-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/XoF2zdjBQRy8rvrLQv9UVeiiDdjf0ZT0jh2bT47kBDHP1VwabzBoYvsA5tRvLf mtognq32W2/T+sKlZ4H8mA== 0000950123-98-009966.txt : 19981118 0000950123-98-009966.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950123-98-009966 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENDRITE INTERNATIONAL INC CENTRAL INDEX KEY: 0000880321 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222786386 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-92434 FILM NUMBER: 98750826 BUSINESS ADDRESS: STREET 1: 1200 MOUNT KEMBLE AVE CITY: MORRISTOWN STATE: NJ ZIP: 07960 BUSINESS PHONE: 2014251200 MAIL ADDRESS: STREET 1: 1200 MOUNT KEMBLE AVE CITY: MORRISTOWN STATE: NJ ZIP: 07960-6797 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from Commission File Number 0-26138 DENDRITE INTERNATIONAL, INC. (Exact name of registrant as specified in its Charter) New Jersey 22-2786386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Mount Kemble Avenue Morristown, NJ 07960 973-425-1200 (Address, including zip code, and telephone number (including area code) of registrant's principal executive office) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
Class Shares Outstanding at November 4, 1998 ----- -------------------------------------- Common Stock 23,241,612
2 DENDRITE INTERNATIONAL, INC. INDEX
PAGE NO ------- PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Consolidated Statements of Operations Three months and nine months ended September 30, 1998 and 1997 3 Consolidated Balance Sheets September 30, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows Nine months ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION ITEM 5. Other Information 16 ITEM 6. Exhibits and Reports on Form 8-K 16 Signatures 16
2 3 PART 1 FINANCIAL INFORMATION ITEM 1. Financial Statements DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: License fees $ 1,116 $ 2,370 $ 8,386 $ 5,189 Services 29,352 17,998 73,036 49,888 -------- -------- -------- -------- 30,468 20,368 81,422 55,077 -------- -------- -------- -------- Cost of revenues: Cost of license fees 379 729 1,764 1,393 Cost of services 13,645 8,795 35,941 26,923 -------- -------- -------- -------- 14,024 9,524 37,705 28,316 -------- -------- -------- -------- Gross margin 16,444 10,844 43,717 26,761 -------- -------- -------- -------- Operating expenses: Selling, general and administrative 10,280 7,678 28,701 21,688 Research and development 847 606 2,617 1,942 Write-off of in-process research and development 1,230 -- 1,230 -- -------- -------- -------- -------- 12,357 8,284 32,548 23,630 -------- -------- -------- -------- Operating income 4,087 2,560 11,169 3,131 Interest income 280 100 690 366 Other income (expense) 117 (21) (248) (180) -------- -------- -------- -------- Income before income taxes 4,484 2,639 11,611 3,317 Income taxes 2,043 1,047 4,751 1,344 -------- -------- -------- -------- Net income $ 2,441 $ 1,592 $ 6,860 $ 1,973 ======== ======== ======== ======== Net income per share: Basic $ .11 $ .07 $ .31 $ .09 ======== ======== ======== ======== Diluted $ .10 $ .07 $ .28 $ .09 ======== ======== ======== ======== Shares used in computing net income per share: Basic 22,705 22,201 22,475 22,265 ======== ======== ======== ======== Diluted 24,818 23,226 24,437 22,942 ======== ======== ======== ========
The accompanying notes are an integral part of these statements 3 4 DENDRITE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1998 1997 ---- ---- Assets Current Assets: Cash and cash equivalents $ 24,929 $ 15,917 Short-term investments 1,384 2,955 Accounts receivable, net 28,306 24,724 Prepaid expenses and other 2,771 2,222 Deferred tax asset 441 441 -------- -------- Total current assets 57,831 46,259 Property and equipment, net 3,957 3,110 Deferred taxes 667 667 Goodwill, net 2,619 575 Capitalized software development costs, net 3,304 2,408 -------- -------- $ 68,378 $ 53,019 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 2,796 $ 2,211 Income taxes payable 997 867 Accrued compensation and benefits 3,943 3,439 Other accrued expenses 7,424 4,352 Deferred revenues 1,346 1,409 -------- -------- Total current liabilities 16,506 12,278 -------- -------- Deferred rent 456 598 -------- -------- Deferred taxes 2,293 1,970 -------- -------- Stockholders' Equity Preferred Stock, no par value, 10,000,000 shares authorized, none issued -- -- Common Stock, no par value, 100,000,000 shares authorized, 23,209,612 and 22,659,548 shares issued and 22,808,612 and 22,258,548 outstanding 36,965 32,814 Retained earnings 16,128 9,268 Deferred compensation (1,160) (1,141) Cumulative translation adjustment (883) (841) Less treasury stock, at cost (1,927) (1,927) -------- -------- 49,123 38,173 -------- -------- $ 68,378 $ 53,019 ======== ========
The accompanying notes are an integral part of these statements 4 5 DENDRITE INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, 1998 1997 ---- ---- Operating activities: Net income $ 6,860 $ 1,973 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,116 2,018 Deferred income taxes -- 73 Write-off of in-process research and development 1,230 -- Changes in assets and liabilities: Increase in accounts receivable (3,859) (6,110) Increase in prepaid expenses and other (536) (691) Increase (decrease) in accounts payable and accrued expenses 3,708 (670) Decrease in deferred rent (142) (128) Increase in income taxes payable 130 673 Decrease in deferred revenues (37) (511) -------- -------- Net cash provided by (used in) operating activities 9,470 (3,373) -------- -------- Investing activities: Purchases of short-term investments (3,942) (2,843) Sales of short-term investments 5,513 8,650 Purchase of ABC, net of cash acquired (2,295) -- Purchases of property and equipment (1,261) (918) Additions to capitalized software development costs (1,067) (756) -------- -------- Net cash provided by (used in) investing activities (3,052) 4,133 -------- -------- Financing activities: Purchase of Treasury Stock -- (1,927) Issuance of Common Stock 2,594 384 -------- -------- Net cash provided by (used in) financing activities 2,594 (1,543) -------- -------- Effect of foreign exchange rate changes on cash -- (130) -------- -------- Net increase (decrease) in cash and cash equivalents 9,012 (913) Cash and cash equivalents, beginning of period 15,917 10,912 -------- -------- Cash and cash equivalents, end of period $ 24,929 $ 9,999 ======== ========
The accompanying notes are an integral part of these statements 5 6 DENDRITE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements of Dendrite International, Inc. and its subsidiaries (collectively, the "Company") included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the three and nine month periods ended September 30, 1998. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The interim operating results of the Company may not be indicative of operating results for the full year. 2. Net Income Per Share The Company has presented net income per share pursuant to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. Basic income per share ("Basic EPS") was computed by dividing the net income for each period by the weighted average number of shares of Common Stock outstanding for each period. Diluted income per share ("Diluted EPS") was computed by dividing net income for each period by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each period. For the three months ended September 30, 1998 and 1997, Common Stock equivalents used in computing Diluted EPS were 2,113,000 and 1,025,000, respectively. For the nine months ended September 30, 1998 and 1997, Common Stock equivalents used in computing Diluted EPS were 1,962,000 and 677,000, respectively. 3. Recently Adopted Accounting Pronouncements Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. For the three and nine months ended September 30, 1998 and 1997, the Company engaged in numerous transactions involving foreign currency, which resulted in unrealized gains and losses. Total after-tax comprehensive income for the quarters ended September 30, 1998 and 1997 was $2.564 million and $1.484 million respectively. Total after-tax comprehensive income for the nine months ended September 30, 1998 and 1997 was $6.835 million and $1.868 million, respectively. 4. Stock Split On July 21, 1998, the Company's Board of Directors declared a two-for-one common stock split. The stock split was distributed in the form of a 100% stock dividend on August 21, 1998 to stockholders of record as of August 11, 1998. All share and per share information have been retroactively adjusted to reflect the stock split. 5. Certain Reclassifications During the second quarter of 1998, the Company determined that costs associated with certain activities that were previously classified as research and development expense, should be classified as cost of services, as these expenditures relate to client specific activities. For consistency of presentation, prior periods have been reclassified. The reclassification for the nine months ended September 30, 1998 and 1997 was $2.189 million and $1.929 million, respectively. The reclassification for the three months ended September 30, 1998 and 1997 was $790,000 and $663,000, respectively. 6 7 6. Acquisition On July 24, 1998, the Company acquired 100% of the capital stock of Associated Business Computing N.V. and an affiliated company (collectively, "ABC") for approximately $4,013,000 and transaction costs of $150,000. The purchase was accounted for under the purchase method of accounting, whereby the purchase price is allocated to the assets and liabilities assumed of ABC based on their respective fair market values at the acquisition date. The excess of purchase price over the fair value of net assets acquired was assigned to identifiable intangibles. The Company assigned $1,230,000 to in-process research and development and such amount was written-off in the accompanying statement of operations. The Company also recorded $2,226,000 as goodwill. ABC's results of operations have been included in the Company's financial statements from the date of acquisition. 7 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Form 10-Q contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including the factors set forth under "Factors that May Affect Future Operating Results", many of which are beyond the Company's control. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and there can be no assurance that actual results will be the same as those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as representation by the Company or any other person that the objectives and plans of the Company will be achieved. Moreover, the Company assumes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Overview The Company succeeded in 1991 to a business co-founded in 1986 by the Company's current Chairman, President and Chief Executive Officer to provide comprehensive Electronic Territory Management ("ETM") solutions to be used to manage, coordinate and control the activities of large sales forces in complex selling environments, primarily in the ethical pharmaceutical industry. Today, the Company's solutions combine advanced software products with a wide range of specialized support services including implementation services, technical and hardware support services and sales force support services. The Company develops, implements and services advanced ETM systems in the United States, Canada, Western Europe, Japan, Australia, New Zealand and Brazil through its own sales, support and technical personnel located in offices worldwide. The Company generates revenues from two sources: service and license fees. Service revenues, which account for a substantial majority of the Company's revenues, consist of fees from a wide variety of contracted services which the Company makes available to its customers, generally under multi-year contracts. Customization and implementation fees are generated from services provided to modify and implement the ETM solution for the customer. Technical and hardware support fees are derived from services related to the operation of the customer's server computers and from the provision of ongoing technical and customer service support including customization of the software following initial implementation. Sales force support fees are derived from organizing and managing support for the customer's sales force. License fees are charged by the Company for use of its proprietary computer software. Customers generally pay one-time perpetual license fees based upon the number of users, territory covered and the number of modules in the particular system licensed by the customer. The Company generally recognizes one-time license fees as revenue using the percentage of completion method over a period of time that commences with execution of the license agreement and concludes with the completion of initial customization, if any. For license contracts that contain customer acceptance provisions, revenue is not recognized until such time as the acceptance provisions are satisfied. Certain license revenue relates to software which the Company considers to be off-the-shelf. These revenues are generally recognized upon delivery of the software. Additional license fees are recognized when customers agree to license additional functions or enhancements, acquire an upgraded version of the Company's software and/or when the maximum number of users or initial geographic coverage is exceeded. The United States, the United Kingdom, France and Japan are the Company's main markets. Approximately 42% and 22% of the Company's total revenues were generated outside the United States during the three month periods ended September 30, 1997 and 1998, respectively. Approximately 46% and 27% of the Company's total revenues were generated outside the United States during the nine month periods ended September 30, 1997 and 1998, respectively. This decrease in the percentage of revenues generated outside the United States was principally due to very strong revenue growth in the United States pharmaceutical and consumer packaged goods businesses, in addition to a modest revenue decline outside the United States, concentrated in Europe. Services provided by Dendrite's foreign branches and subsidiaries are billed in local currency. License fees for Dendrite products are billed in U.S. dollars regardless of where they originate. Operating results generated in local currencies are translated into United States dollars at the average exchange rate in effect for the reporting period. 8 9 Results of Operations Three Months Ended September 30, 1997 and 1998 Revenues. Total revenues increased $10.100 million or 50% from $20.368 million in the three months ended September 30, 1997 to $30.468 million in the three months ended September 30, 1998. License fee revenues decreased 53% from $2.370 million in the three months ended September 30, 1997 to $1.116 million in the three months ended September 30, 1998. This decrease was primarily attributable to the acceleration of anticipated license revenues into the first half of the year as a result of efficiencies realized during the implementation process for significant new licencees, as well as the absence of significant third party software resales. Service revenues increased 63% from $17.998 million in the three months ended September 30, 1997 to $29.352 million in the three months ended September 30, 1998. This increase was primarily the result of an increase in the Company's installed base of Dendrite ETM systems at both new and existing customers, the commencement of major product rollouts, as well as the provision of additional services to the Company's existing customers. Cost of Revenues. Cost of revenues increased $4.500 million or 47% from $9.524 million in the three months ended September 30, 1997 to $14.024 million in the three months ended September 30, 1998. Cost of license fees decreased 48% from $729,000 in the three months ended September 30, 1997 to $379,000 in the three months ended September 30, 1998. Cost of license fees for the three months ended September 30, 1998 represents the amortization of capitalized software development costs of $332,000 and third party vendor license fees of $47,000. Cost of license fees for the three months ended September 30, 1997 represents the amortization of capitalized software development costs of $272,000 and third party license fees of $457,000. The increase in the amortization of capitalized software development costs is due to the increase in capitalized software development costs during 1997 associated with the Company's development efforts in conjunction with new products. The decline in cost of third party vendor license fees is attributable to the absence of significant third party software sales. Cost of services increased 55% from $8.795 million in the three months ended September 30, 1997 to $13.645 million in the three months ended September 30, 1998. This increase was primarily due to an increase in staff required to support higher client activity including the use of higher cost consultants and contractors. As a percentage of service revenues, however, cost of services decreased from 49% of service revenues in the three months ended September 30, 1997 to 46% in the three months ended September 30, 1998. This decrease was primarily the result of increased operational efficiencies in 1998. Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased 34% from $7.678 million in the three months ended September 30, 1997 to $10.280 million in the three months ended September 30, 1998. This increase was primarily attributable to increased staff required for sales and support operations, severance costs associated with the Company's European business and significantly higher incentive compensation expense for its United States business. As a percentage of revenue, SG&A expenses decreased from 38% in the three months ended September 30, 1997 to 34% in the three months ended September 30, 1998, due to leveraging the fixed cost elements in general and administrative expenses over a higher revenue base. Research and Development Expenses. Research and development expenses increased 40% from $606,000 in the three months ended September 30, 1997 to $847,000 in the three months ended September 30, 1998. As a percentage of revenues, research and development expenses remained relatively constant at 3%. The increase in research and development expenses during the most recent period was primarily attributable to increased spending on development of the Company's Consumer Packaged Goods products, the continued development of Force MultiplieRx(TM) and the development of the next generation pharmaceutical ETM system, Force Pharma(TM). Write-off of in-process research and development costs. The Company incurred a one-time charge of $1.230 million to record the write-off of in-process research and development costs resulting from the acquisition of Associated Business Computing N.V. and an affiliated company ("ABC"). This amount represents the estimated fair values, based on an independent appraisal, related to in-process research and development projects that were acquired. The technology acquired will require substantial additional development by the Company. Provision for Income Taxes. The effective tax rate, excluding the write-off of the in-process research and development which is not tax deductible, was reduced to 37%, retroactive to the first quarter, during the three months ended September 30, 1998 as opposed to 40% during the three months ended September 30, 1997. This decrease was due primarily to the implementation of tax minimization strategies throughout the world. 9 10 Nine months Ended September 30, 1997 and 1998 Revenues. Total revenues increased $26.345 million or 48% from $55.077 million in the nine months ended September 30, 1997 to $81.422 million in the nine months ended September 30, 1998. License fee revenues increased 62% from $5.189 million in the nine months ended September 30, 1997 to $8.386 million in the nine months ended September 30, 1998. This increase was primarily attributable to the recognition of revenue related to license fees from several significant contracts, new customer wins for the Company's consumer business division and increased sales of third party software. Service revenues increased 46% from $49.888 million in the nine months ended September 30, 1997 to $73.036 million in the nine months ended September 30, 1998. This increase was primarily the result of an increase in the Company's installed base of Dendrite ETM systems at both new and existing customers, the commencement of major product rollouts, as well as the provision of additional services to the Company's existing customers. Cost of Revenues. Cost of revenues increased $9.389 million or 33% from $28.316 million in the nine months ended September 30, 1997 to $37.705 million in the nine months ended September 30, 1998. Cost of license fees increased 27% from $1.393 million in the nine months ended September 30, 1997 to $1.764 million in the nine months ended September 30, 1998. Cost of license fees for the nine months ended September 30, 1998 represents the amortization of capitalized software development costs of $996,000 and third party vendor license fees of $768,000. Cost of license fees for the nine months ended September 30, 1997 represents the amortization of capitalized software development costs of $818,000 and third party vendor license fees of $575,000. The increase in the amortization of capitalized software development costs is due to the increase in capitalized software development costs during 1997 associated with the Company's development efforts in conjunction with new products. The increase in third party vendor license fees is attributable to the increase in third party software sales. Cost of services increased 33% from $26.923 million in the nine months ended September 30, 1997 to $35.941 million in the nine months ended September 30, 1998. This increase was primarily due to an increase in staff required to support higher client activity including the use of higher cost consultants and contractors. As a percentage of service revenues, however, cost of services decreased from 54% of service revenues in the nine months ended September 30, 1997 to 49% in the nine months ended September 30, 1998. This decrease was primarily the result of increased operational efficiencies in 1998 as well as unusually high costs in the first quarter of 1997. Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased 32% from $21.688 million in the nine months ended September 30, 1997 to $28.701 million in the nine months ended September 30, 1998. This increase is primarily attributable to increased staff required for sales and support operations. As a percentage of revenue, SG&A expenses decreased from 39% in the nine months ended September 30, 1997 to 35% in the nine months ended September 30, 1998, due to leveraging the fixed cost elements in general and administrative expenses over a higher revenue base. Research and Development Expenses. Research and development expenses increased 35% from $1.942 million in the nine months ended September 30, 1997 to $2.617 million in the nine months ended September 30, 1998. As a percentage of revenues, research and development expenses remained relatively constant at 3%. The increase in research and development expenses during the most recent period was primarily attributable to increased spending on development of the Company's Consumer Packaged Goods products, the continued development of Force MultiplieRx(TM) and the development of the next generation pharmaceutical ETM system, Force Pharma(TM). Write-off of in-process research and development costs. The Company incurred a one-time charge of $1.230 million to record the write-off of in-process research and development costs resulting from the acquisition of ABC. This amount represents the estimated fair values, based on an independent appraisal, related to in-process research and development projects that were acquired. The technology acquired will require substantial additional development by the Company. Provision for Income Taxes. The effective tax rate, excluding the write-off of the in-process research and development which is not tax deductible, was reduced to 37% during the nine months ended September 30, 1998 as opposed to 41% during the nine months ended September 30, 1997. This decrease was due primarily to the implementation of tax minimization strategies throughout the world. 10 11 Liquidity and Capital Resources On January 16, 1997 the Board of Directors approved a stock buy-back program initially limited to $3,000,000, which subject to further Board review and approval could be increased to a maximum of $10,000,000, but not greater than 9% of the Company's outstanding shares of Common Stock. During the nine months ended September 30, 1997, the Company repurchased 401,000 shares of Common Stock for a total value of $1,927,000. The Company has historically financed its operations primarily through cash generated by operations. Net cash provided by operating activities was $9.470 million for the nine months ended September 30, 1998 compared to cash used in operating activities of $3.373 million for the nine months ended September 30, 1997. This increase is due primarily to higher net income, as well as more efficient accounts receivable and liability management during the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. Cash used in investing activities was $3.052 million in the nine months ended September 30, 1998 compared to cash obtained from investing activities of $4.133 million in the nine months ended September 30, 1997. This change was due primarily to the decreased sales of short-term investments as well as the purchase of ABC in the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. The Company obtained $2.594 million of cash from financing activities in the nine months ended September 30, 1998 compared to the utilization of $1.543 million in cash from financing activities in the nine months ended September 30, 1997. The change in the Company's cash provided from financing activities is due an increase in the issuance of common stock primarily from the exercise of employee stock options during the nine months ended September 30, 1998 and open-market purchases of its common stock during the nine months ended September 30, 1997. The Company maintains a $5.0 million revolving line of credit agreement with the Chase Manhattan Bank, N.A. The agreement provides for borrowing up to $1.0 million in local currencies directly by the Company or certain of its overseas subsidiaries and is available to finance working capital needs and possible future acquisitions. The $5.0 million line of credit is secured by substantially all of the Company's assets. The $5.0 million line of credit agreement requires the Company to maintain a minimum consolidated net worth, among other covenants, measured quarterly, which is equal to the Company's net worth as of December 31, 1994 plus 50% of net income earned after December 31, 1994 and plus the net proceeds of any stock offering. This covenant has the effect of limiting the amount of cash dividends the Company may pay. At September 30, 1998, there were no borrowings outstanding under the agreement. At September 30, 1998, the Company's working capital was approximately $41.325 million. The Company has no significant capital spending or purchasing commitments other than normal purchase commitments and commitments under facility and capital leases. The Company believes that available funds, anticipated cash flows from operations and its line of credit will satisfy the Company's projected working capital and capital expenditure requirements, exclusive of cash required for possible acquisitions of businesses, products and technologies, through at least the next two years. Management regularly evaluates opportunities to acquire products or businesses complementary to the Company's operations. Such acquisition opportunities, if they arise, and are successfully completed, may involve the use of cash or equity instruments. Year 2000 The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a loss of data or temporary inability to process data or transactions. The efficient operation of the Company's business is dependent in part on computer software programs and operating systems which it uses internally (collectively, the "Internal Programs and Systems"). Since 1997, as part of its Year 2000 compliance program, the Company has been evaluating its Internal Programs and Systems to identify potential Year 2000 compliance problems. To the extent practicable, the Company has completed testing of the Internal Programs and Systems. As a result of the testing, the Company has determined that some of its Internal Programs and Systems are not Year 2000 compliant. The Company has begun and will continue to modify or replace some of its Internal Programs and Systems to make such Internal Programs and Systems Year 2000 compliant. The Company is also communicating with its suppliers and others to coordinate Year 2000 conversion and is requesting assurances from all software vendors from which it may purchase or license software that such software will correctly process all date information at all times. 11 12 Based on present information, the Company believes that it will be able to achieve such Year 2000 compliance through a combination of modification of some existing Internal Programs and Systems and the replacement of other Internal Programs and Systems with new programs and systems that are already Year 2000 compliant. Dendrite expects to have its Year 2000 compliance program substantially completed by the end of the first quarter of 1999. However, no assurance can be given that these efforts will be successful or completed in a timely manner. The Company believes most of its ETM systems and other software products (in base line form) which it licenses to customers (collectively, its "External Programs and Systems") will be Year 2000 compliant. Dendrite defines "Year 2000 compliant" to mean that the applicable Dendrite product is capable of recognizing and processing date data beyond the Year 2000 as belonging to the correct century provided all products (for example, hardware, firmware, and software including interfacing programs, operating systems and database engines) used with the software are Year 2000 compliant and properly exchange data with it. Dendrite uses an industry-recognized methodology known as "windowing" for Year 2000 compliance for its current software products. The Company, however, has identified the products that will not process dates beyond December 31, 1999. Such older products are mature products and will not be supported by Dendrite. In addition, as a result of certain products being customized in the process of installation, it is possible that dates were hardcoded to "19xx" during such process. In order to determine whether any such hardcoding has occurred, the Company has strongly encouraged each customer to have its product tested by Dendrite for Year 2000 compliance. To date, the Company has spent approximately $100,000 to evaluate, test and remediate, if necessary, its Internal Programs and Systems for Year 2000 compliance problems and expects to spend up to an additional $50,000 through 2000. These costs will be funded through cash flows from operations. To date, the Company has not spent any material amount on evaluating the Year 2000 compliance status of its ETM systems and software products licensed to customers and does not anticipate any future material expenditures. The Company expects that the expenses and capital expenditures associated with achieving Year 2000 compliance will not have a material adverse effect on its results of operations or financial condition. For a discussion of the risks associated with the Year 2000, see "Factors that May Affect Future Operating Results - Risks to the Company Relating to the Year 2000". Because of the Company's relatively advanced state of readiness, the Company has not yet formulated a reasonably likely worst case scenario. During the first quarter of 1999, as the Company assesses the state of readiness for January 1, 2000, the Company expects to formulate such a scenario and to prepare a contingency plan, if the reasonably likely worst case scenario warrants such a contingency plan. Factors that May Affect Future Operating Results Impact on Company of changes in ethical drug market. A majority of the Company's ETM systems are currently used in connection with the marketing and sale of prescription-only drugs ("ethical pharmaceutical products" or "ethical drugs"). The market currently serviced by the Company is undergoing a number of significant changes, including (i) consolidations and mergers which may reduce the number of existing and potential customers of the Company, (ii) the increasing prescription of generic drugs, in substitution for ethical drugs, produced by manufacturers which do not use a Company ETM system, (iii) the trend toward the reclassification of formerly prescription-only drugs to permit their over-the-counter sale and (iv) competitive pressures on the Company's pharmaceutical customers resulting from the increasing emphasis in the United States on the delivery of healthcare through managed care organizations such as health maintenance organizations and preferred provider organizations, consolidation of the managed care industry in the United States and other changes in healthcare delivery systems occurring in other countries. Any one or more of these changes may adversely affect the Company's business, operating results or financial condition. The Company may also be materially affected by legislative enactments which alter the structure of, or increase regulations governing, the healthcare systems in any of the countries where Company customers and potential customers are located, including, without limitation, government mandated price reductions in the price of ethical pharmaceutical products. There can be no assurance that the Company can respond positively to all of these and other changes in the marketplace and maintain profitability. Potential for significant fluctuations in quarterly results; seasonality; lengthy sales and implementation cycle. The Company's quarterly revenues, expenses and operating results have varied considerably in the past and are likely to vary from quarter to quarter in the future. Fluctuations in the Company's revenues depend on a number of factors, some of which are beyond the Company's control. These factors include, among others, the timing of contracts, delays in customer installation of the Company's software, the length of sales cycles, customer budget changes and changes in pricing policy by the Company or its competitors. For example, the Company incurred a net loss of $3.3 million in the fourth quarter of 1996, which loss was attributable to, among other things, the delay of certain new license purchases by an existing customer, the delay of an existing client's upgrade decision, the postponement of certain post-production implementations for an existing client in multiple country sites and increased research and development spending. The Company establishes its expenditure levels for product development, personnel and other operating expenses based in large part on its expected future revenues. As a result, should revenues fall below expectations, operating results are likely to be adversely and disproportionately affected because a significant portion of the Company's expenses do not vary with its revenues. 12 13 In addition, the Company's quarterly license fees and service revenues may vary due to seasonal, cyclical and other factors. Selection of an ETM system often entails an extended decision-making process for the customer because of the substantial costs and strategic implications associated with acquiring the system. Senior levels of management are often involved in this process, given the importance of the decision as well as the risks faced by the customer should a system fail or not perform as expected. Depending upon the size of the system and the associated computer hardware and software costs, senior corporate management or even the board of directors of a customer may make the final decision to license a Company ETM system. Therefore, decisions to acquire a Company ETM system involve long selling cycles, typically 12 to 18 months for larger customers, although sometimes as long as 24 months, and usually require lengthy periods of evaluation prior to full installation and roll-out. In addition, the Company's ability to recognize license revenue is affected by the duration of the customization process, if any. Finally, the Company has historically realized a greater percentage of its annual license fees and service revenues in the second half of the year than it does in the first half because, among other things, the Company's customers typically spend more of their annual budget authorization for ETM products and services in the second half of the year. However, the interplay among the foregoing factors means that actual results for a given year may vary from this seasonal expectation. In the future, because service revenues tend to be less seasonal and cyclical than license fees, to the extent the percentage of revenue from service revenues from existing customers of the Company continues to increase, seasonal and cyclical trends in the Company's revenues may change. New products and technological change. The market for ETM systems is characterized by rapid change and improvements in computer hardware and software technology. The Company's future success will depend in part on its ability to enhance its current products, to introduce new products that keep pace with technological and market developments and to address the increasingly sophisticated needs of its customers. While the Company expects to continue doing so, there can be no assurance that the Company will be successful in developing and marketing in a timely manner product enhancements or new products that respond to the technological advances by others, or that its products will adequately and competitively address the needs of the changing marketplace. Competition with respect to software products has been characterized by shortening product cycles, and there can be no assurance that the Company will not be adversely affected by this trend. If the product cycles for the Company's systems prove to be shorter than management anticipates, the Company's operating results could be adversely affected. In addition, in order to remain competitive, the Company may be required to expend a greater percentage of its revenues on product innovation and development than historically has been the case, in which case, the Company's gross profit margins and results of operations could be materially and adversely affected. In addition, products as complex as those offered by the Company may contain previously undetected errors or failures. Such errors have occurred in the past and there can be no assurance that, despite testing by the Company, errors will not be found in new products resulting in losses or delays which could have a material adverse effect on the Company's business, operating results or financial condition. Recent ETM product offerings by the Company include, and future ETM product offerings may include, ETM products designed for markets other than the ethical pharmaceutical market. Recent product offerings also include products that can be used by customers independently of ETM systems, such as the analytical tools the Company has recently introduced that permit managers to analyze data collected by their sales representatives. The selling environment in each market has characteristics that are unique to it. There can be no assurance that the Company will be able to achieve in such markets or with new products the success it has attained in the ethical pharmaceutical market. Dependence on major customers. The Company has approximately 77 pharmaceutical customers. Considering all members of an affiliated group to be a single customer, the Company derived approximately 56%, 58% and 59% of its revenues in the aggregate in the years ended December 31, 1995, 1996 and 1997, respectively, from its three largest pharmaceutical customers, two of which had been among the three largest customers of the Company in terms of revenues in each of those periods. The Company believes that the costs to its customers of switching to an ETM system offered by a competitor, or taking significant system management functions in-house would be substantial. Nevertheless, from time to time in the past, such a change has been made by some of the Company's customers with respect to a Company ETM system or all or some of the services offered by the Company. If such change is made by one or more of the Company's major customers, the Company's business, operating results or financial condition could be materially and adversely affected. Risks from competition. Globally, the current market for sales and marketing information management systems of the type sold by the Company is highly competitive. Many companies offer sales force automation and ETM systems. In addition to Dendrite, the Company believes that there are several companies which supply products automating sales, marketing and customer service functions and specifically target the pharmaceutical industry. The Company believes at least four of these companies are actively selling in more than one country. In addition, the other vertical markets in which the Company markets its products possess numerous vendors who market and sell sales force automation and ETM systems. The Company believes that most of its competitors offer a variety of less configurable software products, which are typically available more rapidly than Company systems and often at a substantially lower price. In addition, competition will increase as new competitors enter the market to supply ETM systems and as existing competitors expand their product lines or consolidate. The Company expects it may encounter additional competition in the future from firms offering outsourcing of information technology services, from purveyors of software products providing specialized applications not offered by the Company, including enterprise resource planning vendors and database vendors not currently in this market space to any substantial degree, and from the development and/or operation of in-house systems by its customers and potential customers. Many of the Company's competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales, marketing and other resources than those of the Company. Some of the Company's competitors and potential competitors are part of large corporate groups with significantly greater resources and broader technology bases than those of the Company. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating results or financial condition. 13 14 Reliance on competitors for market data. Current market data on the sales of ethical pharmaceutical products is an important element for the operation of Company ETM systems, which the Company's customers use to guide and organize their sales forces and marketing efforts. There are currently few sources of such data in the United States, Europe and the Pacific Rim. Two of the leading purveyors of such market information in the United States or elsewhere compete with the Company either directly or through affiliates in the market for ETM systems. Were these purveyors of market information to require that pharmaceutical companies also utilize their ETM systems (or those of their affiliates) instead of the Company's, the Company's business, operating results and financial condition would be materially and adversely affected. International operations. Currently, the Company expects the portion of its business located outside of the United States to continue to account for a material part of its revenues. Licensing software and providing services in many foreign countries is subject to risks inherent in international business activities. Risks include general economic conditions in each such country, the effect of applicable foreign tax structures, tariff and trade regulations, difficulties in obtaining local licenses, the difficulty of managing an organization spread over various jurisdictions, unexpected changes in regulatory environments, complying with a variety of foreign laws and regulations and any adverse changes in the political environments in any such countries. In addition, laws in foreign countries may not always provide protection for the Company's proprietary rights in its software products. Providing specialized system support services outside the United States paid for in local currencies carries the additional risk of currency fluctuation and may also affect the net income, if any, reported by the Company. Dependence on key personnel, management of growth. The success of the Company depends to a significant extent upon the contributions of its executive officers and key sales, technical and customer service personnel. The Company maintains a $3 million key man insurance policy on Mr. John Bailye, its Chairman, President and Chief Executive Officer, the proceeds of which are payable to the Company. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense. The Company has at times experienced difficulty in recruiting qualified personnel and there can be no assurance that the Company will not experience such difficulties in the future. Any such difficulties could adversely affect the Company's business, operating results and financial condition. All of the Company's executive officers, technical employees and sales employees have entered into non-competition agreements with the Company. The laws governing such non-competition agreements vary in different jurisdictions and are evolving. The enforceability of such agreements in any case will depend upon all of the facts and circumstances, including the jurisdiction in which enforcement is sought. In some cases these agreements might be unenforceable, a result that could have a material adverse effect on the Company. To manage its growth effectively, the Company must continue to strengthen its operational, financial and management information systems, and expand, train and manage its work force. There can be no assurance that the Company will be able to do so on a timely basis. Failure to do so effectively and on a timely basis could have a material adverse effect upon the Company's business, operating results or financial condition. Dependence on proprietary technology. The Company relies on a combination of trade secret, copyright and trademark laws, non-disclosure and other contractual agreements, and technical measures to protect its proprietary rights in its products. There can be no assurance that the steps taken by the Company will prevent misappropriation of this technology. Further, there can be no assurance that such protective steps will preclude competitors from developing products with features similar to the Company's products. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The Company believes that its products and trademarks do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation involving the imposition of damages or injunctive relief against the Company, any of which could materially and adversely affect the Company's business, operating results and financial condition. Risks to the Company relating to the Year 2000. A substantial amount of current demand for applications software may be generated by customers in the process of replacing and upgrading applications in order to accommodate the change in date to the year 2000. Once such customers have completed such activities, the Company may experience a significant deceleration in this source of revenue which is expected to contribute to its 1999 annual growth. In addition, the expense and time associated with remediation efforts by customers to address Year 2000 compliance problems for software products other than the Company's, may cause such customers to delay the purchase of, or reduce the amount spent on the Company's products and services, both before and after January 1, 2000. Such a reduction, if it occurs, could have a material adverse effect on the Company's business, operating results or financial condition. 14 15 As part of its Year 2000 compliance plan, the Company has assessed both the readiness of its Internal Systems and Programs for handling the Year 2000 as well as the compliance of products sold or licensed by the Company. With respect to its Internal Programs and Systems, the Company believes that it will be able to achieve Year 2000 compliance through a modification of some existing Internal Programs and Systems and the replacement of other Internal Programs and Systems with new programs and systems that are already Year 2000 compliant. However, if defects are not timely identified and if continued modifications and conversions are not made, or not timely completed, the Year 2000 problem could have a material adverse effect on the Company's operating results and financial condition. The Company has designed and tested the most current version of its products to be Year 2000 compliant. No assurance can be given, however, that the Company's current products do not contain undetected errors or defects associated with Year 2000 date functionality that may result in material costs to the Company. Dendrite defines "Year 2000 compliant" to mean that the applicable Dendrite product is capable of recognizing and processing date data beyond the Year 2000 as belonging to the correct century provided all products (for example, hardware, firmware, and software including interfacing programs, operating systems, and database engines) used with the software are Year 2000 compliant and properly exchange date data with it. Dendrite uses an industry-recognized methodology known as "windowing" for Year 2000 compliance for its current software products. Some of the Company's older products, however, will not, and some may not accurately process dates after the date December 31, 1999. To the extent any of these products are still in use in 1999, the Company will continue to attempt to migrate these customers to products which are Year 2000 compliant, although there can be no assurance that this will occur. A failure to migrate any such customer to a product which is Year 2000 compliant could adversely affect the Company's business, operating results or financial condition. In addition, the Company may experience increased expenses which it cannot recoup from customers in addressing the migration of current customers and introduction of prospective customers to software that is Year 2000 compliant. In addition, some customers may attempt to hold the Company responsible for Year 2000 compliance for hardware or software not supplied or created by the Company, but used in conjunction with one or more of the Company's products. For example, the computer systems and software products of other customers with which the Company's computer systems, software, databases or other technology interface may not accept input of, store, manipulate and output dates after the Year 2000 without error or interruption. To the extent any such allegation is made, the Company intends to defend itself vigorously. Finally, there can be no assurance that the Company will not incur material expenses in connection with any claim relating to Year 2000 compliance of its own products or the products of third parties. Consumer Business Division. The Company is currently engaged in the marketing and selling of ETM systems to companies in the over-the-counter pharmaceutical and consumer packaged goods ("CPG") vertical markets. The selling environment in this vertical market has competitive and other characteristics that are unique to it. In addition, the Company believes that the CPG vertical market is composed of sub-markets each of which may have characteristics unique to such sub-market. Accordingly, there can be no assurance that the Company will be able to achieve in these markets the success it has attained in the ethical pharmaceutical market. 15 EX-10.1 2 FORM OF INDEMNIFICATION AGREEMENT 1 INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement") dated as of October 28, 1998, by and between Dendrite International Inc. a New Jersey corporation (the "Company"), and _________, a _________ of the Company (the "Indemnitee"): WITNESSETH: WHEREAS, the Indemnitee is presently serving as a __________ of the Company, and the Company desires the Indemnitee to continue in such capacity; WHEREAS, the Indemnitee is willing, subject to certain conditions (including the execution and performance of this Agreement by the Company), to continue in that capacity; WHEREAS, in addition to the indemnification to which the Indemnitee is entitled under the Company's certificate of incorporation (the "Certificate"), the Company maintains at its sole expense insurance protecting its officers and directors (including the Indemnitee) against certain losses arising out of actual or threatened actions, suits or proceedings to which such persons may be made or threatened to be made parties; and WHEREAS, as a result of circumstances having no relation to, and beyond the control of, the Company and the Indemnitee, there can be no assurance of the continuation or renewal of that insurance; NOW, THEREFORE, to induce the Indemnitee to continue to serve in his present capacity and in consideration of these premises and the mutual agreements set forth in this Agreement, the Company and the Indemnitee agree as follows: 1. Continued Service. The Indemnitee will continue to serve as [a director of the Company so long as he is duly elected and qualified in accordance with the Company's by-laws (the "By-Laws") or until he resigns in writing in accordance with applicable law] [an executive officer of the Company until removal by the Board of Directors in accordance with the Company's by-laws (the "By-Laws") or he resigns in writing in accordance with applicable law]. 2. Initial Indemnity. (a) The Company shall indemnify the Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, administrative, investigative or criminal (other than an action by or in the right of the Company), by reason of the fact that he is or was or had agreed to become a [director] [executive officer] of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against any and all costs, charges and expenses (including attorneys, and others' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection therewith and any appeal therefrom if the Indemnitee acted in good faith and in a manner he reasonably believed to 2 be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendre or its equivalent shall not, of itself, create a presumption that the Indemnitee did not satisfy the foregoing standard of conduct to the extent applicable thereto. (b) The Company shall indemnify the Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was or had agreed to become a [director] [executive officer] of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against costs, charges and expenses (including attorneys' and others' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement thereof or any appeal therefrom if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Superior Court or the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Superior Court or such other court shall deem proper. (c) To the extent that the Indemnitee has been successful on the merits or otherwise, including without limitation the dismissal of an action without prejudice, in any action, suit or proceeding referred to in Sections 2(a) or 2(b) or in defense of any claim, issue or matter therein, he shall be indemnified against costs, charges and expenses (including attorneys' and others' fees and expenses) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination in accordance with Section 4 or any applicable provision of the Certificate, By-Laws, other agreement, resolution or otherwise. Such determination shall be made (i) by the Board of Directors of the Company (the "Board") by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (ii) if such a quorum of disinterested directors is not available or so directs, by independent legal counsel (designated in the manner provided below in this subsection (d)) in a written opinion or (iii) by a majority vote of a quorum of the stockholders of the Company at a meeting duly called and held present (the "Stockholders"). Independent legal counsel shall be designated by vote of a majority of the disinterested directors; provided, however, that if the Board is unable or fails to so designate, such designation shall be made by the Indemnitee subject to the approval of the Company (which approval shall not be unreasonably withheld). Independent legal counsel shall not be any person or firm who, under the applicable standards professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to 2 3 determine the Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of such independent legal counsel and to indemnify fully such counsel against costs, charges and expenses (including attorneys' and others fees and expenses) actually and reasonably incurred by such counsel in connection with this Agreement or the opinion of such counsel pursuant hereto. (e) A11 expenses (including attorneys' and others', fees and expenses) incurred by the Indemnitee in his capacity as a [director] [executive officer] of the Company in defending an actual or threatened civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding in the manner prescribed by Section 4(b). (f) The Company shall not adopt any amendment to the Certificate or By-Laws the effect of which would be to deny, diminish or encumber the Indemnitee's rights to indemnity or encumber the Indemnitee's rights to indemnity pursuant to the Certificate, By-Laws, the New Jersey Business Corporation Act (the "Corporation Act") or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date (the "Effective Date") upon which the amendment was approved by the Board of Stockholders, as the case may be. If the Company shall adopt any amendment to the Certificate or By-Laws the effect of which would be to so deny, diminish or encumber the Indemnitee's rights to indemnity, such amendment shall apply only to acts or failures to act occurring entirely after the Effective Date thereof. 3. Additional Indemnification. (a) Pursuant to Section 14A:3-5 of the Corporation Act, without limiting any right which the Indemnitee may have pursuant to Section 2, the Certificate, the By-Laws, the Corporation Act, any policy of insurance or otherwise, but subject to the limitations on the maximum permissible indemnity which may exist under applicable law at the time of any request for indemnity hereunder determined as contemplated by Section 3(a), the Company shall indemnify the Indemnitee against any amount which he is or becomes legally obligated to pay relating to or arising out of any claim made against him because of any act, failure to act or neglect or breach of duty, including any actual or alleged error, misstatement or misleading statement, which he commits, suffers, permits or acquiesces in while acting in his capacity as a [director] [executive officer] of the Company, or, at the request of the Company, as a director, officer, trustee, employee or agent of another corporations partnership, joint venture, trust or other enterprise. The payments which the Company is obligated to make pursuant to this Section 3 shall include without limitation damages, judgments, settlements and charges, costs, expenses, expenses of investigation and expenses of defense of legal actions, suits, proceedings or claims and appeals therefrom, and expenses of appeal, attachment or similar bonds; provided, however, that the Company shall not be obligated under this Section 3(a) to make any payment in connection with any claim against the Indemnitee if a judgment or other final adjudication adverse to the Indemnitee establishes that his acts or omissions (i) were in breach of his duty of loyalty to the Company or the Stockholders, (ii) were not in good faith or involved a knowing violation of law, or (iii) resulted in receipt by the Indemnitee of an improper personal benefit. The determination of whether the Indemnitee shall be entitled to indemnification under this 3 4 Section 3(a) may be, but shall not be required to, be made in accordance with Section 4(a). If that determination is so made, it shall be binding upon the Company and the Indemnitee for all, purposes. (b) Expenses (including without limitation attorneys' and others' fees and expenses) incurred by Indemnitee in defending any actual or threatened civil or criminal action, suit, proceeding or claim shall be paid by the Company in advance of the final disposition thereof as authorized in accordance with Section 4(b). 4. Certain Procedures Relating to Indemnification and Advancement of Expenses. (a) Except as otherwise permitted or required by the Corporation Act, for purposes of pursuing his rights to indemnification under Sections 2(a), 2(b) or 3(a), as the case may be, the Indemnitee may, but shall not be required to, (i) submit to the Board a sworn statement of request for indemnification substantially in the form of Exhibit A attached hereto and made a part hereof (the "Indemnification Statement") averring that he is entitled to indemnification hereunder; and (ii) present to the Company reasonable evidence of all expenses for which payment is requested, including appropriate invoices. Submission of an Indemnification Statement to the Board shall create a presumption that the Indemnitee is entitled to indemnification under Sections 2(a), 2(b) or 3(a), as the case may be, and the Board shall be deemed to have determined that the Indemnitee is entitled to such indemnification unless within 30 calendar days after submission of the Indemnification Statement the Board shall determine by vote of a majority of the directors at a meeting at which a quorum is present, based upon clear and convincing evidence (sufficient to rebut the foregoing presumption), and the Indemnitee shall have received notice within such period in writing of such determination, that the Indemnitee is not so entitled to indemnification, which notice shall disclose with particularity the evidence in support of the Board's determination. The foregoing notice shall be signed by the director presiding as chairman at the meeting at which the vote to deny indemnification was taken or, if the action to deny indemnification was by written consent without a meeting, signed by all persons who participated in the determination and voted to deny indemnification. The provisions of this Section 4(a) are intended to be procedural only and shall not affect the right of the Indemnitee to indemnification under this Agreement, and any determination by the Board that the Indemnitee is not entitled to the indemnification and any failure to make the payments requested in the Indemnification Statement shall be subject to judicial review as provided in Section 7. (b) For purposes of determining whether to authorize advancement of expenses pursuant to Section 2(e), the Indemnitee shall submit to the Board a sworn statement of request for advancement of expenses substantially in the form of Exhibit B attached hereto and made a part hereof (the "Undertaking"), averring that (i) he has reasonably incurred or will reasonably incur actual expenses in defending an actual or threatened civil or criminal action, suit, proceeding or claim and (ii) he undertakes to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company under this Agreement or otherwise, which repayment shall be made within 180 days of a written request therefor by the Company. For purposes of requesting advancement of expenses pursuant to Section 3(b), the Indemnitee may, but shall not be required to, submit an Undertaking or such other form of 4 5 request, as he determines to be appropriate (an "Expense Request"). Upon receipt of an Undertaking or Expense Request, as the case may be, the Board may make reasonable inquiries to determine whether such expenses relate to an action, suit, proceeding or claim the subject matter of which is of the type for which the Indemnitee may make a claim for indemnification under this Agreement. Unless the Board determines within 10 calendar days after receipt of such Undertaking or Expense Request that such expenses relate to an action, suit, proceeding or claim the subject matter of which is not of the type for which the Indemnitee may make a claim for indemnification under this Agreement, the Board shall authorize immediate payment of the expenses stated in the Undertaking or Expense Request, as the case may be, whereupon such payments shall immediately be made by the Company. No security shall be required in connection with any Undertaking or Expense Request and any Undertaking or Expense Request shall be accepted without reference to the Indemnitee's ability to make repayment. For purposes of pursuing his rights to advancement of expenses hereunder, the Indemnitee shall present to the Company reasonable evidence of all expenses for which advancement is requested, including appropriate invoices. 5. Subrogation; Duplication of Payments. (a) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. (b) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has actually received payment (under any insurance policy, the Certificate, the By-Laws or otherwise) of the amounts otherwise payable hereunder. 6. Enforcement. (a) if a claim for indemnification made to the Company pursuant to Section 4 is not paid in full by the Company within 30 calendar days after a written claim has been received by the Company, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. (b) In any action brought under Section 6 (a), it shall be a defense to a claim for indemnification pursuant to Sections 2(a) or 2(b) (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the Undertaking, if any is required, has been tendered to the Company) that the Indemnitee has not met the standards of conduct which make it permissible under the Corporation Act for the Company to indemnify the Indemnitee for the amount claimed, but the burden or proving such defense shall be on the Company. Neither the failure of the Company (including the Board, independent legal counsel or the Stockholders) to have made a determination prior to commencement of such action that indemnification of the Indemnitee is proper in the circumstances because he has met the applicable standard of conduct set forth in the Corporation Act, nor an actual determination by the Company (including the Board, independent legal counsel or the Stockholders) that the Indemnitee has not met such applicable standard of 5 6 conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. (c) The Indemnitee shall not be required to incur the expenses associated with the enforcement of his rights under thus Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. Accordingly, if the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any action, suit or proceeding designed (or having the effect of being designed) to deny, or to recover from, the Indemnitee the benefits intended to be provided to the Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time, at the expense of the Company as hereinafter provided, to retain counsel (in compliance with Section 7) to represent the Indemnitee in connection with the initiation or defense of any such action, suit, or proceeding, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. The Company shall pay and be solely responsible for any and all costs, charges and expenses (including attorneys' and others' fees and expenses) reasonably incurred by the Indemnitee (i) as a result of the Company's failure to perform this Agreement or any provision hereof or (ii) as a result of the Company or any Person contesting the validity or enforceability, of this Agreement or any, provision hereof as aforesaid. 7. Counsel. With respect to any action, suit, proceeding or claim for which indemnification or advancement of expenses may be sought pursuant to this Agreement and upon request of the Indemnitee after the Indemnitee has submitted an Indemnification Statement to the Board, the Company shall retain counsel reasonably satisfactory to the Indemnitee to represent the Indemnitee and any other the Company may designate (which may include the Company) in connection with the action, suit, proceeding or claim to which the Indemnification Statement relates. In connection with any such action, suit, proceeding or claim, the Indemnitee shall have the right to retain his own counsel at his own expense, except that the fees and expenses of such counsel retained by the Indemnitee shall be expenses for which indemnification and advancement shall be available under this Agreement if (i) the Company and the Indemnitee shall have agreed to the retention of such counsel or (ii) the parties named or threatened to be named in any such action, suit, proceeding or claim (including impleaded parties) include, in addition to the Indemnitee, the Company or another party who may be indemnified by the Company and representation of more than one party by the same counsel would be inappropriate due to actual or, in the reasonable opinion of the Company, potential conflicts of interests between them. 8. Merger or Consolidation. If the Company shall be a constituent corporation in a consolidation, merger or other reorganization, the Company, if it shall not be the surviving, resulting or other corporation therein, shall require as a condition thereto the surviving, resulting or acquiring corporation to agree to indemnify the Indemnitee to the full extent provided in this Agreement. Whether or not the Company is the resulting, surviving or acquiring corporation in any such transaction, the Indemnitee shall also stand in the same position under this Agreement 6 7 with respect to the resulting, acquiring corporation as he would have with respect to the Company if its separate existence had continued. 9. Nonexclusivity and Severability. (a) The right to indemnification provided by this Agreement shall not be exclusive of any other rights to which the Indemnitee may be entitled under the Certificate, By-Laws, the Corporation Act, any other statute, insurance policy, agreement, vote of stockholders or directors or otherwise, both as to actions in his official capacity and as to actions in another capacity while holding such office, and shall continue after the indemnitee has ceased to be a director, officer, trustee, employee or agent and shall inure to the benefit of his heirs, executors and administrators. (b) If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the principles of conflicts of law thereof. 11. Modification; Survival. This Agreement contains the entire agreement of the parties relating to the subject matter hereof. This Agreement may be modified only by an instrument in writing signed by both parties hereto. The provisions of this Agreement shall survive the death, disability, or incapacity of the Indemnitee or the termination of the Indemnitee's service as [a director] [an executive officer] of the Company and shall inure to the benefit of the Indemnitee's heirs, executors and administrators. 12. Certain Terms. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to any employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, trustee, employee or agent of the Company which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; references to the masculine shall include the feminine; references to the singular shall include the plural and vice versa; and if the Indemnitee acted in good faith and in a manner reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan he shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referenced to herein. 13. Headings and Interpretation. When a reference is made in this Agreement to Sections or Exhibits, such references shall be to a Section or Exhibit to this Agreement unless otherwise indicated. 7 8 IN WITNESS WHEREOF, the Company and the Indemnitee have duly executed this Agreement as of the date first above written. DENDRITE INTERNATIONAL, INC. By:_____________________________ John Bailye, President ________________________________ 8 9 Exhibit A INDEMNIFICATION STATEMENT STATE OF ______________________ ) ) SS COUNTY OF _____________________ ) I, ______________________, being first duly sworn, do depose and say as follows: 1. This Indemnification Statement is submitted pursuant to the Indemnification Agreement dated as of October 28, 1998 between Dendrite International, Inc., a New Jersey corporation (the "Company"), and the undersigned. 2. 1 am requesting indemnification against charges, costs, expenses (including attorneys' and others' fees and expenses), judgments, fines and amounts paid in settlement, all of which (collectively, "Liabilities") have been or will be incurred by me in connection with an actual or threatened action, suit, proceeding or claim to which I am a party or am threatened to be made a party. 3. With respect to all matters related to any action, suit, proceeding or claim, I am entitled to be indemnified as herein contemplated pursuant to the aforesaid Indemnification Agreement. 4. Without limiting any other rights which I have or may have, I am requesting indemnification against Liabilities which have or may arise out of ________________________________________________________________________________ ______________________________________________________________________________ . Subscribed and sworn to before me, a Notary Public in and for said County and State, this ____________ day of __________________, ____. ______________________________________ [Seal] My commission expires the ____ day of ______________, ______. 9 10 Exhibit B UNDERTAKING STATE OF _______________________ ) ) SS COUNTY OF ______________________ ) I, _______________________, being first duly sworn, do depose and say as follows: 1. This Undertaking is submitted pursuant to the Indemnification Agreement dated as of October 28, 1998 between Dendrite International, Inc., a New Jersey corporation (the "Company"), and the undersigned. 2. I am requesting advancement of certain costs, charges and expenses which I have incurred or will incur in defending an actual or threatened civil or criminal action, suit, proceeding or claim. 3. I hereby undertake to repay this advancement of expenses if it shall ultimately be determined that I am not entitled to be indemnified by the Company under the aforesaid Indemnity Agreement or otherwise. Such repayment shall be made within 180 days of a written request therefore by the Company. 4. The costs, charges and expenses for which advancement is requested are, in general, all expenses related to_____________________________________________ ________________________________________________________________________________ ______________________________________________________________________________ . Subscribed and sworn to before me, a Notary Public in and for said County and State, this ___ day of _____________, _____. ____________________________________________ [Seal] My commission expires the ______ day of __________________, ______. 10 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 24,929 1,384 28,306 0 0 57,831 8,977 5,020 68,378 16,506 0 0 0 36,965 12,158 68,378 0 81,422 0 37,705 32,548 0 0 11,611 4,751 6,860 0 0 0 6,860 .31 .28
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