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

 

**Washington, DC  20549**

 

**Form10-Q**

 

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

 

**For the quarterly period ended June 30, 2004**

 

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

 

**For the transition periodfrom          to          **

 

**Commission File Number  001-16379**

 
| **Dendrite  International, Inc.**                                |
|------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)          |
|                                                             |
| **New Jersey**                                                   | ** ** | **22-2786386** |
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |
| **1200 Mount Kemble Avenue**                                     |
| **Morristown, NJ  07960**                                   |
| (Address,  including zip code, of  principal executive offices)  |
|                                                             |
| **(973) 425-1200**                                               |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.ý yes o no

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct): ýyes o no

 

As of August 3, 2004,41,613,913 shares of Dendrite International, Inc. no par value common stockwere outstanding.

 

 

----

 

**DENDRITE INTERNATIONAL, INC.**

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED JUNE 30, 2004**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                    |   |
|----------------|--------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                         |   |
| **ITEM  1.**   | Financial  Statements                                                                                        |   |
|           |                                                                                                         |   |
|           | Consolidated  Statements of Operations (unaudited)  Three and six month periods ended June 30, 2004 and 2003 |   |
|           |                                                                                                         |   |
|           | Consolidated Balance Sheets  (unaudited)  June 30, 2004 and December 31, 2003                                |   |
|           |                                                                                                         |   |
|           | Consolidated  Statements of Cash Flows (unaudited)  Six months ended June 30, 2004 and 2003                  |   |
|           |                                                                                                         |   |
|           | Notes  to Unaudited Consolidated Financial Statements                                                        |   |
|           |                                                                                                         |   |
| **ITEM 2.**    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  |   |
|           |                                                                                                         |   |
| **ITEM 4.**    | Controls and Procedures                                                                                      |   |
|           |                                                                                                         |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                        |   |
| ** **     | ** **                                                                                                   |   |
| **ITEM  2**    | Changes  in Securities and Use of Proceeds                                                                   |   |
|           |                                                                                                         |   |
| **ITEM 4.**    | Submission of Matters to a Vote of Security  Holders                                                         |   |
| ** **     |                                                                                                         |   |
| **ITEM 6.**    | Exhibits and Reports on Form 8-K                                                                             |   |
|           |                                                                                                         |   |
| **Signatures** |                                                                                                         |   |

 

 

2

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PART I.     FINANCIALINFORMATION

 

ITEM1.     Financial Statements

 

**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 
| ** **                          | ** ** | **THREE MONTHS ENDED  JUNE 30,** | ** ** | **SIX MONTHS ENDED  JUNE 30,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                           |       |                             |       |                           |       |   |   |   |   |
| License fees                        |       | $                                | 2,431      |                           | $          | 2,752 |   | $ | 5,777 |   | $ | 5,315 |   |
| Services                            |       | 97,476                           |       | 66,776                         |       | 189,194 |   | 123,923 |   |
| Total revenues                      |       | 99,907                           |       | 69,528                         |       | 194,971 |   | 129,238 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Cost of revenues:                   |       |                             |       |                           |       |   |   |   |   |
| Cost of license fees                |       | 923                              |       | 1,204                          |       | 1,912 |   | 2,283 |   |
| Cost of services                    |       | 50,007                           |       | 33,578                         |       | 99,043 |   | 62,318 |   |
| Total cost of revenues              |       | 50,930                           |       | 34,782                         |       | 100,955 |   | 64,601 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Gross margin:                       |       |                             |       |                           |       |   |   |   |   |
| License fees                        |       | 1,508                            |       | 1,548                          |       | 3,865 |   | 3,032 |   |
| Services                            |       | 47,469                           |       | 33,198                         |       | 90,151 |   | 61,605 |   |
| Total gross margin                  |       | 48,977                           |       | 34,746                         |       | 94,016 |   | 64,637 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Operating expense (income):         |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative |       | 34,652                           |       | 20,983                         |       | 67,618 |   | 41,222 |   |
| Research and development            |       | 2,722                            |       | 3,215                          |       | 5,744 |   | 5,912 |   |
| Other operating (income)            |       | —                           |       | —                         |       | (339 | ) | — |   |
|                                |       | 37,374                           |       | 24,198                         |       | 73,023 |   | 47,134 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Operating income                    |       | 11,603                           |       | 10,548                         |       | 20,993 |   | 17,503 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Interest (expense) income, net      |       | (4                               | )          | 312                            |       | 3 |   | 554 |   |
| Other income                        |       | 18                               |       | 25                             |       | 61 |   | 34 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Income before income tax expense    |       | 11,617                           |       | 10,885                         |       | 21,057 |   | 18,091 |   |
| Income tax expense                  |       | 4,331                            |       | 4,962                          |       | 8,107 |   | 7,844 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net income                          |       | $                                | 7,286      |                           | $          | 5,923 |   | $ | 12,950 |   | $ | 10,247 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net income per share:               |       |                             |       |                           |       |   |   |   |   |
| Basic                               |       | $                                | 0.18       |                           | $          | 0.15 |   | $ | 0.31 |   | $ | 0.26 |   |
| Diluted                             |       | $                                | 0.17       |                           | $          | 0.14 |   | $ | 0.30 |   | $ | 0.25 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

3

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(IN THOUSANDS, EXCEPT SHARE DATA)**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                               | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Assets**                                                                                                                                                                                               |       |
| Current Assets:                                                                                                                                                                                          |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                  | 40,650     |                   | $          | 30,405 |   |
| Accounts receivable, net                                                                                                                                                                                 |       | 66,567             |       | 71,383                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                |       | 8,430              |       | 8,483                  |       |
| Deferred taxes                                                                                                                                                                                           |       | 13,078             |       | 8,844                  |       |
| Facility held for sale                                                                                                                                                                                   |       | 6,900              |       | 6,900                  |       |
| Total current assets                                                                                                                                                                                     |       | 135,625            |       | 126,015                |       |
|                                                                                                                                                                                                     |       |               |       |                   |       |
| Property and equipment, net of accumulated  amortization of $49,820 and $43,946                                                                                                                          |       | 31,184             |       | 28,140                 |       |
| Other assets                                                                                                                                                                                             |       | 4,900              |       | 2,004                  |       |
| Long-term receivable                                                                                                                                                                                     |       | —             |       | 3,157                  |       |
| Goodwill                                                                                                                                                                                                 |       | 84,792             |       | 70,403                 |       |
| Intangible assets, net                                                                                                                                                                                   |       | 21,176             |       | 18,574                 |       |
| Purchased capitalized software, net                                                                                                                                                                      |       | 1,361              |       | 1,666                  |       |
| Capitalized software development costs, net                                                                                                                                                              |       | 6,691              |       | 6,126                  |       |
| Deferred taxes                                                                                                                                                                                           |       | 6,272              |       | 6,372                  |       |
|                                                                                                                                                                                                     |       | $                  | 292,001    |                   | $          | 262,457 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                            |       |
| Current Liabilities:                                                                                                                                                                                     |       |               |       |                   |       |
| Current installments of long-term debt                                                                                                                                                                   |       | $                  | 386        |                   | $          | — |   |
| Accounts payable                                                                                                                                                                                         |       | 10,446             |       | 4,990                  |       |
| Income taxes payable                                                                                                                                                                                     |       | 10,918             |       | 6,194                  |       |
| Capital lease obligations                                                                                                                                                                                |       | 601                |       | 1,033                  |       |
| Accrued compensation and benefits                                                                                                                                                                        |       | 15,843             |       | 16,104                 |       |
| Accrued professional and consulting fees                                                                                                                                                                 |       | 6,341              |       | 7,842                  |       |
| Other accrued expenses                                                                                                                                                                                   |       | 20,040             |       | 21,038                 |       |
| Purchase accounting restructuring accrual                                                                                                                                                                |       | 3,754              |       | 3,203                  |       |
| Deferred revenues                                                                                                                                                                                        |       | 13,235             |       | 16,379                 |       |
| Total current liabilities                                                                                                                                                                                |       | 81,564             |       | 76,783                 |       |
|                                                                                                                                                                                                     |       |               |       |                   |       |
| Capital lease obligations                                                                                                                                                                                |       | 35                 |       | 187                    |       |
| Purchase accounting restructuring accrual                                                                                                                                                                |       | 5,589              |       | 8,627                  |       |
| Deferred rent                                                                                                                                                                                            |       | 468                |       | 369                    |       |
| Long-term debt, excluding current  installments                                                                                                                                                          |       | 1,257              |       | —                 |       |
| Other non-current liabilities                                                                                                                                                                            |       | 3,572              |       | 356                    |       |
|                                                                                                                                                                                                     |       |               |       |                   |       |
| Stockholders’ Equity:                                                                                                                                                                               |       |               |       |                   |       |
| Preferred stock, no par value, 15,000,000  shares authorized, none issued                                                                                                                                |       | —             |       | —                 |       |
| Common stock, no par value, 150,000,000  shares authorized, 43,803,530 and 43,013,428 shares issued; 41,580,830 and  40,790,728 shares outstanding at June 30, 2004 and December 31, 2003,  respectively |       | 110,689            |       | 100,448                |       |
| Retained earnings                                                                                                                                                                                        |       | 110,886            |       | 97,936                 |       |
| Deferred compensation                                                                                                                                                                                    |       | (64                | )          | (56                    | )          |
| Accumulated other comprehensive loss                                                                                                                                                                     |       | (1,119             | )          | (1,317                 | )          |
| Less treasury stock, at cost                                                                                                                                                                             |       | (20,876            | )          | (20,876                | )          |
| Total stockholders’ equity                                                                                                                                                                          |       | 199,516            |       | 176,135                |       |
|                                                                                                                                                                                                     |       | $                  | 292,001    |                   | $          | 262,457 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

4

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Operating activities:                                                              |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 12,950     |   | $ | 10,247 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 10,446                                |       | 8,564 |   |
| Amortization of deferred compensation, net  of forfeitures                         |       | 115                                   |       | (54 | ) |
| Other adjustments for non-cash items                                               |       | 901                                   |       | 608 |   |
| Changes in assets and liabilities, net of  effects from acquisitions:              |       |                                  |       |   |   |
| Decrease in accounts receivable                                                    |       | 9,780                                 |       | 6,858 |   |
| Decrease (increase) in prepaid expenses and  other current assets                  |       | 870                                   |       | (933 | ) |
| Increase in other assets                                                           |       | 693                                   |       | — |   |
| Decrease in accounts payable and accrued  expenses                                 |       | (3,576                                | )          | (16,100 | ) |
| Decrease in purchase accounting  restructuring accrual                             |       | (4,278                                | )          | — |   |
| Increase in income taxes payable                                                   |       | 675                                   |       | 58 |   |
| Decrease in accrued restructuring charge                                           |       | —                                |       | (260 | ) |
| Decrease in deferred revenue                                                       |       | (3,787                                | )          | (1,130 | ) |
| Increase in other non-current liabilities                                          |       | 114                                   |       | 68 |   |
|                                                                               |       |                                  |       |   |   |
| Net cash provided by operating activities                                          |       | 24,903                                |       | 7,926 |   |
|                                                                               |       |                                  |       |   |   |
| Investing activities:                                                              |       |                                  |       |   |   |
| Sales of short-term investments                                                    |       | —                                |       | 1,294 |   |
| Acquisitions, net of cash acquired                                                 |       | (6,812                                | )          | (51,682 | ) |
| Purchases of property and equipment                                                |       | (8,615                                | )          | (3,905 | ) |
| Additions to capitalized software  development costs                               |       | (2,074                                | )          | (1,382 | ) |
| Other, net                                                                         |       | —                                |       | (50 | ) |
|                                                                               |       |                                  |       |   |   |
| Net cash used in investing activities                                              |       | (17,501                               | )          | (55,725 | ) |
|                                                                               |       |                                  |       |   |   |
| Financing activities:                                                              |       |                                  |       |   |   |
| Borrowings from line of credit                                                     |       | —                                |       | 5,000 |   |
| Repayments of line of credit                                                       |       | —                                |       | (5,000 | ) |
| Repayments of long-term debt                                                       |       | (1,689                                | )          | — |   |
| Repayments of acquired loan                                                        |       | (624                                  | )          | — |   |
| Payments on capital lease obligations                                              |       | (592                                  | )          | (251 | ) |
| Issuance of common stock                                                           |       | 5,580                                 |       | 2,530 |   |
|                                                                               |       |                                  |       |   |   |
| Net cash provided by financing activities                                          |       | 2,675                                 |       | 2,279 |   |
|                                                                               |       |                                  |       |   |   |
| Effect of foreign exchange rate changes on  cash                                   |       | 168                                   |       | 401 |   |
|                                                                               |       |                                  |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | 10,245                                |       | (45,119 | ) |
| Cash and cash equivalents, beginning of  year                                      |       | 30,405                                |       | 68,308 |   |
|                                                                               |       |                                  |       |   |   |
| Cash and cash equivalents, end of period                                           |       | $                                     | 40,650     |   | $ | 23,189 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

5

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 

**1.  Basis of Presentation**

 

The consolidated financialstatements of Dendrite International, Inc. and its subsidiaries (“Dendrite” orthe “Company”) included in this Form 10-Q are unaudited and reflect alladjustments (consisting of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of the financialposition as of June 30, 2004, operating results for the three and six monthperiods ended June 30, 2004 and 2003 and cash flows for the six month periodsended June 30, 2004 and 2003.  Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

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

 

***Reclassifications.*******Certainprior period balances have been reclassified to conform to current periodpresentation.

 

**2.  Stock Based Compensation**

 

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

 
| ** **                                                                                                                                        | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                                            |       | $                                        | 7,286      |                                   | $          | 5,923 |   | $ | 12,950 |   | $ | 10,247 |   |
|                                                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Add/(Deduct): Deferred compensation  amortization, net of forfeitures recognized in accordance with APB 25, net of  related tax effects           |       | 6                                        |       | (2                                     | )          | 71 |   | (32 | ) |
|                                                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |       | (3,847                                   | )          | (2,831                                 | )          | (7,648 | ) | (5,257 | ) |
|                                                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Pro forma net income                                                                                                                              |       | $                                        | 3,445      |                                   | $          | 3,090 |   | $ | 5,373 |   | $ | 4,958 |   |
|                                                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Earnings per share:                                                                                                                               |       |                                     |       |                                   |       |   |   |   |   |
| Basic - as reported                                                                                                                               |       | $                                        | 0.18       |                                   | $          | 0.15 |   | $ | 0.31 |   | $ | 0.26 |   |
| Basic - pro forma                                                                                                                                 |       | $                                        | 0.08       |                                   | $          | 0.08 |   | $ | 0.13 |   | $ | 0.12 |   |
|                                                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Diluted - as reported                                                                                                                             |       | $                                        | 0.17       |                                   | $          | 0.14 |   | $ | 0.30 |   | $ | 0.25 |   |
| Diluted - pro forma                                                                                                                               |       | $                                        | 0.08       |                                   | $          | 0.08 |   | $ | 0.13 |   | $ | 0.12 |   |

 

The fair value for these optionswere estimated at the date of grant using the Black-Scholes option pricingmodel based upon the following assumptions:

 

6

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                               | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected dividend yield                  |       | 0.0                                      | %          | 0.0                                    | %          | 0.0 | % | 0.0 | % |
| Expected stock price volatility          |       | 70.0                                     | %          | 70.0                                   | %          | 70.0 | % | 70.0 | % |
| Weighted-average risk-free interest rate |       | 1.0                                      | %          | 3.2                                    | %          | 1.0 | % | 3.2 | % |
| Expected life of the option (years)      |       | 5.25                                     |       | 6.00                                   |       | 5.25 |   | 6.00 |   |

 

The stock-based employeecompensation expense determined under the fair value based methods for allawards, net of related tax effects, disclosed herein is determined based uponthe number and fair value of options granted and an estimate offorfeitures.  The expense is recognizedover the vesting period of the options. Under SFAS 123, compensation expense is not recognized for options thatare forfeited due to the employee’s failure to fulfill servicerequirements.  Therefore, while the fairvalue per option is not recalculated, the number of options vesting wouldchange, thus requiring recalculation of the aggregate compensationexpense.  The Company accounts forforfeitures by estimating the total number of awards that will vest andadjusting that estimate if evidence becomes available that a different numberof awards is expected to vest.

 

The Black-Scholes valuationmodel was developed for use in estimating the fair market value of tradedoptions which have no vesting restrictions and are fully transferable.  In addition, the Black-Scholes valuationmodel requires the input of the highly subjective assumptions disclosedabove.  Since the Company’s employeestock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affectthe fair market value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

 

**3.  Net Income Per Share**

 

The following table presentsthe computation of basic and diluted net income per share for the three and sixmonth periods ended June 30, 2004 and 2003:

 
| ** **                                 | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic net income per share computation:    |       |                                     |       |                                   |       |   |   |   |   |
| Net income                                 |       | $                                        | 7,286      |                                   | $          | 5,923 |   | $ | 12,950 |   | $ | 10,247 |   |
| Weighted-average common shares outstanding |       | 41,464                                   |       | 40,220                                 |       | 41,192 |   | 40,115 |   |
| Basic net income per share                 |       | $                                        | 0.18       |                                   | $          | 0.15 |   | $ | 0.31 |   | $ | 0.26 |   |
|                                       |       |                                     |       |                                   |       |   |   |   |   |
| Diluted net income per share computation:  |       |                                     |       |                                   |       |   |   |   |   |
| Net income                                 |       | $                                        | 7,286      |                                   | $          | 5,923 |   | $ | 12,950 |   | $ | 10,247 |   |
| Diluted common shares outstanding:         |       |                                     |       |                                   |       |   |   |   |   |
| Weighted-average common shares outstanding |       | 41,464                                   |       | 40,220                                 |       | 41,192 |   | 40,115 |   |
| Impact of dilutive stock options           |       | 1,878                                    |       | 881                                    |       | 1,749 |   | 589 |   |
| Diluted common shares outstanding          |       | 43,342                                   |       | 41,101                                 |       | 42,941 |   | 40,704 |   |
| Diluted net income per share               |       | $                                        | 0.17       |                                   | $          | 0.14 |   | $ | 0.30 |   | $ | 0.25 |   |

 

**4.  Comprehensive Income**

 

The components ofcomprehensive income for the three and six month periods ended June 30, 2004and 2003, consisted of the following:

 

7

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                               | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                                 | ** ** | **2003**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                               |       | $                                        | 7,286      |                                   | $          | 5,923 |   | $ | 12,950 |   | $ | 10,247 |   |
| Other comprehensive (losses) income:     |       |                                     |       |                                   |       |   |   |   |   |
| Foreign currency translation adjustments |       | (256                                     | )          | 216                                    |       | 198 |   | 87 |   |
| Comprehensive income                     |       | $                                        | 7,030      |                                   | $          | 6,139 |   | $ | 13,148 |   | $ | 10,334 |            |

 

**5.  Acquisitions**

 

***MDM***

 

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

 

The aggregate purchase pricefor MDM was approximately $9,160 and consisted of approximately $5,000 in cashpayments, approximately $3,300 in restricted stock, approximately $160 of legaland professional fees and $700 of the purchase price still outstanding andincluded within Other Accrued Expenses in the accompanying consolidated balancesheet as of June 30, 2004. The Company is in the process of finalizing athird-party valuation of certain intangible assets and therefore the purchaseprice allocation remains preliminary and subject to adjustment.  The preliminary allocation of purchase priceto intangible assets acquired in connection with the MDM acquisition is asfollows:

 
| ** **                                      | ** **   | **Weighted-Average  Estimated Useful  Life (Years)** | ** **   | **Acquired Intangible  Asset Value** | ** ** |
|-------------------------------------------------|--------------|------------------------------------------------------|--------------|--------------------------------------|------------|
| Intangible Assets Subject to Amortization:      |         |                                                 |         |                                 |       |
| Purchased database                              |         | 3                                                    |         | $                                    | 1,700      |   |
| Customer relationship assets                    |         | 7                                                    |         | 690                                  |       |
| Other                                           |         | 4                                                    |         | 240                                  |       |
| Intangible Assets Not Subject to  Amortization: |         |                                                 |         |                                 |       |
| Goodwill                                        |         | N/A                                                  |         | 5,742                                |       |
| *** ***                                    | *** *** | *** ***                                         | *** *** | $                                    | 8,372      | *** *** |

 

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

 

***Uto Brain***

 

On January 5, 2004, theCompany completed its acquisition of the capital stock of Uto Brain Co., Ltd.(“Uto Brain”).  Based in Osaka, Japan,Uto Brain provided more than thirty pharmaceutical companies with data,analytics, publishing and advisory services. The combining of resources of Uto Brain with the existing resources ofDendrite creates a comprehensive information, software and services companydedicated to the Japanese pharmaceutical industry and further enhancesDendrite’s ability to provide solutions to enhance sales, marketing andclinical functions of pharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

 

The aggregate purchase pricefor Uto Brain was approximately $4,800 (498,270 Yen), including approximately$100 of legal and professional fees.  Asof June 30, 2004, the Company paid approximately $2,300 of the purchase pricewith approximately $2,400 still outstanding and included within Other AccruedExpenses on the June 30, 2004 consolidated balance sheet.  In accordance with the purchase agreement,the outstanding balance is payable as follows: approximately $1,100 onSeptember 30, 2004; $400 on January 5, 2005; and $900 on March 31, 2005. Inaddition, the Company assumed approximately $3,800 in bank debt and an acquiredloan. The Company is in the process of finalizing a third-party valuation ofcertain intangible assets and therefore the purchase price allocation remainspreliminary and subject to adjustment. The preliminary allocation of purchase price to intangible assetsacquired in connection with the Uto Brain acquisition is as follows:

 

8

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                                      | ** ** | **Weighted-Average  Estimated Useful  Life (Years)** | ** ** | **Acquired Intangible  Asset Value** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| Intangible Assets Subject to Amortization:      |       |                                                 |       |                                 |       |
| Customer relationship assets                    |       | 10                                                   |       | $                                    | 1,870      |   |
|                                            |       |                                                 |       |                                 |       |   |
| Intangible Assets Not Subject to  Amortization: |       |                                                 |       |                                 |       |
| Goodwill                                        |       | N/A                                                  |       | 4,557                                |       |
| Trademarks                                      |       | N/A                                                  |       | 148                                  |       |
|                                            |       |                                                 |       | $                                    | 6,575      |   |

 

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

 

***Synavant***

 

On June 16, 2003, theCompany completed its acquisition of Synavant Inc. (“Synavant”). Synavantprovided a broad range of knowledge-based services to pharmaceutical and otherlife science companies around the world. Its comprehensive global solutionsincluded pharmaceutical customer relationship management (“CRM”) applications,interactive marketing, server and database management, dedicated localhelp-line support, training, telemarketing, sample management and productrecall services. Synavant was headquartered in Atlanta, Georgia, and hadoffices in 21 countries. The combining of resources of Synavant with theexisting resources of Dendrite creates a more comprehensive information,software and services company dedicated to the global life sciences industry,and further enhances Dendrite’s ability to provide solutions to the sales,marketing and clinical functions of pharmaceutical and other life sciencecompanies. Synavant’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase pricewas approximately $55,100, including consideration paid for the common stockand approximately $3,400 of legal and professional fees incurred in connectionwith the transaction.

 

The pro forma results ofoperations of the Company as if the Synavant acquisition had occurred as ofJanuary 1, 2003 are as follows:

 
| ** **               | ** ** | **Pro Forma Results for  the Three Months Ended  June 30, 2003 (A)** | ** ** | **Pro Forma Results for  the Six Months Ended  June 30, 2003 (B)** | ** ** |
|--------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Revenues                 |       | $                                                                    | 99,796     |                                                               | $          | 194,321 |   |
| Net (loss)               |       | $                                                                    | (3,883     | )                                                                  | $          | (4,603 | ) |
| Basic (loss) per share   |       | $                                                                    | (0.10      | )                                                                  | $          | (0.11 | ) |
| Diluted (loss) per share |       | $                                                                    | (0.10      | )                                                                  | $          | (0.11 | ) |

 

----

(A)      Net loss includes approximately $500 of historical restructuringcharges from Synavant as well as early termination fees related to Synavant’slines of credit of approximately $800.

(B)        Net loss includes approximately $1,300 of historical restructuringcharges from Synavant as well as early termination fees related to Synavant’slines of credit of approximately $1,850.

 

**6.  Purchase AccountingRestructuring Accrual**

 

In connection with the June2003 acquisition of Synavant, the Company restructured the combined operationsby exiting certain former Synavant facilities and eliminating certain formerSynavant positions. During the first quarter of 2004, the Company’s managementincreased its restructuring accrual by approximately $1,800 due to anadjustment of the total costs to exit certain former Synavant facilities andrecorded the corresponding adjustment to Goodwill in the accompanyingconsolidated balance sheet. The Company anticipates that the balance related tothe termination of employees will be paid during the current year and the remainingaccrued restructuring balance related to the facility exit costs will be paidover the life of the facility leases, ending in February 2012.

 

9

----

 

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 

The liability accrues forexpenses to be incurred in exiting certain Synavant facilities, includingassumptions 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.

 

The activity related to theSynavant and Software Associates International (“SAI”) purchase accountingrestructuring accruals for the six month period ended June 30, 2004 issummarized in the table below:

 
| ** **                        | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2003** | ** ** | **2004 Year-to-Date  Adjustments** | ** ** | **2004 Year-to-Date  Payments** | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  June 30, 2004** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------------------------|------------|
| Synavant                          |       |                                                                      |       |                               |       |                            |       |                                                                  |       |
| Termination payments to employees |       | $                                                                         | 2,378      |                               | $          | —                          |       | $                                                                     | (1,825     | ) | $ | 553 |   |
| Facility exit costs               |       | 7,187                                                                     |       | 1,791                              |       | (1,751                          | )          | 7,227                                                                 |       |
| Total Synavant                    |       | 9,565                                                                     |       | 1,791                              |       | (3,576                          | )          | 7,780                                                                 |       |
| SAI                               |       |                                                                      |       |                               |       |                            |       |                                                                  |       |
| Lease termination costs           |       | 2,265                                                                     |       | —                             |       | (702                            | )          | 1,563                                                                 |       |
| Total                             |       | $                                                                         | 11,830     |                               | $          | 1,791                           |       | $                                                                     | (4,278     | ) | $ | 9,343 |   |

 

**7.  Goodwill and Intangible Assets**

 

The total gross carryingamount and accumulated amortization for intangible assets subject toamortization are as follows:

 
|                                   |   | **Net Intangibles  as of  December 31, 2003** |   | ** **                |   |   |   | ** ** |   | **Net Intangibles  as of  June 30, 2004** |   |
|----------------------------------------|--------|-----------------------------------------------|--------|---------------------------|--------|--------|--------|------------|--------|-------------------------------------------|--------|
| **2004 Year-to-Date Activity**         |   |
| **Additions**                          |   | **Amortization**                              |   | **Translation and Other** |   |
| Purchased capitalized software         |   | $                                             | 1,666  |                      | $      | — |   | $          | (305   | )                                         | $      | — |   | $ | 1,361 |   |
| Capitalized software development costs |   | 6,126                                         |   | 2,074                     |   | (1,509 | )      | —     |   | 6,691                                     |   |
| Customer relationship assets           |   | 6,089                                         |   | 2,560                     |   | (642   | )      | (29        | )      | 7,978                                     |   |
| Backlog                                |   | 602                                           |   | —                    |   | (258   | )      | —     |   | 344                                       |   |
| Non-compete covenants                  |   | 2,560                                         |   | —                    |   | (748   | )      | (21        | )      | 1,791                                     |   |
| Purchased database                     |   | 2,460                                         |   | 1,700                     |   | (272   | )      | —     |   | 3,888                                     |   |
| Other intangibles                      |   | 131                                           |   | 240                       |   | (68    | )      | (6         | )      | 297                                       |   |
| Total                                  |   | $                                             | 19,634 |                      | $      | 6,574  |   | $          | (3,802 | )                                         | $      | (56 | ) | $ | 22,350 |   |

 

The changes in the carryingamount of intangible assets not subject to amortization for the period endedJune 30, 2004 are as follows:

 
| ** ** | ** ** | **Balance as of  December 31, 2003** | ** ** | **Additions** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Balance as of  June 30, 2004** | ** ** |
|------------|------------|--------------------------------------|------------|---------------|------------|----------------------------------------|------------|----------------------------------|------------|
| Goodwill   |       | $                                    | 70,403     |          | $          | 14,458                                 |       | $                                | (69        | ) | $ | 84,792 |   |
| Trademarks |       | 6,732                                |       | 148           |       | (2                                     | )          | 6,878                            |       |
| Total      |       | $                                    | 77,135     |          | $          | 14,606                                 |       | $                                | (71        | ) | $ | 91,670 |   |

 

The Company conducts itsannual impairment testing of goodwill as of October 1 of each year. For thequarter ended June 30, 2004, there were no changes in events or circumstancesthat would indicate impairment.

 

Aggregate annualamortization expense of intangible assets (exclusive of future additions) isestimated to be:

 

10

----

 

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| Year Ending December 31,                                           |   |   |   |
|--------------------------------------------------------------------|--------|--------|--------|
| 2004                                                               |   | $      | 7,882  |   |
| 2005                                                               |   | 5,787  |   |
| 2006                                                               |   | 4,193  |   |
| 2007                                                               |   | 1,858  |   |
| 2008                                                               |   | 972    |   |
| Thereafter                                                         |   | 5,460  |   |
|                                                               |   | 26,152 |   |
| Less: Year-to-date amortization expense                            |   | (3,802 | )      |
| Net intangible assets subject to  amortization as of June 30, 2004 |   | $      | 22,350 |   |

 

**8.Line-of-Credit**

 

The Company entered into aline-of-credit agreement (the “Agreement”) as of June 16, 2003, in the amountof $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreementreplaced the Company’s then existing $15,000 credit facility. The Agreement isavailable to finance working capital needs and possible future acquisitions.Among other covenants, the Agreement requires the Company to maintain a minimumconsolidated net worth, measured quarterly, which is equal to $130,000, plus50% of net income earned after April 1, 2003 and 75% of the net proceeds of anyoffering of new equity interests issued subsequent to June 30, 2003. As of June30, 2004, the Company’s consolidated net worth was $199,516. The Agreementcontains certain restrictions on the Company’s ability to create or assumeliens, dispose of assets, consolidate or merge, extend credit, incur otherindebtedness or pay cash dividends. As of June 30, 2004, the Company was incompliance with all covenants and did not have any amounts outstanding underthe line-of-credit.

 

As of June 30, 2004, theCompany had outstanding letters-of-credit of approximately $5,721.

 

**9.Long-Term Debt**

 

In connection with the UtoBrain acquisition, the Company assumed bank debt of approximately $3,200, witha weighted-average interest rate of 2.10%, and acquired a loan of approximately$600 with an interest rate of 1.80%.  Asof June 30, 2004, approximately $1,600 of the bank debt related to thistransaction was outstanding.  Theacquired loan balance was paid in full during the quarter ended March 31, 2004.

 

As of June 30, 2004, futurepayments related to the acquired bank debt are as follows:

 
| Year Ending December 31, |   |   |   |
|--------------------------|--------|--------|--------|
| 2004                     |   | $      | 225    |   |
| 2005                     |   | 418    |   |
| 2006                     |   | 288    |   |
| 2007                     |   | 259    |   |
| 2008                     |   | 93     |   |
| Thereafter               |   | 360    |   |
|                     |   | $      | 1,643  |   |
|                          |        |        |        |  |  |

 

**10. IncomeTaxes**

 

The Company’s effectiveincome tax expense rate decreased to 38.5% for the six months ended June 30,2004 from 43.4% for the six months ended June 30, 2003. The primary driver forthe change in the effective tax rate was the consolidation of certaininternational legal entities.  Prior tooperational restructuring and legal entity integration, these internationallegal entities generated losses that could not be benefited.  As a result of the integration, the amount oflosses generated that can not be benefited has been significantly reduced.  The effective tax rate for the quarter endedJune 30, 2004 was 37.3% compared to 45.6% for the quarter ended June 30, 2003.  In connection with the Synavant integrationin June 2003, the Company determined which foreign entities would be dissolvedand performed a reforecast of projected taxable income by jurisdiction andrecognized a full valuation allowance on a net operating loss carryforward forone of its foreign subsidiaries of approximately $608.

 

During the three monthsended June 30, 2004, the Company completed the tax accounting analysis relatedto the Synavant acquisition.  As aresult, the Company increased current deferred tax assets by approximately$4,500, increased

 

11

----

 

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 

incometaxes payable approximately $5,800, with the balance increasing goodwillapproximately $1,300.

 

**11.Deferred Compensation Plan**

 

The Company has supplementaldeferred compensation arrangements for the benefit of certain officers,directors and certain key executives. These arrangements are primarily fundedby life insurance contracts, which have been purchased by the Company. Thearrangements permit the participants to diversify their investments. The valueof the assets held, managed and invested, pursuant to the agreements wasapproximately $3,000 as of June 30, 2004 and is included in Other Assets in theaccompanying consolidated balance sheet. The corresponding deferredcompensation liability of $3,500 as of June 30, 2004 is recorded at the fairmarket value of the assets held in a rabbi trust and adjusted to reflect thefair value of the amount owed to certain officers, directors and certain keyexecutives and is included in Other Non-Current Liabilities in the accompanyingconsolidated balance sheet.

 

**12. CommonStock**

 

The following table rollsforward the balance of common stock from December 31, 2003 to June 30, 2004:

 
| **Balance as of  December 31, 2003** | ** ** | **Issuance of  Common  Stock (1)** | ** ** | **MDM  Acquisition** | ** ** | **Tax Benefit of  Stock Option  Exercises** | ** ** | **Other** | ** ** | **Balance as of  June 30, 2004** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|-----------|------------|----------------------------------|------------|
| $                                    | 100,448    |                               | $          | 5,580                |       | $                                           | 3,317      |      | $          | 1,221                            |       | $ | 123 |   | $ | 110,689 |   |
|                                      |            |                                    |            |                      |            |                                             |            |           |            |                                  |            |  |  |  |  |  |  |

 

----

(1) Includes issuance of common stock through employee stock purchase planas well as stock option exercises.

 

**13.  Customer and Geographic Segment Data**

 

For the three month periodsended June 30, 2004 and 2003, the Company derived approximately 27% and 44% ofits revenues from its largest customer, respectively. For the six month periodsended June 30, 2004 and 2003, the Company derived approximately 27% and 45% ofits revenues from its largest customer, respectively.

 

The Company is organized bygeographic location and has one reportable segment. All transfers betweengeographic areas have been eliminated from consolidated revenues. Operatingincome (loss) consists of total revenues recorded in the location lessoperating expenses and does not include interest income, other expense orincome tax expense. This data is presented in accordance with SFAS 131,“Disclosure About Segments of an Enterprise and Related Information.”

 

12

----

 

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **               | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2004**                                | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                |       |                                    |       |                                  |       |   |   |   |   |
| United States            |       | $                                       | 61,852     |                                  | $          | 54,193 |   | $ | 124,318 |   | $ | 102,801 |   |
| Europe                   |       | 24,281                                  |       | 8,558                                 |       | 44,876 |   | 13,616 |   |
| All other                |       | 13,774                                  |       | 6,777                                 |       | 25,777 |   | 12,821 |   |
|                     |       | $                                       | 99,907     |                                  | $          | 69,528 |   | $ | 194,971 |   | $ | 129,238 |   |
| Operating income (loss): |       |                                    |       |                                  |       |   |   |   |   |
| United States            |       | $                                       | 4,255      |                                  | $          | 8,902 |   | $ | 10,470 |   | $ | 13,851 |   |
| Europe                   |       | 2,789                                   |       | 233                                   |       | 3,416 |   | (98 | ) |
| All other                |       | 4,559                                   |       | 1,413                                 |       | 7,107 |   | 3,750 |   |
|                     |       | $                                       | 11,603     |                                  | $          | 10,548 |   | $ | 20,993 |   | $ | 17,503 |   |

 
| ** **           | ** ** | **As of June 30,  2004** | ** ** | **As of December  31, 2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| Identifiable assets: |       |                     |       |                         |       |       |       |       |       |
| United States        |       | $                        | 230,076    |                         | $          | 218,707    |       |       |       |   |   |
| Europe               |       | 31,567                   |       | 28,443                       |       |       |       |       |       |
| All other            |       | 30,358                   |       | 15,307                       |       |       |       |       |       |
|                 |       | $                        | 292,001    |                         | $          | 262,457    |       |       |       |   |   |

 

For disclosure purposes,license revenues have been included within the results of the United States.

 

13

----

 

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

**($ IN THOUSANDS)**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Form 10-Q containscertain forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934,which are intended to be covered by the safe harbors created by such acts. Forthis purpose, any statements that are not statements of historical fact may bedeemed to be forward-looking statements, including the statements under“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” regarding our strategy, future operations, future expectations andfuture estimates, future financial position or results and future plans andobjectives of management. Those statements in this Form 10-Q containing thewords “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 MayAffect Future Results,” many of which are beyond our control. Although webelieve that the assumptions underlying our forward-looking statements arereasonable, any of the assumptions could be inaccurate and actual results maydiffer materially from those indicated by the forward-looking statementsincluded in this Form 10-Q, as more fully described under “Factors That MayAffect Future Results.” In light of the significant uncertainties inherent inthe forward-looking statements included in this Form 10-Q, you should notconsider the inclusion of such information as a representation by us or anyoneelse that we will achieve such results. Moreover, we assume no obligation toupdate these forward-looking statements to reflect actual results or changes inassumptions, expectations or projections. In addition, our financial andperformance outlook concerning future revenues, margins, earnings, earnings pershare and other operating or performance results does not include the impact ofany future acquisitions, future acquisition-related expenses, debt, dilution orany future restructuring or other charges that may occur from time-to-time dueto management decisions and changing business circumstances and conditions.

 

**EXECUTIVEOVERVIEW**

 

We provide a broad array ofsolutions worldwide that enable pharmaceutical and other life science companiesto strategically optimize their sales, marketing and clinical resources. Ourstrategy is to continue to diversify and expand our solutions portfolio,customer base and geographic reach by leveraging our extensive knowledge and deeprelationships with the pharmaceutical and life sciences industries andcapitalizing upon our deep relationships in these industries. We have and willcontinue to rely on both internal growth and acquisitions to meet to our growthobjectives.

 

 Our acquisition of Synavant Inc. (“Synavant”)in 2003 diversified and expanded our solutions portfolio, particularly as itrelates to the pharmaceutical marketing channel, by adding interactivemarketing services in the U.S. and abroad, as well as new data and servicessolutions in Europe. In January 2004, we further broadened and enhanced ourproduct and service portfolio in the Japanese pharmaceutical industry andextended our leadership position in Japan with our acquisition of Uto Brain Co.Ltd. (“Uto Brain”). In April 2004, we acquired the Medical Data Managementgroup of companies (“MDM”), increasing our ability to provide leading solutionsthat drive promotional and sales effectiveness in Central and Eastern Europe.We believe these acquisitions complement our current business operations byenhancing our solutions portfolio and increase our access to new customers andmarkets.

 

We have increased both oursolutions and customer base and believe that this combination presentssignificant opportunity for future growth. We have also committed to investing in key initiatives to help drivefuture growth.  We believe increasedinvestments in marketing and sales resources and programs will help us moreeffectively sell and market the diversity of solutions we now offer.  Our future growth is dependent on our abilityto further penetrate the markets in which we operate and increase the adoptionrate of our expanded portfolio of solutions.

 

We evaluate our performancebased upon a number of operating metrics. Chief among these are revenues,services gross margin percentage, operating margins, diluted net income pershare, operating cash flow and days sales outstanding. In the second quarter of2004, we saw the continued execution of our strategy yield growth in revenues,operating margins and diluted net income per share. We also continued toexhibit strong cash generation attributes, improving days sales outstandingfrom the prior year and generating strong positive operating cash flow even aswe continued to pay some of the remaining liabilities associated with ouracquisitions.

 

**CRITICALACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

 

There have been no materialchanges to our critical accounting policies, judgments and estimates from theinformation provided in Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report onForm 10-K for the year ended December 31, 2003.

 

14

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

**($ IN THOUSANDS)**

 

**MERGERS ANDACQUISITIONS**

 

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

 

**MDM**

 

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

 

The aggregate purchase pricefor MDM was approximately $9,160 and consisted of approximately $5,000 in cashpayments, approximately $3,300 in restricted stock, approximately $160 in legaland professional fees and $700 of the purchase price still outstanding andincluded within Other Accrued Expenses of the accompanying consolidated balancesheet as of June 30, 2004. We are in the process of finalizing a third-partyvaluation of certain intangible assets and therefore the purchase priceallocation remains preliminary and subject to adjustment.

 

**Uto Brain**

 

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

 

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

 

**Synavant**

 

On June 16, 2003, wecompleted our acquisition of Synavant. Synavant provided a broad range ofknowledge-based services to pharmaceutical and other life science companiesaround the world. Its comprehensive global solutions included pharmaceuticalcustomer relationship management (“CRM”) applications, interactive marketing,server and database management, dedicated local help-line support, training,telemarketing, sample management and product recall services. Synavant washeadquartered in Atlanta, Georgia, and had offices in 21 countries. We believethat combining Synavant’s resources with the existing resources of Dendritecreates a more comprehensive information, software and services companydedicated to the global life sciences industry, and further enhances ourability to provide market leading solutions to the sales, marketing andclinical functions of pharmaceutical and other life science companies.Synavant’s results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition.

 

The aggregate purchase pricefor Synavant was approximately $55,100, including consideration paid for thecommon stock and approximately $3,400 of legal and professional fees incurredin connection with the transaction.

 

In connection with the June2003 acquisition of Synavant, we restructured the combined operations byexiting certain former Synavant facilities and eliminating certain formerSynavant positions.  During the firstquarter of 2004, our management increased its restructuring accrual estimate byapproximately $1,800 due to an adjustment of the total costs to exit certainformer Synavant facilities and recorded the corresponding adjustment toGoodwill in the accompanying consolidated balance sheet. Management believes theaccrued liability as of June 30, 2004 will be adequate to cover the costsincurred related to the restructuring.

 

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

 

15

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

**($ IN THOUSANDS)**

 

**RESULTS OFOPERATIONS**

 

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

 

***REVENUES.***Totalrevenues increased to $99,907 for the three months ended June 30, 2004, up$30,379, or 44%, from $69,528 for the three months ended June 30, 2003.  Revenue growth for the quarter ended June 30,2004 was driven by the inclusion of a full quarter of Synavant revenue andstrong performances across nearly all product lines and geographies.

 

License fee revenues decreased to $2,431 for the three months endedJune 30, 2004, down $321, or 12%, from $2,752 for the three months ended June30, 2003. License fees are, by nature, non-recurring items and fluctuate fromperiod-to-period.

 

Service revenues increasedto $97,476 for the three months ended June 30, 2004, up $30,700, or 46%, from$66,776 for the three months ended June 30, 2003. This increase was primarilydriven by the acquisition of Synavant. Including the acquired revenue, the Company experienced growth ofapproximately 10% in domestic technical services, approximately 33% in domesticdata and business consulting services and approximately 25% in domestic salessupport services. In addition, our international services as well as our lowgross margin and pass through postage services both grew more than 100% versusthe comparable prior year period.

 

***COST OF REVENUES.***Total cost of revenues increased to $50,930 for the three months endedJune 30, 2004, an increase of $16,148, or 46%, from $34,782 for the threemonths ended June 30, 2003.   The primarydriver of the increase was our acquisition of Synavant.

 

Cost of license feesdecreased to $923 for the three months ended June 30, 2004, down $281, or 23%,from $1,204 for the three months ended June 30 2003. Cost of license fees forthe three months ended June 30, 2004 is comprised of the amortization ofcapitalized software development costs and purchased software costs of $853 and$153, respectively, and third-party vendor license fees of $389.  In addition, the Company reversed an accrualof $472 related to royalties as a result of an agreement in the second quarterabsolving the Company of such obligation. Cost of license fees for thecomparable period in 2003 was comprised of the amortization of capitalizedsoftware development costs and purchased software costs of $686 and $153,respectively, and third-party vendor license fees of $240.

 

Cost of services increasedto $50,007 for the three months ended June 30, 2004, up $16,429, or 49%, from$33,578 for the three months ended June 30, 2003. The increase in cost ofservices is primarily a result of the additional costs due to the increase in headcountand associated costs from the Synavant acquisition, as well as an increase inpass-through postage costs of approximately $3,100.

 

***GROSS MARGIN.***Total gross margin for the three months ended June 30, 2004 and 2003was 49% and 50%, respectively.

 

Gross margin for licensefees was 62% for the three months ended June 30, 2004, up from 56% for thethree months ended June 30, 2003. The increase in gross margin was primarilyattributable to the reversal of the accrual of $472 related to royalties in thecurrent quarter partially offset by an increase in amortization expense.

 

Gross margin for serviceswas 49% and 50% for the three month periods ended June 30, 2004 and 2003,respectively. This decrease in gross margin for services was predominantlyattributable to the inclusion of certain Synavant lower margin business,including the increase of approximately $3,100 of pass-through postage.

 

***SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES.*** SG&A expenses increased to $34,652 forthe three months ended June 30, 2004, up $13,669, or 65%, from $20,983 for thethree months ended June 30, 2003. This increase reflects the additionaloperating costs and amortization expense related to the Synavant, Uto Brain andMDM acquisitions. As a percentage of revenues, SG&A increased to 35% forthe three months ended June 30, 2004, up from 30% for the three months endedJune 30, 2003.  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.

 

***RESEARCH AND DEVELOPMENT (R&D) EXPENSES.*** R&D expenses decreased to $2,722 for thethree months ended June 30, 2004, down $493, or 15%, from $3,215 for the threemonths ended June 30, 2003. As a percentage of revenues, R&D expenses decreasedto 3% for the three months ended June 30, 2004 from 5% for the three monthsended June 30, 2003, due primarily to the significant increase inrevenues.  In addition, the Companycapitalized more costs in the three months ended June 30, 2004 than in previousquarters due to the development for the release of its next generation CRMsolution, expected to be released in 2005. We expect the capitalization rates for the remainder of 2004 to be lowercompared to the second

 

16

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

**($ IN THOUSANDS)**

 

quarter of 2004, but higher than our normalcapitalization rate.

 

***PROVISION FOR INCOME TAXES.***Our income tax expense rate decreased to 37.3%for the three months ended June 30, 2004 from 45.6% for the three months endedJune 30, 2003. The primary driver for the change in the effective tax rate wasthe consolidation of certain international legal entities.  Prior to operational restructuring and legalentity integration, these international legal entities generated losses thatcould not be benefited.  As a result ofthe integration, the amount of losses generated that can not be benefited hasbeen significantly reduced.  Inconnection with the Synavant integration in June 2003, the Company determinedwhich foreign entities would be dissolved and performed a reforecast ofprojected taxable income by jurisdiction and recognized a full valuationallowance on a net operating loss carryforward for one of its foreignsubsidiaries of approximately $608.

 

**SIX MONTHSENDED JUNE 30, 2004 AND 2003**

 

***REVENUES.***Totalrevenues increased to $194,971 for the six months ended June 30, 2004, up$65,733, or 51%, from $129,238 for the six months ended June 30, 2003.  Revenue growth for the six months ended June30, 2004 was driven by the inclusion of a full second quarter of Synavantrevenue and strong performances across nearly all product lines and geographies.

 

License fee revenuesincreased to $5,777 for the six months ended June 30, 2004, up $462, or 9%,from $5,315 for the six months ended June 30, 2003. This increase is primarilyrelated to a large sale of licenses to a client in Japan and from sales toclients, of former Synavant companies, that expanded their European salesforces.  License fees are, by nature,non-recurring items and fluctuate from period-to-period.

 

Service revenues increasedto $189,194 for the six months ended June 30, 2004, up $65,271, or 53%, from$123,923 for the six months ended June 30, 2003. This increase was primarilydriven by the June 2003 acquisition of Synavant.  Including the acquired revenue, the Companyexperienced growth of approximately 10% in domestic technical services,approximately 86% in domestic data and business consulting services andapproximately 31% in domestic sales support services.  In addition, our international services andlow gross margin and pass through postage services increased more than 100% versusthe comparable prior year period.

 

***COST OF REVENUES.***Total cost of revenues increased to $100,955 for the six months endedJune 30, 2004, an increase of $36,354, or 56%, from $64,601 for the six monthsended June 30, 2003.  The primary driverof the increase was our acquisition of Synavant.

 

Cost of license feesdecreased to $1,912 for the six months ended June 30, 2004, down $371, or 16%,from $2,283 for the six months ended June 30 2003. Cost of license fees for thesix months ended June 30, 2004 is comprised of the amortization of capitalizedsoftware development costs and purchased software costs of $1,509 and $305,respectively, and third-party vendor license fees of $570. In addition, theCompany reversed an accrual of $472 related to royalties as a result of anagreement in the second quarter absolving the Company of such obligation.  Cost of license fees for the comparableperiod in 2003 is comprised of the amortization of capitalized softwaredevelopment costs and purchased software costs of $1,383 and $305,respectively, and third-party vendor license fees of $595.

 

Cost of services increasedto $99,043 for the six months ended June 30, 2004, up $36,725, or 59%, from$62,318 for the six months ended June 30, 2003. The increase in cost ofservices is primarily a result of the additional costs due to the increase inheadcount and associated costs from the Synavant acquisition, as well as anincrease in pass-through postage costs of approximately $7,600.

 

***GROSS MARGIN.***Total gross margin for the six months ended June 30, 2004 and 2003 was48% and 50%, respectively.

 

Gross margin for licensefees was 67% for the six months ended June 30, 2004, up from 57% for the sixmonths ended June 30, 2003. The increase in gross margin was primarilyattributable to the decrease in cost of license fees which generally containedless third-party imbedded software costs during the six months ended June 30,2004 and the reversal of the $472 accrual related to royalties partially offsetby an increase in amortization expense.

 

Gross margin for serviceswas 48% and 50% for the six month periods ended June 30, 2004 and 2003,respectively. This decrease in gross margin for services is attributable to theinclusion of certain Synavant lower margin business, including approximately$7,600 of pass-through postage.

 

***SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES.*** SG&A expenses increased to $67,618 forthe six months ended June 30, 2004, up $26,396, or 64%, from $41,222 for thesix months ended June 30, 2003. This increase reflects the additional operatingcosts and amortization expense related to the Synavant, Uto Brain and MDMacquisitions.

 

17

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

**($ IN THOUSANDS)**

 

As a percentage of revenues, SG&Aincreased to 35% for the six months ended June 30, 2004, up from 32% for thesix months ended June 30, 2003.  We haveand will continue to invest in sales and marketing initiatives in order todrive our top-line growth while continuing to focus on cost containmentmeasures.

 

***RESEARCH AND DEVELOPMENT (R&D) EXPENSES.*** R&D expenses decreased to $5,744 for thesix months ended June 30, 2004, down $168, or 3%, from $5,912 for the sixmonths ended June 30, 2003. As a percentage of revenues, R&D expensesdecreased to 3% for the six months ended June 30, 2004 from 5% for the sixmonths ended June 30, 2003, due primarily to the significant increase inrevenues.  In addition, the Companycapitalized more costs in the six months ended June 30, 2004 than in comparableprior periods due to the development for the release of its next generation CRMsolution, expected to be released in 2005.

 

***OTHER OPERATING (INCOME).*** We received proceeds from an insurance claim of $339 during the threemonth period ended March 31, 2004.

 

***PROVISION FOR INCOME TAXES.***Our effective income tax expense ratedecreased to 38.5% for the six months ended June 30, 2004 from 43.4% for the sixmonths ended June 30, 2003. The primary driver for the change in the effectivetax rate was the consolidation of certain international legal entities.  Prior to operational restructuring and legalentity integration, these international legal entities generated losses thatcould not be benefited.  As a result ofthe integration, the amount of losses generated that can not be benefited hasbeen significantly reduced.  Inconnection with the Synavant integration in June 2003, the Company determinedwhich foreign entities would be dissolved and performed a reforecast ofprojected taxable income by jurisdiction and recognized a full valuationallowance on a net operating loss carryforward for one of its foreignsubsidiaries of approximately $608.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At June 30, 2004, workingcapital was $54,061 compared to $49,232 as of December 31, 2003. Cash and cashequivalents investments were $40,650 as of June 30, 2004, compared to $30,405as of December 31, 2003. These increases were primarily attributable to thecash generated by operating activities partially offset by payments made inconnection with the Synavant, Uto Brain and MDM acquisitions as well as highercapital expenditures related to our new corporate headquarters.

 

We finance our businessprimarily through cash generated by operations. Net cash provided by operatingactivities was $24,903 and $7,926 for the six month periods ended June 30, 2004and 2003, respectively.  Our accountsreceivable days sales outstanding decreased from 68 days for the quarter endedDecember 31, 2003, to 60 days for the quarter ended June 30, 2004, partiallydue to the collection of certain annual billings and the receipt ofapproximately $3,300 of a long-term contracted receivable outstanding as ofDecember 31, 2003.  We also generatedoperating cash from our considerable growth in net income adjusted for changesin assets and liabilities, net of effects from acquisitions.  These increases in operating cash flow werepartially offset by $4,278 of payments related to accrued purchase accountingcharges incurred in connection the Synavant and SAI acquisitions as well asincreased payments of accounts payable and accrued expenses.  Included in the cash generated by operationsfor the six months ended June 30, 2003 is approximately $16,000 of payments relatedto Synavant liabilities as of the date of acquisition.

 

Cash used in investingactivities was $17,501 for the six months ended June 30, 2004, and includespayments for the MDM and Uto Brain acquisitions as well as increased purchasesof property and equipment due to the ongoing relocation of our corporateheadquarters.  Cash used in investingactivities was $55,725 for the six months ended June 30, 2003, and primarilyattributable to the payments made related to the Synavant acquisition.

 

As anticipated, purchases ofproperty and equipment increased for the six months ended June 30, 2004 versusthe comparable prior year period. The increase is primarily due to the capitalrequirements of the new corporate headquarters and the need to adjustgoing-forward capital requirements for a larger combined Company reflecting theacquisition of Synavant. We currently expect that we will incur approximately$8,000 of capital expenditures in connection with the headquarters relocationfor the year ending December 31, 2004. In addition, we also expect capitalspending in the range of approximately $8,000 to $12,000 to support theinfrastructure associated with a full year of combined Dendrite and Synavantoperations. We review our capital expenditure program periodically and adjustit as required to meet current needs. The foregoing amounts are based oncurrent assumptions and are subject to change during the course of 2004.

 

An agreement to sell thefacility in Piscataway was terminated during the quarter ended June 30,2004.  We continue to actively search forpotential buyers.

 

Cash provided by financingactivities was $2,675 for the six months ended June 30, 2004, compared to$2,279 for the six months ended June 30, 2003. The increase of $396 wasprimarily attributable to an increase in stock option exercises partiallyoffset by repayments of long-term debt and loans acquired in connection withthe Uto Brain acquisition.

 

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

**($ IN THOUSANDS)**

 

We regularly evaluateopportunities to acquire products or businesses complementary to ouroperations. Such acquisition opportunities, if they arise and are successfullycompleted, may involve the use of cash, equity or debt instruments. We believethat available funds, anticipated cash flows from operations and theavailability of our revolving line of credit will satisfy our current projectedworking capital and capital expenditure requirements, exclusive of cash requiredfor possible future acquisitions of businesses, products and technologies,during the next twelve to eighteen months. There can be no assurance, however,that our business will continue to generate cash flow at current levels or thatanticipated operational improvements will be achieved. Our ability to generatefuture cash flows depends on our future performance and financial results,which, to a certain extent, are subject to general conditions in or affectingthe pharmaceutical industry and to general economic, political, financial,competitive, legislative and regulatory factors beyond our control.

 

**ContractualObligations and Commitments**

 

We entered into a creditagreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 withJPMorgan Chase Bank that expires on July 1, 2005. The Agreement replaced ourthen existing $15,000 credit facility. The Agreement is available to financeworking capital needs and possible future acquisitions. Among other covenants,the agreement requires 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 new equityinterests issued subsequent to June 30, 2003. As of June 30, 2004, ourconsolidated net worth was $199,516. The Agreement contains certainrestrictions on our ability to create or assume liens, dispose of assets,consolidate or merge, extend credit, incur other indebtedness or pay cashdividends. As of June 30, 2004, there were no borrowings outstanding under theAgreement and we were in compliance with all covenants.

 

In connection with the UtoBrain acquisition, we assumed bank debt of approximately $3,200, with aweighted-average interest rate of 2.10% and acquired a loan of approximately$600, with an interest rate of 1.80%.  Asof June 30, 2004, approximately $1,600 of the bank debt related to thistransaction was outstanding.

 

Our principal commitments atJune 30, 2004 consisted primarily of obligations under operating and capitalleases as well as future minimum guarantees to certain vendors. Future minimumpayments on these obligations are as follows:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** |
| Capital leases              |       | $                          | 636        |   | $ | 441 |   | $ | 195 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Corporate headquarters      |       | 1,236                      |       | 1,236 |   | — |   | — |   | — |   | — |   | — |   |
| Minimum guarantees          |       | 1,407                      |       | 910 |   | 497 |   | — |   | — |   | — |   | — |   |
| Uto Brain purchase price    |       | 2,423                      |       | 1,077 |   | 1,346 |   | — |   | — |   | — |   | — |   |
| Long-term debt              |       | 1,643                      |       | 225 |   | 418 |   | 288 |   | 259 |   | 93 |   | 360 |   |
| Operating leases (1)        |       | 101,732                    |       | 8,040 |   | 15,437 |   | 12,921 |   | 11,795 |   | 9,612 |   | 43,927 |   |
| Total                       |       | $                          | 109,077    |   | $ | 11,929 |   | $ | 17,893 |   | $ | 13,209 |   | $ | 12,054 |   | $ | 9,705 |   | $ | 44,287 |   |

 

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(1) Operating lease amounts disclosed aboveinclude $15,123 of future operating lease costs, excluding estimated futuresublease income, accrued for in the purchase accounting restructuring accrualsrelated to the Synavant and SAI acquisitions.

 

In addition to thecontractual obligations disclosed above, we are currently in negotiations withseveral vendors for net capital expenditures of approximately $3,000 to $5,000in connection with the corporate headquarters relocation.

 

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

 

We have an agreement with aventure capital fund with a commitment to contribute $1,000 to the fund,callable at the discretion of the general partner in $100 increments. As ofJune 30, 2004, $600 of the commitment remains. The agreement has a terminationdate of December 11, 2010, subject to extension with the consent of a majorityin interest of the limited partners. This asset is recorded within Other Assetsin the accompanying June 30, 2004 and December 31, 2003 consolidated balancesheets.

 

### **FACTORS THAT MAY AFFECT FUTURERESULTS**

###  

Set forth in this Form 10-Qare certain risks and uncertainties that could cause our actual results todiffer materially from the forward-looking statements contained in this Form10-Q. You are strongly urged to carefully consider the cautionary language andrisks set forth below.

 

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

**($ IN THOUSANDS)**

 

**WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTIONOF OUR REVENUES**

 

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

 

**OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICALINDUSTRY**

 

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

 

•    the significant and continuing consolidation of the pharmaceuticalindustry which may reduce the number of our existing and potential customers;

•    regulatory changes that permit the over-the-counter sale of formerlyprescription-only drugs;

•    increasing Food and Drug Administration activism; and

•    competitive pressure on the pharmaceutical industry resulting from thecontinuing shift to delivery of healthcare and pharmaceuticals through managedcare organizations.

 

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

 

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

 

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

 

**WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

 

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

 

•unexpected problems, liabilities, risks or costs associated with the acquiredbusiness;

•the effect of the acquisitions on our financial and strategic position;

•our inability to successfully integrate the acquired business;

•the failure of an acquired business to further our strategies;

•our inability to achieve expected cost and business synergies;

•the significant strain on our operating systems;

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

•the impairment or loss of relationships with customers of the acquiredbusiness;

•the negative impact of the combination of different corporate cultures;

•the loss of key employees of the acquired company; and

•the integration and maintenance of uniform, company-wide standards, proceduresand policies.

 

Any of these factors couldhave a material adverse effect on our revenues and earnings. We expect that theconsideration paid for future acquisitions, if any, could be in the form ofcash, equity, debt or a combination of these. To the extent that we issueshares of stock or other rights to purchase stock in connection with any futureacquisition, existing shareholders will experience dilution and potentiallydecreased earnings per share.

 

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

 

We may in the future acquireadditional complementary companies, products or technologies. If we do so, wemay face the same risks, uncertainties and disruptions discussed above. Inaddition, our profitability may suffer because of

 

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

**($ IN THOUSANDS)**

 

acquisition-relatedcosts or amortization costs for acquired intangible assets.

 

**BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAYCAUSE A DECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES**

 

Business and economicpressures on our major customers may result in budget constraints that directlyimpact their ability to purchase our new products and services offerings. Wecannot assure you that any decrease in demand caused by these pressures willnot have a material adverse effect on our business, operating results orfinancial condition.

 

**OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULTTO PREDICT OUR QUARTERLY REVENUES**

 

The selection of a CRM orSFA solution generally entails an extended decision-making process by ourcustomers because of the strategic implications, substantial costs andsignificant commitment of resources associated with a customer’s license orimplementation of the solution. Given the importance of the decision, seniorlevels of management of our customers are often involved in the process and, insome instances, their board of directors may also be involved. As a result, thedecision-making process typically takes nine to eighteen months, and in certaincases longer. Accordingly, we cannot fully control or predict the timing of ourexecution of contracts with customers. Prior sales and implementation cyclescan not be relied upon as any indication of future cycles.

 

In addition, animplementation process of three to six or more months before the software isrolled out to a customer’s sales force is customary. However, if a customerwere to delay or extend its implementation process, our quarterly revenues maydecline below expected levels and could adversely affect our results ofoperations.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE**

 

Our total revenue andoperating results may vary significantly from quarter to quarter. The mainfactors that could cause these fluctuations are:

 

•the discretionary nature of our customers’ purchase and budget cycles;

•potential delays in recognizing revenue from license transactions;

•seasonal variations in operating results; and

•variations in the fiscal or quarterly cycles of our customers.

 

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

**($ IN THOUSANDS)**

 

In addition, we establishour expenditure levels for product development, sales and marketing and some ofour other operating expenses based in large part on our expected futurerevenues and anticipated competitive conditions. In particular, we frequentlyadd staff in advance of new business to permit adequate time for training. Ifthe new business is subsequently delayed, canceled or not awarded, we will haveincurred expenses without the associated revenues. We also may increase salesand marketing expenses if competitive pressures become greater than originallyanticipated. Since only a small portion of our expenses varies directly withour actual revenues, our operating results and profitability are likely to be adverselyand disproportionately affected if our revenues fall below our targeted goalsor expectations.

 

As a result of these andother factors, revenues for any quarter may be subject to fluctuation. Youshould not rely on our period-to-period comparisons of our results ofoperations as indications of future performance. Our future quarterly resultsmay from time to time not meet the expectations of market analysts orinvestors, which could have a materially adverse effect on the price of ourcommon stock.

 

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

 

The market for CRM and SFAproducts changes rapidly because of frequent improvements in computer hardwareand software technology. Our future success will depend, in part, on ourability to:

 

•    use available technologies and data sources to develop new products andservices and to enhance our current products and services;

•    introduce new solutions that keep pace with developments in our targetmarkets; and

•    address the changing and increasingly sophisticated needs of ourcustomers.

 

We cannot assure you that wewill successfully develop and market new products or product enhancements thatrespond to technological advances in the marketplace, or that we will do so ina timely fashion. We also cannot assure you that our products will adequatelyand competitively address the needs of the changing marketplace.

 

Competition for softwareproducts has been characterized by shortening product cycles. We may bematerially and adversely affected by this trend if the product cycles for ourproducts prove to be shorter than we anticipate. If that happens, our business,operating results or financial condition could be adversely affected.

 

To remain competitive, wealso may have to spend more of our revenues on product research and developmentthan we have in the past. As a result, our results of operations could bematerially and adversely affected.

 

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

 

Our software products are technologicallycomplex and 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 from significanterrors. Software errors could cause delays in the commercial release ofproducts until the errors have been corrected. Software errors may cause us tobe in breach of our agreements with customers, which could result intermination of the agreements and monetary damages. Software errors may causedamage to our reputation and cause us to commit significant resources to theircorrection. Errors that result in termination of agreements, monetary damages,losses or delays could have a material adverse effect on our business,operating results or financial condition.

 

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

 

There are a number of othercompanies that sell CRM and SFA products and related services that specificallytarget the pharmaceutical industry, including competitors that are activelyselling CRM and SFA software products in more than one country and competitorsthat also offer CRM and SFA support services. Some of our competitors andpotential competitors are part of large corporate groups and have significantlygreater financial, sales, marketing, technology and other resources than wehave.

 

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

 

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

**($ IN THOUSANDS)**

 

andservices.

 

We believe our ability tocompete depends on many factors, some of which are beyond our control,including:

 

•    the number and success of new market entrants supplying competing CRMand SFA products or support services;

•    alliances among existing competitors;

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

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

•    development and/or operation of in-house CRM or SFA software productsor services by our customers and potential customers.

 

Any one of these factors canlead to price reductions and/or decreased demand and we cannot assure you thatwe will be able to continue to compete successfully or that competition willnot have a material adverse effect on our business, operating results orfinancial condition.

 

**WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THEINTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCESTHAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE**

 

The success of parts of ourbusiness will depend, in part, on our ability to continue developingInternet-related products, modifying and improving our existing products andresponding to technological advances and changing commercial uses of theInternet. We cannot assure you that our Internet-related products and serviceswill adequately respond to such technological advances and changing uses. Norcan we assure you that the demand for our Internet-related products andservices will increase.

 

Commercial use of theInternet raises potential problems with security, privacy, reliability,accessibility, quality of service and government regulation. These issues, ifunresolved, may affect the use of our Internet-related products. If thesepotential problems arise, our business, financial condition or results of operationscould be materially and adversely affected.

 

**OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTICOPERATIONS DO NOT**

 

We have expanded and may inthe future 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 andservices in foreign countries accounts for, and is expected in the future to accountfor, a material part of our revenues. These sales are subject to risks inherentin international business activities, including:

 

•    any adverse change in the political stability or economic environmentsin these countries or regions;

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

•    the absence or significant lack of legal protection for intellectualproperty rights;

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

•    difficulties in managing an organization spread over variousjurisdictions.

 

Any of the above risks couldhave a significant impact on our ability to deliver products on a competitiveand timely basis, which could materially and adversely affect our financialcondition or operating results.

 

Since we have operations ina number of countries and our service agreements in such countries aredenominated in foreign currencies, we face exposure to adverse movements inforeign currency exchange rates.  Ascurrency rates change, translation of the income statements of ourinternational entities from local currencies to U.S. dollars affectsperiod-over-period comparability of operating results. Historically we have nothedged these translation risks because we generally reinvest our cash flowsfrom international operations, however, we continue to evaluate foreigncurrency translation risk exposure.  Aswe continue to grow our business, the risks associated with foreign currencytranslation will also grow.

 

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

**($ IN THOUSANDS)**

 

**AN INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OURBUSINESS**

 

To manage our growtheffectively we must continue to strengthen our operational, financial andmanagement information systems; ensure that we have the appropriateinfrastructure in place; and expand, train and manage our work force. However,we may not be able to do so effectively or on a timely basis. Failure to do socould have a material adverse effect upon our business, operating results orfinancial condition.

 

**CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATIONTECHNOLOGY INFRASTRUCTURE**

 

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

 

**OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENTTEAM AND ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL**

 

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

 

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

 

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BEABLE TO PROTECT COMPLETELY**

 

We rely on a combination oftrade secret, copyright and trademark laws, non-disclosure, license and othercontractual agreements and technical measures to protect our proprietaryrights. We cannot assure you that the steps we take will prevent misappropriationof these rights. Further, protective actions we have taken or will take in thefuture may not prevent competitors from developing products with featuressimilar to our products. In addition, effective copyright and trade secretprotection may be unavailable or limited in certain foreign countries. Inresponse to customer requests, we have also on occasion entered into agreementswhich require us to place our source code in escrow to secure our service andmaintenance obligations.

 

Further, while we believethat our products and trademarks do not infringe upon the proprietary rights ofany third parties, third parties may assert infringement claims against us inthe future that may result in costly litigation, diversion of management’sattention, the imposition of monetary damages or injunctive relief against us.In addition, any such claims may require us to enter into royalty arrangements.Any of these results could materially and adversely affect our business,operating results or financial condition.

 

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

 

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

 

**THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGICRELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED**

 

We are involved in a numberof strategic relationships with third parties and are frequently pursuingothers. Should these relationships, or any of them, prove to be more costlythan anticipated or fail to meet revenue expectations or other anticipatedsynergies, we cannot guarantee that such events will not have a material impactupon our business, operating results or financial condition.

 

 

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

**($ IN THOUSANDS)**

 

**OUR DATA SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPSWHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESESOLUTIONS**

 

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

 

**FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THEDEMAND FOR SOME OF OUR SOLUTIONS**

 

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

 

**GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECTOUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL**

 

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

 

**DIFFICULTIES IN SUBLEASING, SELLING OR OTHERWISE DISPOSING OFCERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS**

 

We expect to sublease all ora portion of certain facilities, including facilities acquired as part of theSynavant acquisition.  An inability tosuccessfully dispose of or sublet, as applicable, any of these facilities or toobtain favorable pricing or sublease terms could negatively impact ourearnings.

 

**UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BEREQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS ANDCOULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS**

 

In reporting our financialresults we rely upon the accounting policies and standards then in effect atthe time of our report. Future regulations, standards or interpretations mayrequire us to adjust or restate financial results previously reported. Arequired restatement could have a material impact upon past financial resultsor current comparison to previous results.

 

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

 

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

 

**PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAYDISCOURAGE AN ACQUISITION OF DENDRITE**

 

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

 

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

**($ IN THOUSANDS)**

 

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

 

The market price of ourcommon stock may be significantly affected by the following factors:

 

•    the announcement or the introduction of new products and services by usor our competitors;

•    quarter-to-quarter variations in our operating results or changes inrevenue or earnings estimates or failure to meet or exceed revenue or earningsestimates;

•    market conditions in the technology, healthcare and other growthsectors;

•    general consolidation in the healthcare information industry which mayresult in the market perceiving us or other comparable companies as potentialacquisition targets;

•    the gain or loss of significant orders;

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

•    future acquisitions.

 

Further, the stock markethas experienced on occasion extreme price and volume fluctuations. The marketprices of the equity securities of many technology companies have beenespecially volatile and often have been unrelated to the operating performanceof such companies. These broad market fluctuations may have a material adverseeffect on the market price of our common stock.

 

**ITEM 4****.  Controls andProcedures**

 

The Company’s ChiefExecutive Officer and Chief Financial Officer, with the assistance of othermembers of the Company’s management, have evaluated the effectiveness of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this Form 10-Q.  Based on suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures areeffective.

 

The Company’s ChiefExecutive Officer and Chief Financial Officer have also concluded that therehave been no changes in the Company’s internal control over financial reportingduring the quarter ended June 30, 2004 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II****.  OTHERINFORMATION**

 

**ITEM 2.Changes in Securities and Use of Proceeds**

 

Changes in Securities

 

On April 6, 2004, the Company issued 194,175 shares of restrictedcommon stock to the shareholders of MDM, as partial consideration for theCompany’s share acquisition of MDM. The Company did not employ an underwriterin connection with the issuance or sale of these securities.  The Company believes that the issuance ofsuch securities was exempt from registration under Section 4(2) of theSecurities Act of 1933, as amended (the “Act”), as a transaction not involvinga public offering and such securities having been acquired for investment andnot with a view to distribution. Appropriate legends were affixed to the stockcertificates issued in the MDM acquisition.

 

**ITEM 4. Submission of Matters to aVote of Security Holders**

 

The Company’s Annual Meetingof Shareholders was held on May 17, 2004. The following was considered and voted upon at the Annual Meeting.

 

Election of Directors.  The following directors were nominated forelection to the Board of Directors until the next Annual Meeting or until theirsuccessors are duly chosen and qualified: John E. Bailye, John A. Fazio, Bernard M. Goldsmith, Edward J. Kfoury,Paul A. Margolis, John H. Martinson, Terence H. Osborne and Patrick J.Zenner.  The votes cast and withheld forsuch nominees were as follows:

 
| **Name**             | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
|                 |       |       |       |         |       |
| John E. Bailye       |       | 37,858,060 |       | 1,325,644    |       |
| John A. Fazio        |       | 36,761,291 |       | 2,422,413    |       |
| Bernard M. Goldsmith |       | 32,815,361 |       | 6,368,343    |       |
| Edward J. Kfoury     |       | 37,551,815 |       | 1,631,889    |       |
| Paul A. Margolis     |       | 37,765,767 |       | 1,417,937    |       |
| John H. Martinson    |       | 38,147,295 |       | 1,036,409    |       |
| Terence H. Osborne   |       | 37,564,305 |       | 1,619,399    |       |
| Patrick J. Zenner    |       | 31,065,701 |       | 8,118,003    |       |

 

Based on these voting results, each of the directors nominated waselected.

 

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**ITEM 6.**** ****Exhibits****and Reports on Form 8-K**

 

(i)  Exhibits

 

10.31          New Hire Option Grant Authorization – Updated Appendix

 

31.1                Certification of John E. Bailye, Chairman ofthe Board and Chief Executive Officer of the Company, pursuant to SecuritiesExchange Act Rule 13a-14(a).

 

31.2                Certification of Kathleen E. Donovan, SeniorVice President and Chief Financial Officer of the Company, pursuant toSecurities Exchange Act Rule 13a-14(a).

 

32                         Certifications Pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,signed by John E. Bailye, Chairman of the Board and Chief Executive Officer ofthe Company, and Kathleen E. Donovan, Senior Vice President and Chief FinancialOfficer of the Company.

 

(ii)  Reports on Form 8-K

 

(a)          The Company furnished a Current Report onForm 8-K on April 27, 2004, pursuant to “Item 12. Results of Operations andFinancial Condition” relating to its results for the first quarter 2004.

 

(b)         The Company filed a Current Report on Form 8-K on May 18, 2004,pursuant to “Item 4. Changes in Registrant’s Certifying Accountant” and “Item.7. Financial Statements, Pro Forma Financial Information and Exhibits” relatingto the resignation of its independent auditors.

 

(c)          The Company filed a Current Report on Form 8-K on June 28, 2004,pursuant to “Item 4. Changes in Registrant’s Certifying Accounting” relating toits appointment of Deloitte & Touche LLP as the Company’s independentregistered accounting firm for 2004.

 

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Signatures

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 9, 2004

 

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

 

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**EXHIBIT INDEX**

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

 

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