UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements have been prepared from the historical financial statements of PDI, Inc. (“PDI” or the “Company”) and Group DCA, LLC (“Group DCA”), formerly known as Group DCA, Inc., to give effect to the Company’s acquisition of Group DCA (the “Acquisition”). See Note 1 for further information. The unaudited pro forma condensed combined financial statements do not purport to represent, and are not necessarily indicative of, what the Company’s financial position or results of operations would have been had the Acquisition occurred on the dates indicated.

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 and nine months ended September 30, 2010 are presented as if the Acquisition had occurred on January 1, 2009 and include all adjustments that (i) give effect to events that are directly attributable to the Acquisition, (ii) are expected to have a continuing impact, and (iii) are factually supportable. The historical consolidated statements of operations of PDI and Group DCA for the year ended December 31, 2009 that were used in preparing the unaudited pro forma condensed combined statement of operations for the same period have been audited. The historical consolidated statements of operations of PDI and Group DCA for the nine months ended September 30, 2010 that were used in preparing the unaudited pro forma condensed combined statement of operations for the same period have not been audited. The unaudited pro forma condensed combined statements of operations do not reflect a reduction of general corporate expenses or other non-direct costs of the Company which are expected to be reduced as a result of the Acquisition.

The unaudited pro forma condensed combined balance sheet as of September 30, 2010 is presented as if the Acquisition had occurred on September 30, 2010, and includes all adjustments that give effect to events that are directly attributable to the Acquisition and are factually supportable. The historical consolidated balance sheets of PDI and Group DCA as of September 30, 2010 that were used in preparing the unaudited pro forma condensed combined balance sheet have not been audited.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the Company’s historical consolidated financial statements, related notes, and “Management’s Discussion and Analysis”, and the Group DCA historical consolidated financial statements and related notes. The consolidated balance sheet of the Company as of December 31, 2009, and the related consolidated statement of operations, cash flows and stockholders’ equity for the year then ended, along with the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are set forth in the Company’s Annual Report on Form 10-K filed March 5, 2010. The unaudited interim consolidated financial statements of the Company for the nine months ended September 30, 2010 are set forth in the Company’s Quarterly Report on Form 10-Q filed November 4, 2010. The consolidated balance sheet of Group DCA as of December 31, 2009, and the related consolidated statement of operations and cash flows for the year then ended, along with the related notes, are included as Exhibit 99.1 in this Form 8-K/A. The unaudited interim consolidated financial statements of Group DCA for the nine months ended September 30, 2010 are included as Exhibit 99.2 in this Form 8-K/A.


 
 
 



PDI, INC.
  
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
  
At September 30, 2010
  
(in thousands, except share and per share data)
  
                           
                           
   
PDI, Inc.
    
Group DCA
    
Pro Forma
      
Pro Forma
  
   
(as reported)
    
(historical)
    
Adjustments
      
Combined
  
                           
ASSETS
                          
Current assets:
                          
Cash and cash equivalents
   $ 83,355     $ 77     $ (25,300 )  A     $ 58,132  
Short-term investments
     130       -       -           130  
Accounts receivable, net
     10,257       3,133       -           13,390  
Unbilled costs and accrued profits
                                    
on contracts in progress
     3,534       -       -           3,534  
Deferred contract costs
     -       238       -           238  
Other current assets
     2,334       145       -           2,479  
Total current assets
     99,610       3,593       (25,300 )          77,903  
Property and equipment, net
     3,030       882       -           3,912  
Goodwill
     5,068       -       22,298   B       27,366  
Other intangible assets, net
     2,270       -       8,769   C       11,039  
Other long-term assets
     4,861       468       -           5,329  
Total assets
   $ 114,839     $ 4,942     $ 5,767         $ 125,548  
                                     
LIABILITIES AND STOCKHOLDERS' EQUITY
                                    
Current liabilities:
                                    
Accounts payable
   $ 2,171     $ 1,128     $ -         $ 3,299  
Bank credit line
     -       1,200       (1,200 )  I       -  
Unearned contract revenue
     8,488       13,683       (9,204 )  G       12,967  
Accrued salary and bonus
     9,498       15       -           9,513  
Other accrued expenses
     13,204       1,418       -           14,622  
Total current liabilities
     33,361       17,444       (10,404 )          40,401  
Acquisition-related contingent consideration
     -       -       2,115   H       2,115  
Long-term liabilities
     9,782       337       -           10,119  
Total liabilities
     43,143       17,781       (8,289 )          52,635  
                                     
Commitments and contingencies
                                    
                                     
Stockholders’ equity:
                                    
Preferred stock, $.01 par value;
                                    
5,000,000 shares authorized, no
                                    
shares issued and outstanding
     -       -       -           -  
Common stock, $.01 par value;
                                    
100,000,000 shares authorized;
                                    
15,396,028 shares issued and
                                    
14,325,139 shares outstanding
     154       -       -           154  
Common stock, $.0001 par value;
                                    
20,000,000 shares authorized;
                                    
10,000,000 shares issued and
                                    
8,500,000 shares outstanding
     -       1       (1 )  D       -  
Additional paid-in capital
     124,405       309       (309 )  D       124,405  
Accumulated deficit
     (39,266 )     (11,999 )     13,216   F       (38,049 )
Accumulated other comprehensive income
     (2 )     -       -           (2 )
Treasury stock, at cost (1,070,889 shares)
     (13,595 )     -       -           (13,595 )
Treasury stock, at cost (1,500,000 shares)
     -       (1,150 )     1,150   E       -  
Total stockholders' equity
     71,696       (12,839 )     14,056           72,913  
Total liabilities and stockholders' equity
   $ 114,839     $ 4,942     $ 5,767         $ 125,548  
                                     



 
 
 






PDI, INC.
  
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
  
For the Nine Months Ended September 30, 2010
  
(in thousands, except for per share data)
  
                           
             
   
PDI, Inc.
    
Group DCA
    
Pro Forma
      
Pro Forma
  
   
(as reported)
    
(historical)
    
Adjustments
      
Combined
  
                           
                           
Revenue, net
   $ 99,952     $ 10,464     $ -       $ 110,416  
Cost of services
     77,209       7,703       -         84,912  
Gross profit
     22,743       2,761       -         25,504  
                                   
Compensation expense
     13,481       2,406       -         15,887  
Other selling, general and administrative expenses
     10,410       2,702       (412 ) C, E     12,701  
Facilities realignment
     583       -       -         583  
Total operating expenses
     24,474       5,108       (412 )       29,171  
Operating income (loss)
     (1,731 )     (2,347 )     412         (3,666 )
                                   
Other income, net
     133       (6 )     (183 ) H      (56 )
Income (loss) from continuing operations
                                  
before income tax
     (1,598 )     (2,353 )     229         (3,722 )
Provision for income tax
     208       1       -         210  
Income (loss) from continuing operations
   $ (1,806 )   $ (2,354 )   $ 229       $ (3,932 )
                                   
                                   
Basic income (loss) per share of common stock:
                                  
Income (loss) from continuing operations
   $ (0.13 )                     $ (0.28 )
                                   
Diluted income (loss) per share of common stock:
                                  
Income (loss) from continuing operations
   $ (0.13 )                     $ (0.28 )
                                   
Weighted average number of common shares and
                                  
common share equivalents outstanding:
                                  
Basic
     14,291                         14,291  
Diluted
     14,291                         14,291  



 

 
 
 





                             
PDI, INC.
  
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
  
For the Year Ended December 31, 2009
  
(in thousands, except for per share data)
  
                             
             
   
PDI, Inc.
    
Group DCA
    
Pro Forma
        
Pro Forma
  
   
(as reported)
    
(historical)
    
Adjustments
        
Combined
  
                             
                             
Revenue, net
   $ 80,384     $ 15,982     $ -         $ 96,366  
Cost of services
     55,844       10,657       -           66,501  
Gross profit
     24,540       5,325       -           29,865  
                                     
Compensation expense
     17,989       3,459       -           21,448  
Other selling, general and administrative expenses
     16,944       3,053       654    C       20,651  
Asset impairment
     18,118       -       -           18,118  
Facilities realignment
     6,609       -       -           6,609  
Total operating expenses
     59,660       6,512       654           66,826  
Operating (loss) income
     (35,120 )     (1,187 )     (654 )  H       (36,960 )
                                     
Other income, net
     183       (53 )     (244 )         (114 )
(Loss) income from continuing operations
                                    
before income tax
     (34,937 )     (1,240 )     (898 )         (37,075 )
Provision for income tax
     (6,834 )     6       -           (6,828 )
(Loss) income from continuing operations
     (28,103 )     (1,246 )     (898 )         (30,247 )
                                     
                                     
Basic (loss) income per share of common stock:
                                    
(Loss) income from continuing operations
   $ (1.98 )                       $ (2.13 )
                                     
Diluted (loss) income per share of common stock:
                                    
(Loss) income from continuing operations
   $ (1.98 )                       $ (2.13 )
                                     
Weighted average number of common shares and
                                    
common share equivalents outstanding:
                                    
Basic
     14,219                           14,219  
Diluted
     14,219                           14,219  
                                     





 

 
 
 

1)   Description of Transaction and Basis of Pro Forma Presentation
 
On November 3, 2010, PDI, Inc., Group DCA, LLC (“Group DCA”), a Delaware limited liability company, JD & RL, Inc., a Delaware corporation (“Seller”) and the sole member of Group DCA, Robert O. Likoff, individually and as the representative of Seller and the stockholders of Seller, and Jack Davis, individually, entered into a Membership Interest Purchase Agreement (the “Agreement”) pursuant to which the Company acquired all of the issued and outstanding membership interests of Group DCA.  The Company has no prior material relationship with any of the parties to the Agreement.

The consideration paid by the Company to Seller consisted of $25,300,000 in cash (the “Cash Consideration”) plus up to $30,000,000 in specified earnout and integration payments (the “Contingent Consideration”) earned through the period ending on December 31, 2012.  The Cash Consideration is subject to a post-closing increase or decrease based on the amount, if any, by which Group DCA’s working capital at closing exceeded or fell short of the target working capital.  The Agreement contains customary indemnification obligations.  An amount equal to $1,250,000 of the Cash Consideration was placed in an 18-month escrow account to satisfy indemnification claims.

The allocation of the purchase price in Group DCA acquisition to the assets acquired and liabilities assumed from Group DCA is based on preliminary estimates and assumptions. In addition, the Company is in the process of assessing the useful lives and appropriate amortization methods for the identifiable intangible assets that were acquired from Group DCA. These estimates and assumptions are subject to future adjustments upon completion of the valuation of Group DCA’s assets and liabilities and these valuations could change significantly from those used in the unaudited pro forma condensed combined financial statements.

Basis of Presentation

The unaudited pro forma condensed combined balance sheet as of September 30, 2010 gives effect to the acquisition as if it occurred on that date. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2010, and the year ended December 31, 2009 give effect to the acquisition as if it occurred on January 1, 2009.

The accompanying unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2010 and for the year ended December 31, 2009 do not reflect any gain or loss on sale from the acquisition.

Pro Forma Footnotes

A  
Reflects the adjustment to cash and cash equivalents as a result of the cash consideration paid in the Acquisition.
 
B  
Reflects the establishment of goodwill resulting from the Acquisition. Under the acquisition method of accounting, the purchase price has been allocated to the Group DCA tangible and identifiable intangible assets acquired and liabilities assumed based on preliminary estimates of fair value. The total purchase consideration less the sum of the estimated fair value of assets acquired and liabilities assumed is recorded as goodwill. The purchase price of the Acquisition has been allocated on a preliminary basis as follows (amounts in thousands):
 

Purchase consideration:
      
Cash consideration paid
   $ 25,300  
Estimated earn-out payments
     2,115  
Working capital adjustment
     (898 )
Total purchase consideration
     26,517  
         
Estimated fair value of assets acquired and liabilities assumed:
        
Current assets
     3,593  
Fixed assets
     882  
Other long-term assets
     468  
Other intangible assets
     6,804  
Liabilities assumed
     (9,492 )
Total estimated fair value of net assets acquired
     2,254  
         
Goodwill
   $ 24,263  
         



 
 
 

C  
Reflects the establishment of other intangible assets resulting from the Acquisition and the associated fair value adjustments for additional amortization expense for the nine months ended September 30, 2010 and twelve months ended December 31, 2009. Under the acquisition method of accounting, the purchase price has been allocated to the Group DCA tangible and identifiable intangible assets acquired and liabilities assumed based on preliminary estimates of fair value. The fair values of identifiable other intangible assets acquired are as follows (amounts in thousands):
 



           
Additional Pro Forma Amortization Expense
   
Fair Value
  
Remaining Useful Life
  
For the Nine Months Ended September 30, 2010
    
For the Twelve Months Ended December 31, 2009
Other intangible assets:
                  
Trade name
   $ 2,057  
Indefinite
   $ -     $ -
Technology
     2,688  
6.0 years
     336       448
Healthcare professional database
     2,059  
10.0 years
     154       206
Total other intangible assets
   $ 6,804       $ 490     $ 654
                         
                         




D  
Reflects the elimination of Group DCA common shares, additional paid-in capital, treasury stock and unamortized stock option costs upon Acquisition.
 
E  
Reflects the elimination of acquisition costs of $902 incurred during the nine months ended September 30, 2010.
 
F  
Reflects the elimination of Group DCA’s historical accumulated deficit and the impact on retained earnings of all pro forma and fair value adjustments.
 
G  
Reflects the fair value adjustment to deferred revenue at the acquisition date based on preliminary estimates.
 
H  
Reflects the fair value adjustment to accrue for the Contingent Consideration, and the related accretion of interest expense, which has been calculated at its present value based on a preliminary estimate of the fair value of future payments to be made to the Seller.
 


   
Fair Value at
  
Present Value at
  
Accretion of Interest Expense
   
Acquisition Date
  
Acquisition Date
  
Year 1
Year 2
Year 3
                 
Contingent consideration
  
 $                   2,725
  
 $                   2,115
  
 $         244
 $         244
 $         122


 
I  
Reflects the payoff of the outstanding bank credit line by the Seller as part of the Agreement.