**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**Form10-Q**

 

**ý        Quarterly Report pursuant to Section 13or 15(d) of the SecuritiesExchange Act of 1934**

 

**For thequarterly period ended September 30, 2004**

 

**o        Transition Report Pursuant to Section 13or 15(d) of the SecuritiesExchange Act of 1934**

 

**For thetransition periodfrom          to**

 

**CommissionFile Number   001-16379**

 
| **Dendrite  International, Inc.**                                |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |
| **New  Jersey**                                                  | ** ** | **22-2786386** |
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |
| **1405  Route 206 South**                                        |
| **Bedminster,  NJ  07921**                                  |
| (Address, including zip  code, of  principal executive offices)  |
|                                                             |
| **(908)  443-2000**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has been subjectto such filing requirements for the past 90 days.ý yes ono

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act): ýyes o no

 

As of November 5, 2004, 41,766,520 shares of DendriteInternational, Inc. no par value common stock were outstanding.

 

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**DENDRITEINTERNATIONAL, INC.**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED SEPTEMBER 30, 2004**

 
| PART  I.   | FINANCIAL  INFORMATION                                                                                             |   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                               |   |
| ITEM  1.   | Financial  Statements                                                                                              |   |
|       |                                                                                                               |   |
|       | Consolidated  Statements of Operations (unaudited)  Three and nine month periods ended September 30, 2004 and 2003 |   |
|       |                                                                                                               |   |
|       | Consolidated  Balance Sheets (unaudited)  September 30, 2004 and December 31, 2003                                 |   |
|       |                                                                                                               |   |
|       | Consolidated  Statements of Cash Flows (unaudited)  Nine months ended September 30, 2004 and 2003                  |   |
|       |                                                                                                               |   |
|       | Notes to Unaudited  Consolidated Financial Statements                                                              |   |
|       |                                                                                                               |   |
| ITEM  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |   |
|       |                                                                                                               |   |
| ITEM 4.    | Controls and  Procedures                                                                                           |   |
|       |                                                                                                               |   |
| PART II.   | OTHER INFORMATION                                                                                                  |   |
|       |                                                                                                               |   |
| ITEM  6.   | Exhibits                                                                                                           |   |
|       |                                                                                                               |   |
| Signatures |                                                                                                               |   |

 

2

----

 

PART I.     FINANCIALINFORMATION

 

ITEM 1.     FinancialStatements

 

**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(INTHOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **SEPTEMBER 30,**      | ** ** | **SEPTEMBER 30,**     | ** ** |
| ** **                                 | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                   |       | $                      | 99,428     |                  | $          | 92,862 |   | $ | 294,399 |   | $ | 222,100 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Operating Costs & Expenses:            |       |                   |       |                  |       |   |   |   |   |
| Operating costs                            |       | 51,578                 |       | 46,688                |       | 151,807 |   | 110,839 |   |
| Selling, general and administrative        |       | 32,832                 |       | 33,780                |       | 98,923 |   | 74,535 |   |
| Research and development                   |       | 1,673                  |       | 2,863                 |       | 7,417 |   | 8,775 |   |
| Amortization of acquired intangible assets |       | 1,214                  |       | 1,251                 |       | 3,467 |   | 2,168 |   |
| Other operating (income)                   |       | (368                   | )          | -                     |       | (707 | ) | - |   |
| Total costs & operating expenses       |       | 86,929                 |       | 84,582                |       | 260,907 |   | 196,317 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Operating income                           |       | 12,499                 |       | 8,280                 |       | 33,492 |   | 25,783 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Interest expense (income), net             |       | 14                     |       | (58                   | )          | 11 |   | (612 | ) |
| Other (income) expense, net                |       | (190                   | )          | 55                    |       | (251 | ) | 21 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Income before income tax expense           |       | 12,675                 |       | 8,283                 |       | 33,732 |   | 26,374 |   |
| Income tax expense                         |       | 4,880                  |       | 3,314                 |       | 12,987 |   | 11,158 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Net income                                 |       | $                      | 7,795      |                  | $          | 4,969 |   | $ | 20,745 |   | $ | 15,216 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Net income per share:                      |       |                   |       |                  |       |   |   |   |   |
| Basic                                      |       | $                      | 0.19       |                  | $          | 0.12 |   | $ | 0.50 |   | $ | 0.38 |   |
| Diluted                                    |       | $                      | 0.18       |                  | $          | 0.12 |   | $ | 0.48 |   | $ | 0.37 |   |
|                                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated statements.

 

3

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE DATA)**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **2004**          | ** ** | **2003**         | ** ** |
| **Assets**                                                                                                                                                                                                   |
| Current Assets:                                                                                                                                                                                              |       |              |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                 | 46,134     |             | $          | 30,405 |   |
| Accounts receivable, net                                                                                                                                                                                     |       | 69,589            |       | 71,383           |       |
| Prepaid expenses and other current assets                                                                                                                                                                    |       | 7,843             |       | 7,949            |       |
| Deferred taxes                                                                                                                                                                                               |       | 4,976             |       | 8,844            |       |
| Income tax receivable                                                                                                                                                                                        |       | 3,045             |       | —           |       |
| Facility held for sale                                                                                                                                                                                       |       | —            |       | 6,900            |       |
| Total current assets                                                                                                                                                                                         |       | 131,587           |       | 125,481          |       |
|                                                                                                                                                                                                         |       |              |       |             |       |
| Property and equipment, net of accumulated amortization of $53,096  and $43,946                                                                                                                              |       | 42,613            |       | 28,140           |       |
| Other assets                                                                                                                                                                                                 |       | 5,851             |       | 2,538            |       |
| Long-term receivable                                                                                                                                                                                         |       | —            |       | 3,157            |       |
| Goodwill                                                                                                                                                                                                     |       | 85,752            |       | 70,403           |       |
| Intangible assets, net                                                                                                                                                                                       |       | 20,067            |       | 18,574           |       |
| Purchased capitalized software, net                                                                                                                                                                          |       | 1,208             |       | 1,666            |       |
| Capitalized software development costs, net                                                                                                                                                                  |       | 8,015             |       | 6,126            |       |
| Deferred taxes                                                                                                                                                                                               |       | 6,462             |       | 6,372            |       |
|                                                                                                                                                                                                         |       | $                 | 301,555    |             | $          | 262,457 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                |
| Current Liabilities:                                                                                                                                                                                         |       |              |       |             |       |
| Current installments of long-term debt                                                                                                                                                                       |       | $                 | 422        |             | $          | — |   |
| Accounts payable                                                                                                                                                                                             |       | 9,666             |       | 4,990            |       |
| Income taxes payable                                                                                                                                                                                         |       | 9,502             |       | 6,194            |       |
| Capital lease obligations                                                                                                                                                                                    |       | 1,345             |       | 1,033            |       |
| Accrued compensation and benefits                                                                                                                                                                            |       | 14,998            |       | 16,104           |       |
| Accrued professional and consulting fees                                                                                                                                                                     |       | 6,330             |       | 7,842            |       |
| Other accrued expenses                                                                                                                                                                                       |       | 22,808            |       | 21,038           |       |
| Purchase accounting restructuring accrual                                                                                                                                                                    |       | 3,600             |       | 3,203            |       |
| Deferred revenues                                                                                                                                                                                            |       | 11,512            |       | 16,379           |       |
| Total current liabilities                                                                                                                                                                                    |       | 80,183            |       | 76,783           |       |
|                                                                                                                                                                                                         |       |              |       |             |       |
| Capital lease obligations                                                                                                                                                                                    |       | 2,651             |       | 187              |       |
| Purchase accounting restructuring accrual                                                                                                                                                                    |       | 4,452             |       | 8,627            |       |
| Deferred rent                                                                                                                                                                                                |       | 1,295             |       | 369              |       |
| Long-term debt, excluding current installments                                                                                                                                                               |       | 1,041             |       | —           |       |
| Other non-current liabilities                                                                                                                                                                                |       | 3,546             |       | 356              |       |
|                                                                                                                                                                                                         |       |              |       |             |       |
| Stockholders’ Equity:                                                                                                                                                                                   |       |              |       |             |       |
| Preferred stock, no par value, 15,000,000 shares authorized, none  issued                                                                                                                                    |       | —            |       | —           |       |
| Common stock, no par value, 150,000,000 shares authorized, 43,881,862  and 43,013,428 shares issued; 41,659,162 and 40,790,728 shares outstanding at  September 30, 2004 and December 31, 2003, respectively |       | 111,556           |       | 100,448          |       |
| Retained earnings                                                                                                                                                                                            |       | 118,681           |       | 97,936           |       |
| Deferred compensation                                                                                                                                                                                        |       | (91               | )          | (56              | )          |
| Accumulated other comprehensive loss                                                                                                                                                                         |       | (883              | )          | (1,317           | )          |
| Less treasury stock, at cost                                                                                                                                                                                 |       | (20,876           | )          | (20,876          | )          |
| Total stockholders’ equity                                                                                                                                                                              |       | 208,387           |       | 176,135          |       |
|                                                                                                                                                                                                         |       | $                 | 301,555    |             | $          | 262,457 |   |
|                                                                                                                                                                                                              |            |                   |            |                  |            |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated statements.

 

4

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| Operating activities:                                                              |       |                                         |       |   |   |
| Net income                                                                         |       | $                                            | 20,745     |   | $ | 15,216 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                      |       | 15,958                                       |       | 14,924 |   |
| Amortization of deferred compensation, net of forfeitures                          |       | 149                                          |       | (40 | ) |
| Other adjustments for non-cash items                                               |       | 901                                          |       | 608 |   |
| Changes in assets and liabilities, net of effects from acquisitions:               |       |                                         |       |   |   |
| Decrease in accounts receivable                                                    |       | 7,424                                        |       | 15,443 |   |
| Decrease in prepaid expenses and other current assets                              |       | 926                                          |       | 1,399 |   |
| Decrease in other assets                                                           |       | 786                                          |       | 136 |   |
| Decrease in accounts payable and accrued expenses                                  |       | (3,671                                       | )          | (21,034 | ) |
| Decrease in purchase accounting restructuring accrual                              |       | (5,606                                       | )          | (6,969 | ) |
| Increase in income taxes payable                                                   |       | 3,907                                        |       | 2,163 |   |
| Decrease in accrued restructuring charge                                           |       | —                                       |       | (260 | ) |
| Decrease in deferred revenue                                                       |       | (5,505                                       | )          | (8,968 | ) |
| Increase in other non-current liabilities                                          |       | 860                                          |       | 288 |   |
| Net cash provided by operating activities                                          |       | 36,874                                       |       | 12,906 |   |
|                                                                               |       |                                         |       |   |   |
| Investing activities:                                                              |       |                                         |       |   |   |
| Sales of short-term investments                                                    |       | —                                       |       | 1,294 |   |
| Proceeds from sale-leaseback of furniture and equipment                            |       | 2,162                                        |       | — |   |
| Acquisitions, net of cash acquired                                                 |       | (7,312                                       | )          | (53,161 | ) |
| Purchases of property and equipment                                                |       | (15,083                                      | )          | (5,038 | ) |
| Additions to capitalized software development costs                                |       | (4,087                                       | )          | (2,362 | ) |
| Other, net                                                                         |       | —                                       |       | (50 | ) |
| Net cash used in investing activities                                              |       | (24,320                                      | )          | (59,317 | ) |
|                                                                               |       |                                         |       |   |   |
| Financing activities:                                                              |       |                                         |       |   |   |
| Borrowings from line of credit                                                     |       | —                                       |       | 8,000 |   |
| Repayments of line of credit                                                       |       | —                                       |       | (8,000 | ) |
| Repayments of long-term debt                                                       |       | (1,773                                       | )          | — |   |
| Repayments of acquired loan                                                        |       | (624                                         | )          | — |   |
| Payments on capital lease obligations                                              |       | (829                                         | )          | (469 | ) |
| Issuance of common stock                                                           |       | 6,249                                        |       | 4,458 |   |
| Net cash provided by financing activities                                          |       | 3,023                                        |       | 3,989 |   |
|                                                                               |       |                                         |       |   |   |
| Effect of foreign exchange rate changes on cash                                    |       | 152                                          |       | 287 |   |
|                                                                               |       |                                         |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 15,729                                       |       | (42,135 | ) |
| Cash and cash equivalents, beginning of period                                     |       | 30,405                                       |       | 68,308 |   |
|                                                                               |       |                                         |       |   |   |
| Cash and cash equivalents, end of period                                           |       | $                                            | 46,134     |   | $ | 26,173 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

5

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**1. Basis of Presentation**

 

The consolidated financial statements of DendriteInternational, Inc. and its subsidiaries (“Dendrite” or the “Company”) includedin this Form 10-Q are unaudited and reflect all adjustments (consisting ofnormal recurring adjustments) which are, in the opinion of management,necessary for a fair presentation of the financial position as of September 30,2004, operating results for the three and nine month periods ended September30, 2004 and 2003 and cash flows for the nine month periods ended September 30,2004 and 2003.  For further information,refer to the consolidated financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Overtime our business has changed and license revenues have become less material toour total revenues and associated gross margins.  These revenues have consistently been lessthan 10% since 2001, and we have therefore condensed our revenue presentationon the face of the accompanying statement of operations.

 

Our interim operating results may not be indicative ofoperating results for the full year.

 

***Reclassifications.*******Certain prior period balances have beenreclassified to conform to current period presentation.

 

**2. Stock Based Compensation**

 

The Company has adopted the disclosure requirements ofSFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure.”  The Company applies Accounting PrinciplesBoard (“APB”) 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for stock options granted under the Company’sstock option plans (the “Plans”). Accordingly, compensation cost has beencomputed for the Plans based on the intrinsic value of the stock option at thedate of grant, which represents the difference between the exercise price andthe fair value of the Company’s stock. As the exercise price of substantiallyall stock options granted equaled the fair value of the Company’s stock at thedate of option issuance, no compensation cost related to stock options has beenrecorded in the accompanying consolidated statements of operations. Hadcompensation cost for the Plans and the employee stock purchase plan beendetermined consistent with SFAS 123, the Company’s net income and net incomeper share would have been adjusted to the following pro forma amounts:

 
| ** **                                                                                                                                       | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                       | ** ** | **Ended September 30,**  | ** ** | **Ended September 30,** | ** ** |
| ** **                                                                                                                                       | ** ** | **2004**                 | ** ** | **2003**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                                           |       | $                        | 7,795      |                    | $          | 4,969 |   | $ | 20,745 |   | $ | 15,216 |   |
|                                                                                                                                             |       |                     |       |                    |       |   |   |   |   |
| Add/(Deduct): Deferred compensation amortization, net of forfeitures  recognized in accordance with APB 25, net of related tax effects           |       | 21                       |       | 8                       |       | 92 |   | (24 | ) |
|                                                                                                                                             |       |                     |       |                    |       |   |   |   |   |
| Deduct: Total stock-based employee compensation expense determined  under the fair value based method for all awards, net of related tax effects |       | (7,836                   | )          | (2,091                  | )          | (15,484 | ) | (7,349 | ) |
|                                                                                                                                             |       |                     |       |                    |       |   |   |   |   |
| Pro forma net income (loss)                                                                                                                      |       | $                        | (20        | )                       | $          | 2,886 |   | $ | 5,353 |   | $ | 7,843 |   |
|                                                                                                                                             |       |                     |       |                    |       |   |   |   |   |
| Earnings per share:                                                                                                                              |       |                     |       |                    |       |   |   |   |   |
| Basic - as reported                                                                                                                              |       | $                        | 0.19       |                    | $          | 0.12 |   | $ | 0.50 |   | $ | 0.38 |   |
| Basic - pro forma                                                                                                                                |       | $                        | 0.00       |                    | $          | 0.07 |   | $ | 0.13 |   | $ | 0.19 |   |
|                                                                                                                                             |       |                     |       |                    |       |   |   |   |   |
| Diluted - as reported                                                                                                                            |       | $                        | 0.18       |                    | $          | 0.12 |   | $ | 0.48 |   | $ | 0.37 |   |
| Diluted - pro forma                                                                                                                              |       | $                        | 0.00       |                    | $          | 0.07 |   | $ | 0.12 |   | $ | 0.19 |   |
|                                                                                                                                                  |            |                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

 

6

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

The fair value for these options were estimated at thedate of grant using the Black-Scholes option pricing model based upon thefollowing assumptions:

 

| ** **                               | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected dividend yield                  |       | 0.0                                           | %          | 0.0                                          | %          | 0.0 | % | 0.0 | % |
| Expected stock price volatility          |       | 70.0                                          | %          | 70.0                                         | %          | 70.0 | % | 70.0 | % |
| Weighted-average risk-free interest rate |       | 1.3                                           | %          | 3.7                                          | %          | 1.1 | % | 3.7 | % |
| Expected life of the option (years)      |       | 5.25                                          |       | 5.25                                         |       | 5.25 |   | 5.25 |   |

 

The stock-based employee compensation expensedetermined under the fair value based methods for all awards, net of relatedtax effects, disclosed herein is determined based upon the number and fairvalue of options granted and an estimate of forfeitures.  The expense is recognized over the vestingperiod of the options.  Under SFAS 123,compensation expense is not recognized for options that are forfeited due tothe employee’s failure to fulfill service requirements.  Therefore, while the fair value per option isnot recalculated, the number of options vesting would change, thus requiringrecalculation of the aggregate compensation expense.  The Company accounts for forfeitures byestimating the total number of awards that will vest and adjusting thatestimate if evidence becomes available that a different number of awards isexpected to vest.

 

The Black-Scholes valuation model was developed foruse in estimating the fair market value of traded options which have no vestingrestrictions and are fully transferable. In addition, the Black-Scholes valuation model requires the input of thehighly subjective assumptions disclosed above. Since the Company’s employee stock options have characteristicssignificantly different from those of traded options and changes in thesubjective input assumptions can materially affect the fair market valueestimate, in management’s opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of its employee stockoptions.

 

**3. Net Income Per Share**

 

The following table presents the computation of basicand diluted net income per share for the three and nine month periods endedSeptember 30, 2004 and 2003:

 
| ** **                                 | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| ** **                                 | ** ** | **2004**                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic net income per share computation:    |       |                           |       |                          |       |   |   |   |   |
| Net income                                 |       | $                              | 7,795      |                          | $          | 4,969 |   | $ | 20,745 |   | $ | 15,216 |   |
| Weighted-average common shares outstanding |       | 41,620                         |       | 40,442                        |       | 41,335 |   | 40,225 |   |
| Basic net income per share                 |       | $                              | 0.19       |                          | $          | 0.12 |   | $ | 0.50 |   | $ | 0.38 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Diluted net income per share computation:  |       |                           |       |                          |       |   |   |   |   |
| Net income                                 |       | $                              | 7,795      |                          | $          | 4,969 |   | $ | 20,745 |   | $ | 15,216 |   |
| Diluted common shares outstanding:         |       |                           |       |                          |       |   |   |   |   |
| Weighted-average common shares outstanding |       | 41,620                         |       | 40,442                        |       | 41,335 |   | 40,225 |   |
| Impact of dilutive stock options           |       | 1,319                          |       | 1,417                         |       | 1,607 |   | 865 |   |
| Diluted common shares outstanding          |       | 42,939                         |       | 41,859                        |       | 42,942 |   | 41,090 |   |
| Diluted net income per share               |       | $                              | 0.18       |                          | $          | 0.12 |   | $ | 0.48 |   | $ | 0.37 |   |
|                                            |            |                                |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

7

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**4. Comprehensive Income**

 

The components of comprehensive income for the threeand nine month periods ended September 30, 2004 and 2003, consisted of thefollowing:

 

 
| ** **                               | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **Ended September 30,**  | ** ** | **Ended September 30,** | ** ** |
| ** **                               | ** ** | **2004**                 | ** ** | **2003**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                               |       | $                        | 7,795      |                    | $          | 4,969 |   | $ | 20,745 |   | $ | 15,216 |   |
| Other comprehensive income:              |       |                     |       |                    |       |   |   |   |   |
| Foreign currency translation adjustments |       | 236                      |       | 315                     |       | 434 |   | 402 |   |
| Comprehensive income                     |       | $                        | 8,031      |                    | $          | 5,284 |   | $ | 21,179 |   | $ | 15,618 |   |
|                                          |            |                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

**5.Acquisitions**

**Schwarzeck**

On July 20, 2004, theCompany completed the strategic acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”).  Schwarzeck was a leading provider ofphysician databases, direct marketing services and sample fulfillment servicesto pharmaceutical companies in Germany. This acquisition accelerated the Company’s expansion in Europe andincreases its interactive marketing solutions and services to the Germanpharmaceutical industry. In connection with the acquisition, the Companyrestructured the combined operations by eliminating certain former Schwarzeckpositions. Schwarzeck’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.The Company has preliminarily allocated the entire purchase price togoodwill.  The assets acquired andliabilities assumed in connection with the Schwarzeck acquisition, theaggregate purchase price and pro forma results of operations are not deemedmaterial to the consolidated financial statements as a whole.

***MDM***

On April 6, 2004, theCompany completed the strategic acquisition of the capital stock of the MedicalData Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a leading provider ofphysician databases, market research and sales force support services topharmaceutical companies in Poland, Hungary, Russia and the Ukraine.  MDM’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

The aggregate purchase price for MDM was approximately$9,250 and consisted of approximately $5,700 in cash payments, approximately$3,300 in restricted stock and approximately $250 of legal and professionalfees. The Company is in the process of finalizing a third-party valuation ofcertain intangible assets and therefore the purchase price allocation remainspreliminary and subject to adjustment. The preliminary allocation of purchase price, including the netliabilities acquired of approximately $250, to intangible assets acquired inconnection with the MDM acquisition is as follows:

 

| ** **                                     | ** **   | **Weighted-Average  Estimated Useful  Life (Years)** | ** **   | **Acquired Intangible  Asset Value** | ** ** |
|------------------------------------------------|--------------|------------------------------------------------------|--------------|--------------------------------------|------------|
| Intangible  Assets Subject to Amortization:    |         |                                                 |         |                                 |       |
| Purchased database                             |         | 3                                                    |         | $                                    | 1,700      |   |
| Customer relationship assets                   |         | 7                                                    |         | 690                                  |       |
| Other                                          |         | 4                                                    |         | 240                                  |       |
| Intangible Assets Not Subject to Amortization: |         |                                                 |         |                                 |       |
| Goodwill                                       |         | N/A                                                  |         | 6,888                                |       |
|                                           | *** *** | *** ***                                         | *** *** | $                                    | 9,518      | *** *** |

 

The assets acquired andliabilities assumed in connection with the MDM acquisition and pro formaresults of operations are not deemed material to the consolidated financialstatements as a whole.

 

8

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

***Uto Brain***

On January 5, 2004, theCompany completed its acquisition of the capital stock of Uto Brain Co., Ltd. (“UtoBrain”).  Based in Osaka, Japan, UtoBrain provided more than thirty pharmaceutical companies with data, analytics,publishing and advisory services.  Thecombining of resources of Uto Brain with the existing resources of Dendritecreates a comprehensive information, software and services company dedicated tothe Japanese pharmaceutical industry and further enhances Dendrite’s ability toprovide solutions to enhance sales, marketing and clinical functions ofpharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

The aggregate purchaseprice for Uto Brain was approximately $4,800 (498,270 Yen), includingapproximately $100 of legal and professional fees.  As of September 30, 2004, the Company paidapproximately $2,300 of the purchase price with approximately $2,400 stilloutstanding and included within Other Accrued Expenses on the September 30,2004 consolidated balance sheet.  Inaccordance with the purchase agreement, the outstanding balance is payable asfollows: approximately $1,100 by October 31, 2004; approximately $400 onJanuary 5, 2005; and $900 on March 31, 2005. In addition, the Company assumedapproximately $3,800 in bank debt and an acquired loan. The Company is in theprocess of finalizing a third-party valuation of certain intangible assets andtherefore the purchase price allocation remains preliminary and subject toadjustment.  The preliminary allocationof purchase price, including net liabilties acquired of approximately$1,100,  to intangible assets acquired inconnection with the Uto Brain acquisition is as follows:

 

| ** **                                     | ** ** | **Weighted-Average  Estimated Useful  Life (Years)** | ** ** | **Acquired Intangible  Asset Value** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| Intangible Assets Subject to Amortization:     |       |                                                 |       |                                 |       |
| Customer relationship assets                   |       | 10                                                   |       | $                                    | 1,870      |   |
|                                           |       |                                                 |       |                                 |       |
| Intangible Assets Not Subject to Amortization: |       |                                                 |       |                                 |       |
| Goodwill                                       |       | N/A                                                  |       | 3,905                                |       |
| Trademarks                                     |       | N/A                                                  |       | 150                                  |       |
|                                           |       |                                                 |       | $                                    | 5,925      |   |

 

The assets acquired and liabilities assumed inconnection with the Uto Brain acquisition and pro forma results of operationsare not deemed material to the consolidated financial statements as a whole.

 

***Synavant***

On June 16, 2003, the Company completed itsacquisition of Synavant Inc. (“Synavant”). Synavant provided a broad range ofknowledge-based services to pharmaceutical and other life science companiesaround the world. Its comprehensive global solutions included pharmaceuticalcustomer relationship management (“CRM”) applications, interactive marketing,server and database management, dedicated local help-line support, training,telemarketing, sample management and product recall services. Synavant washeadquartered in Atlanta, Georgia, and had offices in 21 countries. The combiningof resources of Synavant with the existing resources of Dendrite creates a morecomprehensive information, software and services company dedicated to theglobal life sciences industry, and further enhances Dendrite’s ability toprovide solutions to the sales, marketing and clinical functions ofpharmaceutical and other life science companies. Synavant’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

 

The aggregate purchase price was approximately$55,100, including consideration paid for the common stock and approximately$3,400 of legal and professional fees incurred in connection with thetransaction.

 

The pro forma results of operations of the Company asif the Synavant acquisition had occurred as of January 1, 2003 are as follows:

 

| ** **               | ** ** | **Pro Forma Results for the Nine Months Ended September 30, 2003** | ** ** |
|--------------------------|------------|------------------------------------------------------------------------------|------------|
| Revenues                 |       | $                                                                            | 287,183    |   |
| Net income (A)           |       | $                                                                            | 404        |   |
| Basic income per share   |       | $                                                                            | 0.01       |   |
| Diluted income per share |       | $                                                                            | 0.01       |   |

----

(A)      Net income includes approximately $1,300 of historicalrestructuring charges from Synavant as well as early termination fees relatedto Synavant’s lines of credit of approximately $1,850.

 

9

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**6.  Purchase Accounting Restructuring Accrual**

In connection with theJune 2003 acquisition of Synavant, the Company restructured the combinedoperations by exiting certain former Synavant facilities and eliminatingcertain former Synavant positions. During the first quarter of 2004, theCompany’s management increased its restructuring accrual by approximately$1,800 due to an adjustment of the total costs to exit certain former Synavantfacilities and recorded the corresponding adjustment to Goodwill in theaccompanying consolidated balance sheet. During the third quarter of 2004, theCompany’s management decreased the restructuring accrual by approximately $200due to an adjustment to the total anticipated costs to terminate certain formerSynavant employees and recorded the corresponding adjustment to goodwill in theconsolidated balance sheet. The Company anticipates that the balance related tothe termination of employees will be paid during the current year and theremaining accrued restructuring balance related to the facility exit costs willbe paid over the life of the facility leases, ending in February 2012.

 

The liability accrues for expenses to be incurred inexiting certain Synavant facilities, including assumptions related to subleaseincome which offsets future lease obligations. The underlying subleases are notin place for all facilities and the future placement of subleases, includingthe timing and terms and conditions of subleases, could be different than theassumptions.

 

In connection with the July 2004 acquisition ofSchwarzeck, the Company restructured the combined operations by eliminatingcertain former Schwarzeck positions. The Company accrued approximately $250 onJuly 20, 2004 to complete the restructuring plan.

 

The activity related to purchase accountingrestructuring accruals for the nine month period ended September 30, 2004 issummarized in the table below:

 

 
| ** **                        | ** ** | **Purchase**          | ** ** | ** **            | ** ** | ** **            | ** ** | **Purchase**      | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                        | ** ** | **Accounting**        | ** ** | ** **            | ** ** | ** **            | ** ** | **Accounting**    | ** ** |
| ** **                        | ** ** | **Restructuring**     | ** ** | ** **            | ** ** | ** **            | ** ** | **Restructuring** | ** ** |
| ** **                        | ** ** | **Accrual as of**     | ** ** | **2004 Year-to-Date** | ** ** | **2004 Year-to-Date** | ** ** | **Accrual as of** | ** ** |
| ** **                        | ** ** | **December 31, 2003** | ** ** | **Adjustments**       | ** ** | **Payments**          | ** ** | **September 30,** | ** ** |
| Synavant                          |       |                  |       |                  |       |                  |       |              |       |
| Termination payments to employees |       | $                     | 2,378      |                  | $          | (207                  | )          | $                 | (2,132     | ) | $ | 39 |   |
| Facility exit costs               |       | 7,187                 |       | 1,791                 |       | (2,464                | )          | 6,514             |       |
| Total Synavant                    |       | 9,565                 |       | 1,584                 |       | (4,596                | )          | 6,553             |       |
| SAI                               |       |                  |       |                  |       |                  |       |              |       |
| Lease termination costs           |       | 2,265                 |       | —                |       | (1,010                | )          | 1,255             |       |
| Schwarzeck                        |       |                  |       |                  |       |                  |       |              |       |
| Termination payments to employees |       | —                |       | 244                   |       | —                |       | 244               |       |
| Total                             |       | $                     | 11,830     |                  | $          | 1,828                 |       | $                 | (5,606     | ) | $ | 8,052 |   |

 

 

10

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**7. Goodwill and Intangible Assets**

 

The total gross carrying amount and accumulatedamortization for intangible assets subject to amortization are as follows:

 
| ** **                              | ** ** | **Net Intangibles**   | ** ** | **2004 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **as of**             | ** ** | ** **                     | ** ** | ** **          | ** ** | **Translation** | ** ** | **as of** | ** ** |
| ** **                              | ** ** | **December 31, 2003** | ** ** | **Additions**                  | ** ** | **Amortization**    | ** ** | **and Other** | ** ** | **September 30, 2004** | ** ** |
| Purchased  capitalized software         |       | $                     | 1,666      |                           | $          | —              |       | $ | (458 | ) | $ | — |   | $ | 1,208 |   |
| Capitalized  software development costs |       | 6,126                 |       | 4,087                          |       | (2,198              | )          | — |   | 8,015 |   |
| Customer  relationship assets           |       | 6,089                 |       | 2,560                          |       | (979                | )          | (48 | ) | 7,622 |   |
| Backlog                                 |       | 602                   |       | —                         |       | (386                | )          | — |   | 216 |   |
| Non-compete  covenants                  |       | 2,560                 |       | —                         |       | (1,133              | )          | (12 | ) | 1,415 |   |
| Purchased  database                     |       | 2,460                 |       | 1,700                          |       | (478                | )          | — |   | 3,682 |   |
| Other intangibles                       |       | 131                   |       | 240                            |       | (107                | )          | (11 | ) | 253 |   |
| Total                                   |       | $                     | 19,634     |                           | $          | 8,587               |       | $ | (5,739 | ) | $ | (71 | ) | $ | 22,411 |   |
|                                         |            |                       |            |                                |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

The changes in the carrying amount of intangibleassets not subject to amortization for the period ended September 30, 2004 areas follows:

 
| ** ** | ** ** | ** **            | ** ** | ** **    | ** ** | ** **    | ** ** | **Currency**    | ** ** | ** **             | ** ** |
|------------|------------|-----------------------|------------|---------------|------------|---------------|------------|-----------------|------------|------------------------|------------|
| ** ** | ** ** | **Balance as of**     | ** ** | ** **    | ** ** | ** **    | ** ** | **Translation** | ** ** | **Balance as of**      | ** ** |
| ** ** | ** ** | **December 31, 2003** | ** ** | **Additions** | ** ** | **Deletions** | ** ** | **Adjustments** | ** ** | **September 30, 2004** | ** ** |
| Goodwill   |       | $                     | 70,403     |          | $          | 16,321        |       | $               | (852       | )                      | $          | (120 | ) | $ | 85,752 |   |
| Trademarks |       | 6,732                 |       | 150           |       | —        |       | (3              | )          | 6,879                  |       |
| Total      |       | $                     | 77,135     |          | $          | 16,471        |       | $               | (852       | )                      | $          | (123 | ) | $ | 92,631 |   |
|            |            |                       |            |               |            |               |            |                 |            |                        |            |  |  |  |  |  |  |

 

The Company conducts its annual impairment testing ofgoodwill as of October 1 of each year. For the quarter ended September 30,2004, there were no changes in events or circumstances that would indicateimpairment.

 

Aggregate annual amortization expense of intangibleassets (exclusive of future additions) is estimated to be:

 

| Year Ending  December 31,                                               | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|
| 2004                                                                    |       | $          | 7,719      |   |
| 2005                                                                    |       | 6,164      |       |
| 2006                                                                    |       | 4,821      |       |
| 2007                                                                    |       | 2,791      |       |
| 2008                                                                    |       | 1,030      |       |
| Thereafter                                                              |       | 5,625      |       |
|                                                                    |       | 28,150     |       |
| Less: Year-to-date amortization expense                                 |       | (5,739     | )          |
| Net intangible assets subject to amortization as of  September 30, 2004 |       | $          | 22,411     |   |

 

11

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**8.Line-of-Credit**

The Company entered intoa line-of-credit agreement (the “Agreement”) as of June 16, 2003, in the amountof $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreementis available to finance working capital needs and possible future acquisitions.Among other covenants, the Agreement requires the Company to maintain a minimumconsolidated net worth, measured quarterly, which is equal to $130,000, plus50% of net income earned after April 1, 2003, and 75% of the net proceeds ofany offering of new equity interests issued subsequent to June 30, 2003. As ofSeptember 30, 2004, the Company’s consolidated net worth was $208,387. TheAgreement contains certain restrictions on the Company’s ability to create orassume liens, dispose of assets, consolidate or merge, extend credit, incurother indebtedness or pay cash dividends. On September 24, 2004, the Companyentered into an amendment to the Agreement that relaxed certain covenantsrelating to acquisitions, dispositions of Company assets, indebtedness offoreign subsidiaries of the Company, real estate and capital expenditures inconnection with the Company’s move to its new corporate headquarters facility.As of September 30, 2004, the Company was in compliance with all covenants anddid not have any amounts outstanding under the line-of-credit.

As of September 30, 2004,the Company had outstanding letters-of-credit of approximately $5,721.

 

**9.Long-Term Debt**

In connection with theUto Brain acquisition, the Company assumed bank debt of approximately $3,200,with a weighted-average interest rate of 2.10%, and acquired a loan ofapproximately $600 with an interest rate of 1.80%.  As of September 30, 2004, approximately$1,500 of the bank debt related to this transaction was outstanding.  The acquired loan balance was paid in fullduring the quarter ended March 31, 2004.

As of September 30, 2004,future payments related to the acquired bank debt are as follows:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2004                         |       | $          | 80         |   |
| 2005                         |       | 390        |       |
| 2006                         |       | 283        |       |
| 2007                         |       | 255        |       |
| 2008                         |       | 91         |       |
| Thereafter                   |       | 364        |       |
|                         |       | $          | 1,463      |   |
|                         |       |       |       |

 

**10.Income Taxes**

The Company’s effectiveincome tax expense rate decreased to 38.5% for the nine months ended September30, 2004, from 42.3% for the nine months ended September 30, 2003. The primarydriver for the change in the effective tax rate was the consolidation ofcertain international legal entities. Prior to operational restructuring and legal entity integration, theseinternational legal entities generated losses that could not be benefited.  As a result of the integration, the amount oflosses generated that can not be benefited has been significantly reduced.  In connection with the Synavant integrationin June 2003, the Company determined which foreign entities would be dissolvedand performed a reforecast of projected taxable income by jurisdiction andrecognized a full valuation allowance on a net operating loss carryforward forone of its foreign subsidiaries of approximately $608. The effective tax ratefor the quarter ended September 30, 2004 was 38.5% compared to 40.0% for thequarter ended September 30, 2003.

During the three monthsended June 30, 2004, the Company completed the tax accounting analysis relatedto the Synavant acquisition.  As aresult, the Company increased current deferred tax assets by approximately$4,500, increased income taxes payable approximately $5,800, with the balanceincreasing goodwill approximately $1,300.

During the three monthsended September 30, 2004, the Company completed the tax accounting analysisrelated to the MDM acquisition.  As aresult, the Company decreased current deferred tax assets by approximately $1,100and recorded the corresponding increase to goodwill.

 

12

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**11. Capital Leases**

 

**               **In connectionwith certain leasing arrangements, the Company entered into a sale-leaseback offurniture and equipment of approximately $2,200 expiring in November 2007.  In addition, the Company also entered intonew capital lease arrangements for computer hardware and other equipment ofapproximately $1,400 expiring through November 2007.  The future minimum rental payments of allcapital leases are as follows:

 
| 2004                                                 |   | $     | 273    |   |
|------------------------------------------------------|--------|-------|--------|--------|
| 2005                                                 |   | 1,543 |   |
| 2006                                                 |   | 1,293 |   |
| 2007                                                 |   | 1,185 |   |
| Total                                                |   | 4,294 |   |
| Less: Amount representing interest                   |   | 298   |   |
| Present value of net minimum lease payments          |   | 3,996 |   |
| Less: Current portion of capital lease obligations   |   | 1,345 |   |
| Capital lease obligations, excluding current portion |   | $     | 2,651  |   |

 

**12. Facility Held For Sale**

 

During the three monthsended September 30, 2004, the Company decided to move the New Jersey hardwareservices to the Piscataway, New Jersey facility. Accordingly, the $6,900carrying value, which approximates the fair market value of the facility, wasreclassified to property and equipment in the consolidated balance sheet as ofSeptember 30, 2004.

 

**13. Deferred Compensation Plan**

 

The Company has supplemental deferred compensationarrangements for the benefit of certain officers, directors and certain keyexecutives. These arrangements are primarily funded by life insurancecontracts, which have been purchased by the Company. The arrangements permitthe participants to diversify their investments. The value of the assets held,managed and invested, pursuant to the agreements was approximately $3,000 as ofSeptember 30, 2004 and is included in Other Assets in the accompanyingconsolidated balance sheet. The corresponding deferred compensation liabilityof $3,500 as of September 30, 2004 is recorded at the fair market value of theassets held in a rabbi trust and adjusted to reflect the fair value of theamount owed to certain officers, directors and certain key executives and isincluded in Other Non-Current Liabilities in the accompanying consolidatedbalance sheet.

 

**14. Common Stock**

 

The following table rolls forward the balance ofcommon stock from December 31, 2003 to September 30, 2004:

 
| ** **   | ** ** | **Balance as of December 31, 2003** | ** ** | **Issuance of  Common Stock (1)** | ** ** | **MDM Acquisition** | ** ** | **Tax Benefit of Stock Option Exercises** | ** ** | **Other** | ** ** | **Balance as of  September 30, 2004** | ** ** |
|--------------|------------|-------------------------------------|------------|-----------------------------------|------------|---------------------|------------|-------------------------------------------|------------|-----------|------------|---------------------------------------|------------|
| Common Stock |       | $                                   | 100,448    |                              | 6,249      |                | 3,317      |                                      | 1,358      |      | 184        |                                  | $          | 111,556 |   |
|              |            |                                     |            |                                   |            |                     |            |                                           |            |           |            |                                       |            |  |  |

----

(1)  Includes issuance of commonstock through employee stock purchase plan as well as stock option exercises.

 

 

13

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**15. Enterprise-Wide Data**

 

Information about MajorCustomers:

 

For the three month periods ended September 30, 2004and 2003, the Company derived approximately 28% and 31% of its revenues from itslargest customer, respectively. For the nine month periods ended September 30,2004 and 2003, the Company derived approximately 27% and 39% of its revenuesfrom its largest customer, respectively.

 

Informationabout Products and Services:

Dueto the growth in the Company’s strategic product and service offerings, largelybuilt through recent acquisitions, the Company has expanded its revenuecategories into sales support, marketing support and shipping.  These categories are reflective of howservice offerings are marketed to and viewed by customers. They are notreflective of the way the business is managed. Company operating costs are not broken out for these categories on aglobal basis, as they are not viewed as necessary to the management of the businessglobally. Based upon all of these factors, while these categories are useful inunderstanding the Company’s operating results, the Company’s only operatingsegments for disclosure purposes under Statement of Financial AccountingStandards (“SFAS”) 131, “Disclosure About Segments of an Enterprise and RelatedInformation,” are geographic areas, as presented in footnote 15 to ourconsolidated financial statements.  Thefollowing is a summary of our revenue categories:

*Sales Support* revenue includes product and sales supportservices of the traditional Dendrite business. All of these products and services are used by, or provided to, thesales force of our customers.

*Marketing Support* revenue includes our product and serviceofferings that are not geared toward the client sales force and primarilyconsists of offerings acquired in our business combinations over the past fewyears.  The primary components ofmarketing support revenue include interactive marketing, data, consulting andclinical.

*Shipping*revenues are disclosed separately as they arepass-through costs that bear little to no margin, and are required to beincluded in revenues and costs based upon Emerging Issues Task Force (“EITF”)00-10, “Accounting for Shipping and Handling Fees and Costs.”  These billable shipping transactions areprimarily related to our interactive marketing activities.

 

The following table presentsrevenues by category for the three and nine month periods ended September 30,2004 and 2003.

 
| ** **                 | ** ** | **THREE MONTHS ENDED**

**SEPTEMBER 30,** | ** ** | **NINE MONTHS ENDED**

**SEPTEMBER 30,** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Services & Technology: |       |                                      |       |                                     |       |   |   |   |   |
|                       |       |                                      |       |                                     |       |   |   |   |   |
| Sales support              |       | $                                         | 71,629     |                                     | $          | 71,593 |   | $ | 214,673 |   | $ | 187,723 |   |
| Marketing support          |       | 23,834                                    |       | 18,122                                   |       | 67,847 |   | 30,280 |   |
|                       |       |                                      |       |                                     |       |   |   |   |   |
| Shipping                   |       | 3,965                                     |       | 3,147                                    |       | 11,879 |   | 4,097 |   |
| Total revenues             |       | $                                         | 99,428     |                                     | $          | 92,862 |   | $ | 294,399 |   | $ | 222,100 |   |
|                       |       |                                      |       |                                     |       |   |   |   |   |

 

 

14

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

Information about Geographic Areas:

 

The Company is organized by geographic location andhas one reportable segment. All transfers between geographic areas have beeneliminated from consolidated revenues.

 
| ** **    | ** ** | **For the Three Months Ended**

**September 30,** | ** ** | **For the Nine Months Ended**

**September 30,** | ** ** |
|---------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2004**                                          | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:     |       |                                              |       |                                             |       |   |   |   |   |
| United States |       | $                                                 | 60,992     |                                             | $          | 65,198 |   | $ | 185,197 |   | $ | 167,999 |   |
| Europe        |       | 25,168                                            |       | 18,658                                           |       | 69,991 |   | 32,273 |   |
| All other     |       | 13,268                                            |       | 9,006                                            |       | 39,211 |   | 21,828 |   |
|          |       | $                                                 | 99,428     |                                             | $          | 92,862 |   | $ | 294,399 |   | $ | 222,100 |   |

 

The table aboveallocates license revenues on a legal basis. On a legal basis, license revenueshave been allocated using the geographic location where the intellectualproperty is owned.

 

                Thefollowing table presents long-lived assets by geographic area:

 
| ** **         | ** ** | **As of   September 30, 2004** | ** ** | **As of   December 31, 2003** | ** ** |
|--------------------|------------|--------------------------------|------------|-------------------------------|------------|
| Long-lived assets: |       |                           |       |                          |       |
| United States      |       | $                              | 143,098    |                          | $          | 118,555 |   |
| Europe             |       | 6,576                          |       | 4,436                         |       |
| All other          |       | 7,981                          |       | 1,918                         |       |
|               |       | $                              | 157,655    |                          | $          | 124,909 |   |

 

 

15

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($IN THOUSANDS)**

This Form 10-Q containscertain forward-looking statements within the meaning of Section 27A of theSecurities 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. Forthis purpose, any statements that are not statements of historical fact may bedeemed to be forward-looking statements, including the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our strategy, future operations, future expectations and futureestimates, future financial position or results and future plans and objectivesof management. Those statements in this Form 10-Q containing the words “believes,”“anticipates,” “plans,” “expects” and similar expressions constituteforward-looking statements, although not all forward-looking statements containsuch identifying words. These forward-looking statements are based on ourcurrent expectations, assumptions, estimates and projections about our Companyand the pharmaceutical and consumer packaged goods industries. All suchforward-looking statements involve significant risks and uncertainties, includingthose risks identified in this Form 10-Q under “Factors That May Affect FutureResults,” many of which are beyond our control. Although we believe that theassumptions underlying our forward-looking statements are reasonable, any ofthe assumptions could be inaccurate and actual results may differ materiallyfrom those indicated by the forward-looking statements included in this Form10-Q, as more fully described under “Factors That May Affect Future Results.”In light of the significant uncertainties inherent in the forward-lookingstatements included in this Form 10-Q, you should not consider the inclusion ofsuch information as a representation by us or anyone else that we will achievesuch results. Moreover, we assume no obligation to update these forward-lookingstatements to reflect actual results or changes in assumptions, expectations orprojections. In addition, our financial and performance outlook concerningfuture revenues, margins, earnings, earnings per share and other operating orperformance results does not include the impact of any future acquisitions,future acquisition-related expenses, debt, dilution or any future restructuringor other charges that may occur from time-to-time due to management decisionsand changing business circumstances and conditions.

**EXECUTIVEOVERVIEW**

We provide a broad arrayof solutions worldwide that enable pharmaceutical and other life sciencecompanies to strategically optimize their sales, marketing and clinicalresources. Our strategy is to continue to diversify and expand our solutionsportfolio, customer base and geographic reach by leveraging our extensiveknowledge and deep relationships with the pharmaceutical and life sciencesindustries. We have and will continue to rely on both internal growth and acquisitionsto meet our growth objectives.

Our acquisition ofSynavant Inc. (“Synavant”) in 2003 diversified and expanded our solutionsportfolio, particularly as it relates to the pharmaceutical marketing channel,by adding interactive marketing services in the U.S. and abroad, as well as newdata and services solutions in Europe. In January 2004, we further broadenedand enhanced our product and service portfolio in the Japanese pharmaceuticalindustry and extended our leadership position in Japan with our acquisition ofUto Brain Co. Ltd. (“Uto Brain”). In April 2004, we acquired the Medical DataManagement group of companies (“MDM”), increasing our ability to provideleading solutions that drive promotional and sales effectiveness in Central andEastern Europe. We believe these acquisitions complement our existing businessoperations by enhancing our solutions portfolio and increasing our access tonew customers and markets.

We have expanded both ourportfolio of solutions and customer base and believe that this combinationpresents significant opportunity for future growth.  We have also committed to investing in keyinitiatives to help drive future growth. We believe increased investments in marketing and sales resources andprograms will help us more effectively sell and market the diversity ofsolutions we now offer.  Our futuregrowth is dependent on our ability to further penetrate the markets in which weoperate and increase the adoption rate of our expanded portfolio of solutions.

Weevaluate our performance based upon a number of operating metrics. Chief amongthese metrics are revenues, operating margins, diluted net income per share,operating cash flow and days sales outstanding. In the third quarter of 2004,we saw the continued execution of our strategy yield growth in revenues,operating margins and diluted net income per share versus the same period of2003. We also continued to exhibit strong cash generation attributes, improvingdays sales outstanding from year end and generating strong positive operatingcash flow even as we continued to pay some of the remaining liabilitiesassociated with our acquisitions. In addition, seasonality has become a factorin certain lines of our business due to our international growth from our 2003and 2004 acquisitions.

Dueto the growth in our strategic product and service offerings, largely builtthrough our recent acquisitions, we have expanded our revenue categories into *Sales Support,**Marketing Support*and *Shipping*. These categories arereflective of how our service offerings are marketed to and viewed by ourcustomers.  They are not reflective ofthe way we manage our business. Our operating costs are not broken out forthese categories on a global basis, as they are not viewed as necessary in themanagement of our global business. Based upon all of these factors, while thesecategories are useful in understanding our operating results, our onlyoperating segments for disclosure purposes under the Statement of FinancialAccounting Standards (“SFAS”) 131, “Disclosure About Segments of an Enterpriseand Related Information,” are geographic areas, as presented in footnote 15 toour consolidated financial statements. The following is a summary of our revenue categories:

 

16

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

*Sales Support* revenue includes product and sales supportservices of the traditional Dendrite business. All of these products and services are used by, or provided to, the salesforce of our customers and sales management.

*Marketing Support* revenue includes our product and serviceofferings that are not geared toward the client sales force and primarilyconsists of offerings acquired in our business combinations over the past fewyears.  The primary components ofmarketing revenue include interactive marketing, data, consulting and clinical.

*Shipping* revenues are disclosed separately as they arepass-through costs that bear little to no margin, and are required to beincluded in revenues and costs based upon Emerging Issues Task Force (“EITF”)00-10, “Accounting for Shipping and Handling Fees and Costs.”  These billable shipping transactions areprimarily related to our interactive marketing activities.

ForMD&A purposes, license revenues have been allocated to the geographiclocation of the customer.

**CRITICALACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

There have been nomaterial changes to our critical accounting policies, judgments and estimatesfrom the information provided in Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations included in our Annual Reporton Form 10-K for the year ended December 31, 2003.

 

**MERGERSAND ACQUISITIONS**

We regularly evaluateopportunities to acquire products or businesses that represent strategicenhancements to our operations. Such acquisition opportunities, if they arise,may involve the use of cash, equity or debt instruments.

**Schwarzeck**

On July 20, 2004, wecompleted our strategic acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”).  Schwarzeck was a leading provider ofphysician databases, direct marketing services and sample fulfillment servicesto pharmaceutical companies in Germany. This acquisition accelerated our expansion in Europe and extends ourinteractive marketing solutions and services to the German pharmaceuticalindustry.  In connection with theacquisition, we restructured our combined operations by eliminating certainformer Schwarzeck positions. We have preliminarily allocated the entirepurchase price to goodwill.  Schwarzeck’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition. The assets acquired andliabilities assumed in connection with the Schwarzeck acquisition, theaggregate purchase price and pro forma results of operations are not deemedmaterial to the consolidated financial statements as a whole.

**MDM**

On April 6, 2004, wecompleted our strategic acquisition of MDM. Primarily based in Warsaw, Poland, MDM was a leading provider ofphysician databases, market research and sales force support services topharmaceutical companies in Poland, Hungary, Russia and the Ukraine.  MDM’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

The aggregate purchaseprice for MDM was approximately $9,250 and consisted of approximately $5,700 incash payments, approximately $3,300 in restricted stock and approximately $250in legal and professional fees. We are in the process of finalizing athird-party valuation of certain intangible assets and therefore the purchaseprice allocation, including the net liabilities acquired,   remains preliminary and subject to adjustment.

**UtoBrain**

On January 5, 2004, wecompleted our acquisition of Uto Brain. Based in Osaka, Japan, Uto Brain provided more than thirtypharmaceutical companies with data, analytics, publishing and advisoryservices.  The combining of resources ofUto Brain with our existing resources creates a comprehensive information,software and services company dedicated to the Japanese pharmaceutical industryand further enhances our ability to provide solutions to enhance sales,marketing and clinical functions of pharmaceutical companies in the Japanesemarket.  Uto Brain’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

The aggregate purchaseprice for Uto Brain was approximately $4,800 (498,270 Yen), including approximately$100 of legal and professional fees.  Asof September 30, 2004, we paid approximately $2,300 of the purchase price withapproximately $2,400 still outstanding and included within Other AccruedExpenses on the September 30, 2004 consolidated balance sheet.  In accordance with the purchase agreement,the outstanding balance is payable as follows: approximately $1,100 by October31, 2004; approximately $400 on January 5, 2005; and $900 on March 31, 2005. Inaddition, we assumed approximately $3,800 in bank debt and an acquired loan. Weare in the process of finalizing a third-party valuation of certain intangibleassets and therefore the purchase price allocation, including the netliabilities acquired, remains preliminary and subject to adjustment.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**Synavant**

On June 16, 2003, wecompleted our acquisition of Synavant. Synavant provided a broad range ofknowledge-based services to pharmaceutical and other life science companiesaround the world. Its comprehensive global solutions included pharmaceuticalcustomer relationship management (“CRM”) applications, interactive marketing,server and database management, dedicated local help-line support, training,telemarketing, sample management and product recall services. Synavant washeadquartered in Atlanta, Georgia, and had offices in 21 countries. We believethat combining Synavant’s resources with our existing resources creates a morecomprehensive information, software and services company dedicated to theglobal life sciences industry, and further enhances our ability to providemarket leading solutions to the sales, marketing and clinical functions ofpharmaceutical and other life science companies. Synavant’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

The aggregate purchaseprice for Synavant was approximately $55,100, including consideration paid forthe common stock and approximately $3,400 of legal and professional feesincurred in connection with the transaction.

In connection with theJune 2003 acquisition of Synavant, we restructured the combined operations byexiting certain former Synavant facilities and eliminating certain formerSynavant positions.  During the firstquarter of 2004, our management increased its restructuring accrual estimate byapproximately $1,800 due to an adjustment of the total costs to exit certainformer Synavant facilities and recorded the corresponding adjustment togoodwill in the accompanying consolidated balance sheet. During the thirdquarter of 2004, the Company’s management decreased the restructuring accrualby approximately $200 due to an adjustment to the total anticipated costs toterminate certain former Synavant employees and recorded the correspondingadjustment to goodwill in the consolidated balance sheet. Management believesthe accrued liability as of September 30, 2004 will be adequate to cover thecosts incurred related to the restructuring.

The liability accrued forexpenses incurred in exiting certain Synavant facilities and includesassumptions related to sublease income which offsets future lease obligations.The underlying subleases are not in place for all facilities and the futureplacement of subleases, including the timing and terms and conditions ofsubleases, could be different than the assumptions and may impact futureresults of operations.

**RESULTSOF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2004 AND 2003**

**REVENUES**

 
| ** **                 | ** ** | **THREE MONTHS ENDED SEPTEMBER 30,** | ** ** | **$ **

**Increase /** | ** ** | **%**

**Increase /**            | ** ** | **2004% of**

**Total** | ** ** | **2003% of**

**Total** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **2004**                             | ** ** | **2003**                    | ** ** | ** (Decrease)  ** | ** ** | **(Decrease)**          | ** ** | **Revenue**             | ** ** | **Revenue** | ** ** |
| Services & Technology: |       |                                 |       |                        |       |                             |       |                    |       |                    |       |   |   |
| Sales support              |       | $                                    | 71,629     |                        | $          | 71,593                           |       | $                       | 36         |                    | 0          | % | 72 | % | 77 | % |
| Marketing support          |       | 23,834                               |       | 18,122                      |       | 5,712                            |       | 32                      | %          | 24                      | %          | 20 | % |
| Shipping                   |       | 3,965                                |       | 3,147                       |       | 818                              |       | 26                      | %          | 4                       | %          | 3 | % |
| Total Revenues             |       | $                                    | 99,428     |                        | $          | 92,862                           |       | $                       | 6,566      |                    | 7          | % | 100 | % | 100 | % |

 

Total revenues increasedby 7% for the three months ended September 30, 2004 compared with the sameperiod in 2003.   Our internationalrevenues were $40,278, or approximately 40% of total revenues in the quarter,and increased by 44% over 2003, due to a combination of factors including ourrecent acquisitions, foreign currency impact and organic growth.  Total revenues in the United States decreasedby 9% from the three months ended September 30, 2003, and were $59,150, orapproximately 60% of total revenues. This decrease in the United States was primarily due to two large clientsystem rollouts in the prior year, which did not repeat during the three monthsended September 30, 2004, and delayed decision making by clients that areengaged in complex merger, restructuring or cost containment initiatives.  As a result of our recent acquisitions, ourbusiness is now subject to a higher level of seasonal fluctuation than we haveexperienced in the past.  Specifically,our European business and interactive marketing business in the United Statesexperienced a seasonal slowdown during the summer months.

 

18

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**Sales Support**

Sales support revenues were$71,629 and accounted for approximately 72% of total revenues during the threemonths ended September 30, 2004, and were relatively flat compared with thesame period in 2003.  Sales supportservices in the United States decreased by 10%, primarily in the areas of trainingand software implementation revenues. These decreases were primarily due to two large client system rolloutsin the prior year, which did not repeat during the three months ended September30, 2004, and delayed decision making relating to several of our clients thatare engaged in complex merger, restructuring or cost containmentinitiatives.  The decrease in the UnitedStates sales support service revenues was offset by an increase in salessupport license revenue of $1,908, or 71%, to $4,604 and an increase ininternational sales support service revenues of 18% versus the three monthsended September 30, 2003.  The increasein sales support license  revenue wasprimarily related to sales of new user licenses and upgrades from our existingcustomers in our international business, while the increase in internationalsales support service revenues related primarily to increased softwareimplementation services.

**Marketing Support**

Marketing Supportrevenues were $23,834 and accounted for approximately 24% of total revenuesduring the three months ended September 30, 2004, and increased byapproximately 32% compared with the same period in 2003.  This increase was due to our internationalmarketing support business, which increased by 74% over the prior year,including 84% growth in our international interactive marketing services, 54%growth in our international consulting services, 31% growth in internationaldata revenues and the addition of contract sales services from our recentacquisition of MDM.  This internationalgrowth was primarily driven by our recent acquisitions. These increases werepartially offset by flat growth in our U.S. marketing support revenues for thethree month period ended September 30, 2004, and a greater than anticipatedseasonal slowdown.

**Shipping**

Shipping revenues accountedfor approximately 4% of total revenues during the three months ended September30, 2004, and increased by approximately 26% compared with the same period in2003.  Shipping revenues contributelittle to no margin, and increased primarily as a result of higher pass-throughshipping costs related to the growth in our international interactive marketingbusiness.

 

**OPERATING COSTS & EXPENSES**
| ** **                                 | ** ** | **THREE MONTHS ENDED SEPTEMBER 30,** | ** ** | ** $ **

** Increase /** | ** ** | **%**

**Increase /** | ** ** | **2004% of Total** | ** ** | **2003% of Total** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2004**                             | ** ** | **2003**                                | ** ** | **(Decrease)**        | ** ** | **(Decrease)**     | ** ** | **Revenue**        | ** ** | **Revenue** | ** ** |
| Operating Costs &  Expenses:           |       |                                 |       |                                    |       |                  |       |               |       |               |       |   |   |
| Operating costs (including shipping)       |       | $                                    | 51,578     |                                    | $          | 46,688                |       | $                  | 4,890      |               | 10         | % | 52 | % | 50 | % |
| Selling, general and administrative        |       | 32,832                               |       | 33,780                                  |       | (948                  | )          | -3                 | %          | 33                 | %          | 36 | % |
| Research and development                   |       | 1,673                                |       | 2,863                                   |       | (1,190                | )          | -42                | %          | 2                  | %          | 3 | % |
| Amortization of acquired intangible assets |       | 1,214                                |       | 1,251                                   |       | (37                   | )          | -3                 | %          | 1                  | %          | 1 | % |
| Other operating (income)                   |       | (368                                 | )          | -                                       |       | (368                  | )          | NM                 |       | 0                  | %          | 0 | % |
| Total costs & operating expenses       |       | $                                    | 86,929     |                                    | $          | 84,582                |       | $                  | 2,347      |               | 3          | % | 88 | % | 91 | % |
|                                            |            |                                      |            |                                         |            |                       |            |                    |            |                    |            |  |  |  |  |  |  |  |

 

***OPERATING COSTS (including shipping)***

Operating costs increased 10% for the three months ended September 30,2004 compared with the same period in 2003. This increase was due to higher costs from our current year acquisitions,higher postage costs as well as costs associated with low gross marginrevenues.  We did obtain minimal savingsrelated to our offshore initiative in excess of our significant set-up costs.

***SELLING, GENERAL AND ADMINISTRATIVE (SG&A)***

SG&A expenses decreased3% for the three months ended September 30, 2004 compared with the same periodin 2003. This decrease reflects lower bonus expense and employee benefitrelated costs, and lower severance costs related to the Synavant acquisitionpartially offset by higher costs related to the three acquisitions completedthis year.  As a percentage of revenues,SG&A decreased to 33% for the three months ended September 30, 2004, downfrom 36% compared with the same period in 2003. We have and will continue to invest in sales and marketing initiativesin order to drive our top-line growth while continuing to focus on costcontainment measures.  In addition, wewere able to minimize the cost of several facility moves around the world andrepurpose other facilities, which offset the incremental costs we incurred aswe transitioned to our new headquarters in New Jersey and a new facility in theUnited Kingdom.  We anticipate a slightincrease in SG&A during the fourth quarter of 2004 as a result of ourefforts to satisfy all SEC 404 review, testing and attestation requirementseffective for 2004.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

***RESEARCH AND DEVELOPMENT (R&D)***

R&D expensesdecreased 42% for the three months ended September 30, 2004 compared with thesame period in 2003.  As a percentage ofrevenues, R&D expenses decreased to 2% for the three months ended September30, 2004 from 3% compared with the same period in 2003, due to the costs thathave moved off-shore and a substantially higher software capitalizationrate.  The Company capitalized more costsin the three months ended September 30, 2004 than in previous quarters due tothe development for the release of its next generation CRM solution, expectedto be released in 2005.  We expect ourcapitalization rates for the remainder of 2004 to be higher than our prior year’scapitalization rates.

***OTHEROPERATING (INCOME)***

We received insuranceproceeds related to the recovery of costs of certain previous losses in thethree month period ended September 30, 2004.

***PROVISION FOR INCOME TAXES***

Our income tax expenserate decreased to 38.5% for the three months ended September 30, 2004 from 40%compared with the same period in 2003. The primary driver for the change in theeffective tax rate was the consolidation of certain international legalentities.  Prior to operationalrestructuring and legal entity integration, these international legal entitiesgenerated losses that could not be benefited. As a result of the integration, the amount of losses generated that cannot be benefited has been significantly reduced.

**NINEMONTHS ENDED SEPTEMBER 30, 2004 AND 2003**

**REVENUES**

 
| ** **                 | ** ** | **NINE MONTHS ENDED SEPTEMBER 30,** | ** ** | ** $**

** Increase /** | ** ** | **%**

**Increase /** | ** ** | **2004% of**

**Total** | ** ** | **2003% of**

**Total** | ** ** |
|----------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **2004**                            | ** ** | **2003**                          | ** ** | **(Decrease)**        | ** ** | **(Decrease)**          | ** ** | **Revenue**             | ** ** | **Revenue** | ** ** |
| Services & Technology: |       |                                |       |                              |       |                  |       |                    |       |                    |       |   |   |
| Sales support              |       | $                                   | 214,673    |                              | $          | 187,723               |       | $                       | 26,950     |                    | 14         | % | 73 | % | 85 | % |
| Marketing support          |       | 67,847                              |       | 30,280                            |       | 37,567                |       | 124                     | %          | 23                      | %          | 14 | % |
| Shipping                   |       | 11,879                              |       | 4,097                             |       | 7,782                 |       | 190                     | %          | 4                       | %          | 2 | % |
| Total Revenues             |       | $                                   | 294,399    |                              | $          | 222,100               |       | $                       | 72,299     |                    | 33         | % | 100 | % | 100 | % |

 

Total revenues increasedby 33% for the nine months ended September 30, 2004 compared with the sameperiod in 2003.   Our international revenueswere $113,615, or approximately 40% of total revenues in the nine months endedSeptember 30, 2004 versus $57,365 or 26% of total revenue in the 2003 period,and increased by 98% versus the nine months ended September 30, 2003.  Total revenues in the United States were $180,784or approximately 60% of total revenues and increased by 10% from the ninemonths ended September 30, 2003.  Theincrease in revenues is primarily due to a full nine month period of revenuesin 2004 compared with the revenues from the June 16, 2003 acquisition ofSynavant as well as revenues from the current year acquisitions of Uto Brain,MDM and Schwarzeck.

**Sales Support**

Sales Support revenues were$214,673 and accounted for approximately 73% of total revenues during the ninemonths ended September 30, 2004, and increased by 14% and compared with thesame period in 2003.  Sales supportlicense revenue increased by $2,370, or 30%, to 10,381 over the prior year, dueto a higher level of international licensing activity.  Sales support services in the United Statesincreased by approximately 1%, and included an increase in our ongoing supportservices with off-setting decreases in one-time services related to clientsoftware roll-outs.  International salessupport service revenues increased by 57% versus the nine months endedSeptember 30, 2003, primarily due to our recent acquisitions.

**Marketing Support**

Marketing Supportrevenues were $67,847 and accounted for approximately 23% of total revenuesduring the nine months ended September 30, 2004, and increased by approximately124% compared with the same period in 2003. The total growth in our worldwide marketing support revenues wasprimarily driven by our 2004 and 2003 acquisitions. Our international marketingsupport business increased by more than 225% over the prior year, includingalmost 300% growth in our international interactive marketing services, 69%growth in our international consulting services, 200% growth in internationaldata revenues and the addition of contract sales services from our acquisitionof MDM.  In the United States, marketingsupport revenues increased by 62% compared with the nine months ended September30, 2003.  This increase in the UnitedStates was comprised of greater than 100% growth in our interactive marketingservices, 25% growth in our clinical services, 69% growth in our consultingservices and 30% growth in domestic data revenues.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**Shipping**

Shipping revenuesaccounted for approximately 4% of total revenues during the nine months endedSeptember 30, 2004, and increased approximately 190% compared with the sameperiod in 2003.  Shipping revenuescontribute little to no margin, and result from pass-through shipping costsassociated with our international interactive marketing business.  The interactive marketing business wasoriginated in connection with our June 2003 acquisition of Synavant, and hasbeen further expanded through our other recent acquisitions.

 

**OPERATING COSTS AND EXPENSES.**

 

 
| ** **                                 | ** ** | ** ** | ** ** | **NINE MONTHS ENDED**

**SEPTEMBER 30,** | ** ** | **$**

**Increase /** | ** ** | **%**

**Increase /** | ** ** | **2004% of Total** | ** ** | **2003% of Total** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **2004**                                 | ** ** | **2003**              | ** ** | **(Decrease)**        | ** ** | **(Decrease)**     | ** ** | **Revenue**        | ** ** | **Revenue** | ** ** |
| Operating costs (including shipping)       |       | $          | 151,807    |                                     | $          | 110,839               |       | $                     | 40,968     |               | 37         | %                  | 52         | % | 50 | % |
| Selling, general and administrative        |       | 98,923     |       | 74,535                                   |       | 24,388                |       | 33                    | %          | 34                 | %          | 34                 | %          |
| Research and development                   |       | 7,417      |       | 8,775                                    |       | (1,358                | )          | -15                   | %          | 3                  | %          | 4                  | %          |
| Amortization of acquired intangible assets |       | 3,467      |       | 2,168                                    |       | 1,299                 |       | 60                    | %          | 1                  | %          | 1                  | %          |
| Other operating (income)                   |       | (707       | )          | -                                        |       | (707                  | )          | NM                    |       | 0                  | %          | 0                  | %          |
| Total costs & operating expenses       |       | $          | 260,907    |                                     | $          | 196,317               |       | 64,590                |       | 33                 | %          | 89                 | %          | 88 | % |
|                                            |            |            |            |                                          |            |                       |            |                       |            |                    |            |                    |            |  |  |  |  |  |  |  |

 

***OPERATING COST (including Shipping)***

Operating costs increased37% for the nine months ended September 30, 2004 compared with the same periodin 2003.  The primary driver of theincrease was our acquisition of Synavant. In addition, we had additional costs associated with the recentacquisitions of Uto Brain, MDM and Schwarzeck, the ongoing implementation ofour offshore initiative and increased pass-through postage costs for the ninemonths ended September 30, 2004, compared with the same period in 2003.

***SELLING, GENERAL AND ADMINISTRATIVE (SG&A)***

SG&A expensesincreased 33% for the nine months ended September 30, 2004, compared with thesame period in 2003. This increase reflects the additional costs related to ourrecent acquisitions, primarily Synavant. As a percentage of revenues, SG&A was flat at 34% for the ninemonths ended September 30, 2004, compared with the same period in 2003.  We have and will continue to invest in salesand marketing initiatives in order to drive our top-line growth whilecontinuing to focus on cost containment measures.

***RESEARCH AND DEVELOPMENT (R&D)***

R&D expensesdecreased 15% for the nine months ended September 30, 2004 compared with thesame period in 2003. As a percentage of revenues, R&D expenses decreased to3% for the nine months ended September 30, 2004, from 4% compared with the sameperiod in 2003. This decrease was due to the expansion of revenue in marketingsupport areas, which is not dependent on R&D spending, as well as a highersoftware capitalization rate.  Inaddition, we capitalized more costs in the nine months ended September 30, 2004than in comparable prior periods due to the development for the release of our nextgeneration CRM solution, expected to be released in 2005.

***AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS***

Amortization of acquiredintangible assets increased 60% compared with the same period in 2003.  The increase reflects a full year ofamortization of assets acquired in connection with our June 2003 Synavantacquisition and the current years amortization of assets acquired in connectionwith our Uto Brain and MDM acquisitions.

***OTHER OPERATING (INCOME)***

We received insuranceproceeds related to the recovery of costs of certain previous losses in thenine month period ended  September 30,2004.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

***PROVISION FOR INCOME TAXES***

*** ***Our effective income tax expense ratedecreased to 38.5% for the nine months ended September 30, 2004 from 42.3%compared with the same period in 2003. The primary driver for the change in theeffective tax rate was the consolidation of certain international legalentities.  Prior to operationalrestructuring and legal entity integration, these international legal entitiesgenerated losses that could not be benefited. As a result of the integration, the amount of losses generated that cannot be benefited has been significantly reduced.  In connection with the Synavant integration inJune 2003, we determined which foreign entities would be dissolved and performeda reforecast of projected taxable income by jurisdiction and recognized a fullvaluation allowance on a net operating loss carryforward for one of its foreignsubsidiaries of approximately $608.

**LIQUIDITYAND CAPITAL RESOURCES**

At September 30, 2004, workingcapital was $51,204 compared to $48,698 as of December 31, 2003. Cash and cashequivalents were $46,134 as of September 30, 2004, compared to $30,405 as ofDecember 31, 2003. These increases were primarily attributable to the cashgenerated by operating activities partially offset by payments made inconnection with our recent 2004 and 2003 acquisitions as well as higher capitalexpenditures related to our new corporate headquarters.

We finance our businessprimarily through cash generated by operations. Net cash provided by operatingactivities was $36,874 and $12,906 for the nine month periods ended September30, 2004 and 2003, respectively.  Thisincrease was primarily related to actions taken in the prior period tosignificantly reduce the liabilities assumed in connection with the acquisitionof Synavant.  Payments of these assumedliabilities were $22,866 in the nine months ended September 30, 2003.  We also generated operating cash from ourconsiderable growth in net income adjusted for changes in assets andliabilities, net of effects from acquisitions for the nine months endedSeptember 30, 2004 compared with the same prior period.  These increases in operating cash flow werepartially offset by lower accounts receivable collections for the nine monthsended September 30, 2004 compared with the same prior period.  Our accounts receivable days salesoutstanding increased slightly to 63 days for the quarter ended September 30,2004 from 62 days as of September 30, 2003.

Cash used in investingactivities was $24,320 for the nine months ended September 30, 2004, andincludes payments for the MDM, Uto Brain and Schwarzeck acquisitions as well asincreased purchases of property and equipment due to the ongoing relocation ofour corporate headquarters offset by proceeds from the sale leaseback offurniture and equipment in the three months ended September 30, 2004.  Cash used in investing activities was $59,317for the nine months ended September 30, 2003, and was primarily attributable tothe payments made related to the Synavant acquisition.

As anticipated, purchasesof property and equipment increased for the nine months ended September 30,2004 versus the comparable prior year period. The increase is primarily due tothe capital requirements of the new corporate headquarters and the need toadjust going-forward capital requirements for a larger combined Companyreflecting the acquisition of Synavant. We expect capital spending in the rangeof approximately $3,000 to $5,000 to support the infrastructure expansion aswell as capital expenditures for our new corporate headquarters relocation forthe remainder of 2004. We review our capital expenditure program periodicallyand adjust it as required to meet current needs. An agreement to sell thefacility in Piscataway, New Jersey, was terminated during the quarter endedJune 30, 2004.  During the three monthsended September 30, 2004, we decided to move our New Jersey hardware servicesto this facility. Accordingly, the $6,900 carrying value, which approximatesthe fair market value of the facility, has been reclassified to property andequipment in the consolidated balance sheet as of September 30, 2004.

Cash provided byfinancing activities was $3,023 for the nine months ended September 30, 2004,compared to $3,989 for the nine months ended September 30, 2003. The decreaseof $966 was primarily attributable to the repayments of long-term debt andloans acquired in connection with the Uto Brain acquisition partially offset byan increase in proceeds from stock option exercises.

 

We regularly evaluate opportunities to acquireproducts or businesses complementary to our operations. Such acquisitionopportunities, if they arise and are successfully completed, may involve theuse of cash, equity or debt instruments. We believe that available funds,anticipated cash flows from operations and the availability of our revolvingline of credit will satisfy our current projected working capital and capitalexpenditure requirements, exclusive of cash required for possible futureacquisitions of businesses, products and technologies, during the next twelveto eighteen months. There can be no assurance, however, that our business willcontinue to generate cash flow at current levels or that anticipatedoperational improvements will be achieved. Our ability to generate future cashflows depends on our future performance and financial results, which, to acertain extent, are subject to general conditions in or affecting thepharmaceutical industry and to general economic, political, financial,competitive and regulatory factors beyond our control.

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**Contractual Obligations andCommitments**

 

We entered into a credit agreement (the “Agreement”)as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank thatexpires on July 1, 2005. The Agreement is available to finance working capitalneeds and possible future acquisitions. Among other covenants, the agreementrequires us to maintain a minimum consolidated net worth, measured quarterly,which is equal to $130,000, plus 50% of net income earned after April 1, 2003and 75% of the net proceeds of any offering of new equity interests issuedsubsequent to June 30, 2003. As of September 30, 2004, our consolidated networth was $208,387.  The Agreementcontains certain restrictions on our ability to create or assume liens, disposeof assets, consolidate or merge, extend credit, incur other indebtedness or paycash dividends. On September 24, 2004, we entered into an amendment to theAgreement that relaxed certain covenants relating to acquisitions, dispositionsof our assets, indebtedness of our foreign subsidiaries, real estate andcapital expenditures in connection with our move to the new corporateheadquarters facility. As of September 30, 2004, there were no borrowingsoutstanding under the Agreement and we were in compliance with all covenants.

 

In connection with the Uto Brain acquisition, weassumed bank debt of approximately $3,200, with a weighted-average interestrate of 2.10% and acquired a loan of approximately $600, with an interest rateof 1.80%.  As of September 30, 2004,approximately $1,500 of the bank debt related to this transaction wasoutstanding.

 

Our principal commitments at September 30, 2004consisted primarily of obligations under operating and capital leases as wellas future minimum guarantees to certain vendors. Future minimum payments onthese obligations are as follows:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** |
| Capital leases              |       | $                          | 4,294      |   | $ | 273 |   | $ | 1,543 |   | $ | 1,293 |   | $ | 1,185 |   | $ | - |   | $ | - |   |
| Corporate headquarters      |       | 1,834                      |       | 1,834 |   | - |   | - |   | - |   | - |   | - |   |
| Minimum guarantees          |       | 1,079                      |       | 582 |   | 497 |   | - |   | - |   | - |   | - |   |
| Uto Brain purchase price    |       | 2,423                      |       | 1,077 |   | 1,346 |   | - |   | - |   | - |   | - |   |
| Long-term debt              |       | 1,598                      |       | 111 |   | 417 |   | 303 |   | 269 |   | 104 |   | 394 |   |
| Operating leases(1)         |       | 98,387                     |       | 4,174 |   | 15,846 |   | 12,981 |   | 11,838 |   | 9,621 |   | 43,927 |   |
| Total                       |       | $                          | 109,615    |   | $ | 8,051 |   | $ | 19,649 |   | $ | 14,577 |   | $ | 13,292  |   | $ | 9,725 |   | $ | 44,321 |   |

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(1) Operating lease amounts disclosed above include $14,183 of futureoperating lease costs, excluding estimated future sublease income, accrued forin the purchase accounting restructuring accruals related to the Synavant andSAI acquisitions.

As of September 30, 2004,letters-of-credit for approximately $5,721 were outstanding.

We have an agreement witha venture capital fund with a commitment to contribute $1,000 to the fund,callable at the discretion of the general partner in $100 increments. As ofSeptember 30, 2004, $600 of the commitment remains. The agreement has atermination date of December 11, 2010, subject to extension with the consent ofa majority in interest of the limited partners. This asset is recorded withinOther Assets in the accompanying September 30, 2004 and December 31, 2003consolidated balance sheets.

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

### **FACTORSTHAT MAY AFFECT FUTURE RESULTS**

Set forth in this Form10-Q are certain risks and uncertainties that could cause our actual results todiffer materially from the forward-looking statements contained in this Form10-Q. You are strongly urged to carefully consider the cautionary language andrisks set forth below.

**WEDEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES**

Historically, a limitednumber of our customers have contributed a significant percentage of ourrevenues. We anticipate that our operating results in any given period willcontinue to depend significantly upon revenues from a small number ofcustomers. The loss of any of these customers (which could include loss throughmergers and acquisitions) could have a materially adverse effect on ourbusiness, operating results or financial condition. We cannot make anyassurances that we will retain our existing customers or attract new customersthat would replace the revenue that could be lost if one or more of thesecustomers failed to renew its agreement(s) with us.

**OURBUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY**

Many of our solutions arecurrently used in connection with the marketing and sale of prescription-onlydrugs. This market is undergoing a number of significant changes. Theseinclude:

•      the significant and continuing consolidation of thepharmaceutical industry which may reduce the number of our existing andpotential customers;

•      regulatory changes that permit the over-the-countersale of formerly prescription-only drugs;

•U.S. andinternational governmental regulations mandating price controls;

•      increasing Food and Drug Administration activism; and

•      competitive pressure on the pharmaceutical industryresulting from the continuing shift to delivery of healthcare andpharmaceuticals through managed care organizations.

We cannot assure you thatwe can respond effectively to any or all of these and other changes in themarketplace. Our failure to do so could have a material adverse effect on ourbusiness, operating results or financial condition, as our business depends, inlarge part, on the business conditions within this marketplace.

**OURCUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS**

Our customers oftenimplement our products in stages and our products are often utilized by a largenumber of our customers’ personnel. In the event that our customers havedifficulties implementing our products and services or are not satisfied withour products and services, our business, operating results and financialcondition could be materially and adversely affected.

**WE FACERISKS ASSOCIATED WITH OUR ACQUISITIONS**

Our business may bematerially and adversely affected as a result of the significant risksassociated with our acquisitions, including our recent acquisitions of Synavant,SAI, Uto Brain, the MDM group of companies and Schwarzeck. As part of ourbusiness strategy, we have acquired, and in the future may acquire, businessesthat offer complementary products, services or technologies. These acquisitionsare accompanied by substantial risks, including:

• unexpected problems, liabilities, risksor costs associated with the acquired business;

• the effect of the acquisitions on ourfinancial and strategic position;

• our inability to successfully integratethe acquired business;

• the failure of an acquired business tofurther our strategies;

• our inability to achieve expected costand business synergies;

• the significant strain on our operatingsystems;

• the diversion of our management’sattention from other business concerns;

• the impairment or loss of relationshipswith customers of the acquired business;

• the negative impact of the combinationof different corporate cultures;

• the loss of key employees of theacquired company; and

• the integration and maintenance ofuniform, company-wide standards, procedures and policies.

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

Any of these factorscould have a material adverse effect on our revenues and earnings. We expectthat the consideration paid for future acquisitions, if any, could be in theform of cash, equity, debt or a combination of these. To the extent that weissue shares of stock or other rights to purchase stock in connection with anyfuture acquisition, existing shareholders will experience dilution andpotentially decreased earnings per share.

While to date we have hadsuccess integrating acquired entities into our operations, we cannot guaranteethat we will successfully integrate these new businesses into our operations orachieve any expected cost synergies.

We may in the futureacquire additional complementary companies, products or technologies. If we doso, we may face the same risks, uncertainties and disruptions discussed above.In addition, our profitability may suffer because of acquisition-related costsor amortization costs for acquired intangible assets.

 

**BUSINESSAND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE IN DEMANDFOR OUR NEW PRODUCTS AND SERVICES**

 

Business and economic pressures on our major customersmay result in budget constraints that directly impact their ability to purchaseour new products and services offerings. We cannot assure you that any decreasein demand caused by these pressures will not have a material adverse effect onour business, operating results or financial condition.

 

**OURLENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OURQUARTERLY REVENUES**

 

The selection of a CRM or SFA solution generallyentails an extended decision-making process by our customers because of thestrategic implications, substantial costs and significant commitment ofresources associated with a customer’s license or implementation of the solution.Given the importance of the decision, senior levels of management of ourcustomers are often involved in the process and, in some instances, their boardof directors may also be involved. As a result, the decision-making processtypically takes nine to eighteen months, and in certain cases longer.Accordingly, we cannot fully control or predict the timing of our execution ofcontracts with customers. Prior sales and implementation cycles can not berelied upon as any indication of future cycles.

 

In addition, an implementation process of three to sixor more months before the software is rolled out to a customer’s sales force iscustomary. However, if a customer were to delay or extend its implementationprocess, our quarterly revenues may decline below expected levels and couldadversely affect our results of operations.

 

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE**

 

Our total revenue and operating results may varysignificantly from quarter to quarter. The main factors that could cause thesefluctuations are:

 

• the discretionary nature of ourcustomers’ purchase and budget cycles;

• potential delays in recognizing revenuefrom license and other transactions;

• seasonal variations in operatingresults, including the increased seasonality associated with our internationalgrowth; and

• variations in the fiscal or quarterlycycles of our customers.

 

In addition, we establish our expenditure levels forproduct development, sales and marketing and some of our other operatingexpenses based in large part on our expected future revenues and anticipatedcompetitive conditions. In particular, we frequently add staff in advance ofnew business to permit adequate time for training. If the new business issubsequently delayed, canceled or not awarded, we will have incurred expenseswithout the associated revenues. We also may increase sales and marketingexpenses if competitive pressures become greater than originally anticipated.Since only a small portion of our expenses varies directly with our actualrevenues, our operating results and profitability are likely to be adverselyand disproportionately affected if our revenues fall below our targeted goalsor expectations.

 

As a result of these and other factors, revenues forany quarter may be subject to fluctuation. You should not rely on ourperiod-to-period comparisons of our results of operations as indications offuture performance. Our future quarterly results may from time to time not meetthe expectations of market analysts or investors, which could have a materiallyadverse effect on the price of our common stock.

 

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**WE MAYBE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICALCHANGE**

 

The market for CRM and SFA products changes rapidlybecause 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 developnew products and services and to enhance our current products and services;

•      introduce new solutions that keep pace withdevelopments in our target markets; and

•      address the changing and increasingly sophisticatedneeds of our customers.

 

We cannot assure you that we will successfully developand market new products or product enhancements that respond to technologicaladvances in the marketplace, or that we will do so in a timely fashion. We alsocannot assure you that our products will adequately and competitively addressthe needs of the changing marketplace.

 

Competition for software products has beencharacterized by shortening product cycles. We may be materially and adverselyaffected by this trend if the product cycles for our products prove to beshorter than we anticipate. If that happens, our business, operating results orfinancial condition could be adversely affected.

 

To remain competitive, we also may have to spend moreof our revenues on product research and development than we have in the past.As a result, our results of operations could be materially and adverselyaffected.

 

**SOFTWAREERRORS OR DEFECTS COULD AFFECT OUR REVENUES**

Our software products aretechnologically complex and may contain previously undetected errors orfailures or errors when products are first introduced or when updated versionsare released. We cannot assure you that, despite our testing, our new productswill be free from significant errors. Software errors could cause delays in thecommercial release of products until the errors have been corrected. Softwareerrors may cause us to be in breach of our agreements with customers, whichcould result in termination of the agreements and monetary damages. Software errorsmay cause damage to our reputation and cause us to commit significant resourcesto their correction. Errors that result in termination of agreements, monetarydamages, losses or delays could have a material adverse effect on our business,operating results or financial condition.

**INCREASEDCOMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OURPRODUCTS AND SERVICES SOLUTIONS**

There are a number ofother companies that sell CRM and SFA products and related services thatspecifically target the pharmaceutical industry, including competitors that areactively selling CRM and SFA software products in more than one country andcompetitors that also offer CRM and SFA support services. Some of ourcompetitors and potential competitors are part of large corporate groups andhave significantly greater financial, sales, marketing, technology and otherresources than we have.

While we believe that theCRM and SFA software products and/or services offered by most of ourcompetitors do not address the variety of pharmaceutical customer needs thatour solutions address, increased competition may require us to reduce theprices for our products and services. Increased competition may also result indecreased demand for our products and services.

 

We believe our ability to compete depends on manyfactors, some of which are beyond our control, including:

 

•      the number and success of new market entrantssupplying competing CRM and SFA products or support services;

•      alliances among existing competitors;

•      technological changes or changes in the our customers’use of the Internet;

•      expansion of product lines by, or consolidation among,our existing competitors; and

•      development and/or operation of in-house CRM or SFAsoftware products or services by our customers and potential customers.

 

Any one of these factors can lead to price reductionsand/or decreased demand and we cannot assure you that we will be able tocontinue to compete successfully or that competition will not have a materialadverse effect on our business, operating results or financial condition.

 

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**WE MAYNOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTS ANDSERVICES MARKET NOR CAN WE PROVIDE ASSURANCES THAT THE DEMAND FORINTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE**

 

The success of parts of our business will depend, inpart, on our ability to continue developing Internet-related products,modifying and improving our existing products and responding to technologicaladvances and changing commercial uses of the Internet. We cannot assure youthat our Internet-related products and services will adequately respond to suchtechnological advances and changing uses. Nor can we assure you that the demandfor our Internet-related products and services will increase.

 

Commercial use of the Internet raises potentialproblems with security, privacy, reliability, accessibility, quality of serviceand government regulation. These issues, if unresolved, may affect the use ofour Internet-related products. If these potential problems arise, our business,financial condition or results of operations could be materially and adverselyaffected.

 

**OURINTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT**

 

We have expanded and may in the future expand ourinternational operations and enter additional international markets. Thisexpansion would require significant management attention and financialresources that could adversely affect operating margins and earnings. We maynot be able to maintain or increase international market demand for ourproducts and services. If we do not, our international sales will be limitedand our business, financial condition or results of operations could bematerially and adversely affected.

 

The sale of our products and services in foreigncountries accounts for, and is expected in the future to account for, amaterial part of our revenues. These sales are subject to risks inherent ininternational business activities, including:

 

•      any adverse change in the political stability oreconomic environments in these countries or regions;

•      any adverse change in tax, tariff and trade or otherregulations;

•      the absence or significant lack of legal protectionfor intellectual property rights;

•      exposure to exchange rate risk for service revenuesand expenses which are denominated in currencies other than U.S. dollars; and

•      difficulties in managing an organization spread overvarious jurisdictions.

 

Any of the above risks could have a significant impacton our ability to deliver products on a competitive and timely basis, whichcould materially and adversely affect our financial condition or operatingresults.

Since we have operationsin a number of countries and our service agreements in such countries aredenominated in foreign currencies, we face exposure to adverse movements inforeign currency exchange rates.  As currencyrates change, translation of the income statements of our internationalentities from local currencies to U.S. dollars affects period-over-periodcomparability of operating results. Historically we have not hedged thesetranslation risks because we generally reinvest our cash flows frominternational operations, however, we continue to evaluate foreign currencytranslation risk exposure.  As wecontinue to grow our business, the risks associated with foreign currencytranslation will also grow.

 

**ANINABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS**

To manage our growtheffectively we must continue to strengthen our operational, financial andmanagement information systems; ensure that we have the appropriateinfrastructure in place; 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 socould have a material adverse effect upon our business, operating results orfinancial condition.

 

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**CATASTROPHICEVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE**

The efficient operationof our business, and ultimately our operating performance, depends on theuninterrupted use of our critical business and information technology systems.Many of these systems require the use of specialized hardware and otherequipment that is not readily available in the marketplace. Although wemaintain these systems at more than one location, a natural disaster, a fire orother catastrophic event at any of these locations could result in thedestruction of these systems. In such an event, the replacement of thesesystems and restoration of archived data and normal operation of our businesscould take several days to several weeks, or more. During the interveningperiod when our critical business and information technology systems are fullyor partially inoperable, our ability to conduct normal business operationscould be significantly and adversely impacted and as a result our business,operating results and financial condition could be adversely affected.

**OURSUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON ATTRACTINGAND RETAINING QUALIFIED PERSONNEL**

Our future successdepends, to a significant extent, upon the contributions of our executiveofficers and key sales, technical and customer service personnel.

Our future success alsodepends on our continuing ability to attract and retain highly qualifiedtechnical and managerial personnel. Due to competition for such personnel, wehave at times experienced difficulties in recruiting and retaining qualifiedpersonnel and we may experience such difficulties in the future. Our ability toexpand and increase revenue growth in the future will depend, in part, on oursuccess in recruiting and training such qualified personnel. We may not alwaysbe able to expand our personnel in these areas as necessary to support ouroperations. Any recruiting or retention difficulties could adversely affect ourbusiness, operating results or financial condition.

**OURBUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECTCOMPLETELY**

We rely on a combinationof trade secret, copyright and trademark laws, non-disclosure, license andother contractual agreements and technical measures to protect our proprietaryrights. We cannot assure you that the steps we take will preventmisappropriation of these rights. Further, protective actions we have taken orwill take in the future may not prevent competitors from developing productswith features similar to our products. In addition, effective copyright andtrade secret protection may be unavailable or limited in certain foreign countries.In response to customer requests, we have also on occasion entered intoagreements which require us to place our source code in escrow to secure ourservice and maintenance obligations.

Further, while we believethat our products and trademarks do not infringe upon the proprietary rights ofany third parties, third parties may assert infringement claims against us inthe future that may result in costly litigation, diversion of management’sattention, the imposition of monetary 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.

**IF OURTHIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLY RESPOND TO TECHNOLOGICAL CHANGEOR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITH THIRD- PARTY VENDORS,INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTS MAY RESULT**

Some of our software isprovided by third-party vendors. If our third-party vendors are unable tosuccessfully respond to technological change or if our relationships withcertain third-party vendors are terminated, we may experience difficulty inreplacing the functionality provided by the third-party software currentlyoffered with our products. Although we believe there are other sources for allof our third-party software, any significant interruption in the supply ofthese products could adversely impact our sales unless and until we can secureanother source. The absence of or any significant delay in the replacement offunctionality provided by third-party software in our products could materiallyand adversely affect our sales.

**THERESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BELESS FAVORABLE THAN ANTICIPATED**

We are involved in anumber of strategic relationships with third parties and are frequentlypursuing others. Should these relationships, or any of them, prove to be morecostly than anticipated or fail to meet revenue expectations or otheranticipated synergies, we cannot guarantee that such events will not have amaterial impact upon our business, operating results or financial condition.

 

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**OUR DATASOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED,COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS**

Our data and analyticssolutions are sourced, in part, from data provided through strategicrelationships. Although we believe there are other sources for such data, thetermination of any of these relationships could diminish the breadth or depthof our data. This termination or our failure to establish new strategicrelationships in the future could negatively impact our business, operatingresults or financial condition.

**FEDERALAND STATE LAWS AND REGULATIONS COULD DEPRESS THE DEMAND FOR SOME OF OURSOLUTIONS**

While we believe our dataand analytics solutions are not in violation of current federal or state lawsand regulations pertaining to patient privacy or health information, includingthe Health Insurance Portability and Accountability Act of 1996 (HIPAA), wecannot guarantee that future laws or regulations or interpretations of existinglaws and statutes will not impact negatively upon our ability to market thesesolutions or cause a decrease in demand for such solutions from customers thatsee an increased risk in any such new laws or regulations.

**GOVERNMENTALREGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTECONTROLLED SUBSTANCES THROUGH THE MAIL**

Through the interactivemarketing business we acquired in the Synavant acquisition, we may distributecontrolled substances to doctors’ offices through the mail as part of certaininteractive marketing programs provided on behalf of pharmaceuticalmanufacturers. It is important to the business that this practice ofdistributing prescription-only drugs continues. Future legislation may restrictour ability to provide these types of services. If any such legislation isenacted, it could have a material and adverse effect on our business, operatingresults and financial condition.

**DIFFICULTIESIN SUBLEASING OR OTHERWISE DISPOSING OF CERTAIN OF OUR FACILITIES MAYNEGATIVELY IMPACT UPON OUR EARNINGS**

We expect to sublease allor a portion of certain facilities, including facilities acquired as part ofthe Synavant acquisition.  An inabilityto successfully dispose of or sublet, as applicable, any of these facilities orto obtain favorable pricing or sublease terms could negatively impact ourearnings.

**UNANTICIPATEDCHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BYACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ONOUR FINANCIAL STATEMENTS**

In reporting ourfinancial results we rely upon the accounting policies and standards then ineffect at the time of our report. Future regulations, standards orinterpretations may require us to adjust or restate financial resultspreviously reported. A required restatement could have a material impact uponpast financial results or current comparison to previous results.

**WE MAYFACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY**

World events such asterrorist attacks, the current U.S. military action in the Middle East andelsewhere, and hostilities in the Middle East, Asia and other geographicalareas, have and may in the future weaken the U.S. and world economies.  Any resultant weaknesses in these economiesmay adversely affect our business, financial condition or results of operationsor the businesses of our customers.

**WE FACERISKS IN CONNECTION WITH IMPLEMENTING THE REQUIREMENTS OF SECTION 404 OF THESARBANES OXLEY ACT**

Weare in the process of evaluating our internal controls systems in order toallow management to report on, and our registered independent public accountingfirm to attest to, our internal controls, as required by Section 404 of theSarbanes-Oxley Act. We are performing the system and process evaluation andtesting required in an effort to comply with the management certification andauditor attestation requirements of Section 404. While we currently believe wewill be able to satisfactorily implement the requirements relating to internalcontrols of Section 404 in a timely fashion, we cannot be certain as to thetiming of completion of our evaluation, testing and remediation actions or theimpact of the same on our operations or the results of the required testing andrequired attestation report by us and also by our registered independent publicaccounting firm.  If we are unable toimplement the requirements of Section 404 in a timely manner or with adequatecompliance, we may be subject to sanctions or investigation by regulatoryauthorities, such as the Securities and Exchange Commission or NASDAQ.  Any such actions could have a materialadverse affect our financial results and the price of our common stock.

 

 

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**($ IN THOUSANDS)**

 

**PROVISIONSOF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OFDENDRITE**

Provisions of ourRestated Certificate of Incorporation, as amended, our By-laws, as amended, andNew Jersey law may make it more difficult for a third-party to acquire us. Forexample, the Board of Directors may, without the consent of the stockholders,issue preferred stock with rights senior to those of the common stock. Inaddition, we have a Shareholder Rights Plan which may limit the ability of athird-party to attempt a hostile acquisition of the Company.

 

**OURCOMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS**

 

The market price of our common stock may be significantlyaffected by the following factors:

 

•      the announcement or the introduction of new productsand services by us or our competitors;

•      quarter-to-quarter variations in our operating resultsor changes in revenue or earnings estimates or failure to meet or exceedrevenue or earnings estimates;

•      market conditions in the technology, healthcare andother growth sectors;

•      general consolidation in the healthcare informationindustry which may result in the market perceiving us or other comparablecompanies as potential acquisition targets;

•      the gain or loss of significant orders;

•      changes in the domestic and international economic,political and business conditions; and

•      future acquisitions.

 

Further, the stock market has experienced on occasionextreme price and volume fluctuations. The market prices of the equitysecurities of many technology companies have been especially volatile and oftenhave been unrelated to the operating performance of such companies. These broadmarket fluctuations may have a material adverse effect on the market price ofour common stock.

 

**ITEM 4.  Controls and Procedures**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer, with the assistance of other members of the Company’smanagement, have evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this Form10-Q.  Based on such evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures are effective.

 

The Company’s Chief Executive Officer and ChiefFinancial Officer have also concluded that there have been no changes in theCompany’s internal control over financial reporting during the quarter endedSeptember 30, 2004 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

 

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**PARTII.  OTHER INFORMATION**

 

**ITEM6.**** ****Exhibits**

 

10.31          New Hire Option Grant Authorization — Updated Appendix

 

10.41          Form of Indemnification Agreement

 

31.1                Certification of John E. Bailye, Chairman of the Boardand Chief Executive Officer of the Company, pursuant to Securities Exchange ActRule 13a-14(a).

 

31.2                Certification of Kathleen E. Donovan, Senior VicePresident and Chief Financial Officer of the Company, pursuant to SecuritiesExchange Act Rule 13a-14(a).

 

32                         Certifications Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, signed by John E. Bailye, Chairman of the Board and Chief ExecutiveOfficer of the Company, and Kathleen E. Donovan, Senior Vice President andChief Financial Officer of the Company.

 

 

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Signatures

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

Date: November 8, 2004

 

 
|   | By:    | /s/ John E. Bailye                                                               |
|--------|--------|----------------------------------------------------------------------------------|
|   |   | John E. Bailye,                                                                  |
|   |   | Chairman of the Board and Chief Executive Officer (Principal  Executive Officer) |
|   |   |                                                                             |
|   | By:    | /s/ Kathleen E. Donovan                                                          |
|   |   | Kathleen E. Donovan,                                                             |
|   |   | Senior Vice President and Chief Financial Officer (Principal  Financial Officer) |

 

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                               |
| 10.31      |       | New Hire Option Grant Authorization — Updated  Appendix.                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                               |
| 10.41      |       | Form of Indemnification Agreement                                                                                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                               |
| 31.1       |       | Certification of John E. Bailye, Chairman of the  Board and Chief Executive Officer of the Company, pursuant to Securities  Exchange Act Rule 13a-14(a).                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                               |
| 31.2       |       | Certification of Kathleen E. Donovan, Senior Vice  President and Chief Financial Officer of the Company, pursuant to Securities  Exchange Act Rule 13a-14(a).                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                               |
| 32         |       | Certifications Pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed  by John E. Bailye, Chairman of the Board and Chief Executive Officer of the  Company and Kathleen E. Donovan, Senior Vice President and Chief Financial  Officer of the Company. |

 

 

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