which the Indemnitee
may make a claim for indemnification under this Agreement, the Board shall
authorize immediate payment of the expenses stated in the Undertaking or Expense
Request, as the case may be, whereupon such payments shall immediately be made
by the Company. No security shall be required in connection with any Undertaking
or Expense Request and any Undertaking or Expense Request shall be accepted
without reference to the Indemnitee's ability to make repayment. For purposes of
pursuing his rights to advancement of expenses hereunder, the Indemnitee shall
present to the Company reasonable evidence of all expenses for which advancement
is requested, including appropriate invoices.
5. Subrogation; Duplication of Payments. (a) In the event of payment under
this Agreement, the Company shall be subrogated to the extent of such payment to
all of the rights of recovery of the Indemnitee, who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company
effectively to bring suit to enforce such rights.
(b) The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against the Indemnitee to the extent
the Indemnitee has actually received payment (under any insurance policy, the
Certificate, the By-Laws or otherwise) of the amounts otherwise payable
hereunder.
6. Enforcement. (a) if a claim for indemnification made to the Company
pursuant to Section 4 is not paid in full by the Company within 30 calendar days
after a written claim has been received by the Company, the Indemnitee may at
any time thereafter bring suit against the Company to recover the unpaid amount
of the claim.
(b) In any action brought under Section 6 (a), it shall be a defense
to a claim for indemnification pursuant to Sections 2(a) or 2(b) (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has been tendered to the Company) that the Indemnitee has not met the
standards of conduct which make it permissible under the Corporation Act for the
Company to indemnify the Indemnitee for the amount claimed, but the burden or
proving such defense shall be on the Company. Neither the failure of the Company
(including the Board, independent legal counsel or the Stockholders) to have
made a determination prior to commencement of such action that indemnification
of the Indemnitee is proper in the circumstances because he has met the
applicable standard of conduct set forth in the Corporation Act, nor an actual
determination by the Company (including the Board, independent legal counsel or
the Stockholders) that the Indemnitee has not met such applicable standard of
5
<PAGE> 6
conduct, shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct.
(c) The Indemnitee shall not be required to incur the expenses
associated with the enforcement of his rights under thus Agreement by litigation
or other legal action because the cost and expense thereof would substantially
detract from the benefits intended to be extended to the Indemnitee hereunder.
Accordingly, if the Company has failed to comply with any of its obligations
under this Agreement or if the Company or any other person takes any action to
declare this Agreement void or unenforceable, or institutes any action, suit or
proceeding designed (or having the effect of being designed) to deny, or to
recover from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from
time to time, at the expense of the Company as hereinafter provided, to retain
counsel (in compliance with Section 7) to represent the Indemnitee in connection
with the initiation or defense of any such action, suit, or proceeding, whether
by or against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. The Company shall pay and be
solely responsible for any and all costs, charges and expenses (including
attorneys' and others' fees and expenses) reasonably incurred by the Indemnitee
(i) as a result of the Company's failure to perform this Agreement or any
provision hereof or (ii) as a result of the Company or any Person contesting the
validity or enforceability, of this Agreement or any, provision hereof as
aforesaid.
7. Counsel. With respect to any action, suit, proceeding or claim for
which indemnification or advancement of expenses may be sought pursuant to this
Agreement and upon request of the Indemnitee after the Indemnitee has submitted
an Indemnification Statement to the Board, the Company shall retain counsel
reasonably satisfactory to the Indemnitee to represent the Indemnitee and any
other the Company may designate (which may include the Company) in connection
with the action, suit, proceeding or claim to which the Indemnification
Statement relates. In connection with any such action, suit, proceeding or
claim, the Indemnitee shall have the right to retain his own counsel at his own
expense, except that the fees and expenses of such counsel retained by the
Indemnitee shall be expenses for which indemnification and advancement shall be
available under this Agreement if (i) the Company and the Indemnitee shall have
agreed to the retention of such counsel or (ii) the parties named or threatened
to be named in any such action, suit, proceeding or claim (including impleaded
parties) include, in addition to the Indemnitee, the Company or another party
who may be indemnified by the Company and representation of more than one party
by the same counsel would be inappropriate due to actual or, in the reasonable
opinion of the Company, potential conflicts of interests between them.
8. Merger or Consolidation. If the Company shall be a constituent
corporation in a consolidation, merger or other reorganization, the Company, if
it shall not be the surviving, resulting or other corporation therein, shall
require as a condition thereto the surviving, resulting or acquiring corporation
to agree to indemnify the Indemnitee to the full extent provided in this
Agreement. Whether or not the Company is the resulting, surviving or acquiring
corporation in any such transaction, the Indemnitee shall also stand in the same
position under this Agreement
6
<PAGE> 7
with respect to the resulting, acquiring corporation as he would have with
respect to the Company if its separate existence had continued.
9. Nonexclusivity and Severability. (a) The right to indemnification
provided by this Agreement shall not be exclusive of any other rights to which
the Indemnitee may be entitled under the Certificate, By-Laws, the Corporation
Act, any other statute, insurance policy, agreement, vote of stockholders or
directors or otherwise, both as to actions in his official capacity and as to
actions in another capacity while holding such office, and shall continue after
the indemnitee has ceased to be a director, officer, trustee, employee or agent
and shall inure to the benefit of his heirs, executors and administrators.
(b) If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, unenforceable
or otherwise illegal, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid and legal.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without giving effect to
the principles of conflicts of law thereof.
11. Modification; Survival. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof. This Agreement may be
modified only by an instrument in writing signed by both parties hereto. The
provisions of this Agreement shall survive the death, disability, or incapacity
of the Indemnitee or the termination of the Indemnitee's service as [a director]
[an executive officer] of the Company and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators.
12. Certain Terms. For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to any employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, trustee, employee or agent of the
Company which imposes duties on, or involves services by, the Indemnitee with
respect to an employee benefit plan, its participants or beneficiaries;
references to the masculine shall include the feminine; references to the
singular shall include the plural and vice versa; and if the Indemnitee acted in
good faith and in a manner reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan he shall be deemed to
have acted in a manner "not opposed to the best interests of the Company" as
referenced to herein.
13. Headings and Interpretation. When a reference is made in this
Agreement to Sections or Exhibits, such references shall be to a Section or
Exhibit to this Agreement unless otherwise indicated.
7
<PAGE> 8
IN WITNESS WHEREOF, the Company and the Indemnitee have duly executed this
Agreement as of the date first above written.
DENDRITE INTERNATIONAL, INC.
By:_____________________________
John Bailye, President
________________________________
8
<PAGE> 9
Exhibit A
INDEMNIFICATION STATEMENT
STATE OF ______________________ )
) SS
COUNTY OF _____________________ )
I, ______________________, being first duly sworn, do depose and say as
follows:
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement dated as of October 28, 1998 between Dendrite
International, Inc., a New Jersey corporation (the "Company"), and the
undersigned.
2. 1 am requesting indemnification against charges, costs, expenses
(including attorneys' and others' fees and expenses), judgments, fines and
amounts paid in settlement, all of which (collectively, "Liabilities") have been
or will be incurred by me in connection with an actual or threatened action,
suit, proceeding or claim to which I am a party or am threatened to be made a
party.
3. With respect to all matters related to any action, suit, proceeding or
claim, I am entitled to be indemnified as herein contemplated pursuant to the
aforesaid Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I am
requesting indemnification against Liabilities which have or may arise out of
________________________________________________________________________________
______________________________________________________________________________ .
Subscribed and sworn to before me, a Notary Public in and for said
County and State, this ____________ day of __________________, ____.
______________________________________
[Seal]
My commission expires the ____ day of ______________, ______.
9
<PAGE> 10
Exhibit B
UNDERTAKING
STATE OF _______________________ )
) SS
COUNTY OF ______________________ )
I, _______________________, being first duly sworn, do depose and say as
follows:
1. This Undertaking is submitted pursuant to the Indemnification Agreement
dated as of October 28, 1998 between Dendrite International, Inc., a New Jersey
corporation (the "Company"), and the undersigned.
2. I am requesting advancement of certain costs, charges and expenses
which I have incurred or will incur in defending an actual or threatened civil
or criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it shall
ultimately be determined that I am not entitled to be indemnified by the Company
under the aforesaid Indemnity Agreement or otherwise. Such repayment shall be
made within 180 days of a written request therefore by the Company.
4. The costs, charges and expenses for which advancement is requested are,
in general, all expenses related to_____________________________________________
________________________________________________________________________________
______________________________________________________________________________ .
Subscribed and sworn to before me, a Notary Public in and for said County and
State, this ___ day of _____________, _____.
____________________________________________
[Seal]
My commission expires the ______ day of __________________, ______.
10
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