**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**Form 10-Q**

 

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

 

**For thequarterly period ended June 30, 2005**

 

**For thetransition period from          to          **

 

**CommissionFile Number   001-16379**

 

**Dendrite International, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **New  Jersey**                                                  | ** ** | **22-2786386**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **1405 U.S.  Highway 206**                                       |
| **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 theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.ý yes o no

 

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

 

As of August 2, 2005, 42,662,633 shares ofDendrite International, Inc. no par value common stock were outstanding.

 

 

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**DENDRITEINTERNATIONAL, INC.**

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

**FOR THEQUARTER ENDED JUNE 30, 2005**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                 |   |
|-------------------|------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                       |   |
| **ITEM 1.**       | Financial Statements                                                                                       |   |
|              |                                                                                                       |   |
|              | Consolidated Statements of  Operations (unaudited)  Three and six months ended June 30, 2005 and 2004 |   |
|              |                                                                                                       |   |
|              | Consolidated Balance Sheets  (unaudited)  June 30, 2005 and December 31, 2004                    |   |
|              |                                                                                                       |   |
|              | Consolidated Statements of  Cash Flows (unaudited)  Six months ended June 30, 2005 and 2004           |   |
|              |                                                                                                       |   |
|              | 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 4.**       | Submission of  Matters to a Vote of Security Holders                                                       |   |
|              |                                                                                                       |   |
| **ITEM 6.**       | Exhibits                                                                                                   |   |
|              |                                                                                                       |   |
| **Signatures**    |                                                                                                       |   |

 

2

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PART I.     FINANCIALINFORMATION

 

ITEM1.     Financial Statements

 

**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(UNAUDITED)**

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **JUNE 30,**           | ** ** | **JUNE 30,**         | ** ** |
| ** **                                 | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                   |       | $                      | 115,066    |                 | $          | 99,907 |   | $ | 214,513 |   | $ | 194,971 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Operating Costs & Expenses:       |       |                   |       |                 |       |   |   |   |   |
| Operating costs                            |       | 58,829                 |       | 50,422               |       | 112,480 |   | 100,229 |   |
| Selling, general and administrative        |       | 34,075                 |       | 33,934               |       | 69,863 |   | 66,091 |   |
| Research and development                   |       | 1,454                  |       | 2,722                |       | 3,272 |   | 5,744 |   |
| Facility and other charges                 |       | —                 |       | —               |       | 9,372 |   | — |   |
| Amortization of acquired intangible assets |       | 1,130                  |       | 1,226                |       | 2,380 |   | 2,253 |   |
| Other operating (income)                   |       | —                 |       | —               |       | — |   | (339 | ) |
| Total operating costs & expenses  |       | 95,488                 |       | 88,304               |       | 197,367 |   | 173,978 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Operating income                           |       | 19,578                 |       | 11,603               |       | 17,146 |   | 20,993 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Interest (income) expense, net             |       | (24                    | )          | 4                    |       | (165 | ) | (3 | ) |
| Other expense (income), net                |       | 20                     |       | (18                  | )          | (3 | ) | (61 | ) |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Income before income tax expense           |       | 19,582                 |       | 11,617               |       | 17,314 |   | 21,057 |   |
| Income tax expense                         |       | 7,539                  |       | 4,331                |       | 6,666 |   | 8,107 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Net income                                 |       | $                      | 12,043     |                 | $          | 7,286 |   | $ | 10,648 |   | $ | 12,950 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Net income per share:                      |       |                   |       |                 |       |   |   |   |   |
| Basic                                      |       | $                      | 0.28       |                 | $          | 0.18 |   | $ | 0.25 |   | $ | 0.31 |   |
| Diluted                                    |       | $                      | 0.28       |                 | $          | 0.17 |   | $ | 0.24 |   | $ | 0.30 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

3

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**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE DATA)**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **Assets**                                                                                                                                                                                                         |       |
| Current Assets:                                                                                                                                                                                                    |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | $                 | 56,138     |                  | $          | 64,020 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,174 and $2,034, respectively                                                                                                                    |       | 80,239            |       | 71,653                |       |
| Prepaid expenses and other current assets                                                                                                                                                                          |       | 5,822             |       | 6,935                 |       |
| Deferred income taxes                                                                                                                                                                                              |       | 5,535             |       | 5,029                 |       |
| Total current assets                                                                                                                                                                                               |       | 147,734           |       | 147,637               |       |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| Property and equipment, net of accumulated  depreciation of $54,304 and $56,499, respectively                                                                                                                      |       | 55,719            |       | 45,283                |       |
| Other assets                                                                                                                                                                                                       |       | 8,542             |       | 7,922                 |       |
| Goodwill                                                                                                                                                                                                           |       | 83,430            |       | 80,963                |       |
| Intangible assets, net                                                                                                                                                                                             |       | 22,363            |       | 19,876                |       |
| Purchased capitalized software, net                                                                                                                                                                                |       | 751               |       | 1,056                 |       |
| Capitalized software development costs, net                                                                                                                                                                        |       | 9,851             |       | 9,170                 |       |
| Deferred income taxes                                                                                                                                                                                              |       | 12,351            |       | 9,873                 |       |
|                                                                                                                                                                                                               |       | $                 | 340,741    |                  | $          | 321,780 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                      |       |
| Current Liabilities:                                                                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                   |       | $                 | 10,215     |                  | $          | 8,171 |   |
| Income taxes payable                                                                                                                                                                                               |       | 13,508            |       | 12,013                |       |
| Capital lease obligations                                                                                                                                                                                          |       | 1,616             |       | 1,689                 |       |
| Accrued compensation and benefits                                                                                                                                                                                  |       | 15,497            |       | 16,058                |       |
| Accrued professional and consulting fees                                                                                                                                                                           |       | 5,958             |       | 7,413                 |       |
| Accrued facility and other charges                                                                                                                                                                                 |       | 2,653             |       | —                |       |
| Other accrued expenses                                                                                                                                                                                             |       | 18,337            |       | 19,284                |       |
| Purchase accounting restructuring accrual                                                                                                                                                                          |       | 2,262             |       | 3,000                 |       |
| Deferred revenues                                                                                                                                                                                                  |       | 13,921            |       | 13,347                |       |
| Total current liabilities                                                                                                                                                                                          |       | 83,967            |       | 80,975                |       |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| Capital lease obligations                                                                                                                                                                                          |       | 2,217             |       | 3,036                 |       |
| Purchase accounting restructuring accrual                                                                                                                                                                          |       | 3,437             |       | 4,143                 |       |
| Accrued facility and other charges                                                                                                                                                                                 |       | 4,668             |       | —                |       |
| Deferred rent                                                                                                                                                                                                      |       | 2,371             |       | 2,070                 |       |
| Other non-current liabilities                                                                                                                                                                                      |       | 3,784             |       | 3,967                 |       |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                         |       |              |       |                  |       |
| Preferred stock, no par value, 15,000,000  shares authorized, none issued                                                                                                                                          |       | —            |       | —                |       |
| Common stock, no par value, 150,000,000  shares authorized, 45,171,795 and 44,913,584 shares issued; 42,633,047 and  42,374,836 shares outstanding at June 30, 2005 and December 31,  2004, respectively |       | 128,304           |       | 125,237               |       |
| Retained earnings                                                                                                                                                                                                  |       | 138,149           |       | 127,501               |       |
| Deferred compensation                                                                                                                                                                                              |       | (168              | )          | (123                  | )          |
| Accumulated other comprehensive income                                                                                                                                                                             |       | 277               |       | 1,239                 |       |
| Less treasury stock, at cost                                                                                                                                                                                       |       | (26,265           | )          | (26,265               | )          |
|                                                                                                                                                                                                               |       |              |       |                  |       |
| Total stockholders’ equity                                                                                                                                                                                    |       | 240,297           |       | 227,589               |       |
|                                                                                                                                                                                                               |       | $                 | 340,741    |                  | $          | 321,780 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

4

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**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Operating activities:                                                              |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 10,648     |   | $ | 12,950 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                      |       | 11,135                             |       | 10,446 |   |
| Write-off of property and equipment                                                |       | 1,030                              |       | — |   |
| Amortization of deferred compensation, net  of forfeitures                         |       | 34                                 |       | 115 |   |
| Deferred income tax benefit                                                        |       | (2,905                             | )          | — |   |
| Other adjustments for non-cash items                                               |       | —                             |       | 901 |   |
| Changes in assets and liabilities, net of  effects from acquisitions:              |       |                               |       |   |   |
| (Increase) decrease in accounts receivable                                         |       | (7,247                             | )          | 9,780 |   |
| Decrease in prepaid expenses and other  current assets                             |       | 1,027                              |       | 870 |   |
| (Increase) decrease in other assets                                                |       | (804                               | )          | 693 |   |
| Decrease in accounts payable and accrued  expenses                                 |       | (212                               | )          | (3,576 | ) |
| Increase in accrued facility and other  charges                                    |       | 7,339                              |       | — |   |
| Decrease in purchase accounting  restructuring accrual                             |       | (1,630                             | )          | (4,278 | ) |
| Increase in income taxes payable                                                   |       | 2,045                              |       | 675 |   |
| Increase (decrease) in deferred revenue                                            |       | 716                                |       | (3,787 | ) |
| (Decrease) increase in other non-current  liabilities                              |       | (182                               | )          | 114 |   |
|                                                                               |       |                               |       |   |   |
| Net cash provided by operating activities                                          |       | 20,994                             |       | 24,903 |   |
|                                                                               |       |                               |       |   |   |
| Investing activities:                                                              |       |                               |       |   |   |
| Acquisitions, net of cash acquired                                                 |       | (10,172                            | )          | (6,812 | ) |
| Purchases of property and equipment                                                |       | (17,753                            | )          | (8,615 | ) |
| Additions to capitalized software  development costs                               |       | (2,439                             | )          | (2,074 | ) |
|                                                                               |       |                               |       |   |   |
| Net cash used in investing activities                                              |       | (30,364                            | )          | (17,501 | ) |
|                                                                               |       |                               |       |   |   |
| Financing activities:                                                              |       |                               |       |   |   |
| Repayments of long-term debt                                                       |       | —                             |       | (1,689 | ) |
| Repayments of acquired loan                                                        |       | —                             |       | (624 | ) |
| Payments on capital lease obligations                                              |       | (890                               | )          | (592 | ) |
| Issuance of common stock                                                           |       | 2,527                              |       | 5,580 |   |
|                                                                               |       |                               |       |   |   |
| Net cash provided by financing activities                                          |       | 1,637                              |       | 2,675 |   |
|                                                                               |       |                               |       |   |   |
| Effect of foreign exchange rate changes on  cash                                   |       | (149                               | )          | 168 |   |
|                                                                               |       |                               |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (7,882                             | )          | 10,245 |   |
| Cash and cash equivalents, beginning of  year                                      |       | 64,020                             |       | 30,405 |   |
|                                                                               |       |                               |       |   |   |
| Cash and cash equivalents, end of period                                           |       | $                                  | 56,138     |   | $ | 40,650 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

 

5

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.  Basis ofPresentation**

 

The consolidated financial statements of DendriteInternational, Inc. and its subsidiaries (“Dendrite” or the “Company”)included in this Form 10-Q are unaudited and reflect all adjustments(consisting of normal recurring adjustments) which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position as of June 30,2005, operating results for the three and six months ended June 30, 2005and 2004 and cash flows for the six months ended June 30, 2005 and 2004.  For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004.

 

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

 

***Reclassifications.*******Certain prior period balances have beenreclassified to conform to current period presentation. The Company has alsomade an immaterial adjustment to the prior year classification of current and non-currentpurchase accounting restructuring accruals.

 

**2. Supplemental Cash Flow Information**

 

During the six months ended June 30,2005, the Company acquired $1,100 of property and equipment which was includedin other accrued expenses on the accompanying consolidated balance sheet as of June 30,2005 and is therefore excluded from the consolidated statement of cash flowsfor the six months ended June 30, 2005.

 

**3. Recent Accounting Pronouncements**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as a replacement toSFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Thisstatement supersedes Accounting Principles Board (“APB”) 25, “Accounting forStock Issued to Employees,” which allowed companies to use the intrinsic methodof valuing share-based payment transactions and amends SFAS No. 95, “Statementof Cash Flows.” SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on the fair-value method as defined in SFAS 123.SFAS 123(R) provides two alternatives for adoption: (1) a “modifiedprospective” method in which compensation cost is recognized for all awards grantedsubsequent to the effective date of this statement as well as for the unvestedportion of awards outstanding as of the effective date; or (2) a “modifiedretrospective” method which follows the approach of the “modified prospective”method, but also permits entities to restate prior periods to recordcompensation cost calculated under SFAS 123 for the pro forma disclosure. TheCompany plans to adopt SFAS 123(R) using the modified prospective method.In addition, SFAS 123(R) also requires that tax benefits received inexcess of compensation cost be reclassified from operating cash flows tofinancing cash flows in the consolidated statement of cash flows. The adoptionof FAS 123(R)’s fair value method is expected to have a significant impacton the Company’s consolidated results of operations, though it will have noimpact on the Company’s overall financial position. However, had the Companyadopted SFAS 123(R) in prior periods, the impact of the standard wouldhave approximated the impact of SFAS 123 as described in the disclosure ofpro forma net income and net income per share in Note 4 to ourconsolidated financial statements.

 

In April 2005, the Securities and ExchangeCommission issued Release No. 33-8568, Amendment to Rule 4-01(a) ofRegulation S-X Regarding the Compliance Date for Statement of Financial AccountingStandards No. 123 (Revised 2004), “Share-Based Payment,” which allowscompanies to continue to follow SFAS 123 throughout 2005 and implement SFAS123(R) beginning January 1, 2006, which the Company expects to follow.

 

**4.  Stock BasedCompensation**

 

The Company has adopted the disclosure requirementsof SFAS 123 as amended by SFAS 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” The Company applies APB 25 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 options at thedate of grant, which represents the difference between the exercise price andthe fair value of the Company’s stock. The exercise price of all stock optionsgranted equaled the fair value of the Company’s stock at the date of optiongrant and accordingly, 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

 

6

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 

SFAS 123, the Company’s net income andnet income per share would have been adjusted to the following pro formaamounts:

 

| ** **                                                                                                                                        | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                        | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                            |       | $                        | 12,043     |                    | $          | 7,286 |   | $ | 10,648 |   | $ | 12,950 |   |
|                                                                                                                                              |       |                     |       |                    |       |   |   |   |   |
| Add: Deferred compensation amortization, net  of forfeitures recognized in accordance with APB 25, net of related tax  effects                    |       | 12                       |       | 6                       |       | 21 |   | 71 |   |
|                                                                                                                                              |       |                     |       |                    |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |       | (4,230                   | )          | (3,847                  | )          | (7,733 | ) | (7,648 | ) |
|                                                                                                                                              |       |                     |       |                    |       |   |   |   |   |
| Pro forma net income                                                                                                                              |       | $                        | 7,825      |                    | $          | 3,445 |   | $ | 2,936 |   | $ | 5,373 |   |
|                                                                                                                                              |       |                     |       |                    |       |   |   |   |   |
| Basic income per share:                                                                                                                           |       |                     |       |                    |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                        | 0.28       |                    | $          | 0.18 |   | $ | 0.25 |   | $ | 0.31 |   |
| Pro forma                                                                                                                                         |       | $                        | 0.18       |                    | $          | 0.08 |   | $ | 0.07 |   | $ | 0.13 |   |
| Diluted income per share:                                                                                                                         |       |                     |       |                    |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                        | 0.28       |                    | $          | 0.17 |   | $ | 0.24 |   | $ | 0.30 |   |
| Pro forma                                                                                                                                         |       | $                        | 0.18       |                    | $          | 0.08 |   | $ | 0.07 |   | $ | 0.13 |   |

 

The fair value for these options were estimated atthe date of grant using the Black-Scholes option pricing model with thefollowing assumptions:

 

| ** **                                        | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                                        | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected dividend yield                           |       | 0.0                      | %          | 0.0                     | %          | 0.0 | % | 0.0 | % |
| Weighted-average expected stock price  volatility |       | 50.0                     | %          | 70.0                    | %          | 50.0 | % | 70.0 | % |
| Weighted-average risk-free interest rate          |       | 3.9                      | %          | 3.5                     | %          | 3.9 | % | 3.1 | % |
| 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 above is determined based upon the number and fair valueof options granted and an estimate of forfeitures. The expense is recognizedover the vesting period of the options. Under SFAS 123, compensationexpense is not recognized for options that are forfeited due to the employee’sfailure to fulfill service requirements. Therefore, while the fair value peroption is not recalculated, the number of options vesting would change, thusrequiring recalculation of the aggregate compensation expense.

 

**5.  Net Income PerShare**

 

The following table presents the computation ofbasic and diluted net income per share for the three and six months ended June 30,2005 and 2004:

 

7

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 
| ** **                                 | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                 | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic net income per share computation:    |       |                           |       |                         |       |   |   |   |   |
| Net income                                 |       | $                              | 12,043     |                         | $          | 7,286 |   | $ | 10,648 |   | $ | 12,950 |   |
| Weighted-average common shares outstanding |       | 42,592                         |       | 41,464                       |       | 42,531 |   | 41,192 |   |
| Basic net income per share                 |       | $                              | 0.28       |                         | $          | 0.18 |   | $ | 0.25 |   | $ | 0.31 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Diluted net income per share computation:  |       |                           |       |                         |       |   |   |   |   |
| Net income                                 |       | $                              | 12,043     |                         | $          | 7,286 |   | $ | 10,648 |   | $ | 12,950 |   |
| Diluted common shares outstanding:         |       |                           |       |                         |       |   |   |   |   |
| Weighted-average common shares outstanding |       | 42,592                         |       | 41,464                       |       | 42,531 |   | 41,192 |   |
| Impact of dilutive stock options           |       | 1,038                          |       | 1,878                        |       | 1,156 |   | 1,749 |   |
| Diluted common shares outstanding          |       | 43,630                         |       | 43,342                       |       | 43,687 |   | 42,941 |   |
| Diluted net income per share               |       | $                              | 0.28       |                         | $          | 0.17 |   | $ | 0.24 |   | $ | 0.30 |   |

 

**6. Comprehensive Income**

 

The components of comprehensive income for the threeand six months ended June 30, 2005 and 2004 consisted of the following:

 

| ** **                               | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                               | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                               |       | $                        | 12,043     |                    | $          | 7,286 |   | $ | 10,648 |   | $ | 12,950 |   |
| Other comprehensive (loss) income:       |       |                     |       |                    |       |   |   |   |   |
| Foreign currency translation adjustments |       | (848                     | )          | (256                    | )          | (962 | ) | 198 |   |
| Comprehensive income                     |       | $                        | 11,195     |                    | $          | 7,030 |   | $ | 9,686 |   | $ | 13,148 |   |

 

**7. Acquisition**

 

***Buzzeo***

 

On January 4, 2005, the Company completed the strategicacquisition of BuzzeoPMDA, Inc. (“Buzzeo”). Based in Richmond, Virginia,Buzzeo provides compliance, auditing, consulting and reconciliation outsourcingservices to the pharmaceutical and life sciences industry. This acquisitionfurther expands the Company’s sample and compliance management solutionofferings. In connection with the acquisition, the Company restructured thecombined operations by eliminating certain former Buzzeo positions. The Companyaccrued $200 at January 4, 2005 for liabilities associated with the costof completing the restructuring plan (see Note 8). Buzzeo’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

 

The aggregate purchase price for Buzzeo wasapproximately $10,988, including $33 of legal and professional fees. Approximately$590 of the purchase price was included in other accrued expenses in theconsolidated balance sheet as of June 30, 2005 and $1,025 of the purchaseprice was held in escrow as of June 30, 2005.  In accordance with the purchase agreement,the $1,025 held in escrow, less amounts claimed against escrow, if any, ispayable on January 4, 2006. The Company is in the process of finalizing thevaluation of certain intangible assets, including the review of a third-partyvaluation. Therefore, the allocation of purchase price is preliminary andsubject to adjustment. The assets acquired and liabilities assumed inconnection with the Buzzeo acquisition and pro forma results of operations arenot deemed material to the consolidated financial statements.

 

The preliminary allocation of purchase price,including the net assets acquired of approximately $3,400, to intangible assets

 

8

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 

and goodwill acquired in connection with theBuzzeo acquisition is as follows:

 

| ** **                                       | ** ** | **Weighted-Average** | ** ** | ** **              | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                       | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets Subject to Amortization:       |       |                 |       |                    |       |
| Customer relationship asset                      |       | 10                   |       | $                       | 4,390      |   |
| Trademark                                        |       | 7                    |       | 290                     |       |
| Other                                            |       | 0.25                 |       | 70                      |       |
| Total Intangible Assets Subject to  Amortization |       |                 |       | 4,750                   |       |
|                                             |       |                 |       |                    |       |
| Intangible Assets Not Subject to  Amortization:  |       |                 |       |                    |       |
| Goodwill                                         |       | N/A                  |       | 2,777                   |       |
| Total Intangible Assets                          |       |                 |       | $                       | 7,527      |   |

 

The goodwill and intangible assets recorded forfinancial statement purposes are deductible for tax purposes.

 

**8.  PurchaseAccounting Restructuring Accrual**

 

In connection with the June 2003 acquisition ofSynavant Inc. (“Synavant”), the Company restructured the combined operations byexiting certain former Synavant facilities and eliminating certain formerSynavant positions. The Company anticipates that the remaining accruedrestructuring balance related to the facility exit costs will be paid over thelife of the facility leases, ending in February 2012. The liability accruedfor expenses to be 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 utilized.

 

In connection with the acquisition of SoftwareAssociates International (“SAI”), the Company developed an exit plan to close thefacility in Mt. Arlington, New Jersey, and relocate the operations to theCompany’s other facilities in New Jersey. The Company accrued, as part of theacquisition costs, the costs to terminate certain leases amounting to $3,252. TheCompany closed the facility during the first quarter of 2003.

 

In connection with the July 2004 and January 2005acquisitions of Schwarzeck-Verlag GmbH (“Schwarzeck”) and Buzzeo, the Companyrestructured the combined operations by eliminating certain former positions.The Company accrued approximately $300 and $200 to complete the Schwarzeck andBuzzeo restructuring plans, respectively.

 

The activity related to the purchase accountingrestructuring accrual for the six months ended June 30, 2005 is summarizedin the table below:

 

9

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 
| ** **                        | ** ** | **Purchase**               | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **Purchase**           | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|------------------------|------------|
| ** **                        | ** ** | **Accounting**             | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **Accounting**         | ** ** |
| ** **                        | ** ** | **Restructuring**          | ** ** | ** **      | ** ** | ** **   | ** ** | **Currency**    | ** ** | **Restructuring**      | ** ** |
| ** **                        | ** ** | **Accrual as of**          | ** ** | **2005**        | ** ** | **2005**     | ** ** | **Translation** | ** ** | **Accrual as of**      | ** ** |
| ** **                        | ** ** | **December 31, 2004** | ** ** | **Adjustments** | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **June 30, 2005** | ** ** |
| Synavant                          |       |                       |       |            |       |         |       |            |       |                   |       |
| Termination payments to employees |       | $                          | 23         |            | $          | —       |       | $               | (23        | )                      | $          | — |   | $ | — |   |
| Facility exit costs               |       | 5,926                      |       | —          |       | (965         | )          | —          |       | 4,961                  |       |
| Total Synavant                    |       | 5,949                      |       | —          |       | (988         | )          | —          |       | 4,961                  |       |
|                              |       |                       |       |            |       |         |       |            |       |                   |       |
| SAI                               |       |                       |       |            |       |         |       |            |       |                   |       |
| Lease termination costs           |       | 947                        |       | —          |       | (412         | )          | —          |       | 535                    |       |
|                              |       |                       |       |            |       |         |       |            |       |                   |       |
| Schwarzeck                        |       |                       |       |            |       |         |       |            |       |                   |       |
| Termination payments to employees |       | 247                        |       | —          |       | (228         | )          | (12             | )          | 7                      |       |
|                              |       |                       |       |            |       |         |       |            |       |                   |       |
| Buzzeo                            |       |                       |       |            |       |         |       |            |       |                   |       |
| Termination payments to employees |       | —                     |       | 200             |       | (4           | )          | —          |       | 196                    |       |
|                              |       |                       |       |            |       |         |       |            |       |                   |       |
| Total                             |       | $                          | 7,143      |            | $          | 200          |       | $               | (1,632     | )                      | $          | (12 | ) | $ | 5,699 |   |
|                                   |            |                            |            |                 |            |              |            |                 |            |                        |            |  |  |  |  |  |  |

 

**9.  Goodwill andIntangible Assets**

 

The total gross carrying amount and accumulatedamortization for goodwill and intangible assets are as follows:

 
| ** **                                      | ** ** | **As of June 30, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | ** **                   | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**                    | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible Assets Subject To Amortization:      |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Purchased capitalized software                  |       | $                            | 2,441      |                             | $          | (1,690 | ) | $ | 751 |   | $ | 2,441 |   | $ | (1,385 | ) | $ | 1,056 |   |
| Capitalized software development costs          |       | 29,046                       |       | (19,195                          | )          | 9,851 |   | 26,607 |   | (17,437 | ) | 9,170 |   |
| Customer relationship assets                    |       | 13,903                       |       | (2,930                           | )          | 10,973 |   | 9,595 |   | (2,222 | ) | 7,373 |   |
| Backlog                                         |       | 2,400                        |       | (2,357                           | )          | 43 |   | 2,400 |   | (2,313 | ) | 87 |   |
| Non-compete covenants                           |       | 3,727                        |       | (3,318                           | )          | 409 |   | 3,768 |   | (2,678 | ) | 1,090 |   |
| Purchased database                              |       | 5,163                        |       | (1,535                           | )          | 3,628 |   | 5,221 |   | (979 | ) | 4,242 |   |
| Trademarks                                      |       | 441                          |       | (43                              | )          | 398 |   | 151 |   | (15 | ) | 136 |   |
| Other intangibles                               |       | 482                          |       | (302                             | )          | 180 |   | 413 |   | (197 | ) | 216 |   |
| Total                                           |       | 57,603                       |       | (31,370                          | )          | 26,233 |   | 50,596 |   | (27,226 | ) | 23,370 |   |
|                                            |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Intangible Assets Not Subject to  Amortization: |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | 83,430                       |       | —                           |       | 83,430 |   | 80,963 |   | — |   | 80,963 |   |
| Trademarks                                      |       | 6,732                        |       | —                           |       | 6,732 |   | 6,732 |   | — |   | 6,732 |   |
| Total                                           |       | 90,162                       |       | —                           |       | 90,162 |   | 87,695 |   | — |   | 87,695 |   |
|                                            |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Total Goodwill and Intangible Assets            |       | $                            | 147,765    |                             | $          | (31,370 | ) | $ | 116,395 |   | $ | 138,291 |   | $ | (27,226 | ) | $ | 111,065 |   |

 

The changes in the carrying amount of intangibleassets not subject to amortization for the six months ended June 30, 2005 isas follows:

 

| ** ** | ** ** | ** **                 | ** ** | **Acquisitions /** | ** ** | ** **      | ** ** | ** **             | ** ** |
|------------|------------|----------------------------|------------|--------------------|------------|-----------------|------------|------------------------|------------|
| ** ** | ** ** | ** **                 | ** ** | **Purchase**       | ** ** | **Currency**    | ** ** | ** **             | ** ** |
| ** ** | ** ** | **Balance as of**          | ** ** | **Accounting**     | ** ** | **Translation** | ** ** | **Balance as of**      | ** ** |
| ** ** | ** ** | **December 31, 2004** | ** ** | **Adjustments**    | ** ** | **Adjustments** | ** ** | **June 30, 2005** | ** ** |
| Goodwill   |       | $                          | 80,963     |               | $          | 2,652           |       | $                      | (185       | ) | $ | 83,430 |   |
| Trademarks |       | 6,732                      |       | —             |       | —          |       | 6,732                  |       |
| Total      |       | $                          | 87,695     |               | $          | 2,652           |       | $                      | (185       | ) | $ | 90,162 |   |

 

10

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 

The Company conducts its annual impairment testingof goodwill as of October 1 each year. During the six months ended June 30,2005, there were no changes in events or circumstances that would indicateimpairment.

 

The following table reconciles net intangible assetssubject to amortization for the period from December 31, 2004 to June 30,2005:

 
| ** **                             | ** ** | **Net Intangibles**        | ** ** | **2005 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **as of**                  | ** ** | ** **                     | ** ** | ** **          | ** ** | **Translation** | ** ** | **as of** | ** ** |
| ** **                             | ** ** | **December 31, 2004** | ** ** | **Additions**                  | ** ** | **Amortization**    | ** ** | **and Other** | ** ** | **June 30, 2005** | ** ** |
| Purchased capitalized software         |       | $                          | 1,056      |                           | $          | —              |       | $ | (305 | ) | $ | — |   | $ | 751 |   |
| Capitalized software development costs |       | 9,170                      |       | 2,439                          |       | (1,758              | )          | — |   | 9,851 |   |
| Customer relationship assets           |       | 7,373                      |       | 4,390                          |       | (708                | )          | (82 | ) | 10,973 |   |
| Backlog                                |       | 87                         |       | —                         |       | (44                 | )          | — |   | 43 |   |
| Non-compete covenants                  |       | 1,090                      |       | —                         |       | (640                | )          | (41 | ) | 409 |   |
| Purchased database                     |       | 4,242                      |       | —                         |       | (556                | )          | (58 | ) | 3,628 |   |
| Trademarks                             |       | 136                        |       | 290                            |       | (28                 | )          | — |   | 398 |   |
| Other intangibles                      |       | 216                        |       | 70                             |       | (105                | )          | (1 | ) | 180 |   |
| Total                                  |       | $                          | 23,370     |                           | $          | 7,189               |       | $ | (4,144 | ) | $ | (182 | ) | $ | 26,233 |   |
|                                        |            |                            |            |                                |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense related to intangible assets,including internally developed capitalized software costs, for the three monthperiods ended June 30, 2005 and 2004 was $2,104 and $2,094, respectively.Amortization expense related tointangible assets, including internally developed capitalized software costs,for the six month periods ended June 30, 2005 and 2004 was $4,144 and $3,802,respectively. Aggregate annual amortization expense of intangible assets(exclusive of future additions) is estimated to be:

 

| Year Ending December 31,                                           |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|
| 2005                                                                    |   | $      | 7,887  |   |
| 2006                                                                    |   | 7,303  |   |
| 2007                                                                    |   | 5,056  |   |
| 2008                                                                    |   | 2,464  |   |
| 2009                                                                    |   | 1,513  |   |
| 2010                                                                    |   | 1,357  |   |
| Thereafter                                                              |   | 4,797  |   |
|                                                                    |   | 30,377 |   |
| Less: 2005 year-to-date amortization  expense                           |   | (4,144 | )      |
| Net intangible assets subject to  amortization as of June 30, 2005 |   | $      | 26,233 |   |

 

**10. Accrued Facility and Other Charges**

 

During the period ended March 31, 2005,the Company initiated and completed a plan to exit a facility in New Jersey forwhich it has an operating lease expiring in September 2011.  The accrued facility charge relates tovacating this New Jersey facility and for additional facilities vacated andaccrued for in previous periods, for which the Company has operating leasesexpiring through February 2012, due to changes in current marketconditions. The Company accrued for the present value of these costs,net of estimated future sublease income.  The Company also accrued for severance chargesrelated to the elimination ofcertain senior and mid-level management positions. These charges are includedwithin Accrued Facility and Other Charges on the consolidated balancesheet as of June 30, 2005, and within Facility and Other Charges on theconsolidated statement of operations during the six months ended June 30,2005.

 

The activity related to Accrued Facility and OtherCharges for the six months ended June 30, 2005 is summarized in the tablebelow:

 

11

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 
| ** **          | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **   | ** ** | ** **      | ** ** | **Accrued Facility**   | ** ** |
|---------------------|------------|----------------------------|------------|-------------------|------------|--------------|------------|-----------------|------------|------------------------|------------|
| ** **          | ** ** | **Accrued Facility and**   | ** ** | **2005 Facility** | ** ** | ** **   | ** ** | **Currency**    | ** ** | **and Other**          | ** ** |
| ** **          | ** ** | **Other Charges as of**    | ** ** | **and Other**     | ** ** | **2005**     | ** ** | **Translation** | ** ** | **Charges as of**      | ** ** |
| ** **          | ** ** | **December 31, 2004** | ** ** | **Charges**       | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **June 30, 2005** | ** ** |
| Facility exit costs |       | $                          | —     |              | $          | 6,619        |       | $               | (385       | )                      | $          | — |   | $ | 6,234 |   |
| Severance           |       | —                     |       | 1,723             |       | (618         | )          | (18             | )          | 1,087                  |       |
|                |       | $                          | —     |              | $          | 8,342        |       | $               | (1,003     | )                      | $          | (18 | ) | $ | 7,321 |   |

 

In connection with the plan initiated andcompleted during the six months ended June 30, 2005, the Company alsowrote-off $1,030 of leasehold improvements included within Facility and OtherCharges in the consolidated statement of operations for the six months ended June 30,2005.

 

**11. Line-of-Credit**

 

The June 16, 2003 line-of-creditagreement with JPMorgan Chase, amended September 24, 2004, expired on July 1,2005.  As of June 30, 2005, the Company’sconsolidated net worth was $240,297, the Company was in compliance with allcovenants and did not have any amounts outstanding under the line-of-credit. Refer to Note 14 for the discussion ofsubsequent events associated with the Company’s line-of-credit.

 

As of June 30, 2005, the Company hadoutstanding letters-of-credit of approximately $5,721.

 

**12. Income Taxes**

 

The Company’s effective income tax expense rate was38.5% for the six months ended June 30, 2005 and 2004. The Company’seffective income tax expense rate increased to 38.5% for the three months endedJune 30, 2005, from approximately 37.3% for the three months ended June 30,2004. The reason for the increase in the effective income tax expense rate wasthe year-to-date adjustment to reduce the effective income tax expense rate to38.5% during the three months ended June 30, 2004 due to the consolidationof certain international legal entities. Prior to operational restructuring andlegal entity integration, these international legal entities generated lossesthat could not be benefited.  As a resultof the integration, the amount of losses generated that can not be benefitedhas been reduced.

 

**13. Enterprise-Wide Data**

 

Information about Major Customers:

 

For the three month period ended June 30, 2005,the Company derived approximately 24% and 11% of it revenues from its twolargest customers. For the three month period ended June 30, 2004, theCompany derived approximately 27% of its revenues from its largest customer.  For the six month periods ended June 30,2005 and 2004, the Company derived approximately 25% and 27% of its revenuesfrom its largest customer, respectively. As of June 30, 2005 and December 31,2004, approximately 17% and 18% of the Company’s accounts receivable balancewas due from its largest customer, respectively. Other than what has beenpresented above, no individual customer represented 10% or more of our totalconsolidated revenues or accounts receivable for or as of the periodspresented.  

 

Information about Products and Services:

 

Due to the growth in the Company’s strategicproduct and service offerings, largely built through recent acquisitions, theCompany has expanded its revenue categories into sales solutions, marketing solutionsand shipping. These categories are reflective of how service offerings aremarketed to and viewed by customers. They are not reflective of the way thebusiness is managed. Company operating costs are not broken out for thesecategories on a global basis, as they are not viewed as necessary to themanagement of the business globally. Based upon all of these factors, whilethese categories are useful in understanding the Company’s operating results,the Company has only one reportable segment for disclosure purposes under SFAS131, “Disclosure About Segments of an Enterprise and Related Information.” Thefollowing is a summary of our revenue categories:

 

*Sales solutions*revenue includes product and sales support services which are used by, orprovided to, the sales forces of our customers.

 

*Marketing solutions*revenue includes our product and service offerings that are not directly gearedtoward the client sales force and primarily consists of offerings acquired inour business combinations over the past few years. The primary components ofmarketing solutions revenue include interactive marketing, data, consulting,clinical, and field inventory and reconciliation services.

 

12

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**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PERSHARE DATA)**

 

*Shipping* revenuesare disclosed separately as they are pass-through costs that bear little to nomargin, and are required to be included in revenues and costs based uponEmerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping andHandling Fees and Costs.” These billable shipping transactions are primarilyrelated to our interactive marketing activities.

 

The following table presents revenues bycategory for the three and six month periods ended June 30, 2005 and 2004.

 

| ** **                      | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|---------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                      | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Services & Technology: |       |                     |       |                    |       |   |   |   |   |
| Sales solutions                 |       | $                        | 83,036     |                    | $          | 72,633 |   | $ | 153,213 |   | $ | 143,044 |   |
| Marketing solutions             |       | 27,094                   |       | 23,212                  |       | 51,705 |   | 44,013 |   |
| Shipping                        |       | 4,936                    |       | 4,062                   |       | 9,595 |   | 7,914 |   |
|                            |       | $                        | 115,066    |                    | $          | 99,907 |   | $ | 214,513 |   | $ | 194,971 |   |
|                                 |            |                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

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. The following table presents revenues bygeographic area for the three and six months ended June 30, 2005 and 2004.

 

| ** **    | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|---------------|------------|--------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **    | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                        | 73,680     |                    | $          | 61,852 |   | $ | 133,127 |   | $ | 124,318 |   |
| Europe        |       | 27,397                   |       | 24,281                  |       | 55,339 |   | 44,876 |   |
| All other     |       | 13,989                   |       | 13,774                  |       | 26,047 |   | 25,777 |   |
|          |       | $                        | 115,066    |                    | $          | 99,907 |   | $ | 214,513 |   | $ | 194,971 |   |

 

The table above allocates license revenues on alegal basis. On a legal basis, license revenues have been allocated using thegeographic location where the intellectual property is owned.

 

The following table presents long-livedassets by geographic area:

 

| ** **    | ** ** | ** **        | ** ** | **As of**             | ** ** |
|---------------|------------|-------------------|------------|-----------------------|------------|
| ** **    | ** ** | **As of**         | ** ** | **December 31,** | ** ** |
| ** **    | ** ** | **June 30, 2005** | ** ** | **2004**              | ** ** |
| United States |       | $                 | 159,433    |                  | $          | 144,233 |   |
| Europe        |       | 10,274            |       | 9,614                 |       |
| All other     |       | 10,949            |       | 10,423                |       |
|          |       | $                 | 180,656    |                  | $          | 164,270 |   |

 

**14. Subsequent Events**

 

On July 25, 2005, the Company enteredinto a replacement line-of-credit agreement (the “Agreement”), in the amount of$30,000 with JPMorgan Chase Bank that expires on June 30, 2008. TheAgreement is available to finance working capital needs and possible futureacquisitions. The Agreement contains customary affirmative and negativecovenants and also contains certain financial covenants, including thoserelated to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) aminimum interest coverage ratio at the end of any fiscal quarter and (c) aminimum fixed charge coverage ratio at the end of any fiscal quarter. TheAgreement also restricts the Company’s ability to create or assume liens,dispose of assets, consolidate or merge, extend credit, incur otherindebtedness or pay cash dividends.

 

13

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**ITEM 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ INTHOUSANDS)**

 

This Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21-E of the Securities Exchange Act of 1934, which areintended to be covered by the safe harbors created by such acts. For thispurpose, 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,including those risks identified in this Form 10-Q under “Factors That May AffectFuture Results,” many of which are beyond our control. Although we believe thatthe assumptions underlying our forward-looking statements are reasonable, anyof the assumptions could be inaccurate. Actual results may differ materiallyfrom those indicated by the forward-looking statements included in this Form 10-Q,as more fully described under “Factors That May Affect Future Results.” Inlight of the significant uncertainties inherent in the forward-lookingstatements included in this Form 10-Q, you should not consider theinclusion of such information as a representation by us or anyone else that wewill achieve such results. Moreover, we assume no obligation to update theseforward-looking statements to reflect actual results or changes in assumptions,expectations or projections. In addition, our financial and performance outlookconcerning future revenues, margins, earnings, earnings per share and otheroperating or performance results does not include the impact of any futureacquisitions, future acquisition-related expenses or accruals, or any futurerestructuring or other charges that may occur from time-to-time due tomanagement decisions and changing business circumstances and conditions.

 

**EXECUTIVE OVERVIEW**

 

We provide a broad array of solutions worldwide thatenable pharmaceutical and other life science companies to strategicallyoptimize their sales and marketing channels and clinical resources. Our plan isto continue to diversify and expand our solutions portfolio, customer base andgeographic reach by leveraging our extensive knowledge of the pharmaceuticaland life sciences industries and capitalizing upon our deep relationships inthese industries. Our strategy continues to rely on both internal growth and acquisitionsto meet to our growth objectives.

 

We have expanded both our portfolio of solutions andcustomer base and believe that this combination presents significantopportunity for future growth.  In January 2005,we broadened and enhanced our service portfolio with our acquisition ofBuzzeoPMDA, Inc. (“Buzzeo”). The Buzzeo acquisition expands our sample andcompliance management solution offerings. We believe our recent acquisitionscomplement our existing business operations by enhancing our solutionsportfolio, increasing our access to new customers and allowing deeperpenetration into our current markets.  Wehave also committed to investing in key initiatives to help drive futuregrowth. Our future growth is dependent on our ability to further penetrate themarkets in which we operate and increase the adoption rate of our expandedportfolio of solutions.

 

We evaluate our performance based upon a number ofoperating metrics. Chief among these metrics are revenues, operating margins,diluted net income per share, operating cash flow and days sales outstanding. Ourgoal in 2005 is to execute our strategy to yield growth in revenues, operatingmargins and diluted net income per share. As part of our strategy to improveoperating margins, we began shifting technical positions offshore in early2004.  We currently partner with a thirdparty to operate our offshore development centers.  As of June 30, 2005 we have 300positions located in India.  We expect tocontinue moving additional technical and non-technical functions into low cost countriessuch as India as we further seek to expand our operating margins. We hope to maintainour level of days sales outstanding and generate strong positive operating cashflow as we continue to reduce the remaining liabilities associated with ouracquisitions.  

 

As a result of international growth through ourrecent acquisitions, certain lines of our business are now subject to a higherlevel of seasonal fluctuations than we have experienced in the past.  Specifically, our European business andinteractive marketing business in the United States have historically experienceda seasonal slowdown during the summer months.

 

Due to the growth in our strategic product andservice offerings, largely built through our recent acquisitions, we expandedour revenue categories into sales solutions, marketing solutions and shipping.These categories reflect how our service offerings are marketed to and viewedby our customers. They are not reflective of the way we manage our business. Ouroperating costs are not broken out for these categories on a global basis, asthey are not viewed as necessary in the management of our global business.Based upon all of these factors, while these categories are useful inunderstanding our operating results, we have only one reporting segment fordisclosure purposes under Statement of Financial Accounting Standards (“SFAS”) No. 131,“Disclosure About Segments of an Enterprise and Related Information.” Thefollowing is a summary of our revenue categories:

 

*Sales solutions*revenue includes product and sales support services which are used by, orprovided to, the sales force of our customers.

 

14

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

**($ INTHOUSANDS)**

 

*Marketing solutions*revenue includes our product and service offerings that are not directly gearedtoward the client sales force and primarily consists of offerings acquired inour business combinations over the past few years. The primary components ofmarketing solutions revenue include interactive marketing, data, consulting,clinical, and field inventory and reconciliation services.

 

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

 

**CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

 

There have been no material changes to our criticalaccounting policies, judgments and estimates from the information provided inItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations included in our Annual Report on Form 10-K for the yearended December 31, 2004.

 

**MERGERS AND ACQUISITIONS**

 

We regularly evaluate opportunities to acquireproducts or businesses that represent strategic enhancements to our operations.Such acquisition opportunities, if they arise, may involve the use of cash,equity or debt instruments.

 

**Buzzeo**

 

On January 4, 2005, we completed the strategic acquisitionof Buzzeo. Based in Richmond, Virginia, Buzzeo provides compliance, auditing,consulting and reconciliation outsourcing services to the pharmaceutical andlife sciences industry. This acquisition further expands our sample andcompliance management solution offerings. In connection with the acquisition, werestructured the combined operations by eliminating certain former Buzzeopositions. We accrued $200 at January 4, 2005 for liabilities associatedwith the cost of completing the restructuring plan. Buzzeo’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

 

The aggregate purchase price for Buzzeo wasapproximately $10,988, including $33 of legal and professional fees.   Approximately $590 of the purchase price wasincluded in other accrued expenses in the consolidated balance sheet as of June 30,2005 and $1,025 of the purchase price was held in escrow as of June 30,2005. In accordance with the purchase agreement, the $1,025 held in escrow,less amounts claimed against escrow, if any, is payable on January 4,2006. We are in the process of finalizing the valuation of certain intangibleassets, including the review of a third-party valuation. Therefore, theallocation of purchase price is preliminary and subject to adjustment. Theassets acquired and liabilities assumed in connection with the Buzzeoacquisition and pro forma results of operations are not deemed material to theconsolidated financial statements.

 

The preliminary allocation of purchase price,including the net assets acquired of approximately $3,400, to intangible assetsand goodwill acquired in connection with the Buzzeo acquisition are as follows:customer relationship asset of $4,390, amortizable over 10 years; trademark of$290, amortizable over 7 years; other intangibles of $70, fully amortizedduring the three months ended March 31, 2005; and goodwill of $2,777.

 

**Schwarzeck**

 

On July 20, 2004, we completed the strategicacquisition of the capital stock of Schwarzeck-Verlag GmbH (“Schwarzeck”).Schwarzeck was a provider of physician databases, direct marketing services andsample fulfillment services to pharmaceutical companies in Germany. Thisacquisition accelerated our expansion in Europe and increased our interactivemarketing solutions and services to the German pharmaceutical industry. Inconnection with the acquisition, we restructured the combined operations byeliminating certain former Schwarzeck positions. We accrued approximately $300at July 20, 2004 for liabilities associated with the cost of completingthe restructuring plan. Schwarzeck’s results of operations have been includedin the accompanying consolidated financial statements since the date ofacquisition. We have preliminarily allocated the entire purchase price ofapproximately $800 to purchased database. The assets acquired and liabilitiesassumed in connection with the Schwarzeck acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

 

**MDM**

 

On April 6, 2004, we completed the strategicacquisition of the capital stock of the Medical Data Management group ofcompanies (“MDM”). Primarily based in Warsaw, Poland, MDM was a provider ofphysician databases, market research and sales force support services topharmaceutical companies in Poland, Hungary, Russia and Ukraine. MDM’s resultsof operations have been included in the accompanying consolidated financialstatements since the date of acquisition.

 

The aggregate purchase price for MDM wasapproximately $9,290 and consisted of approximately $5,700 in cash payments,approximately $3,320 in restricted stock and approximately $270 of legal andprofessional fees. The valuation of certain intangible assets was finalizedduring the fourth quarter of 2004. The assets acquired and liabilities assumedin connection with the MDM acquisition and pro forma results of operations arenot deemed material to the consolidated financial statements.

 

15

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

**Uto Brain**

 

On January 5, 2004, we completed the strategicacquisition of the capital stock of Uto Brain Co. Ltd. (“Uto Brain”). Based inOsaka, Japan, Uto Brain provided more than thirty pharmaceutical companies withdata, analytics, publishing and advisory services. The combining of resourcesof Uto 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 the sales,marketing and clinical functions of pharmaceutical companies in the Japanesemarket. Uto Brain’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Uto Brain wasapproximately $4,900 (498,270 Yen), including approximately $100 of legal andprofessional fees. As of June 30, 2005, the purchase price was paid. Inaddition, we assumed approximately $3,800 in bank debt and an acquired loan,all of which was repaid during the year ended December 31, 2004. Theassets acquired and liabilities assumed in connection with the Uto Brainacquisition and pro forma results of operations are not deemed material to theconsolidated financial statements.

 

**RESULTS OF OPERATIONS**

 

**THREE MONTHS ENDED JUNE 30, 2005 AND 2004**

 

**REVENUES**

 
| ** **                      | ** ** | **THREE MONTHS ENDED** | ** ** | ** **          | ** ** | ** **       | ** ** | **2005 % of**    | ** ** | **2004 % of** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|---------------|------------|
| ** **                      | ** ** | **JUNE 30,**      | ** ** | **$ Increase** | ** ** | **% Increase**   | ** ** | **Total**        | ** ** | **Total**     | ** ** |
| ** **                      | ** ** | **2005**               | ** ** | **2004**            | ** ** | **/ (Decrease)** | ** ** | **/ (Decrease)** | ** ** | **Revenue**   | ** ** | **Revenue** | ** ** |
|                            |       |                   |       |                |       |             |       |             |       |          |       |   |   |
| Services & Technology: |       |                   |       |                |       |             |       |             |       |          |       |   |   |
| Sales solutions                 |       | $                      | 83,036     |                | $          | 72,633           |       | $                | 10,403     |          | 14         | % | 72 | % | 73 | % |
| Marketing solutions             |       | 27,094                 |       | 23,212              |       | 3,882            |       | 17               | %          | 24            | %          | 23 | % |
| Shipping                        |       | 4,936                  |       | 4,062               |       | 874              |       | 22               | %          | 4             | %          | 4 | % |
| Total Revenues                  |       | $                      | 115,066    |                | $          | 99,907           |       | $                | 15,159     |          | 15         | % | 100 | % | 100 | % |

 

Total revenues of $115,066 increased by 15% for thethree months ended June 30, 2005 compared with the three months ended June 30,2004.   Our international revenues were$42,238, or approximately 37% of total revenues in the quarter, and increasedby 10% over 2004 due to our recent acquisitions and organic growth, as well asa favorable foreign currency impact of approximately 2% of prior year revenues.  Total revenues in the United States increasedby 18% from the three months ended June 30, 2004, and were $72,828, orapproximately 63% of total revenues.  Theincrease in the United States included $4,000 associated with the earlytermination of a contract with Odyssey Pharmaceuticals (“Odyssey”), a mid-tierdomestic client that has ceased operating in the United States, an increase inimplementation fees associated with new system roll-outs by our customers, anincrease in our interactive marketing business and the addition of revenuesfrom our Buzzeo acquistion. We anticipate a negative impact to revenues of$1,500 to $1,700 during the second half of 2005 related to the Odyssey contracttermination.

 

As a result of our recent acquisitions, our businessis now subject to a higher level of seasonal fluctuation than we haveexperienced in the past.  Specifically,our European business and our interactive marketing business in the UnitedStates have historically experienced a seasonal slowdown during the summermonths.

 

***Sales Solutions***

 

Sales solutions accounted for approximately 72% oftotal revenues during the three months ended June 30, 2005, and increasedby 14% compared with the three months ended June 30, 2004.  Sales solutions services in the United Statesincreased by 17%, which included $4,000 associated with the early terminationof a contract with Odyssey, and other fees associated with client systemroll-outs, as well as the addition of inventory and reconciliation servicesfrom our recent acquisition of Buzzeo. Additionally, there was a significant increase in domestic licenserevenue due to an upgrade from an existing customer. International salessolutions services increased by 4% versus the three months ended June 30,2004.

 

***Marketing Solutions***

 

Marketing solution accounted for approximately 24%of total revenues during the three months ended June 30, 2005, andincreased by approximately 17% compared with the three months ended June 30,2004.  We achieved growth in both ourdomestic and our international marketing solutions business during the threemonths ended June 30, 2005.  In theUnited States, marketing solutions revenue increased by approximately 18%compared with the three months ended June 30, 2004, due to increases ininteractive marketing and clinical services as well as the addition ofconsulting services from our acquisition of Buzzeo. These increases werepartially offset by decreases in domestic consulting and data revenues.  Our international marketing solutionsbusiness increased by

 

16

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

16% compared with the three months ended June 30,2004, primarily due to 26% growth in our international interactive marketingservices.  The growth in internationalinteractive marketing solutions resulted from our 2004 acquisition ofSchwarzeck and organic growth.

 

***Shipping***

 

Shipping revenues accounted for approximately 4% oftotal revenues during the three months ended June 30, 2005, and increasedby approximately 22% compared with the three months ended June 30,2004.  Shipping revenues contributelittle to no margin, and increased primarily as a result of higher pass-throughshipping costs related to the growth in our interactive marketing business.

 

**OPERATING COSTS &EXPENSES**

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** | ** **          | ** ** | ** **       | ** ** | **2005 % of**    | ** ** | **2004 % of** | ** ** |
|--------------------------------------------|------------|------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|---------------|------------|
| ** **                                 | ** ** | **JUNE 30,**      | ** ** | **$ Increase** | ** ** | **% Increase**   | ** ** | **Total**        | ** ** | **Total**     | ** ** |
| ** **                                 | ** ** | **2005**               | ** ** | **2004**            | ** ** | **/ (Decrease)** | ** ** | **/ (Decrease)** | ** ** | **Revenue**   | ** ** | **Revenue** | ** ** |
| Operating Costs & Expenses:       |       |                   |       |                |       |             |       |             |       |          |       |   |   |
| Operating costs (including shipping)       |       | $                      | 58,829     |                | $          | 50,422           |       | $                | 8,407      |          | 17         | % | 51 | % | 50 | % |
| Selling, general and administrative        |       | 34,075                 |       | 33,934              |       | 141              |       | 0                | %          | 30            | %          | 34 | % |
| Research and development                   |       | 1,454                  |       | 2,722               |       | (1,268           | )          | -47              | %          | 1             | %          | 3 | % |
| Amortization of acquired intangible assets |       | 1,130                  |       | 1,226               |       | (96              | )          | -8               | %          | 1             | %          | 1 | % |
| Total operating costs & expenses  |       | $                      | 95,488     |                | $          | 88,304           |       | $                | 7,184      |          | 8          | % | 83 | % | 88 | % |

 

***OPERATING COSTS (including shipping).***Operating costs increased 17% for the three months ended June 30, 2005 comparedwith the three months ended June 30, 2004.  This increase was due to higher costs from ourtwo acquisitions completed subsequent to June 30, 2004, as well as ouroverall revenue growth, higher pass-through postage costs and the unfavorableimpact of foreign currency exchange rates. As a percentage of revenues, including the impact of the earlytermination of the contract with Odyssey, operating costs during the threemonths ended June 30, 2005 were 51% versus 50% during the three monthsended June 30, 2004. We anticipate realizing additional savings in futureperiods as we continue to build our offshore presence.

 

***SELLING, GENERAL AND ADMINISTRATIVE(SG&A).***SG&Aexpenses were relatively flat for the three months ended June 30, 2005compared with the three month ended June 30, 2004. SG&A cost increasesdue to higher costs related to the two acquisitions completed subsequent to June 30,2004, were offset by actions taken by management to contain costs during thefirst quarter of 2005.  As a percentage ofrevenues, including the impact of the early termination of the contract with Odyssey,SG&A decreased to 30% for the three months ended June 30, 2005, downfrom 34% for the three months ended June 30, 2004. We have and willcontinue to invest in sales and marketing initiatives in order to drive ourtop-line growth while continuing to focus on cost containment measures in otherelements of SG&A.

 

***RESEARCH AND DEVELOPMENT (R&D).***R&D expenses decreased by 47% for thethree months ended June 30, 2005 compared with the three months ended June 30,2004.  As a percentage of revenues,R&D expenses decreased to 1% for the three months ended June 30, 2005,from 3% for the three months ended June 30, 2004. The decrease was due to reducedR&D spending and a substantially higher capitalization rate during thethree months ended June 30, 2005. We capitalized more costs in the threemonths ended June 30, 2005 due to the development for the expected 2005release of our next generation CRM solutions. Gross R&D spending (R&Dexpenses plus additions to capitalized software development costs) decreased 38%from $4,026 for the three months ended June 30, 2004 to $2,486 for thethree months ended June 30, 2005. Gross R&D decreased due to thedeployment of resources to revenue-generating projects and the savings relatedto our offshore initiative. We expect our capitalization rates for the secondhalf of 2005 to decline.

 

***AMORTIZATION OF ACQUIRED INTANGIBLEASSETS.***Amortization of acquiredintangible assets decreased 8% from the comparable three months ended June 30,2004. The decrease reflects certain intangible assets related to the SAIacquisition which were fully amortized as of March 31, 2005, partiallyoffset by amortization of intangibles related to the Schwarzeck and Buzzeo acquisitions.

 

***PROVISION FOR INCOME TAXES. ***Our effective income tax expense rate increased to 38.5% for the threemonths ended June 30, 2005, from approximately 37.3% for the three monthsended June 30, 2004. The reason for the increase in the effective income taxexpense rate was the year-to-date adjustment to reduce the effective income taxexpense rate to 38.5% during the three months ended June 30, 2004 due tothe consolidation of certain international legal entities. 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 reduced. We expect our annualized effective income taxexpense rate for the year ending December 31, 2005 to be approximately 38.5%.

 

17

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

**SIX MONTHS ENDED JUNE 30, 2005 AND 2004**

 

**REVENUES**

 
| ** **                      | ** ** | **SIX MONTHS ENDED** | ** ** | ** **            | ** ** | ** **     | ** ** | **2005 % of**     | ** ** | **2004 % of** | ** ** |
|---------------------------------|------------|----------------------|------------|-----------------------|------------|----------------|------------|-------------------|------------|---------------|------------|
| ** **                      | ** ** | **JUNE 30,**    | ** ** | **$ Increase /** | ** ** | **% Increase** | ** ** | **Total**         | ** ** | **Total**     | ** ** |
| ** **                      | ** ** | **2005**             | ** ** | **2004**              | ** ** | **(Decrease)** | ** ** | **/  (Decrease)** | ** ** | **Revenue**   | ** ** | **Revenue** | ** ** |
| Services & Technology: |       |                 |       |                  |       |           |       |              |       |          |       |   |   |
| Sales solutions                 |       | $                    | 153,213    |                  | $          | 143,044        |       | $                 | 10,169     |          | 7          | % | 71 | % | 73 | % |
| Marketing solutions             |       | 51,705               |       | 44,013                |       | 7,692          |       | 17                | %          | 24            | %          | 23 | % |
| Shipping                        |       | 9,595                |       | 7,914                 |       | 1,681          |       | 21                | %          | 4             | %          | 4 | % |
| Total revenues                  |       | $                    | 214,513    |                  | $          | 194,971        |       | $                 | 19,542     |          | 10         | % | 100 | % | 100 | % |

 

Total revenues of $214,513 increased by 10% for thesix months ended June 30, 2005 compared with the six months ended June 30,2004.   Our international revenues were$83,224, or approximately 39% of total revenues for the period, and increasedby 13% over 2004, due to our recent acquisitions and organic growth, as well asa favorable foreign currency impact of approximately 2% of prior year revenues.  Total revenues in the United States increasedby 8% from the six months ended June 30, 2004, and were $131,290, orapproximately 61% of total revenues.  Theincrease in the United States resulted from $4,000 of revenue associated withthe early termination of a contract with Odyssey, a mid-tier domestic clientthat has ceased operating in the United States, the addition of revenues fromour Buzzeo acquistion and growth in our domestic clinical services. Weanticipate a negative impact to revenues of $1,500 to $1,700 during the secondhalf of 2005 related to the Odyssey contract termination.

 

As a result of our recent acquisitions, our businessis now subject to a higher level of seasonal fluctuation than we haveexperienced in the past.  Specifically,our European business and our interactive marketing business in the UnitedStates have historically experienced a seasonal slowdown during the summermonths.

 

***Sales Solutions***

 

Sales solutions accounted for approximately 71% oftotal revenues during the six months ended June 30, 2005, and increased byapproximately 7% compared with the six months ended June 30, 2004.  Sales solution services in the United Statesincreased by 6%, which included $4,000 associated with the early termination ofa contract with Odyssey and the addition of sales support services from ourBuzzeo acquistion.  We were unfavorablyimpacted by delayed decision making relating to our clients that are engaged inrestructuring or cost containment initiatives, which drove decreases in ourimplementation and system roll-out support services in the United States.  The increase in the United States salessolutions also included a significant increase in domestic software licenserevenues due to sales of new user licenses and upgrades from our existing customers.  Our international sales solutions servicesincreased by approximately 7% versus the six months ended June 30, 2004,which included moderate growth in service revenues for all regions, partially offsetby a decrease in license fees of our international business versus the sixmonths ended June 30, 2004.

 

***Marketing Solutions***

 

Marketing solutions accounted for approximately 24%of total revenues during the six months ended June 30, 2005, and increasedby approximately 17% compared with the six months ended June 30,2004.  The increase was mostly due togrowth in our international marketing solutions business, which increased by28% over the prior year, primarily from 44% growth in our internationalinteractive marketing services.  Thegrowth in international interactive marketing included the additional revenuesfrom our 2004 acquisitions as well as organic growth.  In the United States, marketing solutionsincreased by approximately 6% compared with the six months ended June 30,2004, due to increases in interactive marketing, clinical services and theinclusion of marketing services from our Buzzeo acquisition, which was partiallyoffset by a decrease in our domestic data and consulting revenues.

 

***Shipping***

 

Shipping revenues accounted for approximately 4% oftotal revenues during the six months ended June 30, 2005, and increased byapproximately 21% compared with the six months ended June 30, 2004.  Shipping revenues contribute little to nomargin, and increased primarily as a result of higher pass-through shippingcosts related to the growth in our interactive marketing business.

 

18

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

**OPERATING COSTS &EXPENSES**

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** | **$**          | ** ** | ** **     | ** ** | **2005 % of**    | ** ** | **2004 % of** | ** ** |
|--------------------------------------------|------------|----------------------|------------|----------------|------------|----------------|------------|------------------|------------|---------------|------------|
| ** **                                 | ** ** | **JUNE 30,**    | ** ** | **Increase /** | ** ** | **% Increase** | ** ** | **Total**        | ** ** | **Total**     | ** ** |
| ** **                                 | ** ** | **2005**             | ** ** | **2004**       | ** ** | **(Decrease)** | ** ** | **/ (Decrease)** | ** ** | **Revenue**   | ** ** | **Revenue** | ** ** |
| Operating costs (including shipping)       |       | $                    | 112,480    |           | $          | 100,229        |       | $                | 12,251     |          | 12         | % | 52 | % | 51 | % |
| Selling, general and administrative        |       | 69,863               |       | 66,091         |       | 3,772          |       | 6                | %          | 33            | %          | 33 | % |
| Research and development                   |       | 3,272                |       | 5,744          |       | (2,472         | )          | -43              | %          | 2             | %          | 3 | % |
| Facility and other charges                 |       | 9,372                |       | —         |       | 9,372          |       | N/A              |       | 4             | %          | 0 | % |
| Amortization of acquired intangible assets |       | 2,380                |       | 2,253          |       | 127            |       | 6                | %          | 1             | %          | 1 | % |
| Other operating (income)                   |       | —               |       | (339           | )          | 339            |       | -100             | %          | —        |       | — |   |
| Total operating costs & expenses  |       | $                    | 197,367    |           | $          | 173,978        |       | 23,389           |       | 13            | %          | 92 | % | 89 | % |
|                                            |            |                      |            |                |            |                |            |                  |            |               |            |  |  |  |  |  |

 

***OPERATING COSTS (includingshipping).***Operating costs increased 12% for the six months ended June 30,2005 compared with the six months ended June 30, 2004.  This increase was due to higher costs fromour two acquisitions completed subsequent to June 30, 2004, higherpass-through postage costs and our overall increase in revenues.  These increases were partially offset by the savingsrelated to our offshore initiative. As a percentage of revenues, including theimpact of the early termination of the contract with Odyssey, operating costsduring the six months ended June 30, 2005 were 52% versus 51% during thesix months ended June 30, 2004. We anticipate realizing additional savingsin future periods as we continue to build our offshore presence.

 

***SELLING, GENERAL AND ADMINISTRATIVE(SG&A).***SG&Aexpenses increased 6% for the six months ended June 30, 2005 compared withthe six month ended June 30, 2004. SG&A costs increased due to highercosts related to the two acquisitions completed subsequent to June 30,2004, and increased expenses as a result of our efforts to comply withSarbanes-Oxley section 404 review, testing and attestationrequirements.  As a percentage ofrevenues, including the impact of the early termination of the contract withOdyssey, SG&A remained flat at 33% for the six months ended June 30,2005 and 2004.  We have and will continueto invest in sales and marketing initiatives in order to drive our top-linegrowth while continuing to focus on cost containment measures in other elementsof SG&A.

 

***RESEARCH AND DEVELOPMENT (R&D).***R&D expenses decreased 43% for the sixmonths ended June 30, 2005 compared with the six months ended June 30,2004.  As a percentage of revenues,R&D expenses decreased to 2% for the six months ended June 30, 2005from 3% for the six months ended June 30, 2004. The decrease was due to decreasedR&D spending and a substantially higher capitalization rate during the sixmonths ended June 30, 2005. We capitalized more costs in the six monthsended June 30, 2005 due to the development for the expected 2005 releaseof our next generation CRM solutions. Gross R&D spending (R&D expensesplus additions to capitalized software development costs) decreased 27% from$7,818 for the six months ended June 30, 2004, to $5,711 for the sixmonths ended June 30, 2005. Gross R&D decreased due to the thedeployment of resources to revenue-generating projects and the savings relatedto our offshore initiative. We expect our capitalization rates for the secondhalf of 2005 to decline.

 

***FACILITY AND OTHER CHARGES.***During the six months ended June 30,2005, we recorded $7,649 of facility-related charges and a severance charge of$1,723. The facility charges consist of $6,619 related to vacating a New Jerseyfacility and for additional facilities vacated in previous periods due tochanges in current market conditions, as well as $1,030 related to thewrite-off of leasehold improvements associated with the exit of our New Jerseyfacility.  The $1,723 severance chargerelates to the elimination of certain senior and mid-level management positionsduring the three months ended March 31, 2005.

 

***AMORTIZATION OF ACQUIRED INTANGIBLEASSETS.***Amortization of acquiredintangible assets increased 6% over the comparable six months ended June 30,2004. The increase reflects a full current period’s amortization of intangibleassets acquired in connection with our acquisitions of MDM, Schwarzeck andBuzzeo, offset by certain intangible assets related to the SAI, Synavant andUto Brain acquisitions being fully amortized during or prior to the six monthsended June 30, 2005.

 

***OTHER OPERATING (INCOME).***We received proceeds of $339 related to aninsurance claim during the six months ended June 30, 2004.

 

***PROVISION FOR INCOME TAXES. ***Our effective income tax expense rate remained flat at 38.5% for the sixmonths ended June 30, 2005 and 2004. We expect our annualized effective incometax expense rate for the year ending December 31, 2005 to be approximately38.5%.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2005, working capital was $63,767compared to $66,662 as of December 31, 2004. Cash and cash equivalentswere $56,138 as of June 30, 2005, compared to $64,020 as of December 31,2004. These decreases were primarily attributable to the payments made inconnection with our 2005 and 2004 acquisitions as well as the previouslycommunicated increase in capital expenditures during the six months ended June 30,2005.

 

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $20,994and $24,903 for the six month periods ended June 30, 2005 and 2004,respectively. During the six months ended June 30,

 

19

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

2005, we generated operating cash from ournet income adjusted for changes in assets and liabilities, net of effects fromacquisitions. Our accrued facility and other charges resulted in us recording anet loss for the three months ended March 31, 2005 and lower net incomefor the six months ended June 30, 2005, however, these charges only had anapproximate $1,000 negative impact on our operating cash flows for the sixmonths ended June 30, 2005. Future payments of these accruals will continueto have a negative impact on future operating cash flows.  Impacting our operating cash flow were paymentsof income taxes, purchase accounting restructuring charges, and accountspayable and accrued expenses. During the three months ended June 30, 2005,our accounts receivable days sales outstanding decreased to 63 days for the threemonths ended June 30, 2005, from 66 days for the three months ended March 31,2005 due to improved cash collections and the increase in revenues during thethree months ended June 30, 2005.

 

During the six months ended June 30, 2004, wegenerated operating cash from net income adjusted for changes in assets andliabilities, net of effects from acquisitions. This increase in operating cash flow was partially offset by $4,278 ofpayments related to accrued purchase accounting restructuring charges incurredin connection the Synavant and SAI acquisitions as well as increased paymentsof accounts payable and accrued expenses. Our accounts receivable days salesoutstanding decreased to 60 days for the three months ended June 30, 2004,from 68 days for the three months ended December 31, 2003 partially due tocertain annual billings and the receipt of approximately $3,300 of a long-termcontracted receivable.

 

Cash used in investing activities was $30,364 forthe six months ended June 30, 2005, and includes payments for the Buzzeoand Uto Brain acquisitions, as well as additions to capitalized softwaredevelopment costs and purchases of property and equipment. Additions of propertyand equipment primarily related to our new hardware facility in New Jersey, newcorporate headquarters in New Jersey and new international facilities, as wellas investing in our helpdesk automation process and interactive marketingmachinery.  Cash used in investingactivities was $17,501 for the six months ended June 30, 2004, and wasprimarily attributable to purchases of property and equipment related to therelocation of our corporate headquarters, as well as payments made related tothe MDM and Uto Brain acquisitions.

 

As anticipated, purchases of property and equipmentincreased for the six months ended June 30, 2005 versus the comparableprior year period. During 2005, we currently expect capital spending in therange of approximately $22,000 to $26,000 primarily to support ourinfrastructure expansion, as well as for the consolidation of our New Jerseybased, U.S. hardware facility. We review our capital expenditure programperiodically and adjust it as required to meet current needs.

 

Cash provided by financing activities was $1,637 forthe six months ended June 30, 2005, and includes proceeds from theissuance of common stock partially offset by payments related to capital leaseobligations.  Cash provided by financingactivities was $2,675 for the six months ended June 30, 2004, and wasprimarily attributable to the issuance of common stock partially offset by therepayments of long-term debt and loans acquired in connection with the UtoBrain acquisition.

 

We regularly evaluate opportunities to acquireproducts or businesses complementary to our operations. Such acquisitionopportunities, if they arise, may involve the use of cash, equity or debtinstruments. We believe that available funds, anticipated cash flows fromoperations and the availability of our revolving line of credit will satisfyour current projected working capital and capital expenditure requirements,exclusive of cash required for possible future acquisitions of businesses,products and technologies, during the next twelve to eighteen months. There canbe no assurance, however, that our business will continue to generate cash flowat current levels or that anticipated operational improvements will beachieved. Our ability to generate future cash flows depends on our futureperformance and financial results, which, to a certain extent, are subject togeneral conditions in or affecting the pharmaceutical and life sciencesindustry and to general economic, political, financial, competitive andregulatory factors beyond our control.

 

**Contractual Obligations and Commitments**

 

We entered into a line-of-credit agreement (the “Agreement”)as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bankthat expired on July 1, 2005. The Agreement was available to financeworking capital needs and possible future acquisitions. Among other covenants,the Agreement required us to maintain a minimum consolidated net worth,measured quarterly, which is equal to $130,000, plus 50% of net income earnedafter April 1, 2003, and 75% of the net proceeds of any offering of newequity interests issued subsequent to June 30, 2003. As of June 30,2005, our consolidated net worth was $240,297. The Agreement contained certainrestrictions on our ability to create or assume liens, dispose of assets,consolidate or merge, extend credit, incur other indebtedness or pay cash dividends.On September 24, 2004, we entered into an amendment to the Agreement that relaxedcertain covenants relating to acquisitions, dispositions of our assets,indebtedness of our foreign subsidiaries, real estate and capital expendituresin connection with our move to our new corporate headquarters facility. As of June 30,2005, we were in compliance with all covenants and did not have any amountsoutstanding under the line-of-credit.

 

 On July 25,2005, the Company entered into a replacement line-of-credit agreement (the “Agreement”),in the amount of $30,000 with JPMorgan Chase Bank that expires on June 30,2008. The Agreement is available to finance working capital needs and possiblefuture acquisitions. The Agreement contains customary affirmative and negativecovenants and also contains certain financial covenants, including thoserelated to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) aminimum interest coverage ratio at the end of any fiscal quarter and (c) aminimum fixed charge coverage ratio at the end of any fiscal quarter. TheAgreement also restricts the Company’s ability to create or assume liens,dispose of assets, consolidate or merge, extend credit, incur otherindebtedness

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

or pay cash dividends.

 

Our principle commitments at June 30, 2005consisted 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** | ** ** |
|-----------------------------|------------|------------|------------|----------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **July 1, 2005**      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **through**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **December 31, 2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Capital leases              |       | $          | 4,063      |                       | $          | 929 |   | $ | 1,668 |   | $ | 1,444 |   | $ | 22 |   | $ | — |   | $ | — |   |
| Corporate headquarters      |       | 48         |       | 48                         |       | — |   | — |   | — |   | — |   | — |   |
| Minimum guarantees          |       | 2,448      |       | 1,811                      |       | 355 |   | 282 |   | — |   | — |   | — |   |
| Buzzeo purchase price       |       | 1,615      |       | —                     |       | 1,615 |   | — |   | — |   | — |   | — |   |
| Operating leases (1)        |       | 104,293    |       | 10,111                     |       | 17,661 |   | 15,168 |   | 12,010 |   | 11,275 |   | 38,068 |   |
| Total                       |       | $          | 112,467    |                       | $          | 12,899 |   | $ | 21,299 |   | $ | 16,894 |   | $ | 12,032 |   | $ | 11,275 |   | $ | 38,068 |   |

 

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(1)           Operating lease amounts disclosed aboveinclude $18,635 of future operating lease costs, excluding estimated futuresublease income, accrued for in accrued facility charges and in the purchaseaccounting restructuring accruals related to the Synavant and SAI acquisitions.

 

As of June 30, 2005, letters of credit forapproximately $5,721 were outstanding related to deposits on certainfacilities.

 

We have an agreement with a venture capital fundwith a commitment to contribute $1,000 to the fund, callable at the discretionof the general partner in $100 increments. As of June 30, 2005, $500 hasbeen paid, with $500 of the commitment remaining. The agreement has atermination date of December 11, 2010, subject to extension with theconsent of a majority in interest of the limited partners. This asset isrecorded within other assets in the accompanying consolidated balance sheets.

 

### **FACTORS THAT MAY AFFECT FUTURE RESULTS**

###  

Set forth in this Form 10-Q are certain risksand uncertainties that could cause our actual results to differ materially fromthe forward-looking statements contained in this Form 10-Q. You arestrongly urged to carefully consider the cautionary language and risks setforth below.

 

**WE DEPEND ON A FEW MAJOR CUSTOMERSFOR A SIGNIFICANT PORTION OF OUR REVENUES**

 

Historically, a limited number of our customers havecontributed a significant percentage of our revenues. We anticipate that ouroperating results in any given period will continue to depend significantlyupon revenues from a small number of customers. The loss of any of thesecustomers (which could include loss through mergers and acquisitions) couldhave a materially adverse effect on our business, operating results or financialcondition. We cannot make any assurances that we will retain our existingcustomers or attract new customers that would replace the revenue that could belost if one or more of these customers failed to renew itsagreement(s) with us.

 

**OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY**

 

Most of our solutions are currently used inconnection with the marketing and sale of prescription-only drugs. This marketis undergoing a number of significant changes. These changes include:

 

•                  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-counter sale offormerly prescription-only drugs;

 

•                  U.S. and international governmental regulations mandatingprice 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 that we can respond effectivelyto any or all of these and other changes in the marketplace. Our failure to doso could have a material adverse effect on our business, operating results orfinancial condition, as our business depends, in large

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

part, on the business conditions within thismarketplace.

 

**OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS**

 

Our customers often implement our products in stagesand our products are often utilized by a large number of our customers’personnel. In the event that our customers have difficulties implementing ourproducts and services or are not satisfied with the implementation or operationour products and services, our business, operating results and financialcondition could be materially and adversely affected.

 

**WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

 

Our business may be materially and adverselyaffected as a result of the significant risks associated with our acquisitions,including our recent acquisitions of Synavant, Uto Brain, the MDM group ofcompanies, Schwarzeck and Buzzeo. As part of our business strategy, we haveacquired, and in the future may acquire, businesses that offer complementaryproducts, services or technologies. These acquisitions are accompanied bysubstantial risks, including:

 

•                  unexpected problems, liabilities, risks or costs associatedwith the acquired business;

 

•                  the effect of the acquisitions on our financial andstrategic position;

 

•                  our inability to successfully integrate the acquiredbusiness;

 

•                  the failure of an acquired business to further ourstrategies;

 

•                  our inability to achieve expected cost and businesssynergies;

 

•                  the significant strain on our operating systems;

 

•                  the diversion of our management’s attention from otherbusiness concerns;

 

•                  the impairment or loss of relationships with customers ofthe acquired business;

 

•                  the negative impact of the combination of differentcorporate cultures;

 

•                  the loss of key employees of the acquired company;

 

•                  undetected problems within the acquired organization; and

 

•                  the integration and maintenance of uniform, company-widestandards, procedures and policies.

 

Any of these factors could have a material adverseeffect on our revenues and earnings. We expect that the consideration paid forfuture acquisitions, if any, could be in the form of cash, equity, debt or acombination of these. To the extent that we issue shares of stock or otherrights to purchase stock in connection with any future acquisition, existingshareholders will experience dilution and potentially decreased earnings pershare.

 

While to date we have had success integratingacquired entities into our operations, we cannot guarantee that we willsuccessfully integrate these new businesses into our operations or achieve anyexpected cost synergies.

 

We may in the future acquire additionalcomplementary companies, products or technologies. If we do so, we may face thesame risks, uncertainties and disruptions discussed above. In addition, ourprofitability may suffer because of acquisition-related costs or amortizationcosts of acquired intangible assets.

 

**BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE ADECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES**

 

Business and economic pressures on our majorcustomers may result in budget constraints that directly impact their abilityto purchase our new products and services offerings. We cannot assure you thatany decrease in demand caused by these pressures will not have a materialadverse effect on our business, operating results or financial condition.

 

**OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TOPREDICT OUR QUARTERLY 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 thesolution. Given the importance of the decision, senior levels of management ofour customers are often involved in the process and, in some instances, theirboard of directors may also be involved. As a result, the decision-makingprocess typically takes nine to eighteen months, and in certain cases longer.In addition, other factors, unrelated to our product and services,

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

such as acquisitions, product delays, orother issues, may also significantly impact the timing and amounts of buyingdecisions. Accordingly, we cannot fully control or predict the timing of ourexecution of contracts with customers. Prior sales and implementation cyclescannot be relied upon as any indication of future cycles.

 

In addition, an implementation process of three tosix or more months before the software is rolled out to a customer’s salesforce is customary. However, if a customer were to delay or extend itsimplementation process, our quarterly revenues may decline below expectedlevels and could adversely affect our results of operations.

 

**OUR QUARTERLY 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 our customers’ purchase andbudget cycles;

 

•                  potential delays in recognizing revenue from license andother transactions;

 

•                  seasonal variations in operating results, including theincreased seasonality associated with our international growth; and

 

•                  variations in the fiscal or quarterly cycles 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 marketing expensesif competitive pressures become greater than originally anticipated. Since onlya small portion of our expenses varies directly with our actual revenues, ouroperating results and profitability are likely to be adversely anddisproportionately affected if our revenues fall below our targeted goals orexpectations.

 

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.

 

**WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPONDTO TECHNOLOGICAL CHANGE**

 

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 develop newproducts and services and to enhance our current products and services;

 

•                  introduce new solutions that keep pace with developments inour target markets; and

 

•                  address the changing and increasingly sophisticated needsof our customers.

 

We cannot assure you that we will successfullydevelop and market new products or product enhancements that respond totechnological advances in the marketplace, or that we will do so in a timelyfashion. We also cannot assure you that our products will adequately andcompetitively address the 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 spendmore of our resources on product research and development than we have in thepast. As a result, our results of operations could be materially and adverselyaffected.

 

**SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES**

 

Our software products are technologically complexand may contain previously undetected errors or failures or errors whenproducts are first introduced or when updated versions are released. We cannotassure you that, despite our testing, our new products will be free fromsignificant errors. Software errors could cause delays in the commercialrelease of products until the errors have been corrected. Software errors maycause us to be in breach of our agreements with customers, which could resultin termination of the agreements and monetary damages. Software errors maycause damage to our reputation and cause us to commit significant resources

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

to their correction. Errors that result intermination of agreements, monetary damages, losses or delays could have amaterial adverse effect on our business, operating results or financialcondition.

 

**INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASEDDEMAND FOR OUR PRODUCTS AND SERVICES SOLUTIONS**

 

There are a number of other companies that sell CRMand SFA products and related services that specifically target thepharmaceutical industry, including competitors that are actively selling CRMand SFA software products in more than one country and competitors that alsooffer CRM and SFA support services. Some of our competitors and potentialcompetitors are part of large corporate groups and have significantly greaterfinancial, sales, marketing, technology and other resources than we have.

 

While we believe that the CRM and SFA softwareproducts and/or services offered by most of our competitors do not address thevariety of pharmaceutical customer needs that our solutions address, increasedcompetition may require us to reduce the prices for our products and services.Increased competition may also result in decreased demand for our products andservices.

 

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

 

•                  the number and success of new market entrants supplyingcompeting CRM and SFA products or support services;

 

•                  alliances among existing competitors;

 

•                  technological changes or changes in the our customers’ useof the Internet;

 

•                  expansion of product lines by, or consolidation among, ourexisting 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 pricereductions and/or decreased demand and we cannot assure you that we will beable to continue to compete successfully or that competition will not have amaterial adverse effect on our business, operating results or financialcondition.

 

**WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATEDPRODUCTS AND SERVICES 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.

 

**OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DONOT**

 

We have recently significantly expanded and may inthe future further expand our international operations and enter additionalinternational markets. This expansion would require significant managementattention and financial resources that could adversely affect operating marginsand earnings. We may not be able to maintain or increase international marketdemand for our products and services. If we do not, our international saleswill be limited and our business, financial condition or results of operationscould be materially and adversely affected.

 

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

 

•                  adverse changes in the political stability and economicenvironments in these countries and regions;

 

•                  adverse changes in tax, tariff and trade and otherregulations;

 

•                  the absence or significant lack of legal protection forintellectual property rights in certain of these countries; and

 

•                  difficulties in managing an organization spread on a globalbasis.

 

Each of the above risks could have a significantimpact on our revenues, profitability and our ability to deliver products on a competitiveand timely basis, which could materially and adversely affect our business,financial condition or operating results.

 

Since we have operations in a number of countriesand our service agreements in such countries are denominated in foreign

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

currencies, we face exposure to adversemovements in foreign currency exchange rates. As currency rates change,translation of the income statements of our international entities from localcurrencies to U.S. dollars affects period-over-period comparability ofoperating results. Historically, we have not hedged these translation risksbecause we generally reinvest our cash flows from international operations.However, we continue to evaluate foreign currency translation risk exposure. Aswe continue to grow our international business, the risks associated withforeign currency translation will also grow.

 

**CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGYINFRASTRUCTURE**

 

The efficient operation of our business, and ultimatelyour operating performance, depends on the uninterrupted use of our criticalbusiness and information technology systems. Many of these systems require theuse of specialized hardware and other equipment that is not readily availablein the marketplace. Although we maintain these systems at more than onelocation, a natural disaster, a fire or other catastrophic event at any ofthese locations could result in the destruction of these systems. In such anevent, the replacement of these systems and restoration of archived data andnormal operation of our business could take several days to several weeks, ormore. During the intervening period when our critical business and informationtechnology systems are fully or partially inoperable, our ability to conductnormal business operations could be significantly and adversely impacted and asa result our business, operating results and financial condition could beadversely affected.

 

**OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ONATTRACTING AND RETAINING QUALIFIED PERSONNEL**

 

Our future success depends, to a significant extent,upon the contributions of our executive officers and key sales, technical andcustomer service personnel.

 

Our future success also depends on our continuing abilityto attract and retain highly qualified technical and managerial personnel. Dueto competition for such personnel, we have at times experienced difficulties inrecruiting and retaining qualified personnel and we may experience suchdifficulties in the future. Our ability to expand and increase revenue growthin the future will depend, in part, on our success in recruiting and trainingsuch qualified personnel. We may not always be able to expand our personnel inthese areas as necessary to support our operations. Any recruiting or retentiondifficulties could adversely affect our business, operating results orfinancial condition.

 

**IF OUR SECURITY MEASURES ARE BREACHED AND AN UNAUTHORIZED PARTY OBTAINSACCESS TO A CUSTOMER’S DATA, CERTAIN OF OUR SOLUTIONS MAY BE PERCEIVED ASBEING INSECURE AND CUSTOMERS MAY CURTAIL OR STOP USING OUR SERVICE.**

 

Certain of our solutions involve the storage andtransmission of customers’ proprietary information, and security breaches couldexpose us to a risk of loss of this information, litigation and potentialliability. Because techniques used to obtain unauthorized access or to sabotagesystems change frequently and generally are not recognized until launchedagainst a target, we may be unable to anticipate these techniques or toimplement adequate preventative measures. If an actual or perceived breach ofour security occurs, the market perception of the effectiveness of our securitymeasures could be harmed and we could lose existing customers and our abilityto obtain new customers.

 

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLETO PROTECT COMPLETELY**

 

We rely on a combination of trade secret, copyrightand trademark laws, non-disclosure, license and other contractual agreementsand technical measures to protect our proprietary rights. We cannot assure youthat the steps we take will prevent misappropriation of these rights. Further,protective actions we have taken or will take in the future may not preventcompetitors from developing products with features similar to our products. Inaddition, effective copyright and trade secret protection may be unavailable orlimited in certain foreign countries. In response to customer requests, we havealso on occasion entered into agreements which require us to place our sourcecode in escrow to secure our service and maintenance obligations.

 

Further, while we believe that our products andtrademarks do not infringe upon the proprietary rights of any third parties,third parties may assert infringement claims against us in the future that mayresult in costly litigation, diversion of management’s attention, theimposition of monetary damages or injunctive relief against us. In addition,any such claims may require us to enter into royalty arrangements. Any of theseresults could materially and adversely affect our business, operating resultsor financial condition.

 

**IF OUR THIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLY RESPOND TOTECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITH THIRD-PARTYVENDORS, INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTS MAY RESULT**

 

Some of our software is provided by third-partyvendors. If our third-party vendors are unable to successfully respond totechnological change or if our relationships with certain third-party vendorsare terminated, we may experience difficulty in replacing the functionalityprovided by the third-party software currently offered with our products.Although we believe there are other sources for all of our third-partysoftware, any significant interruption in the supply of these products couldadversely impact our sales unless and until we can secure another source. Theabsence of or any significant delay in the replacement of functionalityprovided by third-

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

party software in our products couldmaterially and adversely affect our sales.

 

**THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVETO BE LESS FAVORABLE THAN ANTICIPATED**

 

We are involved in a number of strategicrelationships with third parties and are frequently pursuing others. Shouldthese relationships, or any of them, prove to be more costly than anticipatedor fail to meet revenue expectations or other anticipated synergies, we cannotguarantee that such events will not have a material impact upon our business,operating results or financial condition.

 

**OUR DATA SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IFNOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS**

 

Our data and analytics solutions are sourced, inpart, from data provided through strategic relationships. Although we believethere are other sources for such data, the termination of any of theserelationships could diminish the breadth or depth of our data. This terminationor our failure to establish new strategic relationships in the future couldnegatively impact our business, operating results or financial condition.

 

**FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THE DEMAND FORSOME OF OUR SOLUTIONS**

 

While we believe our data and analytics solutionsare not in violation of current federal or state laws and regulationspertaining to patient privacy or health information, including the HealthInsurance Portability and Accountability Act of 1996 (HIPAA), we cannotguarantee that future laws or regulations or interpretations of existing lawsand 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.

 

**GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECT OURABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL**

 

Through the interactive marketing business weacquired in the Synavant acquisition, we may distribute controlled substancesto doctors’ offices through the mail as part of certain interactive marketingprograms provided on behalf of pharmaceutical manufacturers. It is important tothe business that this practice of distributing prescription-only drugscontinues. Future legislation may restrict our ability to provide these typesof services. If any such legislation is enacted, it could have a material andadverse effect on our business, operating results and financial condition.

 

**DIFFICULTIES IN SUBLEASING OR OTHERWISE DISPOSING OF CERTAIN OF OURFACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS**

 

We expect to sublease all or a portion of certainfacilities, including facilities acquired as part of the Synavant acquisition.An inability to successfully dispose of or sublet, as applicable, any of thesefacilities or to obtain favorable pricing or sublease terms could negativelyimpact our earnings.

 

**UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIREDBECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULDHAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS**

 

In reporting our financial results we rely upon theaccounting policies and standards then in effect at the time of our report.Future regulations, standards or interpretations may require us to adjust orrestate financial results previously reported. A required restatement couldhave a material impact upon past financial results or current comparison toprevious results.

 

**WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THEWORLD ECONOMY**

 

World events such as terrorist attacks, the currentU.S. military action in the Middle East and elsewhere, and hostilities in theMiddle East, Asia and other geographical areas, have and may in the futureweaken the U.S. and world economies. Any resultant weaknesses in theseeconomies may adversely affect our business, financial condition or results ofoperations or the businesses of our customers.

 

**WE FACE RISKS IN CONNECTION WITH IMPLEMENTING THE REQUIREMENTS OF SECTION 404OF THE SARBANES OXLEY ACT**

 

We continue to be involved in the process ofevaluating our internal control over financial reporting in order to allowmanagement to report on, and our registered independent public accounting firmto attest to, our internal controls, as required by Section 404 of theSarbanes-Oxley Act. This is a continuing process and we cannot be certain as tothe timing of completion of our future reviews, evaluation, testing andremediation actions or the impact of the same on our operations or the resultsof the required testing and required attestation report by us and also by ourregistered independent public accounting firm. If at any time we are 

 

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**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

**($ IN THOUSANDS)**

****

****

 

unable to implement the requirements of Section 404in a timely manner or with adequate compliance, we may be subject to sanctionsor investigation by regulatory authorities, such as the Securities and ExchangeCommission or NASDAQ. Any such actions could have a material adverse affect ourfinancial results and the price of our common stock.

 

**PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGEAN ACQUISITION OF DENDRITE**

 

Provisions of our Restated Certificate ofIncorporation, as amended, our By-laws, as amended, and New Jersey law may makeit more difficult for a third-party to acquire us. For example, the Board ofDirectors may, without the consent of the stockholders, issue preferred stockwith rights senior to those of the common stock. In addition, we have aShareholder Rights Plan which may limit the ability of a third-party to attempta hostile acquisition of the Company.

 

**OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS**

 

Themarket price of our common stock may be significantly affected by thefollowing factors:

 

•                  theannouncement or the introduction of new products and services by us or ourcompetitors;

 

•                  quarter-to-quartervariations in our operating results or changes in revenue or earnings estimatesor failure to meet or exceed revenue or earnings estimates;

 

•                  marketconditions in the technology, healthcare and other growth sectors;

 

•                  generalconsolidation in the healthcare information industry which may result in themarket perceiving us or other comparable companies as potential acquisitiontargets;

 

•                  thegain or loss of significant orders;

 

•                  changesin the domestic and international economic, political and business conditions;and

 

•                  futureacquisitions.

 

Further, the stock market has experienced onoccasion extreme 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.

 

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**ITEM 4.  Controls andProcedures**

 

The Company’s Chief Executive Officer and Interim ChiefFinancial Officer, with the assistance of other members of the Company’smanagement, have evaluated the effectiveness of the Company’s disclosure controlsand procedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934 as amended, as of the end of the periodcovered by this Form 10-Q.  Based onsuch evaluation, the Company’s Chief Executive Officer and Interim ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are effective.

 

The Company’s Chief Executive Officer and Interim ChiefFinancial Officer have also concluded that there have been no changes in theCompany’s internal control over financial reporting during the quarter ended June 30,2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

**ITEM4.  Submission of Matters to a Vote of Security Holders.**

 

TheCompany’s Annual Meeting of Shareholders was held on May 17, 2005 (the “AnnualMeeting”). The following proposals were considered and voted upon at the AnnualMeeting:

 

1.   Election of Directors. The followingdirectors were nominated for election to the Board of Directors until the nextAnnual Meeting or until their successors are duly chosen and qualified: JohnBailye, John Fazio, Bernard Goldsmith, Edward Kfoury, Paul Margolis, JohnMartinson, Terence Osborne and Patrick Zenner. The votes cast and withheld forsuch nominees were as follows:

 
| **Name**          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|
| John Bailye       |       | 37,208,276 |       | 3,067,249    |       |
| John Fazio        |       | 37,773,024 |       | 2,502,501    |       |
| Bernard Goldsmith |       | 37,666,023 |       | 2,609,502    |       |
| Edward Kfoury     |       | 37,666,223 |       | 2,609,302    |       |
| Paul Margolis     |       | 37,666,313 |       | 2,609,212    |       |
| John Martinson    |       | 37,666,813 |       | 2,608,712    |       |
| Terence Osborne   |       | 37,668,761 |       | 2,606,764    |       |
| Patrick Zenner    |       | 28,024,078 |       | 12,251,447   |       |

 

2.  Ratification of Independent RegisteredPublic Accounting Firm. The ratification of the appointment of Deloitte &Touche LLP as the Company’s independent registered public accounting firm forthe Company’s 2005 fiscal year was proposed. There were 40,261,618 votes castfor the proposal, 7,342 votes cast against the proposal and 6,565 abstentions.

 

3.  Amendment to 1997 Stock Incentive Plan.An amendment was proposed to the Company’s 1997 Stock Incentive Plan toincrease the number of authorized plan shares by 1,000,000 shares. There were 21,541,456votes cast for the amendment, 13,982,362 votes cast against the amendment and 104,456abstentions.

 

Based on these voting results, each of the directorsnominated was elected and both proposals were approved.

 

**ITEM 6.****               ****Exhibits**

 

10.1     Cashbonus between the Company and Natasha Giordano, Senior Vice President,incorporated by reference to the Company’s Current Report on Form 8-Kfiled on April 29, 2005.

 

10.2     TheDendrite International, Inc. 1997 Stock Incentive Plan, as amended,incorporated by reference to Appendix A to the Company’s proxy statement filedon April 26, 2005. 

 

10.3     EmploymentAgreement between the Company and George T. Robson, dated June 6, 2005,incorporated by reference to the Company’s Current Report on Form 8-Kfiled on June 10, 2005.

 

10.4     TheDendrite International, Inc. New Hire Option Grant Authorization, asamended, incorporated by reference to the Company’s Current Report on Form 8-Kfiled June 23, 2005.

 

31.1     Certification of John E. Bailye, Chairman ofthe Board and Chief Executive Officer of the Company, pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

31.2     Certification of George T. Robson, InterimChief Financial Officer of the Company, pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32        Certifications of John E. Bailye, Chairman ofthe Board and Chief Executive Officer of the Company, and George T. Robson, InterimChief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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:August 5, 2005

 
|   | By:    | /s/ John E. Bailye                                                               |   |
|--------|--------|----------------------------------------------------------------------------------|--------|
|   |   | John E. Bailye,                                                                  |
|   |   | Chairman of the Board and Chief Executive Officer (Principal  Executive Officer) |
|   |   |                                                                             |
|   | By:    | /s/ Brent J. Cosgrove                                                            |   |
|   |   | Brent J. Cosgrove,                                                               |
|   |   | Vice President and Corporate Controller  (Principal Accounting Officer)     |

 

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**EXHIBIT INDEX**

 

Material Contracts andCompensatory Plans and Arrangements:

 

10.1         Cash bonus between the Company and NatashaGiordano, Senior Vice President, incorporated by reference to the Company’sCurrent Report on Form 8-K filed on April 29, 2005.

 

10.2         The Dendrite International, Inc. 1997Stock Incentive Plan, as amended, incorporated by reference to Appendix A tothe Company’s proxy statement filed on April 26, 2005.  

 

10.3         Employment Agreement between the Company andGeorge T. Robson, dated June 6, 2005, incorporated by reference to theCompany’s Current Report on Form 8-K filed on June 10, 2005.

 

10.4         The Dendrite International, Inc. NewHire Option Grant Authorization, as amended, incorporated by reference to theCompany’s Current Report on Form 8-K filed June 23, 2005.

 

Certifications:

 

31.1         Certification of John E. Bailye, Chairman ofthe Board and Chief Executive Officer of the Company, pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

31.2         Certification of George T. Robson, InterimChief Financial Officer of the Company, pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32            Certifications of John E. Bailye, Chairman ofthe Board and Chief Executive Officer of the Company, and George T. Robson, InterimChief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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