-----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, Fa5qptKNF3y6xFqLE4xbpZXvohxBhlDEz9dVVc90Qi7Ty5z/bRNlAQ/ysF3g2HxO mD5WQqu1NFCVmq/CKDdL0A== 0000950123-00-003013.txt : 20000331 0000950123-00-003013.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950123-00-003013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K SEC ACT: SEC FILE NUMBER: 033-92434 FILM NUMBER: 586542 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-K 1 DENDRITE INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES Exchange Act of 1934 For the fiscal year ended December 31, 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 Mt. Kemble Avenue Morristown, NJ 07960-6797 973-425-1200 (Address, including zip code, and telephone number (including area code) of registrant's principal executive office) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of Class Common Stock, no par value 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 time 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of the Common Stock held by nonaffiliates of the registrant was approximately $679,948,122 based upon the closing price of the Common Stock on March 15, 2000, which was $21.00. The number of shares of Common Stock outstanding on that date was 38,957,422. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT DESCRIPTION 10-K PART Registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for the 2000 fiscal year expected to be filed III 2 on or about April 5, 2000. Note: The reader should be aware that, unless otherwise indicated, for purposes of this Form 10-K, all share and per share data have been adjusted to reflect a three-for-two stock split of Dendrite's common stock, which became effective on October 8, 1999. Dendrite(R), Catalyst(TM), ForceAnalyzeRx(TM), ForceCompanion(TM), ForceOne(R), ForcePharma (TM), J Force(TM), Medicheck (TM), SalesPlus(TM), ScripMax (TM), Series 4(TM), Series 5(TM), Series 6(TM), and Voyager (TM) are either trademarks or registered trademarks of Dendrite International, Inc. All other servicemarks, trademarks and trade names referred to in this prospectus are the property of their respective owners. The Company and any of its U.S. or international subsidiaries are sometimes collectively referred to herein as "Dendrite," "we," "our" or "the Company." PART I ITEM 1. BUSINESS. GENERAL Dendrite International, Inc. is a leading worldwide supplier of a comprehensive range of sales force software products and support services to the pharmaceutical industry. We design, develop and sell comprehensive customer relationship management sometimes called CRM solutions that enable customers to effectively manage the activities of large sales forces in complex selling environments. These solutions also permit customers to coordinate diverse home office functions, such as distribution of product literature, sales call follow-up activities and organization of educational programs. Historically, we have focused our solutions on large sales forces within the prescription-only pharmaceutical industry. We believe that our extensive knowledge of the complex and unique selling processes in this industry and our demonstrated ability to meet our customers' business needs have given us a commanding position in this portion of our target market. We are presently the world's largest supplier of customer relationship management solutions to the prescription-only pharmaceutical industry based on the number of sales representatives we support. In the fourth quarter of 1998 we announced our global reach strategy which expanded our target market to mid-size pharmaceutical companies as well as to subsidiaries in emerging markets. Our customers' sales forces now range in size from as few as 50 representatives in smaller European countries to several thousand representatives in the United States. Our solutions enable our pharmaceutical customers to maximize the return on the investments made conducting sales calls to physicians and improves the profitability of their operations by allowing them to: - analyze prescriber patterns to target physicians to ensure the delivery of the right message at the right time; - coordinate the activities and sales call content of multiple sales forces calling on the same physicians; - provide integrated data from multiple sources quickly to direct individual sales representatives; - provide technical and support services to maximize the selling time of the sales representatives; and - provide Internet-based training and meetings to minimize out of territory time of the sales representatives. We also supply our solutions to manufacturers of consumer packaged goods. Our consumer packaged goods or CPG products are targeted at manufacturers whose sales representatives call on retail outlets and enable sales representatives to manage all aspects of their call reporting obligations, including the collection of pricing, promotions and product placement information. In addition, our products can integrate sales information from a number of data sources. By using our products, consumer packaged goods manufacturers can measure the effect of their promotions activities and can effectively plan and execute sales strategies in ways that bring them significant competitive benefits. Our pharmaceutical customers include: Allergan; Aventis; Block; Bristol-Meyers Squibb; Eli Lilly; Forrest; Johnson & Johnson; Kissei; Novo Nordisk; Parke-Davis; Pfizer; Savage; Searle; SmithKline Beecham; Solvay; Takeda; and 3M. Our customers in the consumer packaged goods market include: Bacardi-Martini; Federal Express; Gillette; and Rayovac. Our current offering of sales force software products includes: ForcePharma; Catalyst; Voyager; SalesPlus; J Force; Force Companion; Medicheck; ForceOne; ForceAnalyzeRx; ScripMax and WebSessions, each of which is described below under "Products and Services." We also offer a broad range of support services that enable our customers to maximize the effectiveness of our software products. These services include software configuration and implementation, technical and hardware support, sales force support and data integration and analysis. We typically provide these services under multi-year agreements. 2 3 We develop and market a comprehensive range of sales force solutions consisting of software products and a wide range of support services. These solutions, among other things, enable our customers to: - centralize data to maintain a history of all contacts with each physician; - target specific physicians with specific messages; - realign sales territories; - reallocate sales personnel on a customer or formulary basis; - share data among sales representatives calling on the same physician; and - redeploy sales and marketing resources more rapidly and more precisely. Our sales force software products integrate and process large volumes of time-sensitive sales-related data for use in developing sales strategies and campaigns. Our current sales force software product offerings allow customers to select many different combinations of features for different types of sales forces. Our current product offerings typically do not require customization (i.e., modification of source code) in order to be implemented, however, they are generally significantly configured to address data, market and other specific customer requirements. We price our sales force software products based on the geographic area in which a customer uses our software product, the software configuration and the total number of users. We also charge additional up front fees to configure and install the software and to train the sales representatives as well as annual fees for continuing services and project specific fees. PHARMACEUTICAL SALES FORCE SOFTWARE PRODUCTS Our pharmaceutical sales force software products are designed to provide information to those involved in sales and sales management and also to other levels within each sales organization including its senior management. For example, information directly related to sales, such as travel and expense reports, may be provided to the finance and personnel departments. Similarly, representatives in the field can provide information concerning a physician that can assist managed care sales personnel. These systems create the linkage which connects a customer's sales and management functions with other business departments. We currently offer our pharmaceutical customers 4 primary software products: ForcePharma; Catalyst; SalesPlus; and J Force. We also offer our pharmaceutical customers 3 additional Windows CE(TM)-based software products known as Force Companion, Voyager and Medicheck. FORCEPHARMA. ForcePharma is our sales force management software product targeted at large multinational pharmaceutical customers. ForcePharma can be configured to support sales representatives and managers at all levels within a sales organization. The ForcePharma product can also be configured to address a customer's specific business requirements, including the creation of new data structures. New functions, which integrate fully with the existing configuration, can be added over time, therefore allowing the customer to acquire a system that is capable of evolving as the customer's business requirements change. A typical major pharmaceutical customer will select a configuration depending on the structure of the customer's sales force, the geographic region involved and the type of pharmaceutical sales data available. Each function is offered with specific continuing support services. The ForcePharma software product can be combined with a number of our other CRM tools to enhance its value to the customer. CATALYST. Our Catalyst product provides a suite of comprehensive SFE tools tailored to the specific needs of mid-size pharmaceutical, medical device, biopharmaceutical, biotechnology, and contract sales organizations. Catalyst's flexible architecture and application development tools permit extensive configuration to meet a customer's unique business requirements and subsequent implementation within condensed time frames. Through the integration of third-party sales data, comprehensive opportunity and contact management functionality and sophisticated targeting capabilities, Catalyst empowers healthcare product sales organizations with critical customer intelligence. Like ForcePharma, Catalyst uses object-oriented programming technology and can be configured for all user levels within a sales organization. SALESPLUS. SalesPlus is marketed to mid-tier European pharmaceutical companies. We configure SalesPlus prior to sale, which saves our customers the time and costs associated with configuration. This product is offered to those pharmaceutical customers whose business needs do not require all of the features of the ForcePharma product. Like ForcePharma, this product supports all levels within a sales organization. J FORCE. Our J Force product was specifically developed for the Japanese market and contains functionality similar to that of ForcePharma. J Force is highly configured and has graphical user interface and local market requirements that reflect the unique characteristics of the Japanese prescription-only pharmaceutical market. FORCE COMPANION. Force Companion, our Windows CE(TM)-based companion software, is designed to work in conjunction with Force Pharma and provides sales representatives with access to critical client information at the point of contact and allows for 3 4 remote information capture and subsequent synchronization with Force Pharma. VOYAGER. Voyager, a Windows CE(TM)-based handheld application provides robust functionality comparable to many laptop applications at a reduced cost. Optimized for growth-focused organizations of all sizes that require greater portability, instant data access and lower cost of hardware ownership, Voyager provides comprehensive functionality, two- or three-tier synchronization capabilities, and a common enterprise architecture with Catalyst. Voyager enables organizations to increase sales effectiveness by delivering and capturing information at the prescriber point of contact and enabling sales representatives to effectively and timely target prescribers. MEDICHECK. Medicheck, a Windows CE(TM)-based palm-top solution, is used by pharmaceutical company sales representatives in emerging markets where highly portable, lower cost hardware is essential. The multiple module palm-top system replaces paper based systems and permits information sharing among multiple levels within a sales organization. CPG INDUSTRY PRODUCT Our CPG software product is generally configured in a manner similar to our pharmaceutical software products. FORCEONE. Force One is our sales force software product for the consumer packaged goods or CPG markets and is sold in Europe, the United States and Canada. ForceOne contains most of the same basic features as our ForcePharma product, as well as features specifically created for the CPG industry. ForceOne can be configured to support field sales representatives, their managers and key account managers. The structure of our license, implementation and ongoing service fees for our CPG customers is generally similar to that of our pharmaceutical customers, however, to date this market segment has outsourced very few ongoing support services. ANALYTICAL TOOLS We currently offer certain analytical software and reporting tools under the ForceAnalyzeRx and ScripMax product names, which may be used either with our sales force software products or on a stand-alone basis. These software products allow users to analyze data, such as prescription trends, and produce reports based on the results of these analyses. These products also provide customers with timely information that they can use in developing sales strategies. The custom applications that we design with these products address a wide variety of client business needs including sales, market research, clinical trials, new product launch analyses and sales reporting. Additional capabilities of these analytical products include the ability to: predict prescriber switching allowing early intervention to encourage or forestall a change in prescribing behavior; provide detailed analysis of the effectiveness of various promotional activities; provide promotional activity optimization solutions; and deliver the results of such analysis to the user via e-mail or over the Internet. SERVICES Our customers generally enter into agreements covering software implementation, technical and hardware support and sales force support services. We also provide data related services including: data scrubbing; match, merge and purge activities; and a variety of data analysis services. Virtually all customers sign a software maintenance agreement that covers, among other things, software defect resolution. For the year ended December 31, 1999, service revenues represented approximately 86% of our total revenues. As a result of providing these ongoing services, we have developed long-term strategic relationships with our customers. For example, it is generally our experience that once we begin supplying SFE solutions to our larger customers, we continue to provide support services to them beyond the expiration of the initial service agreement. In addition, as these relationships develop, our customers generally increase the amount and variety of support services they purchase from us. These relationships have accounted for some of the increase in our service-related revenues. The complexity and size of the sales and market research databases being integrated and manipulated by our software products require highly specialized information systems skills, particularly as new sources of data must be integrated. The creation of a customer's database requires loading third party data onto a central server or servers and encoding that data with proprietary Dendrite data links. This encoding process allows the data to be integrated into a functional sales-related database used by our sales force software products. We initially perform these services during installation and, if requested, may continue to manage these information 4 5 systems over time. Many companies choose not to employ the information systems staff needed to manage these large, complex databases and consider the outsourcing of these tasks to us as both economically and operationally advantageous. We offer a full range of support services to all of our customers. However, because customers of our SalesPlus, Medicheck, and ForceOne products often require less functionality, we expect the amount of support services for these customers to be less than the amount provided to customers of our other products. The principal categories of services we offer are implementation services, technical and hardware support services and sales force support services. IMPLEMENTATION SERVICES. Our implementation services include: the configuration, if applicable, and implementation of our sales force software products to meet customer requirements; creation of the customer's specific version of our data model; creation of the customer's integrated database; the loading of data onto the customer's remote computer hardware and training customer employees on use and capabilities of Dendrite sales force software products. TECHNICAL AND HARDWARE SUPPORT SERVICES. Our technical and hardware support service offerings consist of: the management of technical support for Dendrite sales force software products; customization of source code, if applicable, to meet the customer's needs; continued support of the customer's database, including: loading and linking new releases of third party data purchased by the customer; identifying new functional segments for data analysis; providing software defect resolution and issuing performance enhancements; feature changes and, in certain circumstances, new versions of products; operation and maintenance of server computers; providing asset control and maintaining remote computer hardware, including recapture of data on defective equipment and replacement of defective equipment; and developing business interruption plans for management of any unforeseen interference with Dendrite's provision of ongoing support services, including coordinating the retention of a disaster recoverY provider for the customer's servers. SALES FORCE SUPPORT SERVICES. Our sales force support services include: project management; providing ongoing training on use and capabilities of Dendrite sales force software products; assisting the customer in planning and executing realignments of sales territories or functional (e.g., formulary-based) segments to allow more effective resource allocation; providing direct customer service telephone support for Dendrite sales force and certain third party software products (available seven days a week and in many foreign languages); providing pro-active prescription data analysis at a territory and physician level to a customer's sales representatives to improve sales and promotional campaigns, and providing data integration and data management services with data our customers obtain from third party sources. When a large customer licenses a Dendrite sales force software product, we typically establish an implementation services and ongoing support group focused on that customer, as well as a separate support service group composed of both customer support and technical support personnel who are primarily dedicated to servicing that customer. However, for customers with smaller sales forces or sales forces with specialized needs, such as non-home country language capability, the service group may have responsibility for more than one client. Typically, we provide services under a multi-year contract. In North America, we enter into service agreements directly with our customers. Outside North America, we enter into service agreements through our local wholly-owned subsidiary. Depending upon the size of the customer and the scope of services to be performed, a dedicated service group may be comprised of 5 to 100 persons. SOFTWARE CONFIGURATION Our pharmaceutical sales force software products are configured to allow information access and communication among geographically dispersed sales and marketing personnel and regional and home offices. The core of the configuration is a central database server, which stores the customer information and integrates and controls all data flow from external points. Most of the servers used by our customers are manufactured by IBM, Compaq, Hewlett-Packard or Sun Microsystems and run on UNIX(TM) or Windows NT(R) operating systems. Servers are purchased or leased by Dendrite's customers or leased for them by Dendrite. Some smaller customers lease space on our servers located in various offices worldwide. Remote databases are stored on laptop and palm-top computers used by sales representatives in the field and updated regularly via modem. Regional sales managers using personal computers may access the server via wide area networks. Our customers are responsible for selecting computer equipment and for deciding when to upgrade or replace it. 5 6 Our pharmaceutical sales force software products permit a sales representative to send updated information to the central database server. Similarly, the sales representative can receive information concerning upcoming calls as well as additional sales efforts planned by other sales representatives within the same company. This server, in most cases located at one of our facilities, contains the customer's own database of sales-related information which is generally maintained and operated for the customer by us. CUSTOMERS Our customers include major multinational pharmaceutical companies, including: Allergan; Aventis; Block; Bristol-Myers Squibb; Eli Lilly; Johnson & Johnson; Kissei; Novo Nordisk; Parke-Davis; Pfizer; Savage; Searle; Smith-Kline Beecham; Solvay; Takeda; and 3M. In addition, in the CPG market, our customers include: Bacardi-Martini; Federal Express; Gillette; and Rayovac. Approximately 37% of our total revenues in 1999 came from Pfizer and Johnson & Johnson. Approximately 49% of our total revenues in 1998 came from Pfizer, Johnson & Johnson and Parke-Davis. Approximately 51% of our total revenues in 1997 came from Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer. The loss of all or a significant part of the business of any of these customers could have a material adverse effect on us. SALES AND MARKETING We actively market our sales force software products and services to prescription-only and over the counter pharmaceutical, medical device, biopharmaceutical, biotechnology and CPG companies worldwide using regional and local sales and marketing personnel. Sales presentations are typically made to the customer's management information services department or sales department. The selection of a sales force software product often entails an extended decision-making process that typically takes nine to eighteen months. This process may involve senior levels of management and, in some cases, the board of directors. See Item 7 -- "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 -- Our lengthy sales and implementation cycles make it difficult to predict quarterly revenues". We work with a potential customer to identify its business requirements in light of its markets, sales organization and operating structure. We draw upon our broad product functionality and our experience in the applicable vertical market to provide a comprehensive, yet highly targeted SFE solution. The positive response of our customers' sales representatives can influence the decisions of those customers to license additional functionality and/or to contract for expanded support services. Accordingly, we try to address the concerns of sales personnel during the training portion of our implementation services. We also promptly respond to customer communications and evaluate them for indications of potential systemic problems or changing market trends. We believe that our relationships with existing customers create additional sales and marketing opportunities. Further, we believe that our network of international offices allows us to serve our existing customers in new locations. Many of our prescription-only pharmaceutical customers also have over-the-counter operations that provide us with additional sales opportunities. Finally, we have occasionally entered into arrangements with business partners to market our products and/or services jointly. In addition, we occasionally resell computer hardware and third-party software. COMPETITION The current market for sales force software, customer relationship management products and support services is highly competitive. Many companies offer sales force automation or SFA and SFE products and/or services in the prescription-only pharmaceutical and CPG industries. We believe that there are approximately eight other companies that sell sales force software products and specifically target the pharmaceutical industry, including: - three competitors that are actively selling in more than one country; and - two competitors that also offer sales force support services. SFA software products differ greatly in terms of functionality, flexibility and the type of hardware platform supported. Vendors of SFA software products also generally do not provide support services to the same extent as SFE or CRM vendors. We believe that our sales 6 7 force software products and support services offer customers a more comprehensive solution than SFA software products. We believe that potential competitors must incur significant expense in order to develop an integrated, configurable solution for the problems presented by complex multinational selling environments. While we believe SFA software products are less compelling solutions, these software products, nonetheless, often cost less than SFE or CRM solutions. We also face competition from many vendors that market and sell SFA and sales force software products and services in the CPG market. In addition, we also compete with many companies that provide support services similar to our services. Our sales force products and services compete with others principally on the basis of the following factors: - product flexibility and configuration; - platform configuration; - name recognition; - global competence; - service standards; - breadth of customer base; and - technical support and service. We believe our solutions compete favorably with respect to these factors, and that we are positioned to maintain our market leadership position through innovative new product and application developments and continued focus on support services. Some of our existing competitors, as well as a number of potential market entrants, have larger technical staffs, larger marketing and sales organizations and greater financial resources than we do. In the prescription-only pharmaceutical vertical market, two of our competitors, IMS Health Strategic Technologies and TVF (Cegedim), own and control, either directly or through affiliated entities, proprietary data collection systems. It may be possible for a competitor to gain a competitive advantage in the pricing of its sales force software products with respect to customers who are interested in purchasing the data it or its affiliates collect. In addition, as new data sources emerge, companies providing such data may enter the market and provide solutions to our customers directly. We believe that competition will increase as new competitors enter the market to supply sales force software products and/or services and as existing competitors expand their product lines, consolidate or offer more compelling solutions. We also expect that we may encounter additional competition in the future from firms offering outsourcing of information technology services and from vendors of software products providing specialized applications not offered by us, including enterprise resource planning vendors and data base vendors. We also may face competition from CRM vendors who do not currently compete in our vertical market. We also face potential competition from our current customers and potential customers who may elect to design and install or to operate their own sales force management systems. PROPRIETARY RIGHTS We rely on a combination of methods to protect our proprietary intellectual technology. These include: - trade secret, copyright and trademark laws; - license agreements with customers containing confidentiality provisions; - confidentiality agreements with consultants, vendors and suppliers; and - non-disclosure agreements with each of our executive officers and technical employees. Existing United States copyright laws provide only limited protection and even less protection may be available under foreign laws. 7 8 EMPLOYEES As of December 31, 1999, we employed 1,333 employees: 962 in the United States and Canada; 247 in Europe; 56 in the Pacific Rim; and 68 in Latin America. We believe that relations with our employees are good. Our employees generally are not part of any collective bargaining unit except for our employees in France who are subject to a national collective bargaining agreement. We believe that our future growth and success will depend upon our ability to attract and retain skilled and motivated personnel, which is becoming progressively more difficult for many technology and services companies in many countries. ADDITIONAL INFORMATION For additional information regarding the Company's business, see Item 7 of "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 2. PROPERTIES. We lease a 101,500 square foot building, which serves as our corporate headquarters in Morristown, New Jersey; a 31,575 square foot building in Stroudsburg, Pennsylvania, which houses customer support personnel; 26,280 square feet of office space in Basking Ridge, New Jersey, which houses customer support personnel; a 10,000 square foot building in Stroudsburg, Pennsylvania which serves as a hardware repair and maintenance facility; 9,490 square feet of office space in Durham, North Carolina, which houses customer support personnel; a 5,000 square foot warehouse in Somerset, New Jersey; and a 120 square foot office in Newark, Delaware. We also lease a total of 57,670 square feet in fifteen locations in Australia, Belgium, Brazil, Canada, Ecuador, France, Germany, Hungary, Italy, Japan, Mexico, New Zealand, Spain and the United Kingdom for local management, sales offices and customer support operations. We believe that our existing U.S. corporate facilities will become insufficient for our needs in 2000, but that adequate space will be available as needed. Servers located at our facilities are commonly maintained in a secured area and are often subject to regular audit and inspection by our customers. We maintain database servers located at our facilities for substantially all of our U.S. customers and for a substantial majority of our international customers. For these customers, we offer a business interruption service which is intended to protect these customers' businesses in the event of any unforeseen interruption, interference or disruption of the Company's provision of customer support services. As part of this offering, we will assist a customer in developing a business interruption plan, which will include the coordination of the customer's retention of a disaster recovery provider. ITEM 3. LEGAL PROCEEDINGS. We are occasionally involved in litigation relating to personnel and other claims arising in the ordinary course of business. We are not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a materially adverse effect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 8 9 Our common stock, no par value, is quoted on the Nasdaq National Market under the symbol "DRTE". As of March 15, 2000 there were approximately 142 holders of record of our common stock. The following table sets forth for the periods indicated the high and low sale prices for our common stock as reported by the Nasdaq National Market System. Such market prices have been adjusted to give retroactive effect to the three-for-two forward stock split of our common stock which became effective on October 8, 1999.
Period High Low ------ -------- ------ Quarter Ended March 31, 1998........ $10.25 $6.29 Quarter Ended June 30, 1998......... 12.67 8.52 Quarter Ended September 30, 1998.... 18.59 10.33 Quarter Ended December 31, 1998..... 19.66 10.83 Quarter Ended March 31, 1999........ 21.17 13.63 Quarter Ended June 30, 1999......... 25.33 13.17 Quarter Ended September 30, 1999.... 33.67 19.25 Quarter Ended December 31, 1999..... 39.00 25.00
We have never paid any cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock in the foreseeable future. Our line of credit agreement with The Chase Manhattan Bank, N.A. requires us to maintain a minimum net worth 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 plus 75% of the net proceeds to us of any stock offerings. This covenant effectively limits the amount of cash dividends we may pay. See Note 4 of "Notes to Consolidated Financial Statements" for a discussion of our line of credit agreement. 9 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ----------------- ----------------- ----------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: License fees........................... $ 6,961 $ 10,310 $ 9,074 $ 14,955 $ 24,244 Services.............................. 53,625 66,573 82,248 115,678 148,441 --------- --------- --------- --------- ---------- 60,586 76,883 91,322 130,633 172,685 Costs of revenues: Cost of license fees................... 712 832 1,758 2,314 2,360 Cost of services....................... 27,153 37,771 45,078 57,887 72,380 --------- --------- --------- --------- ---------- 27,865 38,603 46,836 60,201 74,740 --------- --------- --------- --------- ---------- Gross margin........................... 32,721 38,280 44,486 70,432 97,945 Operating expenses: Selling, general and administrative.... 23,073 28,519 33,305 44,046 56,927 Research and development............... 2,518 7,361 3,674 4,584 7,669 Mergers and acquisitions............... -- -- -- -- 3,466 Write-off of in-process research and Development.......................... -- 2,640 -- 1,230 -- --------- --------- --------- --------- ---------- 25,591 38,520 36,979 49,860 68,062 --------- --------- --------- --------- ---------- Operating income (loss)................ 7,130 (240) 7,507 20,572 29,883 Interest income............................. 559 1,168 531 1,099 1,880 Other income (expense)...................... 227 (240) (261) (466) (189) --------- --------- --------- --------- ---------- Income (loss) before income taxes...... 7,916 688 7,777 21,205 31,574 Income taxes................................ 3,082 1,467 3,002 8,446 12,234 --------- --------- --------- --------- ---------- Net income (loss)........................... $ 4,834 $ (779) $ 4,775 $ 12,759 $ 19,340 ========= ========= ========= ========= ========== Net income (loss) per share: Basic.................................. $ 0.21 $ (0.02) $ 0.13 $ 0.35 $ 0.51 ========= ========= ========= ========= ========== Diluted................................ $ 0.14 $ (0.02) $ 0.13 $ 0.32 $ 0.48 ========= ========= ========= ========= ========== Shares used in computing net income (loss) per share: Basic.................................. 23,501 35,370 35,601 36,080 37,725 ========= ========= ========= ========= ========== Diluted................................ 33,365 35,370 36,870 39,392 40,599 ========= ========= ========= ========= ==========
DECEMBER 31, -------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- ------------- ------------- ------------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital.................................. $ 29,063 $ 31,530 $ 34,813 $ 50,608 $ 78,131 Total assets..................................... 47,704 54,176 57,876 81,831 124,720 Capital lease obligations, less current portion.. 51 201 353 544 285 Stockholders' equity............................. 33,510 37,511 40,672 61,049 101,116
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS This Form 10-K 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, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding our strategy, future operations, financial position and objectives of management. Those statements in this Form 10-K 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 "Risk Factors," 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-K, as more fully described under "Risk Factors". In light of the 10 11 significant uncertainties inherent in the forward-looking statements included in this Form 10-K, 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 co-founded in 1986 by John E. Bailye, the Company's current Chairman, President and Chief Executive Officer. The business was established to provide Sales Force Effectiveness or 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 through our own sales, support and technical personnel located in 21 offices worldwide. We generate revenues from both services and licenses. 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, sometimes as part of longer projects when enhancing customer relationships is our goal. We receive technical and hardware support fees for services related to, among other things, ongoing technical support, maintenance of our customers' databases, operations of our customers' server computers, maintenance for our customers' remote hardware and asset control. Technical and hardware support fees also include fees for software maintenance services such as software defect resolution and performance enhancements. We charge fees for these maintenance services based on a percentage of total license fees plus configuration fees, if any. 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 licensed by the customer. The Company generally recognizes license fees as revenue using the percentage of completion method over a period of time that commences with the exceution of a license agreement and ends when the product configuration is complete and it is ready for use in the field. This period of time usually includes initial customization or configuration and concludes with quality assurance and testing. In those historically rare cases when there is no initial customization or configuration the company generally recognizes the license fees from those products upon delivery assuming any services to be provided are not essential to the functionality of the software. Additionally, license revenues will be recognized immediately when user count for previously delivered software increases and/or a third party is used for implementation and configuration. The Company's software licensing agreements provide for a warranty period (typically 180 days from the date of excution 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 United States, the United Kingdom, France and Japan are our main markets. We generated approximately 36% of our total revenues outside the United States during the year ended December 31, 1997; approximately 23% during the year ended December 31, 1998; and approximately 24% during the year ended December 31, 1999. 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. Foreign license fees are shown as United States revenues in Note 10 of "Notes to Consolidated Financial Statements." 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 profits by geographic segments are shown in Note 10 of "Notes to Consolidated Financial Statements". Our geographic operating profits are affected primarily by our use of local technical and customer support personnel, costs associated with opening new facilities or expanding existing facilities and our ability to increase service revenues faster than the growth in selling, general and administrative expenses. 11 12 MERGERS AND ACQUISITIONS We regularly evaluate opportunities to acquire products or businesses that represent strategic enhancements 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. In accordance with this policy, the Company has engaged in the following acquisitions over the last few years: 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 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. On May 27, 1999, the Company exchanged 2,220,807 shares of its common stock for all the outstanding shares of common stock of CorNet International, Ltd. ("CorNet"), a provider of sales force effectiveness solutions for the U.S. pharmaceutical, consumer and business to business markets. 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. On June 30, 1999, the Company purchased all of the assets and assumed certain liabilities, as defined, of Marketing Management International, Inc. and certain affiliated companies (collectively, "MMI"), providers of palm-top software and paper based sales force effectiveness solutions and consulting services to subsidiaries of multinational pharmaceutical companies operating in emerging markets, such as Latin America, Eastern Europe and Southeast Asia. Under the terms of the acquisition agreement, MMI received $6,640,000 in cash, which includes estimated transaction costs, and $3,435,000 in Dendrite common 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 has been allocated between capitalized software development costs and goodwill based upon an independent appraisal. MMI's results of operations have been included in the Company's consolidated financial statements from the date of acquisition. On January 6, 2000, the Company purchased all of the assets and assumed certain liabilities, as defined, of Analytika, Inc. ("Analytika"), a provider of advanced analytical products, consulting services and outsourced operations services to the pharmaceutical industry. The final purchase price was approximately $9,000,000 in Dendrite common stock and assumed liabilities, with transaction costs of $400,000. The acquisition will be 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. 12 13 RESULTS OF OPERATIONS The following table sets forth our results of operations expressed as a percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1998 1999 ---- ---- ---- Revenues: License fees................................... 10% 11% 14% Services....................................... 90 89 86 ---- ---- ---- 100 100 100 Costs of Revenues: Cost of license fees........................... 2 2 2 Cost of services............................... 50 44 42 ---- ---- ---- 52 46 44 ---- ---- ---- Gross Margin................................... 48 54 56 Operating Expenses: Selling, general and administrative............ 36 33 33 Research and development....................... 4 4 4 Mergers and acquisitions....................... -- -- 2 Write-off in-process research and development.. -- 1 -- ---- ---- ---- 40 38 39 ---- ---- ---- Operating income......................... 8 16 17 Other income....................................... 1 -- 1 ---- ---- ---- Income before income taxes.................... 9 16 18 Income taxes....................................... 4 6 7 ---- ---- ---- Net Income ........................................ 5% 10% 11% ==== ==== ===
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. YEARS ENDED DECEMBER 31, 1998 AND 1999 REVENUES. Total revenues increased $42,052,000 to $172,685,000 in 1999, up 32% from $130,633,000 in 1998. License fee revenues increased $9,289,000 to $24,244,000 in 1999, up 62% from $14,955,000 in 1998. License fee revenues as a percentage of total revenues were 14% in 1999 as compared to 11% in 1998. This increase was attributable primarily to sales to new pharmaceutical customers, sales force expansions and software upgrades by existing pharmaceutical customers. Service revenues increased $32,763,000 to $148,441,000 in 1999, up 28% from $115,678,000 in 1998. Service revenues as a percentage of total revenues were 86% in 1999 as compared to 89% in 1998. 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. The Company expects the approximate current relationship of license to service revenues to continue in the future. COST OF REVENUES. Cost of revenues increased $14,539,000 to $74,740,000 in 1999, up 24% from 60,201,000 in 1998. Cost of license fees increased $46,000 to $2,360,000 in 1999 up 2% from $2,314,000 in 1998. Cost of license fees for 1999 represents the amortization of purchased software and capitalized software development costs of $1,654,000 and third party vendor license fees of $706,000. 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. The increase in the amortization of capitalized software development costs in 1999 was primarily due to the increase in purchased capitalized software associated with the acquisitions of ABC and MMI software development costs in 1999 as compared to 1998. Cost of services increased $14,493,000 to $72,380,000 in 1999, up 25% from $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 1998 to 49% in 1999. This 13 14 decrease was primarily the result of increased operational efficiencies in 1999. Total Gross Margin for 1999 rose to 57%, up from 54% in 1998. This increase is due to the improvement in both service and license margins as described above, as well as the higher proportion of license to service revenues in 1999. This is due to the launch of several new products. The Company believes that the appropriate targeted gross margin rate should be between 58%-60%. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $12,881,000 to $56,927,000 in 1999, up 29% from $44,046,000 in 1998. As a percentage of revenues, SG&A expenses remained constant at 33% for the years ended 1999 and 1998. The increase in the absolute dollar amount of SG&A expenses was primarily attributable to an increase in sales and marketing expenses from both our existing businesses and our newly acquired businesses, as well as increases related to additional leased facilities in Morristown, New Jersey. The Company's annual targeted SG&A expenses, as a percentage of total revenues, are 30-32%. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased $3,085,000 to $7,669,000 in 1999 up 67% from $4,584,000 in 1998. The increase in research and development expenses during the most recent period was attributable primarily to increased spending on development of our laptop pharmaceutical sales force software products and a new version of our palmtop pharmaceutical sales force software product. 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. MERGERS AND ACQUISITIONS. During the second quarter 1999, the Company acquired CorNet in a transaction accounted for as a pooling of interests and incurred a one time expense for the costs related to the acquisition and the cancellation of a proposed common stock offering. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. On July 24, 1998, we acquired 100% of the capital stock of ABC. We assigned $1,230,000 to in-process research and development and such amount was written-off in the accompanying statement of operations for the three months ended September 30, 1998. PROVISION FOR INCOME TAXES. The effective rate decreased to 39% in 1999 from 40% in 1998. The effective rate for both the years ended December 31, 1999 and 1998 included one-time charges, which are not deductible for tax purposes. Excluding the effect of these charges the effective rate would have been reduced to 36% in 1999 from 38% in 1998. This decrease was due to the continued implementation of tax planning strategies throughout the world. YEARS ENDED DECEMBER 31, 1997 AND 1998 REVENUES. Total revenues increased $39,311,000 to $130,633,000 in 1998, up 43% from $91,322,000 in 1997. License fee revenues increased $5,881,000 to $14,955,000 in 1998, up 65% from $9,074,000 in 1997. This increase was attributable primarily to the recognition of revenues 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 $33,430,000 to $115,678,000 in 1998, up 41% from $82,248,000 in 1997. This increase was primarily the result of an increase in our installed base of sales force software products for 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 to $60,201,000 in 1998, up 29% from $46,836,000 in 1997. Cost of license fees increased $556,000 to $2,314,000 in 1998, up 32% from $1,758,000 in 1997. In 1998, the cost of license fees represents the amortization of capitalized 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 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 $12,809,000 to $57,887,000 in 1998, up 28% from $45,078,000 in 1997. 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 55% of service revenues in 1997 to 50% 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. The total gross margin for 1998 rose to 54% from 49% in 1997. This increase is primarily attributable to the improved service's margin resulting from increased operational efficiencies in 1998. 14 15 SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $10,741,000 to $44,046,000 in 1998 up 32% from $33,305,000 in 1997. 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. Research and development expenses increased $910,000 to $4,584,000 in 1998 up 25% from $3,674,000 in 1997. 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 wasprimarily 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 total revenues. 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, decreased to 38% for the year ended December 31, 1998 as opposed to 39% during 1997. This decrease was due primarily to the implementation of tax minimization strategies throughout the world. 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" in this Item 7.
QUARTERS ENDED --------------------------------------------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 1998 1998 1998 1998 1999 1999 1999 1999 --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Revenues: License fees................. $ 3,273 $ 4,735 $ 1,621 $ 5,326 $ 4,054 $ 6,747 $ 6,891 $ 6,552 Services..................... 23,564 27,930 33,314 30,870 33,580 35,104 38,855 40,902 --------- --------- --------- --------- --------- --------- --------- -------- 26,837 32,665 34,935 36,196 37,634 41,851 45,746 47,454 Costs of Revenues: Cost of license fees......... 361 1,024 379 550 398 592 535 835 Cost of services............. 12,270 14,751 16,248 14,618 16,503 17,722 18,847 19,307 --------- --------- --------- --------- --------- --------- --------- -------- 12,631 15,775 16,627 15,168 16,901 18,314 19,382 20,142 --------- --------- --------- --------- --------- --------- --------- -------- Gross margin................. 14,206 16,890 18,308 21,028 20,733 23,537 26,364 27,312 Operating Expenses: Selling, general and administrative............ 9,374 10,826 11,254 12,592 12,627 14,397 14,716 15,186 Research and development..... 1,111 1,094 1,059 1,320 1,638 1,835 2,393 1,803 Mergers and acquisitions..... -- -- -- -- -- 3,466 -- -- Write-off of in-process research and development.. -- -- 1,230 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- -------- 10,485 11,920 13,543 13,912 14,265 19,698 17,109 16,989 --------- --------- --------- --------- --------- --------- --------- -------- Operating income .......... 3,721 4,970 4,765 7,116 6,468 3,839 9,255 10,323 Interest income.................. 196 215 283 405 418 440 408 613 Other income (expense)........... (344) (30) 120 (212) (125) 43 (10) (97) --------- --------- --------- --------- --------- --------- --------- --------- Income before income taxes (benefit)..... 3,573 5,155 5,168 7,309 6,761 4,322 9,653 10,839 Income taxes (benefit)........... 1,408 1,949 2,320 2,769 2,562 2,296 3,475 3,901 --------- --------- --------- --------- --------- --------- --------- -------- Net income ...................... $ 2,165 $ 3,206 $ 2,848 $ 4,540 $ 4,199 $ 2,026 $ 6,178 $ 6,938 ========= ========= ========= ========= ========= ========= ========= ======== Net income per share:
15 16 Basic........................ $ 0.06 $ 0.09 $ 0.08 $ 0.12 $ 0.11 $ 0.05 $ 0.16 $ 0.18 ========= ========= ========= ========= ========= ========= ========= ======== Diluted...................... $ 0.06 $ 0.08 $ 0.07 $ 0.11 $ 0.11 $ 0.05 $ 0.15 $ 0.17 ========= ========= ========= ========= ========= ========= ========= ======== Shares used in computing net income per share: Basic........................ 35,694 35,835 36,266 36,534 37,026 37,545 38,025 38,305 ========= ========= ========= ========= ========= ========= ========= ======== Diluted...................... 38,306 38,943 39,702 40,118 39,690 40,104 41,012 41,527 ========= ========= ========= ========= ========= ========= ========= ========
LIQUIDITY AND CAPITAL RESOURCES We finance our operations primarily through cash generated by operating activities. Net cash provided by operating activities was $31,811,000 for the year ended December 31, 1999, compared to cash provided by operating activities of $27,387,000 for the year ended December 31, 1998. This increase was due primarily to higher net income and by the cash tax benefit provided from the exercise of stock options during the year ended December 31, 1999, compared to the year ended December 31, 1998. Cash used in investing activities was $21,916,000 in the year ended December 31, 1999, compared to cash used in investing activities of $13,370,000 in the year ended December 31, 1998. This increase was due primarily to increased purchases of short-term investments as well as the purchase of ABC in the year ended December 31, 1998. On January 16, 1997, our 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 601,500 shares of common stock for a value of $1,927,000. Dendrite did not repurchase any shares of common stock during the year ending December 31, 1998 and 1999. We obtained $7,903,000 of cash from financing activities in the year ended December 31, 1999, compared to obtaining $2,471,000 in cash from financing activities in the year ended December 31, 1998. 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, 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 terms of this agreement require us to maintain a minimum consolidated net worth, among other covenants, measured quarterly, which is equal to our net worth as of December 31, 1999, plus 50% of our net income earned after January 1, 1998 plus 75% of the net proceeds to us of any equity offering. This covenant effectively limits the amount of cash dividends we may pay. At December 31, 1999, there were no borrowings outstanding under the agreement and we satisfied all of our covenant obligations. Our working capital was approximately $78,131,000 at December 31, 1999 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. YEAR 2000 READINESS DISCLOSURE We spent approximately $355,000 to evaluate, test and remediate, if necessary, our internal computer software and operating systems, collectively, our Internal Programs and Systems, for Year 2000 compliance problems. These costs were funded with cash from our operations and such costs were expensed or capitalized, depending on the nature of the expenditure. Since January 1, 2000, the Company has not had any Year 2000-related problems associated with its Internal Programs and Systems or software products licensed to its customers, and is not aware of any Year 2000-related problems associated with the systems or software of its vendors, distributors or suppliers. Although the Company expects most material Year 2000 compliance problems to have arisen or occurred on or after January 1, 2000, there can be no assurance, however, that the Year 2000 problem will not adversely affect the Company's business, financial condition, results of operations or cash flows. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY Most of our sales force software products and services are currently 16 17 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 our existing and potential customers, also could alter implementation or purchase cycles; - - 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 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. 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 typically takes nine to eighteen 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, 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 revenues 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 REVENUES 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 revenues. 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 SFE solutions 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. 17 18 WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES 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 36% of our total revenues in 1999 came from Pfizer and Johnson & Johnson. Approximately 49% of our total revenues in 1998 came from Pfizer, Johnson & Johnson and Parke-Davis. Approximately 51% of our total revenues in 1997 came from Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer. 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 or by in-house staff. 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. WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE The market for CRM 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, 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. INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES We believe there are eight other companies that sell sales force software products that specifically target the pharmaceutical industry, including: - - Three competitors that are actively selling sales force software products in more than one country; and - - Two competitors that also offer sales force support services. We believe the sales force software products and/or services offered by most of our competitors do not address the variety of Pharmaceutical and CPG 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 automation and CRM solutions in the consumer packaged goods or CPG 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; 18 19 - - 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; - - any adverse change in tax, tariff and 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. WE MAY FACE RISKS ASSOCIATED WITH ACQUISITIONS Our business could be materially and adversely affected as a result of the risks associated with acquisitions. As part of our business strategy, we have acquired businesses that offer complementary products, services, or technologies. These acquisitions are accompanied by the risks commonly encountered in an acquisition of a business, including: - - the effect of the acquisition on our financial and strategic position; - - the failure of an acquired business to further our strategies; - - the difficulty of integrating the acquired business; - - the diversion of our management's attention from other business concerns; - - the impairment of relationships with customers of the acquired business; - - the potential loss of key employees of the acquired company; and - - the maintenance of uniform company-wide standards, procedures and policies. 19 20 These factors could have a material adverse effect on our revenues and earnings. We expect that the consideration paid for future acquisitions, if any, could be in the form of cash, stock, rights to purchase a stock or a combination of these. To the extent that we issue shares of stock or other rights to purchase stock in connection with any future acquisition, existing shareholders will experience dilution and potentially decreased earnings per share. OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON 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. 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 and adverse effect upon our business, operating results or financial condition. 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. THERE ARE CHARACTERISTICS IN THE CONSUMER PACKAGED GOODS MARKET THAT DIFFER FROM THE PHARMACEUTICAL MARKET. We market and sell CRM solutions to companies in the CPG market. The selling environment in this market has unique characteristics that differentiate it from the pharmaceutical market. In addition, we believe that the CPG 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. PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE Provisions of our Restated Certificate of Incorporation, our By-laws and New Jersey law may make it more difficult for a third party to acquire us. For example, the Board of Directors may, without the consent of the stockholders, issue preferred stock with rights senior to those of the common stock. OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS The market price of our common stock may be significantly affected by the following factors: - - the announcement or the introduction of new products by us or our competitors; 20 21 - - quarter-to-quarter variations in our operating results and changes in earnings estimates by analysts; - - market conditions in the technology, healthcare and other growth sectors; and - - general consolidation in the healthcare information industry which may result in the market perceiving us or other comparable companies as potential acquisition targets. Further, the stock market has experienced on occasion extreme price and volume fluctuations. The market prices of the equity securities of many technology companies have been especially volatile and often have been unrelated to the operating performance of such companies. These broad market fluctuations may have a material adverse effect on the market price of our common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY RISK Because we have operations in a number of countries and our service agreements in such countries are denominated in a foreign currency, 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. 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. The eleven participating countries will issue sovereign debt exclusively in Euro and will redenominate outstanding sovereign debt. The legal currencies will continue to be used as legal tender through January 1, 2002, at which point the legacy currencies will be canceled and Euro bills and coins will be used for cash transactions in the participating countries. There can be no assurance that such Euro conversion will not adversely effect our business, financial condition, results of operations or cash flows. We have not determined what impact, if any, the Euro has on our foreign exchange exposure. INTEREST RATE RISK We earn interest income from our larger balances of cash and short term investments. This interest income is subject to market risk related to changes in interest rates primarily 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 December 31, 1999, our investments consisted primarily of commercial paper maturing over the following three months. Due to the average maturity and conservative nature of our investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio. Management estimates that if the average yield of the Company's investments decreased by 100 basis points, our interest income for the year ended December 31, 1999 would have decreased by less than $500,000. This estimate assumes that the decrease occurred on the first day of 1999 and reduced the yield of each investment instrument by 100 basis points. The impact of future changes in investment yields on our future interest income will depend largely on the gross amount of our investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's 1999 Financial Statements, together with the report thereon of Arthur Andersen LLP, are included elsewhere herein. See Item 14 for a list of Financial Statements and Financial Statement Schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers of the Company will be set forth in the Registrant's Notice of Annual Meeting of Shareholders and Proxy Statement, expected to be filed on or about April 5, 2000 (the "Proxy Statement"), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding the Company's compensation of its directors and executive officers will be set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management will be set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding transactions with the Company's directors and executive officers will be set forth in the Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules: None. 3. Exhibits: 3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (the "Commission") June 30, 1996) 3.2 By-laws of the Company, as amended (incorporated herein by reference to the Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed with the Commission November 13, 1995) 4.1 Specimen of Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 22 23 4.2 Registration Rights Agreement dated October 2, 1991 between the several purchasers named therein and the Company (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 4.3 Amendment to Registration Rights Agreement dated April 23, 1992 between the Company and the parties named therein as shareholders of the Company (incorporated herein by reference to Exhibit 4.3 of Amendment 1 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 10.1 1992 Stock Plan, as amended* 10.2 1992 Senior Management Stock Option Plan , as amended* 10.3 1997 Stock Incentive Plan, as amended* 10.4 1997 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed with the Commission April 1, 1997)* 10.5 Lease of 1200 Mount Kemble Avenue, Morristown, New Jersey (incorporated herein by reference to Exhibit 10.40 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 10.6 Form of Indemnification Agreement dated as of October 28, 1998 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission November 18, 1998)* 10.7 Amended and Restated Credit Agreement, entered into as of November 30, 1998, between the Company and The Chase Manhattan Bank, N.A. (incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K, filed with the Commission March 26, 1999) 10.8 Employment Agreement dated March 25, 1997 with John E. Bailye (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A filed with the Commission May 16, 1997)* 10.9 Employment Agreement dated June 2, 1997 with George T. Robson (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission August 14,1997)* 10.10 Employment Agreement dated June 9, 1997 with Mark Cieplik (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed with the Commission August 14, 1997)* 10.11 Employment Agreement dated July 24, 1997 with Bruce Savage (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission November 14, 1997)* 10.12 Employment Agreement dated October 1, 1991 with Teresa F. Winslow (incorporated herein by reference to Exhibit 10.50 to the Company's Registration Statement on Form S-1, filed with the Commission February 5, 1996)* 10.13 Consulting Agreement dated as of January 5, 1998 with Edward Kfoury (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report filed with the Commission May 14, 1998.) 10.14 Deferred Compensation Plan dated as of September 1,1998 (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report filed with the Commission August 14, 1998.)* 23 24 10.15 Deferred Compensation Plan Trust Agreement dated as of September 1, 1998 (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report filed with the Commission August 14, 1998.)* 21 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 23.2 Consent of KPMG LLP 27 Financial Data Schedule (b) Reports on Form 8-K. The Company filed a current report on Form 8-K on June 1, 1999 pursuant to "Item 5. Other Events." relating to the acquisition of CorNet International Ltd. consummated on May 27, 1999. * These contracts are identified pursuant to the requirement in Item 14 to identify "each management contract or compensatory plan or arrangement required to be filed as an exhibit". 24 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. DENDRITE INTERNATIONAL, INC. Date: March 30, 2000 By: /s/ John E. Bailye ------------------ John E. Bailye Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Name Title Date - ---- ----- ---- /s/ John E. Bailye Chief Executive Officer, March 30, 2000 - ------------------ John E. Bailye President and Director (Principal Executive Officer) /s/ George T. Robson Executive Vice President March 30, 2000 - -------------------- and Chief Financial Officer George T. Robson (Principal Financial Officer and Principal Accounting Officer) /s/ Bernard M. Goldsmith Director March 30, 2000 - ------------------------ Bernard M. Goldsmith /s/ Edward J. Kfoury Director March 30, 2000 - -------------------- Edward J. Kfoury /s/ Paul A. Margolis Director March 30, 2000 - -------------------- Paul A. Margolis /s/ John H. Martinson Director March 30, 2000 - --------------------- John H. Martinson /s/ Terence H. Osborne Director March 30, 2000 - ---------------------- Terence H. Osborne
25 26 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, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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, Ltd., a company acquired during 1999 in a transaction accounted for as a pooling of interests, as discussed in Note 2, as of December 31, 1998 and 1997 and for each of the years in the two-year period ended December 31, 1998. 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 audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for CorNet International, Ltd., 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, Pa., January 21, 2000 F-1 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CorNet International, Ltd.: We have audited the accompanying consolidated balance sheets of CorNet International, Ltd. (a Pennsylvania Corporation) as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two 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, which are not presented herein, 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 two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Allentown, Pennsylvania February 16, 1999 F-2 28 DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 1998 1999 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................................ $ 32,555 $ 50,024 Short-term investments........................................... 9,614 15,151 Accounts receivable, net......................................... 20,378 29,374 Prepaid expenses and other....................................... 3,391 3,659 Prepaid taxes.................................................... 921 114 Deferred tax asset............................................... 675 1,368 --------- --------- Total current assets........................................ 67,534 99,690 PROPERTY AND EQUIPMENT, net........................................... 7,221 10,249 DEFERRED TAXES........................................................ 1,077 -- GOODWILL, net......................................................... 2,496 8,716 PURCHASED CAPITALIZED SOFTWARE, net 779 2,399 CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net........................... 2724 3,666 --------- --------- $ 81,831 $ 124,720 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................. $ 2,249 $ 3,735 Income taxes payable............................................. 1,036 -- Accrued compensation and benefits................................ 4,321 6,000 Other accrued expenses........................................... 7,493 8,001 Deferred revenues................................................ 1,827 3,822 --------- --------- Total current liabilities................................... 16,926 21,558 --------- --------- DEFERRED RENT......................................................... 392 -- --------- --------- CAPITALIZED LEASE OBLIGATIONS......................................... 544 285 DEFERRED TAXES........................................................ 2,920 1,761 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY: Preferred stock, no par value, 10,000,000 shares authorized, none issued........................................................ -- -- Common stock, no par value, 150,000,000 shares authorized; 37,245,675 and 39,042,606 shares issued as of December 31, 1998 and 1999 respectively; 36,644,175 and 38,441,106 shares outstanding as of December 31, 1998 and 1999 respectively ................ 41,442 61,550 Retained earnings................................................ 23,998 43,338 Deferred compensation............................................ (1,970) (777) Accumulated other comprehensive income........................... (494) (1,068) Less treasury stock, at cost..................................... (1,927) (1,927) --------- --------- Total stockholders' equity.................................. 61,049 101,116 --------- --------- $ 81,831 $ 124,720 ========= =========
The accompanying notes are an integral part of these statements. F-3 29 DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1997 1998 1999 --------------------- --------------------- --------------------- REVENUES: License fees......................................... $ 9,074 $ 14,955 $ 24,244 Services............................................. 82,248 115,678 148,441 --------- --------- ---------- 91,322 130,633 172,685 --------- --------- ---------- COSTS OF REVENUES: Cost of license fees................................. 1,758 2,314 2,360 Cost of services..................................... 45,078 57,887 72,380 --------- --------- ---------- 46,836 60,201 74,740 --------- --------- ---------- Gross margin.................................... 44,486 70,432 97,945 --------- --------- ---------- OPERATING EXPENSES: Selling, general and administrative.................. 33,305 44,046 56,927 Research and development............................. 3,674 4,584 7,669 Write-off of in-process research and development..... -- 1,230 -- Mergers and acquisitions............................. -- -- 3,466 --------- --------- ---------- 36,979 49,860 68,062 --------- --------- ---------- Operating income................................ 7,507 20,572 29,883 INTEREST INCOME........................................... 531 1,099 1,880 OTHER (EXPENSE)/INCOME.................................... (261) (466) (189) --------- --------- ---------- Income (loss) before income taxes............... 7,777 21,205 31,574 INCOME TAXES.............................................. 3,002 8,446 12,234 --------- --------- ---------- NET INCOME ............................................... $ 4,775 $ 12,759 $ 19,340 ========= ========= ========== NET INCOME PER SHARE: Basic................................................ $ 0.13 $ 0.35 $ 0.51 ========= ========= ========== Diluted.............................................. $ 0.13 $ 0.32 $ 0.48 ========= ========= ========== SHARES USED IN COMPUTING NET INCOME PER SHARE: Basic................................................ 35,601 36,080 37,725 ========= ========= ========== Diluted.............................................. 36,870 39,392 40,599 ========= ========= ==========
The accompanying notes are an integral part of these statements. F-4 30 DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED COMMON STOCK OTHER TOTAL ------------ RETAINED DEFERRED COMPREHENSIVE COMPREHENSIVE TREASURY STOCKHOLDERS' SHARES DOLLARS EARNINGS COMPENSATION INCOME INCOME STOCK EQUITY ------- ------- -------- ----------- ------ ------ ----- ------ BALANCE, DECEMBER 31, 1996............................. 35,699 $32,726 $ 6,464 $(1,227) $ (453) $ -- $ 37,510 Issuance of common stock..... 500 616 -- (20) -- -- 596 Amortization of deferred Compensation............... -- -- -- 106 -- -- 106 Purchase of 601,500 shares of treasury stock.......... (602) -- -- -- -- (1,927) (1,927) Comprehensive income: Net income................... -- -- 4,775 -- -- $4,775 -- 4,775 Other comprehensive income: Currency translation Adjustment............. -- -- -- -- (388) (388) -- (388) Comprehensive income..... $4,387 ------ ------ ------ ------ ------ ====== ------ ------ BALANCE, DECEMBER 31, 1997....... 35,597 33,342 11,239 (1,141) (841) (1,927) 40,672 Issuance of common stock..... 1,047 6,740 -- (1,257) -- -- 5,483 Amortization of deferred Compensation............... -- -- -- 428 -- -- 428 Stock option income tax benefits............... 1,360 -- -- -- 1,360 Comprehensive income: Net income................... -- -- 12,759 -- -- $12,759 -- 12,759 Other comprehensive Income: Currency translation Adjustment............. -- -- -- -- 347 347 -- 347 Comprehensive income..... $13,106 ------ ------ ------ ------ ------ ======= ------ ------ BALANCE, DECEMBER 31, 1998....... 36,644 41,442 23,998 (1,970) (494) (1,927) 61,049 Issuance of common stock..... 1,797 11,621 -- 899 12,520 Amortization of deferred Compensation............... -- -- -- 294 -- 294 Stock option income tax benefits............... -- 8,487 -- ---- -- 8,487 Comprehensive income: Net income................... -- -- 19,340 -- -- $19,340 -- 19,340 Other comprehensive Income: Currency translation Adjustment............. -- -- -- -- (574) (574) -- (574) Comprehensive income...... ------ ------ ------ ------ ------ ------ ------ BALANCE, DECEMBER 31, 1999............................ 38,441 $61,550 $43,338 $ (777) $(1,068) $18,766 $(1,927) $101,116 ====== ======= ======= ====== ======== ======= ======== ========
The accompanying notes are an integral part of these statements. F-5 31 DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1997 1998 1999 --------- --------- --------- OPERATING ACTIVITIES: Net income............................................................ $ 4,775 $ 12,759 $ 19,340 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization...................................... 3,417 4,197 6,118 Compensation expense............................................... -- -- 688 Deferred income taxes (benefit).................................... 749 25 24 Tax benefit from employee stock options -- 1,360 8,487 Write-off of in-process research and development................... -- 1,230 -- Changes in assets and liabilities, net of effect from acquisition: (Increase) decrease in accounts receivable....................... (5,230) 6,099 (6,047) Increase in prepaid expenses and other........................... (772) (870) (371) (Increase) decrease in prepaid income taxes...................... 1,397 (921) 1,052 Increase in accounts payable and accrued expenses................ 922 3,335 3,136 Increase (decrease) in deferred rent............................. (128) (206) (392) Increase (decrease) in income taxes payable...................... (378) 22 (2,219) (Increase) decrease in deferred revenues......................... (691) 357 1,995 --------- --------- --------- Net cash provided by operating activities..................... 4,061 27,387 31,811 --------- --------- --------- INVESTING ACTIVITIES: Purchases of short-term investments................................... (3,800) (13,552) (39,341) Sales of short-term investments....................................... 9,266 6,893 33,804 Purchases of businesses, net of cash acquired......................... -- (2,295) (6,640) Purchases of property and equipment................................... (2,022) (2,779) (7,512) Additions to capitalized software development costs................... (919) (1,637) (2,227) --------- --------- ----------- Net cash provided by (used in) investing activities........... 2,525 (13,370) (21,916) --------- ---------- ----------- FINANCING ACTIVITIES: Payments on capital lease obligations................................. (188) (302) (788) Purchase of treasury stock............................................ (1,927) -- -- Issuance of common stock.............................................. 596 3,703 8,691 Proceeds from bank loan............................................... 5,805 4,625 -- Repayments from bank loan............................................. (5,572) (5,555) -- --------- --------- ---------- Net cash provided by (used in) financing activities........... (1,286) 2,471 7,903 ---------- --------- ---------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH......................... (283) 130 (329) ---------- --------- ----------- NET INCREASE (DECREASE) IN CASH......................................... 5,017 16,618 17,469 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................ 10,920 15,937 32,555 --------- --------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR.................................. $ 15,937 $ 32,555 $ 50,024 ========= ========= ==========
The accompanying notes are an integral part of these statements. F-6 32 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 industry. The Company's solutions combine proprietary software products with extensive system support services. On May 27, 1999, the Company acquired Cornet International, Ltd ("CorNet") in a transaction accounted for as a pooling of interests (see Note 2). 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 a license agreement and ends when the product configuration is completed and it is ready for use in the field. This period of time usually includes initial customization or configuration and concludes with quality assurance and testing. In those historically rare cases when there is no initial customization or configuration the company generally recognizes the license fees from those products upon delivery, assuming any services to be provided are not essential to the functionality of the software. Additionally, license revenues will be recognized immediately when user count for previously delivered software increases and/or a third party is used for implementation and configuration. 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. F-7 33 The Company recognizes license fees when it resells certain third party software. 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, 1997, 1998 and 1999, the Company recorded $796,000, $1,208,000 and $1,640,000, respectively, of license fees and $658,000, $922,000 and $706,000, respectively, of cost of license fees relating to third party software. Revenues from services are 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 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. This predominantly occurs in two situations A) Annual billings of software maintenance fees and B) Upfront billings of license fees that are recognized over time. The value of deferred revenues will increase and decrease based on the timing of invoices and recognition of license revenues. 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, 1997, 1998 and 1999, the Company paid interest of $85,000, $86,000 and $42,000. For the years ended December 31, 1997, 1998 and 1999, the Company paid income taxes of $1,273,000, $7,776,000 and $5,828,000, 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:
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1999 ------------ ------------- Noncash assets: Accounts receivable............................. $ 301,000 $ 1,826,000 Prepaid expenses................................ 59,000 -- Property and equipment.......................... 408,000 -- Capitalized software development costs.......... 850,000 1,989,000 Goodwill........................................ 2,226,000 7,235,000 ------------ ------------- 3,844,000 11,050,000 Assumed liabilities: Accounts payable................................ (294,000) (243,000) Income taxes payable............................ (121,000) (39,000) Other accrued expenses.......................... (396,000) (300,000) Deferred revenues............................... (107,000) (393,000) Deferred taxes.................................. (323,000) -- ------------ ------------- Net noncash assets acquired.................. 2,603,000 10,075,000 Write-off of in-process research and development.. 1,230,000 -- Purchase price paid in stock...................... (1,538,000) (3,435,000) ------------ ------------- Cash paid, net of cash acquired................... $ 2,295,000 $ 6,640,000 ============ =============
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, 1998 and 1999, all marketable securities have been classified as available-for-sale. Available-for-sale securities are carried at fair value, based on quoted F-8 34 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. Capitalized Software Development Costs and Purchased Capitalized Software 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, 1999, 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 $4,362,000 and $5,647,000 at December 31, 1998 and 1999, respectively. The Company capitalized software development cost of $919,000, $1,637,000 and $2,227,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Amortization of capitalized software development costs for the years ended December 31, 1997, 1998 and 1999, was $1,100,000, $1,321,000 and $1,285,000, respectively and is included in cost of license fees in the accompanying consolidated statements of operations. In connections with certain business acquisitions, the Company has purchased software that was determined to have reached technological feasibility. During 1998 the Company purchased $850,000 of capitalized software in connection with the acquisition of Associated Business Computing N.V. and an affiliated company (collectively, "ABC"). During 1999, the Company purchased $1,989,000 of capitalized software in connection with the acquisition of Marketing Management International, Inc. and subsidiaries (collectively, "MMI"). Capitalized software from the acquisition of other companies is net of accumulated amortization of $71,000 and $440,000 at December 31, 1998 and 1999 respectively. Purchased capitalized software is being amortized on a straight-line basis over a period ranging from five to seven years. Amortization of purchased capitalized software for the years ended December 31, 1998 and 1999 was $71,000 and $369,000, respectively, and is included in cost of license fees in the accompanying consolidated statement of operations. In aggregate capitalized software development costs are net of accumulated amortization of $4,433,000 and $6,087,000 at December 31, 1998 and 1999, respectively. In aggregate amortization of capitalized software development costs for the years ended December 31, 1997, 1998, and 1999, was $1,100,000 $1,392,000 and $1,654,000, respectively. F-9 35 Goodwill Goodwill of $10,322,000 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, 1997, 1998 and 1999 was $172,000, $305,000 and $1,015,000, 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, 1999, there were approximately $4,891,000 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, 1997, the Company derived approximately 28% and 13% of its revenues from its two largest customers. 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. In the year ended December 31, 1999, the Company derived approximately 26%, and 11% of its revenues from its two largest customers, both of which were among the Company's largest customers in 1997 and 1998. 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 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 year by the weighted average number of shares of common stock outstanding for each year. Diluted income per share (Diluted EPS) was computed by dividing net income 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: F-10 36
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 1997 1998 ------------------------------------------------ ---------------------------------------------- INCOME LOSS SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ---------- ----------- ------------- ------------ Net income......... $ 4,775 $ 12,759 Basic EPS.......... 35,601 $0.13 36,080 $0.35 Effect of dilutive securities Stock options.... 1,269 3,312 ------- ------- Diluted EPS........ 36,870 $0.13 39,392 $0.32 ======= ===== ======= =====
1999 ----------------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ----------- Net income......... $ 19,340 Basic EPS.......... 37,725 $0.51 Effect of dilutive securities Stock options.... 2,874 ----- Diluted EPS........ 40,599 $0.48 ====== ====
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 and October 1999, the Company amended its articles of incorporation to reflect a 2-for-1 and 3-for-2 forward stock split, respectively, of its common shares and to change the number of authorized common shares to 150,000,000. 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. Reclassifications Certain reclassifications have been made to prior year amounts to conform with current year presentation. 2. ACQUISITIONS: 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 consolidated statements of operations. The Company also recorded $2,226,000 as goodwill and $850,000 as capitalized software. ABC's results of operations have been included in the Company's consolidated financial statements from the date of acquisition. F-11 37 On May 27, 1999, the Company exchanged 2,220,807 shares of its common stock for all the outstanding shares of common stock of 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 acquisition of CorNet under the pooling of interests method. Separate results of Dendrite International, Inc. and CorNet for the three month period and two years prior to the consummation of the merger are as follows:
Dendrite Cornet Combined ---------------------------------------------------------------- Three months ended March 31, 1999 (unaudited) Total Revenue $ 32,402,000 $ 5,232,000 $ 37,634,000 Net Income $ 3,688,000 $ 511,000 $ 4,199,000 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
On June 30, 1999, the Company purchased all of the assets of Marketing Management International, Inc. ("MMI"), as well as assumed certain liabilities, as defined, for $6,640,000 in cash, which includes estimated transaction costs, and $3,435,000 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. The Company recorded $7,235,000 as goodwill and $1,989,000 as capitalized software. MMI's results of operations have been included in the Company's consolidated financial statements from the date of acquisition. 3. PROPERTY AND EQUIPMENT:
DECEMBER 31, ----------------------------------- 1998 1999 ------------- ------------- Computer hardware and other equipment..... $ 10,596,000 $ 15,312,000 Furniture and fixtures.................... 2,188,000 2,590,000 Leasehold improvements.................... 2,028,000 2,420,000 ------------- ------------- Gross Property and Equipment 14,812,000 20,322,000 Less -- Accumulated depreciation and amortization............................ (7,591,000) (10,073,000) ------------- ------------- $ 7,221,000 $ 10,249,000 ============= =============
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, 1999, approximately $37,400,000 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 maintained a line of credit with a bank which permitted short term borrowings up to $1,500,000. Interest expense for this line of credit for the years ended December 31, 1997, 1998 and 1999 was $45,000, $35,000 and $42,000, respectively. This line of credit expired on June 30, 1999 and was not renewed. F-12 38 5. INCOME TAXES: The components of income before income taxes were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 1998 1999 ----------------------- ----------------------- ----------------------- Domestic... $ 6,226,000 $20,765,000 $ 29,663,000 Foreign.... 1,551,000 440,000 1,911,000 ------------- ----------- ------------- $ 7,777,000 $21,205,000 $ 31,574,000 ============= =========== =============
The components of income taxes were as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1997 1998 1999 ------------------------ ------------------------ ------------------------ Current Provision: Federal..................... $2,032,000 $ 7,797,000 $ 9,528,000 State....................... 31,000 295,000 1,612,000 Foreign..................... 190,000 329,000 1,070,000 ---------- ------------ ------------ 2,253,000 8,421,000 12,210,000 Deferred Provision (Benefit): Federal..................... 25,000 (301,000) 524,000 State....................... 376,000 366,000 (8,000) Foreign..................... 348,000 (40,000) (492,000) ---------- ------------ ------------ 749,000 25,000 24,000 ---------- ------------ ------------ $3,002,000 $ 8,446,000 $ 12,234,000 ========== ============ ============
The reconciliation of the statutory Federal income tax rate to the Company's effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ---- ---- ---- Federal statutory tax rate................................. 34.0% 34.0% 35.0% Impact of foreign subsidiaries subject to higher (lower) tax rates.................................................... 0.1 -- (0.3) State income taxes, net of federal tax benefit............. 4.8 3.8 2.4 Nondeductible expenses..................................... 0.3 0.8 0.8 Write-off of in-process research and development........... -- 2.2 -- Nondeductible pooling costs................................ -- -- 2.2 Tax credits utilized....................................... (0.6) (1.0) (1.7) Other...................................................... -- -- 0.3 ---- ---- ---- 38.6% 39.8% 38.7% ==== ==== ====
The tax effect of temporary differences as established in accordance with SFAS No. 109 that give rise to deferred income taxes is as follows:
DECEMBER 31, --------------------------------- 1998 1999 ------------- ------------- Gross deferred tax asset: Depreciation and amortization........... $ 426,000 $ 377,000 Foreign net operating loss.............. 1,309,000 1,894,000 Accruals and revenues not currently deductible........................... 301,000 1,026,000 Other................................... 475,000 145,000 ------------- ------------- $ 2,511,000 $ 3,442,000 ============= ============= Gross deferred tax liability: Capitalized software development costs.. $ (1,357,000) $ (1,857,000) Other................................... (2,322,000) (1,978,000) ------------- ------------- $ (3,679,000) $ (3,835,000) ============= =============
The Company has recorded a deferred tax asset of $1,894,000 reflecting the benefit of approximately $4,600,000 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 39 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:
EXERCISE PRICE WEIGHTED AVERAGE SHARES PER SHARE EXERCISE PRICE ------ --------- -------------- Outstanding December 31, 1996 1,754,550 $ 0.14 - $10.50 $ 3.60 Granted........................ 4,460,753 $ 2.09 - $ 6.98 4.70 Exercised...................... (394,226) $ 0.14 - $ 3.33 (0.48) Canceled....................... (335,615) $ 0.14 - $10.50 (5.94) ---------- --------------- ------------ Outstanding December 31, 1997.... 5,485,462 $ 0.14 - $10.50 4.57 Granted........................ 1,888,620 $ 2.09 - $15.15 10.26 Exercised...................... (837,579) $ 0.14 - $10.50 (3.73) Canceled....................... (564,841) $ 0.14 - $10.50 (4.38) ---------- --------------- ------------ Outstanding December 31, 1998.... 5,971,662 $ 0.14 - $15.15 6.51 Grants......................... 2,116,202 $10.97 - $27.88 17.52 Exercises...................... (1,551,242) $ 0.14 - $14.92 (4.70) Canceled....................... (278,467) $ 1.45 - $19.79 (9.13) ---------- --------------- ------------ Outstanding December 31, 1999.... 6,258,155 $ 0.98 - $27.88 10.56 ========== =============== ============
At December 31, 1999, there were 2,211,088 options exercisable at $0.98-$15.15 per share. The aggregate exercise price of these options was $14,573,707 as of December 31, 1999. 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 and net income per share would have been adjusted to the following pro forma amounts:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1997 1998 1999 ------------------------ ------------------------ ------------------------ Net income: As reported.................... $ 4,775,000 $ 12,759,000 $ 19,340,000 Pro forma...................... $ 2,473,000 $ 6,545,000 $ 11,483,000 Basic income per share: As reported.................... $ .13 $ .35 $ .51 Pro forma...................... $ .07 $ .18 $ .30 Diluted income per share: As reported.................... $ .13 $ .33 $ .48 Pro forma...................... $ .07 $ .17 $ .28
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 $4.86, $11.35 and $12.01 for the years ended December 31, 1997, 1998 and 1999, respectively. Information with respect to the options outstanding under the three stock option plans at December 31, 1999 is as follows: F-14 40
WEIGHTED WEIGHTED AVERAGE AVERAGE REMAINING NUMBER EXERCISE PRICE EXERCISE CONTRACTUAL OF VESTED PER SHARE SHARES PRICE LIFE SHARES - ----------------------- ---------- -------------- ------------------- ---------- $0.98-$2.65 529,010 $ 2.38 7.38 229,840 $3.48-$6.42 2,311,653 $ 5.56 7.58 1,357,749 $7.83-$10.97 887,316 $ 9.07 7.91 482,330 $13.83-$14.92 583,907 $14.19 8.94 87,433 $15.08-$16.75 1,405,844 $16.58 9.27 53,736 $19.50-$27.85 540,425 $22.84 9.49 0 ------------- ---------- ------ ---- --------- 6,258,155 $10.56 8.28 2,211,088 ========== ====== ==== =========
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 1997, 1998 and 1999: 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 450,000 shares available for purchase under this plan, of which 63,354, 83,787 and 72,122 were purchased in 1997,1998 and 1999, 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 $300,000, $416,000 and $492,000 in the years ended December 31, 1997, 1998 and 1999, 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 $76,000, $74,000 and $41,000 for the years ended December 31, 1997, 1998 and 1999, 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 41 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 $5,237,000, $5,992,000 and $7,390,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Future minimum rental payments at December 31, 1999, on these leases are as follows:
2000........ $ 6,639,000 2001........ 4,947,000 2002........ 2,338,000 2003........ 1,470,000 2004........ 632,000 Thereafter.. 544,000 ------------- $ 16,570,000 =============
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 $33,000 and $15,000 for the years ended December 31, 1997 and 1999, respectively, to an entity owned by the President and Chief Executive Officer of the Company for rental and usage of an aircraft. There were no payments made to this entity during 1998. 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".
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1997 1998 1999 ------------- -------------------- -------------- Revenues: United States............. $ 61,915,000 $ 103,765,000 $ 138,352,000 All Other................. 29,407,000 26,868,000 34,333,000 ------------- -------------------- -------------- $ 91,322,000 $130,633,000 $172,685,000 ============= ==================== ============== Operating income: United States............. $ 6,183,000 20,453,000 $ 26,893,000 All Other................. 1,324,000 119,000 2,991,000 ------------- -------------------- -------------- $ 7,507,000 $ 20,572,000 $ 29,884,000 ============= ==================== ============== Identifiable assets: United States............. $ 43,150,000 $ 67,211,000 $ 94,805,000 All Other................. 14,726,000 14,620,000 29,915,000 ------------- -------------------- -------------- $ 57,876,000 $ 81,831,000 $ 124,720,000 ============= ==================== ==============
11. SUBSEQUENT EVENTS: On January 6, 2000, the Company purchased all of the assets and assumed certain liabilities, as defined, of Analytika, Inc. ("Analytika"), a provider of advanced analytical products, consulting services and outsourced operations services to the pharmaceutical industry. The final purchase price was approximately $9,000,000 in stock and assumed liabilities, with transaction costs of $400,000. The acquisition will be 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-16 42 EXHIBIT INDEX Exhibit No. Exhibit 3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (the "Commission") June 30, 1996) 3.2 By-laws of the Company, as amended (incorporated herein by reference to the Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed with the Commission November 13, 1995) 4.1 Specimen of Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 4.2 Registration Rights Agreement dated October 2, 1991 between the several purchasers named therein and the Company (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 4.3 Amendment to Registration Rights Agreement dated April 23, 1992 between the Company and the parties named therein as shareholders of the Company (incorporated herein by reference to Exhibit 4.3 of Amendment 1 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 10.1 1992 Stock Plan, as amended. 10.2 1992 Senior Management Stock Option Plan, as amended. 10.3 1997 Stock Incentive Plan , as amended. 10.4 1997 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed with the Commission April 1, 1997) 10.5 Lease of 1200 Mount Kemble Avenue, Morristown, New Jersey (incorporated herein by reference to Exhibit 10.40 to the Company's Registration Statement on Form S-1, filed with the Commission May 17, 1995) 10.6 Form of Indemnification Agreement dated as of October 28, 1998 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission November 18, 1998) 10.7 Amended and Restated Credit Agreement, entered into as of November 30, 1998, between the Company and The Chase Manhattan Bank N.A. (incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K, filed with the commission March 26, 1999) 10.8 Employment Agreement dated March 25, 1997 with John E. Bailye (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A filed with the Commission May 16, 1997) 10.9 Employment Agreement dated June 2, 1997 with George T. Robson (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission August 14, 1997) 10.10 Employment Agreement dated June 9, 1997 with Mark Cieplik (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed with the Commission August 14, 1997) 10.11 Employment Agreement dated July 24, 1997 with Bruce Savage 43 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the Commission November 14, 1997) 10.12 Employment Agreement dated October 1, 1991 with Teresa F. Winslow (incorporated herein by reference to Exhibit 10.50 to the Company's Registration Statement on Form S-1, filed with the Commission February 5, 1996) 10.13 Consulting Agreement dated as of January 5, 1998 with Edward Kfoury (incorporated herein by reference to exhibit 10.1 of the Company's Quarterly Report filed with the Commission May 14, 1998.) 10.14 Deferred Compensation Plan dated as of September 1, 1998 (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report filed with the Commission August 14, 1998.) 10.15 Deferred Compensation Plan Trust Agreement dated as of September 1, 1998 (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report filed with the Commission August 14, 1998.) 21 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 23.2 Consent of KPMG LLP 27 Financial Data Schedule EX-10.1 2 STOCK PLAN AS AMENDED 1 DENDRITE INTERNATIONAL, INC. 1992 STOCK PLAN (AS AMENDED THROUGH MARCH 24, 2000(1)) 1. PURPOSE. This 1992 Stock Plan (the "Plan") is intended to provide incentives: (a) to the officers and other employees of Dendrite International, Inc. (the "Company"), its parent (if any) and any present or future subsidiaries of the Company (collectively, "Related Corporations") by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO" or "ISOs"); (b) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-qualified Options") (c) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with awards of stock in the Company ("Awards"); and (d) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options". Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights". As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation", respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board may appoint a Stock Plan Committee (the "Committee") of three or more of its members to administer this Plan. However, at least two members of the Committee appointed by the Board to administer the Plan and to perform the functions set forth herein must be "outside directors" within the meaning of Section 162(m) of the Code. If the Committee has been so appointed, no member of the Committee, while a member, shall be eligible to participate in the Plan. Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine the employees of the Company and Related Corporation (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) to whom Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards may be granted or Purchases made; (iii) determine the Option price of shares subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase price of shares subject to each Purchase; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option - -------- (1) The Plan has been amended to reflect the three-for-two forward stock split (the "Stock Split") of the Company's Common Stock which became effective on October 8, 1999, and all share amounts and per share prices provided herein have been adjusted to reflect such Stock Split. 1 2 shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase Options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any, and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and place as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted to members of the Board, but any such grant shall be made and approved in accordance with paragraph 2(D), if applicable. All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who are either (i) eligible for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to him of the Stock Rights. D. COMPLIANCE WITH FEDERAL SECURITIES LAWS. In the event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any grant of Stock Rights to a member of the Board (made at any time from the effective date of such registration until six months after the termination of such registration) must be approved by a majority vote of the Committee; provided, however, that the Committee shall consist of two or more directors, each of whom is a disinterested person, i.e., a director who is not, during the one year prior to service as an administrator of the Plan, eligible to be granted or awarded Options or equity securities pursuant to the Plan or any other plan of the Company or a Related Company. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee of the Company or any Related Corporation. Those officers and directors of the company who are not employees may not be granted ISOs under the Plan. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to an employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a Purchase. Granting of any Stock Right to any 2 3 individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Options, Awards and Purchases shall be authorized but unissued shares of Common Stock of the Company, no par value per share (the "Common Stock"), or shares of the Common Stock reacquired by the Company in any manner. The aggregate number of shares, on a post-split adjusted basis, which may be issued pursuant to Stock Rights under the Plan is 3,600,000, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any unvested shares issued pursuant to Awards or authorizations to Purchase, the unpurchased shares subject to such Options and any unvested shares so reacquired by the Company shall again be available for grants of Stock Rights under the Plan. Subject to adjustment as provided in paragraph 13, no employee shall be granted in any calendar year Options to purchase more than 750,000 shares of Common Stock, on a post-split adjusted basis. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time on or after January 21, 1992 and prior to January 20, 2002. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to paragraph 16. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share specified in the agreement relating to each Non-Qualified Option granted under the Plan shall in no event be less that the lesser of (i) the book value per share of Common Stock as of the end of the fiscal year of the company immediately preceding the date of such grant, or (ii) fifty percent (50%) of the fair market value per share of Common Stock on the date of such grant. B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. C. $100,000 ANNUAL LIMITATION ON ISOS. Each eligible employee may be granted ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, such ISOs do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the ISOs were granted) of Common Stock in that year. Any Options granted to an employee in excess of such amount will be granted as Non-Qualified Options. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which prices or quotes are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is 3 4 traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market List, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market List. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10, each Option shall expire on the date specified by the Committee, which date shall be no more than (i) ten years and one day from the date of grant in the case of Non-Qualified Options, (ii) ten years from the date of grant in the case of ISOs other than those ISOs described in clause (iii), and (iii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bona fide leave of absence with the written approval of the 4 5 Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISO's granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22 (e) (3) of the Code or successor statute. 11. ASSIGNABILITY. No Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee each Option shall be exercisable only by him. 12. TERMS AND CONDITIONS OF OPTIONS. A. GENERAL TERMS AND CONDITIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISO's, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 5 6 B. SPECIAL TERMS AND CONDITIONS. Without limiting the generality of paragraph 12(A), the Committee may include in any such instrument described in paragraph 12(A) one or more of the following provisions: 1. ADDRESSING THE BEHAVIOR OF INDIVIDUALS "The exercise of any Option after termination of employment shall be subject to satisfaction of the condition precedent that the optionee neither takes other employment nor renders services to others without the written consent of the Company, nor conducts himself/herself in a manner adversely affecting the Company." 2. LIMITING PUBLIC COMMENTS "You agree not to make any false, misleading, or negative statements, either orally or in writing, about the Company, its Directors or organizations they represent, or its Officers or to otherwise disparage them or any of them, and Dendrite's Directors and the organizations they represent, and its Executive Officers, agree not to make any false, misleading or negative statements, either orally or in writing, about you or to otherwise disparage you. The appropriate liquidated damages for each such incident will be $25,000.00." 3. FORFEITURE OF BENEFITS "The optionee acknowledges that a material part of the inducement for the Company to enter into this agreement is the optionee's covenants with respect to non-competition and non-disparagement set forth in this agreement. The optionee agrees that if he shall breach any of those covenants, the Company shall have no further obligation to pay the optionee any benefits otherwise payable hereunder (except as may otherwise be required at law) and shall be entitled to such other legal and equitable relief as a court or arbitrator shall reasonably determine, unless such breach is an inadvertent breach that does not result in any significant harm to the Company." 13. ADJUSTMENTS. Upon the occurrence of any of the events described in subparagraphs A, B or D below, an optionee's rights with respect to Stock Rights granted to him hereunder (and the securities reserved for issuance hereunder) shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the Stock Right recipient and the Company relating to such Stock Right: A. ADJUSTMENTS IN CAPITALIZATION. Subject to any specific provisions in paragraph B below, in the event of any change in the outstanding shares of Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Committee, the Board or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board") may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock or other securities reserved for issuance pursuant to the Plan, or subject to outstanding ISOs, and to any other terms and conditions of outstanding ISOs including the ISO exercise price. 6 7 B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee, the Board, or the Successor Board, shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such ISOs (to the extent then exercisable) over the exercise price thereof; or (iv) upon written notice to the optionees, provided that all ISOs shall be immediately exercisable in full regardless of any vesting schedule otherwise applicable. C. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A or B with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments. D. DISSOLUTION OF LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. E. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. F. RESTRICTED COMMON STOCK. If any person or entity owning restricted Common Stock obtained by exercise of a Stock Right made hereunder receives shares or securities or cash in connection with a corporate transaction described in subparagraph A or B above as a result of owning such restricted Common Stock, such shares or securities or cash shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board or otherwise provided herein. 14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, or (b) at the discretion of the committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Stock Right, or (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at not less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Committee, through a cashless exercise procedure established with a broker dealer or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be 7 8 exercised in writing at the time of the grant of the ISO in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on January 21, 1992, subject (with respect to the validation of ISOs granted under the Plan) to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to January 20, 1993, any grants of ISOs under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on January 20, 2002 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Stock Rights may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (c) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may any action of the Committee, the Board or stockholders alter or impair the rights of a grantee, without his consent, under any Stock Right previously granted to him. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS. The Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 8 9 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 20) or the vesting of restricted Common Stock acquired on the exercise of a Stock Right hereunder, the Company, in accordance with Section 3402(a) of the Code, may require the optionee, Award recipient or purchaser to pay additional withholding taxes in respect of the amount that is considered compensation includible in such person's gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the grant of any Award, (iii) the making of a Purchase of Common Stock for less than its fair market value, or (iv) the vesting of restricted Common Stock acquired by exercising a Stock Right, on the grantee's payment of such additional withholding taxes. 20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such Common Stock before the later of (a) two years after the date the employee was granted the ISO, or (b) one year after the date the employee acquired Common stock by exercising the ISO. If the employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 21. GOVERNING LAW: CONSTRUCTION. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the Laws of the State of New Jersey, without regard to the conflict of laws provisions thereof. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 9 EX-10.2 3 STOCK OPTION PLAN FOR SENIOR MANAGEMENT 1 DENDRITE INTERNATIONAL, INC. 1992 SENIOR MANAGEMENT INCENTIVE STOCK OPTION PLAN (AS AMENDED THROUGH MARCH 24, 2000(1)) 1. PURPOSE. This 1992 Senior Management Incentive Stock Option Plan (the "Plan") is intended to provide incentives: (a) to the senior managers of Dendrite International, Inc. (the "Company"), its parent (if any) and any present or future subsidiaries of the Company (collectively, "Related Corporations") by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO" or "ISOs"). As used in this Plan, the term "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation", respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board may appoint a Stock Plan Committee (the "Committee") of three or more of its members to administer this Plan. However, at least two members of the Committee appointed by the Board to administer the Plan and to perform the functions set forth herein must be "outside directors" within the meaning of Section 162(m) of the Code. If the Committee has been so appointed, no member of the Committee, while a member, shall be eligible to participate in the Plan or any other option plan of the Company. All references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each ISO by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to determine the employees of the Company and Related Corporation (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted; (ii) determine the time or times at which ISOs may be granted; (iii) determine the option price of shares subject to each ISO, which price shall not be less than the minimum price specified in paragraph 6; (iv) determine (subject to paragraph 7) the time or times when each ISO shall become exercisable and the duration of the exercise period; (v) determine whether restrictions such as repurchase options are to be imposed on shares subject to ISOs and the nature of such restrictions, if any, and (vi) interpret the Plan and prescribe and rescind rules and regulations relating to it. The interpretation and construction by the Committee of any provisions of the Plan or of any ISO granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any ISO granted under it. - -------- (1) The Plan has been amended to reflect the three-for-two forward stock split (the "Stock Split") of the Company's Common Stock which became effective on October 8, 1999, and all share amounts and per share prices provided herein have been adjusted to reflect such Stock Split. 1 2 B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and place as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the committee, shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF ISOS TO BOARD MEMBERS. ISOs may not be granted to members of the Board under the terms of this Plan. 3. ELIGIBLE EMPLOYEES. ISOs may be granted to any employee of the Company or any Related Corporation who is a senior manager. Employees of the Company who are not senior managers may not be granted ISOs under the Plan. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO. Granting of any ISO to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of stock rights under any other plan of the Company. For purposes of this Plan, a "senior manager" shall include (i) any employee in the United States or Japan who holds the position of Corporate Executive or Senior Director, and (ii) any employee in Europe who holds the position of Country Manager or European Regional Manager. 4. STOCK. The stock subject to ISOs shall be authorized but unissued shares of Common Stock of the Company, no par value per share (the "Common Stock"), or shares of the Common Stock reacquired by the Company in any manner. The aggregate number of shares, on a post-split adjusted basis, which may issued as ISOs pursuant to the Plan is 1,200,000, subject to adjustment as provided in paragraph 13. If any ISO granted under the Plan expires or terminates for any reason without having been exercised in full or ceases for any reason to be exercisable in whole or in part, the unpurchased shares subject to such ISOs shall again be available for grants of ISOs under the Plan. Subject to adjustment as provided in paragraph 13, no employee shall be granted in any calendar year ISOs to purchase more than 750,000 shares of Common Stock, on a post-split adjusted basis. 5. GRANTING OF ISOS. ISOs may be granted under the Plan at any time on or after October 21, 1992 and prior to October 20, 2002. The date of grant of an ISO under the Plan will be the date specified by the Committee at the time it grants the ISO; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a non-qualified option pursuant to paragraph 16. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock on the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not 2 3 be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. B. $100,000 ANNUAL LIMITATION ON ISOS. Each eligible employee may be granted ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, such ISOs do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the ISOs were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as non-qualified options. C. DETERMINATION OF FAIR MARKET VALUE. If, at the time an ISO is granted under the Plan, the Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes are available prior to the date such ISO is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market List, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market List. However, if the Common Stock is not publicly traded at the time an ISO is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10, each ISO shall expire on the date specified by the Committee, which date shall be no more than (i) ten years from the date of grant in the case of ISOs other than those ISOs described in clause (ii), and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a non-qualified option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each ISO granted under the Plan shall be exercisable as follows: A. VESTING. The ISO shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the ISO, unless otherwise specified by the Committee. 3 4 C. PARTIAL EXERCISE. Each ISO or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date of exercise of any installment of any ISO; provided that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any ISO granted to any employee (and not previously converted into a non-qualified option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(B). 9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installment of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into non-qualified options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISO's granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any guarantee of any ISO the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22 (e) (3) of the Code or successor statute. 4 5 11. ASSIGNABILITY. No ISO shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee each ISO shall be exercisable only by him. 12. TERMS AND CONDITIONS OF OPTIONS. A. GENERAL TERMS AND CONDITIONS. ISOs shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 of this Plan and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common stock issuable upon exercise of Options. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. B. SPECIAL TERMS AND CONDITIONS. Without limiting the generality of paragraph 12(A), the Committee may include in any such instrument described in paragraph 12(A) one or more of the following provisions: 1. ADDRESSING THE BEHAVIOR OF INDIVIDUALS "The exercise of any Option after termination of employment shall be subject to satisfaction of the condition precedent that the optionee neither takes other employment nor renders services to others without the written consent of the Company, nor conducts himself/herself in a manner adversely affecting the Company." 2. LIMITING PUBLIC COMMENTS "You agree not to make any false, misleading, or negative statements, either orally or in writing, about the Company, its Directors or organizations they represent, or its Officers or to otherwise disparage them or any of them, and Dendrite's Directors and the organizations they represent, and its Executive Officers, agree not to make any false, misleading or negative statements, either orally or in writing, about you or to otherwise disparage you. The appropriate liquidated damages for each such incident will be $25,000.00." 3. FORFEITURE OF BENEFITS "The optionee acknowledges that a material part of the inducement for the Company to enter into this agreement is the optionee's covenants with respect to non-competition and non-disparagement set forth in this agreement. The optionee agrees that if he shall breach any of those covenants, the Company shall have no further obligation to pay the optionee any benefits otherwise payable hereunder (except as may otherwise be required at law) and shall be entitled to such other legal and equitable relief as a court 5 6 or arbitrator shall reasonably determine, unless such breach is an inadvertent breach that does not result in any significant harm to the Company." 13. ADJUSTMENTS. Upon the occurrence of any of the events described in subparagraphs A, B or D below, an optionee's rights with respect to ISOs granted to him under this Plan (and the securities reserved for issuance hereunder), shall be adjusted as provided in this paragraph unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such ISO: A. ADJUSTMENTS IN CAPITALIZATION. Subject to any specific provisions in paragraph B below, in the event of any change in the outstanding shares of Common Stock (including any increase or decrease in such shares) by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends, the Committee, the Board or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board") may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock or other securities reserved for issuance pursuant to the Plan, or subject to outstanding ISOs, and to any other terms and conditions of outstanding ISOs including the ISO exercise price. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee, the Board, or the Successor Board, shall, as to outstanding ISOs, either (i) make appropriate provision for the continuation of such ISOs by substituting on a equitable basis for the shares then subject to such ISOs the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) upon written notice to the optionees, provide that all ISOs must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the ISOs shall terminate; or (iii) terminate all ISOs in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such ISOs (to the extent then exercisable) over the exercise price thereof; or (iv) upon written notice to the optionees, provide that all ISOs shall be immediately exercisable in full regardless of any vesting schedule otherwise applicable. C. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A or B with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments. D. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each ISO will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. 6 7 E. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. F. RESTRICTED COMMON STOCK. If any person or entity owning restricted Common Stock obtained by exercise of a ISO under this Plan receives shares or securities or cash in connection with a corporate transaction described in subparagraphs A or B above as a result of owning such restricted Common Stock such shares or securities or cash shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board. 14. MEANS OF EXERCISING ISOS. A ISO (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the ISO being exercised and specify the number of shares as to which such ISO is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, or (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the ISO, or (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at not less than 100% of the lowest applicable Federal rate, as defined in section 1274(d) of the Code, or (d) at the discretion of the Committee, through a cash-less exercise procedure established with a broker-dealer, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d), or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an ISO shall not have the rights of a shareholder with respect to the shares covered by his ISO until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on October 21, 1992, subject (with respect to the validation of ISOs granted under the Plan) to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders, or in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to October 20, 1993, any grants of ISOs under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on October 20, 2002 (except as to ISOs outstanding on that date). Subject to the provisions of paragraph 5 above, ISOs may be granted under the plan prior to the date of stockholder approval of the plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (c) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may any action of the Committee, the Board or stockholders alter or impair the rights of a grantee, without his consent, 7 8 under any ISO previously granted to him. In the event of a conversion of any ISO into a non-qualified option, all references to ISOs shall be deemed to apply, to the extent appropriate, to such non-qualified option. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS. The Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments there of) that have not been exercised on the date of conversion into non-qualified options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may included, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting non-qualified options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into non-qualified options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to ISOs issued under the Plan shall be used for general corporate purposes. 18. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a non-qualified option, or the making of a Disqualifying Disposition (as defined in paragraph 20), the Company, in accordance with Section 3402(a) of the Code, may require the optionee to pay additional withholding taxes in respect of the amount that is considered compensation includible in such person's gross income. The Committee in its discretion may condition the exercise of an ISO on the grantee's payment of such additional withholding taxes. 20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such Common Stock before the later of (a) two years after the date the employee was granted the ISO, or (b) one year after the date the employee acquired Common Stock by exercising the ISO. If the employee has died before such stock is sold, these holding period requirement do not apply and no Disqualifying Disposition can occur thereafter. 21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan and the instrument evidencing ISOs shall be governed by the Laws of the State of New Jersey, without regard to the conflict of laws provisions thereof. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 8 EX-10.3 4 AMENDED STOCK INCENTIVE PLAN 1 DENDRITE INTERNATIONAL, INC. 1997 STOCK INCENTIVE PLAN (AS AMENDED THROUGH MARCH 24, 2000(1)) 1. Purpose. The purpose of the Dendrite International, Inc. 1997 Stock Incentive Plan (the "Plan") is to enhance the ability of Dendrite International, Inc. (the "Company") and its subsidiaries to attract and retain employees, directors and consultants of outstanding ability and to provide employees, directors and consultants with an interest in the Company parallel to that of the Company's shareholders. 2. Definitions. (a) "Award" shall mean an award determined in accordance with the terms of the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Change in Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 33-1/3% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (i) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any subsidiary, (B) by any employee benefit plan sponsored or maintained by the Company or any subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Control Transaction (as defined in paragraph (iii)), or (E) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Board (as defined below) approves a resolution providing expressly that the acquisition pursuant to this clause (E) does not constitute a Change in Control under this paragraph (i); (ii) individuals who, on the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date, whose election or nomination for election was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be considered a member of the Incumbent Board; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with - -------- (1) The Plan has been amended to reflect the three-for-two forward stock split (the "Stock Split") of the Company's Common Stock which became effective on October 8, 1999, and all share amounts and per share prices provided herein have been adjusted to reflect such Stock Split. 1 2 respect to directors or any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be a member of the Incumbent Board; (iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate reorganization of the Company or any such type of transaction involving the Company or any of its subsidiaries (whether for such transaction or the issuance of securities in the transaction or otherwise) (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of the publicly traded corporation resulting from such Business Combination (including, without limitation, any corporation which directly or indirectly has beneficial ownership of 100% of the Company Voting Securities or all or substantially all of the assets of the Company and its subsidiaries) eligible to elect directors of such corporation would be represented by shares that were Company Voting Securities immediately prior to such Business Combination (either by remaining outstanding or being converted), and such voting power would be in substantially the same proportion as the voting power of such Company Voting Securities immediately prior to the Business Combination, (B) no person (other than any publicly traded holding company resulting from such Business Combination, any employee benefit plan sponsored or maintained by the Company (or the corporation resulting from such Business Combination), or any person which beneficially owned, immediately prior to such Business Combination, directly or indirectly, 33-1/3% or more of the Company Voting Securities (a "Company 33-1/3% Stockholder")) would become the beneficial owner, directly or indirectly, of 33-1/3% or more of the total voting power of the outstanding voting securities eligible to elect directors of the corporation resulting from such Business Combination and no Company 33-1/3% Stockholder would increase its percentage of such total voting power, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination would be members of the Incumbent Board at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (a "Non-Control Transaction"); or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or the sale or disposition of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 33-1/3% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which, by reducing the number of Company Voting Securities outstanding, increases the percentage of shares beneficially owned by such person; provided, that if a Change in Control of the Company would occur as a result of such an acquisition by the Company (if not for the operation of this sentence), and after the Company's acquisition such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, then a Change in Control of the Company shall occur. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Committee" shall mean a committee of at least two members of the Board appointed by the Board to administer the Plan and to perform the functions set forth herein and -2- 3 who are "non-employee directors" within the meaning of Rule 16b-3 as promulgated under Section 16 of the Exchange Act and who are also "outside directors" within the meaning of Section 162(m) of the Code. (f) "Common Stock" shall mean the common stock, no par value per share, of the Company. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (h) "Fair Market Value" per share as of a particular date shall mean the last reported sale price (on the day immediately preceding such date) of the Common Stock on the Nasdaq National Market List. (i) "Immediate Family Member" shall mean, except as otherwise determined by the Committee, a Participant's children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings, in-laws and persons related by reason of legal adoption. (j) "Incentive Stock Option" shall mean a stock option which is intended to meet the requirements of Section 422 of the Code. (k) "Non-Employee Director" shall mean a member of the Board who is not an employee of the Company or any Subsidiary. (l) "Nonqualified Stock Option" shall mean a stock option which is not intended to be an Incentive Stock Option. (m) "Option" shall mean either an Incentive Stock Option or a Nonqualified Stock Option. (n) "Participant" shall mean an employee, director or consultant of the Company or its Subsidiaries who is selected to participate in the Plan in accordance with Section 5. (o) "Subsidiary" shall mean any subsidiary of the Company that is a corporation and which at the time qualifies as a "subsidiary corporation" within the meaning of Section 424(f) of the Code. 3. Shares Subject to the Plan. Subject to adjustment in accordance with Section 16, the total of the number of shares of Common Stock which shall be available for issuance pursuant to the grant of Awards under the Plan shall not exceed 6,000,000 shares, on a post-split adjusted basis; provided, that for purposes of this limitation, any Option which is canceled or expires without exercise shall again become available for Awards under the Plan. Upon forfeiture of Awards in accordance with the provisions of the Plan, and the terms and conditions of the Award, such shares shall no longer be counted in any determination of the number of shares available under the Plan and shall be available for subsequent Awards. To the extent that the exercise price of any Option granted under the Plan is satisfied by tendering shares of Common Stock to the Company (either by actual delivery or by attestation), then subject to the requirements of Section 422 of the Code in connection with any stock-for-stock exercise of Incentive Stock Options, only the number of shares of Common Stock issued, net of the shares tendered, shall be deemed delivered for purposes of determining the total number of shares of Common Stock available for issuance under the Plan. Subject to adjustment in accordance with Section 16, no employee shall be granted in any calendar year Options to purchase more than 1,500,000 shares of Common Stock. -3- 4 Shares of Common Stock available for issue or distribution under the Plan shall be authorized and unissued shares or shares reacquired by the Company in any manner. 4. Administration. (a) The Plan shall be administered by the Committee. (b) The Committee shall (i) approve the selection of Participants, (ii) determine the type of Awards to be made to Participants, (iii) determine the number of shares of Common Stock subject to Awards, (iv) determine the terms and conditions of any Award granted hereunder (including, but not limited to, any restriction and forfeiture conditions on such Award) and (v) have the authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry it into effect. (c) Any action of the Committee shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries and shareholders, Participants and persons claiming rights from or through a Participant. (d) The Committee may delegate to officers or employees of the Company or any Subsidiary, and to service providers, the authority, subject to such terms as the Committee shall determine, to perform administrative functions with respect to the Plan and Award agreements. (e) Members of the Committee and any officer or employee of the Company or any Subsidiary acting at the direction of, or on behalf of, the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified by the Company with respect to any such action or determination. 5. Eligibility. Individuals eligible to receive Awards under the Plan shall be the directors, officers, other key employees and selected consultants of the Company and its Subsidiaries selected by the Committee. In addition, all Non-Employee Directors shall be eligible to receive Options as provided in Section 9 hereof. 6. Awards. Awards under the Plan may consist of Options, stock awards or other awards based on the value of the Common Stock. Awards shall be subject to the terms and conditions of the Plan and shall be evidenced by an agreement containing such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. 7. Options. Options may be granted under the Plan in such form as the Committee may from time to time approve pursuant to terms set forth in an Option agreement. The Committee may alter or waive, at any time, any term or condition of an Option that is not mandatory under the Plan. (a) Types of Options. Each Option agreement shall state whether or not the Option will be treated as an Incentive Stock Option or Nonqualified Stock Option. Incentive Stock Options shall only be granted to employees of the Company and its Subsidiaries. (b) Option Price. The purchase price per share of the Common Stock purchasable under an Option shall be determined by the Committee, but in the case of Incentive Stock Options, the Option price will be not less than 100% of the Fair Market Value of the Common Stock on the date of the grant of the Option and in the case of Incentive Stock Options granted to an employee -4- 5 owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company and its Subsidiaries (a "10% Shareholder") the price per share specified in the agreement relating to such Option shall not be less than 110% of the Fair Market Value per share of the Common Stock on the date of grant. (c) Option Period. The term of each Option shall be fixed by the Committee, but no Option shall be exercisable after the expiration of 10 years from the date the Option is granted, provided, however, that in the case of Incentive Stock Options granted to 10% Shareholders, the term of such Option shall not exceed 5 years from the date of grant. (d) Exercisability. Each Option shall vest and become exercisable at a rate determined by the Committee at or subsequent to grant. (e) Method of Exercise. Options may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by the payment in full of the Option purchase price. Such payment shall be made: (a) in cash, or (b) to the extent authorized by the Committee, by surrender of shares of Common Stock owned by the holder of the Option, or (c) through simultaneous sale through a broker of shares acquired on exercise, as permitted under Regulation T of the Federal Reserve Board, or (d) through additional methods prescribed by the Committee, or (e) by a combination of any such methods. 8. Stock Awards. Subject to such performance and employment conditions as the Committee may determine, awards of Common Stock or awards based on the value of the Common Stock may be granted either alone or in addition to Options granted under the Plan. Any Awards under this Section 8 and any Common Stock covered by any such Award may be forfeited to the extent so provided in the Award agreement, as determined by the Committee. 9. Non-Employee Director Stock Options. (a) Initial Grant. Nonqualified Stock Options to purchase 30,000 shares of Common Stock shall be granted automatically to each Non-Employee Director who is a Non-Employee Director on the day the Board approves the adoption of the Plan. With respect to each person who becomes a Non-Employee Director after such date, Nonqualified Stock Options shall be granted to each such Non-Employee Director on the day he or she first becomes a Non-Employee Director. The number of shares of Common Stock to be subject to such Options granted under this Section 9(a), the exercise price, and all other terms (not inconsistent with the Plan) of such Options, shall be determined by the Committee or the Board in their discretion. (b) Subsequent Options. In addition to the Nonqualified Stock Options granted to Non-Employee Directors under Section 9(a), Nonqualified Stock Options may be granted from time to time to each Non-Employee Director. The number of shares of Common Stock to be subject to such Options granted under this Section 9(b), the exercise price, and all other terms (not inconsistent with the Plan) of such Options, shall be determined by the Committee or the Board in their discretion. (c) Option Price. The purchase price for each Option granted under this Section 9 to a Non-Employee Director shall be the Fair Market Value of the Common Stock on the date of grant of the Option. -5- 6 (d) Exercisability. Each Initial Option and Subsequent Option granted under this Section 9 shall become exercisable and vest on the first anniversary of the date of grant of such Option. (e) Method of Exercise. Each Option granted under this Section 9 may be exercised in the same manner as provided in Section 7(e). (f) Option Period. Each Option granted under this Section 9 shall terminate 10 years from the date of grant unless sooner terminated by reason of termination of service as a director of the Company and its Subsidiaries. (g) Termination of Director Status. (i) In the event of termination of service as a director of the Company and its Subsidiaries for any reason other than cause, death or permanent disability (as determined by the Committee), an Option granted under this Section 9 (to the extent exercisable as of the date of termination) shall be exercisable for the remaining term of the Option and shall thereafter terminate. (ii) In the event of the death of a Non-Employee Director while a director of the Company or any Subsidiaries, the Option (to the extent exercisable as of the date of death), shall be exercisable by any prior transferee or by the Non-Employee Director's designated beneficiary, or if none, the person(s) to whom such Non-Employee Director's rights under the Option are transferred by will or the laws of descent and distribution for 180 days following the date of death (but in no event beyond the term of the Option), and shall thereafter terminate. (iii) In the event of the termination of service as a director of the Company and its Subsidiaries due to permanent disability (as determined by the Committee), the Option (to the extent exercisable as of the date of termination), shall be exercisable for 180 days following such termination of service (but in no event beyond the term of the Option), and shall thereafter terminate. (iv) In the event of the termination of service as a director of the Company and its Subsidiaries for cause (as determined by the Committee in its sole discretion), the Option shall terminate upon such termination of status as director, regardless of whether the Option was then exercisable. (h) Except as expressly provided in this Section 9, any Option granted to a Non-Employee Director hereunder shall be subject to the terms and conditions of the Plan. 10. Change in Control. Upon the occurrence of a Change in Control, all Options shall automatically become vested and exercisable in full and all restrictions or conditions, if any, on any stock awards granted hereunder shall automatically lapse. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Options as it may deem equitable and in the best interests of the Company. 11. Forfeiture. Notwithstanding anything in the Plan to the contrary, the Committee may provide in any Award agreement that in the event of a serious breach of conduct by the person granted such Award (including, without limitation, any conduct prejudicial to or in conflict with the Company or its Subsidiaries), or any activity of any such person in competition with any of the businesses -6- 7 of the Company or any Subsidiary, (a) cancel any outstanding Award granted to such person, in whole or in part, whether or not vested, and/or (b) if such conduct or activity occurs within 1 year following the exercise or payment of an Award, require such person to repay to the Company any gain realized or payment received upon the exercise or payment of such Award (with such gain or payment valued as of the date of exercise or payment). Such cancellation or repayment obligation shall be effective as of the date specified by the Committee. Any repayment obligation may be satisfied in Common Stock or cash or a combination thereof (based upon the Fair Market Value of Common Stock on the day prior to the date of payment), and the Committee may provide for an offset to any future payments owed by the Company or any Subsidiary to such person if necessary to satisfy the repayment obligation. The determination of whether any such person has engaged in a serious breach of conduct or any activity in competition with any of the businesses of the Company or any Subsidiary shall be determined by the Committee in good faith and in its sole discretion. This Section 11 shall have no application following a Change in Control. 12. Withholding. The Company shall have the right to deduct from any payment to be made pursuant to the Plan the amount of any taxes required by law to be withheld therefrom, or to require a Participant to pay to the Company in cash such amount required to be withheld prior to the issuance or delivery of any shares of Common Stock or the payment of cash under the Plan. Such taxes may be paid by (a) delivering previously owned shares of Common Stock or (b) having the Company retain shares of Common Stock which would otherwise be delivered upon exercise or payment of Awards or (c) any combination of a cash payment or the methods set forth in (a) and (b) above. For purposes of (a) and (b) above, shares of Common Stock shall be valued at Fair Market Value determined as of the day immediately prior to exercise or payment. If and to the extent authorized by the Committee, the Company may, upon election by a Participant, withhold from any distribution of Common Stock hereunder shares of Common Stock with a Fair Market Value in excess of the Participant's required withholding obligation. 13. Nontransferability, Beneficiaries. Unless otherwise determined by the Committee with respect to the transferability of Nonqualified Stock Options by a Participant to his Immediate Family Members (or to trusts or partnerships or limited liability companies established for such family members), no Award shall be assignable or transferable by the Participant, otherwise than by will or the laws of descent and distribution or pursuant to a beneficiary designation, and Options shall be exercisable, during the Participant's lifetime, only by the Participant (or by the Participant's legal representatives in the event of the Participant's incapacity). Each Participant may designate a beneficiary to exercise any Option held by the Participant at the time of the Participant's death or to be assigned any other Award outstanding at the time of the Participant's death. If no beneficiary has been named by a deceased Participant, any Award held by the Participant at the time of death shall be transferred as provided in his will or by the laws of descent and distribution. Except in the case of the holder's incapacity, an Option may only be exercised by the holder thereof. 14. No Right to Employment. Nothing contained in the Plan or in any Award under the Plan shall confer upon any employee any right with respect to the continuation of employment with the Company or any of its Subsidiaries, or interfere in any way with the right of the Company to terminate his or her employment at any time. Nothing contained in the Plan shall confer upon any employee or other person any claim or right to any Award under the Plan. 15. Governmental Compliance. Each Award under the Plan shall be subject to the requirement that if at any time the Committee shall determine that the listing, registration or qualification of any shares issuable or deliverable thereunder upon any securities exchange or under any Federal or state law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition thereof, or in connection therewith, no such grant or award may be exercised or shares issued or -7- 8 delivered unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 16. Adjustments. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other corporate change, or any distribution to holders of Common Stock other than regular cash dividends, the number or kind of shares available for Options and Awards under the Plan may be adjusted by the Committee as it shall in its sole discretion deem equitable and the number and kind of shares subject to any outstanding Awards granted under the Plan and the purchase price thereof may be adjusted by the Committee as it shall in its sole discretion deem equitable to preserve the value of such Awards. 17. Award Agreement. Each Award under the Plan shall be evidenced by an agreement setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award, in addition to the terms and conditions specified in the Plan. 18. Amendment. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that (a) except as provided in Section 16, no amendment shall be made that would adversely affect the rights of a Participant under an Award theretofore granted, without such Participant's written consent and (b) if and when the Plan is approved by the shareholders of the Company, no amendment made after such approval shall be made without shareholder approval if such approval is necessary to comply with any applicable law, regulation or stock exchange rule. 19. General Provisions. (a) The Committee may require each Participant purchasing or acquiring shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that such Participant is acquiring the shares for investment and without a view to distribution thereof. (b) All certificates for shares of Common Stock delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If the Committee determines that the issuance of shares of Common Stock hereunder is not in compliance with, or subject to an exemption from, any applicable Federal or state securities laws, such shares shall not be issued until such time as the Committee determines that the issuance is permissible. (c) It is the intent of the Company that the Plan satisfy, and be interpreted in a manner that satisfies, the applicable requirements of Rule 16b-3 as promulgated under Section 16 of the Exchange Act so that Participants will be entitled to the benefit of Rule 16b-3, or any other rule promulgated under Section 16 of the Exchange Act, and will not be subject to short-swing liability under Section 16. Accordingly, if the operation of any provision of the Plan would conflict with the intent expressed in this Section 19(c), such provision to the extent possible shall be interpreted and/or deemed amended so as to avoid such conflict. (d) Except as otherwise provided by the Committee in the applicable grant or Award agreement, a Participant shall have no rights as a shareholder with respect to any shares of Common Stock subject to Options until a certificate or certificates evidencing shares of Common Stock shall have been issued to the Participant and, subject to Section 16, no adjustment shall be made for -8- 9 dividends or distributions or other rights in respect of any share for which the record date is prior to the date on which Participant shall become the holder of record thereof. (e) The law of the State of New Jersey shall apply to all Awards and interpretations under the Plan regardless of the effect of such state's conflict of laws principles. (f) Where the context requires, words in any gender shall include any other gender. 20. Term of Plan. Subject to earlier termination pursuant to Section 18, the Plan shall have a term of 10 years from its Effective Date. 21. Effective Date. The Plan is effective as of July 24, 1997. -9- EX-21 5 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES 1. AAC-NJ Holding Company, Inc. 2. Analytika, Inc. 3. DEN-AL Holding Company, Inc. 4. Dendrite Andes 5. Dendrite Belgium S.A. 6. Dendrite Brasil LTDA 7. Dendrite Canada Company 8. Dendrite Corporate Services 9. Dendrite Deutschland GMBH 10. Dendrite France S.A. 11. Dendrite Hungary Software Services, Inc. 12. Dendrite International, Inc. 13. Dendrite International Subsidiaries Holding Company 14. Dendrite Italia, S.R.I. 15. Dendrite Japan K.K. 16. Dendrite Mexico 17. Dendrite Netherlands, B.V. 18. Dendrite New Zealand Ltd. 19. Dendrite Portugal 20. Dendrite Pty. Ltd. 21. Dendrite Software Ventures, Ltd. 22. Dendrite U.K. Ltd. 23. Fremantle Financial Services, Inc. 24. Sydney Software, Inc. 25. Tasmania Resource, Inc. EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 333-14363, 333-19141, 333-24329, 333-35701, 333-81783,333-91449 and 333-92711. /s/ Arthur Andersen - -------------------- Philadelphia, Pa. March 28, 2000 EX-23.2 7 CONSENT OF KPMG LLP 1 The Board of Directors Dendrite International, Inc. We consent to the incorporation by reference in the registration statement (Nos. 333-14363, 333-19141, 333-24329, 333-35701,333-81783 and 333-92711) on Form S-8 and (No. 333-91449) on Form S-3 of Dendrite International, Inc. 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 operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998, which report appears in Form 10-K of Dendrite International, Inc. /s/ KPMG LLP - ------------ Allentown, Pennsylvania March 28, 2000 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 65,175 0 29,374 0 0 99,690 10,249 0 124,720 21,558 0 0 0 61,550 0 124,720 0 172,685 74,740 56,927 11,135 0 (1,691) 31,574 12,234 19,340 0 0 0 19,340 .51 .48
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