**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D. C. 20549**

** **

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**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30, 2002**

 

**OR**

** **

| **o** | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom          to          **

 

**CommissionFile Number: 0-30822**

** **

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**SYNAVANT Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                    |   | **22-2940965**                            |
|---------------------------------------------------------------------------------|--------|-------------------------------------------|
| (State of Incorporation)                                                        |   | (I.R.S. Employer Identification No.) |
|                                                                            |   |                                      |
| **3445 Peachtree  Road NE, Suite 1400**                                         |   |                                      |
| **Atlanta, GA**                                                                 |   | **30326**                                 |
| (Address of principal executive offices)                                        |   | (Zip Code)                                |
|                                                                            |
| Registrant’s telephone number, including area code **(404) 841-4000** |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Sections 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes ýNo o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 
| **Title of Class**                     |   | **Shares Outstanding****at July 31, 2002** |   |
|----------------------------------------|--------|--------------------------------------------|--------|
| Common  Stock,par value $.01 per share |   | 15,160,567 Shares                          |   |

 

 

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**SYNAVANT Inc.**

**FORM10-Q**

**FOR THEQUARTER ENDED JUNE 30, 2002**

 

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                         |
|--------------|---------------------------------------------------------------------------------------------------|
|         |                                                                                              |
| ITEM 1.      | FINANCIAL STATEMENTS                                                                              |
|         |                                                                                              |
|         | Condensed  Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001                  |
|         |                                                                                              |
|         | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2002 and  2001 |
|         |                                                                                              |
|         | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001            |
|         |                                                                                              |
|         | Notes to  Consolidated Financial Statements                                                       |
|         |                                                                                              |
| ITEM  2.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS       |
|         |                                                                                              |
| ITEM  3.     | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                       |
|         |                                                                                              |
| **PART II.** | **OTHER INFORMATION**                                                                             |
|         |                                                                                              |
| ITEM  1.     | LEGAL  PROCEEDINGS                                                                                |
|         |                                                                                              |
| ITEM 2.      | CHANGES IN SECURITIES AND  USE OF PROCEEDS                                                        |
|         |                                                                                              |
| ITEM 3.      | DEFAULTS UPON  SENIOR SECURITIES                                                                  |
|         |                                                                                              |
| ITEM  4.     | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                              |
|         |                                                                                              |
| ITEM  5.     | OTHER  INFORMATION                                                                                |
|         |                                                                                              |
| ITEM 6.      | EXHIBITS  AND REPORTS ON FORM 8-K                                                                 |
|         |                                                                                              |
| SIGNATURES   |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM I. FINANCIAL STATEMENTS**

 

**SYNAVANT Inc.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

***(Dollar amounts in thousands, exceptper share data)***

 
|                                                                                                        |   | **June 30,  2002****** |    | **December 31,  2001****** |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|----------------------------|--------|
|                                                                                                        |   | **(Unaudited)**        |    | **(Audited)**              |   |
| **ASSETS:**                                                                                                 |   |                   |    |                       |   |
| CURRENT ASSETS:                                                                                             |   |                   |    |                       |   |
| Cash and cash equivalents                                                                                   |   | $                      | 11,782  |                       | $      | 9,578 |   |
| Accounts receivable—net                                                                                |   | 39,581                 |    | 39,574                     |   |
| Other receivables                                                                                           |   | 223                    |    | 209                        |   |
| Other current assets                                                                                        |   | 5,804                  |    | 6,113                      |   |
| TOTAL CURRENT ASSETS                                                                                        |   | 57,390                 |    | 55,474                     |   |
|                                                                                                        |   |                   |    |                       |   |
| Property, plant and equipment—net                                                                      |   | 12,138                 |    | 11,210                     |   |
| Computer software—net                                                                                  |   | 4,911                  |    | 7,410                      |   |
| Goodwill—net                                                                                           |   | 41,156                 |    | 41,156                     |   |
| Long term notes receivable                                                                                  |   | 1,000                  |    | 1,000                      |   |
| Other assets                                                                                                |   | 2,207                  |    | 2,008                      |   |
| TOTAL LONG TERM ASSETS                                                                                      |   | 61,412                 |    | 62,784                     |   |
| TOTAL ASSETS                                                                                                |   | $                      | 118,802 |                       | $      | 118,258 |   |
|                                                                                                        |   |                   |    |                       |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                                              |   |                   |    |                       |   |
| CURRENT LIABILITIES:                                                                                        |   |                   |    |                       |   |
| Accounts payable                                                                                            |   | $                      | 9,229   |                       | $      | 9,516 |   |
| Accrued restructuring                                                                                       |   | 3,285                  |    | 4,816                      |   |
| Accrued and other current liabilities                                                                       |   | 15,738                 |    | 13,289                     |   |
| Accrued income taxes                                                                                        |   | 3,231                  |    | 1,885                      |   |
| Deferred revenues                                                                                           |   | 9,249                  |    | 8,388                      |   |
| TOTAL CURRENT LIABILITIES                                                                                   |   | 40,732                 |    | 37,894                     |   |
|                                                                                                        |   |                   |    |                       |   |
| Deferred taxes                                                                                              |   | 430                    |    | 421                        |   |
| Accrued liability due to former parent                                                                      |   | 9,000                  |    | 9,000                      |   |
| Other liabilities                                                                                           |   | 1,413                  |    | 793                        |   |
| TOTAL LIABILITIES                                                                                           |   | $                      | 51,575  |                       | $      | 48,108 |   |
|                                                                                                        |   |                   |    |                       |   |
| Commitments and contingencies (see note 2)                                                                  |   |                   |    |                       |   |
|                                                                                                        |   |                   |    |                       |   |
| STOCKHOLDERS’ EQUITY:                                                                                  |   |                   |    |                       |   |
| Common stock, par value $.01, authorized 41,000,000  shares; 15,153,065 shares outstanding at June 30, 2002 |   | 152                    |    | 150                        |   |
| Other stockholders’ equity                                                                             |   | 67,075                 |    | 70,000                     |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                             |   | 67,227                 |    | 70,150                     |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                             |   | $                      | 118,802 |                       | $      | 118,258 |   |

 

See accompanying Notes to the Consolidated Financial Statements(unaudited).

 

3

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**SYNAVANT Inc.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

***(Dollar amounts in thousands, exceptper share data)***

 
|                                                         |   | **Three Months Ended****June 30,** |       | **Six Months Ended****June 30,** |       |
|--------------------------------------------------------------|--------|------------------------------------|------------|----------------------------------|------------|
|                                                         |   | **2002**                           |       | **2001**                         |       | **2002** |   | **2001** |   |
| REVENUES:                                                    |   |                               |       |                             |       |   |   |   |   |
| Software fees                                                |   | **$**                              | **1,086**  | ** **                       | **$**      | **4,019** | ** ** | **$** | **2,526** | ** ** | **$** | **7,172** | ** ** |
| Software  services                                           |   | **22,107**                         | ** ** | **22,296**                       | ** ** | **42,956** | ** ** | **43,750** | ** ** |
| Interactive  marketing                                       |   | **20,396**                         | ** ** | **20,358**                       | ** ** | **43,068** | ** ** | **39,829** | ** ** |
| TOTAL REVENUES                                               |   | **43,589**                         | ** ** | **46,673**                       | ** ** | **88,550** | ** ** | **90,751** | ** ** |
|                                                         |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| OPERATING COSTS:                                             |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Software fees                                                |   | **807**                            | ** ** | **2,321**                        | ** ** | **1,534** | ** ** | **4,573** | ** ** |
| Software services                                            |   | **15,319**                         | ** ** | **17,580**                       | ** ** | **30,428** | ** ** | **33,590** | ** ** |
| Interactive  marketing                                       |   | **16,865**                         | ** ** | **16,897**                       | ** ** | **36,124** | ** ** | **32,828** | ** ** |
| TOTAL OPERATING COSTS                                        |   | **32,991**                         | ** ** | **36,798**                       | ** ** | **68,086** | ** ** | **70,991** | ** ** |
|                                                         |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Research & development                                   |   | **1,593**                          | ** ** | **2,089**                        | ** ** | **3,532** | ** ** | **4,454** | ** ** |
| Selling and administrative expenses                          |   | **8,315**                          | ** ** | **8,824**                        | ** ** | **15,911** | ** ** | **18,177** | ** ** |
| Depreciation and amortization                                |   | **1,868**                          | ** ** | **5,338**                        | ** ** | **3,705** | ** ** | **10,699** | ** ** |
| Spin related costs                                           |   | **—**                         | ** ** | **350**                          | ** ** | **—** | ** ** | **560** | ** ** |
| OPERATING LOSS                                               |   | **(1,178**                         | **)**      | **(6,726**                       | **)**      | **(2,684** | **)** | **(14,130** | **)** |
|                                                         |   |                               |       |                             |       |   |   |   |   |
| Other income-net                                             |   | **131**                            | ** ** | **299**                          | ** ** | **34** | ** ** | **221** | ** ** |
| LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES             |   | **(1,047**                         | **)**      | **(6,427**                       | **)**      | **(2,650** | **)** | **(13,909** | **)** |
|                                                         |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Income tax (Provision) Benefit                               |   | **(681**                           | **)**      | **213**                          | ** ** | **(1,022** | **)** | **(1,952** | **)** |
| NET LOSS                                                     |   | **$**                              | **(1,728** | **)**                            | **$**      | **(6,214** | **)** | **$** | **(3,672** | **)** | **$** | **(15,861** | **)** |
|                                                         |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Net loss per share of common stock:  basic and diluted  |   | **$**                              | **(0.11**  | **)**                            | **$**      | **(0.42** | **)** | **$** | **(0.24** | **)** | **$** | **(1.07** | **)** |
| Weighted average shares outstanding:  basic and diluted |   | **15,103**                         | ** ** | **14,909**                       | ** ** | **15,085** | ** ** | **14,891** | ** ** |

 

See accompanying Notes to the Consolidated Financial Statements(unaudited).

 

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**SYNAVANT Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

***(Dollar amounts in thousands)***

*** ***
|                                                                                    |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                    |   | **2002**                       |   | **2001** |   |
|                                                                                    |   |                           |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |   |                           |   |   |   |
| Net loss                                                                                |   | $                              | (3,672 | ) | $ | (15,861 | ) |
| Adjustments to reconcile net loss to net cash provided  (used) by operating activities: |   |                           |   |   |   |
| Depreciation and amortization                                                           |   | 3,705                          |   | 10,699 |   |
| Amortization of capitalized computer software                                           |   | 1,190                          |   | 1,034 |   |
| Restructuring payments                                                                  |   | (1,531                         | )      | — |   |
| Deferred income taxes                                                                   |   | —                         |   | (11 | ) |
| Changes in operating assets and liabilities:                                            |   |                           |   |   |   |
| Accounts and other receivable                                                           |   | 1,397                          |   | 140 |   |
| Accounts payable                                                                        |   | (699                           | )      | (1,014 | ) |
| Accrued liabilities and other current liabilities                                       |   | 2,176                          |   | 111 |   |
| Accrued income taxes                                                                    |   | 1,209                          |   | 356 |   |
| Deferred revenues                                                                       |   | 630                            |   | (1,127 | ) |
| Other                                                                                   |   | 130                            |   | (3,008 | ) |
| NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                        |   | 4,535                          |   | (8,681 | ) |
|                                                                                    |   |                           |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |   |                           |   |   |   |
| Capital expenditures                                                                    |   | (2,602                         | )      | (1,338 | ) |
| Additions to computer software                                                          |   | (323                           | )      | (19 | ) |
| Other                                                                                   |   | —                         |   | (307 | ) |
| NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES                                        |   | (2,925                         | )      | (1,664 | ) |
|                                                                                    |   |                           |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |   |                           |   |   |   |
| Payments for capital leases                                                             |   | (185                           | )      | — |   |
| Payments for deferred loan fees                                                         |   | —                         |   | (195 | ) |
| NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES                                        |   | (185                           | )      | (195 | ) |
|                                                                                    |   |                           |   |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                           |   | 779                            |   | (97 | ) |
| Increase (decrease) in cash and cash equivalents                                        |   | 2,204                          |   | (10,637 | ) |
| Cash and cash equivalents, beginning of period                                          |   | 9,578                          |   | 19,768 |   |
| Cash and cash equivalents, end of period                                                |   | $                              | 11,782 |   | $ | 9,131 |   |

 

SupplementalDisclosure of Cash Flow Information:

Cashpayments for foreign, state and local income taxes were $177 and $1,784 for thesix months endedJune 30, 2002 and2001, respectively.

 

See accompanying Notes to the Consolidated Financial Statements(unaudited).

 

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**SYNAVANT Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1. ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Basis ofPresentation.*  The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles (“US GAAP”) for interim financial informationand with the rules and regulations of the Securities and Exchange Commission(the “SEC”).  The consolidated financialstatements and related notes should be read in conjunction with theconsolidated financial statements and related notes of SYNAVANT Inc. (the“Company” or “SYNAVANT”) on Form 10-K. These consolidated financial statements include estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets, and amounts of revenues and expenses.  Actual results may differ from thoseestimated.  In the opinion ofmanagement, all adjustments of a normal recurring nature considered necessaryfor a fair presentation of financial position, results of operations and cashflows for the periods presented have been included.  Certain information and footnote disclosures have been condensedor omitted pursuant to SEC rules and regulations.  However, management believes that the disclosures made areadequate for a fair presentation of the results of all interim periods reportedherein.

 

*Organization.*  SYNAVANTserves the biopharmaceutical and healthcare industries through its three corebusiness categories:  implementing andsupporting pharmaceutical-specific customer relationship management (“CRM”)solutions, developing interactive marketing programs and medical professionaldatabases, and offering strategic consulting services that support clinicalresearch, sales and marketing decision-making and program implementation.  SYNAVANT is composed of the automated salesand marketing support businesses which were formerly part of IMS HEALTHINCORPORATED (“IMS HEALTH”) which operated under the name IMS HEALTH StrategicTechnologies, Inc. (“ST”); certain other former foreign subsidiaries of IMSHEALTH; substantially all of IMS HEALTH’s former interactive and directmarketing businesses, including the business of Clark-O’Neill, Inc. (“ClarkO’Neill”), formerly a wholly owned subsidiary of IMS HEALTH; and a 51% interestin Permail Pty., Ltd. (“Permail”).  OnAugust 31, 2000, shares of SYNAVANT were distributed to shareholders of IMSHEALTH following the conveyance of assets and stock of entities comprising theSYNAVANT business into SYNAVANT Inc., a Delaware corporation.

 

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

 

*Earnings PerShare.*  Basic and diluted earnings per share (“EPS”)are calculated in accordance with Statement of Financial StandardsNo. 128. For the Company’s calculation, the numerator is the same for thecalculation of both basic and diluted EPS. The denominator for basic anddiluted EPS is the same for the three and six month periods ended June 30,2002 and 2001 as the loss from operations would otherwise cause the inclusionof common stock options to be anti-dilutive. Options to purchase 7,608,717shares of common stock at a weighted average price of $9.17 were outstandingbut not included in the computation of diluted EPS for the three or six monthsended June 30, 2002.

 

*Recently IssuedAccounting Standards.*  In July 2001, the FASB issued SFASNo. 141, “Business Combinations” and SFAS No. 142 “Goodwill and otherIntangibles”. Under these new standards the FASB eliminated accounting forcertain mergers and acquisitions as poolings of interests, eliminatedamortization of goodwill and indefinite life intangible assets, and establishednew impairment measurement procedures for goodwill. For the Company, thestandards become effective for all acquisitions completed on or afterJune 30, 2001. Changes in financial statement treatment for goodwill andintangible assets arising from mergers and acquisitions completed prior toJune 30, 2001 became effective January 1, 2002, and has been adoptedby the Company as of the effective date.

 

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InOctober of 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”, which is effective for fiscalyears beginning after December 15, 2001. This statement supercedes FASBStatement No. 121, “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to Be Disposed Of.” However, it retains the fundamentalprovisions of SFAS No. 121 for the recognition and measurement of theimpairment of long-lived assets to be held and used and the measurement oflong-lived assets to be disposed of by sale. Impairment on Goodwill is notincluded in the scope of SFAS No. 144 and will be treated in accordancewith the accounting standards established in SFAS No. 142, “Goodwill andOther Intangible Assets.” According to SFAS No. 144, long-lived assets aremeasured at the lower of carrying amount or fair value less cost to sell,whether reported in continuing or discontinued operations. The statementapplies to all long-lived assets, including discontinued operations, andreplaces the provisions of APB Opinion No. 30, “Reporting the Results ofUnusual and Infrequently Occurring Events and Transactions”, for the disposalof segments of a business. The Company has adopted this statement effectiveJanuary 1, 2002.

 

Therehas been no material impact related to the implementation of these recentlyissued statements on its results of operations, financial position and cashflows.

 

InJune of 2002, the FASB issued SFAS No. 146, Accounting for Costs Associatedwith Exit or Disposal Activities.  FAS146 requires that a liability for a cost that is associated with an exit ordisposal activity be recognized when the liability is incurred.  It nullifies the guidance of the EmergingIssues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).  Under EITF Issue No. 94-3, an entityrecognized a liability for an exit cost on the date that the entity committeditself to an exit plan.  In FAS 146, theBoard acknowledges that an entity’s commitment to a plan does not, by itself,create a present obligation to other parties that meets the definition of aliability.  FAS 146 also establishesthat fair value is the objective for the initial measurement of theliability.  FAS 146 will be effectivefor exit or disposal activities that are initiated after December 31, 2002.

 

**NOTE 2.CONTINGENCIES**

 

SYNAVANT has from time to time been involved in legal proceedings andlitigation arising in the ordinary course of business. In the opinion ofmanagement, the outcome of all current proceedings, claims and litigation willnot materially affect SYNAVANT’s consolidated financial position. In additionto these immaterial items, the Company is subject to certain othercontingencies discussed below.

 

In connection with the Distribution, SYNAVANT is jointly and severallyliable to other parties in connection with prior IMS HEALTH DistributionAgreements for the liabilities relating to certain tax matters as well as alegal matter (“Distribution Liabilities”). Under the Distribution Agreement,IMS HEALTH and SYNAVANT agreed that SYNAVANT would have a maximum liability of$9.0 million for the Distribution Liabilities. Management believes it isprobable that at least one of these matters will have an unfavorable outcomeand as a result the Company recorded a $9.0 million liability associatedwith these matters as part of the Distribution in 2000. The DistributionAgreement required that if an unfavorable outcome occurred, the amount due upto $9.0 million is due and payable in January 2003. In concurrence withthe Foothill Facility obtained by the Company (See *“Management’s Discussion andAnalysis—Liquidity and Capital Resources”*), IMS HEALTH has agreed todefer any payments associated with the Distribution Liabilities until January2005. Under the Distribution Agreement, SYNAVANT would be liable for amounts inexcess of $9.0 million, related to the Distribution Liabilities, only tothe extent that all of the parties involved do not have sufficient combinedassets to settle such contingencies.

 

**NOTE 3.RESTRUCTURING CHARGE**

 

On August 16, 2001, the Company announced that, in an attempt tooptimize customer responsiveness and

 

7

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organizationaleffectiveness, it would simplify its senior leadership structure as well aseliminate certain other positions in its international and domestic operations.The Company completed the first two steps in the restructuring process during2001, resulting in the elimination of approximately 100 positions reflected inthe charge totaling $7.5 million recorded in 2001.  These reductions included six senior management positions withthe remainder being operating, technical and administrative staff.  The restructuring charge is composedentirely of employee severance and separation related costs, such as extendedbenefits and outplacement fees.  Therehas been no additional restructuring charge taken in 2002.  Of the $7.5 million charge, $4.2 million hasbeen paid to date, with the remainder expected to be paid within the nexttwelve to eighteen months.

 

**NOTE 4. INCOMETAX**

 

The Company’s consolidated tax provision was $0.7 million and $1.0million for the three and six months ended June 30, 2002,respectively.   For the same periods inthe prior year, the Company maintained a benefit of $0.2 million for thethree months and a provision of $2.0 million for the six months ended June 30,2001.  The improvement in the taxprovision is due to worldwide tax planning by the Company.  The Company’s effective tax rate isdifferent than the U.S. federal statutory tax rate due to taxable income incertain foreign jurisdictions and losses for which a full valuation has beenprovided.

 

**NOTE 5.OPERATIONS BY SEGMENT**

 

The Company delivers pharmaceutical relationship management solutionsglobally in approximately 30 countries. The Company’s chief operatingdecision-makers evaluate the business on a global basis with consideration ofresource allocation on a geographic basis. The Americas Segment principallyconsists of operations for the United States, the Company’s country ofdomicile. The Europe Segment includes, but is not limited to, the operations ofthe United Kingdom, which is the largest region in this segment. The AsiaPacific Segment consists principally of the operations of Australia. Forfurther information on material individual countries see the additionaldisclosure in the second table of this note.

 
|                                        |   | **Americas**                      |   | **Europe** |   | **Asia Pacific** |   | **Total** |   |
|---------------------------------------------|--------|-----------------------------------|--------|------------|--------|------------------|--------|-----------|--------|
|                                        |   | **(Dollar amounts in thousands)** |   |
| **Six Months Ended June 30, 2002**          |   |                              |   |       |   |             |   |      |   |
| Operating revenues                          |   | 54,912                            |   | 26,722     |   | 6,916            |   | 88,550    |   |
| Segment operating income (loss)             |   | (2,986                            | )      | 616        |   | (314             | )      | (2,684    | )      |
| Non-operating income (loss)                 |   | (314                              | )      | 214        |   | 134              |   | 34        |   |
| Income / (loss) before income taxes         |   | (3,300                            | )      | 830        |   | (180             | )      | (2,650    | )      |
| Provision for income taxes                  |   |                              |   |       |   |             |   | (1,022    | )      |
| Net loss                                    |   |                              |   |       |   |             |   | (3,672    | )      |
| Segment total depreciation and amortization |   | 3,997                             |   | 662        |   | 236              |   | 4,895     |   |
| Segment capital expenditures                |   | 2,387                             |   | 536        |   | 160              |   | 3,083     |   |
| Identifiable assets at June 30, 2002        |   | 83,031                            |   | 29,878     |   | 5,893            |   | 118,802   |   |

 
|                                        |   | **Americas** |   | **Europe** |   | **Asia Pacific** |   | **Total** |   |
|---------------------------------------------|--------|--------------|--------|------------|--------|------------------|--------|-----------|--------|
| **Six Months Ended June 30, 2001**          |   |         |   |       |   |             |   |      |   |
| Operating revenues                          |   | 54,866       |   | 28,458     |   | 7,427            |   | 90,751    |   |
| Segment operating income (loss)             |   | (15,728      | )      | 1,769      |   | (171             | )      | (14,130   | )      |
| Non-operating income (loss)                 |   | 328          |   | (130       | )      | 23               |   | 221       |   |
| Income / (loss) before income taxes         |   | (15,400      | )      | 1,639      |   | (148             | )      | (13,909   | )      |
| Provision for income taxes                  |   |         |   |       |   |             |   | (1,952    | )      |
| Net loss                                    |   |         |   |       |   |             |   | (15,861   | )      |
| Segment total depreciation and amortization |   | 10,995       |   | 416        |   | 322              |   | 11,733    |   |
| Segment capital expenditures                |   | 385          |   | 655        |   | 298              |   | 1,338     |   |
| Identifiable assets at June 30, 2001        |   | 100,251      |   | 27,785     |   | 6,701            |   | 134,737   |   |

 

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Informationabout the Company’s operations and long-lived assets by geography is asfollows:

 
|                               |   | **US** |   | **UK** |   | **Australia** |   | **Rest of World(2)** |   | **Total** |   |
|------------------------------------|--------|--------|--------|--------|--------|---------------|--------|----------------------|--------|-----------|--------|
|                               |   |   |   |   |   |          |   |                 |   |      |   |
| **Six Months Ended June 30, 2002** |   |   |   |   |   |          |   |                 |   |      |   |
| Operating revenues                 |   | 51,761 |   | 9,309  |   | 6,351         |   | 21,129               |   | 88,550    |   |
| Long-lived assets(1)               |   | 52,613 |   | 3,350  |   | 711           |   | 2,530                |   | 59,204    |   |
| **Six Months Ended June 30, 2001** |   |   |   |   |   |          |   |                 |   |      |   |
| Operating revenues                 |   | 51,809 |   | 10,893 |   | 6,851         |   | 21,198               |   | 90,751    |   |
| Long-lived assets(1)               |   | 62,276 |   | 3,601  |   | 818           |   | 2,180                |   | 68,875    |   |

 

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(1)                                  Long-lived assets in the U.S. and the U.K. arecomprised predominantly of goodwill associated with the acquisition of WalshInternational Inc. in June 1998.

 

(2)                                  Rest of World is primarily comprised of operationsin Europe.

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” includes forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  All statements other thanstatements of historical fact made in this Quarterly Report on Form 10-Q areforward-looking, which can be identified by the use of forward-lookingterminology such as “may,” “will,” “expect,” “anticipate,” “estimate,”“believe,” “continue” or other similar words. Such forward-looking statementsare based on management’s current plans and expectations and are subject torisks and uncertainties that could cause actual results to differ materiallyfrom those described in the forward-looking statements.  Factors that could cause or contribute tosuch differences include, but are not limited to: risks associated withcompetition from other providers of customer relationship management solutions;customer decisions favoring competitor products, solutions and/or services; theability to obtain additional financing on satisfactory terms to meet futurecapital requirements; loss of key personnel; failure to introduce new orenhanced products in a timely manner; defects in our products and delaysrelated to market adoption of our software; consolidation of the pharmaceuticalindustry; fluctuations in quarterly and/or annual operating results that may adverselyaffect the market price of our common stock; operating on a global basis; theability to protect our intellectual property; product infringement claims; theability to identify, consummate and integrate acquisitions, alliances andventures on satisfactory terms; the ability to develop new or advancedtechnologies, systems or products; the ability to successfully maintainhistoric effective tax rates; and regulatory, legislative and enforcementinitiatives. These risks and uncertainties are not intended to be exhaustiveand should be read in conjunction with other cautionary statements made hereinincluding, but not limited to, the material set forth herein under the heading“Factors That May Affect Future Performance.” The Company assumes no obligationto update any such forward-looking statements.

 

Thisdiscussion and analysis should be read in conjunction with the consolidatedfinancial statements and related notes contained in Item I of this report andwith the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

**OVERVIEW**

 

On August 31, 2000, SYNAVANT was spun off from IMSHEALTH, a provider of information solutions to the biopharmaceutical andhealthcare industries.  Pursuant to thespin-off, shares of SYNAVANT common stock were distributed to the shareholdersof IMS HEALTH. This transaction was structured as a tax-free dividend to thestockholders of IMS HEALTH, who received one share of SYNAVANT common stock

 

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(together with the associated preferred share purchase right) for every20 shares of IMS HEALTH common stock held as of the record date for theDistribution.

 

This discussion and analysis should be read inconjunction with the accompanying consolidated financial statements and relatednotes.

 

**SIEBEL ALLIANCE**

 

On July 14, 2000, SYNAVANT entered into a strategicalliance (the “Alliance”) with Siebel Systems Inc. (“Siebel”), a leadingprovider of eBusiness application software. Through the Alliance, the companiesintended to jointly develop, market and sell pharmaceutical and healthcarerelated versions of Siebel’s eBusiness software applications as part of a jointoffering.

 

As part of the Alliance, SYNAVANT and Siebel enteredinto:  (1) a Value Added IndustryRemarketer Agreement (the “Reseller Agreement”), (2) a Siebel Alliance ProgramMaster Agreement (the “Alliance Agreement”), and (3) a license of certainSiebel software for SYNAVANT’s internal use. Pursuant to the Reseller Agreement, Siebel appointed SYNAVANT as a non-exclusivedistributor of certain Siebel licensed software. Under the Agreement, SYNAVANThad the right to distribute Siebel software products to companies in the lifesciences industry (e.g., pharmaceutical, biotechnology and healthcarecompanies) worldwide in conjunction with SYNAVANT’s own proprietary softwareand services.  As part of thearrangement, Siebel and SYNAVANT shared in the fees generated from thelicensing of the Siebel software when contracted by SYNAVANT as part of a jointoffering.  The Alliance Agreement hasbeen superceded by a new Siebel Alliance Program Master Agreement (“the RevisedAlliance Agreement”) entered into by SYNAVANT and Siebel on December 31, 2001(“Revised Alliance”).

 

Under the Revised Alliance, SYNAVANT and Siebel haveagreed to terminate the Reseller Agreement, revise the Alliance Agreement andto continue the license of certain Siebel software for SYNAVANT’s internaluse.  In addition to terminating theReseller Agreement, the Revised Alliance also results in the following:

 

•                  SYNAVANT isdesignated as a “Strategic Consulting Partner”;

 

•                  Siebel no longershares in revenue associated with the sale of SYNAVANT software licenses;

 

•                  SYNAVANT nolonger has restrictions on its product development, including Cornerstone andPremiere;

 

•                  SYNAVANT is nolonger required to exclusively support Siebel software; and

 

•                  SYNAVANT is ableto support a broader product set including Siebel eMedical, eClinical as wellas Employee Relationship Management (“ERM”).

 

A chief difference between this new partner status andthe previous one is that SYNAVANT is no longer a Siebel Value Added Reseller(“VAR”) and therefore no longer sells Siebel licenses.  This eliminates channel conflict for licensesales, allowing SYNAVANT to focus on delivering its core competencies ofconsulting, implementation and support services for Siebel technology in amanner that achieves high value. Another important benefit of this new partner status is that SYNAVANThas additional rights to implement and support Siebel’s *e*Medical, *e*Clinicaland ERM applications, providing a broader revenue potential opportunity withinthe life sciences area.

 

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**CRITICAL ACCOUNTING POLICIES**

 

“Management’s Discussion and Analysis of FinancialCondition and Results of Operations” are based upon the Company’s consolidatedfinancial statements and the notes thereto, which have been prepared inaccordance with generally accepted accounting principles in the United States(“US GAAP”).  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reported periods.  On an on-going basis, management evaluatesits estimates and judgments, including those related to revenue recognition,allowance for uncollectible accounts, goodwill and other intangible assets,income taxes, restructuring costs, and litigation.

 

Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. There can be no assurance that actual results will not differ from thoseestimates.

 

The Company has identified the significant estimatesand judgments below as critical to our business operations and theunderstanding of our results of operations. For a detailed discussion on the application of these significantestimates and judgments and our accounting policies, also see Note 1 of theConsolidated Financial Statements.

 

*Revenuerecognition*.* *The Company recognizes revenueswhen persuasive evidence of an arrangement exists, services have been rendered,the price to the buyer is fixed or determinable, and collectibility is reasonablyassured.  Revenues consist of softwarelicense fees, related maintenance and software service fees, database andinformation services, and interactive marketing programs.  Deferred revenue consists of maintenancebillings due in advance of service periods, and other software and projectbillings for which services have not yet been completed.  The Company’s revenue recognition policiesare consistent with the guidance in Staff Accounting Bulletin (“SAB”) No. 101,“Revenue Recognition in Financial Statements”, as amended by SAB No. 101A and101B, and AICPA Statement of Position (“SOP”) No. 97-2 “Software RevenueRecognition”, as amended by SOP Nos. 98-4 and 98-9.

 

In cases whereservices to be provided are not essential to the functionality of the software,the Company has sufficient vendor specific objective evidence (“VSOE”) of fairvalue of the elements to recognize the revenue separately.  The Company has determined the VSOE of itssoftware license fee based on the consistent per user license fee charged toits customers. The VSOE of the software service element is based on the priceof the software services when sold separately. The Company accounts for themaintenance and support element separately using VSOE, which is determinedbased on the customer renewal fees for such services.

 

The Company’s software services derives a portion ofits revenue from contracts recorded using the percentage of completion methodof accounting based on labor input measures, which require the accurateestimation of the cost, scope and duration of each engagement.  If the Company does not accurately estimatethe resources required or the scope of work to be performed, or does not manageits projects properly within the planned periods of time or satisfy itsobligations under the contracts, then future software service margins may besignificantly and negatively affected or losses on existing contracts may needto be recognized.  Any such resultingreductions in margins or contract losses could be material to the Company’s resultsof operations.   Should changes inconditions cause management to determine these criteria are not met for certainfuture transactions, revenue recognized for any reporting period could beadversely affected.

 

*Allowancefor uncollectible accounts.* Prior to the recognition of revenue, the Company makes a decision thatcollectibility is reasonably assured. Over time, management analyzes accounts receivable

 

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balances, historical bad debts, customer concentrations, customercredit-worthiness, current economic trends, and changes in our customer paymentterms and trends when evaluating the adequacy of the allowance foruncollectible accounts receivable. Significant management judgment and estimates must be made and used inconnection with establishing the allowance for uncollectible accountsreceivable in any accounting period. The Company provides specific amounts for known individual accountswhich have deterioriated and general amounts for changes that are indicators offuture deterioration.  If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may be required.

 

*Goodwilland other intangible assets. *Purchaseaccounting requires extensive use of accounting estimates and judgments toallocate the purchase price to the fair market value of the assets andliabilities purchased.  The Companyevaluates acquired businesses for potential impairment indicators wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable.  Factors that managementconsider important, which could trigger an impairment review include, but arenot limited to, the following:

 

•                  Significantdecrease in the market value of an asset;

 

•                  Significantchanges in our use of the acquired assets or the strategy for our overallbusiness;

 

•                  Significantadverse change in legal factors or negative industry or economic trends;

 

•                  Significantunderperformance relative to current period and/or projected future operatingprofits or cash flows associated with an asset;

 

•                  Significantdecline in the Company’s stock price for a sustained period; and

 

•                  Our marketcapitalization relative to net book value.

 

When the Company determines that the carrying value oflong-lived assets, intangibles and related goodwill may not be recoverablebased upon the existence of one or more of the indicators of impairment, theCompany recognizes an impairment loss when the sum of undiscounted expectedfuture cash flow is less than the carrying amount of such assets.  The impairment loss, if applicable, is thencalculated based on the fair value or the sum of the discounted cash flowscompared to the carrying value.  Thediscounted cash flow method would use a discount rate determined by managementto be commensurate with the risk inherent in the current business model.

 

Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets” became effective January 1, 2002, and as a result, we ceasedamortization of the remaining $41.2 million of goodwill.  The Company recorded approximately $11.7million of goodwill amortization during 2001. In lieu of amortization, we are required to perform a periodicimpairment review of the goodwill. Future events could cause us to conclude that impairment indicatorsexist and that goodwill associated with our acquired businesses is impaired.  Any resulting impairment loss could have amaterial adverse impact on our financial condition and results ofoperations.  Other intangible assetswith finite lives that do not meet the criteria of SFAS No. 142 will continueto be amortized in accordance with the adoption of SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”.  This amortization is based on the estimated useful lives of theunderlying acquired business or underlying assets. * *These pronouncementshave not had a material impact on theCompany’s results of operations, financial position and cash flows.

 

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The impact of SFAS No. 142 on previously reportedresults follows.

 
|                                     |   | **Three  months ended** |   | **Six months  ended** |   |
|------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                     |   | **June 30,****2002**    |   | **June 30,****2001**  |   | **June 30,****2002** |   | **June 30,2001** |   |
| Reported net loss                        |   | $                       | (1,728 | )                     | $      | (6,214 | ) | $ | (3,672 | ) | $ | (15,861 | ) |
| Add back:  Goodwill amortization    |   | —                  |   | 2,933                 |   | — |   | 5,867 |   |
| Adjusted net  loss                       |   | $                       | (1,728 | )                     | $      | (3,281 | ) | $ | (3,672 | ) | $ | (9,994 | ) |
|                                     |   |                    |   |                  |   |   |   |   |   |
| Loss per share –  basic and diluted |   |                    |   |                  |   |   |   |   |   |
| Reported net  loss                       |   | $                       | (0.11  | )                     | $      | (0.42 | ) | $ | (0.24 | ) | $ | (1.07 | ) |
| Goodwill  amortization                   |   | —                  |   | 0.20                  |   | — |   | 0.39 |   |
| Adjusted net  loss                       |   | $                       | (0.11  | )                     | $      | (0.22 | ) | $ | (0.24 | ) | $ | (0.68 | ) |

 

*Incometaxes. *As part of theprocess of preparing our consolidated financial statements we are required toestimate our taxes in each of the jurisdictions in which we operate.  This process involves management estimatingthe actual current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and US GAAP purposes.  These differences result in deferred taxassets and liabilities, which are included within our condensed consolidatedbalance sheet.  The Company must thenassess the likelihood that deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent the Company establishes a valuation allowance or increasesthis allowance in a period, an expense is recorded within the tax provision in theconsolidated statement of operations.

 

Significant management judgment is required indetermining our provision for income taxes, our deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets.  The Company has recorded avaluation allowance due to uncertainties related to our ability to utilize someof our deferred tax assets, primarily consisting of certain net operatinglosses carried forward and foreign tax credits, before they expire.  The valuation allowance is based on ourestimates of taxable income by jurisdiction in which the Company operates andthe period over which our deferred tax assets could be recoverable.  In the event that actual results differ fromthese estimates or the Company adjusts these estimates in future periods we mayneed to establish an additional valuation allowance which could materiallyimpact our financial condition and results of operations.

 

The Company also records a reserve for certaininternational, federal and state tax contingencies based on the likelihood ofobligation, when needed.  In the normalcourse of business, the Company is subject to challenges from U.S. and non-U.S.tax authorities regarding the amount of taxes due. These challenges may resultin adjustments of the timing or amount of taxable income or deductions or theallocation of income among tax jurisdictions. Management believes SYNAVANT has appropriately accrued for taxexposures.  If the Company prevails in amatter for which an accrual has been established or is required to pay anamount exceeding its reserves, the financial impact will be reflected in theperiod in which the matter is resolved. In the event that actual results differ from these estimates or theCompany adjusts these estimates in future periods we may need to establish anadditional valuation allowance which could materially impact our financialcondition and results of operations.

 

*Restructuringcosts. *Therestructuring accruals are based on certain estimates and judgments related tocontractual obligations and related costs. Potential restructuring accruals related to contractual office leaseobligations could be materially affected by factors such as our ability tosecure subleases, the credit-worthiness of sub-lessees and our success atnegotiating early termination agreements with lessors.  In the event that actual results differ fromthese estimates or the Company adjusts these estimates in future periods we mayneed to establish an additional restructuring accrual or reverse accrualamounts accordingly.

 

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*Legalcontingencies. *TheCompany is currently involved in certain legal proceedings as disclosed in Note2.  The Company has accrued an estimateof the probable costs for the resolution of these claims.  This estimate has been developed inconsultation with outside counsel handling our defense in these matters and isbased upon an analysis of potential results, assuming a combination oflitigation and settlement strategies. The Company does not believe these proceedings will materially affectSYNAVANT’s financial position, although no assurance can be given as to theultimate outcome of any such proceedings.

 

*Fair Value of Stock Options. *SFAS No. 123, “Accountingfor Stock–Based Compensation”, requires that companies with tock–basedcompensation plans either recognize compensation expense based on the fairvalue of options granted or continue to apply the existing accountingrules and disclose pro forma net income and earnings per share assumingthe fair value method had been applied. The Company has chosen to continueapplying Accounting Principles Board Opinion No. 25 (“APB No. 25”) and relatedinterpretations in accounting for its stock incentive plans.  Accordingly, no compensation expense related to theissuance of stock options has been recognized for the three and six monthsended June 30, 2002 and 2001.  Thecompensation cost for the SYNAVANT stock incentive plans based on the fairvalue at the grant dates for awards under those plans, consistent with themethod of SFAS No. 123, are disclosed on an annual basis in the Company’sAnnual Report on Form 10-K.

 

However, the Companyrecognizes that as a result of recent events in the business and financialcommunity, the accounting profession has been reevaluating practices concerningemployee compensation and its accounting. Therefore the Company will be evaluating the appropriateness of thepractice of recording compensation expense as a result of the issuance of stockoptions, as it relates to the Company’s particular situation and set ofcircumstances.

 

The above listing is not intended to be acomprehensive list of all of our estimates and judgments or accountingpolicies.  In many cases, the accountingtreatment of a particular transaction is specifically dictated by US GAAP, withno need for management’s judgment in their application.  There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.  See our auditedconsolidated financial statements and notes thereto which contain accountingpolicies and other disclosures required by US GAAP.

 

**RESULTS OF OPERATIONS**

 

**THREE MONTHS ENDED JUNE 30, 2002COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001.**

 

**REVENUE**

 

Total revenues for the three months ended June 30,2002 decreased by $3.1 million and 6.6% to $43.6 million from$46.7 million for the three months ended June 30, 2001. The overallrevenue decrease was primarily driven by a decrease in Software fees, partiallyoffset by the impact of a weaker U.S. Dollar. Excluding the impact of a weaker U.S. Dollar, revenues decreased by8.6%.

 

*SOFTWARE FEES.*  Softwarefees decreased to $1.1 million for the three months ended June 30,2002 from $4.0 million for the three months ended June 30, 2001, adecrease of $2.9 million and 72.5%. The decrease in Software fees is primarily due to a significant declinein customer sales representative expansions in the U.S. compared to the prioryear.  Software fees have declined, andare expected to continue to decline in future periods, as the Company is nolonger a Siebel VAR (See Siebel Alliance) and due to the discontinuance ofongoing development of certain of the Company’s legacy software products.  Excluding the impact of a weaker U.S.Dollar, Software fees revenue decreased 73.7%.

 

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*SOFTWARESERVICES.*  Software services revenue decreased to$22.1 million for the three months ended June 30, 2002 from$22.3 million for the three months ended June 30, 2001, a decrease of$0.2 million.  The decrease inrevenue from Software services is principally due to a decrease of certainroll-out related revenues, such as hardware rebills, associated with customersales representative expansions in the U.S. Excluding the impact of a weaker U.S. dollar, Software services revenuedecreased by 2.6%.

 

*INTERACTIVEMARKETING.*  Interactive marketing revenue remainedessentially unchanged at $20.4 million for the three months endedJune 30, 2002 compared with June 30, 2001.  Excluding the impact of a weaker U.S. Dollar, Interactivemarketing revenue decreased by 2.3%.

 

**OPERATING COSTS**

 

*COST OFSOFTWARE FEES.*  Cost of Software fees decreased to$0.8 million for the three months ended June 30, 2002, from$2.3 million for the three months ended June 30, 2001, a decrease of$1.5 million and 65.2%.  Thedecrease relates to the decline in Software fees revenue, partially offset byan increase in amortization of capitalized software costs.

 

*COST OF SOFTWARESERVICES.*  Cost of Software services decreased to$15.3 million for the three months ended June 30, 2002, from$17.6 million for the three months ended June 30, 2001, a decrease of $2.3million and 13.1%. The decrease in Cost of Software services is primarily dueto the change in product mix of services and cost containment actions.

 

*COST OFINTERACTIVE MARKETING.*  Cost of Interactive marketing revenueremained unchanged at $16.9 million for the three months ended June 30,2002 from the same period in the prior year. These costs remained consistent as a percentage of the Interactivemarketing revenue for the three month period.

 

**GROSS MARGIN**

 

The Company calculates gross margin as revenue lessoperating costs as categorized in the Company’s consolidated financialstatements.  The following tablesummarizes the Company’s gross margin information in dollars and as apercentage of the associated revenues for the three months ended June 30, 2002and the comparable period for the prior year.

 
|                  |   | **6/30/02  Gross Margin** |       | **6/30/01  Gross Margin** |   |
|-----------------------|--------|---------------------------|------------|---------------------------|--------|
|                  |   | **(in thousands)**        | ** ** |
| Software fees         |   | $                         | 279        |                      | 25.7   | % | $ | 1,698 |   | 42.2 | % |
| Software services     |   | 6,788                     |       | 30.7                      | %      | 4,716 |   | 21.2 | % |
| Interactive marketing |   | 3,531                     |       | 17.3                      | %      | 3,461 |   | 17.0 | % |
|                  |   |                      |       |                      |   |   |   |   |   |
| Total                 |   | $                         | 10,598     |                      | 24.3   | % | $ | 9,875 |   | 21.2 | % |

 

Total gross margin for the three months endedJune 30, 2002 increased by $0.7 million and improved as a percentageof revenue by 3.1% to 24.3%.  TheCompany experienced improved software services margins due to changes inproduct mix, reflecting a higher level of recurring service revenue and a lowerlevel of one-time project related revenues and cost containment actions takenin the second half of 2001.  Theseimproved software services margins were partially offset by a decline insoftware fee margins caused by a significant decline in customer salesrepresentative expansions in the U.S. compared to the prior year.  Due to the ongoing transition to a softwareservices model from a proprietary software business, the Company expectssoftware fees to continue to decline as the Company is no longer a Siebel VARand due to the discontinuance of ongoing development of certain of theCompany’s legacy software products. Interactive marketing gross margins remained essentially unchanged ascompared to the same period in the prior year.

 

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**OPERATINGEXPENSES**

 

*RESEARCH ANDDEVELOPMENT.*  Research and development expenses declinedby 23.8% to $1.6 million for the three months ended June 30, 2002 from$2.1 million for the three months ended June 30, 2001.  The decline in research and developmentcosts is principally attributable to a de-emphasis on proprietary softwaredevelopment.

 

*SELLING ANDADMINISTRATIVE.*  Selling and administrative expensesdecreased to $8.3 million for the three months ended June 30, 2002 from$8.8 million for the three months ended June 30, 2001, a decrease of $0.5million or 5.7%.  The decrease inSelling and administrative expenses is principally due to cost containmentactions taken during the second half of 2001.

 

*DEPRECIATIONAND AMORTIZATION.*  Depreciation and amortization for the threemonths ended June 30, 2002 declined to $1.9 million from $5.3 millionfor the same period in the prior year. The decline is due to the absence of Goodwill amortization during 2002in accordance with new accounting standards that eliminated the amortization ofgoodwill (See Note 1 Recently Issued Accounting Standards).

 

**OPERATING LOSS**

 

Operating loss decreased to $1.2 million for the three months endedJune 30, 2002 compared with an operating loss of $6.7 million for thethree months ended June 30, 2001.  Theloss narrowed by $5.5 million primarily due to the absence of goodwillamortization, cost containment actions taken during the second half of 2001 andimproved gross margins due to changes in the product mix.

 

**RESTRUCTURING**

 

On August 16, 2001, the Company announced that, in an attempt tooptimize customer responsiveness and organizational effectiveness, it wouldsimplify its senior leadership structure as well as eliminate certain otherpositions in its international and domestic operations.  The Company completed a large portion of therestructuring during 2001, resulting in the elimination of approximately 100positions reflected in the charge of $7.5 million for 2001.  These reductions included six seniormanagement positions with the remainder being operating, technical andadministrative staff.  The restructuringcharge is composed entirely of employee severance and separation related costs,such as extended benefits and outplacement fees.  There has been no additional restructuring charge taken in2002.  Of the $7.5 million chargerecorded in 2001, $4.2 million has been paid through June 30, 2002.  The remainder is expected to be paid withinthe next twelve to eighteen months.

 

**TAXES**

 

The Company had a consolidated tax provision of $0.7 million forthe three months ended June 30, 2002, compared with a tax benefit of$0.2 million for the three months ended June 30, 2001.  The change reflects the impact of global taxplanning initiatives. The Company’s effective tax rate is different than theU.S. federal statutory tax rate due to taxable income in certain foreignjurisdictions and losses for which a full valuation has been provided.

 

**SIX MONTHS ENDED JUNE 30, 2002COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001.**

 

**REVENUE**

 

Total revenues for the six months ended June 30, 2002decreased by $2.2 million and 2.4% to $88.6 million from$90.8 million for the six months ended June 30, 2001. The overall revenuedecrease was driven by a decrease in license fees, partially offset byincreased interactive marketing services and the impact of a

 

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weaker U.S. Dollar.  Excludingthe impact of a weaker U.S. Dollar, revenues decreased by 2.7%.

 

*SOFTWARE FEES.*  Softwarefees decreased to $2.5 million for the six months ended June 30, 2002from $7.2 million for the six months ended June 30, 2001, a decreaseof $4.7 million and 65.3%.  Thedecrease in Software fees is primarily due to a significant decline in customersales representative expansions in the U.S. compared to the prior year.  Software fees have declined, and areexpected to continue to decline in future periods, as the Company is no longera Siebel VAR (See Siebel Alliance) and due to the discontinuance of ongoingdevelopment of certain of the Company’s legacy software products.

 

*SOFTWARESERVICES.*  Software services revenue decreased to$43.0 million for the six months ended June 30, 2002 from$43.8 million for the six months ended June 30, 2001, a decrease of$0.8 million and 1.8%. The decrease in revenue from Software services isprincipally due to a decrease of certain hardware rebills associated withcustomer sales representative expansions in the U.S.

 

*INTERACTIVEMARKETING.*  Interactive marketing revenue increased to$43.1 million for the six months ended June 30, 2002 from$39.8 million for the six months ended June 30, 2001, an increase of$3.3 million and 8.3%. The increase in revenue from Interactive marketingis primarily due to a large product communications program implemented for acustomer in the U.S.

 

**OPERATING COSTS**

 

*COST OFSOFTWARE FEES.*  Cost of Software fees decreased to$1.5 million for the six months ended June 30, 2002, from$4.6 million for the six months ended June 30, 2001, a decrease of$3.1 million and 67.4%.  Thedecrease relates to lower Software fees revenue and a better product mix,partially offset by an increase in amortization of capitalized software costs.

 

*COST OFSOFTWARE SERVICES.*  Cost of Software services decreased to$30.4 million for the six months ended June 30, 2002, from$33.6 million for the six months ended June 30, 2001, a decrease of $3.2million and 9.5%.  The decrease in Costof Software services is primarily due to lower Software services revenues, theproduct mix of services and cost containment actions.

 

*COST OFINTERACTIVE MARKETING.*  Cost of Interactive marketing revenueincreased to $36.1 million for the six months ended June 30, 2002, from$32.8 million for the six months ended June 30, 2001, an increase of $3.3million or 10.1%.  The increase in theCost of Interactive marketing is primarily driven by the revenue increase.  A large product communications programimplemented for a customer in the U.S., included significant postage relatedfees, which are pass-through costs to the customer.  The cost of this program, including postage, was the primarydriver of the increase in costs.

 

**GROSS MARGIN**

 

The Company calculates gross margin as revenue lessoperating costs as categorized in the Company’s consolidated financialstatements.  The following tablesummarizes the Company’s gross margin information in dollars and as apercentage of the associated revenues for the six months ended June 30, 2002and the comparable period for the prior year.

 
|                  |   | **6/30/02  Gross Margin** |   | **6/30/01  Gross Margin** |   |
|-----------------------|--------|---------------------------|--------|---------------------------|--------|
|                  |   |                      |   |                      |   |   |   |   |   |
| Software fees         |   | $                         | 992    |                      | 39.3   | % | $ | 2,599 |   | 36.2 | % |
| Software services     |   | 12,528                    |   | 29.2                      | %      | 10,160 |   | 23.2 | % |
| Interactive marketing |   | 6,944                     |   | 16.1                      | %      | 7,001 |   | 17.6 | % |
|                  |   |                      |   |                      |   |   |   |   |   |
| Total                 |   | $                         | 20,464 |                      | 23.1   | % | $ | 19,760 |   | 21.8 | % |

 

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Total gross margin for the six months endedJune 30, 2002 increased by $0.7 million and increased by 1.3% as apercentage of revenue to 23.1%.  The Companyexperienced improved software services margins and software fee margins as apercentage of revenue.  Based on thetransition to a software services model from a proprietary software business,the Company expects software fee gross margin to decline in future periodscompared to prior years.  The increasein software services gross margins were also partially offset by lowerinteractive marketing margins as a percentage of revenue due to postage costsassociated with the large product communications program discussed above.

 

 **OPERATING EXPENSES**

 

*RESEARCH ANDDEVELOPMENT.*  Research and development expenses declinedby 22.2% to $3.5 million for the six months ended June 30, 2002 from$4.5 million for the six months ended June 30, 2001.  The decline in research and developmentcosts is principally attributable to a de-emphasis on proprietary softwaredevelopment.

 

*SELLING ANDADMINISTRATIVE.*  Selling and administrative expensesdecreased to $15.9 million for the six months ended June 30, 2002 from$18.2 million for the six months ended June 30, 2001, a decrease of $2.3million or 12.6%.  The decrease inSelling and administrative expenses is principally due to cost containmentactions taken during the second half of 2001.

 

*DEPRECIATIONAND AMORTIZATION.*  Depreciation and amortization for the sixmonths ended June 30, 2002 declined to $3.7 million from$10.7 million for the same period in the prior year.  The decline is due to the absence ofGoodwill amortization during 2002 in accordance with new accounting standardsthat eliminated the amortization of goodwill (See Note 1. Recently IssuedAccounting Standards).

 

**OPERATING LOSS**

 

Operating loss improved to $2.7 million for the six months endedJune 30, 2002 compared with an operating loss of $14.1 million for the sixmonths ended June 30, 2001.  The lossnarrowed by $11.4 million primarily due to the absence of goodwillamortization and cost containment actions taken during the second half of 2001.

 

**RESTRUCTURING**

 

On August 16, 2001, the Company announced that, in an attempt tooptimize customer responsiveness and organizational effectiveness, it wouldsimplify its senior leadership structure as well as eliminate certain otherpositions in its international and domestic operations.  The Company completed a large portion of therestructuring process during 2001, resulting in the elimination ofapproximately 100 positions reflected in the charge of $7.5 million for2001.  These reductions included sixsenior management positions with the remainder being operating, technical andadministrative staff.  The restructuringcharge is composed entirely of employee severance and separation related costs,such as extended benefits and outplacement fees.  There has been no additional restructuring charge taken in2002.  Of the $7.5 million charge, $4.2million has been paid through June 30, 2002 and the remainder expected to bepaid within the next twelve to eighteen months.

 

**TAXES**

 

The Company had a consolidated tax provision of $1.0 million forthe six months ended June 30, 2002, compared with a provision of$2.0 million for the six months ended June 30, 2001.  The change reflects the impact of global taxplanning initiatives. The Company’s effective tax rate is different than the U.S.federal statutory tax rate due to taxable income in certain foreignjurisdictions and losses for which a full valuation has been provided.

 

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**RESULTS BYSEGMENT**

 

*THE AMERICAS.*  Revenuefor the six months ended June 30, 2002 remained constant at $54.9 millionas compared to the same period in the prior year.  The operating loss for the six months ended June 30, 2002 was$3.0 million compared to a loss of $15.7 million for the six monthsended June 30, 2001 primarily due to the absence of goodwill amortization andcost containment actions taken during the second half of 2001.

 

*EUROPE.*  Revenuefor the six months ended June 30, 2002 was $26.7 million compared with$28.5 million for the six months ended June 30, 2001.  Lower Software fees and Interactivemarketing volumes were the primary factors for revenue decreasing by $1.8million.  Operating income for the sixmonths ended June 30, 2002 decreased to $0.6 million from$1.8 million in the six months ended June 30, 2001 due to lower revenues.

 

*ASIA PACIFIC.*  Revenuefor the six months ended June 30, 2002, decreased to $6.9 million comparedto $7.4 million for the six months ended June 30, 2001. The decrease inrevenue was primarily the result of lower interactive marketing revenues inAustralia.  The increased operating lossfor the six months ended June 30, 2002 was $0.3 million compared to anoperating loss of $0.2 million for the six months ended June 30,2001.  The increased operating loss isdue to the decrease in revenue.

 

**NON-U.S.OPERATING AND MONETARY ASSETS**

 

SYNAVANT operates globally, deriving 41.5% of its revenues in the firstsix months of 2002 from non-U.S. operations. As a result, fluctuations in the value of foreign currencies relative tothe U.S. Dollar may increase the volatility of reported U.S. Dollar operatingresults.

 

Non-U.S. monetary assets are maintained in currencies other than theU.S. Dollar, principally those of the Euro, the Pound Sterling and theAustralian Dollar.  Changes in the valueof these currencies relative to the U.S. Dollar are charged or credited tostockholders’ equity.  The effect ofexchange rate changes during the six months ended June 30, 2002 increased theU.S. Dollar amount of cash and cash equivalents by $0.8 million.

 

**LIQUIDITY ANDCAPITAL RESOURCES**

 

On April 27, 2001, SYNAVANT Inc. entered into a revolvingcredit facility with Foothill Capital Corporation (the “Foothill Facility”), awholly-owned subsidiary of Wells Fargo & Company.  The Foothill Facility has a term of five years with a maximumcredit line of $20 million. The available line is determined based on apercentage of the eligible accounts receivable in the U.S. Any borrowingagainst the line will be at a rate of Prime plus 100 basis points. The Companyis required to maintain certain financial covenants relating to earnings, networth and capital expenditures.  TheCompany has met these covenants for the first half of 2002.  As of June 30, 2002, the Company had nooutstanding balance in relation to the Foothill Facility.  Concurrent with the Foothill Facility, IMSHEALTH has agreed to defer any payments associated with the DistributionLiabilities (See Note 2) until January 1, 2005.  The Company filed an 8-K on May 8, 2001 related to theclosing of the Foothill Facility.

 

We currently estimate that our cash and workingcapital needs for the next twelve months can be met by cash on hand, amountsavailable under our credit facility, and cash flow from operations. However,certain U.S. based customers have notified the Company that they have selectedalternative suppliers for their software services and, as a result, do notintend to renew existing contracts. The timing of these transitions is, in somecases, not certain. As a result, the financial impact of these transitions willvary throughout the remainder of 2002 and 2003. The Company estimates that inthe U.S. approximately $25 million to $30 million of 2002 software servicesrevenue associated with these customers will not recur in 2003. Accordingly,the Company expects to require additional financing by the end of 2003 toadequately fund its working capital requirements. If our expectations changedue to market conditions, strategic opportunities or otherwise, then ourcapital requirements may vary materially from those currently anticipated.

 

**CASH FLOWS**

 

Net cash provided by operating activities totaled $4.5 million forthe six months ended June 30, 2002 compared with net cash used in operatingactivities of $8.7 million for the six months ended June 30, 2001. The

 

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increaseof $13.2 million primarily reflects a smaller Net Loss and timing inworking capital, partially offset by payments related to restructuring (SeeNote 3).

 

Net cash used in investing activities totaled $2.9 million for thesix months ended June 30, 2002 compared with cash used in investing activitiesof $1.7 million for the six months ended June 30, 2001. The increase inthe cash outflow of $1.2 million was primarily due to higher capitalexpenditures associated with facilities moves in the U.S. interactive marketingbusiness and our operations in the UK.

 

Net cash used in financing activities totaled $0.2 million for thesix months ended June 30, 2002 unchanged from the same period in the prioryear. The cash outflow in 2002 was attributable to payments on capitalleases.  The payment of deferred loanfees associated with the Foothill Facility was the primary outflow for thefirst half of 2001.

 

**CHANGES IN FINANCIAL POSITION AT JUNE30, 2002 COMPARED WITH DECEMBER 31, 2001**

 

Cash and cash equivalents were $11.8 million as of June 30, 2002compared with $9.6 million as of December 31, 2001. The increase incash and cash equivalents of $2.2 million was primarily due to a lower netloss for the period as well as the timing in working capital requirements.

 

*Accounts andOther Receivables—Net.*  Remained unchanged at $39.8 million atJune 30, 2002 from December 31, 2001.

 

*Other CurrentAssets.*  Decreased $0.3 million to$5.8 million primarily due to a decrease in prepaid expenses associatedwith advances on certain subcontracted projects in our U.S. interactivemarketing business.

 

*ComputerSoftware.*  Decreased $2.5 million to$4.9 million due to amortization of the remaining book value based on thegreater of straight line or revenue based amortization.

 

*Goodwill—Net.*  Remainedunchanged as this balance is no longer amortized in accordance with newaccounting guidelines (See Note 1. Recently Issued Accounting Standards).

 

*Accounts Payable*. Decreased by $0.3 million due to the timing of certain year-end relatedpayments.

 

*AccruedRestructuring.*   Decreased by $1.5 million due to severancepayments made during 2002.

 

*Accrued andOther Current Liabilities.*  Increased to $15.7 million at June 30,2002 from $13.3 million at December 31, 2001. The increase reflectedthe accrual of the current portion of capital lease commitments, employeebonuses and professional fees.

 

*Accrued Income Taxes*. Increased to $3.2 million at June 30, 2002 from $1.9 million at December31, 2001.  The increase is related tothe quarterly accrual of income taxes, partially offset by cash payments fortaxes related to prior periods.

 

*DeferredRevenue.*  Increased to $9.2 million at June 30,2002 from $8.4 million at December 31, 2001. The increase relates tothe billing of annual software maintenance contracts at the beginning of 2002,with revenue being recognized ratably throughout the year.

 

*Total Equity.*  Decreasedto $67.2 million at June 30, 2002 from $70.2 million atDecember 31, 2001. The reduction was primarily due to the Net Loss duringthe period, partially offset by the impact of foreign currency changes.

 

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**FACTORS THAT MAYAFFECT FUTURE PERFORMANCE**

 

*Inaddition to other information in this quarterly report on Form 10-Q, thefollowing risk factors should be carefully considered in evaluating our Companyand our business because such factors currently may have a significant impacton our business, operating results and financial condition. As a result of therisk factors set forth below, actual results could differ materially from thoseprojected in any forward–looking statements.*

 

**COMPETITIONFROM OTHER PROVIDERS OF CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS MAY REDUCEDEMAND FOR OUR PRODUCTS AND SERVICES OR CAUSE US TO REDUCE THE PRICE OF OURPRODUCTS AND SERVICES.**

 

We compete with other companies that sell sales forcesoftware products and services and interactive marketing services thatspecifically target the pharmaceutical industry. We also face competition frommany vendors that market and sell CRM solutions in the consumer packaged goodsindustry. In addition, we compete with various companies that provide supportservices and interactive marketing services similar to our services.

 

We may not compete effectively in our markets.Competitive pressure may result in our reducing the price of our products andservices, which would negatively affect our revenues and operating margins. Ifwe are unable to compete effectively in our markets, our business, results ofoperations and financial condition would be materially and adversely affected.

 

Increased competition is anticipated based on thegrowing strategic focus on Customer Relationship Management (“CRM”) and thesuccess of Siebel’s E-Business solutions. Large established companies, such as Oracle, SAP and Microsoft, that arewell established providers of ERP software solutions are expected to offer newCRM solutions that may compete with SYNAVANT solutions based on Siebeltechnology.

 

The Company typically contracts with customers for athree year license and support agreement for software products.  At the end of the contract the customer mayrenew their agreement, normally for a one to two year period.  Past experience has indicated that theCompany’s customers typically reassess these contracts every three to fiveyears.  As customers reassess theirrequirements, the Company may not be able to renew the agreements, and may notbe selected to provide implementation and/or support services even if a Siebelsolution is selected by the customer. Certain U.S. based customers have notified the Company that they haveselected alternative suppliers for their software services and, as a result, donot intend to renew existing contracts. The timing of these transitions is, in some cases, not certain.  As a result, the financial impact of thesetransitions will vary throughout the remainder of 2002 and 2003.  The Company estimates that in the U.S.approximately $25 million to $30 million of 2002 software services revenueassociated with these customers will not recur in 2003.

 

Some of our competitors and potential competitors arepart of large corporate groups and have longer operating histories andsignificantly greater financial, sales and marketing, technology and otherresources than we have.  In the eventthat we are unable to compete successfully with these companies, it could havea material adverse effect on our business, operating results or financialcondition.

 

**IF OURREVISED ALLIANCE WITH SIEBEL IS UNSUCCESSFUL, OUR BUSINESS MAY SUFFERMATERIALLY.**

 

You should note the following risk factors relating toour alliance with Siebel:

 

•                  Customersmay choose to purchase software services directly from Siebel or anotherprovider and not as part of an integrated solutions offering from SYNAVANT;

 

•                  Wemay not be able to implement successfully the changes to our business modelnecessitated by the Siebel alliance;

 

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•                  Wemay not successfully develop and differentiate our value added services andproducts together with Siebel software products; and

 

•                  OtherSiebel partners and/or providers of CRM services may effectively compete tosell portions of a total solution offering such as integration services, helpdesk support or data services to potential customers of SYNAVANT.

 

**WE MAYNEED ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL REQUIREMENTS.**

 

We invest in research and development as well as incapital projects to enhance existing products and services and develop new productsand services in response to technological and marketplace changes.  As of June 30, 2002, the Company had cashand cash equivalents of $11.8 million and availability under the revolvingcredit facility with Foothill Capital Corporation (See Liquidity and CapitalResources).  To the extent that we needadditional funding in the future to finance our operations and capitalexpenditures, we may not be able to access the capital markets or otherwiseobtain necessary financing, or to obtain such financing in a timely manner oron commercially favorable terms. In the event that we satisfy our financingneeds through the issuance of additional equity securities, such issuance wouldbe dilutive to existing stockholders. The Company expects to require additional financing to meet anticipatedworking capital needs by the end of 2003.

 

**THE LOSSOF OUR KEY PERSONNEL COULD NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OFOPERATIONS.**

 

Our success depends on our continuing ability toattract, hire, train and retain a substantial number of highly skilledmanagerial, technical, sales, marketing and customer support personnel.  In particular, our Chairman and ChiefExecutive Officer, Wayne P. Yetter, is integral to our future success and isnot currently bound by an employment agreement. Competition for qualifiedpersonnel is intense, and we may fail to retain our key employees or to attractor retain other highly qualified personnel. Even if we are able to attract qualified personnel, new hires frequentlyrequire extensive training before they achieve desired levels ofproductivity.  If we are unable to hireor fail to retain competent personnel, our business, results of operations andfinancial condition could be materially and adversely affected.  None of our key employees is bound by anemployment agreement.

 

**OURFAILURE TO INTRODUCE NEW OR ENHANCED PRODUCTS IN A TIMELY MANNER COULD RENDEROUR PRODUCTS OBSOLETE AND UNMARKETABLE.**

 

We compete in businesses that provide and marketsophisticated information systems, software and other technology. We expectthat these systems, software and other technology will be subject torefinements as such systems and underlying technologies are upgraded andadvanced. As various systems and technologies become outdated, we may not be ableto enhance or replace them, to enhance or replace them as quickly as ourcompetition, or to introduce and market new or enhanced products and servicesin the future on schedule and on a cost-effective basis.  Our failure to provide and market new orenhanced products that compete with other available products could materiallyand adversely affect our business, results of operations and financialcondition.

 

Our success will depend, in part, upon our ability to:

 

•                  continueto provide best-in-class enterprise solutions;

 

•                  continueto develop best-in-class CRM solutions;

 

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•                  continueto develop best-in-class Interactive marketing solutions

 

•                  enternew markets; and

 

•                  developand/or provide new solutions that satisfy increasingly sophisticated customerrequirements, that keep pace with technological developments (including, inparticular, developments related to the Internet) and that are accepted in themarket.

 

**DEFECTSIN OUR PRODUCTS COULD DELAY MARKET ADOPTION OF OUR SOFTWARE OR CAUSE US TOCOMMIT SIGNIFICANT RESOURCES TO REMEDIAL EFFORTS.**

 

Software products frequently contain errors orfailures, especially when first introduced or when new versions or enhancementsare released. We could be forced to delay the commercial release of productsuntil software problems have been corrected. We could lose revenues as a resultof software errors or defects. Our products are intended for use in sales andmarketing applications that may be critical to a customer’s business. As aresult, we expect that customers and potential customers will have a greatersensitivity to product defects than the market for software products generally.Testing errors may also be found in new products, enhancements or releasesafter commencement of commercial shipments, resulting in loss of revenue ordelay in market acceptance, damage to our reputation, or increased service andwarranty costs, any of which could have a material adverse effect on ourbusiness, operating results or financial condition.  The foregoing would also be applicable to Siebel products aroundwhich future services would be based. With respect to such products, we would also depend on Siebel for thecorrection of errors and the delivery of any required modifications relating tosuch products.

 

**OURSUCCESS DEPENDS ON THE STRENGTH OF THE PHARMACEUTICAL INDUSTRY.**

 

Our products and services are primarily used inconnection with the marketing and sale of prescription-only drugs. The marketfor prescription-only drugs is undergoing a number of significant changes,including:

 

•                  consolidationsand mergers, which may reduce the number of existing customers and the size oftheir combined sales forces, and could also alter implementation and purchasecycles;

 

•                  reclassificationof formerly prescription-only drugs to permit over-the-counter sales;

 

•                  competitivepressures on our pharmaceutical customers resulting from the continuing shiftto delivery of healthcare through managed care organizations; and

 

•                  changesin law, such as government-mandated price reductions for prescription-onlydrugs, that affect the healthcare systems in the countries where our customersand potential customers are located.

 

Our failure to respond effectively to any or all ofthese and other changes in the marketplace for prescription-only drugs couldhave a material and adverse effect on our business, operating results andfinancial condition.

 

**SIGNIFICANTFLUCTUATIONS IN OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY ADVERSELY AFFECTTHE MARKET PRICE OF OUR COMMON STOCK.**

 

We believe that our quarterly and annual operatingresults could fluctuate significantly in the future, and our results ofoperations could fall below the expectations of securities analysts andinvestors.  If this occurs or if market analystsperceive that it will occur, our market value could decreasesubstantially.  The selection of a CRMsoftware product and service partners often entails an extended decision-makingprocess because of the strategic implications and substantial costs associatedwith a customer’s license of the software

 

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and project implementation.  Asa result, the decision-making process typically takes nine to eighteen months,although in some cases it may take even longer.  Accordingly, we cannot control or predict the timing of ourexecution of contracts with customers. In addition, an implementation processof three to nine months is customary before the software is rolled out to acustomer’s sales force. Other factors may cause significant fluctuations in ourquarterly and annual operating results, including:

 

•                  changesin the demand for our products;

 

•                  thetiming, composition and size of orders from our customers;

 

•                  customerspending patterns and budgetary resources;

 

•                  lowercontribution margin associated with an expected decline in license fee revenue;

 

•                  oursuccess in obtaining new customers;

 

•                  thetiming of introductions of or enhancements to our products;

 

•                  changesin our pricing policies or those of our competitors;

 

•                  ourability to anticipate and adapt effectively to developing markets and rapidlychanging technologies;

 

•                  ourability to attract, retain and motivate qualified personnel, particularlywithin our sales and marketing and research and development organizations;

 

•                  thepublication of opinions or reports about us, our products, our competitors ortheir products;

 

•                  changesin general economic conditions;

 

•                  actionstaken by our competitors, including new product introductions and enhancements;and

 

•                  ourability to control costs.

 

We establish expenditure levels for productdevelopment, sales and marketing and other operating expenses based in largepart on expected future revenues and anticipated competitive conditions.  In particular, we frequently add staff inadvance of new business to permit adequate time for training.  If the new business is delayed or cancelled,we will incur expenses without the associated revenues.  In addition, we may increase sales andmarketing expenses if competitive pressures become greater than we currentlyanticipate.  Because only a smallportion of expenses varies directly with actual revenues in the near term,operating results and profitability are likely to be adversely anddisproportionately affected if revenues fall below expectations.

 

**AS WEEXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS WILL BEMORE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.**

 

Fluctuations in the value of foreign currenciesrelative to the U.S. dollar may increase the volatility of our operatingresults.  We expect to commit resourcesto expand our international sales and marketing activities. If successful, wewill be subject to a number of risks associated with international business activities.These risks generally include:

 

•                  currencyexchange rate fluctuations;

 

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•                  seasonalfluctuations in purchasing patterns;

 

•                  unexpectedchanges in regulatory requirements;

 

•                  tariffs,export controls and other trade barriers;

 

•                  longeraccounts receivable payment cycles and difficulties in collecting accountsreceivable;

 

•                  difficultiesin managing and staffing international operations;

 

•                  potentiallyadverse tax consequences, including restrictions on the repatriation ofearnings;

 

•                  theburdens of complying with a wide variety of foreign laws, including dataprivacy laws; and

 

•                  politicalinstability.

 

**EXPOSURETO CERTAIN DISTRIBUTION LIABILITIES MAY MATERIALLY AND ADVERSELY AFFECT THECOMPANY.**

 

We are subject to certain material liabilitiesassociated with certain matters relating to activities prior to theDistribution.  As a condition to ourspin-off from IMS HEALTH, we are required to undertake to be jointly andseverally liable to certain corporate predecessors of IMS HEALTH for IMSHEALTH’s obligations under certain agreements with such entities, includingpotential liability relating to a complaint filed against such entitiesalleging violations of federal antitrust laws and seeking $350 million indamages.  Pursuant to our agreement withIMS HEALTH, IMS HEALTH will indemnify the Company for any liability we incur inconnection with such Distribution liabilities in excess of $9.0 million, whichhas been recorded in the consolidated financial statements.  Any failure of IMS HEALTH to fulfill itsindemnification obligations that resulted in our obligation to fund asubstantial portion of such excess liabilities could have a material adverseeffect on our business, operating results and financial condition.

 

**WE MAY BE UNABLE TO GENERATESUFFICIENT CASH FLOWS TO ADEQUATELY FUND CERTAIN DISTRIBUTION LIABILITIES.**

 

If we incur the Distribution liability of up to $9.0million, pursuant to our agreement with IMS HEALTH, in connection with thealleged violations of federal antitrust laws by our corporate predecessors, ourcash flows may need to be over and above our projected income in order to meetour financial obligations.  There is noassurance that we will have a sufficient amount of pre-tax income to meet ourfinancial obligations in respect to such Distribution liabilities, which couldhave a material and adverse effect on our business, operating results andfinancial condition.

 

**WE MAY BE SUBJECT TO TAXATION IF THESPIN-OFF DOES NOT QUALIFY AS A TAX FREE TRANSACTION.**

 

If the distribution of SYNAVANT shares of common stockto IMS HEALTH shareholders, pursuant to the spin-off, were not to qualify underSection 355 of the Internal Revenue Code, the aggregate corporate tax liabilitycould be approximately $100 million and SYNAVANT could be severally liable forsuch tax.  In the event that SYNAVANTwere obligated to fund a substantial portion of such liability, it would have amaterial adverse effect on SYNAVANT’S financial condition.  Moreover, each IMS HEALTH stockholder thatreceived shares of SYNAVANT common stock in the spin-off would be treated as ifsuch stockholder had received a taxable distribution in an amount equal to thefair market value of the SYNAVANT common stock received.

 

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

 

We currently distribute controlled substances todoctors’ offices through the mail as part of certain interactive marketingprograms we provide on behalf of pharmaceutical manufacturers. It is importantto our business that this practice of distributing prescription-only drugscontinues. Future legislation may restrict our ability to provide these typesof services. If any such legislation is enacted, it could have a material andadverse effect on our business, operating results and financial condition.

 

**WE RELYON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.**

 

We rely on a combination of trade secret, copyrightand trademark laws, non-disclosure and other contractual agreements, andtechnical measures to protect our proprietary technology. The steps we havetaken or will take in the future may not prevent misappropriation of ourtechnology. 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. Despiteour efforts to protect our products’ proprietary rights, unauthorized partiesmay attempt to copy aspects of our products or to obtain and use informationthat we regard as proprietary. Litigation may be necessary to enforce our intellectual property rights,to protect our trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement orinvalidity. Such litigation could result in substantial costs and diversion ofresources and could harm our business, operating results and financialcondition.

 

**CLAIMSAGAINST US REGARDING OUR PROPRIETARY TECHNOLOGY COULD REQUIRE US TO PAYLICENSING OR ROYALTY FEES OR TO MODIFY OR DISCONTINUE OUR PRODUCTS.**

 

Any claim that our products infringe on intellectualproperty rights could materially and adversely affect our business, results ofoperations and financial condition. Because knowledge of a third party’s patentrights is not required for a determination of patent infringement and becausethe United States Patent and Trademark Office is issuing new patents on anongoing basis, infringement claims against us are a continuing risk.

 

Infringement claims could cause product releasedelays, require the redesign of our products or require us to enter intoroyalty or license agreements. These agreements may be unavailable onacceptable terms. Litigation, regardless of the outcome, could result insubstantial cost, divert management attention and delay or reduce customerpurchases. Claims of infringement are becoming increasingly common as thesoftware industry matures and as courts apply expanded legal protections tosoftware products. Third parties may assert infringement claims against usregarding our proprietary technology and intellectual property licensed fromothers. Generally, third-party software licensors indemnify us from claims ofinfringement. However, licensors may be unable to indemnify us fully for suchclaims, if at all.

 

If a court determines that one of our productsviolates a third party’s patent or other intellectual property rights, there isa material risk that the revenue from the sale of the infringing product willbe significantly reduced or eliminated, as we may have to:

 

•                  paylicensing fees or royalties to continue selling the product;

 

•                  incursubstantial expense to modify the product so that the third party’s patent orother intellectual property rights no longer apply to the product; or

 

•                  stopselling the product.

 

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In addition, if a court finds that one of our productsinfringes a third party’s patent or other intellectual property rights, then wemay be liable to that third party for actual damages and attorneys’ fees. If acourt finds that we willfully infringed on a third party’s patent, the thirdparty may be able to recover treble damages, plus attorneys’ fees and costs.

 

**OURCERTIFICATE OF INCORPORATION, OUR BYLAWS AND OUR AGREEMENT WITH IMS HEALTHCONTAIN PROVISIONS THAT MAY DISCOURAGE A TAKEOVER.**

 

Our Amended and Restated Certificate of Incorporationand Amended and Restated By-Laws contain provisions that may have the effect ofdiscouraging an acquisition of control of the Company not approved by our Boardof Directors.  Such provisions may alsohave the effect of discouraging third parties from making proposals involvingan acquisition or change of control of the Company, although such proposals,might be considered desirable by a majority of our stockholders.  Such provisions could further have theeffect of making it more difficult for third parties to cause the replacementof our Board of Directors. These provisions include:

 

•                  theavailability of capital stock for issuance from time to time at the discretionof our Board of Directors;

 

•                  prohibitionsagainst stockholders calling a special meeting of stockholders or acting bywritten consent in lieu of a meeting;

 

•                  requirementsfor advance notice for raising business or making nominations at stockholders’meetings;

 

•                  theability of our Board of Directors to increase the board and appoint directorsto newly created directorships;

 

•                  aclassified Board of Directors; and

 

•                  higherthan majority requirements to make certain amendments to our By-Laws andCertificate of Incorporation.

 

These provisions have been designed to enable us todevelop our businesses and foster our long-term growth without disruptionscaused by the threat of a takeover not deemed by our Board of Directors to bein the best interests of the Company and our stockholders.  In addition, under the DistributionAgreement we entered into with IMS HEALTH, we agree that until August 31, 2002we will not, among other things, merge or consolidate with another corporation,sell or transfer all or substantially all of our assets, or take any otheraction which would result in one or more persons acquiring a 50 percent orgreater interest in us, unless, before taking such action, we obtain a writtenopinion of a law firm or a ruling from the Internal Revenue Service that suchaction will not affect the tax-free treatment of the distribution.  Such provisions may have the effect ofdiscouraging third parties from making proposals involving an acquisition orchange of control of the Company.

 

We have a stockholder rights plan that is designed toprotect our stockholders in the event of an unsolicited offer and othertakeover tactics that, in the opinion of our Board of Directors, could impairthe Board’s ability to represent stockholder interests. The provisions of ourstockholder rights plan may render an unsolicited takeover of the Company moredifficult or less likely to occur or might prevent such a takeover.

 

Pursuant to the Distribution Agreement with IMSHEALTH, we are each subject to certain non-competition arrangements thatrestrict our respective business activities for a specified period after thedistribution. Pursuant to the terms of the Distribution Agreement, therestrictions would generally be binding on an entity that acquires us or is thesurvivor in a business combination with the Company.  Such restrictions may have the effect of discouraging thirdparties from making proposals involving an acquisition or change in control ofthe Company.  We are also subject to theprovisions of Delaware corporate law, which may restrict

 

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certain business combination transactions.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Information in response to this Item is set forth in “Non-U.S. Operatingand Monetary Assets” under Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

Information in response to this Item is also set forth in “Note 2Contingencies” of the Notes to Consolidated Financial Statements.

 

**Item 2.    Changes In Securities**

 

None.

 

**Item 3.    Default Upon Senior Securities**

 

None.

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

 

(a)  The AnnualMeeting of Shareholders (the “Annual Meeting”) of the Company was held on April30, 2002.  There were present at theAnnual Meeting, in person or by proxy, holders of 12,982,660 shares or 86.18%of the common stock entitled to vote.

 

(b)  Thefollowing directors were elected to hold office for a term as designated belowor until their successors are elected and qualified, with the vote for eachdirector being reflected below:

 
| **Name**                                              |   | **Votes For** |   | **Votes  Withheld** |   |
|-------------------------------------------------------|--------|---------------|--------|---------------------|--------|
| Elected to hold office until the 2005 Annual Meeting: |   |          |   |                |   |
| Peter H. Fuchs                                        |   | 12,899,304    |   | 84,582              |   |
| Barry L.  Williams                                    |   | 12,899,304    |   | 84,582              |   |

 

The affirmative vote of the holders of a plurality ofthe outstanding shares of common stock represented at the Annual Meeting wasrequired to elect each director.

 

(c)  The proposalto approve the 2000 Stock Incentive Plan was approved with 7,783,010affirmative votes cast, 5,182,343 negative votes and 18,541 abstentions.  The affirmative vote of the holders of amajority of the outstanding shares of common stock represented at the AnnualMeeting was required to approve the 2000 Stock Incentive Plan.

 

(d)  Theproposal to approve the Annual Incentive Plan was approved with 10,471,935affirmative votes cast, 2,494,383 negative votes cast and 17,576abstentions.  The affirmative vote ofthe holders of a majority of the outstanding shares of common stock representedat the Annual Meeting was required to approve the Annual Incentive Plan.

 

(e)  Theappointment of PricewaterhouseCoopers LLP as independent public accountants toaudit the accounts of the Company and its subsidiaries for the year endingDecember 31, 2002, was ratified with 12,907,161 affirmative votes cast, 69,442negative votes cast and 7,291 abstentions. The affirmative vote of the holders of a majority of the outstandingshares of common stock represented at the Annual Meeting was required to ratifythe appointment of PricewaterhouseCoopers LLP.

 

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**Item 5.    Other Information**

 

None.

 

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

 

(a) Exhibits

 
| Exhibit  Number |   | Exhibit                                                                                                                 |   |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
|            |   |                                                                                                                    |   |
| 99.1            |   | Certification pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |
|            |   |                                                                                                                    |   |
| 99.2            |   | Certification pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |

 

(b) Reports on Form 8-K

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

Synavant Inc.

 
|          |                        |      |                                              |     |            |
|---------------|-----------------------------|-----------|---------------------------------------------------|----------|-----------------|
| **Signature** |                        | **Title** |                                              | **Date** |
|          |                        |      |                                              |     |            |
| By:           | /s/ Wayne P. Yetter         |      | Chairman and Chief Executive Officer              |     | August 13, 2002 |
|          | Wayne P. Yetter             |      | (Principal Executive Officer)                     |     |            |
|          |                        |      |                                              |     |            |
| By:           | /s/ Clifford A. Farren, Jr. |      | Senior Vice President and Chief Financial Officer |     | August 13, 2002 |
|          | Clifford A. Farren, Jr.     |      | (Principal Financial and Accounting Officer)      |     |            |

 

 

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