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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 March 31, 1998
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from
Commission File Number 0-26138
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Dendrite International, Inc.
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(Exact name of registrant as specified in its Charter)
New Jersey 22-2786386
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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1200 Mt. Kemble Avenue
Morristown, NJ 07960
973-425-1200
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(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
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.
Class Shares Outstanding at May 11, 1998
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Common Stock 11,425,619
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DENDRITE INTERNATIONAL, INC.
INDEX
PART I -- FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)
PAGE NO.
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Consolidated Statements of Operations
Three months months ended March 31, 1998 and 1997................. 3
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997.............................. 4
Consolidated Statements of Cash Flows
Three months months ended March 31, 1998 and 1997................. 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.............................. 13
Signatures.......................................................... 13
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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
March 31,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
License fees $ 2,971 $ 1,094
Services 19,656 15,548
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22,627 16,642
-------- --------
Cost of revenues:
Cost of license fees 361 273
Cost of services 9,209 9,208
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9,570 9,481
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Gross margin 13,057 7,161
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Operating expenses:
Selling, general and administrative 8,459 6,373
Research and development 1,584 1,270
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10,043 7,643
-------- --------
Operating income (loss) 3,014 (482)
Interest income 196 128
Other expense 321 57
-------- --------
Income (loss) before income taxes 2,889 (411)
Income taxes 1,127 (145)
-------- --------
Net income (loss) $ 1,762 ($266)
======== ========
Net income (loss) per share:
Basic $0.16 ($0.02)
======== ========
Diluted $0.15 ($0.02)
======== ========
Shares used in computing net income (loss) per share:
Basic 11,162 11,225
======== ========
Diluted 11,950 11,225
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
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Dendrite International, Inc.
Consolidated Balance Sheets
(In thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $19,434 $15,917
Short-term investments 4,332 2,955
Accounts receivable, net 21,102 24,724
Prepaid expenses and other 2,338 2,222
Deferred tax asset 441 441
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Total current assets 47,647 46,259
Property and equipment, net 3,044 3,110
Deferred taxes 667 667
Goodwill, net 532 575
Capitalized software development costs, net 2,360 2,408
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$54,250 $53,019
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,853 $ 2,211
Income taxes payable 1,116 867
Accrued compensation and benefits 2,814 3,439
Other accrued expenses 3,313 4,352
Deferred revenues 1,370 1,409
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Total current liabilities 11,466 12,278
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Deferred rent 553 598
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Deferred taxes 1,970 1,970
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Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 50,000,000 shares
authorized, 11,387,494 and 11,329,774 shares issued
and 11,186,994 and 11,129,274 outstanding 33,441 32,814
Retained earnings 11,030 9,268
Deferred compensation (1,287) (1,141)
Cumulative translation adjustment (996) (841)
Less treasury stock at cost (1,927) (1,927)
-------- --------
40,261 38,173
-------- --------
$54,250 $53,019
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
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Dendrite International, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Operating activities:
Net income (loss) $ 1,762 ($266)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 714 340
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 3,533 (4,373)
Increase in prepaid expenses and other (131) (478)
Decrease in accounts payable and accrued expenses (992) (856)
Decrease in deferred rent (45) (37)
Increase (decrease) in income taxes payable 249 (148)
Decrease in deferred revenues (31) (999)
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Net cash provided by (used in) operating activities 5,059 (6,817)
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Investing activities:
Purchases of short-term investments (1,488) (535)
Sale of short-term investments 111 1,627
Purchases of property and equipment (267) (22)
Additions to capitalized software development costs (284) (181)
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Net cash provided by (used in) investing activities (1,928) 889
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Financing activities:
Purchase of Treasury Stock -- (1,175)
Issuance of Common Stock 426 90
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Net cash provided by (used in) financing activities 426 (1,085)
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Effect of foreign exchange rate changes on cash (40) 154
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Net increase (decrease) in cash 3,517 (6,859)
Cash and cash equivalents, beginning of period 15,917 10,912
------- ------
Cash and cash equivalents, end of period $19,434 $ 4,053
======= ======
</TABLE>
The accompanying notes are an integral part of these statements
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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 month period ended March
31, 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 (Loss) Per Share
The Company has presented net income (loss) 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 (loss) per share ("Basic EPS") was computed by dividing the net
income (loss) for each period by the weighted average number of shares of Common
Stock outstanding for each period. Diluted income (loss) per share ("Diluted
EPS") was computed by dividing net income (loss) 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 March 31, 1998,
Common Stock equivalents used in computing Diluted EPS was 788,000. For the
three months ended March 31, 1997, Common Stock equivalents are not included, as
their effect is antidilutive.
3. Recently Adopted Accounting Pronouncements
During the quarter, 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 (loss).
For the quarters ended March 31, 1998 and 1997, the Company engaged in
numerous transactions involving foreign currency, which resulted in unrealized
gains and losses. Total after-tax comprehensive income (loss) for the quarters
ended March 31, 1998 and 1997 was $1.668 million and ($210,000),
respectively.
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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. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's opinion
only as of the date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.
Overview
The Company succeeded in 1991 to a business co-founded in 1986 by the
Company's current President and Chief Executive Officer to provide comprehensive
Electronic Territory Management ("ETM") solutions to be used to manage,
coordinate and control the activities of large sales forces in complex selling
environments, primarily in the ethical pharmaceutical industry. Today, the
Company's solutions combine advanced software products with a wide range of
specialized support services including implementation services, technical and
hardware support services and sales force support services. The Company
develops, implements and services advanced ETM systems in the United States,
Canada, Western Europe, Japan, Australia, New Zealand, Hong Kong and Brazil
through its own sales, support and technical personnel located in offices
worldwide.
The Company generates revenues from two sources: fees from support services
and license fees. Service revenues, which account for a substantial majority of
the Company's revenues, consist of fees from a wide variety of contracted
services which the Company makes available to its customers, generally under
multi-year contracts. Customization and implementation fees are generated from
services provided to modify and implement the ETM solution for the customer.
Technical and hardware support fees are derived from services related to the
operation of the customer's server computers and from the provision of ongoing
technical and customer service support including customization of the software
following initial implementation. Sales force support fees are derived from
organizing and managing support for the customer's sales force.
License fees are charged by the Company for use of its proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, territory covered and the number of functions in the particular
system licensed by the customer. The Company recognizes one-time license fees as
revenue using the percentage of completion method over a period of time that
commences with execution of the license agreement and concludes with the
completion of initial customization, if any. 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.
The United States, the United Kingdom, France and Japan are the Company's main
markets. Approximately 45% and 34% of the Company's total revenues were
generated outside the United States during the three month periods ended March
31, 1997 and 1998, respectively. Services provided by Dendrite's foreign
branches and subsidiaries are billed in local currency. License fees for
Dendrite products are billed in U.S. dollars regardless of where they originate.
Operating results generated in local currencies are translated into United
States dollars at the average exchange rate in effect for the reporting period.
The efficient operation of the Company's business is dependent in part on
computer software programs and operating systems which it uses internally
(collectively, the "Internal Programs and Systems"). The Company has been
evaluating its Internal Programs and Systems to identify potential Year 2000
compliance problems. These actions are necessary to ensure that the Internal
Programs and Systems will be Year 2000 compliant. It is anticipated that
modification or replacement of some of the Internal Programs and Systems may be
necessary to make such Programs and Systems Year 2000 compliant. The Company is
also communicating with its suppliers and others to coordinate Year 2000
conversion.
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Based on present information, the Company believes that it will be able to
achieve such Year 2000 compliance through a combination of modification of some
existing Internal Programs and Systems and the replacement of other Internal
Programs and Systems with new programs and systems that are already Year 2000
compliant. However, no assurance can be given that these efforts will be
successful. The Company expects that the expenses and capital expenditures
associated with achieving Year 2000 compliance will not have a material effect
on its financial results in 1998 and 1999.
Results of Operations
Three Months Ended March 31, 1997 and 1998
Revenues. Total revenues increased $5.985 million or 36% from $16.642 million
in the three months ended March 31, 1997 to $22.627 million in the three months
ended March 31, 1998.
License fee revenues increased 172% from $1.094 million in the three months
ended March 31, 1997 to $2.971 million in the three months ended March 31,
1998. This increase was primarily attributable to the recognition of revenue
related to license fees from three significant customer implementations during
the three months ended March 31, 1998.
Service revenues increased 26% from $15.548 million in the three months ended
March 31, 1997 to $19.656 million in the three months ended March 31, 1998. This
increase was primarily the result of an increase in the Company's installed base
of Dendrite ETM systems with new and existing customers and the provision of
additional services to the Company's existing customers.
Cost of Revenues. Cost of revenues increased $89,000 or 1% from $9.481 million
in the three months ended March 31, 1997 to $9.570 million in the three months
ended March 31, 1998.
Cost of license fees increased 32% from $273,000 in the three months ended
March 31, 1997 to $361,000 in the three months ended March 31, 1998. Cost of
license fees for the three months ended March 31, 1998 represents the
amortization of capitalized software development costs of $332,000 and third
party vendor license fees of $29,000. Cost of license fees for the three months
ended March 31, 1997 represents the amortization of capitalized software
development costs of $273,000.
Cost of services was flat during the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997. Accordingly, because service
revenue in the period increased over last year's corresponding period, as a
percentage of service revenues, cost of services decreased from 59% of service
revenues in the three months ended March 31, 1997 to 47% in the three months
ended March 31, 1998. During the three months ended March 31, 1997, there was a
$307,000 misclassification of SG&A expense as cost of services, which was
corrected in the second quarter of 1997. After adjusting cost of services by the
$307,000 misclassification, cost of services, as a percentage of service
revenues would have been 57%. The decrease in cost of services as a percentage
service revenues was primarily due to the Company's efforts in the area of cost
control.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased
33% from $6.373 million in the three months ended March 31, 1997 to $8.459
million in the three months ended March 31, 1998. After adjusting SG&A expenses
by $307,000 for the misclassification during the three months ended March 31,
1997, SG&A expenses increased 27%. As a percentage of revenue, SG&A expenses,
after the correction for the misclassification, decreased from 40% in three
months ended March 31, 1997 to 37% in the three months ended March 31, 1998.
Research and Development Expenses. Research and development expenses increased
25% from $1.270 million in the three months ended March 31, 1997 to $1.584
million in the three months ended March 31, 1998. As a percentage of revenues,
research and development expenses decreased from 8% in the three months ended
March 31, 1997 to 7% in the three months ended March 31, 1998. The increase in
research and development expenses during the most recent period was primarily
attributable to increased spending on the development of the Company's Consumer
Packaged Goods products, the continuing development of Force MultiplieRx(TM) and
the development of the next generation pharmaceutical ETM system.
Provision for Income Taxes. The effective tax rate remained relatively
constant at 39% in the three months ended March 31, 1998.
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Other Expense. Other expense increased $264,000 from $57,000 in the three
months ended March 31, 1997 to $321,000 in the three months ended March 31,
1998. This increase was primarily attributable to a one time expense associated
with correcting administrative errors by the plan administrator in the Company's
401(k) plan that relates to the 1994 and 1995 plan years. These errors were
found in the three months ended March 31, 1998, and the Company estimated the
associated costs during this period.
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 three months
ended March 31, 1997, the Company repurchased 119,500 shares of Common Stock for
a total value of $1,175,000.
The Company has historically financed its operations primarily through cash
generated by operations. Net cash provided by operating activities was $5.059
million for the three months ended March 31, 1998 compared to cash used in
operating activities of $6.817 million for the three months ended March 31,
1997. This increase is due primarily to higher net income and a decrease in
accounts receivable during the three months ended March 31, 1998 as compared to
the three months ended March 31, 1997.
Cash used in investing was $1.928 million in the three months ended March 31,
1998 compared to cash obtained from investing of $889,000 in the three months
ended March 31, 1997. This increase was due primarily to the purchase of short-
term investments in the three months ended March 31, 1998 as opposed to the sale
of such investments in the three months ended March 31, 1997.
The Company obtained $426,000 of cash from financing activities in the three
months ended March 31,1998 compared to the utilization of $1.085 million in cash
from financing activities in the three months ended March 31, 1997. The change
in the Company's cash provided from financing activities is due to the purchase
of Treasury Stock during the three months ended March 31, 1997 and an increase
in the issuance of common stock primarily from the exercise of employee stock
options during the three months ended March 31, 1998.
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 March 31, 1998, there were no
borrowings outstanding under the agreement.
At March 31, 1998, the Company's working capital was approximately $35.871
million. The Company has no significant capital spending or purchasing
commitments other than normal purchase commitments and commitments under
facility and capital leases.
Outlook
Due to evidence of overall stronger sales and increased operating profit, the
Company has increased its diluted earnings per share expectations for the year
to $.83 to $.85 per share. Higher revenue is the primary cause of this
increased expectation. The Company's actual results may vary from this
expectation. See "Factors That May Affect Future Operating Results".
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
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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 and
other operating expenses based in large part on its expected future revenues. As
a result, should revenues fall below expectations, operating results are likely
to be adversely and disproportionately affected because only a small portion of
the Company's expenses vary with its revenues.
In addition, the Company's quarterly license fees and service revenues may
vary due to seasonal, cyclical and other factors. Selection of an ETM system
often entails an extended decision-making process for the customer because of
the substantial costs and strategic implications associated with acquiring the
system. Senior levels of management are often involved in this process, given
the importance of the decision as well as the risks faced by the customer should
a system fail or not perform as expected. Depending upon the size of the system
and the associated computer hardware and software costs, senior corporate
management or even the board of directors of a customer may make the final
decision to license a Company ETM system. Therefore, decisions to acquire a
Company ETM system involve long selling cycles, typically 12 to 18 months for
larger customers, although sometimes as long as 24 months, and usually require
lengthy periods of evaluation prior to full installation and roll-out. In
addition, the Company's ability to recognize license revenue is affected by the
duration of the customization process, if any. Finally, the Company has
historically realized a greater percentage of its license fees and service
revenues for a year in the second half of the year than it does in the first
half because, among other things, the Company's customers typically spend more
of their annual budget authorization for ETM products and services in the second
half of the year. 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 be reduced.
New products and technological change. The market for ETM systems is
characterized by rapid change and improvements in computer hardware and software
technology. The Company's future success will depend in part on its ability to
enhance its current products, to introduce new products that keep pace with
technological and market developments and to address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing in a timely manner product
enhancements or new products that respond to the technological advances by
others, or that its products will adequately and competitively address the needs
of the changing marketplace. Competition with respect to software products has
been characterized by shortening product cycles, and there can be no assurance
that the Company will not be adversely affected by this trend. If the product
cycles for the Company's systems prove to be shorter than management
anticipates, the Company's operating results could be adversely affected. In
addition, in order to remain competitive, the Company may be required to expend
a greater percentage of its revenues on product innovation and development than
historically has been the case, in which case, the Company's gross profit
margins and results of operations could be materially and adversely affected. In
addition, products as complex as those offered by the Company may contain
previously undetected errors or failures. Such errors have occurred in the past
and there can be no assurance that, despite testing by the Company, errors will
not be found in new products resulting in losses or delays which could have a
material adverse effect on the Company's business, operating results or
financial condition.
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Dependence on major customers. The Company has approximately 29 pharmaceutical
customers (considering all members of an affiliated group to be a single
customer). The Company derived approximately 56%, 58% and 59% of its revenues in
the aggregate in the years ended December 31, 1995, 1996 and 1997, respectively,
from the three largest pharmaceutical customers, two of which had been among the
three largest customers of the Company in terms of revenues in each of those
periods. The Company believes that the costs to its customers of switching to an
ETM system offered by a competitor, or taking significant system management
functions in-house would be substantial. Nevertheless, from time to time in the
past, such a change has been made by some of the Company's customers with
respect to a Company ETM system or to all or some of the services offered by the
Company. If such change is made by one or more of the Company's major customers,
the Company's business, operating results or financial condition could be
materially and adversely affected.
Risks from competition. Globally, the current market for sales and marketing
information management systems of the type sold by the Company is highly
competitive. Many companies offer sales force automation and ETM systems. In
addition to Dendrite, the Company believes that there are approximately ten
companies which supply products automating sales, marketing and customer service
functions and specifically target the pharmaceutical industry. The Company
believes at least four of these companies are actively selling in more than one
country. In addition, the other vertical markets in which the Company markets
its products possess numerous vendors who market and sell sales force automation
and ETM systems. The Company believes that most of its competitors offer a
variety of less customizable software products, which are typically available
more rapidly than Company systems and often at a substantially lower price. In
addition, competition will increase as new competitors enter the market to
supply ETM systems and as existing competitors expand their product lines or
consolidate.
The Company expects it may encounter additional competition in the future from
firms offering outsourcing of information technology services, from purveyors of
software products providing specialized applications not offered by the Company,
including enterprise resource planning vendors and database vendors not
currently in this market space to any substantial degree, and from the
development and/or operation of in-house systems by its customers and potential
customers. Many of the Company's competitors and potential competitors have
longer operating histories and significantly greater financial, technical,
sales, marketing and other resources than those of the Company. Some of the
Company's competitors and potential competitors are part of large corporate
groups with significantly greater resources and broader technology bases than
those of the Company. There can be no assurance that the Company will be able to
compete successfully or that competition will not have a material adverse effect
on the Company's business, operating results or financial condition.
Reliance on competitors for market data. Current market data on the sales of
ethical pharmaceutical products is an important element for the operation of
Company ETM systems, which the Company's customers use to guide and organize
their sales forces and marketing efforts. There are currently few sources of
such data in the United States, Europe and the Pacific Rim. Two of the leading
purveyors of such market information in the United States or elsewhere compete
with the Company either directly or through affiliates in the market for ETM
systems. Were these purveyors of market information to require that
pharmaceutical companies also utilize their information management services (or
those of their affiliates) instead of the Company's, the Company's business,
operating results and financial condition would be materially and adversely
affected.
International operations. Currently, the Company expects the portion of its
business located outside of the United States to shrink as a percentage of the
Company's revenues, but to continue to account for a material part of its
revenues. Licensing software and providing services in many foreign countries is
subject to risks inherent in international business activities. Risks include
general economic conditions in each such country, the effect of applicable
foreign tax structures, tariff and trade regulations, difficulties in obtaining
local licenses, the difficulty of managing an organization spread over various
jurisdictions, unexpected changes in regulatory environments, complying with a
variety of foreign laws and regulations and any adverse changes in the political
environments in any such countries. In addition, laws in foreign countries may
not always provide protection for the Company's proprietary rights in its
software products. Providing specialized system support services outside the
United States paid for in local currencies carries the additional risk of
currency fluctuation and may also affect the net income, if any, reported by the
Company.
Dependence on key personnel, management of growth. The success of the Company
depends to a significant extent upon the contributions of its executive officers
and key sales, technical and customer service personnel. The Company's future
success also depends on its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense. The Company has at times experienced difficulty in
11
<PAGE>
recruiting qualified personnel and there can be no assurance that the Company
will not experience such difficulties in the future. Any such difficulties could
adversely affect the Company's business, operating results and financial
condition. All of the Company's executive officers and technical employees and a
significant number of sales employees have entered into non-competition
agreements with the Company. The laws governing such non-competition agreements
vary in different jurisdictions and are evolving. The enforceability of such
agreements in any case will depend upon all of the facts and circumstances,
including the jurisdiction in which enforcement is sought. In some cases these
agreements might be unenforceable, a result that could have a material adverse
effect on the Company.
To manage growth effectively, the Company must continue to strengthen its
operational, financial and management information systems, and expand, train and
manage its work force. There can be no assurance that the Company will be able
to do so on a timely basis. Failure to do so effectively and on a timely basis
could have a material adverse effect upon the Company's business, operating
results or financial condition.
Dependence on proprietary technology. The Company relies on a combination of
trade secret, copyright and trademark laws, non-disclosure and other contractual
agreements, and technical measures to protect its proprietary rights in its
products. There can be no assurance that the steps taken by the Company will
prevent misappropriation of this technology. Further, there can be no assurance
that such protective steps will preclude competitors from developing products
with features similar to the Company's products. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. The Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not require the
Company to enter into royalty arrangements or result in costly litigation
involving the imposition of damages or injunctive relief against the Company,
any of which could materially and adversely affect the Company's business,
operating results and financial condition.
Year 2000. A substantial amount of current demand for applications software
may be generated by customers in the process of replacing and upgrading
applications in order to accommodate the change in date to the year 2000. Once
such customers have completed such activities, the Company may experience a
significant deceleration in this source of revenue which is expected to
contribute to its 1998 and 1999 annual growth.
Some of the Company's older products may not accurately process dates after
the date December 31, 1999. To the extent any of these products are still in use
in 1999, the Company will continue to attempt to migrate these customers to
products which are year 2000 compliant, although there can be no assurance that
this will occur. A failure to migrate any such customer to a product which is
Year 2000 compliant could adversely affect the Company's business, operating
results or financial condition. In addition, the Company may experience
increased expenses which it cannot recoup from customers in addressing the
migration of current and prospective customers to software that is Year 2000
compliant.
Some customers may attempt to hold the Company responsible for Year 2000
compliance for hardware or software not supplied or created by the Company, but
used in conjunction with one or more of the Company's products. The Company
intends to defend itself vigorously against any such allegation.
Finally, there can be no assurance that the Company will not incur material
expenses in connection with any claim relating to Year 2000 compliance of its
own products or others.
Consumer Packaged Goods Business. The Company is currently engaged in the
marketing and selling of ETM systems to companies in the OTC and CPG vertical
markets. The selling environment in each vertical market has competitive and
other characteristics that are unique to it. In addition, the Company believes
that the CPG vertical market is composed of sub-markets each of which may have
characteristics unique to such sub-market. Accordingly, there can be no
assurance that the Company will be able to achieve in these markets the success
it has attained in the ethical pharmaceutical market.
12
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) The Company is furnishing the following exhibits in connection with
this report:
10.1 Consulting Agreement dated as of January 5, 1998 with Edward
Kfoury
27 Financial Data Schedule
(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: May 14, 1998
By: /s/ John E. Bailye
-------------------------------------------
John E. Bailye, President and
Chief Executive Officer
By: /s/ George T. Robson
-------------------------------------------
George T. Robson, Senior Vice President
and Chief Financial Officer
13
<PAGE>
EXHIBIT 10.1
CONSULTING AGREEMENT
--------------------
This Consulting Agreement, dated as of January 5, 1998, by and between
Dendrite International, Inc., a New Jersey corporation maintaining its principal
offices at 1200 Mount Kemble Avenue, Morristown, New Jersey 07960 ("Dendrite"),
and Edward Kfoury, an individual residing at 1272 Isabel Drive, Sanibel Island,
Florida 33957 ("Consultant").
WITNESSETH
----------
WHEREAS, Dendrite, together with its affiliates, is the developer and
exclusive owner of certain computer software programs for Electronic Territory
Management Systems and related matters known as the Dendrite System (such
computer programs, together with any copyrights and/or trade secrets
incorporated into such programs, shall be hereinafter referred to as the
"Dendrite System");
WHEREAS, Consultant is a consultant who provides business advice to
computer software and services companies; and
WHEREAS, the parties have agreed to establish a business relationship in
which Consultant will provide certain defined services to Dendrite upon the
terms and conditions specified herein.
NOW, THEREFORE, in consideration of the above premises and the mutual
promises and covenants contained herein, the parties agree as follows:
1. SCOPE OF SERVICES
-----------------
(a) Dendrite hereby engages Consultant, and Consultant accepts such
engagement, to provide the following services to Dendrite:
(i) advice regarding the conduct of business by Dendrite in
Japan;
(ii) advice concerning the implementation of certain business
processes within Dendrite;
(iii) advice regarding the adoption and implementation of a
technology strategy by Dendrite; and
(iv) such other services as may be mutually agreed upon from time
to time by Consultant and the President and Chief Executive
Officer of Dendrite.
The foregoing services to be provided by Consultant are hereinafter referred to
as the "Services."
(b) Consultant shall use his reasonable commercial efforts in
performing the Services according to the timetables, milestones and all other
requirements as may be mutually determined from time to time by Consultant and
the President and Chief Executive Officer of Dendrite. Consultant warrants that
all Services shall be performed in compliance with all applicable law.
(c) Consultant shall perform the Services at Dendrite facilities or such
other locations as are mutually acceptable to the parties.
2. COMPENSATION AND EXPENSES
-------------------------
(a) Dendrite agrees that Consultant's sole compensation for the performance
of the Services shall be a grant under Dendrite's 1997 Stock Incentive Plan of
options to purchase 12,000 shares of Dendrite's common stock.
(b) In addition to the fee specified above, Dendrite will reimburse
Consultant for his reasonable travel and business expenses (over and above
relocation expenses and the normal daily working and commuting expenses which
are the responsibility of Consultant) related to any business travel or
expenditure specifically requested by Dendrite. Such expenses must be
authorized in advance by Dendrite. Actual out-of-pocket expenses incurred shall
be reimbursed within thirty (30) days after receipt of invoices or receipts
submitted by Consultant.
<PAGE>
3. TERM OF AGREEMENT
-----------------
This Agreement shall become effective as of January 5, 1998 and continue
until January 5, 2001 unless earlier terminated by either party upon two (2)
weeks prior written notice to the other party.
4. CONSULTANT'S REPRESENTATIONS AND CERTAIN OBLIGATIONS
----------------------------------------------------
(a) Consultant represents and warrants to Dendrite that he is not now nor
shall be a party to any other agreement or under any obligation to or
restriction by any third party which would prevent Consultant from entering into
this Agreement or which would adversely affect the performance by him of the
Services or any of the other undertakings set forth herein.
(b) Consultant agrees to keep records and books of account for Dendrite in
accordance with United States generally accepted accounting principles and
practices in its industry, which records and books of account shall be subject
to audit by Dendrite. Dendrite shall, at all reasonable times, have access to
such books and records and Consultant shall preserve such books and records for
a period of two (2) years after termination of the Agreement.
5. CONFIDENTIALITY; RETURN OF DATA
-------------------------------
(a) Consultant shall hold confidential and shall not, directly or
indirectly, disclose, publish, or use for the benefit of itself or any third
party, any "Confidential Information" of Dendrite, without first having obtained
Dendrite's written consent to such disclosure or use. "Confidential Information"
shall mean any and all information disclosed to, or otherwise acquired or
observed by, Consultant from Dendrite, relating to the Dendrite System and/or
the business of Dendrite. The term "Confidential Information" does not include
information which (i) becomes generally available to the public other than as a
result of disclosure by Consultant in breach of this Agreement, (ii) was
available to Consultant on a non-confidential basis as shown in written records
prior to its disclosure to Consultant by Dendrite or (iii) becomes available to
Consultant on a non-confidential basis from a source other than the Company;
provided that such source is not bound by a confidentiality agreement with the
Company or is otherwise prohibited from transferring the information to
Consultant by a contractual, legal or fiduciary obligation.
(b) In the event that Consultant is requested or required (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process) to disclose any of the
Confidential Information, it is agreed that Consultant will provide Dendrite
with prompt notice of such request(s) so that Dendrite may seek an appropriate
protective order or other appropriate remedy and/or waive compliance with the
confidentiality provisions of this Agreement. In the event that such protective
order or other remedy is not obtained, or Dendrite grants a waiver hereunder,
Consultant may furnish that portion (and only that portion) of the Confidential
Information which Consultant is legally compelled to disclose and shall use
reasonable commercial efforts to obtain reliable assurance that confidential
treatment will be accorded any Confidential Information so furnished.
(d) Promptly following the written request of Dendrite, Consultant will
deliver to Dendrite all documents or other matter furnished by Dendrite to
Consultant constituting Confidential Information, together with all copies
thereof. In the event of such request, all other documents or other matter
constituting Confidential Information, together with all copies thereof in the
possession of Consultant, will be destroyed with any such destruction confirmed
by Consultant in writing to Dendrite.
The provisions of this Article 5, CONFIDENTIALITY; RETURN OF DATA, shall survive
the termination or expiration of this Agreement.
6. INDEPENDENT CONTRACTOR
----------------------
(a) Consultant is retained by Dendrite solely for the purposes and to the
extent set forth in this Agreement, and Consultant's relationship to Dendrite
shall, during the period of his rendering of the Services hereunder, be that of
an independent contractor. Consultant shall be solely responsible for the
timely withholding, reporting and payment to the proper authorities of all taxes
incurred in connection with the performance of the Services. Consultant further
agrees to indemnify, defend and hold Dendrite harmless against all claims and
taxes (including interest, penalties, and any other costs) which are claimed or
assessed against Dendrite and are attributable to acts or omissions arising out
of the
<PAGE>
Agreement or the payments made hereunder. The provisions of this paragraph (a)
shall survive the termination or expiration of this Agreement.
(b) Dendrite shall not withhold from any fee or other payments made to the
Consultant any deductions for income taxes, employment taxes or other items, nor
make any premium payments or contributions for any worker's compensation or
unemployment compensation for the benefit of Consultant. Consultant expressly
agrees that he will not be entitled by virtue of the Agreement to participate in
or to have any employee status under any employment-related right, benefit, plan
or program of any form or nature whatsoever available to Dendrite's employees,
and that Consultant hereby unconditionally and irrevocably waives and releases
all rights to any such participation. The provisions of this paragraph (b) shall
survive the expiration or termination of this Agreement.
(c) Consultant agrees that no liability shall accrue in favor of Consultant
as against any officer, director, agent or employee of Dendrite, but it will
look solely to the assets of Dendrite for satisfaction of this Agreement.
Consultant shall, at Consultant's expense, indemnify, defend and hold Dendrite
harmless against all claims, liabilities, and expenses (including reasonable
attorneys' fees and expenses) for bodily injury, death or property damage which
are in any way connected with the performance of the Services, or the acts or
omissions of Consultant. For the purposes of this article, the term "Dendrite"
shall be deemed to include Dendrite's officers, directors, agents, employees,
affiliates, and all those claiming any interest in the project to which the
Services relates. The provisions of this paragraph (c) shall survive the
expiration or termination of the Agreement.
7. NOTICES
-------
Any notice required or permitted to be given hereunder shall be in writing
and shall be either (i) delivered personally by hand, (ii) sent by registered or
certified mail, return receipt requested, or (iii) sent by a recognized
qualified overnight delivery service (e.g., Federal Express). All such notices
----
shall be sent to the addresses of each party set forth below in the first
paragraph of this Agreement or to such other address or addresses as shall be
designated in writing in the same manner.
All notices shall be deemed to have been given when received.
8. MISCELLANEOUS PROVISIONS
------------------------
(a) Consultant acknowledges that money damages would be both incalculable
and an insufficient remedy for any breach of this agreement by Consultant and
that any such breach would cause Dendrite irreparable harm. Accordingly,
Consultant also agrees that, in the event of any breach or threatened breach of
this Agreement, Dendrite, in addition to any other remedies at law or in equity
it may have, shall be entitled, without the requirement of posting a bond or
other security, to equitable relief, including injunctive relief and specific
performance.
(b) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New Jersey applicable to agreements entered into and
performed wholly within the State of New Jersey, and without regard to its
conflict of law principles.
(c) All disputes arising out of or in connection with this Agreement shall
be solely and exclusively resolved by a court of competent jurisdiction in the
State of New Jersey. Consultant expressly consents to the jurisdiction of the
courts of the State of New Jersey and the Federal District Court for the
District of New Jersey, and waives any objections or right as to the forum non
conviens, lack of personal jurisdiction or similar grounds with respect to any
dispute relating to this Agreement.
(d) This Agreement may not be and shall not be deemed or construed to have
been modified, amended, rescinded or canceled in whole or in part, except by
written instrument signed by the parties hereto which makes specific reference
to this Agreement and which specifies that this Agreement is being modified,
amended, rescinded or canceled.
(e) If any provision of this Agreement shall be declared invalid or illegal
for any reason whatsoever, then notwithstanding such invalidity or illegality,
the remaining terms and provisions of this Agreement shall remain in full force
and effect in the same manner as if the invalid or illegal provision had not
been contained herein.
(f) No failure on the part of either party to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right or remedy hereunder preclude
any other or a future exercise thereof or the exercise of any other right or
remedy granted hereby, or by any related
<PAGE>
document, or by law. Any failure of a party to comply with any obligation
contained in this Agreement may be waived by the party entitled to the benefit
thereof only by a written instrument duly executed and delivered by the party
granting such waiver, which instrument makes specific reference to this
Agreement and the provision to which it relates and describes the right or
obligation consented to, waived or purported to be violated.
(g) This Agreement contains the entire agreement and understanding between
the parties hereto in reference to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter hereof.
(h) This Agreement is personal in nature and Consultant shall not, without
the written consent of Dendrite, assign or transfer this Agreement or any rights
or obligations hereunder, whether by operation of law or otherwise.
IN WITNESS WHEREOF, the undersigned parties have executed this Agreement as
of the date first above written.
DENDRITE INTERNATIONAL, INC.
By: /s/ Christopher J. French
-------------------------
Name: Christopher J. French
Title: Vice President, General Counsel
/s/ Edward Kfoury
-----------------
Edward Kfoury
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