<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 June 30, 1999
[ ] 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 August 9,1999
----- -----------------------------------
<S> <C>
Common Stock 25,833,832
</TABLE>
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DENDRITE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
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<S> <C>
PART I FINANCIAL INFORMATION 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Statements of Operations
Three months and six months ended June 30, 1999 and 1998 3
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION 16
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
DENDRITE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 6,747 $ 4,735 $ 10,801 $ 8,008
Services 35,104 27,930 68,684 51,494
-------- -------- -------- --------
41,851 32,665 79,485 59,502
-------- -------- -------- --------
Cost of revenues:
Cost of license fees 592 1,024 990 1,385
Cost of services 17,722 14,751 34,225 27,021
-------- -------- -------- --------
18,314 15,775 35,215 28,406
-------- -------- -------- --------
Gross margin 23,537 16,890 44,270 31,096
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 14,397 10,826 27,024 20,200
Research and development 1,835 1,094 3,473 2,205
Mergers and acquisitions 3,466 -- 3,466 --
-------- -------- -------- --------
19,698 11,920 33,963 22,405
-------- -------- -------- --------
Operating income 3,839 4,970 10,307 8,691
Interest income 440 215 858 411
Other income (expense) 43 (30) (82) (374)
-------- -------- -------- --------
Income before income taxes 4,322 5,155 11,083 8,728
Income taxes 2,296 1,949 4,858 3,357
-------- -------- -------- --------
Net income $ 2,026 $ 3,206 $ 6,225 $ 5,371
======== ======== ======== ========
Net income per share:
Basic $ .08 $ .13 $ .25 $ .23
======== ======== ======== ========
Diluted $ .08 $ .12 $ .23 $ .21
======== ======== ======== ========
Shares used in computing net income per share:
Basic 25,030 23,890 24,857 23,843
======== ======== ======== ========
Diluted 26,736 25,962 26,598 25,750
======== ======== ======== ========
</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>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 33,307 $ 32,555
Short-term investments 8,334 9,614
Accounts receivable, net 29,394 20,378
Prepaid expenses and other 3,995 3,391
Prepaid taxes 2,137 921
Deferred tax asset 675 675
--------- ---------
Total current assets 77,842 67,534
Property and equipment, net 8,693 7,221
Deferred taxes 1,077 1,077
Goodwill, net 10,303 2,496
Capitalized software development costs, net 6,045 3,503
--------- ---------
$ 103,960 $ 81,831
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,806 $ 2,249
Income taxes payable 982 1,036
Accrued compensation and benefits 5,417 4,321
Other accrued expenses 8,953 7,493
Deferred revenues 2,495 1,827
--------- ---------
Total current liabilities 20,653 16,926
--------- ---------
Deferred rent 264 392
Capital lease obligation 522 544
Deferred taxes 3,737 2,920
Stockholders' Equity
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 100,000,000 shares
authorized, 25,634,755 and 24,830,450 shares issued
as of June 30, 1999 and December 31, 1998,
respectively and 25,233,755 and 24,429,450
outstanding as of June 30, 1999 and December 31,
1998, respectively 53,467 41,442
Retained earnings 30,223 23,998
Deferred compensation (1,537) (1,970)
Accumulated other comprehensive income (1,442) (494)
Less treasury stock, at cost (1,927) (1,927)
--------- ---------
Total stockholders' equity 78,784 61,049
--------- ---------
$ 103,960 $ 81,831
========= =========
</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>
Six Months Ended June 30
------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 6,225 $ 5,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,354 1,763
Compensation expense 407 55
Tax benefit from employee stock plan 3,913 --
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable (7,863) (7,417)
(Increase)/decrease in prepaid expenses and other (520) (196)
(Increase)/decrease in prepaid income taxes (1,216) --
Increase/(decrease) in accounts payable and accrued expenses 2,337 697
Increase/(decrease) in deferred rent (128) (95)
Increase/(decrease) in income taxes payable 61 596
Increase/(decrease) in deferred revenues 661 535
-------- --------
Net cash provided by operating activities 6,231 1,308
-------- --------
Investing activities:
Purchases of short-term investments (14,695) (2,558)
Sales of short-term investments 15,975 1,790
Purchase of MMI, net of cash acquired (6,640) --
Purchases of property and equipment (2,855) (807)
Additions to capitalized software development costs (1,270) (698)
-------- --------
Net cash used in investing activities (9,485) (2,273)
-------- --------
Financing activities:
Payments on capital lease obligations (288) (111)
Issuance of Common Stock 4,703 959
-------- --------
Net cash provided by financing activities 4,415 848
-------- --------
Effect of foreign exchange rate changes on cash (409) (132)
Net increase/(decrease) in cash and cash equivalents 752 (249)
Cash and cash equivalents, beginning of period 32,555 15,937
-------- --------
Cash and cash equivalents, end of period $ 33,307 $ 15,688
======== ========
</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 included in this Form 10-Q 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 six month periods ended June
30, 1999. These consolidated financial statements should be read in conjunction
with the financial statements and notes contained in our Annual Report on Form
10-K for the year ended December 31, 1998 and the Audited Financial Statements
included herein as Item 5.
Our interim operating results may not be indicative of operating results for
the full year.
2. Net Income Per Share
We have 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 June 30, 1999 and 1998, common stock
equivalents used in computing Diluted EPS were 1,706,000 and 2,072,000,
respectively. For the six months ended June 30, 1999 and 1998, common stock
equivalents used in computing Diluted EPS were 1,741,000 and 1,907,000,
respectively.
3. Recently Adopted Accounting Pronouncements
Effective January 1, 1998, we 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 six months ended June 30, 1999 and 1998, we engaged in
numerous transactions involving foreign currency, which resulted in unrealized
gains and losses. Total after-tax comprehensive income for the three months
ended June 30, 1999 and 1998 was $1,562,000 and $3,122,000, respectively. Total
after-tax comprehensive income for the six months ended June 30, 1999 and 1998
was $5,277,000 and $5,132,000, respectively.
4. Merger with CorNet International, Ltd.
On May 26, 1999, the Company acquired CorNet International, Ltd., ("CorNet")
in a transaction accounted for as pooling of interest. The Company exchanged
1,480,538 of its shares for all outstanding shares of CorNet's common stock. All
prior historical consolidated financial statements contained herein have been
restated to include the financial positions, results of operations and cash
flows of CorNet.
5. Marketing Management International, Inc. Acquisition
On June 30, 1999, the Company purchased substantially all of the assets and
assumed certain liabilities of Marketing Management International, Inc. and
certain affiliated companies ("MMI") for $7,300,000 in cash, which includes
estimated transaction costs, and $3,400,000 in stock. The acquisition has been
accounted for using the purchase method with the purchase price allocated to
the fair value of the acquired assets and liabilities. The excess purchase
price over the fair value of the net assets acquired will be allocated between
capitalized software development costs and goodwill based upon an independent
appraisal.
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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 that we believe are
within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E
of the Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created by such acts. For this purpose, any statements that are not
statements of historical fact may be deemed to be forward-looking statements.
Those statements in this Form 10-Q containing the words "believes",
"anticipates", "plans", "expects" and similar expressions constitute
forward-looking statements, although not all forward-looking statements contain
such identifying words. These forward-looking statements are based on our
current expectations, assumptions, estimates and projections about our company
and the pharmaceutical and consumer packaged goods industries. All
forward-looking statements involve risks and uncertainties, including those
risks identified under "Factors That May Affect Future Operating Results", many
of which are beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could be inaccurate and actual results may differ from those indicated by the
forward-looking statements included in this Form 10-Q, as more fully described
under "Factors That May Affect Future Operating Results". In light of the
significant uncertainties inherent in the forward-looking statements included in
this Form 10-Q, you should not consider the inclusion of such information as a
representation by us or anyone else that we will achieve our objectives and
plans. Moreover, we assume 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
We succeeded in 1991 to a business founded in 1986 by John Bailye, our current
President and Chief Executive Officer. The business was established to provide
sales force software products and support services that would enable companies
to manage, coordinate and control the activities of large sales forces in
complex selling environments, primarily in the prescription-only pharmaceutical
industry. Today, our solutions combine advanced software products with a wide
range of specialized support services. These services include software
implementation, technical and hardware support and sales force support. We
develop, implement and service sales force software products worldwide through
our own sales, support and technical personnel located in 15 offices.
We generate revenues from two sources: support services and license fees.
Service revenues, which account for a substantial majority of our revenues,
consist of fees from a wide variety of contracted services which we make
available to our customers, generally under multi-year contracts. We generate
implementation fees from services provided to configure and implement sales
force software products for our customers. We receive technical and hardware
support fees for services related to, among other things, the operation of our
customers' server computers, maintenance of our customers' databases, asset
control and maintenance for our customers' remote hardware and ongoing technical
support. Services revenue also include fees for software maintenance services
such as software defect resolution, performance enhancements and, in some cases,
product upgrades. We charge fees for these maintenance services based on a
percentage of applicable license fees, plus any customization fees. We receive
sales force support fees for organizing and managing support of our customers'
sales force, including training, telephone support and data analysis services.
Ongoing support fees are generally negotiated at the commencement of a contract.
However, it is our experience that our larger customers increase the amount of
services they purchase from us over time. Fees for these additional services are
typically based on the labor and materials used to provide the applicable
service.
We charge our customers license fees to use our proprietary computer software.
Customers generally pay one-time perpetual license fees based upon the number of
users, the territory covered and the particular software product licensed by the
customer.
Historically, we have generally recognized license fees as revenue using the
percentage of completion method over a period of time that begins with execution
of the license agreement and ends with the completion of initial customization
and installation, if any. However, we believe that with some of our newer sales
force software products, such as, ForcePharma and SalesPlus, our customers will
not require customization and therefore we may be able to recognize license fees
from these products upon delivery.
We recognize additional license fees when some customers agree to license
additional products, functions or enhancements, acquire an upgraded version of
Dendrite's software and/or when the maximum permitted number of users or initial
geographic coverage is exceeded.
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The United States, the United Kingdom, France and Japan are our main markets.
We generated approximately 27% and 23% of our total revenues outside the United
States during the three months ended June 30, 1999 and 1998, respectively, and
approximately 25% during both the six months ended June 30, 1999 and 1998,
respectively.
We bill services provided by our foreign branches and subsidiaries in local
currency. License fees for our products are generally billed in U.S. dollars
regardless of where they originate. Operating results generated in local
currencies are translated into U.S. dollars at the average exchange rate in
effect for the reporting period.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
REVENUES. Total revenues increased $9.186 million or 28% from $32.665 million
in the three months ended June 30, 1998 to $41.851 million in the three months
ended June 30, 1999.
License fee revenues increased 42% from $4.735 million in the three months
ended June 30, 1998 to $6.747 million in the three months ended June 30, 1999.
License fee revenues as a percentage of total revenues were 15% in the three
months ended June 30, 1998 as compared to 16% in the three months ended June 30,
1999. Sales to new pharmaceutical customers and sales force expansions by
existing pharmaceutical customers drove the increase in license fee revenues
across all regions as well as new customer sales in the European consumer
business.
Service revenues increased 26% from $27.930 million in the three months ended
June 30, 1998 to $35.104 million in the three months ended June 30, 1999.
Service revenues as a percentage of total revenues were 85% in the three months
ended June 30, 1998 as compared to 84% in the three months ended June 30, 1999.
The increase in the absolute dollar amount of service revenues was primarily the
result of an increase in the number of installed users of Dendrite sales force
software products at both new and existing customers, as well as the provision
of additional services for our existing customers.
COST OF REVENUES. Cost of revenues increased $2.539 million or 16% from
$15.775 million in the three months ended June 30, 1998 to $18.314 million in
the three months ended June 30, 1999.
Cost of license fees decreased 42% from $1.024 million in the three months
ended June 30, 1998 to $592,000 in the three months ended June 30, 1999. Cost of
license fees in the three months ended June 30, 1999 represents the amortization
of capitalized software development costs of $363,000 and third party vendor
license fees of $229,000. Cost of license fees in the three months ended June
30, 1998 represents the amortization of capitalized software development costs
of $332,000 and third party license fees of $692,000.
Cost of services increased 20% from $14.751 million in the three months ended
June 30, 1998 to $17.722 million in the three months ended June 30, 1999. The
absolute dollar amount increase in cost of services was primarily due to an
increase in staff required to support higher client activity. As a percentage of
service revenues, however, cost of services decreased from 53% of service
revenues in the three months ended June 30, 1998 to 50% in the three months
ended June 30, 1999. This decrease was primarily the result of increased
operational efficiencies in the three months ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
33% from $10.826 million in the three months ended June 30, 1998 to $14.397
million in the three months ended June 30, 1999. As a percentage of revenue,
SG&A expenses increased from 33% in the three months ended June 30, 1998 to 34%
in the three months ended June 30, 1999. The increase in the absolute dollar
amount of SG&A expenses was primarily attributable to an increase in sales and
marketing expenses, as well as increases related to additional lease space in
Morristown, New Jersey, and the inclusion of SG&A expense from acquisitions
completed in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
68% from $1.094 million in the three months ended June 30, 1998 to $1.835
million in the three months ended June 30, 1999. As a percentage of revenues,
research and development expenses increased from 3% in the three months ended
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June 30, 1998 to 4% in the three months ended June 30, 1999. The increase in
research and development expenses during the most recent period was primarily
attributable to increased spending on continued development of our laptop
pharmaceutical sales force software products and a new version of our palmtop
pharmaceutical sales force software product.
PROVISION FOR INCOME TAXES. The effective rate increased from 38% in the three
months ended June 30, 1998 to 53% in the three months ended June 30, 1999. This
increase was due to the non-deductible nature of certain expenses incurred in
connection with the acquisition of CorNet.
Six Months Ended June 30, 1999 and 1998
REVENUES. Total revenues increased $19.983 million or 34% from $59.502 million
in the six months ended June 30, 1998 to $79.485 million in the six months ended
June 30, 1999.
License fee revenues increased 35% from $8.008 million in the six months ended
June 30, 1998 to $10.801 million in the six months ended June 30, 1999. License
fee revenues as a percentage of total revenues were 13% in the six months ended
June 30, 1998 as compared to 14% in the six months ended June 30, 1999.
Pharmaceutical customers drove the increase in license fee revenues across all
geographies, as well as increases in the European consumer division.
Service revenues increased 33% from $51.494 million in the six months ended
June 30, 1998 to $68.684 million in the six months ended June 30, 1999. Service
revenues as a percentage of total revenues were 87% in the six months ended June
30, 1998 as compared to 86% in the six months ended June 30, 1999. The increase
in the absolute dollar amount of service revenues was primarily the result of an
increase in our installed base of Dendrite sales force software products at both
new and existing customers, as well as the provision of additional services to
our existing customers.
COST OF REVENUES. Cost of revenues increased $6.809 million or 24% from
$28.406 million in the six months ended June 30, 1998 to $35.215 million in the
six months ended June 30, 1999.
Cost of license fees decreased 29% from $1.385 million in the six months ended
June 30, 1998 to $990,000 in the six months ended June 30, 1999. Cost of license
fees in the six months ended June 30, 1999 represents the amortization of
capitalized software development costs of $728,000 and third party vendor
license fees of $262,000. Cost of license fees in the six months ended June 30,
1998 represents the amortization of capitalized software development costs of
$664,000 and third party license fees of $721,000.
Cost of services increased 27% from $27.021 million in the six months ended June
30, 1998 to $34.225 million in the six months ended June 30, 1999. The absolute
dollar amount increase in cost of services was primarily due to an increase in
staff required to support higher client activity. As a percentage of service
revenues, however, cost of services decreased from 52% of service revenues in
the six months ended June 30, 1998 to 50% in the six months ended June 30, 1999.
This decrease was primarily the result of increased operational efficiencies in
1999.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
34% from $20.200 million in the six months ended June 30, 1998 to $27.024
million in the six months ended June 30, 1999. This increase was primarily
attributable to an increased investment in sales and marketing staff, as well as
increases related to additional lease space in Morristown, New Jersey, and the
inclusion of SG&A expense from the ABC business. As a percentage of revenue,
SG&A expenses remained relatively constant at 34%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
57% from $2.206 million in the six months ended June 30, 1998 to $3.473 million
in the six months ended June 30, 1999. As a percentage of revenues, research and
development expenses remained relatively constant at 4%. The increase in
research and development expenses during the most recent period was primarily
attributable to increased spending on continued development of our laptop
pharmaceutical sales force software products and a new version of our palmtop
pharmaceutical sales force software product.
PROVISION FOR INCOME TAXES. The effective rate increased from 38% in the six
months ended June 30, 1998 to 44% in the six months ended June 30, 1999. This
increase was due primarily to the non-deductible nature of expenses incurred in
connection with the acquisition of CorNet.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through cash generated
by operations. Net cash provided by operating activities was $1.308 million for
the six months ended June 30, 1998 compared to cash provided by operating
activities of $6.231 million for the six months ended June 30, 1999. This
increase in cash provided by operating activities was due primarily to a higher
net income, higher non-cash expenses, such as depreciation, non-cash
compensation and accrued expenses, as well as increases in accounts payable and
lower tax payments due to improved tax planning. These favorable items were
partially offset by an increase in accounts receivable from $20.378 million at
December 30, 1998, to $29.394 million at June 30, 1999.
Cash used in investing activities was $2.273 million, at June 30, 1999, in the
six months ended June 30, 1998 compared to cash used in investing activities of
$9.485 million in the six months ended June 30, 1999. This change was due
primarily to the purchase of MMI as well as increased purchases of fixed assets
and additions to capitalized software development costs.
We obtained $848,000 of cash from financing activities in the six months ended
June 30, 1998 compared to $4.415 million of cash from financing activities in
the six months ended June 30, 1999. The change in our cash provided from
financing activities was due to an increase in the issuance of common stock
primarily from the exercise of employee stock options, as well as the purchase
of stock through our employee stock purchase plan, during the six months ended
June 30, 1999.
We maintain a $15.0 million revolving line of credit agreement with the Chase
Manhattan Bank, N.A. The agreement is available to finance working capital needs
and possible future acquisitions. The $15.0 million line of credit agreement
requires us to maintain a minimum consolidated net worth, among other covenants,
measured quarterly, which is equal to our net worth as of December 31, 1997 plus
50% of net income earned after March 31, 1998 plus 75 % of the net proceeds of
any stock offering. This covenant effectively limits the amount of cash
dividends we may pay. At June 30, 1999, there were no borrowings outstanding
under the agreement and we satisfied all of our covenant obligations.
At June 30, 1999, our working capital was approximately $57.189 million. We
had no significant capital spending or purchasing commitments other than normal
purchase commitments and commitments under facility and capital leases. We
believe that available funds, anticipated cash flows from operations and our
line of credit will satisfy our 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.
On January 28, 1999, Dendrite filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Securities and Exchange Commission to
register a proposed offering of 2,750,000 shares of common stock by the Company
and an additional 500,000 shares of common stock by certain selling stockholders
named in the Registration Statement. Due to unfavorable market conditions and
the acquisition of CorNet, we elected not to proceed with this offering and
have expensed in the second quarter all the transaction expenses incurred in
connection with such Registration Statement.
We regularly evaluate opportunities to acquire products or businesses
complementary to our operations. Such acquisition opportunities, if they arise,
and are successfully completed, may involve the use of cash or equity
instruments.
RECENT DEVELOPMENTS
On May 26, 1999, we exchanged 1,480,538 shares of Dendrite stock for all of
the outstanding capital stock of CorNet International, Ltd., a provider of sales
force effectiveness solutions for the U.S. pharmaceutical, consumer and business
to business markets. The transaction, valued at approximately $40 million, was
accounted for as a pooling of interests.
On June 30, 1999, we acquired substantially all the assets of Marketing
Management International, Inc. and certain affiliated companies, providers of
palmtop software and paper based sales force effectiveness solutions and
consulting services to subsidiaries of multinational pharmaceutical companies
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operating in emerging markets, such as Latin America, Eastern Europe and
Southeast Asia. The transaction, valued at approximately $10.5 million,
was accounted for as a purchase.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of our business is dependent in part on our internal
computer software and operating systems (collectively, our "Internal Programs
and Systems"). Since 1997, as part of our Year 2000 compliance plan, we have
been evaluating our Internal Programs and Systems to identify potential Year
2000 compliance problems. We have tested our Internal Programs and Systems to
verify Year 2000 compliance. As a result of the testing, we have determined that
some of our Internal Programs and Systems are not Year 2000 compliant.
Accordingly, we have modified or replaced these Internal Programs and Systems to
make them Year 2000 compliant. Although we believe our internal Year 2000
compliance program has been completed, we are actively monitoring our Internal
Programs and Systems to determine whether any further modification or
replacement of these systems is necessary. We cannot assure that our efforts in
this regard have been or will be successful. We are also communicating with our
suppliers and others to coordinate Year 2000 conversion and are requesting
assurances from all software vendors from which we may purchase or license
software that such software will correctly process all date information at all
times.
To date, we have spent approximately $312,970 to evaluate, test and remediate,
if necessary, our Internal Programs and Systems for Year 2000 compliance
problems. These costs have been funded with cash from our operations. To date,
we have not spent any material amount on evaluating the Year 2000 compliance
status of our sales force software products licensed to customers. Although we
do not anticipate any future material expenditures, our customers may require us
to incur additional expenses associated with remediating their software
products. We expect that the expenses and capital expenditures associated with
achieving Year 2000 compliance will not have a material adverse effect on our
business, results of operations or financial condition.
We believe that the sales force software products that we currently offer to
customers are Year 2000 compliant. We define "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, so long as 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 our products.
Some of our older products will not, and some may not, accurately process
dates beyond December 31, 1999. To the extent any of these products are still in
use in 1999, we will continue to attempt to migrate our customers to products
which are Year 2000 compliant. We cannot assure you that this will occur. A
failure to migrate any such customer to a product which is Year 2000 compliant
could adversely affect our business, operating results or financial condition.
We may also experience increased expenses which we cannot recoup from current
customers in addressing their migration to software that is Year 2000 compliant.
We have strongly encouraged each customer to have its product tested by them for
Year 2000 compliance.
As we continue to assess our state of readiness for January 1, 2000, we are
working to formulate a reasonably likely worst case scenario, and to prepare
contingency plans, as warranted. In this regard, we expect to spend up to an
additional $300,000 through the end of the year in order to purchase generators
to provide electrical power in the event of any interruption in the power supply
to our facilities throughout the world. For a discussion of the risks associated
with the Year 2000, please see the heading under "Factors that May Affect Future
Operating Results" entitled "We are exposed to risks associated with the Year
2000."
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY.
Most of our sales force software products and support services are
currently used in connection with the marketing and sale of prescription-only
drugs. This market is undergoing a number of significant changes. These include:
- consolidations and mergers which may reduce the number of existing and
potential customers;
- reclassification of formerly prescription-only drugs to permit their
over-the-counter sale;
- competitive pressures on our pharmaceutical customers resulting from the
continuing shift to the delivery of healthcare through managed care
organizations; and
- changes in law, such as government mandated price reductions for
prescription-only drugs, that affect the healthcare systems in the
countries where our customers and potential customers are located.
11
<PAGE> 12
We cannot assure you that we can respond effectively to any or all of these
and other changes in the marketplace. Our failure to do so could have a material
adverse effect on our business, operating results or financial condition.
OUR QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY AND MAY NOT MEET
MARKET EXPECTATIONS.
Our results of operations may vary from quarter to quarter due to lengthy
sales and implementation cycles for our products, our fixed expenses in relation
to our fluctuating revenues and variations in our customers' budget cycles, each
of which is discussed below. As a result, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. It is possible that in some future period our results of
operations may be below the expectations of the public market analysts and
investors. If this happens, the price of our common stock may decline.
- - Our lengthy sales and implementation cycles make it difficult to predict
our quarterly revenues. The selection of a sales force software product
often entails an extended decision-making process because of the strategic
implications and substantial costs associated with a customer's license of
the software. Given the importance of the decision, senior levels of
management often are involved and, in some instances, the board of
directors may be involved in this process. As a result, the decision-making
process for some of our larger customers can take from six to twelve
months, although in some cases it may take even longer. Accordingly, we
cannot control or predict the timing of our execution of contracts with
customers. In addition, for customers with large sales forces, an
implementation process of three to six months is customary before the
software is rolled out to a customer's sales force. However, if a customer
were to delay or extend its implementation process, our quarterly revenue
may decline below expected levels and could adversely affect our results of
operations.
- - Our fixed costs may lead to fluctuations in our quarterly operating results
if results of revenue fall below expectations. We establish our expenditure
levels for product development, sales and marketing and some of our other
operating expenses based in large part on our expected future revenues and
anticipated competitive conditions. In particular, we frequently add staff
in advance of new business to permit adequate time for training. If the new
business is subsequently delayed or canceled, we will have incurred
expenses without the associated revenue. In addition, we may increase sales
and marketing expenses if competitive pressures become greater than we
currently anticipate. Since only a small portion of our expenses varies
directly with our actual revenues, our operating results and profitability
are likely to be adversely and disproportionately affected if our revenues
fall below expectations.
- - Our business is affected by variations in our customers' budget cycles. We
have historically realized a greater percentage of our license fees and
service revenues in the second half of the year than in the first half
because, among other things, our customers typically spend more of their
annual budget authorization for sales force software products and support
services in the second half of the year. However, the relationship between
the amounts spent in the first and second halves of a year may vary from
year to year and from customer to customer. In addition, changes in our
customers' budget authorizations may reduce the amount of revenues we
receive from the license of additional software or the provision of
additional services. As a result, our operating results could be adversely
affected.
OUR REVENUES WOULD DECLINE AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED BY THE
LOSS OF ONE OF OUR CUSTOMERS.
We derive a significant portion of our revenues from a limited number of
customers (considering all affiliates of each customer as part of that
customer). Approximately 49% of our total revenues in 1998 came from our top
three customers. Approximately 51% of our total revenues in 1997 came from our
top three customers. Approximately 50% of our total revenue in 1996 came from
our top three customers. We believe that the costs to our customers of switching
to a competitor's software product, or of taking significant system management
functions in-house, are substantial. Nevertheless, some of our customers have
switched, and in the future other customers may switch, to software products
and/or services offered by our competitors. If any of our major customers were
to make such a change, our business, operating results or financial condition
would be materially and adversely affected.
12
<PAGE> 13
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO
TECHNOLOGICAL CHANGE.
The market for sales force software products changes rapidly because of
frequent improvements in computer hardware and software technology. Our future
success will depend, in part, on our ability to:
- - use available technologies and data sources to develop new products and
services and to enhance our current products and services;
- - introduce new solutions that keep pace with developments in our target
markets; and
- - address the changing and increasingly sophisticated needs of our customers.
We cannot assure you that we will successfully develop and market new products
or product enhancements that respond to technological advances in the
marketplace, or that we will do so in a timely fashion. We also cannot assure
you that our products will adequately and competitively address the needs of the
changing marketplace.
Competition for software products has been characterized by shortening product
cycles. We may be materially and adversely affected by this trend if the product
cycles for our products prove to be shorter than we anticipate. If that happens,
our business, operating results or financial condition could be adversely
affected.
To remain competitive and to continue to develop and enhance products acquired
as part of our recent acquisitions, we also may have to spend more of our
revenues on product research and development than we have in the past. As a
result, our results of operations could be materially and adversely affected.
Further, our software products are technologically complex and may contain
previously undetected errors or failures. Such errors have occurred in the past
and we cannot assure you that, despite our testing, our new products will be
free from errors. Errors that result in losses or delays could have a material
adverse effect on our business, operating results or financial condition.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH THE YEAR 2000-YEAR 2000 READINESS
DISCLOSURE.
- - Demand for our software products and services may decline before and after
the Year 2000. A substantial amount of demand for our software may come
from customers in the process of replacing and upgrading software
applications to accommodate the change in date to the year 2000. This
demand may have contributed to our 1998 sales growth as well as our 1999
sales growth. Once customers have completed these activities, we may
experience a deceleration in revenue growth. In addition, the expense and
time associated with remediation efforts by customers to address Year 2000
compliance problems for software products other than ours may cause our
customers to delay the purchase of, or reduce the amount they spend on, our
products and services, both before and after January 1, 2000. Such
reductions could have a material adverse effect on our business, operating
results or financial condition.
- - Our Year 2000 remediation efforts may not be successful. As part of our
Year 2000 compliance plan, we have assessed the readiness of our Internal
Programs and Systems. We believe our Internal Programs and Systems are
substantially Year 2000 compliant. However, if additional defects,
including defects in hardware, are identified and the necessary
modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 problem could have a material adverse effect
on our business, operating results or financial condition.
- - We may incur material expenses in connection with any claim relating to
Year 2000 compliance of our own products or products of third parties. We
believe the sales force software products that we currently offer to our
customers, prior to any customization, are Year 2000 compliant. We cannot
assure you, however, that our current products do not contain undetected
errors or defects associated with the Year 2000 date functionality that may
result in material costs to us.
Some of our older products will not, and some may not accurately process
dates after December 31, 1999. To the extent any of these products are
still in use in 1999, we will continue to attempt to migrate our customers
to products that are Year 2000 compliant. We cannot assure you that this
will occur. A failure to migrate any customer to a product that is Year
2000 compliant could adversely affect our business, operating results or
financial condition. We may also experience increased expenses which we
cannot recoup from current customers in addressing their migration to
software that is Year 2000 compliant. We may also incur additional
expenses associated with remediating software products of our current
customers, including those customers of companies we have recently
acquired.
13
<PAGE> 14
In addition, some of our customers may attempt to hold us responsible
for Year 2000 compliance of hardware or software not supplied or created
by us, but used in conjunction with one or more of our products. For
example, our customers' computer hardware and software, with which our
software must interface, may not properly handle date information after
the Year 2000 without error or interruption.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES.
We believe there are approximately ten other companies that sell sales force
software products and specifically target the pharmaceutical industry,
including;
- - four competitors that are actively selling sales force software products in
more than one country; and
- - three competitors that also offer sales force support services.
We believe that most of our competitors offer sales force software products
and/or services that do not address the variety of customer needs that our
solutions address. However, these competing solutions may cost less than our
solutions. We also face competition from many vendors that market and sell sales
force software products in the consumer packaged goods market. In addition, we
also compete with various companies that provide support services similar to our
services. We believe our ability to compete depends on many factors, some of
which are beyond our control, including:
- - the number and success of new market entrants supplying competing sales
force products or support services;
- - expansion of product lines by, or consolidation among, our existing
competitors; and
- - development and/or operation of in-house sales force software products or
services by our customers and potential customers.
Some of our competitors and potential competitors are part of large corporate
groups and have longer operating histories and significantly greater financial,
sales, marketing, technology and other resources than we have. We cannot assure
you that we will be able to compete successfully with these companies or that
competition will not have a material adverse effect on our business, operating
results or financial condition.
SOME OF OUR CUSTOMERS RELY ON OUR COMPETITORS FOR MARKET DATA.
Current market data on the sales of prescription-only pharmaceutical products
is an important element for the operation of our sales force software products
in the prescription-only pharmaceutical industry. Our customers use this data to
guide and organize their sales forces and marketing efforts. Some of the leading
purveyors of this market information compete with us either directly or through
affiliates or may compete with us in the future. If these purveyors of market
information require pharmaceutical companies to use their sales force products
and/or services, our business, operating results and financial condition may be
materially and adversely affected.
OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT.
The sale of our products and services in foreign countries accounts for, and
is expected in the future to account for, a material part of our revenues. These
sales are subject to risks inherent in international business activities,
including:
- - any adverse change in the political or economic environments in these
countries;
- - economic instability;
- - any adverse change in tax, tariff, trade or other regulations;
- - the absence or significant lack of legal protection for intellectual
property rights;
- - exposure to exchange rate risk for service revenues which are denominated
in currencies other than U.S. Dollars; and
- - difficulties in managing an organization spread over various jurisdictions.
OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ATTRACTING
AND RETAINING QUALIFIED PERSONNEL.
Our future success depends, to a significant extent, upon the contributions of
our executive officers and key sales, technical and customer service personnel.
Our future success also depends on our continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for such
personnel is intense. We have at times experienced difficulties in recruiting
qualified personnel and we may experience such difficulties in the future. Any
such difficulties could adversely affect our business, operating results or
financial condition.
14
<PAGE> 15
OUR INABILITY TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
To manage our growth effectively, we must continue to strengthen our
operational, financial and management information systems and expand, train and
manage our work force. However, we may not be able to do so effectively or on a
timely basis. Failure to do so could have a material adverse effect upon our
business, operating results or financial condition.
In addition, we have historically pursued and will continue to pursue
acquisitions of companies with complimentary businesses or products. We also
have entered and will continue to enter into strategic joint ventures and
alliances. There can be no assurance, however, that we will be able to identify
attractive opportunities or enter into any such transactions in the future. In
addition, as to completed acquisitions, there can be no assurance that we will
be able to integrate successfully the acquired entity into our operations. Among
other things, specific risks associated with such acquisitions include:
- - possible adverse effects on the Company's operating results;
- - diversion of management's attention;
- - unanticipated liabilities or contingencies, including unanticipated
liabilities associated with Year 2000 compliance of acquired companies
and their customers; and
- - possible inability to integrate service offerings, operations and
employees of acquired businesses.
OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO
PROTECT COMPLETELY.
We rely on a combination of trade secret, copyright and trademark laws,
non-disclosure and other contractual agreements and technical measures to
protect our proprietary technology. We cannot assure you that the steps we take
will prevent misappropriation of this technology. Further, protective actions we
have taken or will take in the future may not prevent competitors from
developing products with features similar to our products. In addition effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. We have, on occasion, in response to a request by our
customer, entered into agreements which require us to place our source code in
escrow to secure our service and maintenance obligations.
Further, we believe that our products and trademarks do not infringe upon the
proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future that may result in the imposition
of damages or injunctive relief against us. In addition, any such claims may
require us to enter into royalty arrangements. Any of these results could
materially and adversely affect our business, operating results or financial
condition.
UNIQUE CHARACTERISTICS OF THE CONSUMER PACKAGED GOODS MARKET.
We market and sell sales force software products and support services to
companies in the consumer packaged goods market. The selling environment in this
market has unique characteristics that differentiate it from the pharmaceutical
market. In addition, we believe that the consumer packaged goods market is
composed of sub-markets, each of which may have unique characteristics.
Accordingly, we cannot assure you that we will be able to replicate in this
market the success we have achieved in the ethical pharmaceutical market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
FOREIGN CURRENCY RISK
Because we have operations in a number of countries, we face exposure to
adverse movements in foreign currency exchange rates. As currency rates change,
translation of the income statements of our international entities from local
currencies to U.S. dollars affects year-over-year comparability of operating
results. We do not hedge translation risks because we generally reinvest the
cash flows from international operations in the country where they originate.
Management estimates that a 10% change in foreign exchange rates would impact
reported operating profit by less than $500,000. This sensitivity analysis
disregards the possibility that rates can move in opposite directions and that
losses from one area may be offset by gains from another area.
The introduction of the Euro as a common currency for members of the European
Monetary Union took place on January 1, 1999. We believe that this event has had
minimal impact on our foreign exchange exposure.
INTEREST RATE RISK
Our exposure to market risk is related to changes in interest rates which
primarily applies to our investment portfolio. We invest in instruments that
meet high credit quality standards, as specified in our investment policy. The
policy also limits the amount of credit exposure to any one issue, issuer and
type of investment.
As of June 30, 1999, our investments consisted primarily of commercial paper
maturing over the following four months. Due to the average maturity and
conservative nature of our investment portfolio, a sudden change in
15
<PAGE> 16
interest rates would not have a material effect on the value of the portfolio.
Management estimates that had the average yield of our investments decreased by
100 basis points, our interest income for the year ended December 31, 1998 would
have decreased by less than $150,000. This estimate assumes that the decrease
occurred on the first day of 1998 and reduced the yield of each investment
instrument by 100 basis points. The impact on our future interest income, of
future changes in investment yields will depend largely on the gross amount of
our investments. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities
On June 30, 1999, the Company issued 105,660 shares of restricted Common Stock
to MMI Holdings, Inc. ("MMI Holdings") as partial consideration for the
Company's acquisition of substantially all of the assets of certain direct and
indirect subsidiaries of MMI Holdings (the "MMI Acquisition"). The Company did
not employ an underwriter in connection with the issuance or sale of the
securities described above. The Company claims that the issuance or sale of the
foregoing securities was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Act"), as transactions not involving
any public offering and such securities having been acquired for investment and
not with a view to distribution. Appropriate legends were affixed to the stock
certificates issued in the MMI Acquisition and MMI Holdings had adequate access
to information about the Company.
On May 26, 1999, the Company issued 1,480,538 shares of restricted Common
Stock to the shareholders of CorNet International, Ltd. ("CorNet") in exchange
for all of the outstanding capital stock of CorNet in a merger transaction (the
"CorNet Merger"). The Company did not employ an underwriter in connection with
the issuance or sale of the securities described above. The Company claims that
the issuance or sale of the foregoing securities was exempt from registration
under Section 4(2) of the Act, as transactions not involving any public
offering and such securities having been acquired for investment and not with a
view to distribution. Appropriate legends were affixed to the stock
certificates issued in connection with the CorNet Merger and all recipients had
adequate access to information about the Company.
On July 24, 1998, the Company issued 67,692 shares of restricted Common Stock
to the owners of Associated Business Computing N.V. and an associated company
(collectively, "ABC") as partial consideration for the Company's acquisition of
all of the outstanding capital stock of ABC (the "ABC Acquisition"). The
Company did not employ an underwriter in connection with the issuance or sale
of the securities described above. The Company claims that the issuance or sale
of the foregoing securities was exempt from registration under Section 4(2) of
the Act, as transactions not involving any public offering and such securities
having been acquired for investment and not with a view to distribution.
Appropriate legends were affixed to the stock certificates issued in connection
with the ABC Acquisition and all recipients had adequate access to information
about the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On May 11, 1999, the Company held its 1999 Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the following six individuals
were elected to the Company's Board of Directors: John E. Bailye, Bernard M.
Goldsmith, Edward J. Kfoury, Paul A. Margolis, John H. Martinson, and Terence H.
Osborne. In addition, at the Annual Meetings the shareholders of the Company
approved the following three proposals: (1) a proposal to ratify the appointment
of Anderson LLP as the Company's independent public accountants for the year
ending December 31, 1999; (2) a proposal to approve an amendment to the
Company's 1997 Stock Incentive Plan; and (3) a proposal to reapprove the
Company's 1992 Stock Plan and 1992 Senior Management Incentive Stock Option
Plan. The results of the voting in the Company's election of directors and on
the foregoing three proposals are set forth below.
16
<PAGE> 17
Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
John E. Bailye 20,459,751 225,639
Bernard M. Goldsmith 20,460,311 225,079
Edward J. Kfoury 20,460,311 225,079
Paul A. Margolis 20,460,311 225,079
John H. Martinson 20,459,711 225,679
Terence H. Osborne 20,456,881 228,509
</TABLE>
Ratification of Appointment of Arthur Andersen LLP:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
20,672,860 4,044 8,486
</TABLE>
Approval of an amendment to the Company's 1997 Stock Incentive Plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
13,554,323 2,990,004 16,998
</TABLE>
Reapproval of 1992 Stock Plan and 1992 Senior Management Incentive Stock
Option Plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
20,273,383 400,313 11,694
</TABLE>
Item 5. Other Information
(a) On May 26, 1999, the Company's Board of Directors approved an amendment to
the Company's existing employment agreements (the "Amendment") with certain
of its senior executives, including Teresa F. Winslow and Mark H. Cieplik.
The Amendment provides for immediate option vesting upon change of control
of the Company, to the extent the executive's existing option agreements do
not already so provide, and severance in an amount equal to one year's base
salary upon change of control of the Company accompanied by a material
diminution of such executive's duties or compensation. George T. Robson's
existing employment agreement was also modified to bring it into
conformance with the Amendment.
(b) On May 26, 1999 we completed the acquisition of CorNet International, Ltd.
the transaction was accounted for as a pooling of interests. Set forth on
pages F-1 through F-16 are the Company's historical financial statements
restated to reflect this transaction.
(c) Selected Consolidated Financial Data and Management's Discussion and
Analysis, restated for the pooling of interests discussed above is
Attachment 1.
Item 6. Exhibits and Reports on Form 8-K
(a) The Company is furnishing the following exhibits in connection
with this report:
10.1 Form of Amendment to Employment Agreements
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule, Restated 1997
27.3 Financial Data Schedule, Restated 1998
27.4 Financial Data Schedule, Restated March 31, 1999
(b) The Company filed one report on Form 8-K during the quarter for
which this report is filed. The report was filed on June 2, 1999,
and reported on the Company's May 26, 1999 acquisition of CorNet
International, Ltd.
17
<PAGE> 18
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: August 16, 1999
By:/s/ John E. Bailye
---------------------
John E. Bailye, President and
Chief Executive Officer
By: /s/ George T. Robson
-------------------------
George T. Robson, Executive Vice President
and Chief Financial Officer
18
<PAGE> 19
ITEM 5B
DENDRITE INC. AND SUBSIDIARIES
------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE> 20
Report of Independent Public Accountants
To Dendrite International, Inc.:
We have audited the accompanying consolidated balance sheets of Dendrite
International, Inc. (a New Jersey corporation) and Subsidiaries as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of CorNet International, Inc., a company acquired during 1999 in a
transaction accounted for as a pooling of interest, as discussed in Notes 1 and
11. Such statements are included in the consolidated financial statements of
Dendrite International, Inc. and reflect total assets and total revenues of 9
percent and 14 percent in 1998, and 8 percent and 14 percent in 1997,
respectively, of the related consolidated totals. These statements were audit by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to amounts included for CorNet International, Inc., is based solely
upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Dendrite International, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
August 16, 1999
F-2
<PAGE> 21
\ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors
CorNet International, Ltd.:
We have audited the accompanying balance sheets of CorNet International, Ltd.
as of December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, which are not presented herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of CorNet International, Ltd as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
KPMG LLP
February 16, 1999
Allentown, Pennsylvania
F-3
<PAGE> 22
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 15,937 $ 32,555
Short-term investments .............................. 2,955 9,614
Accounts receivable, net ............................ 27,005 20,378
Prepaid expenses and other .......................... 2,668 3,391
Prepaid taxes ....................................... -- 921
Deferred tax asset .................................. 507 675
-------- --------
Total current assets ........................... 49,072 67,534
PROPERTY AND EQUIPMENT, net .............................. 5,049 7,221
DEFERRED TAXES ........................................... 667 1,077
GOODWILL, net ............................................ 575 2,496
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net .............. 2,408 3,503
-------- --------
$ 57,876 $ 81,831
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 2,368 $ 2,249
Income taxes payable ................................ 867 1,036
Accrued compensation and benefits ................... 3,876 4,321
Other accrued expenses .............................. 4,477 7,493
Deferred revenues ................................... 1,741 1,827
Note payable .......................................... 930 --
-------- --------
Total current liabilities ...................... 14,259 16,926
-------- --------
DEFERRED RENT ............................................ 598 392
-------- --------
CAPITALIZED LEASE OBLIGATIONS ............................ 353 544
DEFERRED TAXES ........................................... 1,994 2,920
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued ........................... -- --
Common stock, no par value, 100,000,000 shares
authorized, 24,131,211 and 24,830,450 shares issued
and 24,131,211 and 24,429,450 outstanding ......... 33,342 41,442
Retained earnings ................................... 11,239 23,998
Deferred compensation ............................... (1,141) (1,970)
Accumulated other comprehensive income .............. (841) (494)
Less treasury stock, at cost ........................ (1,927) (1,927)
-------- --------
Total stockholders' equity ..................... 40,672 61,049
-------- --------
$ 57,876 $ 81,831
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 23
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
License fees ................................... $ 10,310 $ 9,074 $ 14,955
Services ....................................... 66,573 82,248 115,678
--------- --------- ---------
76,883 91,322 130,633
--------- --------- ---------
COSTS OF REVENUES:
Cost of license fees ........................... 832 1,758 2,314
Cost of services ............................... 37,771 45,078 57,887
--------- --------- ---------
38,603 46,836 60,201
--------- --------- ---------
Gross margin .............................. 38,280 44,486 70,432
--------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative ............ 28,519 33,305 44,046
Research and development ....................... 7,361 3,674 4,584
Write-off of in-process research and development 2,640 -- 1,230
--------- --------- ---------
38,520 36,979 49,860
--------- --------- ---------
Operating income (loss) ................... (240) 7,507 20,572
INTEREST INCOME ..................................... 1,168 531 1,099
OTHER EXPENSE ....................................... (240) (261) (466)
--------- --------- ---------
Income (loss) before income taxes ......... 688 7,777 21,205
INCOME TAXES ........................................ 1,467 3,002 8,446
--------- --------- ---------
NET INCOME (LOSS) ................................... $ (779) $ 4,775 $ 12,759
========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic .......................................... $ (0.03) $ 0.20 $ 0.53
========= ========= =========
Diluted ........................................ $ (0.03) $ 0.19 $ 0.49
========= ========= =========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
Basic .......................................... 23,580 23,734 24,053
========= ========= =========
Diluted ........................................ 23,580 24,580 26,261
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 24
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED DEFERRED
SHARES AMOUNT EARNINGS COMPENSATION
------ ------ -------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..... 22,818 $27,336 $ 7,243 $ (502)
Issuance of common stock... 381 1,095 -- (838)
Amortization of deferred
compensation............. -- -- -- 113
Issuance of common stock
from consummation
of public offering,
net of offering costs.... 600 4,295 -- --
Comprehensive income:
Net loss................... -- -- (779) --
Other comprehensive
income:
Realization of gain on
short-term investments -- -- -- --
Currency translation
adjustment........... -- -- -- --
Comprehensive income...
----- ------- ------- --------
BALANCE, DECEMBER 31, 1996..... 23,799 32,726 6,464 (1,227)
Issuance of common stock... 333 616 -- (20)
Amortization of deferred
compensation............. -- -- -- 106
Purchase of 401,000 shares
of treasury stock........ (401) -- -- --
Comprehensive income:
Net income................. -- -- 4,775 --
Other comprehensive
income:
Currency translation
adjustment........... -- -- -- --
Comprehensive income...
----- ------- ------- --------
BALANCE, DECEMBER 31, 1997..... 23,731 33,342 11,239 (1,141)
Issuance of common stock... 698 6,740 -- (1,257)
Amortization of deferred
compensation............. -- -- -- 428
Stock option income
tax benefits............. -- 1,360 -- --
Comprehensive income:
Net income................. -- -- 12,759 --
Other comprehensive
income:
Currency translation
adjustment........... -- -- -- --
Comprehensive income....
----- ------- ------- --------
BALANCE, DECEMBER 31, 1998..... 24,429 $41,442 $23,998 $ (1,970)
====== ======= ======= ========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME INCOME STOCK EQUITY
------ ------ ----- ------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..... $ (567) $ -- $33,510
Issuance of common stock... -- -- 257
Amortization of deferred
compensation............. -- -- 113
Issuance of common stock
from consummation
of public offering,
net of offering costs.... -- -- 4,295
Comprehensive income:
Net loss................... -- $(779) -- (779)
Other comprehensive
income:
Realization of gain on
short-term investments (14) (14) -- (14)
Currency translation 128
adjustment........... 128 -- 128
Comprehensive income... $(665)
------------ ===== ------- -------
BALANCE, DECEMBER 31, 1996..... (453) -- 37,510
Issuance of common stock... -- -- 596
Amortization of deferred
compensation............. -- -- 106
Purchase of 401,000 shares
of treasury stock........ -- (1,927) (1,927)
Comprehensive income:
Net income................. -- $4,775 -- 4,775
Other comprehensive
income:
Currency translation
adjustment........... (388) (388) -- (388)
Comprehensive income... $4,387
------------ ====== ------- -------
BALANCE, DECEMBER 31, 1997..... (841) (1,927) 40,672
Issuance of common stock... 5,483
Amortization of deferred
compensation............. -- 428
Stock option income
tax benefits............. -- 1,360
Comprehensive income:
Net income................. -- $12,759 -- 12,759
Other comprehensive
income:
Currency translation
adjustment........... 347 347 -- 347
Comprehensive income.... $13,106
------------ =======
BALANCE, DECEMBER 31, 1998..... $ (494) $(1,927) $61,049
============ ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 25
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ (779) $ 4,775 $ 12,759
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 2,368 3,417 4,197
Deferred income taxes (benefit).......................... (257) 749 25
Write-off of in-process research and development......... 2,640 -- 1,230
Changes in assets and liabilities, net of effect from
acquisition:
(Increase) decrease in accounts receivable............. (5,382) (5,230) 6,099
Increase in prepaid expenses and other................. (276) (772) (870)
(Increase) decrease in prepaid income taxes............ (1,397) 1,397 --
Increase in accounts payable and accrued expenses...... 2,826 992 3,335
Increase (decrease) in deferred rent................... 262 (128) (206)
Increase (decrease) in income taxes payable............ (1,299) (378) 461
(Increase) decrease in deferred revenues............... (1,519) (691) 357
------- ------- --------
Net cash provided by (used in) operating activities. (2,813) 4,061 27,387
------- ------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments......................... (8,271) (3,800) (13,552)
Sales of short-term investments............................. 10,805 9,266 6,893
Purchases of businesses, net of cash acquired............... (2,965) -- (2,295)
Purchases of property and equipment......................... (1,373) (2,022) (2,779)
Additions to capitalized software development costs......... (1,296) (919) (1,637)
------- ------- --------
Net cash provided by (used in) investing activities. (3,100) 2,525 (13,370)
------- ------- --------
FINANCING ACTIVITIES:
Payments on capital lease obligations....................... (68) (188) (302)
Issuance of Common stock from consummation of public
offering, net of offering costs............................. 4,295 -- --
Purchase of treasury stock.................................. -- (1,927) --
Issuance of common stock.................................... 257 596 3,703
Proceeds from bank loan...................................... 4,065 5,805 4,625
Repayments from bank loan.................................... (3,380) (5,572) (5,555)
------- ------- --------
Net cash provided by (used in) financing activities. 5,169 (1,286) 2,471
------- ------- --------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH............... 94 (283) 130
------- ------- --------
NET INCREASE (DECREASE) IN CASH............................... (650) 5,017 16,618
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................. 11,570 10,920 15,937
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........................ $10,920 $15,937 $ 32,555
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 26
DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Dendrite International, Inc. and Subsidiaries (the "Company") provides
comprehensive Sales Force Effectiveness solutions used to manage, coordinate and
control the activities of large sales forces in complex selling environments
primarily within the ethical pharmaceutical industry. The Company also markets
its products in the consumer packaged goods market. The Company's solutions
combine proprietary software products with extensive system support services.
On May 26, 1999 the Company acquired CorNet International, Ltd. ("CorNet")
in a transaction accounted for as a pooling of interests (see Note 11).
Accordingly, the accompanying financial statements have been restated to reflect
the acquisition of CorNet under the pooling of interests method.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Dendrite
International, Inc. and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
substantially all assets and liabilities of the Company's wholly-owned
international subsidiaries are translated at their respective period-end
currency exchange rates and revenues and expenses are translated at average
currency exchange rates for the period. The resulting translation adjustments
are accumulated in a separate component of stockholders' equity. All foreign
currency transaction gains and losses are included in other expense on the
accompanying statements of operations and are immaterial in each year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company generally recognizes license fees as revenue using the
percentage-of-completion method over a period of time that commences with the
execution of the license agreement and ends with the completion of initial
customization and installation, if any. Some of the Company's newer products do
not require initial customization. If the customer does not request such
customization, the Company generally recognizes the license fees from these
products upon delivery, assuming the services to be provided are not essential
to the functionality of the software. The Company's software licensing
agreements provide for a warranty period (typically 180 days from the date of
execution of the agreement). The portion of the license fee associated with the
warranty period is unbundled from the license fee and is recognized ratably over
the warranty period. The Company does not recognize any license fees unless
persuasive evidence of an arrangement exists, the license amount is fixed and
determinable and collectability is probable.
The Company recognizes license fees from certain third party software
embedded into the product when the related license fees are recognized. The cost
of third party software is included in cost of license fees in the accompanying
statements of operations. For the years ended December 31, 1996, 1997 and 1998,
the Company recorded $112,000, $796,000 and $1,208,000, respectively, of license
fees and $93,000, $658,000 and $922,000, respectively, of cost of license fees
relating to third party software.
Revenues from services are generally recognized as the services are
performed. Revenues from customer maintenance, support and data server rental
agreements are recognized ratably over the term of the agreements.
Services are generally provided under multiyear contracts. The contracts
specify the payment terms, which are generally over the
F-8
<PAGE> 27
term of the contract and generally provide for termination in the event of
breach, as defined in the contract.
Deferred Revenues
Deferred revenues represent amounts collected from or invoiced to customers
in excess of revenues recognized. Such amounts are recognized as revenue when
the related significant performance obligations have been satisfied.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
For the years ended December 31, 1996, 1997 and 1998, the Company paid
interest of $41,000, $85,000 and $86,000. For the years ended December 31, 1996,
1997 and 1998, the Company paid income taxes of $4,499,000, $1,273,000 and
$7,776,000, respectively.
The following table lists noncash assets that were acquired and liabilities
that were assumed as a result of the acquisitions discussed in Note 2:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1998
---- ----
Noncash assets:
<S> <C> <C>
Accounts receivable...................... $ 823,000 $ 301,000
Prepaid expenses......................... 31,000 59,000
Property and equipment................... 91,000 408,000
Capitalized software development costs... -- 850,000
Goodwill................................. 860,000 2,226,000
---------- -----------
1,805,000 3,844,000
Assumed liabilities:
Accounts payable......................... (488,000) (294,000)
Income taxes payable..................... -- (121,000)
Accrued compensation and benefits........ (250,000) --
Other accrued expenses................... (613,000) (396,000)
Deferred revenues........................ (129,000) (107,000)
Deferred taxes........................... -- (323,000)
---------- -----------
Net noncash assets acquired........... 325,000 2,603,000
Write-off of in-process research and 2,640,000 1,230,000
development................................
Purchase price paid in stock............... -- (1,538,000)
---------- -----------
Cash paid, net of cash acquired............ $2,965,000 $ 2,295,000
========== ===========
</TABLE>
Short-Term Investments
The Company follows SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company invests
in highly rated corporate bonds and municipal bonds. At December 31, 1997 and
1998, all marketable securities have been classified as available-for-sale.
Available-for-sale securities are carried at fair value, based on quoted market
prices, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses, computed using
specific identification, and declines in value determined to be permanent are
recognized in the statement of operations.
Property and Equipment
Fixed assets are stated at cost. Depreciation and amortization are provided
generally on the straight-line basis over the estimated useful lives of the
respective assets, which range from 3 to 15 years. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives of the
assets or the lease terms, whichever are shorter. Maintenance, repairs and minor
replacements are charged to expense as incurred.
F-9
<PAGE> 28
Capitalized Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes
certain costs related to the development of new software products or the
enhancement of existing software products for sale or license. These costs are
capitalized from the point in time that technological feasibility has been
established, as evidenced by a working model or a detailed working program
design, to the point in time that the product is available for general release
to customers. Capitalized software development costs are amortized on a product
by product basis over the greater of the ratio of current revenues to total
anticipated revenues or on a straight-line basis over the estimated economic
lives of the products (no longer than four years), beginning with the release to
the customer. Research and development costs incurred prior to establishing
technological feasibility and costs incurred subsequent to general product
release to customers are charged to expense as incurred. The Company continually
evaluates whether events or circumstances have occurred that indicate that the
remaining useful lives of the capitalized software development costs should be
revised or that the remaining balance of such assets may not be recoverable. As
of December 31, 1998, management believes that no revisions to the remaining
useful lives or write-down of capitalized development costs is required.
Capitalized software development costs are net of accumulated amortization
of $3,041,000 and $4,433,000 at December 31, 1997 and 1998, respectively. The
Company capitalized software development costs of $1,296,000, $919,000 and
$2,487,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Included in the 1998 additions to capitalized software development costs are
$850,000 of costs related to the acquisition of Associated Business Computing
N.V. and an affiliated company (collectively, "ABC"). Amortization of
capitalized software development costs for the years ended December 31, 1996,
1997 and 1998, was $739,000, $1,100,000 and $1,392,000, respectively, and is
included in cost of license fees in the accompanying consolidated statements of
operations.
Intangible Assets
Goodwill of $3,086,000 is being amortized on a straight-line basis over five
to seven years (see Note 2). Amortization of goodwill for the years ended
December 31, 1996, 1997 and 1998 was $113,000, $172,000 and $305,000,
respectively.
Impairment of Long-Lived Assets
The Company follows SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
reviews its long-lived assets, including property and equipment, capitalized
software development costs, and goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
that are expected to be in effect when the differences reverse.
At December 31, 1998, there were approximately $3,581,000 of accumulated
undistributed earnings of subsidiaries outside the United States that are
considered to be reinvested indefinitely. If such earnings were remitted to the
Company, applicable U.S. federal income and foreign withholding taxes may be
partially offset by foreign tax credits.
Major Customers
In the year ended December 31, 1996, the Company derived approximately 31%
and 12% of its revenues from its two largest customers. In the year ended
December 31, 1997, the Company derived approximately 28%, and 13% of its
revenues from its two largest customers, one of which was the Company's largest
customers in 1996. In the year ended December 31, 1998, the Company derived
approximately 31% and 11% of its revenues from its two largest customers, both
of which were among the Company's largest customers in 1997.
F-10
<PAGE> 29
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash with large banks. The Company's customer base
principally comprises companies within the ethical pharmaceutical industry. The
Company does not require collateral from its customers.
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 year by the weighted average number of shares of common
stock outstanding for each year. Diluted income (loss) per share (Diluted EPS)
was computed by dividing net income (loss) for each year by the weighted average
number of shares of common stock and common stock equivalents outstanding during
each year.
The computation of shares used for Basic EPS and Diluted EPS is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1997
---------------------------------------------- ----------------------------------------------
LOSS SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (779) $4,775
Basic EPS....... 23,580 $(0.03) 23,734 $ 0.20
Effect of dilutive
securities
Stock options. -- 846
------ ------
Diluted EPS..... 23,580 $(0.03) 24,580 $ 0.19
====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net income (loss) $ 12,759
Basic EPS....... 24,053 $0.53
Effect of dilutive
securities
Stock options. 2,208
-------
Diluted EPS..... 26,261 $0.49
====== =====
</TABLE>
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Management believes that SFAS 133 will have no impact on the Company's
consolidated financial statements.
Recapitalization
In August 1998, the Company amended its articles of incorporation to reflect
a 2-for-1 split of its common shares and to change the number of authorized
common shares to 100,000,000. All references in the consolidated financial
statements to the number of shares and to per share amounts have been
retroactively restated to reflect these changes.
F-11
<PAGE> 30
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
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 related to client specific activities. For consistency of
presentation, prior periods have been reclassified. The reclassification for the
years ended December 31, 1996 and 1997 was $1,913,000 and $2,540,000,
respectively.
2. ACQUISITIONS:
On May 1, 1996, the Company acquired 100% of the capital stock of SRCI, S.A.
("SRCI") for approximately $3,198,000 and transaction costs of $302,000. The
purchase was accounted for under the purchase method of accounting, whereby the
purchase price is allocated to the assets acquired and liabilities assumed of
SRCI based on their fair market values at the acquisition date. The excess of
purchase price over the fair value of net assets acquired was assigned to
identifiable intangibles. The Company assigned $2,640,000 to in-process research
and development and such amount was written off in the accompanying consolidated
statements of operations. The Company also recorded $860,000 as goodwill. SRCI's
results of operations have been included in the Company's consolidated financial
statements from the date of acquisition.
On July 24, 1998, the Company acquired 100% of the capital stock of 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 consolidated
statements of operations. The Company also recorded $2,226,000 as goodwill.
ABC's results of operations have been included in the Company's consolidated
financial statements from the date of acquisition.
In May 1999, the Company completed an acquisition accounted for under the
pooling of interests method (see Note 11).
In June 1999, the Company completed an acquisition accounted for under the
purchase method (see Note 11).
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
Computer hardware and other equipment $ 7,465,000 $10,596,000
Furniture and fixtures.............. 1,951,000 2,188,000
Leasehold improvements.............. 1,192,000 2,028,000
----------- -----------
10,608,000 14,812,000
Less -- Accumulated depreciation and
amortization...................... (5,559,000) (7,591,000)
----------- -----------
$ 5,049,000 $ 7,221,000
=========== ===========
</TABLE>
4. REVOLVING LINE OF CREDIT:
During the year ended December 31, 1998, the Company amended its revolving
line of credit agreement with a bank which provides for borrowings of up to
$15,000,000 and is available to finance working capital needs and possible
future acquisitions. The agreement requires, among other covenants, that the
Company maintain a minimum consolidated net worth, measured quarterly, which is
equal to the Company's net worth as of December 31, 1997 plus 50% of the
Company's net income earned after January 1, 1998, and 75% of the net proceeds
of any stock offerings. This covenant has the effect of limiting the amount of
cash dividends the Company may pay. As of December 31, 1998, approximately
$43,806,000 was available for the payment of dividends under this covenant. The
line of credit expires on November 30, 2001. The Company has never had any
borrowings under this revolving line of credit.
In addition, CorNet maintains a line of credit with a bank which permits short
term borrowings up to $1,500,000. Interest is at the prime rate (7.75% at
December 31, 1998). Interest expense for this line of credit for the years ended
December 31, 1996, 1997 and 1998 was $27,000, $45,000 and $35,000, respectively.
The line of credit is collateralized by substantially all of CorNet's assets.
This line of credit expires on June 30, 1999 and is subject to certain
financial covenants. As of December 31, 1998 there were no outstanding
borrowings under this line.
F-12
<PAGE> 31
5. INCOME TAXES:
The components of income (loss) before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Domestic. $ 745,000 $6,226,000 $ 20,765,000
Foreign.. (57,000) 1,551,000 440,000
---------- ---------- ------------
$ 688,000 $7,777,000 $ 21,205,000
========== ========== ============
</TABLE>
The components of income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current Provision:
Federal ........ $ 1,158,000 $ 2,032,000 $ 7,797,000
State .......... 193,000 31,000 295,000
Foreign ........ 373,000 190,000 329,000
----------- ----------- -----------
1,724,000 2,253,000 8,421,000
Deferred Provision
(Benefit):
Federal ........ (114,000) 25,000 (301,000)
State .......... 113,000 376,000 366,000
Foreign ........ (257,000) 348,000 (40,000)
----------- ----------- -----------
(258,000) 749,000 25,000
----------- ----------- -----------
$ 1,466,000 $ 3,002,000 $ 8,446,000
=========== =========== ===========
</TABLE>
The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate ......................... (34.0)% 34.0% 34.0%
Impact of foreign subsidiaries subject to higher tax
rates ............................................ 0.4 0.1 --
Impact of enacted change in German tax rates on
deferred tax assets ................................ 8.5 -- --
State income taxes, net of federal tax benefit ..... 9.8 4.8 3.8
Nondeductible expenses ............................. 10.9 0.3 0.8
Write-off of in-process research and development ... 149.6 -- 2.2
Tax credits utilized ............................... -- (0.6) (1.0)
----- ----- -----
213.2% 38.6% 39.8%
===== ===== =====
</TABLE>
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
Gross deferred tax asset:
Depreciation and amortization ..... $ 314,000 $ 426,000
Foreign net operating loss ........ 1,021,000 1,309,000
Accruals and revenues not currently
deductible ..................... 142,000 301,000
Other ............................. 418,000 475,000
----------- -----------
$ 1,895,000 $ 2,511,000
=========== ===========
Gross deferred tax liability:
Capitalized software development
costs............................ $ (598,000) $(1,357,000)
Other ............................. (2,117,000) (2,322,000)
----------- -----------
$(2,715,000) $(3,679,000)
=========== ===========
</TABLE>
The Company has recorded a deferred tax asset of $1,309,000 reflecting the
benefit of approximately $3,000,000 in foreign loss carryforwards, which expire
in varying amounts commencing in 2000. Realization is dependent on generating
sufficient foreign taxable income prior to the expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
F-13
<PAGE> 32
6. EQUITY PLANS:
STOCK OPTION PLANS
The Company has three stock option plans that provide for the granting of
options, the awarding of stock and the purchase of stock. Options granted under
the three stock option plans generally vest over a four-year period and are
exercisable over a period not to exceed ten years both as determined by the
Board of Directors. Incentive stock options are granted at fair value.
Nonqualified options are granted at exercise prices determined by the Board of
Directors.
Information with respect to the options under the three stock option plans
is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
------ --------- --------
<S> <C> <C> <C>
Outstanding December 31, 1995 1,197,606 $0.21 - $ 9.56 $ 1,840,256
Granted................... 471,711 $2.18 - $15.75 5,763,349
Exercised................. (373,910) $0.21 - $ 5.00 (257,280)
Canceled.................. (125,707) $0.21 - $15.75 (1,036,963)
--------- --------------- -----------
Outstanding December 31, 1996 1,169,700 $0.21 - $15.75 6,309,362
Granted................... 2,973,835 $3.13 - $10.47 20,948,227
Exercised................. (262,817) $0.21 - $ 5.00 (189,869)
Canceled.................. (223,743) $0.21 - $15.75 (1,994,654)
--------- --------------- -----------
Outstanding December 31, 1997 3,656,975 $0.21 - $15.75 $25,073,066
Grants.................... 1,259,080 $3.13 - $22.72 19,381,743
Exercises................. (558,386) $0.21 - $15.75 (3,126,224)
Terminations.............. (376,587) $0.21 - $15.75 (2,476,211)
--------- --------------- -----------
Outstanding December 31, 1998 3,981,082 $0.21 - $22.72 38,863,203
========= =============== ===========
</TABLE>
At December 31, 1998, there were 1,048,339 options exercisable at
$0.21-$15.75 per share. The aggregate exercise price of these options was
$7,330,553 as of December 31, 1998.
The Company adopted the disclosure requirement of SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for the Company's December 31, 1996
financial statements. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly,
compensation cost has been computed for the stock option plans based on the
intrinsic value of the stock option at the date of grant, which represents the
difference between the exercise price and the fair value of the Company's stock.
As the exercise price of the stock options equaled the fair value of the
Company's stock at the date of option issuance, no compensation cost has been
recorded in the accompanying statements of operations. Had compensation cost for
the three option plans and the employee stock purchase plan been determined
consistent with SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported............... $ (779,000) $ 4,775,000 $12,759,000
Pro forma................. $(1,276,000) $ 2,473,000 $ 6,545,000
Basic income (loss) per share:
As reported............... $ (.03) $ .20 $ .53
Pro forma................. $ (.05) $ .10 $ .27
Diluted income (loss) per share:
As reported............... $ (.03) $ .19 $ .49
Pro forma................. $ (.05) $ .10 $ .25
</TABLE>
Because the SFAS No. 123 method of accounting is not required to be applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The weighted average fair value of options granted was $8.30, $4.86 and
$11.35 for the years ended December 31, 1996, 1997 and 1998, respectively.
F-14
<PAGE> 33
Information with respect to the options outstanding under the three stock
option plans at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING NUMBER
EXERCISE PRICE EXERCISE CONTRACTUAL OF VESTED
PER SHARE SHARES PRICE LIFE SHARES
--------- ------ ----- ---- ------
<S> <C> <C> <C> <C>
$0.21 15,188 $ 0.21 0.5 15,188
$1.35-$3.96 709,759 $ 3.02 6.62 305,101
$5.00-$6.37 681,685 $ 5.90 8.06 205,500
$8.00-$11.875 1,605,750 $ 9.88 8.68 425,550
$13.25-$20.94 696,700 $ 15.53 9.19 97,000
$21.00-$22.72 272,000 $ 22.07 9.73 --
--------- ------- ---- ---------
3,981,082 $ 9.76 8.34 1,048,339
========= ======= ==== =========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1996, 1997 and 1998: risk-free interest rates ranging from 5.4% to
6.9% based on the rate in effect on the date of grant; no expected dividend
yield; expected lives of 4.0 to 6.0 years for the options; and expected
volatility of 70%.
EMPLOYEE STOCK PURCHASE PLAN
In 1997, the Company established an employee stock purchase plan that
provides full-time employees the opportunity to purchase shares at 85% of fair
value on dates determined by the Board of Directors, up to a maximum 10% of
their eligible compensation or $21,250, whichever is less. There were 300,000
shares available for purchase under this plan, of which 42,236 and 55,858 were
purchased in 1997 and 1998, respectively.
ANNIVERSARY STOCK PLAN
The Company grants 200 shares of the Company's common stock to all employees
who commenced employment prior to December 31, 1998 in July following their
fifth anniversary of employment. The cost of the anniversary stock plan is
accrued over the employment period of the employees.
7. SAVINGS AND DEFERRED COMPENSATION PLANS:
The Company maintains Employee Savings Plans (the "Plans") that cover
substantially all of its full-time U.S. and U.K. employees. All eligible
employees may elect to contribute a portion of their wages to the Plans, subject
to certain limitations. In addition, the Company contributes to the Plans at the
rate of 50% of the employee's contributions up to a maximum of 3% of the
employee's salary. The Company's contributions to the Plans were $274,000,
$300,000 and $416,000 in the years ended December 31, 1996, 1997 and 1998,
respectively.
The Company also maintains a noncontributory pension plan that covers
substantially all of its full-time Japanese employees. All contributions to this
pension plan are made by the Company in accordance with prescribed statutory
requirements. The Company's contributions to the Plan were $56,000, $76,000 and
$74,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
In 1998, the Company created a deferred compensation plan. Under the plan,
eligible, highly compensated employees, as defined, can elect to defer a portion
of their compensation and determine the nature of the investments which will be
used to calculate earnings on the deferred amounts. The Company will record the
deferrals as a liability and intends to place a corresponding amount into a
trust fund.
F-15
<PAGE> 34
8. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities and equipment under various operating
leases with remaining noncancelable lease terms generally in excess of one year.
Rent expense was $4,049,000, $5,237,000 and $5,992,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. Future minimum rental payments
at December 31, 1998, on these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999...... $ 7,630,000
2000...... 4,582,000
2001...... 2,673,000
2002...... 1,999,000
2003...... 1,170,000
Thereafter 972,000
------------
$ 19,026,000
============
</TABLE>
From time to time the Company is involved in certain legal actions arising
in the ordinary course of business. In the Company's opinion, the outcome of
such actions will not have a material adverse effect on the Company's financial
position or results of operations.
9. RELATED-PARTY TRANSACTIONS:
The Company paid approximately $78,000 and $33,000 for the years ended
December 31, 1996 and 1997, respectively, to an entity owned by the President
and Chief Executive Officer of the Company for rental and usage of an aircraft.
10. GEOGRAPHIC SEGMENT DATA:
See Note 1 for a brief description of the Company's business. The Company is
organized by geographic locations and has one reportable segment: the United
States. All license fees are recorded in the United States; service fees are
recorded in the location in which the sale originates and the service is
performed. All transfers between geographic areas have been eliminated from
consolidated net sales. Operating income consists of total net sales recorded in
the location less operating expenses and does not include interest income, other
expense or income taxes. This data is presented in accordance with SFAS No. 131
"Disclosure About Segments of an Enterprise and Related Information".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States......... $49,158,000 $ 61,915,000 $ 103,765,000
All Other............. 27,725,000 29,407,000 26,868,000
----------- ---------------- ---------------
$76,883,000 $ 91,322,000 $ 130,633,000
=========== ================ ================
Operating income (loss):
United States......... $ (136,000) 6,183,000 $ 20,453,000
All Other............. (104,000) 1,324,000 119,000
----------- ----------------- ---------------
$ (240,000) $ 7,507,000 $ 20,572,000
=========== ================= ===============
Identifiable assets:
United States......... $40,872,000 $ 43,150,000 $ 67,211,000
All Other............. 13,304,000 14,726,000 14,620,000
----------- ----------------- ---------------
$54,176,000 $ 57,876,000 $ 81,831,000
=========== ================= ===============
</TABLE>
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1998:
On May 26, 1999, the Company exchanged 1,480,538 shares of its common stock
for all of the outstanding shares of common stock of CorNet International, Inc.
("CorNet"). The merger has been accounted for under the pooling of interests
method. Accordingly, the Company's financial statements have been restated to
reflect the acquisition of CorNet under the pooling of interests method.
F-16
<PAGE> 35
Separate results of Dendrite International, Inc. and CorNet for the years
prior to the consummation of the merger are as follows:
<TABLE>
<CAPTION>
DENDRITE CORNET COMBINED
-------- ------ --------
<S> <C> <C> <C>
Year ended December 31, 1998
Total revenue......... $ 112,518,000 $ 18,115,000 $ 130,633,000
Net income............ $ 11,267,000 $ 1,492,000 $ 12,759,000
Year ended December 31, 1997
Total revenue......... $ 78,446,000 $ 12,876,000 $ 91,322,000
Net income............ $ 4,610,000 $ 165,000 $ 4,775,000
Year ended December 31, 1996
Total revenue......... $ 66,246,000 $ 10,637,000 $ 76,883,000
Net income (loss)..... $ (1,912,000) $ 1,133,000 $ (779,000)
</TABLE>
On June 30, 1999, the Company purchased substantially all of the assets and
assumed certain liabilities of Marketing Management International, Inc. and
certain affiliated companies ("MMI") for $7,300,000 in cash, which includes
estimated transaction costs, and $3,400,000 in stock. The acquisition has been
accounted for using the purchase method with the purchase price allocated to
the fair value of the acquired assets and liabilities. The excess purchase
price over the fair value of the net assets acquired will be allocated between
capitalized software development costs and goodwill based upon an independent
appraisal.
F-17
<PAGE> 36
ATTACHMENT 1
ITEM 5C. DENDRITE INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in 000's except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees..................... $ 9,167 $ 6,961 $ 10,310 $ 9,074 $ 14,955
Services........................ 36,329 53,625 66,573 82,248 115,678
-------- -------- -------- -------- --------
45,496 60,586 76,883 91,322 130,633
-------- -------- -------- -------- --------
Costs of revenues:
Cost of license fees............. 1,450 712 832 1,758 2,314
Cost of services................. 19,628 27,153 37,771 45,078 57,887
-------- -------- -------- -------- --------
21,078 27,865 38,603 46,836 60,201
-------- -------- -------- -------- --------
Gross margin..................... 24,418 32,721 38,280 44,486 70,432
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative 17,226 23,073 28,519 33,305 44,046
Research and development......... 1,831 2,518 7,361 3,674 4,584
Write-off of in-process research
and development................. -- -- 2,640 -- 1,230
-------- -------- -------- -------- --------
19,057 25,591 38,520 39,979 49,860
-------- -------- -------- -------- --------
Operating income (loss).......... 5,361 7,130 (240) 7,507 20,572
Interest income....................... 37 559 1,168 531 1,099
Other income (expense)................ (566) 227 (240) (261) (466)
-------- -------- -------- -------- --------
Income (loss) before income taxes 4,832 7,916 688 7,777 21,205
Income taxes.......................... 1,972 3,082 1,467 3,002 8,446
-------- -------- -------- -------- --------
Net income (loss)..................... $ 2,860 $ 4,834 $ (779) $ 4,775 $ 12,759
======== ======== ======== ======== ========
Net income (loss) per share:
Basic............................ $ 0.35 $ 0.31 $ (0.03) $ 0.20 $ 0.53
======== ======== ======== ======== =========
Diluted.......................... $ 0.14 $ 0.22 $ (0.03) $ 0.19 $ 0.49
======== ======== ======== ======== =========
Shares used in computing net income
(loss) per share:
Basic............................ 8,275 15,667 23,580 23,734 24,053
======== ======== ======== ======== ========
Diluted.......................... 18,666 22,243 23,580 24,580 26,261
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 5,455 $29,063 $31,530 $34,813 $50,608
Total assets.............................. 23,223 47,704 54,176 57,876 81,831
Capital lease obligations, less current
portion ............................... 33 51 201 353 544
Redeemable Series A convertible preferred
stock ................................. 6,976 -- -- -- --
Stockholders' equity...................... 2,755 33,510 37,511 40,672 61,049
</TABLE>
<PAGE> 37
DENDRITE INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 5B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-K contains
forward-looking statements that are subject to risks and uncertainties and 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
We succeeded in 1991 to a business founded in 1986 by John E. Bailye, the
Company's current President and Chief Executive Officer. The business was
established to provide SFE solutions that would enable companies to manage,
coordinate and control the activities of large sales forces in complex selling
environments, primarily in the prescription-only pharmaceutical industry. Today,
our solutions combine software products with a wide range of specialized support
services. These services include software implementation, technical and hardware
support and sales force support. We develop, implement and service sales force
software products in the United States, Canada, Western Europe, Japan,
Australia, New Zealand and Brazil through our own sales, support and technical
personnel located in 14 offices worldwide.
We generate revenues from two sources: fees from support services and
license fees. Service revenues, which account for a substantial majority of our
revenues, consist of fees from a wide variety of contracted services which we
make available to our customers, generally under multi-year contracts. We
generate implementation fees from services provided to configure and implement
the sales force software products for our customers. We receive technical and
hardware support fees for services related to, among other things, the operation
of our customers' server computers, maintenance of our customers' databases,
asset control and maintenance for our customers' remote hardware and ongoing
technical support. Technical and hardware support fees also include fees for
software maintenance services such as software defect resolution, performance
enhancements and, in some cases, product upgrades. We charge fees for these
maintenance services based on a percentage of applicable license fees, plus any
customization fees. We receive sales force support fees for organizing and
managing support of our customers' sales force, including training, telephone
support and data analysis services. Ongoing support fees are generally
negotiated at the commencement of a contract. However, it is our experience that
our larger customers increase the amount of services they purchase from us over
time. Fees for these additional services are typically based on the labor and
materials used to provide the applicable service.
We charge our customers license fees to use our proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, the territory covered and the number of modules, or features,
in the particular software licensed by the customer.
Historically, we have generally recognized license fees as revenue using the
percentage of completion method over a period of time that begins with execution
of the license agreement and ends with the completion of initial customization
and installation, if any. However, we believe that with some of our newer sales
force software products, such as ForcePharma and SalesPlus, our customers will
not require customization and therefore we may be able to recognize license fees
from these products upon delivery.
We recognize additional license fees when customers agree to license
additional functions or enhancements, acquire an upgraded version of Dendrite's
software and/or when the maximum permitted number of users or initial geographic
coverage is exceeded. All license fees, domestic and export, are included under
the heading "License Fees -- United States" in Note 10 of "Notes to Consolidated
Financial Statements".
The United States, the United Kingdom and France are our main markets. We
generated approximately 45% of our total revenues outside the United States
during the year ended December 31, 1996; approximately 36% during the year ended
December 31, 1997; and approximately 23% during the year ended December 31,
1998. This decrease in the percentage of revenues generated outside the United
States during 1998 was principally due to very strong revenue growth in our
pharmaceutical and CPG businesses in the United States.
2
<PAGE> 38
We bill services provided by our foreign branches and subsidiaries in local
currency. License fees for our products are generally billed in U.S. dollars
regardless of where they originate. Operating results generated in local
currencies are translated into U.S. dollars at the average exchange rate in
effect for the reporting period.
Our operating income generated outside the United States is shown in Note 10
of "Notes to Consolidated Financial Statements". Our geographic operating
profits are affected primarily by our use of technical and support personnel to
support service revenues, costs associated with opening new or expanding
existing facilities and our ability to increase service revenues faster than the
growth in selling, general and administrative expenses.
On May 26, 1999, the Company exchanged 1,480,538 shares of its common stock
for all of the outstanding shares of common stock of CorNet International, Inc.
("CorNet"). The merger has been accounted for under the pooling-of-interest
method. Accordingly, the Company's financial statements have been restated to
reflect the pooling of CorNet.
Separate results of Dendrite International, Inc. and CorNet for the years
prior to the consummation of the merger are as follows:
<TABLE>
<CAPTION>
DENDRITE CORNET COMBINED
-------- ------ --------
<S> <C> <C> <C>
Year ended December 31,
1998
Total revenue......... $ 112,518,000 $ 18,115,000 $ 130,633,000
Net income............ $ 11,267,000 $ 1,492,000 $ 12,759,000
Year ended December 31,
1997
Total revenue......... $ 78,446,000 $ 12,876,000 $ 91,322,000
Net income............ $ 4,610,000 $ 165,000 $ 4,775,000
Year ended December 31,
1996
Total revenue......... $ 66,246,000 $ 10,637,000 $ 76,883,000
Net income (loss)..... $ (1,912,000) $ 1,133,000 $ (779,000)
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees........................... 13% 10% 11%
Services............................... 87 90 89
--- --- ---
100 100 100
Costs of Revenues:
Cost of license fees................... 1 2 2
Cost of services....................... 49 50 44
--- --- ---
50 52 46
--- --- ---
Gross Margin........................... 50 48 54
Operating Expenses:
Selling, general and administrative.... 37 36 33
Research and development............... 10 4 4
Write-off in-process research and 3 -- 1
--- --- ---
development................................
50 40 38
--- --- ---
Operating income (loss)............... - 8 16
Other income............................... 1 1 -
--- --- --
Income (loss) before income taxes..... 1 9 16
Income taxes............................... 2 4 6
--- --- ---
Net Income (loss).......................... (1)% 5% 10%
=== === ===
</TABLE>
Certain reclassifications have been made to prior year amounts to conform
with current year presentations. During the second quarter of 1998, we
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, all prior periods have been reclassified.
3
<PAGE> 39
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Total revenues increased $39,311,000 or 43% from $91,311,000 in
1997 to $130,633,000 in 1998.
License fee revenues increased 65% from $9,074,000 in 1997 to $14,955,000 in
1998. This increase was primarily attributable to the recognition of revenue
related to license fees from several significant contracts in the pharmaceutical
division, sales to new customers in our consumer business division and increased
sales of third party software.
Service revenues increased 41% from $82,248,000 in 1997 to $115,678,000 in
1998. This increase was primarily the result of an increase in our installed
base of sales force software products at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to our existing customers.
COST OF REVENUES. Cost of revenues increased $13,365,000 or 29% from
46,836,000 in 1997 to $60,201,000 in 1998.
Cost of license fees increased 32% from $1,758,000 in 1997 to $2,314,000 in
1998. Cost of license fees for 1998 represents the amortization of capitalized
software development costs of $1,392,000 and third party vendor license fees of
$922,000. Cost of license fees for 1997 represents the amortization of
capitalized software development costs of $1,100,000 and third party vendor
license fees of $658,000. The increase in the amortization of capitalized
software development costs in 1998 was due to the increase in gross capitalized
software development costs in 1998 as compared to 1997. The increase in third
party vendor license fees in 1998 was attributable to the increase in third
party software sales in 1998.
Cost of services increased 28% from $45,078,000 in 1997 to $57,887,000 in
1998. This increase was primarily due to an increase in staff required to
support greater client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 50% of service revenues in 1997 to 44% in 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 associated with the carry-over
effect of expenses initially incurred in the fourth quarter of 1996 as discussed
under " -- Years Ended December 31, 1996 and 1997 -- Cost of Revenues".
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
32% from $33,305,000 in 1997 to $44,046,000 in 1998. This increase was primarily
attributable to increased staff required for sales and support operations. As a
percentage of revenue, SG&A expenses decreased from 36% in 1997 to 33% in 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 25% from $3,674,000 in 1997 to $4,584,000 in 1998. As a percentage of
revenues, research and development expenses remained relatively constant. The
increase in research and development expenses during the most recent period was
primarily attributable to increased spending on development of our CPG products,
the continued development of ForceMultiplieRx and the development of our next
generation pharmaceutical sales force software product, ForcePharma. With
respect to future research and development expenses, subject to market
conditions, we currently anticipate that such expenses will be approximately 4%
to 6% of revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Future Operating
Results -- Our quarterly results of operations may fluctuate significantly and
may not meet market expectations" and -- "Factors That May Affect Future
Operating Results --We may be unable to successfully introduce new products or
respond to technological change".
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. We incurred a
one-time charge of $1,230,000 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 which had not yet reached
technological feasibility.
PROVISION FOR INCOME TAXES. The effective tax rate, excluding the impact of
the write-off of in-process research and development which is not tax
deductible, was reduced to 40% during 1998 as opposed to 39% during 1997. This
decrease was due primarily to the implementation of tax minimization strategies
throughout the world.
4
<PAGE> 40
ACQUISITION OF ABC. On July 24, 1998, we acquired 100% of the capital stock
of ABC for a combination of cash and stock equivalent to approximately
$4,013,000 and transaction costs of $150,000. The acquisition has been accounted
for using the purchase method of accounting, whereby the purchase price is
allocated to the assets and liabilities of ABC based on their respective fair
market values at the acquisition date. The excess of the purchase price over the
fair value of the net assets acquired was assigned to identifiable intangibles.
We assigned $1,230,000 to in-process research and development and such amount
was written off in the accompanying statement of operations. We also recorded
$850,000 as capitalized software and $2,226,000 as goodwill. ABC's results of
operations have been included in our Consolidated Financial Statements from the
date of acquisition.
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUES. Total revenues increased $14,439,000 or 19% from $76,883,000 in
1996 to $91,322,000 in 1997.
License fee revenues decreased 12% from $10,310,000 in 1996 to $9,074,000 in
1997. This decrease was primarily attributable to the recognition of revenue
related to license fees for a major European client during 1996, partially
offset by the inclusion of $796,000 in revenue associated with the resale of
third party software during 1997 versus $112,000 in revenue associated with the
resale of third party software during 1996.
Service revenues increased 24% from $66,573,000 in 1996 to $82,248,000 in
1997. This increase was primarily the result of an increase in our installed
base of sales force software products with new and existing customers and the
provision of additional services to our existing customers, largely in the U.S.,
where the service revenue increase was $13,993,000 or 36%.
COST OF REVENUES. Cost of revenues increased 21% from $38,603,000 in 1996 to
$46,838,000 in 1997.
Cost of license fees increased 111% from $832,000 in 1996 to $1,758,000 in
1997. In 1997, the cost of license fees represents the amortization of
capitalized costs of $1,100,000 and third party vendor license fees of $658,000.
In 1996, the cost of license fees represents the amortization of capitalized
costs of $739,000 and third party vendor license fees of $93,000.
Cost of services increased 19% from $37,771,000 in 1996 to $45,078,000 in
1997, primarily due to an increase in the number of service representatives and
technical staff from the prior year. The increase was necessary to support the
increased client activity during the year, and was partially offset by
productivity efficiencies at CorNet in 1997. As a percentage of service
revenues, cost of services decreased from 56% of service revenues in 1996 to 55%
of service revenues in 1997. This decrease was due to certain events which
occurred in 1996, including:
- multiple customer delayed implementations for which we had hired
personnel for training, customer service and technical support;
- costs associated with retaining a significant number of independent
contractors to complete client deliverables;
- delayed customer license purchase and upgrade decisions; and
- increased research and development spending.
As a result of these factors, we incurred a net loss of $2.7 million in the
fourth quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
17% from $28,519,000 in 1996 to $33,305,000 in 1997. As a percentage of revenue,
SG&A expenses decreased from 37% in 1996 to 36% in 1997. This decrease was
attributable to the fixed nature of certain SG&A costs, such as rent and
corporate salaries, as revenues increase.
5
<PAGE> 41
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 50%
from $7,361,000 in 1996 to $3,674,000 in 1997. As a percentage of revenues,
research and development expenses decreased from 10% for the year ended December
31, 1996 to 4% for the year ended December 31, 1997. The decrease in research
and development expenses in 1997 was consistent with our intentions, as peak
development efforts associated with several new software products decreased as
these software products neared completion.
PROVISION FOR INCOME TAXES. The effective tax rate was reduced to 39% for
the year ended December 31, 1997 as compared to 44% for the year ended December
31, 1996, excluding the impact of the write-off of in-process research and
development which is not tax deductible. The reduction was due to the higher
base of net income relative to the amount of non-deductible expenses in the year
ended December 31, 1997 as compared to the year ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data expressed in U.S. dollars for our eight most recently ended
fiscal quarters. This data has been derived from our unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles. Our
results of operations for a particular quarter are not necessarily indicative of
our results of operations for any future period. Our quarterly results have
varied considerably in the past and are likely to vary from quarter to quarter
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors that May Affect Future Operating Results --
Our quarterly results of operations may fluctuate significantly and may not meet
market expectations"
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License fees............ $ 1,711 $ 2,216 $ 2,404 $ 2,743 $ 3,273 $ 4,735 $ 1,621 $ 5,326
Services................ 18,165 18,877 21,204 24,002 23,564 27,930 33,314 30,870
-------- -------- -------- -------- -------- -------- -------- --------
19,876 21,093 23,608 26,745 26,837 32,665 34,935 36,196
Costs of Revenues:
Cost of license fees.... 272 392 729 365 361 1,024 379 550
Cost of services........ 11,667 10,262 11,051 12,098 12,270 14,751 16,248 14,618
-------- -------- -------- -------- -------- -------- -------- --------
11,939 10,654 11,780 12,463 12,631 15,775 16,627 15,168
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin............ 7,937 10,439 11,828 14,282 14,206 16,890 18,308 21,028
Operating Expenses:
Selling, general, and
administrative....... 7,195 8,488 8,526 9,096 9,374 10,826 11,254 12,592
Research and development 789 845 800 1,240 1,111 1,094 1,059 1,320
Write-off of in-process
research and
development ......... -- -- -- -- -- -- 1,230 --
-------- -------- -------- -------- -------- -------- -------- --------
7,984 9,333 9,326 10,336 10,485 11,920 13,543 13,912
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) (47) 1,106 2,502 3,946 3,721 4,970 4,765 7,116
.
Interest income............. 129 132 100 170 196 215 283 405
Other income (expense)...... (55) (49) (99) (58) (344) (30) 120 (212)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes (benefit) 27 1,189 2,503 4,058 3,573 5,155 5,168 7,309
Income taxes (benefit)...... 36 482 998 1,486 1,408 1,949 2,320 2,769
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ (9) $ 707 $ 1,505 $ 2,572 $ 2,165 $ 3,206 $ 2,848 $ 4,540
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic................... $ (0.00) $ 0.03 $ 0.06 $ 0.11 $ 0.09 $ 0.13 $ 0.12 $ 0.19
======== ======== ======== ======== ======== ======== ======== ========
Diluted................. $ (0.00) $ 0.03 $ 0.06 $ 0.10 $ 0.08 $ 0.12 $ 0.11 $ 0.17
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing net
income (loss) per share:
Basic................... 23,921 23,614 23,673 23,724 23,796 23,890 24,177 24,356
======== ======== ======== ======== ======== ======== ======== ========
Diluted................. 23,954 24,274 24,792 24,860 25,537 25,962 26,468 26,745
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 42
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through cash
generated by operations. Net cash provided by operating activities was
$27,387,000 for the year ended December 31, 1998, compared to cash provided by
operating activities of $4,061,000 for the year ended December 31, 1997. This
increase was due primarily to higher net income, as well as more efficient
accounts receivable and liability management during the year ended December 31,
1998, compared to the year ended December 31, 1997.
Cash used in investing activities was $13,370,000 in the year ended December
31, 1998, compared to cash obtained from investing activities of $2,525,000 in
the year ended December 31, 1997. This increase was due primarily to the
increase in short-term investments as well as the purchase of ABC in the year
ended December 31, 1998.
On January 16, 1997, Dendrite's Board of Directors (the "Board of Directors"
or the "Board") 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 Dendrite's
outstanding shares of common stock. During the twelve month period ending
December 31, 1997, Dendrite repurchased 401,000 shares of common stock for a
value of $1,927,000. Dendrite did not repurchase any shares of common stock
during the period ending December 31, 1998.
We obtained $2,471,000 of cash from financing activities in the year ended
December 31, 1998, compared to the use of $1,286,000 in cash from financing
activities in the year ended December 31, 1997. The change in our cash provided
from financing activities was due to an increase in the issuance of common
stock, primarily from the exercise of employee stock options during the year
ended December 31, 1998 and open-market purchases of our common stock during the
year ended December 31, 1997.
We recently entered into a $15,000,000 revolving line of credit agreement
with The Chase Manhattan Bank, N.A. The agreement is available to finance
working capital needs and possible future acquisitions. The $15,000,000 line of
credit agreement requires us to maintain a minimum consolidated net worth, among
other covenants, measured quarterly, which is equal to our net worth as of
December 31, 1997 plus 50% of our net income earned after January 1, 1998 and
plus 75% of the net proceeds to us of any stock offering. This covenant
effectively limits the amount of cash dividends we may pay. At December 31,
1998, there were no borrowings outstanding under the agreement.
Our working capital was approximately $34,813,000 at December 31, 1997 and
$50,608,000 at December 31, 1998. We have no significant capital spending or
purchasing commitments other than normal purchase commitments and commitments
under facility and capital leases.
We regularly evaluate opportunities to acquire products or businesses
complementary to our operations. Such acquisition opportunities, if they arise,
and are successfully completed, may involve the use of cash or equity
instruments. We currently have no agreements to make any acquisitions.
7
<PAGE> 43
EXHIBIT INDEX
10.1 Form of Amendment to Employment Agreements
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule, Restated 1997
27.3 Financial Data Schedule, Restated 1998
27.4 Financial Data Schedule, Restated March 31, 1999
<PAGE> 1
Exhibit 10.1
AMENDMENT
MAY 26, 1999
THIS AMENDMENT modifies and amends the Employment Agreement
(the "Agreement") by and between DENDRITE INTERNATIONAL, INC. ("Dendrite") and
_____________ ("Employee"). Unless otherwise defined herein, capitalized terms
used herein shall have their respective meanings set forth in the Agreement.
The parties hereby agree as follows:
1. THE AGREEMENT IS HEREBY MODIFIED TO INCLUDE THE FOLLOWING:
26. VESTING OF STOCK OPTIONS UPON "CHANGE IN CONTROL"
Notwithstanding anything to the contrary, in the event of a "Change in
Control" (as defined below), all of Employee's options owned by him at the time
of such event shall immediately vest. For the purposes of this Agreement,
"Change in Control" shall mean the occurrence of any one of the following
events:
(i) any "person" (as such term is defined in Section 3(a)(9)
of the Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Dendrite
representing 33-1/3% or more of the combined voting power of Dendrite's
then outstanding securities eligible to vote for the election of the
Board (the "Dendrite Voting Securities"); provided, however, that the
event described in this paragraph (i) shall not be deemed to be a
Change in Control by virtue of any of the following acquisitions: (A)
by Dendrite or any subsidiary, (B) by any employee benefit plan
sponsored or maintained by Dendrite or any subsidiary, (C) by any
underwriter temporarily holding securities pursuant to an offering of
such securities, (D) pursuant to a Non-Control Transaction (as defined
in paragraph (iii)), or (E) a transaction (other than one described in
(iii) below) in which Dendrite Voting Securities are acquired from
Dendrite, if a majority of the Incumbent Board (as defined below)
approves a resolution providing expressly that the acquisition pursuant
to this clause (E) does not constitute a Change in Control under this
paragraph (i);
(ii) individuals who, on the effective date of this Agreement,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the Effective Date, whose election or
nomination for election was approved by a vote of at least two-thirds
of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of Dendrite in which such
person is named as a nominee for director, without objection to such
nomination) shall be considered a member of the Incumbent Board;
provided, however, that no individual initially elected or nominated as
a director of Dendrite as a result of an actual or threatened election
contest with respect to directors or any other actual or threatened
solicitation of proxies or consents by or on behalf of any person other
than the Board shall be deemed to be a member of the Incumbent Board;
(iii) the shareholders of Dendrite approve a merger,
consolidation, share exchange or similar form of corporate
reorganization of Dendrite or any such type of transaction involving
Dendrite or any of its subsidiaries (whether for such transaction or
the issuance of securities in the transaction or otherwise) (a
"Business Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of the
publicly traded corporation resulting from such Business Combination
(including, without limitation, any corporation which directly or
indirectly has beneficial ownership of 100% of Dendrite Voting
Securities or all or substantially all of the assets of Dendrite and
its subsidiaries) eligible to elect directors of such corporation would
be represented by shares that were Dendrite Voting Securities
immediately prior to such Business Combination (either by remaining
outstanding or being converted), and such voting power would be in
substantially the same proportion as the voting power of such Dendrite
Voting Securities immediately prior to the Business Combination, (B) no
person (other than any publicly traded holding company resulting from
such Business Combination, any employee benefit plan sponsored or
maintained by Dendrite (or the corporation resulting from such Business
Combination), or any person which beneficially owned, immediately prior
to such Business Combination, directly or indirectly, 33-1/3% or more
of Dendrite Voting Securities (a "Dendrite 33-1/3% Stockholder")) would
become the beneficial owner, directly or indirectly, of 33-1/3% or more
<PAGE> 2
of the total voting power of the outstanding voting securities
eligible to elect directors of the corporation resulting from such
Business Combination and no Dendrite 33-1/3% Stockholder would
increase its percentage of such total voting power, and (C) at least a
majority of the members of the board of directors of the corporation
resulting from such Business Combination would be members of the
Incumbent Board at the time of the Board's approval of the execution
of the initial agreement providing for such Business Combination (a
"Non-Control Transaction"); or
(iv) the shareholders of Dendrite approve a plan of complete
liquidation or dissolution of Dendrite or the sale or disposition of
all or substantially all of Dendrite's assets.
Notwithstanding the foregoing, a Change in Control of Dendrite shall not be
deemed to occur solely because any person acquires beneficial ownership of more
than 33-1/3% of Dendrite Voting Securities as a result of the acquisition of
Dendrite Voting Securities by Dendrite which, by reducing the number of Dendrite
Voting Securities outstanding, increases the percentage of shares beneficially
owned by such person; provided, that if a Change in Control of Dendrite would
occur as a result of such an acquisition by Dendrite (if not for the operation
of this sentence), and after Dendrite's acquisition such person becomes the
beneficial owner of additional Dendrite Voting Securities that increases the
percentage of outstanding Dendrite Voting Securities beneficially owned by such
person, then a Change in Control of Dendrite shall occur.
27. SEVERANCE FOLLOWING TERMINATION OF EMPLOYMENT FOLLOWING A
"CHANGE IN CONTROL" "WITHOUT CAUSE" OR FOR "GOOD REASON"
(a) The following severance payment only applies in the event of a
Change in Control. If Employee's employment hereunder is terminated within one
(1) year following a Change in Control (i) by Dendrite for any reason other than
death, Cause, or Disability (each as defined below) or (ii) by Employee for Good
Reason (as defined below), the Employee shall be entitled to receive severance
payments in an aggregate amount equal to the sum of twelve (12) months base
salary (calculated at the rate of base salary then being paid to Employee as of
the date of termination). The severance payments to be paid to Employee under
this Section shall be referred to herein as the "Change in Control Severance
Payment". Employee's Change In Control Severance Payment shall be paid by
Dendrite in cash in twelve (12) consecutive equal monthly payments commencing
not later than thirty (30) days after the effective date of the termination of
Employee's employment. No interest shall accrue or be payable on or with respect
to any Change in Control Severance Payment. In the event of a termination of
Employee's employment described in this Section, Employee shall be provided
continued "COBRA" coverage pursuant to Sections 601 et seq. of ERISA under
Dendrite's group medical and dental plans. During the period which Employee
receives the Change in Control Severance Payment, Employee's cost of COBRA
coverage shall be the same as the amount paid by employees of Dendrite for the
same coverage under Dendrite's group health and dental plans. Notwithstanding
the foregoing, in the event Employee becomes re-employed with another employer
and becomes eligible to receive health coverage from such employer, the payment
of COBRA coverage by Dendrite as described herein shall cease. In the event
Employee is entitled to the Change in Control Severance Payment as set forth in
this Section, Employee shall not be entitled to any other severance payments
from Dendrite.
(b) The making of any Change in Control Severance Payment under this
Section is conditioned upon the signing of a general release in form and
substance satisfactory to Dendrite under which Employee releases Dendrite and
its affiliates together with their respective officers, directors, shareholders,
employees, agents and successors and assigns from any and all claims he may have
against them. In the event Employee breaches any of the covenants or agreements
contained in this Agreement, in addition to any other remedies at law or in
equity, Dendrite may cease making any Change in Control Severance Payment
otherwise due under this Section. Nothing herein shall affect any of Employee's
obligations or Dendrite's rights under this Agreement.
(c) For purposes of this Agreement, "Cause" as used herein shall mean
(i) any gross misconduct on the part of Employee with respect to his duties
under this Agreement, (ii) the engaging by Employee in an indictable offense
which relates to Employee's duties under this Agreement or which is likely to
have a material adverse effect on the business of Dendrite, (iii) the commission
by Employee of any willful or intentional act which injures in any material
respect or could reasonably be expected to injure in any material respect the
reputation, business or business relationships of Dendrite, including without
limitation, a breach of any of his covenants or agreements of this Agreement, or
(iv) the engaging by Employee through gross negligence in conduct which injures
materially or could reasonably be expected to injure materially the business or
reputation of Dendrite.
<PAGE> 3
(d) For purposes of this Agreement, "Good Reason" as used herein shall
mean, without Employee's express written consent, concurrently with or within
one (1) year following a "Change in Control" (as defined above), the occurrence
of any of the following events which is not corrected within ten (10) days
following notice of such event given by Employee to Dendrite:
(i) the assignment to Employee of any duties or
responsibilities materially and adversely inconsistent with Employee's
position (including any material diminution of such duties or
responsibilities) or a material and adverse change in Employee's
reporting responsibilities, titles or offices with Dendrite;
(ii) any material breach by Dendrite of this Agreement with
respect to the making of any compensation payments;
(iii) any requirement of Dendrite that Employee be based
anywhere other than in a thirty-five (35) mile radius of the Dendrite
office Employee is based in on the date of consummation of the Change
in Control;
(iv) the failure of Dendrite to continue in effect any
employee benefit plan, compensation plan, welfare benefit plan or
fringe benefit plan (such plans being referred to herein as "Welfare
Plans") in which Employee is participating as of the effective date of
this Agreement (or as such benefits and compensation may be increased
from time to time), or the taking of any action by Dendrite which would
materially and adversely affect Employee's participation in or
materially reduce Employee's benefits under such Welfare Plans (other
than an across-the-board reduction of such benefits affecting senior
executives of Dendrite) unless (i) Employee is permitted to participate
in other plans providing Employee with substantially comparable
benefits (at substantially comparable cost with respect to the Welfare
Plans), (ii) any such Welfare Plan does not provide material benefits
to Employee (determined in relation to Employee's compensation and
benefits package), (iii) such failure or action is taken at the
direction of Employee or with his consent, or (iv) such failure or
action is required by law; or
(v) the failure of Dendrite to obtain an agreement from a
successor employer to assume Dendrite's obligations under this
Agreement in the event of a "Change in Control".
Employee must notify Dendrite of any event constituting Good Reason within
ninety (90) days following Employee's knowledge of its existence, it being
understood that Employee's failure to do so shall deem such event not to
constitute Good Reason under this Agreement.
(e) For purposes of this Agreement, "Disabled" as used herein shall
have the same meaning as that term, or such substantially equivalent term, has
in any group disability policy carried by Dendrite. If no such policy exists,
the term "Disabled" shall mean the occurrence of any physical or mental
condition which materially interferes with the performance of Employee's
customary duties in his capacity as an employee where such disability has been
in effect for a consecutive six (6) month period (excluding permitted vacation
time), the existence of which is supported by credible medical evidence.
2. EXCEPT AS EXPRESSLY MODIFIED BY THIS AMENDMENT, ALL OF THE
TERMS AND CONDITIONS OF THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT.
IN WITNESS WHEREOF, the parties have signed this Amendment as of
the first date written above.
DENDRITE INTERNATIONAL, INC.
---------------------------------
Name:
Title:
---------------------------------
[Employee]
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in Item 5 of this Form 10-Q, into the Company's
previously filed Form S-8 Registration Statements File Nos. 333-14363,
333-19141, 333-24329, 333-35701, 333-09090, 333-09092 and 333-81783. Our
report dated January 27, 1999 included in Dendrite's Form 10-K for the year
ended December 31, 1998 is no longer appropriate since restated financial
statements have been presented giving effect to a business combination
accounted for as a pooling of interests.
ARTHUR ANDERSEN LLP
Philiadelphia, PA
August 16, 1999
<PAGE> 1
The Board of Directors
Dendrite International, Inc.:
We consent to the incoporation by reference of our report dated February 16,
1999, with respect to the balance sheets of CorNet International, Ltd. as of
December 31, 1998 and 1997, and the related statements of income, shareholders'
equity, and cash flow for each of the years in the three-year period ended
December 31, 1998, which are not presented herein, into Dendrite International
Inc.'s previously filed Form S-8 Registration Statements Files Nos. 333014363,
333-19141, 333-24329, 333-35701, 333-09090 and 333-81783.
KPMG LLP
Allentown, Pennsylvania
August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 33,307
<SECURITIES> 8,334
<RECEIVABLES> 29,394
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,842
<PP&E> 8,693
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,960
<CURRENT-LIABILITIES> 20,653
<BONDS> 0
0
0
<COMMON> 53,467
<OTHER-SE> 25,317
<TOTAL-LIABILITY-AND-EQUITY> 78,784
<SALES> 0
<TOTAL-REVENUES> 79,485
<CGS> 35,215
<TOTAL-COSTS> 27,024
<OTHER-EXPENSES> 6,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (776)
<INCOME-PRETAX> 11,083
<INCOME-TAX> 4,858
<INCOME-CONTINUING> 6,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,225
<EPS-BASIC> .25
<EPS-DILUTED> .23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 4,292 10,705 10,102 15,937
<SECURITIES> 7,329 3,356 2,614 2,955
<RECEIVABLES> 25,026 22,748 27,432 27,005
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 41,963 41,684 45,389 49,072
<PP&E> 4,721 4,980 5,181 5,049
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 50,091 50,245 54,010 57,876
<CURRENT-LIABILITIES> 11,067 11,342 13,302 14,258
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 32,667 32,698 33,044 33,342
<OTHER-SE> 3,850 3,811 5,055 7,331
<TOTAL-LIABILITY-AND-EQUITY> 50,091 50,245 54,010 57,876
<SALES> 0 0 0 0
<TOTAL-REVENUES> 19,876 40,969 64,577 91,322
<CGS> 0 0 0 0
<TOTAL-COSTS> 11,939 22,593 34,373 46,836
<OTHER-EXPENSES> 7,910 17,160 26,485 36,709
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 27 1,216 3,719 7,777
<INCOME-TAX> 36 518 1,516 3,002
<INCOME-CONTINUING> (9) 698 2,203 4,775
<DISCONTINUED> 0 0 0 0
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