DENDRITE INTERNATIONAL INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended June 30, 2004

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

For the transition period from to

Commission File Number 001-16379

Dendrite International, Inc.
(Exact name of registrant as specified in its charter)

New Jersey		22-2786386
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1200 Mount Kemble Avenue
Morristown, NJ 07960
(Address, including zip code, of principal executive offices)

(973) 425-1200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
ý yes o no

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

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

DENDRITE INTERNATIONAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Operations (unaudited) Three and six month periods ended June 30, 2004 and 2003

	Consolidated Balance Sheets (unaudited) June 30, 2004 and December 31, 2003

	Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2004 and 2003

	Notes to Unaudited Consolidated Financial Statements

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

ITEM 4.	Controls and Procedures

PART II.	OTHER INFORMATION

ITEM 2	Changes in Securities and Use of Proceeds

ITEM 4.	Submission of Matters to a Vote of Security Holders

ITEM 6.	Exhibits and Reports on Form 8-K

Signatures

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2004			2003		2004			2003
Revenues:
License fees	$	2,431		$	2,752	$	5,777		$	5,315
Services	97,476			66,776		189,194			123,923
Total revenues	99,907			69,528		194,971			129,238

Cost of revenues:
Cost of license fees	923			1,204		1,912			2,283
Cost of services	50,007			33,578		99,043			62,318
Total cost of revenues	50,930			34,782		100,955			64,601

Gross margin:
License fees	1,508			1,548		3,865			3,032
Services	47,469			33,198		90,151			61,605
Total gross margin	48,977			34,746		94,016			64,637

Operating expense (income):
Selling, general and administrative	34,652			20,983		67,618			41,222
Research and development	2,722			3,215		5,744			5,912
Other operating (income)	—			—		(339		)	—
	37,374			24,198		73,023			47,134

Operating income	11,603			10,548		20,993			17,503

Interest (expense) income, net	(4		)	312		3			554
Other income	18			25		61			34

Income before income tax expense	11,617			10,885		21,057			18,091
Income tax expense	4,331			4,962		8,107			7,844

Net income	$	7,286		$	5,923	$	12,950		$	10,247

Net income per share:
Basic	$	0.18		$	0.15	$	0.31		$	0.26
Diluted	$	0.17		$	0.14	$	0.30		$	0.25

The accompanying notes are an integral part of these consolidated statements.

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

	June 30, 2004			December 31, 2003
Assets
Current Assets:
Cash and cash equivalents	$	40,650		$	30,405
Accounts receivable, net	66,567			71,383
Prepaid expenses and other current assets	8,430			8,483
Deferred taxes	13,078			8,844
Facility held for sale	6,900			6,900
Total current assets	135,625			126,015

Property and equipment, net of accumulated amortization of $49,820 and $43,946	31,184			28,140
Other assets	4,900			2,004
Long-term receivable	—			3,157
Goodwill	84,792			70,403
Intangible assets, net	21,176			18,574
Purchased capitalized software, net	1,361			1,666
Capitalized software development costs, net	6,691			6,126
Deferred taxes	6,272			6,372
	$	292,001		$	262,457
Liabilities and Stockholders’ Equity
Current Liabilities:
Current installments of long-term debt	$	386		$	—
Accounts payable	10,446			4,990
Income taxes payable	10,918			6,194
Capital lease obligations	601			1,033
Accrued compensation and benefits	15,843			16,104
Accrued professional and consulting fees	6,341			7,842
Other accrued expenses	20,040			21,038
Purchase accounting restructuring accrual	3,754			3,203
Deferred revenues	13,235			16,379
Total current liabilities	81,564			76,783

Capital lease obligations	35			187
Purchase accounting restructuring accrual	5,589			8,627
Deferred rent	468			369
Long-term debt, excluding current installments	1,257			—
Other non-current liabilities	3,572			356

Stockholders’ Equity:
Preferred stock, no par value, 15,000,000 shares authorized, none issued	—			—
Common stock, no par value, 150,000,000 shares authorized, 43,803,530 and 43,013,428 shares issued; 41,580,830 and 40,790,728 shares outstanding at June 30, 2004 and December 31, 2003, respectively	110,689			100,448
Retained earnings	110,886			97,936
Deferred compensation	(64		)	(56		)
Accumulated other comprehensive loss	(1,119		)	(1,317		)
Less treasury stock, at cost	(20,876		)	(20,876		)
Total stockholders’ equity	199,516			176,135
	$	292,001		$	262,457

The accompanying notes are an integral part of these consolidated statements.

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	For the Six Months Ended June 30,
	2004			2003
Operating activities:
Net income	$	12,950		$	10,247
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,446			8,564
Amortization of deferred compensation, net of forfeitures	115			(54		)
Other adjustments for non-cash items	901			608
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable	9,780			6,858
Decrease (increase) in prepaid expenses and other current assets	870			(933		)
Increase in other assets	693			—
Decrease in accounts payable and accrued expenses	(3,576		)	(16,100		)
Decrease in purchase accounting restructuring accrual	(4,278		)	—
Increase in income taxes payable	675			58
Decrease in accrued restructuring charge	—			(260		)
Decrease in deferred revenue	(3,787		)	(1,130		)
Increase in other non-current liabilities	114			68

Net cash provided by operating activities	24,903			7,926

Investing activities:
Sales of short-term investments	—			1,294
Acquisitions, net of cash acquired	(6,812		)	(51,682		)
Purchases of property and equipment	(8,615		)	(3,905		)
Additions to capitalized software development costs	(2,074		)	(1,382		)
Other, net	—			(50		)

Net cash used in investing activities	(17,501		)	(55,725		)

Financing activities:
Borrowings from line of credit	—			5,000
Repayments of line of credit	—			(5,000		)
Repayments of long-term debt	(1,689		)	—
Repayments of acquired loan	(624		)	—
Payments on capital lease obligations	(592		)	(251		)
Issuance of common stock	5,580			2,530

Net cash provided by financing activities	2,675			2,279

Effect of foreign exchange rate changes on cash	168			401

Net increase (decrease) in cash and cash equivalents	10,245			(45,119		)
Cash and cash equivalents, beginning of year	30,405			68,308

Cash and cash equivalents, end of period	$	40,650		$	23,189

The accompanying notes are an integral part of these consolidated statements.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

1. Basis of Presentation

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

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

Reclassifications. Certain prior period balances have been reclassified to conform to current period presentation.

2. Stock Based Compensation

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003
Net income as reported	$	7,286		$	5,923		$	12,950		$	10,247

Add/(Deduct): Deferred compensation amortization, net of forfeitures recognized in accordance with APB 25, net of related tax effects	6			(2		)	71			(32		)

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(3,847		)	(2,831		)	(7,648		)	(5,257		)

Pro forma net income	$	3,445		$	3,090		$	5,373		$	4,958

Earnings per share:
Basic - as reported	$	0.18		$	0.15		$	0.31		$	0.26
Basic - pro forma	$	0.08		$	0.08		$	0.13		$	0.12

Diluted - as reported	$	0.17		$	0.14		$	0.30		$	0.25
Diluted - pro forma	$	0.08		$	0.08		$	0.13		$	0.12

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

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

The stock-based employee compensation expense determined under the fair value based methods for all awards, net of related tax effects, disclosed herein is determined based upon the number and fair value of options granted and an estimate of forfeitures. The expense is recognized over the vesting period of the options. Under SFAS 123, compensation expense is not recognized for options that are forfeited due to the employee’s failure to fulfill service requirements. Therefore, while the fair value per option is not recalculated, the number of options vesting would change, thus requiring recalculation of the aggregate compensation expense. The Company accounts for forfeitures by estimating the total number of awards that will vest and adjusting that estimate if evidence becomes available that a different number of awards is expected to vest.

The Black-Scholes valuation model was developed for use in estimating the fair market value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes valuation model requires the input of the highly subjective assumptions disclosed above. Since the Company’s employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

3. Net Income Per Share

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2004		2003		2004		2003
Basic net income per share computation:
Net income	$	7,286	$	5,923	$	12,950	$	10,247
Weighted-average common shares outstanding	41,464		40,220		41,192		40,115
Basic net income per share	$	0.18	$	0.15	$	0.31	$	0.26

Diluted net income per share computation:
Net income	$	7,286	$	5,923	$	12,950	$	10,247
Diluted common shares outstanding:
Weighted-average common shares outstanding	41,464		40,220		41,192		40,115
Impact of dilutive stock options	1,878		881		1,749		589
Diluted common shares outstanding	43,342		41,101		42,941		40,704
Diluted net income per share	$	0.17	$	0.14	$	0.30	$	0.25

4. Comprehensive Income

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

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

5. Acquisitions

MDM

On April 6, 2004, the Company completed the strategic acquisition of the capital stock of the Medical Data Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for MDM was approximately $9,160 and consisted of approximately $5,000 in cash payments, approximately $3,300 in restricted stock, approximately $160 of legal and professional fees and $700 of the purchase price still outstanding and included within Other Accrued Expenses in the accompanying consolidated balance sheet as of June 30, 2004. The Company is in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment. The preliminary allocation of purchase price to intangible assets acquired in connection with the MDM acquisition is as follows:

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

The assets acquired and liabilities assumed in connection with the MDM acquisition and pro forma results of operations are not deemed material to the consolidated financial statements as a whole.

Uto Brain

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

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

	Weighted-Average Estimated Useful Life (Years)	Acquired Intangible Asset Value
Intangible Assets Subject to Amortization:
Customer relationship assets	10	$	1,870

Intangible Assets Not Subject to Amortization:
Goodwill	N/A	4,557
Trademarks	N/A	148
		$	6,575

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

Synavant

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

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

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

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

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

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

6. Purchase Accounting Restructuring Accrual

In connection with the June 2003 acquisition of Synavant, the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. During the first quarter of 2004, the Company’s management increased its restructuring accrual by approximately $1,800 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to Goodwill in the accompanying consolidated balance sheet. The Company anticipates that the balance related to the termination of employees will be paid during the current year and the remaining accrued restructuring balance related to the facility exit costs will be paid over the life of the facility leases, ending in February 2012.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

The liability accrues for expenses to be incurred in exiting certain Synavant facilities, including assumptions related to sublease income which offsets future lease obligations. The underlying subleases are not in place for all facilities and the future placement of subleases, including the timing and terms and conditions of subleases, could be different than the assumptions.

The activity related to the Synavant and Software Associates International (“SAI”) purchase accounting restructuring accruals for the six month period ended June 30, 2004 is summarized in the table below:

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

7. Goodwill and Intangible Assets

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

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

The changes in the carrying amount of intangible assets not subject to amortization for the period ended June 30, 2004 are as follows:

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

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

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

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

8. Line-of-Credit

The Company entered into a line-of-credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement replaced the Company’s then existing $15,000 credit facility. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the Agreement requires the Company to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003 and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of June 30, 2004, the Company’s consolidated net worth was $199,516. The Agreement contains certain restrictions on the Company’s ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of June 30, 2004, the Company was in compliance with all covenants and did not have any amounts outstanding under the line-of-credit.

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

9. Long-Term Debt

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

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

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

10. Income Taxes

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

During the three months ended June 30, 2004, the Company completed the tax accounting analysis related to the Synavant acquisition. As a result, the Company increased current deferred tax assets by approximately $4,500, increased

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

income taxes payable approximately $5,800, with the balance increasing goodwill approximately $1,300.

11. Deferred Compensation Plan

The Company has supplemental deferred compensation arrangements for the benefit of certain officers, directors and certain key executives. These arrangements are primarily funded by life insurance contracts, which have been purchased by the Company. The arrangements permit the participants to diversify their investments. The value of the assets held, managed and invested, pursuant to the agreements was approximately $3,000 as of June 30, 2004 and is included in Other Assets in the accompanying consolidated balance sheet. The corresponding deferred compensation liability of $3,500 as of June 30, 2004 is recorded at the fair market value of the assets held in a rabbi trust and adjusted to reflect the fair value of the amount owed to certain officers, directors and certain key executives and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheet.

12. Common Stock

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

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

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

13. Customer and Geographic Segment Data

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

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

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

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

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

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

($ IN THOUSANDS)

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations and future estimates, future financial position or results and future plans and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and the pharmaceutical and consumer packaged goods industries. All such forward-looking statements involve significant risks and uncertainties, including those risks identified in this Form 10-Q under “Factors That May Affect Future Results,” many of which are beyond our control. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ materially from those indicated by the forward-looking statements included in this Form 10-Q, as more fully described under “Factors That May Affect Future Results.” In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results or changes in assumptions, expectations or projections. In addition, our financial and performance outlook concerning future revenues, margins, earnings, earnings per share and other operating or performance results does not include the impact of any future acquisitions, future acquisition-related expenses, debt, dilution or any future restructuring or other charges that may occur from time-to-time due to management decisions and changing business circumstances and conditions.

EXECUTIVE OVERVIEW

We provide a broad array of solutions worldwide that enable pharmaceutical and other life science companies to strategically optimize their sales, marketing and clinical resources. Our strategy is to continue to diversify and expand our solutions portfolio, customer base and geographic reach by leveraging our extensive knowledge and deep relationships with the pharmaceutical and life sciences industries and capitalizing upon our deep relationships in these industries. We have and will continue to rely on both internal growth and acquisitions to meet to our growth objectives.

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

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

We evaluate our performance based upon a number of operating metrics. Chief among these are revenues, services gross margin percentage, operating margins, diluted net income per share, operating cash flow and days sales outstanding. In the second quarter of 2004, we saw the continued execution of our strategy yield growth in revenues, operating margins and diluted net income per share. We also continued to exhibit strong cash generation attributes, improving days sales outstanding from the prior year and generating strong positive operating cash flow even as we continued to pay some of the remaining liabilities associated with our acquisitions.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

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

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

($ IN THOUSANDS)

MERGERS AND ACQUISITIONS

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

MDM

On April 6, 2004, we completed our strategic acquisition of MDM. Primarily based in Warsaw, Poland, MDM was a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for MDM was approximately $9,160 and consisted of approximately $5,000 in cash payments, approximately $3,300 in restricted stock, approximately $160 in legal and professional fees and $700 of the purchase price still outstanding and included within Other Accrued Expenses of the accompanying consolidated balance sheet as of June 30, 2004. We are in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment.

Uto Brain

On January 5, 2004, we completed our acquisition of Uto Brain. Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceutical companies with data, analytics, publishing and advisory services. The combining of resources of Uto Brain with our existing resources creates a comprehensive information, software and services company dedicated to the Japanese pharmaceutical industry and further enhances our ability to provide solutions to enhance sales, marketing and clinical functions of pharmaceutical companies in the Japanese market. Uto Brain’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

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

Synavant

On June 16, 2003, we completed our acquisition of Synavant. Synavant provided a broad range of knowledge-based services to pharmaceutical and other life science companies around the world. Its comprehensive global solutions included pharmaceutical customer relationship management (“CRM”) applications, interactive marketing, server and database management, dedicated local help-line support, training, telemarketing, sample management and product recall services. Synavant was headquartered in Atlanta, Georgia, and had offices in 21 countries. We believe that combining Synavant’s resources with the existing resources of Dendrite creates a more comprehensive information, software and services company dedicated to the global life sciences industry, and further enhances our ability to provide market leading solutions to the sales, marketing and clinical functions of pharmaceutical and other life science companies. Synavant’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

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

In connection with the June 2003 acquisition of Synavant, we restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. During the first quarter of 2004, our management increased its restructuring accrual estimate by approximately $1,800 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to Goodwill in the accompanying consolidated balance sheet. Management believes the accrued liability as of June 30, 2004 will be adequate to cover the costs incurred related to the restructuring.

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

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

($ IN THOUSANDS)

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

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

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

Service revenues increased to $97,476 for the three months ended June 30, 2004, up $30,700, or 46%, from $66,776 for the three months ended June 30, 2003. This increase was primarily driven by the acquisition of Synavant. Including the acquired revenue, the Company experienced growth of approximately 10% in domestic technical services, approximately 33% in domestic data and business consulting services and approximately 25% in domestic sales support services. In addition, our international services as well as our low gross margin and pass through postage services both grew more than 100% versus the comparable prior year period.

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

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

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

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

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

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

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased to $34,652 for the three months ended June 30, 2004, up $13,669, or 65%, from $20,983 for the three months ended June 30, 2003. This increase reflects the additional operating costs and amortization expense related to the Synavant, Uto Brain and MDM acquisitions. As a percentage of revenues, SG&A increased to 35% for the three months ended June 30, 2004, up from 30% for the three months ended June 30, 2003. We have and will continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures.

RESEARCH AND DEVELOPMENT (R&D) EXPENSES. R&D expenses decreased to $2,722 for the three months ended June 30, 2004, down $493, or 15%, from $3,215 for the three months ended June 30, 2003. As a percentage of revenues, R&D expenses decreased to 3% for the three months ended June 30, 2004 from 5% for the three months ended June 30, 2003, due primarily to the significant increase in revenues. In addition, the Company capitalized more costs in the three months ended June 30, 2004 than in previous quarters due to the development for the release of its next generation CRM solution, expected to be released in 2005. We expect the capitalization rates for the remainder of 2004 to be lower compared to the second

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

($ IN THOUSANDS)

quarter of 2004, but higher than our normal capitalization rate.

PROVISION FOR INCOME TAXES. Our income tax expense rate decreased to 37.3% for the three months ended June 30, 2004 from 45.6% for the three months ended June 30, 2003. The primary driver for the change in the effective tax rate was the consolidation of certain international legal entities. Prior to operational restructuring and legal entity integration, these international legal entities generated losses that could not be benefited. As a result of the integration, the amount of losses generated that can not be benefited has been significantly reduced. In connection with the Synavant integration in June 2003, the Company determined which foreign entities would be dissolved and performed a reforecast of projected taxable income by jurisdiction and recognized a full valuation allowance on a net operating loss carryforward for one of its foreign subsidiaries of approximately $608.

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

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

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

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

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

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

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

GROSS MARGIN. Total gross margin for the six months ended June 30, 2004 and 2003 was 48% and 50%, respectively.

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

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

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

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

($ IN THOUSANDS)

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

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

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

PROVISION FOR INCOME TAXES. Our effective income tax expense rate decreased to 38.5% for the six months ended June 30, 2004 from 43.4% for the six months ended June 30, 2003. The primary driver for the change in the effective tax rate was the consolidation of certain international legal entities. Prior to operational restructuring and legal entity integration, these international legal entities generated losses that could not be benefited. As a result of the integration, the amount of losses generated that can not be benefited has been significantly reduced. In connection with the Synavant integration in June 2003, the Company determined which foreign entities would be dissolved and performed a reforecast of projected taxable income by jurisdiction and recognized a full valuation allowance on a net operating loss carryforward for one of its foreign subsidiaries of approximately $608.

LIQUIDITY AND CAPITAL RESOURCES

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

We finance our business primarily through cash generated by operations. Net cash provided by operating activities was $24,903 and $7,926 for the six month periods ended June 30, 2004 and 2003, respectively. Our accounts receivable days sales outstanding decreased from 68 days for the quarter ended December 31, 2003, to 60 days for the quarter ended June 30, 2004, partially due to the collection of certain annual billings and the receipt of approximately $3,300 of a long-term contracted receivable outstanding as of December 31, 2003. We also generated operating cash from our considerable growth in net income adjusted for changes in assets and liabilities, net of effects from acquisitions. These increases in operating cash flow were partially offset by $4,278 of payments related to accrued purchase accounting charges incurred in connection the Synavant and SAI acquisitions as well as increased payments of accounts payable and accrued expenses. Included in the cash generated by operations for the six months ended June 30, 2003 is approximately $16,000 of payments related to Synavant liabilities as of the date of acquisition.

Cash used in investing activities was $17,501 for the six months ended June 30, 2004, and includes payments for the MDM and Uto Brain acquisitions as well as increased purchases of property and equipment due to the ongoing relocation of our corporate headquarters. Cash used in investing activities was $55,725 for the six months ended June 30, 2003, and primarily attributable to the payments made related to the Synavant acquisition.

As anticipated, purchases of property and equipment increased for the six months ended June 30, 2004 versus the comparable prior year period. The increase is primarily due to the capital requirements of the new corporate headquarters and the need to adjust going-forward capital requirements for a larger combined Company reflecting the acquisition of Synavant. We currently expect that we will incur approximately $8,000 of capital expenditures in connection with the headquarters relocation for the year ending December 31, 2004. In addition, we also expect capital spending in the range of approximately $8,000 to $12,000 to support the infrastructure associated with a full year of combined Dendrite and Synavant operations. We review our capital expenditure program periodically and adjust it as required to meet current needs. The foregoing amounts are based on current assumptions and are subject to change during the course of 2004.

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

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

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

($ IN THOUSANDS)

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

Contractual Obligations and Commitments

We entered into a credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement replaced our then existing $15,000 credit facility. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the agreement requires us to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003 and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of June 30, 2004, our consolidated net worth was $199,516. The Agreement contains certain restrictions on our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of June 30, 2004, there were no borrowings outstanding under the Agreement and we were in compliance with all covenants.

In connection with the Uto Brain acquisition, we assumed bank debt of approximately $3,200, with a weighted-average interest rate of 2.10% and acquired a loan of approximately $600, with an interest rate of 1.80%. As of June 30, 2004, approximately $1,600 of the bank debt related to this transaction was outstanding.

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

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

(1) Operating lease amounts disclosed above include $15,123 of future operating lease costs, excluding estimated future sublease income, accrued for in the purchase accounting restructuring accruals related to the Synavant and SAI acquisitions.

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

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

($ IN THOUSANDS)

WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES

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

OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY

Many of our solutions are currently used in connection with the marketing and sale of prescription-only drugs. This market is undergoing a number of significant changes. These include:

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

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

• increasing Food and Drug Administration activism; and

• competitive pressure on the pharmaceutical industry resulting from the continuing shift to delivery of healthcare and pharmaceuticals through managed care organizations.

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

OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS

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

WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS

Our business may be materially and adversely affected as a result of the significant risks associated with our acquisitions, including our recent acquisitions of Synavant, SAI, Uto Brain and the MDM group of companies. As part of our business strategy, we have acquired, and in the future may acquire, businesses that offer complementary products, services or technologies. These acquisitions are accompanied by substantial risks, including:

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

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

• our inability to successfully integrate the acquired business;

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

• our inability to achieve expected cost and business synergies;

• the significant strain on our operating systems;

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

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

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

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

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

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

While to date we have had success integrating acquired entities into our operations, we can not guarantee that we will successfully integrate these new businesses into our operations or achieve any expected cost synergies.

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

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

($ IN THOUSANDS)

acquisition-related costs or amortization costs for acquired intangible assets.

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

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

OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES

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

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

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE

Our total revenue and operating results may vary significantly from quarter to quarter. The main factors that could cause these fluctuations are:

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

• potential delays in recognizing revenue from license transactions;

• seasonal variations in operating results; and

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

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

($ IN THOUSANDS)

In addition, we establish our expenditure levels for product development, sales and marketing and some of our other operating expenses based in large part on our expected future revenues and anticipated competitive conditions. In particular, we frequently add staff in advance of new business to permit adequate time for training. If the new business is subsequently delayed, canceled or not awarded, we will have incurred expenses without the associated revenues. We also may increase sales and marketing expenses if competitive pressures become greater than originally anticipated. Since only a small portion of our expenses varies directly with our actual revenues, our operating results and profitability are likely to be adversely and disproportionately affected if our revenues fall below our targeted goals or expectations.

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

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

The market for CRM and SFA products changes rapidly because of frequent improvements in computer hardware and software technology. Our future success will depend, in part, on our ability to:

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

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

• address the changing and increasingly sophisticated needs of our customers.

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

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

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

SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES

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

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

There are a number of other companies that sell CRM and SFA products and related services that specifically target the pharmaceutical industry, including competitors that are actively selling CRM and SFA software products in more than one country and competitors that also offer CRM and SFA support services. Some of our competitors and potential competitors are part of large corporate groups and have significantly greater financial, sales, marketing, technology and other resources than we have.

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

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

($ IN THOUSANDS)

and services.

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

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

• alliances among existing competitors;

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

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

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

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

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

The success of parts of our business will depend, in part, on our ability to continue developing Internet-related products, modifying and improving our existing products and responding to technological advances and changing commercial uses of the Internet. We cannot assure you that our Internet-related products and services will adequately respond to such technological advances and changing uses. Nor can we assure you that the demand for our Internet-related products and services will increase.

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

OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT

We have expanded and may in the future expand our international operations and enter additional international markets. This expansion would require significant management attention and financial resources that could adversely affect operating margins and earnings. We may not be able to maintain or increase international market demand for our products and services. If we do not, our international sales will be limited and our business, financial condition or results of operations could be materially and adversely affected.

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

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

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

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

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

• difficulties in managing an organization spread over various jurisdictions.

Any of the above risks could have a significant impact on our ability to deliver products on a competitive and timely basis, which could materially and adversely affect our financial condition or operating results.

Since we have operations in a number of countries and our service agreements in such countries are denominated in foreign currencies, we face exposure to adverse movements in foreign currency exchange rates. As currency rates change, translation of the income statements of our international entities from local currencies to U.S. dollars affects period-over-period comparability of operating results. Historically we have not hedged these translation risks because we generally reinvest our cash flows from international operations, however, we continue to evaluate foreign currency translation risk exposure. As we continue to grow our business, the risks associated with foreign currency translation will also grow.

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

($ IN THOUSANDS)

AN INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS

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

CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE

The efficient operation of our business, and ultimately our operating performance, depends on the uninterrupted use of our critical business and information technology systems. Many of these systems require the use of specialized hardware and other equipment that is not readily available in the marketplace. Although we maintain these systems at more than one location, a natural disaster, a fire or other catastrophic event at any of these locations could result in the destruction of these systems. In such an event, the replacement of these systems and restoration of archived data and normal operation of our business could take several days to several weeks, or more. During the intervening period when our critical business and information technology systems are fully or partially inoperable, our ability to conduct normal business operations could be significantly and adversely impacted and as a result our business, operating results and financial condition could be adversely affected.

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

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

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

OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECT COMPLETELY

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

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

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

Some of our software is provided by third-party vendors. If our third-party vendors are unable to successfully respond to technological change or if our relationships with certain third-party vendors are terminated, we may experience difficulty in replacing the functionality provided by the third-party software currently offered with our products. Although we believe there are other sources for all of our third-party software, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source. The absence of or any significant delay in the replacement of functionality provided by third-party software in our products could materially and adversely affect our sales.

THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED

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

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

($ IN THOUSANDS)

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

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

FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS

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

GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL

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

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

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

UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS

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

WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY

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

PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE

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

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

($ IN THOUSANDS)

OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS

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

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

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

• market conditions in the technology, healthcare and other growth sectors;

• general consolidation in the healthcare information industry which may result in the market perceiving us or other comparable companies as potential acquisition targets;

• the gain or loss of significant orders;

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

• future acquisitions.

Further, the stock market has experienced on occasion extreme price and volume fluctuations. The market prices of the equity securities of many technology companies have been especially volatile and often have been unrelated to the operating performance of such companies. These broad market fluctuations may have a material adverse effect on the market price of our common stock.

ITEM 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

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

PART II. OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds

Changes in Securities

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

ITEM 4. Submission of Matters to a Vote of Security Holders

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

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

Name	For	Withheld

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

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

ITEM 6. Exhibits and Reports on Form 8-K

(i) Exhibits

10.31 New Hire Option Grant Authorization – Updated Appendix

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

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

32 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, and Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company.

(ii) Reports on Form 8-K

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

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

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

Signatures

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

Date: August 9, 2004

	By:	/s/ John E. Bailye
	John E. Bailye, Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)

	By:	/s/ Kathleen E. Donovan
	Kathleen E. Donovan, Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

EXHIBIT INDEX

Number		Description

10.31		New Hire Option Grant Authorization – Updated Appendix.

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

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

32		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company and Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company.