UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 31, 2004
------------
PDI, INC.
------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-24249 22-2919486
-------- ------- ----------
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
Saddle River Executive Centre
1 Route 17 South
Saddle River, NJ 07458
-------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 258-8450
--------------
- --------------------------------------------------------------------------------
Item 2.01. Acquisition or Disposition of Assets.
As previously reported on its Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 31, 2004, on August 31, 2004, PDI,
Inc. completed its acquisition of the assets of Pharmakon, LLC (Pharmakon), a
healthcare communications company focused on the marketing of ethical
pharmaceutical and biotechnology products, located in Schaumburg, Illinois. The
transaction was made pursuant to a definitive agreement, dated August 26, 2004
(the Asset Purchase Agreement), among the Company, its wholly-owned subsidiary
InServe Support Solutions, Pharmakon and Steve Agnoff, Stuart Cass, Robert
Clements and James Berardi, the owners of 100% of the outstanding and issued
equity interests of Pharmakon (each, a Member and, collectively, the Members
and, together with Pharmakon, the Sellers). The transaction is an asset
acquisition for tax purposes. Prior to the execution of the Asset Purchase
Agreement, there were no material relationships between the Company and the
Sellers.
Pursuant to the Asset Purchase Agreement, the Company acquired substantially all
of Pharmakon's assets, including, without limitation, its contracts, agreements,
license agreements, tangible personal property, books and records, accounts
receivables, intangible assets and intellectual property.
Under the terms of the Asset Purchase Agreement, Pharmakon received $27,383,195
in cash, after certain closing adjustments, upon closing of the transaction with
the possibility of earning up to an additional $10 million in cash based upon
achievement of certain annual profit targets by Pharmakon through December 2006.
Item 9.01. Financial Statements and Exhibits
This Form 8-K/A amends the current report on Form 8-K dated August 31, 2004 to
include Item 9.01 (a) Financial Statements of Business Acquired and Item 9.01
(b) Pro Forma Financial Information
(a) Financial Statements of Business Acquired
Report of Independent Registered Public Accounting Firm
The following historical financial statements of Pharmakon are included in
this report:
Balance sheets as of June 30, 2004 (unaudited) and December 31, 2003
Statements of income and members' equity for the six months ended June 30,
2004 and 2003 (unaudited) and the year ended December 31, 2003
Statements of cash flows for the six months ended June 30, 2004 and 2003
(unaudited) and the year ended December 31, 2003
(b) Pro Forma Financial Information
The following unaudited pro forma combined financial statements giving
effect to the registrant's acquisition of Pharmakon completed August 31,
2004 are included in this report:
Pro forma combined balance sheet as of June 30, 2004
Pro forma combined statement of operations for the six months ended June
30, 2004 and the year ended December 31, 2003
Notes to unaudited pro forma combined financial information
(c) Exhibits
23.1 Consent from Mayer Hoffman McCann P.C.
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
PHARMAKON, LLC
We have audited the accompanying balance sheet of Pharmakon, LLC as of December
31, 2003, and the related statements of income and members' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmakon, LLC as of December
31, 2003, and the results of its operations and its cash flows for the year then
ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 15 to the financial statements, the Company restated its
2003 financial statements during 2004 to reflect pass-through income and
expenses as gross amounts, in conformity with U.S. generally accepted accounting
principles. The effect of the restatement increased net sales and cost of goods
sold by $2,027,844. The restatement has no effect on gross profit or net income.
/s/ MAYER HOFFMAN McCANN P.C.
- ------------------------------
MAYER HOFFMAN McCANN P.C.
Chicago, Illinois
October 28, 2004
3
PHARMAKON, LLC
BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
June 30, 2004 December 31,
(unaudited) 2003
--------------------------------
ASSETS
Current assets:
Cash $ 1,706,245 $ 326,744
Accounts receivable 1,500,771 3,908,403
Other current assets 57,485 23,535
----------- -----------
Total current assets 3,264,501 4,258,682
----------- -----------
Fixed assets, at cost, less
accumulated depreciation 73,752 80,772
Other assets
Security deposit -- 12,784
Goodwill 7,911,254 7,911,254
----------- -----------
Total assets $11,249,507 $12,263,492
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ 294,664 $ 580,641
Accounts payable 292,229 628,830
Accrued expenses 643,602 443,648
Honoraria payable 795,667 935,180
Deferred revenue 2,995,329 3,817,299
----------- -----------
Total current liabilities 5,021,491 6,405,598
----------- -----------
Long-term liabilities
Total long-term liabilities -- --
----------- -----------
Total liabilities 5,021,491 6,405,598
----------- -----------
MEMBERS' EQUITY
Members' equity $ 6,228,016 $ 5,857,894
----------- -----------
Total liabilities & members' equity $11,249,507 $12,263,492
=========== ===========
See accompanying notes to the financial statements
4
PHARMAKON, LLC
STATEMENTS OF INCOME AND MEMBERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Six months ended Year ended
--------------------------------- ---------------
June 30, 2004 June 30, 2003 December 31,
(unaudited) (unaudited) 2003
-------------- --------------- ---------------
Net sales $ 10,927,073 $ 7,250,500 $ 17,155,843
Cost of goods sold 5,867,612 4,186,442 9,588,269
------------ ----------- -------------
Gross profit 5,059,461 3,064,058 7,567,574
Total operating expenses 1,780,680 1,636,460 3,083,934
------------ ----------- -------------
Operating income 3,278,781 1,427,598 4,483,640
Other expenses 8,659 33,886 349,111
------------ ----------- -------------
Net income $ 3,270,122 $ 1,393,713 $ 4,134,529
Members' equity, beginning of period 5,857,894 2,923,365 2,923,365
Members' capital distributions (2,900,000) -- (1,200,000)
------------ ----------- -------------
Total members' equity $ 6,228,016 $ 4,317,078 $ 5,857,894
============ =========== =============
See accompanying notes to the financial statements
5
PHARMAKON, LLC
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Six months ended Year ended
------------------------------- -------------
June 30, 2004 June 30, 2003 December 31,
(unaudited) (unaudited) 2003
------------------------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,270,122 $ 1,393,712 $ 4,134,529
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation 15,356 14,343 29,587
Loss on disposition of fixed assets -- 9,288 13,134
Deferred noncompete fee -- -- (69,048)
Decrease (increase) in operating assets:
Accounts receivable 2,407,982 1,223,678 (231,576)
Other current assets (21,516) 18,661 30,570
Increase (decrease) in operating liabilities:
Accounts payable (336,601) (235,333) 195,276
Accrued expenses 199,954 36,130 (78,587)
Honoraria payable (139,513) (41,924) (66,079)
Deferred revenue (821,971) (75,305) (657,184)
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 4,573,813 2,343,250 3,300,622
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposition of fixed assets -- 400
Investment in fixed assets (8,335) (20,145) (31,947)
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (8,335) (20,145) (31,547)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loan -- -- 5,901,000
Repayment of bank loan -- (1,271,566) (7,172,566)
Prinicipal reduction of note payable (285,977) (269,363) (546,909)
Members' capital distributions (2,900,000) -- (1,200,000)
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (3,185,977) (1,540,929) (3,018,475)
----------- ----------- -----------
NET INCREASE IN CASH 1,379,501 782,176 250,600
CASH, BEGINNING OF PERIOD 326,744 76,144 76,144
----------- ----------- -----------
CASH, END OF PERIOD $ 1,706,245 $ 858,320 $ 326,744
=========== =========== ===========
See accompanying notes to the financial statements
6
PHARMAKON, LLC
NOTES TO THE FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Pharmakon, LLC (the "Company") was organized as a
limited liability company under the laws of Illinois and will terminate
on December 31, 2025. Under this form of organization, members are not
liable for the debts of the Company. The Company also operates under
different assumed names including C. Beck, LLC, Group Dynamics, LLC,
ShareCom, LLC and VistaCom, LLC.
On February 23, 2000, the Company purchased the assets of C. Beck &
Associates, Inc. and related companies in exchange for assuming all of
the outstanding operating liabilities and bank indebtedness.
As discussed in Note 16, substantially all of the Company's assets were
sold on August 31, 2004.
NATURE OF OPERATIONS - The Company is a health care communications
business that specializes in promoting pharmaceutical products to
various health care audiences including physicians, nurses, physician
assistants, nurse practitioners and pharmacists in the United States
and Canada.
Within the health care industry, the Company's promotional activities
are classified as peer-to-peer and are executed primarily in the form
of teleconferences and dinner meetings.
FIXED ASSETS - Fixed assets are recorded at cost. Depreciation on fixed
assets, which consist primarily of furniture, fixtures and equipment is
computed using the straight-line method over the useful lives of the
assets.
INCOME TAXES - The Company is treated as a partnership for Federal tax
purposes, and, as such, the Company is not liable for Federal income
taxes. The members report their respective share of the Company's
income on their individual tax returns. The Company remains liable for
Illinois replacement tax.
GOODWILL - Goodwill represents the excess of purchase price over the
fair value of net assets acquired. In accordance with Financial
Accounting Standards Board Pronouncement 142, "Goodwill and Other
Intangible Assets," goodwill is not amortized but is tested for
impairment annually.
The Company reviewed goodwill for impairment by comparing the carrying
value of the assets including goodwill to the estimated fair value.
Management concluded that goodwill is not impaired. The carrying value
of goodwill is $7,911,254 at each of June 30, 2004 and December 31,
2003.
ACCOUNTS RECEIVABLE - The Company carries its accounts receivable at
cost less an allowance for doubtful accounts. On a periodic basis, the
Company evaluates its accounts receivable and establishes an allowance
for doubtful accounts, based on a history of past write-offs and
collections and current credit conditions. No allowance for doubtful
accounts was deemed necessary at June 30, 2004 or December 31, 2003. A
receivable is considered past due if payments have not been received by
the Company for 90 days.
USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
7
PHARMAKON, LLC
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
PASS-THROUGH ACTIVITY - The Company incurs pass-through expenses such
as speaker fees and related travel costs that are then billed to
customers and treated as pass-through income. The amount of
pass-through activity amounted to $754,504 (unaudited), $681,098
(unaudited) and $2,027,844 for the six months ended June 30, 2004 and
2003 and the year ended December 31, 2003, respectively.
(2) FIXED ASSETS
As of June 30, As of December 31,
2004 2003
Furniture and fixtures $ 49,793 $ 49,793
Equipment 121,857 113,521
-------- --------
Total 171,650 163,314
Accumulated Depreciation 97,898 82,542
-------- --------
Net fixed assets $ 73,752 $ 80,772
======== ========
The total depreciation expense charged to operations for the six months
ended June 30, 2004 and 2003 and the year ended December 31, 2003 was
$15,356, (unaudited), $14,343 (unaudited) and $29,587, respectively.
(3) HONORARIA PAYABLE
Program participants customarily receive merchandise honoraria
certificates redeemable for health care-related products as
compensation for attending the Company's programs. The certificates are
redeemed directly by the merchandise provider, who in turn invoices the
Company as certificates are presented. During 2003, the Company changed
its redemption period from two years to one year. Included in honoraria
payable is an estimated liability associated with unredeemed
merchandise certificates of $778,657 (unaudited) and $930,430 as of
June 30, 2004 and December 31, 2003, respectively.
(4) DEFERRED REVENUE
Deferred revenue represents billings for programs to be held in the
future. The Company recognizes these amounts as revenue once the
related program occurs. Included in deferred revenue and accounts
receivable is $1,078,041 (unaudited) and $2,215,670 representing
uncollected prebillings as of June 30, 2004 and December 31, 2003,
respectively.
(5) BANK LOAN PAYABLE
On October 17, 2000, the Company entered into a revolving loan
agreement with LaSalle National Bank for a maximum borrowing of
$2,750,000. The agreement was amended effective June 15, 2003, to
decrease the maximum borrowing amount to $2,250,000 and to increase the
interest rate from the prime rate (4.00% as of December 31, 2003) to
the prime rate plus .75%. The note requires monthly payments of
interest only and matures on June 15, 2005. The individual members have
personally guaranteed the entire principal balance and have pledged
their membership interests in the Company as collateral. The loan
contains restrictive covenants relating to financial ratios and is
secured by all of the Company's assets. There was no outstanding
balance as of June 30, 2004 or December 31, 2003. During the six months
ended June 30, 2003 and the year ended December 31, 2003, the Company
incurred interest expense of $3,406 (unaudited)
8
PHARMAKON, LLC
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
and $3,441, respectively, related to this loan. There was no interest
expense incurred during the six months ended June 30, 2004.
(6) NOTE PAYABLE
On October 19, 2000, the Company issued a promissory note to an
honoraria vendor in the original principal amount of $2,127,897. The
note bears interest at 6% per annum, requires monthly payments of
principal and interest of $49,974, and matures on December 1, 2004. The
outstanding balance at June 30, 2004 and December 31, 2003, is $294,664
and $580,641, respectively. During the six months ended June 30, 2004
and 2003, and the year ended December 31, 2003, the Company incurred
interest expense of $13,865 (unaudited), $30,479 (unaudited) and
$52,776, respectively related to this note.
(7) LEASE AGREEMENTS
On April 1, 2000, the Company entered into a three-year lease for
office space in Schaumburg, Illinois. The lease required monthly base
rent of $17,241, provided for base rent increases of approximately 3%
per annum, and required as additional rent the tenants' proportionate
share of the landlord's operating expenses and real estate taxes over a
base year amount. This lease terminated March 31, 2003.
In December 2002, the Company entered into a sublease agreement for new
office space in Schaumburg, Illinois, which commenced on January 1,
2003, and expires on February 27, 2005, and requires monthly base rent
of $6,392.
Future minimum base rent is as follows:
Years ending December 31,
2004 $76,705
2005 12,784
-------
Total $89,489
=======
Rent expense charged to operations under these leases was $41,460
(unaudited), $97,828 (unaudited) and $132,946 for the six months ended
June 30, 2004 and 2003 and the year ended December 31, 2003,
respectively.
(8) EMPLOYEE BENEFIT PLAN
The Company has adopted a 401(k) plan that covers all of its employees.
Participants can make contributions of up to 15% of their compensation
and are 100% vested immediately. At the discretion of the board of
directors, the Company may elect to make matching contributions of up
to 6% of compensation. The Company made a matching contribution of
$20,371 (unaudited), $20,777 (unaudited) and $41,487 for the six months
ended June 30, 2004 and 2003 and the year ended December 31, 2003.
(9) NONCOMPETE AGREEMENT
The Company entered into a noncompete agreement with the owner of the
predecessor companies of the Company through December 31, 2008,
requiring monthly payments at varying amounts totaling $2,225,000 over
the term of the agreement. The cost of this agreement is being
recognized on a straight-line basis over the term of the agreement.
Included in accrued expenses as of June 30, 2004 and December
9
PHARMAKON, LLC
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
31, 2003, was $193,214 (unaudited) and $217,738, representing the
excess of the amount expensed to-date over the actual payments made. In
2003, the Company made a $20,000 payment as part of an agreement to
decrease the final payments in 2008 by $40,000. On August 31, 2004, the
noncompete agreement was terminated with a lump-sum payment of $950,000
in lieu of the remaining scheduled payments.
(10) EMPLOYMENT AGREEMENTS
On February 16, 2000, the Company entered into five-year employment
agreements with two key employees that provide for a base salary and
additional compensation based on a portion of the net proceeds upon
sale of the Company. Total compensation under these employment
agreements amounted to $208,756 (unaudited), $206,327 (unaudited) and
$485,639, respectively, for the six months ended June 30, 2004 and 2003
and the year ended December 31, 2003.
(11) RELATED PARTY TRANSACTIONS
The Company engages a company owned by the former managing member to
recruit program participants. Included in recruiting costs for the six
months ended June 30, 2004 and 2003 and the year ended December 31,
2003 is $1,842,492 (unaudited), $1,603,431 (unaudited) and $3,131,961,
respectively, of costs incurred to this related company, of which
$40,313 (unaudited) and $52,949 is included in accounts payable as of
June 30, 2004 and December 31, 2003, respectively.
(12) BUSINESS CONCENTRATION
Net sales to the Company's largest customers, who each accounted for
more than 10% of sales, aggregated to 81% (5 customers) (unaudited),
81% (3 customers) (unaudited) and 66% (3 customers) of net sales for
the six months ended June 30, 2004 and 2003 and the year ended December
31, 2003. Accounts receivable from these customers totaled 91% and 66%
of the accounts receivable balance at June 30, 2004 and December 31,
2003, respectively.
(13) CONCENTRATION OF CREDIT RISK
The Company's cash is potentially exposed to concentration of credit
risk. However, the Company's cash is placed with a major financial
institution, which limits the Company's exposure.
10
PHARMAKON, LLC
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
(14) CASH FLOW DISCLOSURES
The following is a summary of supplemental cash flow information for
the year ended December 31, 2003:
Cash paid:
Interest $ 60,680
========
Income taxes (Illinois replacement tax) $ 17,094
========
During the six months ended June 30, 2003 and the year ended December
31, 2003, the Company wrote off leasehold improvements with an original
cost of $111,758 and accumulated amortization of $102,470. During the
six months ended June 30, 2003 and the year ended December 31, 2003,
the Company sold equipment with an original cost of $15,251 and
accumulated depreciation of $11,005.
(15) RESTATEMENT
The accompanying financial statements have been restated to reflect the
gross up of pass-through income and expenses. The effect of the
restatement increased net sales and cost of goods sold by $754,504
(unaudited), $681,098 (unaudited) and $2,027,844, respectively, for the
six months ended June 30, 2004 and 2003 and the year ended December 31,
2004. The restatement has no effect on gross profit or net income.
(16) SUBSEQUENT EVENTS
On August 31, 2004, the assets of the Company were sold for an amount
in excess of book value.
The noncompete agreement described in Note 9 was terminated on August
31, 2004, with a lump-sum payment of $950,000 in lieu of the remaining
scheduled payments.
11
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On August 31, 2004, PDI, Inc. acquired substantially all of the assets of
Pharmakon in a cash transaction. The transaction was made pursuant to a
definitive agreement, dated August 26, 2004 (the "Asset Purchase Agreement"),
among the Company, its wholly-owned subsidiary InServe Support Solutions,
Pharmakon and Steve Agnoff, Stuart Cass, Robert Clements and James Berardi, the
owners of 100% of the outstanding and issued equity interests of Pharmakon
(each, a "Member" and, collectively, the "Members" and, together with Pharmakon,
the "Sellers"). Prior to the execution of the Asset Purchase Agreement, there
were no material relationships between the Company and the Sellers. Under the
terms of the Asset Purchase Agreement, Pharmakon received $27,383,195 in cash,
after certain closing adjustments, upon closing of the transaction with the
possibility of earning up to an additional $10 million in cash based upon
achievement of certain annual profit targets by Pharmakon through December 2006.
The results of operations and financial condition of Pharmakon have been
included in the PDI, Inc. historical financial statements since the August 31,
2004 acquisition date.
The unaudited pro forma combined financial information gives effect to the
acquisition of Pharmakon by PDI, Inc. as if the acquisition had occurred as of
the beginning of the periods presented for purposes of the pro forma combined
statements of operations.
The unaudited pro forma combined financial information should be read in
conjunction with the historical consolidated financial statements and
accompanying notes of PDI, Inc., which are included in its 2003 Annual Report on
Form 10-K/A, and Pharmakon, which are included elsewhere in this document. The
unaudited pro forma combined financial information is not intended to represent
or be indicative of the consolidated results of operations or financial
condition of PDI, Inc. that would have been reported had the transactions been
completed as of the dates presented, and should not be taken as representative
of the future consolidated results of operations or financial condition of PDI,
Inc.
12
PDI, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2004
Pro Forma Pro Forma
(unaudited) PDI, Inc. Pharmakon Adjustment Combined
---------- -------- -------- ----------
(in thousands, except for share data)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 91,545 $ 1,706 $ (1,706) (1) $ 64,520
(27,025) (2)
Short-term investments 33,795 -- -- 33,795
Accounts receivable, net 30,848 1,501 -- 32,349
Unbilled cost & accrued profits contracts in
progress 4,991 -- -- 4,991
Deferred training and other program costs 3,037 -- -- 3,037
Other current assets 11,831 57 1,500 (3) 13,388
Deferred tax asset 6,834 -- -- 6,834
---------- -------- -------- ----------
TOTAL CURRENT ASSETS 182,881 3,264 (27,231) 158,914
---------- -------- -------- ----------
Net property and equipment 16,892 74 -- 16,966
Deferred tax asset 7,304 -- -- 7,304
Goodwill 11,132 7,911 2,585 (2) 21,628
Other intangible assets 1,341 -- 18,940 (2) 20,281
Other long-term assets 3,830 -- -- 3,830
---------- -------- -------- ----------
TOTAL ASSETS $ 223,380 $ 11,249 $ (5,706) $ 228,923
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,162 $ 292 $ 1,010 (2) $ 6,464
Accrued returns 11,382 -- -- 11,382
Accrued incentives 14,050 -- -- 14,050
Accrued salaries and wages 9,203 -- -- 9,203
Unearned contract revenue 15,397 2,995 -- 18,392
Restructuring accrual 444 -- -- 444
Current portion of long-term debt -- 295 (295) (1) --
Income taxes and other accrued expenses 14,294 1,439 (193) (1) 15,540
---------- -------- -------- ----------
TOTAL CURRENT LIABILITIES 69,932 5,021 522 75,475
---------- -------- -------- ----------
LONG-TERM LIABILITIES
Deferred tax liability -- -- -- --
---------- -------- -------- ----------
TOTAL LONG-TERM LIABILITIES -- -- -- --
---------- -------- -------- ----------
TOTAL LIABILITIES 69,932 5,021 522 75,475
---------- -------- -------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized;
shares issued and outstanding, June 30, 2004 - 14,619,271;
restricted; $.01 par value; shares issued and outstanding;
June 30, 2004 - 161,115 $ 148 $ -- $ -- $ 148
Preferred stock, $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding -- -- -- --
Members' equity -- 6,228 (1,218) (1) --
(5,010) (2)
Additional paid-in capital (includes restricted of $4,955
as of June 30, 2004 115,421 -- -- 115,421
Retained earnings 40,523 -- -- 40,523
Accumulated other comprehensive income 58 -- -- 58
Unamortized compensation costs (2,592) -- -- (2,592)
Treasury stock, at cost: 5,000 shares at June 30, 2004 (110) -- -- (110)
---------- -------- -------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 153,448 $ 6,228 $ (6,228) $ 153,448
---------- -------- -------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 223,380 $ 11,249 $ (5,706) $ 228,923
========== ======== ======== ==========
See accompanying notes to Pro Forma Combined financial statements
13
PHARMAKON, LLC
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(Unaudited) Year Ended December 31, 2003
----------------------------
Pro Forma Pro Forma
PDI Pharmakon Adjustments Combined
-----------------------------------------------------------
(in thousands, except per share data)
Revenue
Service $ 356,143 $ 17,157 $ -- $ 373,300
Product, net (11,613) -- -- (11,613)
---------- --------- --------- ----------
Total revenue 344,530 17,157 -- 361,687
---------- --------- --------- ----------
Cost of goods and services
Program expenses (including related party amounts of
$983 for the year ended December 31, 2003) 254,162 9,588 -- 263,750
Cost of goods sold 1,287 -- -- 1,287
---------- --------- --------- ----------
Total cost of goods and services 255,449 9,588 -- 265,037
---------- --------- --------- ----------
Gross profit 89,081 7,569 -- 96,650
Compensation expense 36,901 2,519 -- 39,420
Other selling, general and administrative expenses 30,347 859 1,281 (4) 32,487
Restructuring and other related expenses 143 -- -- 143
Litigation settlement 2,100 -- -- 2,100
---------- --------- --------- ----------
Total operating expenses 69,491 3,378 1,281 74,150
---------- --------- --------- ----------
Operating income 19,590 4,191 (1,281) 22,500
Other income, net 1,073 (56) (353) (6) 664
---------- --------- --------- ----------
Income before provision for taxes 20,663 4,135 (1,634) 23,164
Provision for income taxes 8,405 -- 1,017 9,422
---------- --------- --------- ----------
Net income $ 12,258 $ 4,135 $ (2,651) $ 13,742
========== ========= ========= ==========
Basic net income per share $ 0.86 $ 0.11 $ 0.97
========== ========= ==========
Diluted net income per share $ 0.85 $ 0.10 $ 0.95
========== ========= ==========
Basic weighted average number of shares outstanding 14,231 14,231
========== ==========
Diluted weighted average number of shares outstanding 14,431 14,431
========== ==========
See accompanying notes to Pro Forma Combined financial statements
14
PHARMAKON, LLC
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
(Unaudited) Six Months Ended June 30, 2004
------------------------------
Pro Forma Pro Forma
PDI Pharmakon Adjustments Combined
-------------------------------------------------------------
(in thousands, except per share data)
Revenue
Service $ 85,066 $ 10,927 $ -- $ 195,993
Product, net (1,030) -- -- (1,030)
--------- -------- --------- ----------
Total revenue 184,036 10,927 -- 194,963
--------- -------- --------- ----------
Cost of goods and services
Program expenses 135,471 5,868 -- 141,339
Cost of goods sold 233 -- -- 233
--------- -------- --------- ----------
Total cost of goods and services 135,704 5,868 -- 141,572
--------- -------- --------- ----------
Gross profit 48,332 5,059 -- 53,391
Compensation expense 18,140 1,299 -- 19,439
Other selling, general and administrative expenses 12,148 482 641 (5) 13,271
Restructuring and other related expenses -- -- -- -
Litigation settlement -- -- -- -
--------- -------- --------- ----------
Total operating expenses 0,288 1,781 641 32,710
--------- -------- --------- ----------
Operating income 18,044 3,278 (641) 20,681
Other income, net 631 (8) (189) (6) 434
--------- -------- --------- ----------
Income before provision for taxes 18,675 3,270 (830) 21,115
Provision for income taxes 7,657 -- 1,000 8,657
--------- -------- --------- ----------
Net income $ 11,018 $ 3,270 $ (1,830) $ 12,458
========= ======== ========= ==========
Basic net income per share $ 0.76 $ 0.10 $ 0.86
========= ========= ==========
Diluted net income per share $ 0.74 $ 0.10 $ 0.84
========= ========= ==========
Basic weighted average number of shares outstanding 14,497 14,497
========= ==========
Diluted weighted average number of shares outstanding 14,843 14,843
========= ==========
See accompanying notes to Pro Forma Combined financial statements
15
PDI, INC.
Notes to Unaudited Pro Forma Combined Financial Statements
[A] Basis of Presentation
The accompanying pro forma combined balance sheet and statements of operations
reflect the pro forma effect of the acquisition (the Acquisition) of
substantially all of the assets of Pharmakon which occurred on August 31, 2004.
The transaction was made pursuant to a definitive agreement, dated August 26,
2004 (the Asset Purchase Agreement), among the Company, its wholly-owned
subsidiary InServe Support Solutions, Pharmakon and Steve Agnoff, Stuart Cass,
Robert Clements and James Berardi, the owners of 100% of the outstanding and
issued equity interests of Pharmakon (each, a Member and, collectively, the
Members and, together with Pharmakon, the Sellers). Prior to the execution of
the Asset Purchase Agreement, there were no material relationships between the
Company and the Sellers.
Pursuant to the Asset Purchase Agreement, the Company acquired substantially all
of Pharmakon's assets, including, without limitation, its contracts, agreements,
license agreements, tangible personal property, books and records, accounts
receivables, intangible assets and intellectual property.
In accordance with the Asset Purchase Agreement, Pharmakon received $27,383,195
in cash, after certain closing adjustments, upon closing of the transaction with
the possibility of earning up to an additional $10 million in cash based upon
achievement of certain annual profit targets by Pharmakon through December 2006.
The pro forma combined balance sheet assumes that the Acquisition occurred on
June 30, 2004. The pro forma combined statement of operations for the six months
ended June 30, 2004 and the year ended December 31, 2003 assumes that the
Acquisition occurred on January 1, 2004 and January 1, 2003, respectively. The
pro forma combined financial statements for the year ended December 31, 2003
included the audited consolidated financial statements of PDI, Inc. as of
December 31, 2003 and for the year then ended, which are included in its 2003
Annual Report on Form 10-K/A and the audited financial statements of Pharmakon,
LLC as of December 31, 2003 and for the year then ended. The pro forma combined
financial statements for the six months ended June 30, 2004 were prepared based
on the interim unaudited consolidated financial statements of PDI, Inc. as of
June 30, 2004 and for the six months then ended, which are included in its
Report on Form 10-Q/A and the interim unaudited financial statements of
Pharmakon, LLC as of June 30, 2004 and for the six months then ended. The
accompanying pro forma combined balance sheet and statement of operations should
be read in conjunction with the historical financial statements and related
notes contained in the Company's 2003 Annual Report on Form 10-K/A.
These pro forma combined financial statements are provided for illustrative
purposes only. Reliance should not be placed on these pro forma combined
financial statements since they are not necessarily indicative of the financial
position or the results of operations that would have been obtained if the
Acquisition had occurred on the dates assumed or to project the results of
operations for any future period or the financial condition at any future date.
[B] Pro Forma Combined Balance Sheet:
(1) Certain assets and liabilities were retained by the Members as a condition
of the Asset Purchase Agreement. The Members retained all cash in the bank at
closing (leaving a balance to clear outstanding checks). The Members also
retained the outstanding current debt of Pharmakon and an accrued expense of
$193.
(2) To give effect to the acquisition by the Company of Pharmakon including (a)
the payment of cash of $27,025, (b) the accrual of direct closing costs of
$1,010, (c) the elimination of Pharmakon's members'equity of $5,010 and previous
goodwill of $7,911, and (e) the preliminary allocation of the purchase price
over the estimated fair values of the assets and liabilities acquired to
identifiable intangibles of $18,800, (primarily customer relationships and
corporate trade names), covenant not-to-compete of $140, and goodwill of
$10,496.
(3) Included in the cash paid for the Acquisition is $1,500, which is required
to be placed in escrow and paid out in future periods upon the Company's
approval of Pharmakon's final working capital deficiency statement as of the
date of closing. The Company has 90 days from the closing date of the
acquisition to determine that the final working capital deficiency statement is
accurate. Any resulting adjustments would affect goodwill.
[C] Pro Forma Combined Statement of Operations:
The pro forma combined statements of operation for the six months ended June 30,
2004 and the year ended December 31, 2003 reflect the Acquisition as though it
had occurred at the beginning of each of the respective periods and reflects the
following adjustments:
(4) To reflect amortization for the year ended December 31, 2003 relating to
identified intangible assets of $18,800 based on an estimated useful life of 15
years and a covenant not-to-compete of $140 with an estimated useful life of 5
years.
(5) To reflect amortization for the six months ended June 30, 2004 relating to
identified intangible assets of $18,800 based on an estimated useful life of 15
years and a covenant not-to-compete of $140 with an estimated useful life of 5
years.
(6) To reflect the net adjustment of the following:
(a) The estimated interest income of $203 and $405 that would have been
forgone by the Company for the six months ended June 30, 2004 and the
year ended December 31, 2003, respectively, had the acquisition
occurred at the beginning of each period; net of
(b) The estimated interest expense of $14 and $53 that would not have been
incurred by Pharmakon for the six months ended June 30, 2004 and the
year ended December 31, 2003, respectively, had the acquisition
occurred at the beginning of each period.
(7) Reflects applicable income tax effect of the above adjustments and records
tax expense on Pharmakon's income before provision for income taxes as Pharmakon
had previously been an LLC and therefore, was not required to pay income taxes.
16
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 hereunto duly authorized.
Date: November 15, 2004
PDI, INC.
(Registrant)
By: /s/ Charles T. Saldarini
-----------------------
Charles T. Saldarini
Chief Executive Officer
17