UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
|_| 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: 0-24249
PROFESSIONAL DETAILING, INC.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2919486
------------------ -------------------
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
10 Mountainview Road
Upper Saddle River, NJ 07458-1937
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (201) 258-8450
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 2001 was approximately $383,275,000.
The number of shares outstanding of the registrant's common stock, $.01
par value, as of March 23, 2001 was 13,860,223 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PROFESSIONAL DETAILING, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
Page
PART I........................................................................3
Item 1. Business..........................................................3
Item 2. Properties.......................................................17
Item 3. Legal Proceedings................................................17
Item 4. Submission of Matters to a Vote of Security Holders..............17
PART II......................................................................17
Item 5. Market for our Common Equity and Related Stockholder Matters.....17
Item 6. Selected Financial Data..........................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......29
Item 8. Financial Statements and Supplementary Data......................29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial disclosures.....................................29
PART III.....................................................................30
Item 10. Directors and Executive Officers.................................30
Item 11. Executive Compensation...........................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management...36
Item 13. Certain Relationships and Related Transactions...................36
PART IV......................................................................38
Item 14. Exhibits and Financial Statement Schedules.........................38
FORWARD LOOKING STATEMENT INFORMATION
Various statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that we can achieve our
objectives or implement our plans. Factors that could cause actual results to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the factors set forth under the headings
"Business," "Certain Factors That May Affect Future Growth," and Management's
Discussion and Analysis of Financial Condition and Results of Operations."
2
PART I
ITEM 1. BUSINESS
Description of business
We are a leading provider of sales and marketing services to the United
States pharmaceutical industry. We have achieved our leadership position based
on more than 13 years of designing and executing customized sales and marketing
programs for many of the pharmaceutical industry's largest companies, including
Abbott, Allergan, Astra-Zeneca, Bayer, GlaxoSmithKline, Novartis, Pfizer,
Pharmacia, Procter & Gamble, Schering Plough, and Hofmann LaRoche. We have
designed and implemented sales and marketing programs that promote, and have
conducted marketing research for, more than 100 products, including some of the
leading prescription medications.
Within our three operating segments we provide the following services:
o dedicated contract sales services, in which detailing programs are
customized to client specifications;
o syndicated contract sales services, provided through our ProtoCall
unit, enabling clients to tap into an existing, large-scale sales
team for specific detail positions and periods;
o LifeCycle X-Tension(TM) services, providing sales, marketing and
distribution services for companies facing portfolio optimization
challenges;
o LifeCycle Launch(TM) services, providing commercial launch services
for emerging and biotechnology companies to independently launch new
brands;
o marketing research and consulting services, provided through our TVG
unit, enabling clients to study qualitative and quantitative aspects
of brand performance on a pre-launch, launch and continuing basis;
and
o medical education and communication services, provided through TVG,
through which clients can access continuing medical education, Sales
Force Tactical Briefings(TM) and peer-to-peer promotion.
Contract sales
Our clients engage us on a contractual basis to design and implement
product detailing programs for both prescription and over-the-counter (OTC)
pharmaceutical products. Product detailing involves meeting face-to-face with
targeted prescribers and other healthcare decision-makers to provide a technical
review of the product being promoted. Contract sales organizations (CSOs) have
evolved from providing part-time detailing support for OTC products into
turn-key commercialization partners handling some of the leading prescription
pharmaceutical compounds. Since the early 1990s, the United States
pharmaceutical industry has increasingly used CSOs to provide detailing services
to introduce new products and supplement existing sales efforts.
Our product detailing programs typically include three phases: design,
execution and assessment. In the program design phase, we work with the client
to understand needs, define objectives, select targets and determine appropriate
staffing. Program execution involves recruiting, hiring, training and managing a
sales force, which performs detail calls promoting the particular client's
pharmaceutical products. Assessment, the last phase of the program, involves
measurement of sales force performance and program success relative to the goals
and objectives outlined in the program design phase.
A dedicated contract sales program typically involves designing and
deploying a fully integrated sales force customized to the client's particular
needs. A dedicated sales force details one to three products of a single client
during a call.
Through our ProtoCall subsidiary, the leading provider of syndicated
detailing programs to the United States pharmaceutical industry, we also provide
syndicated contract sales programs. A syndicated sales program utilizes a team
of highly qualified sales representatives to promote non-competing products of
multiple manufacturers. Because the costs associated with a syndicated sales
force are shared among the various manufacturers, these programs may be less
expensive than programs involving a dedicated sales force. In addition, since
the sales force is already deployed, the detailing program can be launched even
more quickly than a program using a dedicated sales force.
3
Product sales and distribution
In June 2000, we formed LifeCycle Ventures, Inc. (LCV) to compete more fully
for pharmaceutical commercialization opportunities. LCV undertakes
performance-based sales, marketing and distribution assignments, taking over
completely, or in cooperation with the client, the sales, marketing and
distribution function of brands. This service has a broad target customer base,
including all tiers of the pharmaceutical and biotechnology sectors. Over the
next several years, we expect this new service offering to be an important
contributor to our growth.
Through LCV, we offer pharmaceutical and biotechnology manufacturers a new
approach towards optimizing their portfolios. This approach may be more
beneficial to us and our clients than traditional alternatives, such as
out-licensing or selling these brands. Through LCV, we couple our sales and
marketing expertise with creative financial strategies to maximize brand
profitability. LCV draws on our expertise in sales, product marketing, brand
management and managed care and trade relations to maximize the sales and profit
potential of brands by funding and managing their commercialization in return
for a fee or a percentage of the product sales. LCV's services are appropriate
for brands at all stages of their lifecycle; from mature brands, through LCV's
LifeCycle X-Tension group, to emerging brands, through LCV's LifeCycle Launch
group.
Our LifeCycle X-Tension strategy is to seek opportunities with established
branded pharmaceutical products and to increase their sales by executing focused
marketing and promotion. In doing so, we seek to extend the product's life cycle
beyond the period a pharmaceutical firm typically expects profitable growth.
Cost containment initiatives and consolidation among large, global
pharmaceutical companies have created substantial opportunities for us to
provide commercialization services for established branded pharmaceutical
products that:
o have remaining patent life;
o can benefit from focused sales, marketing and brand management
services including detailing, sampling, advertising and direct mail;
or
o complement our existing product lines.
In October 2000, LCV signed a five-year agreement with GlaxoSmithKline for
the exclusive United States marketing, sales and distribution rights for
Ceftin(R) Tablets and Ceftin(R) for Oral Suspension (cefuroxime axetil), two
dosage forms of a cephalosporin antibiotic. Ceftin, which is indicated for acute
bacterial respiratory infections such as acute sinusitis, bronchitis and otitis
media, generated over $332 million in United States sales in 1999. Ceftin is the
top selling oral cephalosporin in the United States and in the world. In July
2000, Ceftin was recommended by the Sinus and Allergy Health Partnership as
first-line treatment for acute bacterial rhinosinusitis. In January 1999, the
Centers for Disease Control and Prevention issued guidelines recommending Ceftin
as one of only two oral antibiotics as second-line treatment of acute bacterial
otitis media. GlaxoSmithKline retains some regulatory responsibilities for
Ceftin and ownership of all intellectual property relevant to Ceftin and will
continue to manufacture the product.
Our LifeCycle Launch strategy is to partner with pharmaceutical and
biotechnology companies that either do not have the resources to commercialize
and launch a new product or would rather allocate their resources to other
products in their portfolio. LifeCycle Launch intends to work with products
beginning two years prior to launch through the entire commercialization period.
In November 2000, we signed a five-year agreement with United Therapeutics
Corporation under which we will provide a broad range of pre-launch and launch
commercialization services for Beraprost(TM), a compound under development for
peripheral vascular disease.
Marketing services
Through TVG, we provide marketing research and consulting services, as well
as medical education and communication services, to the pharmaceutical and
biotechnology industries. These services can be utilized on a stand alone basis
or in support of our commercialization services. Our marketing research and
consulting services enable clients to study qualitative and quantitative aspects
of brand performance on a pre-launch, launch and continuing basis. Through our
medical education and communication services, clients can access continuing
medical education, Sales Force Tactical Briefings(TM) and peer-to-peer
promotion.
4
The three service categories described above comprise the basis of our
segment reporting for 2000. As our business evolves, existing and new services
may be grouped differently within segments. Financial information for the
operating segments can be found in note 21 to the consolidated financial
statements included elsewhere in this report.
Corporate growth
We have generated strong internal growth by renewing and expanding programs
with existing clients and by securing new business from leading pharmaceutical
companies. In 2000 we further expanded our operations by launching our product
sales and distribution business. We believe that we are the largest CSO
operating in the United States measured both by revenue and total number of
sales representatives used in detailing programs. The number of sales
representatives employed by us has grown from 134 as of January 1, 1995 to 3,319
as of December 31, 2000, consisting of 2,947 full-time sales representatives and
372 part-time sales representatives. While none of our sales representatives at
January 1, 1995 were full-time employees, 89% of our sales representatives at
December 31, 2000 were full-time employees.
We believe that growth in the pharmaceutical industry is being driven
primarily by:
o an aging population;
o technological developments, which have increased the number of medical
conditions that can be treated or prevented by drugs; and
o managed care's preference for drug therapy over other treatment
methods since drug therapy is generally less costly.
Large pharmaceutical companies are focusing their marketing efforts on
drugs with high volume sales, newer or novel drugs which have the potential for
high volume sales, and products which fit within core therapeutic or marketing
priorities. As a result, major pharmaceutical companies increasingly have sought
to outsource the sales, marketing and distribution of specific products or
complete product lines.
We further believe that the trend toward the increased use of
commercialization partners by pharmaceutical and biotechnology companies will
continue due to the following industry dynamics:
o pharmaceutical companies will continue to expand their product
portfolios and as a result will need to add sales force capacity;
o pharmaceutical companies will continue to face margin pressures and
will seek to maintain flexibility by converting fixed costs to
variable costs; and
o a tremendous influx of investment dollars into the specialty
pharmaceutical and biotechnology industries has decreased the reliance
of these companies on the larger pharmaceutical companies for
commercialization capabilities and marketing dollars.
In order to leverage our competitive advantages, our growth strategy
emphasizes:
o enhancing our leadership position in the CSO market by maintaining our
historical focus on high-quality contract sales services and by
continuing to build and invest in our core competencies and
operations;
o continuing and expanding our concentrated marketing efforts to
pharmaceutical and biotechnology companies for our commercialization
services including brand management, managed care marketing, contract
administration and trade relations;
o offering additional promotional, marketing and educational services
and further developing our existing detailing services;
o investigating and pursuing appropriate acquisitions; and
o entering new geographic markets.
5
Other recent developments
In February 2000, we signed a three-year agreement with iPhysicianNet Inc..
iPhysicianNet is creating an internet based detailing service designed to
enhance communication between drug manufacturers and physicians. Under our
agreement with iPhysicianNet, we were appointed as the exclusive CSO in the
United States for the iPhysicianNet network. As a result, once the service is
available we will be able to offer e-detailing to existing and potential
clients. In addition, as part of this agreement, we purchased $2.5 million worth
of iPhysicianNet's preferred stock.
During the fourth quarter of 2000, we invested approximately $760,000 in
In2Focus Sales Development Services Limited, a United Kingdom contract sales
company. In2Focus intends to provide a full range of sales-related services and
technologies to the pharmaceutical industry.
Manufacturers and suppliers
We do not have the capability to manufacture the pharmaceutical products we
currently sell. As a result, we are dependent on GlaxoSmithKline to supply us
with product. As part of our agreement with GlaxoSmithKline, LCV has minimum
quarterly purchase requirements. If Glaxo is unable to supply product, our
ability to ship product to our customers would be impaired, which could have an
adverse effect on our business and results of operations. In addition, because
we do not have expertise in these areas, we engaged an independent company to
provide us with a full range of services relating to Ceftin, including inventory
maintenance, shipping, billing and collections. Any change, delay or
interruption in the distribution process could have a material effect on our
business and results of operation.
Clients and contracts
Clients
We believe that our relationships with our clients, which include many of
the largest pharmaceutical companies in the United States, are among our most
important strategic assets and competitive advantages. We have enjoyed
long-standing relationships with many of these clients, and a high percentage of
our clients either renew their programs or enter into new contracts. We believe
that the quality and stability of our client base promotes the consistency of
our core business and that the scope and complexity of our clients' marketing
needs present opportunities for expansion into new areas. There can be no
assurance, however, that our clients will continue to renew or expand their
relationships with us.
Contracts
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee-for-services, i.e., the client pays a fee for a specified package of
services. These contracts typically include performance benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. More
recently, our contracts tend to have a lower base fee offset by built-in
incentives we can earn based on our performance. In these situations, we have
the opportunity to earn additional fees based on enhanced program results.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason upon 30 to 90 days notice. These
contracts typically, but not always, provide for termination payments by the
client upon a termination without cause. While the cancellation of a contract by
a client without cause may result in the imposition of penalties on the client,
these penalties may not act as an adequate deterrent to the termination of any
contract. In addition, we cannot assure you that these penalties will offset the
revenue we could have earned under the contract or the costs we may incur as a
result of its termination. The loss or termination of a large contract or the
loss of multiple contracts could adversely affect our future revenue and
profitability. In February 2001, GlaxoSmithKline notified us that they were
exercising their right to terminate one of our contracts without cause. The
termination will be effective April 18 2001, 75 days following the date of the
termination notice. Contracts may also be terminated for cause if we fail to
meet stated performance benchmarks. To date, no programs have been terminated
for cause.
6
Our product detailing contracts typically contain cross-indemnification
provisions between us and our client. The client will usually indemnify us
against product liability and related claims arising from the sale of the
product and we indemnify the clients with respect to the errors and omissions of
our sales representatives in the course of their detailing activities. To date,
we have not asserted, nor has there been asserted against us, any claim for
indemnification under any contract.
In connection with LCV, we anticipate that we will also use a variety of
contract structures. The Ceftin agreement is a marketing and distribution
contract, under which we have the exclusive right to market and distribute the
designated Ceftin products in the United States. The agreement has a five-year
term but is cancelable by either party without cause on 120 days notice In
addition, the agreement specifically provides that we have exposure for product
liability claims. If GlaxoSmithKline was to cancel this contract it could have a
material adverse effect on our results of operations and financial position.
Ceftin distribution
We market and sell Ceftin products through both full-time and part-time
sales personnel. Ceftin products are sold primarily to wholesale drug
distributors, retail chains and managed care providers. The wholesale drug
distribution market is dominated by a limited number of large firms. For the
year ended December 31, 2000, approximately 61.9% of our Ceftin sales were
attributable to three distributors. In addition, the number of independent drug
stores and small chains has decreased as retail consolidation has occurred.
Our marketing and sales promotion for Ceftin principally targets
general/family practitioners and internal medicine physicians through detailing
and sampling to encourage physicians to prescribe Ceftin for the appropriate
patients. The sales force is supported and supplemented in trade publications.
Significant customers
Our significant customers are discussed in note 10 to the consolidated
financial statements included elsewhere in this report.
Marketing
Most of our revenue is derived from renewals and extensions of existing
programs, new programs with existing clients and new programs from new clients.
Most of our new business, from both existing clients and new clients, is derived
from responses to "requests for proposals" from pharmaceutical companies.
However, we are also engaged in proactive efforts to generate more business from
new and prospective clients. We have also implemented a sales process that is
designed to leverage our results-oriented image through case studies, references
and comprehensive proposals. This new business development process relies on the
use of a dedicated sales and marketing team as well as our experienced senior
management team.
Competition
Our competition includes in-house sales and marketing departments of
pharmaceutical companies, other CSOs, the largest of which are Innovex (a
subsidiary of Quintiles Transnational), the various sales and marketing
affiliates of Ventiv Health (formerly Snyder Communications) and Nelson
Professional Sales (a division of Nelson Communications, Inc.), emerging
pharmaceutical companies and wholesale drug distributors. We also compete with
other pharmaceutical companies for the distribution and marketing of
pharmaceutical products. These competitors include Bradley Pharmaceuticals,
Inc., Dura Pharmaceuticals, Inc. (purchased in 2000 by Elan Corporation PLC),
and King Pharmaceuticals, Inc., and other companies that acquire branded
products and product lines from other pharmaceutical companies. This is an
entirely new business for us and, as such, we face all the risks generally
associated with the marketing and distribution of pharmaceutical products. There
are relatively few barriers to entry into the businesses in which we operate
and, as the industry continues to evolve, new competitors are likely to emerge.
Many of our current and potential competitors are larger than we are and have
greater financial, personnel and other resources than we do. Increased
competition may lead to price and other forms of competition that may have a
material adverse effect on our business and results of operations.
7
As a result of competitive pressures, pharmaceutical companies, as well as
various organizations providing services to the pharmaceutical industry, are
consolidating and are becoming targets of global organizations. This trend is
likely to produce increased competition for clients and increased competitive
pressures on smaller providers. If the trend in the pharmaceutical industry
towards consolidation continues, pharmaceutical companies may have excess
in-house sales force capacity and may, as a result, reduce or eliminate their
use of CSOs. Although we intend to monitor industry trends and respond
appropriately, we cannot be certain that we will be able to anticipate and
successfully respond to such trends.
We believe that the primary competitive factor affecting contract sales
services is the ability to quickly hire, train, deploy and manage qualified
sales representatives to implement product detailing programs. We also compete
on the basis of such factors as reputation, quality of services, experience of
management, performance record, customer satisfaction, ability to respond to
specific client needs, integration skills and price. We believe we compete
effectively with respect to each of these factors.
Since Ceftin is generally established and commonly sold, we compete with
companies that market and sell products with similar indications and alternate
therapies during the period of patent protection and, subsequently, generic
equivalents. The manufacturers of generic products typically do not bear the
related research and development costs and other invested capital in products
and consequently are able to offer their products at considerably lower prices.
There are, however, a number of tactics that enable products to remain
profitable once patent protection ceases. These include establishing a strong
brand image with the prescriber or the consumer, supported by developing a
broader range of alternative formulations than the manufacturers of generic
products typically supply.
Government and industry regulation
The healthcare sector is heavily regulated by both government and industry.
Various laws, regulations and guidelines promulgated by government, industry and
professional bodies affect, among other matters, the provision, licensing,
labeling, marketing, promotion, sale and reimbursement of healthcare services
and products, including pharmaceutical products. The federal government has
extensive enforcement powers over the activities of pharmaceutical
manufacturers, including authority to withdraw product approvals, commence
actions to seize and prohibit the sale of unapproved or non-complying products,
to halt manufacturing operations that are not in compliance with Good
Manufacturing Procedures, and to impose or seek injunctions, voluntary recalls,
and civil monetary and criminal penalties. These restrictions or prohibitions on
sales or withdrawal of approval of products marketed by us could materially
adversely affect our business, financial condition and results of operations.
The Food, Drug and Cosmetic Act, as supplemented by various other statutes,
regulates, among other matters, the approval, labeling, advertising, promotion,
sale and distribution of drugs, including the practice of providing product
samples to physicians. Under this statute, the United States Food and Drug
Administration regulates all promotional activities involving prescription
drugs. The distribution of pharmaceutical products is also governed by the
Prescription Drug Marketing Act (PDMA), which regulates these activities at both
the federal and state level. The PDMA imposes extensive licensing, personnel
record keeping, packaging, quantity, labeling, product handling and facility
storage and security requirements intended to prevent the sale of pharmaceutical
product samples or other diversions. Under the PDMA and its implementing
regulations, states are permitted to require registration of manufacturers and
distributors who provide pharmaceutical products even if such manufacturers or
distributors have no place of business within the state. States are also
permitted to adopt regulations limiting the distribution of product samples to
licensed practitioners and require extensive record keeping and labeling of such
samples for tracing purposes. The sale or distribution of pharmaceuticals is
also governed by the Federal Trade Commission Act.
Some of the services that we currently perform or that we may provide in
the future may also be affected by various guidelines promulgated by industry
and professional organizations. For example, ethical guidelines promulgated by
the American Medical Association (AMA) govern, among other matters, the receipt
by physicians of gifts from health-related entities. These guidelines govern
honoraria, and other items of pecuniary value, which AMA member physicians may
receive, directly or indirectly, from pharmaceutical companies. Similar
guidelines
8
and policies have been adopted by other professional and industry organizations,
such as Pharmaceutical Research and Manufacturers of America.
There are also numerous federal and state laws pertaining to healthcare
fraud and abuse. In particular, certain federal and state laws prohibit
manufacturers, suppliers and providers from offering or giving or receiving
kickbacks or other remuneration in connection with ordering or recommending
purchase or rental of healthcare items and services. The federal anti-kickback
statute imposes both civil and criminal penalties for, among other things,
offering or paying any remuneration to induce someone to refer patients to, or
to purchase, lease, or order (or arrange for or recommend the purchase, lease,
or order of), any item or service for which payment may be made by Medicare or
certain federally-funded state healthcare programs (e.g., Medicaid). This
statute also prohibits soliciting or receiving any remuneration in exchange for
engaging in any of these activities. The prohibition applies whether the
remuneration is provided directly or indirectly, overtly or covertly, in cash or
in kind. Violations of the law can result in numerous sanctions, including
criminal fines, imprisonment, and exclusion from participation in the Medicare
and Medicaid programs.
Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the
purchase or rental of medical equipment and supplies. State laws vary in scope
and have been infrequently interpreted by courts and regulatory agencies, but
may apply to all healthcare items or services, regardless of whether Medicare or
Medicaid funds are involved.
We cannot determine what effect changes in regulations or statutes or legal
interpretations, when and if promulgated or enacted, may have on our business in
the future. Changes could, among other things, require changes to manufacturing
methods, expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations. Our
failure, or the failure of our clients to comply with, or any change in, the
applicable regulatory requirements or professional organization or industry
guidelines could, among other things, limit or prohibit us or our clients from
conducting business activities as presently conducted, result in adverse
publicity, increase the costs of regulatory compliance or result in monetary
fines or other penalties. Any of these occurrences could have a material adverse
affect on us.
Insurance
We maintain various types of insurance relating to our operations. We
cannot assure you that the insurance policies we have will cover all potential
claims that may be brought against us or that the particular policy limits are
adequate.
Liability insurance
We protect ourselves against potential liability by maintaining general
liability and professional liability insurance, and by contractual
indemnification provisions. We may seek to increase our existing policy limits
or obtain additional insurance coverage in the future as our business grows.
Although we have not experienced difficulty obtaining insurance coverage in the
past, we cannot be certain that we can increase our existing policy limits or
obtain additional insurance coverage on acceptable terms or at all. In addition,
although our clients may indemnify us for their negligent conduct, that may not
adequately protect us from liability.
Product liability insurance
In connection with our marketing and distribution of Ceftin, we maintain
product liability insurance. To date, to our knowledge, no product liability
claim has been made against us, and we have no reason to believe that any claim
is pending or threatened. We cannot assure you that our product liability
coverage is sufficient to protect us against any claim.
9
Employment practice liability insurance
The success of our business depends on our ability to deploy a high-quality
sales force quickly. As part of our recruiting and hiring process, we conduct a
thorough screening process, drug testing and rigorous interviews. In addition,
we must continually evaluate our personnel and, when necessary, terminate some
of our employees with or without cause. Accordingly, we may be subject to
lawsuits relating to wrongful termination, discrimination and harassment. We
have obtained employment practice liability insurance, which insures us against
claims made by employees or former employees relating to their employment, i.e.,
wrongful termination, sexual harassment, etc. To date, we have not made any
claims under this policy. We cannot be sure that the coverage we maintain will
be sufficient to cover any future claims or will continue to be available in
adequate amounts or at a reasonable cost. We could be materially and adversely
affected if we were required to pay damages or incur defense costs in connection
with a claim by an employee that is outside the scope of coverage or exceeds the
limits of our policy.
Automobile Insurance
We maintain a fleet of automobiles for our sales force and certain other
employees. These automobiles are covered by a fleet automobile insurance policy.
Other Insurance
We maintain insurance to protect the inventory of Ceftin while in storage.
We also maintain business interruption insurance to protect against sudden and
unexpected events where manufacturing problems might make Ceftin unavailable to
us.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
The following factors may affect our future growth and should be considered
by any prospective purchaser of our securities.
Risks Related to LCV
LCV represents a new business with which we have no prior experience. We cannot
assure you that we will successfully execute our business plans for LCV.
In October 2000, LCV entered into an agreement with GlaxoSmithKline, the
owner of all the rights to, and the manufacturer of, the antibiotic Ceftin.
Under this agreement, LCV acquired the exclusive right to distribute designated
Ceftin products in the United States. This is an entirely new business for us
and, as such, we face all the risks generally associated with emerging
pharmaceutical companies. These risks include the following:
o establishing and maintaining relationships with wholesale drug
distributors, third party payors, retail drug chains and other
distributors;
o attracting, hiring and retaining qualified personnel;
o complying with regulatory requirements;
o establishing inventory control procedures;
o identifying and obtaining the rights to sell and distribute additional
pharmaceutical products; and
o obtaining capital to finance the expansion of the business.
In addition, as a result of our agreement with GlaxoSmithKline, our operating
expenditures have increased significantly. These expenditures include minimum
purchase requirements of Ceftin, payments to third parties for inventory
maintenance and control, distribution services and accounts receivable
administration, as well as expenditures for sales and marketing.
10
If we are unable to increase sales of Ceftin, or if sales of Ceftin decline, our
profitability could be adversely affected, which could adversely affect the
price of our common stock.
Under our agreement with GlaxoSmithKline, we are required to make minimum
quarterly purchases of Ceftin. These minimum purchase requirements are based
upon historical Ceftin sales. However, in order for this program to be
profitable for us, we must increase sales of Ceftin significantly beyond these
minimum purchase requirements. Decreased or lower-than-anticipated demand for
Ceftin could materially adversely affect our operating results. The market
demand for cephalosporin antibiotics, such as Ceftin, in the United States has
been declining as a percentage of overall antibiotic sales. Other factors that
could adversely affect sales of Ceftin include:
o competition from new or existing drug products, including introduction
of generic equivalents prior to the expiration of Ceftin's patents;
o our ability to maintain adequate and uninterrupted sources of supply
to meet demand;
o contamination of product lots or product recalls; and
o changes in private health insurer reimbursement rates or policies for
Ceftin.
If we cannot maintain or increase sales of Ceftin from their current
levels, our business, operations and financial results could be adversely
affected. We cannot give any assurance that we will be able to maintain or
increase the market for Ceftin.
The profitability of the Ceftin contract depends, in part, on the rebates and
sales allowances we are required to pay our customers. If our assumptions are
incorrect, our actual costs under the Ceftin contract will be greater than
anticipated.
The minimum purchase requirements under the Ceftin agreement assume a
certain level of customer rebates and sales allowances. If these assumptions are
incorrect -- i.e., actual rebates and allowances are higher than anticipated --
we would have to further increase the sales of Ceftin in order to make a profit.
The assumptions are based on the historical experiences of Ceftin as well as
estimated changes based on new facts and circumstances. We cannot assure you
that these trends will continue or that estimated changes will materialize.
If GlaxoSmithKline fails to supply us with sufficient quantities of Ceftin to
meet continued demand for the product, our remedies are limited.
We depend on GlaxoSmithKline to provide us with sufficient quantities of
the designated Ceftin products to meet demand. We try to maintain inventory
levels that are no greater than necessary to meet our projected needs. Any
interruption in the supply of Ceftin could hinder our ability to timely
distribute finished Ceftin to our customers. Although GlaxoSmithKline is
contractually bound to meet our supply requirements, we cannot assure you that
it will be able to manufacture sufficient quantities of Ceftin to meet demand.
Limits on our current sources of supply could have a material adverse impact on
our financial condition, results of operation and cash flows. We cannot be
certain that supply interruptions will not occur or that our inventory will
always be adequate. Numerous factors could cause interruptions in the supply of
our finished products including shortages in raw material required by our
manufacturers, changes in our sources for manufacturing, our failure to timely
locate and obtain replacement manufacturers as needed and conditions effecting
the cost and availability of raw materials. GlaxoSmithKline relies on suppliers
of raw materials used in the production of Ceftin. Some of these materials are
available from only one source and others may become available from only one
source. Any disruption in the supply of raw materials or an increase in the cost
of raw materials to GlaxoSmithKline could have a significant effect on its
ability to supply us with Ceftin products.
If we are unable to attract key employees and consultants, we may be unable to
develop our LCV business.
Due to the fact that we have no prior experience with contracts like the
Ceftin agreement, the successful execution of that contract and of LCV in
general depends, in large part, on our ability to attract and retain qualified
management and marketing personnel with the skills and qualifications necessary
to fully execute the Ceftin agreement. Competition for personnel among companies
in the pharmaceutical industry is intense and we cannot assure you that we will
be able to continue to attract or retain the personnel necessary to support the
growth of our
11
LCV business. Christopher Tama is executive vice president - LifeCycle Ventures.
If Mr. Tama ceases to perform services for LCV the business, financial condition
and results of operations of LCV could be adversely affected.
We depend on third parties, over whom we have no control, for client
maintenance, contract administration, inventory control, distribution, and
accounts receivable administration.
We have no existing relationships with drug wholesalers, government
agencies or third party payors, which is critical to the success of the Ceftin
program. GlaxoSmithKline will continue to administer contractual relationships
regarding Ceftin through June 2001. If we cannot establish or expand these
relationships before July 2001, our financial condition, results of operations
and cash flows could be adversely affected. In addition, we depend on an
unrelated third party to provide us with inventory control, distribution and
accounts receivable administration services regarding Ceftin. We have no
experience dealing with this third party vendor and we cannot assure you that
they can or will provide us with these services efficiently and reliably. If we
are forced to terminate this relationship, we will need to find a suitable
replacement quickly or our ability to execute the Ceftin contract will be
severely compromised. We cannot assure you that we will be able to find a
suitable replacement quickly, if at all.
Failure to have Ceftin designated for reimbursement by third party payors will
adversely affect our sales.
The use of Ceftin depends substantially on governmental agencies, private
health insurers and health maintenance organizations reimbursing patients for
the cost of Ceftin or including Ceftin on their formulary lists. There are many
considerations that determine whether a particular product will be approved by
these agencies and organizations, including price. If Ceftin is not reimbursed
or included on formulary lists of these agencies and organizations, and
therefore not approved for use by affiliated physicians, demand for Ceftin could
decline which would adversely impact our results of operations. In addition, any
change in reimbursement rates or reimbursement policies by these organizations
could adversely affect the market for Ceftin.
If Ceftin's patent expires, the introduction of generic alternatives will
adversely impact the market for Ceftin.
Ceftin Tablets and Ceftin for Oral Suspension are covered by patents which
expire in July 2003 and May 2008, respectively. GlaxoSmithKline retains all of
the patent rights to Ceftin. However, it is under no obligation to defend those
rights or seek to extend the patent rights. If the patent rights to Ceftin are
allowed to expire or if GlaxoSmithKline elects not to defend those rights,
generic alternatives are likely to be introduced and sales of Ceftin will
suffer. This will have a material adverse affect on our business, results of
operations and financial condition. Recently, GlaxoSmithKline obtained a
preliminary injunction blocking the introduction of a generic form of
cephalosporin that it believed violated its patent rights. Other drug
manufacturers may try to introduce generic forms of Ceftin in the future and we
cannot be certain that GlaxoSmithKline will continue to defend its patents or,
if it does, that it will be successful in doing so.
We may be required to defend lawsuits or pay damages for product liability
claims. Product liability litigation is costly and could divert management's
time and attention from more productive activities.
Product liability is a major risk in distributing and marketing
pharmaceutical products. We could face substantial product liability exposure
relating to the distribution and sale of Ceftin. Product liability claims,
regardless of their merits, could be costly and divert management's attention,
or adversely affect our reputation and the demand for our products. Although we
currently maintain product liability insurance coverage there is no assurance
that we will continue to maintain such coverage or that any such coverage will
be adequate to offset potential damages.
Risks Relating to Our Other Businesses
If the pharmaceutical industry does not continue to use, or fails to increase
its use of, third party service organizations to market and promote its
products, our business would be seriously harmed.
We generate substantially all of our service revenue from providing product
detailing services to pharmaceutical companies. We have benefited from the
growing trend of pharmaceutical companies to outsource marketing and promotional
programs. We cannot be certain that this trend will continue. For example, the
growth in outsourcing is
12
driven, in part, by the growth in the number of pharmaceutical products
developed over the last few years. However, recently there has been a decrease
in the number of new ethical compounds coming to market. If this trend
continues, pharmaceutical companies may reduce their outsourcing programs.
Furthermore, the trend in the pharmaceutical industry toward consolidation, by
merger or otherwise, may result in a reduction in the use of CSOs. A significant
change in the direction of the outsourcing trend generally, or a trend in the
pharmaceutical industry not to use, or to reduce the use of, outsourced
marketing services, such as those we provide, would have a material adverse
effect on our business.
A decrease in marketing or promotional expenditures by the pharmaceutical
industry as a result of private initiatives, government reform or otherwise,
could have an adverse affect on our business.
Our business, financial condition and results of operations depend on
marketing and promotional expenditures by pharmaceutical companies for their
products. Unfavorable developments in the pharmaceutical industry could
adversely affect our business. These developments could include reductions in
expenditures for marketing and promotional activities or a shift in marketing
focus away from product detailing. Promotional, marketing and sales expenditures
by pharmaceutical companies could also be negatively impacted by government
reform or private market initiatives intended to reduce the cost of
pharmaceutical products or by government, medical association or pharmaceutical
industry initiatives designed to regulate the manner in which pharmaceutical
companies promote their products.
Most of our service revenue is derived from a limited number of clients, the
loss of any one of which could adversely affect our business.
Our revenue and profitability are highly dependent on our relationships
with a limited number of large pharmaceutical companies. In 2000, we had three
clients that each accounted for more than 10% of our service revenue.
Individually, they accounted for approximately 29%, 21% and 12%, respectively,
or a total of 62%, of our service revenue. We are likely to continue to
experience a high degree of client concentration, particularly if there is
further consolidation within the pharmaceutical industry. The loss or a
significant reduction of business from any of our major clients could have a
material adverse effect on our business and results of operations.
Our contracts are short-term agreements and are subject to cancellation at any
time, which may result in lost revenue, additional costs and expenses and
adversely affect our stock price.
Our contracts are generally for a term of one year and may be terminated by
the client at any time for any reason. In February 2001, GlaxoSmithKline
cancelled a significant detailing program. The termination of a contract by one
of our major clients not only results in lost revenue, but may cause us to incur
additional costs and expenses. For example, all of our sales representatives are
employees rather than independent contractors. Accordingly, upon termination of
a contract, unless we can immediately transfer the related sales force to a new
program, we either must continue to compensate those employees, without
realizing any related revenue, or terminate their employment. If we terminate
their employment, we may incur significant expenses relating to their
termination.
We may lose money on fixed-fee contracts and performance-based contracts.
Many of our contracts are fixed fee arrangements. We also enter into some
contracts in which a portion of our fees are contingent on meeting performance
objectives. Accordingly, if we underestimate the costs associated with the
services to be provided under a particular contract, or if there are
unanticipated increases in our operating or administrative expenses, or if we
fail to meet certain performance objectives, or if we incorrectly assess the
market potential of a particular product, the margins on that contract and our
overall profitability may be adversely affected.
Our recent rapid growth has placed additional burdens on our corporate
infrastructure. In order to remain profitable, we must continue to manage our
growth properly.
We have recently experienced rapid growth in the number of employees, the
size of our programs and the scope of our operations. Our ability to manage such
growth effectively will depend upon our ability to enhance our management team
and our ability to attract and retain skilled employees. Our success will also
depend on the ability of our officers and key employees to continue to implement
and improve our operational, management information
13
and financial control systems, and to expand, train and manage our workforce.
Failure to manage growth effectively could have a material adverse effect on our
business and results of operations.
Government or private initiatives to reduce healthcare costs could have a
material adverse effect on the pharmaceutical industry and on us.
The primary trend in the United States healthcare industry is toward cost
containment. Comprehensive government healthcare reform intended to reduce
healthcare costs, the growth of total healthcare expenditures and expand
healthcare coverage for the uninsured have been proposed in the past and may be
considered again in the near future. Implementation of government healthcare
reform may adversely affect promotional and marketing expenditures by
pharmaceutical companies, which could decrease the business opportunities
available to us. In addition, the increasing use of managed care, centralized
purchasing decisions, consolidations among and integration of healthcare
providers are continuing to affect purchasing and usage patterns in the
healthcare system. Decisions regarding the use of pharmaceutical products are
increasingly being consolidated into group purchasing organizations, regional
integrated delivery systems and similar organizations and are becoming more
economically focused, with decision makers taking into account the cost of the
product and whether a product reduces the cost of treatment. Significant cost
containment initiatives adopted by government or private entities could have a
material adverse effect on our business.
Our failure, or that of our clients, to comply with applicable healthcare
regulations could limit, prohibit or otherwise adversely impact our business
activities.
Various laws, regulations and guidelines promulgated by government,
industry and professional bodies affect, among other matters, the provision,
licensing, labeling, marketing, promotion, sale and distribution of healthcare
services and products, including pharmaceutical products. In particular, the
healthcare industry is subject to various Federal and state laws pertaining to
healthcare fraud and abuse, including prohibitions on the payment or acceptance
of kickbacks or other remuneration in return for the purchase or lease of
products that are paid for by Medicare or Medicaid. Sanctions for violating
these laws include civil and criminal fines and penalties and possible exclusion
from Medicare, Medicaid and other Federal healthcare programs. Although we
believe our current business arrangements do not violate these Federal and state
fraud and abuse laws, we cannot be certain that our business practices will not
be challenged under these laws in the future or that a challenge would not have
a material adverse effect on our business, financial condition and results of
operations. Our failure, or the failure of our clients, to comply with these
laws, regulations and guidelines, or any change in these laws, regulations and
guidelines may, among other things, limit or prohibit our business activities or
those of our clients, subject us or our clients to adverse publicity, increase
the cost of regulatory compliance or subject us or our clients to monetary fines
or other penalties.
Our industry is highly competitive and our failure to address competitive
developments promptly will limit our ability to retain and increase our market
share.
Our primary competitors include in-house sales and marketing departments
of pharmaceutical companies, other CSOs, such as Innovex (a subsidiary of
Quintiles Transnational) the various sales and marketing affiliates of Ventiv
Health (formerly, Snyder Communications) and Nelson Professional Sales (a
division of Nelson Communications, Inc.), drug wholesalers and emerging
pharmaceutical companies. We also compete with other pharmaceutical companies
for the distribution and marketing of pharmaceutical products. There are
relatively few barriers to entry in the businesses in which we compete and, as
the industry continues to evolve, new competitors are likely to emerge. Many of
our current and potential competitors are larger than we are and have
substantially greater capital, personnel and other resources than we have.
Increased competition may lead to price and other forms of competition that
could have a material adverse effect on our market share, business and results
of operations.
As a result of competitive pressures, various organizations providing
services to the pharmaceutical industry are consolidating and are becoming
targets of global organizations. This trend is likely to produce increased
competition for clients. In addition, if the trend in the pharmaceutical
industry towards consolidation continues, pharmaceutical companies may have
excess in-house sales force capacity and they may, as a result, reduce or
eliminate their use of CSOs or choose to award their product detailing and other
marketing and promotional programs to organizations
14
that can provide a broader range of services. Although we intend to monitor
industry trends and respond appropriately, we may not be able to anticipate and
successfully respond to such trends.
Our business will suffer if we fail to attract and retain experienced sales
representatives.
The success and growth of our business depends on our ability to attract
and retain qualified and experienced pharmaceutical sales representatives. There
is intense competition for experienced pharmaceutical sales representatives from
competing CSOs and pharmaceutical companies. On occasion our clients have hired
the sales representatives that we trained to detail its products. We cannot be
certain that we can continue to attract and retain qualified personnel. If we
cannot attract, retain and motivate qualified sales personnel, we will not be
able to expand our business and our ability to perform under our existing
contracts will be impaired.
Our business will suffer if we lose certain key management personnel.
The success of our business also depends on our ability to attract, retain
and motivate qualified senior management, financial and administrative personnel
who are in high demand and who often have multiple employment options.
Currently, we depend on a number of our senior executives, including Charles T.
Saldarini, our chief executive officer; Steven K. Budd, our president and chief
operating officer; and Bernard C. Boyle, our chief financial officer. The loss
of the services of any one or more of these executives could have a material
adverse effect on our business, financial condition and results of operations.
Except for a $5 million key-man life insurance policy on the life of Mr.
Saldarini and a $3 million policy on the life of Mr. Budd, we do not maintain
and do not contemplate obtaining insurance policies on any of our employees.
The costs and difficulties of acquiring and integrating new businesses could
impede our future growth and adversely affect our competitiveness.
As part of our growth strategy, we constantly evaluate new acquisition
opportunities. Since our initial public offering in May 1998 we have completed
two acquisitions, TVG and ProtoCall. Acquisitions involve numerous risks and
uncertainties, including:
o the difficulty of identifying appropriate acquisition candidates;
o the difficulty integrating the operations and products and services
of the acquired companies;
o the expenses incurred in connection with the acquisition and
subsequent integration of operations and products and services;
o the impairment of relationships with employees, customers or vendors
as a result of changes in management and ownership;
o the diversion of management's attention from other business
concerns; and
o the potential loss of key employees or customers of the acquired
company.
Acquisitions of companies outside the United States also may involve the
following additional risks:
o assimilating differences in international business practices;
o overcoming language differences;
o exposure to currency fluctuations;
o difficulties in complying with a variety of foreign laws;
o unexpected changes in regulatory requirements;
o difficulties in staffing and managing foreign operations; and
o potentially adverse tax consequences.
We may be unable to successfully identify, complete or integrate any
future acquisitions, and acquisitions that we complete may not contribute
favorably to our operations and future financial condition. We may also face
increased competition for acquisition opportunities, which may inhibit our
ability to consummate suitable acquisitions on favorable terms.
15
Our controlling stockholder continues to have effective control of us, which
could delay or prevent a change in corporate control that stockholders may
believe will improve management.
John P. Dugan, our chairman, beneficially owns approximately 35% of our
outstanding common stock (excluding shares issuable upon the exercise of
options). As a result, Mr. Dugan will be able to exercise substantial control
over the election of all of our directors, and to determine the outcome of most
corporate actions requiring stockholder approval, including a merger with or
into another company, the sale of all or substantially all of our assets and
amendments to our certificate of incorporation.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
Our certificate of incorporation and bylaws include certain provisions,
such as three classes of directors, which are intended to enhance the likelihood
of continuity and stability in the composition of our board of directors. These
provisions may render the removal of our directors and management more difficult
and adversely affect the price of our common stock. In addition, our certificate
of incorporation authorizes the issuance of "blank check" preferred stock. This
provision could have the effect of delaying, deterring or preventing a future
takeover or a change in control, unless the takeover or change in control is
approved by our board of directors, even though the transaction might offer our
stockholders an opportunity to sell their shares at a price above the current
market price.
Our quarterly revenues and operating results may vary which may cause the price
of our common stock to fluctuate.
Our quarterly operating results may vary as a result of a number of
factors, including:
o the commencement, delay, cancellation or completion of programs;
o the mix of services provided;
o the timing and amount of expenses for implementing new programs and
services;
o the accuracy of estimates of resources required for ongoing
programs;
o uncertainty related to compensation based on achieving performance
benchmarks;
o the timing and integration of acquisitions;
o changes in regulations related to pharmaceutical companies; and
o general economic conditions.
In addition, generally, we recognize revenue as services are performed,
while program costs, other than training costs, are expensed as incurred. As a
result, during the first two to three months of a new contract, we may incur
substantial expenses associated with staffing that new program without
recognizing any revenue under that contract. This could have an adverse impact
on our operating results and the price of our common stock for the quarters in
which these expenses are incurred. We believe that quarterly comparisons of our
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. Fluctuations in quarterly results could
adversely affect the market price of our common stock in a manner unrelated to
our long term operating performance.
Our stock price is volatile and could be further affected by events not within
our control. In 2000 our stock traded at a low of $18 and a high of $142.
The market for our common stock is volatile. The trading price of our
common stock has been and will continue to be subject to:
o volatility in the trading markets generally;
o significant fluctuations in our quarterly operating results;
o announcements regarding our business or the business of our
competitors;
o industry development;
o changes in product mix;
o changes in revenue and revenue growth rates for us and for our
industry as a whole; and
16
o statements or changes in opinions, ratings or earnings estimates
made by brokerage firms or industry analysts relating to the markets
in which we operate or expect to operate.
Employees
As of December 31, 2000, we had 4,061 employees, including 3,319 sales
representatives. Approximately 169 employees work at our headquarters in Upper
Saddle River, New Jersey, 162 employees work out of TVG's headquarters in Fort
Washington, Pennsylvania, six employees work out of LCV's headquarters in
Lawrenceville, New Jersey, and 27 employees work out of ProtoCall's headquarters
in Cincinnati, Ohio. In addition, we have 378 field based sales managers. We are
not party to a collective bargaining agreement with a labor union and our
relations with our employees are good.
ITEM 2. PROPERTIES
Facilities
Our corporate headquarters is located in Upper Saddle River, New Jersey,
in approximately 46,500 square feet of space. The lease for all but 8,000 square
feet of this expires in the fourth quarter of 2004 with an option to extend for
an additional five years. The remaining 8,000 square feet was taken by
assignment and expires in the second quarter of 2004. In July 2000, to
accommodate growth at our headquarters' facility, we leased approximately 20,000
square feet in Mahwah, New Jersey. This lease commenced in September 2000, and
expires in the first quarter of 2003.
In December 2000, we signed a three-year lease for an operating office in
High Point, North Carolina. The lease is for approximately 1200 square feet of
office space.
TVG operates from a 48,000 square foot facility in Fort Washington,
Pennsylvania, under a lease that expires in the second quarter of 2005.
ProtoCall's headquarters are located in Cincinnati, Ohio, in approximately
11,000 square feet of space occupied under a lease this is for five years and
commenced in April 2000.
LCV occupies space in two facilities. LCV's main office is located in
Lawrenceville, New Jersey in approximately 9,300 square feet. LCV also rents a
1,000 square foot sales office in Durham, North Carolina.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material pending litigation and we are
not aware of any material threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
PDII. The following table sets forth, for each of the periods indicated, the
range of high and low closing sales prices for the common stock as reported by
the Nasdaq National Market.
17
High Low
------ ------
1999
First quarter......................................................... 36.000 23.375
Second quarter........................................................ 32.000 22.750
Third quarter......................................................... 33.875 24.750
Fourth quarter ....................................................... 31.625 24.875
2000
First quarter......................................................... 30.000 19.625
Second quarter........................................................ 34.063 19.000
Third quarter......................................................... 57.250 34.313
Fourth quarter ....................................................... 135.188 72.000
We believe that, as of March 23, 2001, we had approximately 3,000
beneficial stockholders.
Dividend policy
We have not paid any dividends and do not intend to pay any dividends in
the foreseeable future. Future earnings, if any, will be used to finance the
future growth of our business. Future dividends, if any, will be determined by
our board of directors.
Changes in securities and use of proceeds
In May 1998, we completed our initial public offering (the "IPO") of
3,220,000 shares of Common Stock (including 420,000 shares in connection with
the exercise of the underwriters' over-allotment option) at a price per share of
$16.00. Net proceeds to us after expenses of the IPO were approximately $46.4
million.
(1) Effective date of Registration Statement: May 19, 1998 (File No.
333-46321).
(2) The Offering commenced on May 19, 1998 and was consummated on May
22, 1998.
(4)(i) All securities registered in the Offering were sold.
(4)(ii) The managing underwriters of the Offering were Morgan Stanley Dean
Witter, William Blair & Company and Hambrecht & Quist.
(4)(iii) Common Stock, $.01 par value
(4)(iv) Amount registered and sold: 3,220,000 shares Aggregate purchase
price: $51,520,000 All shares were sold for the account of the
Issuer.
(4)(v) $3,606,400 in underwriting discounts and commissions were paid to
the underwriters. $1,490,758 of other expenses were incurred,
including estimated expenses.
(4)(vi) $46,422,842 of net Offering proceeds to the Issuer.
(4)(vii) Use of Proceeds:
$46,422,842 of temporary investments with
maturities of up to 3 months as of December 31, 2000.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996 are derived from our
audited consolidated financial statements and the accompanying notes. Our
consolidated financial statements for each of the periods presented reflects our
acquisition of TVG in May 1999, which was accounted for as a pooling of
interests. Consolidated balance sheets at December 31, 2000 and 1999 and
consolidated statements of operations, stockholders' equity and cash flows for
the three years ended December 31, 2000, 1999 and 1998 and the accompanying
notes are included elsewhere in this report and have been
18
audited by PricewaterhouseCoopers LLP, independent accountants, in reliance of
the audit reports issued to TVG by Grant Thornton LLP for 1998. Our audited
consolidated balance sheets at December 31, 1998, 1997 and 1996 and our
consolidated statements of operations, stockholder's equity and cash flows for
the years ended December 31, 1997 and 1996 are not included in this report but
have been audited by PricewaterhouseCoopers LLP in reliance on audit reports
issued to TVG by Grant Thornton LLP for 1998 and 1997 and Arthur Andersen LLP
for 1996. The selected financial data set forth below should be read together
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited Financial
Statements and related notes appearing elsewhere in this report.
Statement of operations data:
Years Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share and statistical data)
Revenue
Service, net ..................................... $315,867 $174,902 $119,421 $ 75,243 $ 49,090
Product, net ..................................... 101,008 -- -- -- --
-------- -------- -------- -------- --------
Total revenue, net ............................. 416,875 174,902 119,421 75,243 49,090
-------- -------- -------- -------- --------
Cost of goods and services
Program expenses ................................. 235,355 130,121 87,840 55,854 35,738
Cost of goods sold ............................... 68,997 -- -- -- --
-------- -------- -------- -------- --------
Total cost of goods and services ............... 304,352 130,121 87,840 55,854 35,738
-------- -------- -------- -------- --------
Gross profit ........................................ 112,523 44,781 31,581 19,389 13,352
Compensation expense ................................ 32,820 19,611 15,779 12,021 8,519
Bonus to controlling stockholder (1) (2) ............ -- -- -- 2,243 1,500
Stock grant expense (2) (3) ......................... -- -- -- 4,470 --
Other selling, general and administrative expenses .. 38,827 9,448 6,546 4,749 3,509
Acquisition and related expenses .................... -- 1,246 -- -- --
-------- -------- -------- -------- --------
Total selling, general and administrative expenses .. 71,647 30,305 22,325 23,483 13,528
-------- -------- -------- -------- --------
Operating income (loss) (2) ......................... 40,876 14,476 9,256 (4,094) (176)
Other income, net ................................... 4,864 3,471 2,273 376 275
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes ..... 45,740 17,947 11,529 (3,718) 99
Provision for income taxes .......................... 18,712 7,539 1,691 126 208
-------- -------- -------- -------- --------
Net income (loss) ................................... $ 27,028 $ 10,408 $ 9,838 $ (3,844) $ (109)
-------- -------- -------- -------- --------
Basic net income (loss) per share ................... $ 2.00 $ 0.87 $ 0.92 $ (0.44) $ (0.01)
-------- -------- -------- -------- --------
Diluted net income (loss) per share ................. $ 1.96 $ 0.86 $ 0.91 $ (0.44) $ (0.01)
-------- -------- -------- -------- --------
Basic weighted average number of shares outstanding . 13,503 11,958 10,684 8,730 9,064
-------- -------- -------- -------- --------
Diluted weighted average number of shares outstanding 13,773 12,167 10,814 8,730 9,064
-------- -------- -------- -------- --------
Years Ended December 31,
--------------------------------------------------
1999 1998 1997 1996
--------- --------- --------- ---------
(In thousands, except per share and statistical data)
Pro forma data (unaudited)
Income (loss) before provision for income taxes ................... $ 17,947 $ 11,529 $ (3,718) $ 99
Pro forma provision for income taxes (4) .......................... 7,677 4,611 -- 40
--------- --------- --------- ---------
Pro forma net income (loss) (4) ................................... $ 10,270 $ 6,918 $ (3,718) $ 59
========= ========= ========= =========
Pro forma basic net income (loss) per share (4) (5) ............... $ 0.86 $ 0.65 $ (0.43) $ 0.01
--------- --------- --------- ---------
Pro forma diluted net income (loss) per share (4) (5) ............. $ 0.84 $ 0.64 $ (0.43) $ 0.01
--------- --------- --------- ---------
Basic weighted average number of shares outstanding (5) ........... 11,958 10,684 8,730 9,064
--------- --------- --------- ---------
Pro forma diluted weighted average number of shares outstanding (5) 12,167 10,814 8,730 9,064
--------- --------- --------- ---------
Other operating data (unaudited):
Years Ended December 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Number of sales representatives at end of period:
Full-time ................................... 2,947 1,669 1,143 529 33
Part-time ................................... 372 433 242 401 691
----- ----- ----- ----- -----
Total ........................................... 3,319 2,102 1,385 930 724
===== ===== ===== ===== =====
19
Balance sheet data:
As of December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(in thousands)
Cash and cash equivalents ....................... $109,000 $ 57,787 $ 56,989 $ 7,762 $ 3,658
Working capital ................................. 120,720 53,144 47,048 584 307
Total assets .................................... 270,225 102,960 77,390 21,868 15,805
Total long-term debt ............................ -- -- -- -- --
Stockholders' equity ............................ 138,110 60,820 50,365 1,647 1,297
- ----------------
(1) Prior to the IPO, we were treated as an S corporation under subchapter S
of the Internal Revenue Code and under the corresponding provisions of the
tax laws of the State of New Jersey. Historically, as an S corporation, we
made annual bonus payments to our controlling stockholder based on our
estimated profitability and working capital requirements. We have not paid
bonuses to our controlling stockholder since 1997 and do not expect to in
future periods.
(2) There were no bonus payments to our controlling stockholder or stock grant
expense charges in 2000, 1999 and 1998, and we do not expect to incur
these charges in future periods. Exclusive of these non-recurring charges,
our operating income (loss) for the years ended December 31, 1997 and 1996
would have been $2,619 and $1,324 respectively. See note 1 above.
(3) On January 1, 1997, we issued shares of our common stock to Charles T.
Saldarini, our current vice chairman and chief executive officer. For
financial accounting purposes, a non-recurring, non-cash compensation
expense was recorded in the quarter ended March 31, 1997.
(4) Prior to the IPO, we were an S corporation and had not been subject to
Federal or New Jersey corporate income taxes, other than a New Jersey
state corporate income tax of approximately 2%. In addition, TVG, a 1999
acquisition accounted for as a pooling of interest, was also taxed as an S
corporation from January 1997 to May 1999. Pro forma provision for income
taxes, pro forma net income (loss) and basic and diluted net income (loss)
per share for all periods presented reflect a provision for income taxes
as if we and TVG had been taxed at the statutory tax rates in effect for C
corporations for all periods. See note 19 to our audited consolidated
financial statements included elsewhere in this report.
(5) See note 7 to our audited consolidated financial statements included
elsewhere in this report for a description of the computation of basic and
diluted weighted average number of shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause Our Actual
Results to Differ From Those Projected in Forward Looking Statements.
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to risks and uncertainties,
which could cause our actual results to differ materially from those indicated
by the forward looking statements. Examples of forward looking statements
include, but are not limited to (i) projections of revenues, income or loss,
earnings per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements regarding our plans and objectives including
product enhancements, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements.
This report also identifies important factors that could cause our actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the factors discussed under
the heading "Certain Factors That May Affect Future Growth" beginning at page 10
of this report.
20
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this report.
Overview
We are a leading provider of sales and marketing services to the United
States pharmaceutical industry. Within our three operating segments we provide
the following services:
o dedicated contract sales services;
o syndicated contract sales services;
o LifeCycle X-Tension services;
o LifeCycle Launch services;
o marketing research and consulting services; and
o medical education and communication services.
Our clients, which include some of the largest pharmaceutical companies in
the world, engage us on a contractual basis to design and implement product
detailing programs for both prescription and over-the-counter (OTC)
pharmaceutical products. Product detailing involves meeting face-to-face with
targeted prescribers to provide a technical review of the product being
promoted. Since the early 1990s, the United States pharmaceutical industry has
increasingly used CSOs to provide detailing services to introduce new products
and supplement existing sales efforts.
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee-for-services, i.e., the client pays a fee for a specified package of
services. These contracts typically include performance benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. More
recently, our contracts tend to have a lower base fee but built-in incentives
based on our performance. In these situations, we have the opportunity to earn
additional fees based on enhanced program results.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason upon 30 to 90 days notice. These
contracts typically provide for termination payments by the client upon a
termination without cause. While the cancellation of a contract by a client
without cause may result in the imposition of penalties on the client, these
penalties may not act as an adequate deterrent to the termination of any
contract. In addition, we cannot assure you that these penalties will offset the
revenue we could have earned under the contract or the costs we may incur as a
result of its termination. The loss or termination of a large contract or the
loss of multiple contracts could adversely affect our future revenue and
profitability.
Our product detailing contracts typically contain cross-indemnification
provisions between us and our client. The client will usually indemnify us
against product liability and related claims arising from the sale of the
product and we indemnify the clients with respect to the errors and omissions of
our sales representatives in the course of their detailing activities. To date,
we have not asserted, nor has there been asserted against us, any claim for
indemnification under any contract.
On February 2, 2001, GlaxoSmithKline exercised its right to terminate our
fee for services contract. The termination will be effective April 18, 2001. As
a result, we expect 2001 consolidated revenues to be reduced by approximately
$45 million, and earnings per share to be reduced by $0.35 to $0.40 per share.
In June 2000, we formed LCV to compete more fully for pharmaceutical
commercialization opportunities. LCV undertakes performance-based sales,
marketing and distribution assignments, taking over completely, or in
cooperation with the client, the sales, marketing and distribution function of
brands. This service has a broad target customer base, including all tiers of
the pharmaceutical and biotechnology sectors. Over the next several years, we
expect this new service offering to be an important contributor to our growth.
21
In October 2000, LCV signed a five-year agreement with GlaxoSmithKline for
the exclusive U.S. marketing, sales and distribution rights for Ceftin Tablets
and Ceftin for Oral Suspension (cefuroxime axetil), two dosage forms of a
cephalosporin antibiotic. Ceftin is the top selling oral cephalosporin in the
United States and throughout the world. Ceftin, which is indicated for acute
bacterial respiratory infections such as acute sinusitis, bronchitis and otitis
media, generated over $332 million in United States sales in 1999.
GlaxoSmithKline retains some regulatory responsibilities for Ceftin and
ownership of all intellectual property relevant to Ceftin and will continue to
manufacture the product. The agreement with GlaxoSmithKline is cancelable by
either party on 120 days written notice.
Under the agreement with GlaxoSmithKline, LCV is required to purchase
certain minimum levels of Ceftin during each calendar quarter. In order to meet
anticipated demand, LCV intends to maintain an inventory of Ceftin that we
expect to average between $30 to $60 million. In the event our estimates of the
demand for Ceftin are not accurate, or the timing on collections of Ceftin
related receivables is slower than anticipated, the LCV-Ceftin transaction could
have a material adverse impact on our results of operations, cash flows and
liquidity.
In November 2000, LCV signed a five-year agreement with United
Therapeutics Corporation under which LCV will provide a broad range of
pre-launch and launch commercialization services for Beraprost, a compound under
development for peripheral vascular disease.
Other recent developments
In the first quarter of 2000, we completed a public offering of 3,220,000
shares of common stock at a public offering price per share of $28.00, yielding
net proceeds per share after deducting underwriting discounts of $26.35 (before
deducting expenses of the offering). Of the shares offered, 1,609,312 shares
were sold by us and 1,610,688 shares were sold by selling shareholders. Net
proceeds to us after expenses of the offering were approximately $41.6 million.
In February 2000, we signed a three-year agreement with iPhysicianNet Inc.
iPhysicianNet is creating an internet based detailing service that is intended
to enhance communication between drug manufacturers and physicians. Under this
agreement we were appointed as the exclusive CSO in the United States to be
affiliated with the iPhysicianNet network, allowing iPhysicianNet and us to
offer e-detailing capabilities to existing and potential clients. In connection
with this agreement, we purchased $2.5 million worth of iPhysicianNet's
preferred stock.
During the fourth quarter of 2000, we invested approximately $760,000 in
In2Focus Sales Development Services Limited, a United Kingdom contract sales
company. In2Focus intends to provide a full range of sales related services and
technologies to the pharmaceutical industry.
Revenues and expenses
Our revenues are segregated between service and product sales for
reporting purposes. Our operations are currently organized around three
principal activities and business segments:
o contract sales programs;
o product sales; and
o marketing, research services.
Historically, we have derived a significant portion of our service revenue
from a limited number of clients. However, concentration of business in the CSO
industry is common and we believe that pharmaceutical companies will continue to
outsource large projects as the CSO industry grows and continues to demonstrate
an ability to successfully implement large programs. Accordingly, we are likely
to continue to experience significant client concentration in future periods
with respect to our CSO segment. Nevertheless, over the last three years our
client concentration has actually decreased. Our three largest clients accounted
for approximately 62%, 71% and 74%, of our service revenue for 2000, 1999 and
1998, respectively. This decline in client concentration reflects our continued
efforts to expand our client base. For the year ended December 31, 2000, revenue
from sales of Ceftin primarily came from three major customers who accounted for
approximately 61.9% of total net product revenue.
22
Service revenue and program expenses
Contract sales revenue is earned primarily by performing product detailing
programs and other marketing and promotional services under contracts. Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured. Revenue is recognized net of any potential penalties
until the performance criteria eliminating the penalties have been achieved.
Bonus and other performance incentives as well as termination payments are
recognized as revenue in the period earned and when payment of the bonus,
incentive or other payment is assured.
Program expenses consist primarily of the costs associated with executing
a product detailing program or the other services identified in the contract.
Program expenses include personnel costs and other costs, including facility
rental fees, honoraria and travel expenses, associated with executing a product
detailing or other marketing or promotional program, as well as the initial
direct costs associated with staffing a product detailing program. Personnel
costs, which constitute the largest portion of program expenses, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives and sales managers and professional staff
who are directly responsible for executing a particular program. Initial direct
program costs are those costs associated with initiating a product detailing
program, such as recruiting, hiring and training the sales representatives who
staff a particular product detailing program. All personnel costs and initial
direct program costs, other than training costs, are expensed as incurred for
service offerings. Training costs include the costs of training the sales
representatives and managers on a particular product detailing program so that
they are qualified to properly perform the services specified in the related
contract. Training costs are deferred and amortized on a straight-line basis
over the shorter of the life of the contract to which they relate or 12 months.
Expenses related to the product detailing of products we distribute (as
discussed in the next section) are recorded as a selling expense and are
included in other selling, general and administrative expenses in the
consolidated statements of operations.
As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing contract. We typically
receive an initial payment upon commencement of a product detailing program and,
as appropriate, characterize that payment as compensation for recruiting, hiring
and training services associated with staffing that program. This permits us to
record the initial payment as revenue in the same period in which the costs of
the services are expensed. Our inability to specifically provide in our product
detailing contracts that we are being compensated for recruiting, hiring or
training services could adversely impact our operating results for periods in
which the costs associated with the product detailing services are incurred.
Product revenue and cost of goods sold
Product revenue is recognized when products are shipped and title to
products is transferred to the customer. Provision is made at the time of sale
for all discounts and estimated sales allowances. We prepare our estimates for
sales returns and allowances, discounts and rebates based primarily on
historical experience updated for changes in facts and circumstances, as
appropriate.
Cost of goods sold includes all expenses for both product distribution
costs and manufacturing costs of product sold. Inventory is valued at the lower
of cost or fair value. Cost is determined using the first in, first out costing
method. Inventory consists of only finished goods. Cost of goods sold and gross
margin on sales could fluctuate based on our quantity of product purchased, and
our contractual unit costs including applicable discounts, as well as
fluctuations in the selling price for our products including applicable
discounts.
Corporate overhead and taxes
Selling, general and administrative expenses include compensation and
general corporate overhead. Compensation expense consists primarily of salaries,
bonuses, training and related fringe benefits for senior management and other
administrative, marketing, finance, information technology and human resources
personnel who are not directly involved with executing a particular program.
Other selling, general and administrative expenses include corporate overhead
such as facilities costs, depreciation and amortization expenses and
professional services fees, as well as product detailing, marketing and
promotional expenses associated with product sales.
23
From January 1, 1995 through May 1998, we were an S corporation for
Federal and New Jersey state corporate income tax purposes. In addition, TVG was
an S corporation from January 1, 1997 through May 1999. Accordingly, during
those respective periods neither we nor TVG were subject to Federal corporate
income taxes or state corporate income taxes at the regular corporate income tax
rates. Our consolidated statement of operations data in the "Selected Financial
Data" tables reflect a provision for income taxes on a pro forma basis as if we
were required to pay Federal and state corporate income taxes during all periods
presented.
Consolidated results of operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future operating results.
Year Ended December 31,
-------------------------------------------------------
Operating data 2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Revenue
Service, net 75.8% 100.0% 100.0% 100.0% 100.0%
Product, net 24.2 -- -- -- --
----- ----- ----- ----- -----
Total revenue, net 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of goods and services
Program expenses 56.5 74.4 73.6 74.2 72.8
Cost of goods sold 16.5 -- -- -- --
----- ----- ----- ----- -----
Total cost of goods and services 73.0 74.4 73.6 74.2 72.8
----- ----- ----- ----- -----
Gross profit 27.0 25.6 26.4 25.8 27.2
Compensation expense 7.9 11.2 13.2 16.0 17.4
Bonus to majority stockholder -- -- -- 3.0 3.1
Stock grant expense -- -- -- 5.9 --
Other selling, general and
administrative expenses 9.3 5.4 5.5 6.3 7.1
Acquisition and related expenses -- 0.7 -- -- --
----- ----- ----- ----- -----
Total general, selling and
administrative expenses 17.2 17.3 18.7 31.2 27.6
----- ----- ----- ----- -----
Operating income (loss) 9.8 8.3 7.7 (5.4) (0.4)
Other income, net 1.2 2.0 1.9 0.5 0.6
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes 11.0 10.3 9.6 (4.9) 0.2
Provision for income taxes 4.5 4.3 1.4 0.2 0.4
----- ----- ----- ----- -----
Net income (loss) 6.5% 6.0% 8.2% (5.1)% (0.2)%
----- ----- ----- ----- -----
Pro forma data (unaudited)
Income (loss) before pro forma provision
for income taxes 10.3% 9.6% (4.9)% 0.2%
Pro forma provision for income taxes 4.4 3.8 -- 0.1
----- ----- ----- -----
Pro forma net income (loss) 5.9% 5.8% (4.9)% 0.1%
----- ----- ----- -----
Comparison of 2000 and 1999
Revenue, net. Net revenue for 2000 was $416.9 million, an increase of
138.3% over revenue of $174.9 million for 1999. Net revenue from the CSO and
marketing services segments for the year ended December 31, 2000 was $315.9
million, an increase of $141.0 million, or 80.6%, over net revenue from those
segments of $174.9 million for the prior year. This increase was generated
primarily from the continued renewal and expansion of product detailing programs
from existing clients and the expansion of our client base. Net product revenue
for the year ended December 31, 2000 was $101.0 million, all of which was
attributable to sales of Ceftin.
24
Cost of goods and services. Cost of goods and services for the year ended
December 31, 2000 were $304.4 million, an increase of 133.9% over cost of goods
and services of $130.1 million for the year ended December 31, 1999. As a
percentage of total net revenue, cost of goods and services decreased to 73.0%
in 2000 from 74.4% in 1999, which decrease was almost entirely attributable to
the lower cost of goods sold from our product sales and distribution segment.
Program expenses (i.e., cost of services) for 2000 were $235.4 million, an
increase of 80.9% over program expenses of $130.1 million for 1999. As a
percentage of net CSO and marketing services revenue, program expenses for 2000
and 1999 were 74.5% and 74.4%, respectively. Cost of goods sold was $69.0
million for the year ended December 31, 2000. As a percentage of net product
revenue, cost of goods sold for 2000 was 68.3%. Cost of goods sold and gross
margin on sales could fluctuate based on our quantity of product purchased, and
our contractual unit costs including applicable discounts, as well as
fluctuations in the selling price for our products including applicable
discounts.
Compensation expense. Compensation expense for 2000 was $32.8 million
compared to $19.6 million for 1999. As a percentage of total net revenue,
compensation expense decreased to 7.9% for 2000 from 11.2% for 1999.
Compensation expense for the year ended December 31, 2000 attributable to the
CSO and marketing services segments was $31.8 million compared to $19.6 million
for the year ended December 31, 1999. As a percentage of net revenue from those
segments, compensation expense decreased to 10.1% in 2000 from 11.2% in 1999,
reflecting the continuing expense reduction leverage resulting from our
continued rapid growth. Compensation expense for the year ended December 31,
2000 attributable to the product segment was $1.0 million, or 1.0% of product
revenue. The low compensation expense for this segment contributed greatly to
the overall reduction in compensation expense as a percentage of total net
revenue.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $38.8 million for the year ended
December 31, 2000, an increase of 311.0% over other selling, general and
administrative expenses of $9.4 million for 1999. As a percentage of total net
revenue, total other selling, general and administrative expenses increased to
9.3% for 2000 from 5.4% for 1999. Other selling, general and administrative
expenses attributable to CSO and marketing services for the year ended December
31, 2000 were $16.9 million, an increase of 79.8% over other selling, general
and administrative expenses of $9.4 million attributable to those segments for
1999. As a percentage of net revenue from CSO and marketing services, other
selling, general and administrative expenses were 5.4% for both the years. Other
selling, general and administrative expenses attributable to the product segment
for 2000 were $21.9 million, or 21.7% of net product revenue, greatly increasing
this category's impact on total other selling, general and administrative
expenses as a percentage of total net revenue. Other selling, general and
administrative expenses for net product revenue consists primarily of field
selling costs and professional fees. Professional fee expenses were higher
during 2000 than we anticipate they will be in future periods because of
expenses incurred for the startup of LCV and the launch of the Ceftin
distribution agreement.
Acquisition and related expenses. There were no acquisition and related
expenses for the year ended December 31, 2000.
Operating income. Operating income for 2000 was $40.9 million, an increase
of 182.4% over operating income of $14.5 million for 1999. As a percentage of
total net revenue, operating income increased to 9.8% in 2000 from 8.3% in 1999.
Operating income for 2000 for the CSO and marketing services segment was $31.8
million, an increase of 119.3% over the CSO and marketing services segments
operating income in 1999 of $14.5 million. As a percentage of net revenue from
the CSO and marketing services segments, operating income for the those segments
increased to 10.1% from 8.3% in 1999. The increase was due primarily to the
reduction of the compensation expense attributable to those segments for the
year ended December 31, 2000 compared to the year ended December 31, 1999 and
the absence of acquisition and related expense in 2000. Operating income for the
product segment for 2000 was $9.1 million, or 9.0% of net product revenue.
Other income, net. Other income, net, for 2000 was $4.9 million, compared
to other income, net of $3.5 million for 1999. Interest income of $7.4 million
was the primary component of other income, net in 2000, compared to $3.6 million
in 1999. The $3.8 million increase in interest income in 2000 over 1999 was
partially offset by the $2.5 million loss recorded during the year resulting
from our investment in iPhysicianNet.
Net income. Net income for 2000 was $27.0 million, an increase of 159.7%
from net income of $10.4 million in 1999. The effective tax rate for 2000 was
40.9%, compared to an effective tax rate of 42.0% for 1999. The pro
25
forma 1999 effective tax rate was lower as a result of $1.2 million of
non-deductible acquisition and related expenses.
Comparison of 1999 and 1998
Revenue, net. Net revenue for 1999 was $174.9 million, an increase of
46.5% over net revenue of $119.4 million for 1998. This increase in net revenue
for 1999 was generated primarily from the continued renewal and expansion of
product detailing programs from existing clients and the expansion of our client
base, as well as the increase in marketing research services provided by TVG.
Net revenue excludes $8.9 million of costs (approximately 4.8% of gross revenue)
incurred by us for which we received direct reimbursement from our clients.
Cost of services. Program expenses for 1999 were $130.1 million, an
increase of 48.1% over program expenses of $87.8 million for 1998. As a
percentage of net revenue, program expenses increased to 74.4% for 1999 from
73.6% for 1998. This increase is due to our fastest growing service offering,
product detailing, having lower gross profit margins, in general, than our other
service offerings. Program expenses exclude $8.9 million of costs incurred by us
for which we received direct reimbursement from our clients.
Compensation expense. Compensation expense for 1999 was $19.6 million
compared to $15.8 million for 1998. As a percentage of net revenue, compensation
expense decreased to 11.2% for 1999 from 13.2% for 1998. This percentage
decrease reflects the continued selling, general and administrative expense
leverage that we have realized through our expansion.
Other selling, general and administrative expenses. Other selling, general
and administrative expenses were $9.4 million for 1999, an increase of 44.3%
over other selling, general and administrative expenses of $6.5 million for
1998. As a percentage of net revenue, other selling, general and administrative
expenses decreased slightly to 5.4% for 1999 from 5.5% for 1998.
Acquisition and related expenses. In 1999, we incurred $1.2 million of
non-recurring acquisition and related expenses in connection with the
acquisition of TVG, which was accounted for as a pooling of interest. No such
expenses were incurred in 1998. As a percentage of net revenue, acquisition and
related expenses were 0.7% in 1999.
Operating income. Operating income for 1999 was $14.5 million, an increase
of 56.4% over operating income of $9.3 million for 1998. As a percentage of net
revenue, operating income increased to 8.3% in 1999 from 7.7% in 1998. The
increase is due primarily to the reduction of compensation expense as a
percentage of net revenue, which was partially offset by the increase in program
expenses as a percentage of net revenue and the non-recurring expenses incurred
in the acquisition of TVG and ProtoCall in 1999.
Other income, net. Other income, primarily net interest income, for 1999
was $3.5 million, compared to other income of $2.3 million for 1998. The
increase was primarily due to the full year impact of the investment of the net
proceeds of the IPO in May 1998, and the increase in net cash provided by
operations for 1999.
Pro forma net income. Pro forma net income for 1999 was $10.3 million, an
increase of 48.5% from pro forma net income of $6.9 million for 1998. Pro forma
net income for both periods assumes that we were taxed for Federal and state
income tax purposes as a C corporation during both periods. The pro forma
effective tax rate for 1999 was 42.8% compared to a pro forma effective tax rate
for 1998 of 40.0%.
Liquidity and capital resources
As of December 31, 2000 we had cash and cash equivalents of approximately
$109.0 million and working capital of $120.7 million compared to cash and cash
equivalents of approximately $57.8 million and working capital of $53.1 million
at December 31, 1999.
For the year ended December 31, 2000, net cash provided by operating
activities was $19.1 million. The main components of cash provided by operating
activities were net income from operations of $27.0 million, offset by a
26
net cash outflow of $7.9 million from changes in "Other changes in assets and
liabilities," which was almost totally attributable to the net working capital
investment required for our Ceftin activities.
For the year ended December 31, 2000, net cash used in investing
activities of $14.4 million consisted of $7.9 million in purchases of property
and equipment, $3.2 million invested in iPhysicianNet and In2Focus, and $4.9
million of short-term investments. Cash used in investing activities was
partially offset by the cash realized from the sale of short term investments of
$1.6 million. Capital expenditures were funded out of cash generated from
operations.
For the year ended December 31, 2000, net cash provided by financing
activities was $46.6 million. This increase in cash is due to the net proceeds
received from the secondary offering in first quarter 2000 of $41.6 million,
$3.6 million in proceeds received from the employees' exercise of common stock
options, and $1.4 million in cash received from the repayment of the stockholder
loan.
Capital expenditures during the periods ended December 31, 2000, 1999, and
1998, were $7.9 million, $1.4 million and $2.2 million, respectively, and were
funded out of cash generated from operations.
When we bill clients for services before they have been completed, billed
amounts are recorded as unearned contract revenue, and are recorded as income
when earned. When services are performed in advance of billing, the value of
such services is recorded as unbilled costs and accrued profits. As of December
31, 2000, we had $23.8 million of unearned contract revenue and $3.0 million of
unbilled costs and accrued profits. Substantially all deferred and unbilled
costs and accrued profits are earned or billed, as the case may be, within 12
months of the end of the respective period.
We believe that our cash flows from operations and existing cash balances
will be sufficient to meet our working capital and capital expenditure
requirements for the next twelve months.
Quarterly operating results
Our results of operations have varied, and are expected to continue to
vary, from quarter-to-quarter. These fluctuations result from a number of
factors including, among other things, the timing of commencement, completion or
cancellation of major programs. In the future, our revenue may also fluctuate as
a result of a number of additional factors, including the types of products we
market and sell, delays or costs associated with acquisitions, government
regulatory initiatives and conditions in the healthcare industry generally.
Revenue, generally, is recognized as services are performed and products are
shipped. Program costs, other than training costs, are expensed as incurred. As
a result, we may incur substantial expenses associated with staffing a new
detailing program during the first two to three months of a contract without
recognizing any revenue under that contract. This could have an adverse impact
on our operating results for the quarters in which those expenses are incurred.
Costs of goods sold are expensed when products are shipped. We believe that
because of these fluctuations, quarterly comparisons of our financial results
cannot be relied upon as an indication of future performance.
27
The following table sets forth quarterly operating results for the eight
quarters ended December 31, 2000:
Quarter Ended
-------------------------------------------------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenue
Service, net $ 71,289 $ 75,789 $ 84,367 $ 84,422 $ 40,312 $ 41,006 $ 43,125 $ 50,459
Product, net -- -- -- 101,008 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue, net 71,289 75,789 84,367 185,430 40,312 41,006 43,125 50,459
-------- -------- -------- -------- -------- -------- -------- --------
Cost of goods and services
Program expenses 50,120 58,108 63,233 63,894 29,483 30,611 32,954 37,073
Cost of goods sold -- -- -- 68,997 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of goods and services 50,120 58,108 63,233 132,891 29,483 30,611 32,954 37,073
Gross profit 21,169 17,681 21,134 52,539 10,829 10,395 10,171 13,386
Compensation expense 8,394 6,793 7,846 9,787 4,725 4,326 4,582 5,978
Other selling, general and
administrative expenses 4,006 2,973 5,863 25,985 1,851 1,969 2,095 3,533
Acquisition and related expenses -- -- -- -- -- 1,335 406 (495)
-------- -------- -------- -------- -------- -------- -------- --------
Total selling, general and
administrative expenses 12,400 9,766 13,709 35,772 6,576 7,630 7,083 9,016
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 8,769 7,915 7,425 16,767 4,253 2,765 3,088 4,370
Other income 684 255 1,984 1,941 802 802 901 966
-------- -------- -------- -------- -------- -------- -------- --------
Income before provision for taxes 9,453 8,170 9,409 18,708 5,055 3,567 3,989 5,336
Provision for income taxes 3,839 3,332 3,701 7,840 1,733 1,535 1,794 2,477
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 5,614 $ 4,838 $ 5,708 $ 10,868 $ 3,322 $ 2,032 $ 2,195 $ 2,859
======== ======== ======== ======== ======== ======== ======== ========
Basic net income per share $ 0.43 $ 0.36 $ 0.42 $ 0.79 $ 0.28 $ 0.17 $ 0.18 $ 0.24
Diluted net income per share $ 0.43 $ 0.35 $ 0.41 $ 0.77 $ 0.27 $ 0.17 $ 0.18 $ 0.24
Weighted average number of shares:
Basic 13,005 13,592 13,647 13,768 11,946 11,949 11,965 11,972
Diluted 13,183 13,744 13,961 14,174 12,179 12,156 12,179 12,166
Effect of new accounting pronouncements
The Financial Accounting Standards Board released in June 1998, SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. This statement addresses the accounting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" (SFAS 137). SFAS 137 defers the effective date of
SFAS 133 for all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" (SFAS 138). SFAS 138 amends the
accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. The Company does not expect the
adoption of these pronouncements to have a material effect on its earnings,
comprehensive income and financial position.
Year 2000 compliance
During 1999, we undertook a project addressing the Y2K issue of computer
systems and other equipment with embedded chips or processors not being able to
properly recognize and process date-sensitive information after December 31,
1999. All phases of our Y2K project were completed by November 30, 1999. Through
March 1, 2001, all of our internal operations have functioned normally. There
have been no disruptions in business activities and therefore we have not had to
implement any contingency plans. Additionally, our key business partners appear
to be operating normally. We have not been made aware of any Y2K contingency
planning being implemented by our key business partners. However, we are
continually monitoring our operations and that of our key business partners to
ensure Y2K compliance.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and required financial statement schedules are
included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers
The following table sets forth the names, ages and positions of our
directors, executive officers and key employees:
Name Age Position
- ---- --- --------
John P. Dugan.................................. 65 Chairman of the board of directors and director
of strategic planning
Charles T. Saldarini........................... 37 Chief executive officer and vice chairman of
the board of directors
Steven K. Budd................................. 44 President and chief operating officer
Bernard C. Boyle............................... 56 Chief financial officer, executive vice
president, secretary and treasurer
Robert R. Higgins.............................. 58 Executive vice president-- client programs
Christopher Tama............................... 42 Executive vice president-- LifeCycle Ventures
Stephen Cotugno................................ 41 Executive vice president-- corporate development
John M. Pietruski(1)........................... 68 Director
Jan Martens Vecsi(1)........................... 57 Director
Gerald J. Mossinghoff(1)....................... 65 Director
- ------------------------
(1) Member of audit and compensation committees
John P. Dugan is our founder, chairman of the board of directors and
director of strategic planning. He served as our president from inception until
January 1995 and as our chief executive officer from inception until November
1997. In 1972, Mr. Dugan founded Dugan Communications, a medical advertising
agency that later became known as Dugan Farley Communications Associates Inc.
and served as its president until 1990. We were a wholly-owned subsidiary of
Dugan Farley in 1990 when Mr. Dugan became our sole stockholder. Mr. Dugan was a
founder and served as the president of the Medical Advertising Agency
Association from 1983 to 1984. Mr. Dugan also served on the board of directors
of the Pharmaceutical Advertising Council (now known as the Healthcare Marketing
Communications Council, Inc.) and was its president from 1985 to 1986. Mr. Dugan
received an M.B.A. from Boston University in 1964.
Charles T. Saldarini is our vice chairman and chief executive officer.
Joining PDI in 1987, Mr. Saldarini has held positions of ever-increasing
responsibility, becoming president of PDI in January 1995 and chief executive
officer in November 1997, leading to his present role in June 2000. In his 13
years at PDI, his contributions have spanned the full range of the our
development. He is responsible for establishing PDI's premier reputation and
making PDI the largest contract sales organization in the United States. Mr.
Saldarini is a frequent speaker on industry topics and an author, with numerous
industry publications to his credit. Prior to working at PDI, Mr. Saldarini
worked at Merrill Dow Pharmaceuticals. He received a B.A. in Political Science
from Syracuse University in 1985.
Steven K. Budd is our president and chief operating officer. Since June
2000, Mr. Budd oversees the management of PDI's internal support functions,
contributes to the development of PDI's strategic plans and serves on our
executive business development team. Since joining PDI in April 1996 as vice
president, Account Group Sales, he became executive vice president in July 1997
and chief operating officer in January 1998. From January 1994 through April
1995, Mr. Budd was employed by Innovex, Inc., as director of new business
development. From 1989 through December 1993, he was employed by Professional
Detailing Network (now known as Nelson Professional Sales, a division of Nelson
Communications, Inc.), as vice president with responsibility for building sales
teams and developing marketing strategies. Mr. Budd received a B.A. in History
and Education from Susquehanna University in 1978.
Bernard C. Boyle has served as our chief financial officer and executive
vice president since March 1997. In 1990, Mr. Boyle founded BCB Awareness, Inc.,
a firm that provided management advisory services, and served as its president
until March 1997. During that period he was also a partner in Boyle & Palazzolo,
Partners, an accounting firm. From 1982 through 1990 he served as controller and
then chief financial officer and treasurer of
30
William Douglas McAdams, Inc., an advertising agency. From 1966 through 1971,
Mr. Boyle was employed by the national accounting firm of Coopers & Lybrand
L.L.P. as supervisor/senior audit staff. Mr. Boyle received a B.B.A. in
Accounting from Manhattan College in 1965 and an M.B.A. in corporate finance
from New York University in 1972.
Robert R. Higgins became our executive vice president-client programs in
October 1998. He joined us as a district sales manager in August 1996 and became
vice president in 1997. Mr. Higgins has over 30 years experience in the
pharmaceutical industry. From 1965 to 1995, Mr. Higgins was employed by
Burroughs Wellcome Co., where he was responsible for building and managing sales
teams and developing and implementing marketing strategies. After he left
Burroughs Wellcome and before he joined us, Mr. Higgins was self-employed. Mr.
Higgins received a B.S. in biology from Kansas State University in 1964, and an
MBA from North Texas State University in 1971.
Christopher Tama joined us as executive vice president-LifeCycle Ventures
in January 2000. Prior to joining us, Mr. Tama spent 19 years with Pharmacia &
Upjohn, Searle and Novartis where he held various marketing and sales positions.
Before joining us, Mr. Tama was with Pharmacia & Upjohn for 13 years. Most
recently he was vice president-marketing for Novartis' central nervous system
therapeutic area. His marketing and sales experience range many different
therapeutic areas, both in primary care and specialty markets. He has extensive
domestic and international experience and has launched 13 products throughout
his career. He received his B.A. in Economics from Villanova University in 1981.
Stephen P. Cotugno became our executive vice president-corporate
development in January 2000. He joined us as a consultant in 1997 and in January
1998 he was hired full time as vice president-corporate development. Prior to
joining us, Mr. Cotugno was an independent financial consultant. He received his
B.A. in finance and economics from Fordham University in 1981.
Gerald J. Mossinghoff became a director in May 1998. Mr. Mossinghoff is a
former Assistant Secretary of Commerce and Commissioner of Patents and
Trademarks of the Department of Commerce (1981 to 1985) and served as President
of Pharmaceutical Research and Manufacturers of America from 1985 to 1996. Since
1997 he has been senior counsel to the law firm of Oblon, Spivak, McClelland,
Maier and Newstadt of Arlington, Virginia. Mr. Mossinghoff has been a visiting
professor of Intellectual Property Law at the George Washington University Law
School since 1997 and Adjunct Professor of Law at George Mason University School
of Law since 1997. Mr. Mossinghoff served as United States Ambassador to the
Diplomatic Conference on the Revision of the Paris Convention from 1982 to 1985
and as Chairman of the General Assembly of the United Nations World Intellectual
Property Organization from 1983 to 1985. He is also a former Deputy General
Counsel of the National Aeronautics and Space Administration (1976 to 1981). Mr.
Mossinghoff received an electrical engineering degree from St. Louis University
in 1957 and a juris doctor degree with honors from the George Washington
University Law School in 1961. He is a member of the Order of the Coif and is a
Fellow in the National Academy of Public Administration. He is the recipient of
many honors, including NASA's Distinguished Service Medal and the Secretary of
Commerce Award for Distinguished Public Service.
John M. Pietruski became a director in May 1998. Since 1990 Mr. Pietruski
has been the chairman of the board of Texas Biotechnology Corp., a
pharmaceutical research and development company. He is a retired chairman of the
board and chief executive officer of Sterling Drug Inc. where he was employed
from 1977 until his retirement in 1988. Mr. Pietruski is a member of the boards
of directors of Hershey Foods Corporation, GPU, Inc., and Lincoln National
Corporation. Mr. Pietruski graduated Phi Beta Kappa with a B.S. in business
administration with honors from Rutgers University in 1954 and currently serves
as a regent of Concordia College.
Jan Martens Vecsi became a director in May 1998. Ms. Vecsi is the
sister-in-law of John P. Dugan, our chairman. Ms. Vecsi was employed by
Citibank, N.A. from 1967 through 1996 when she retired. Starting in 1984 she
served as the senior human resources officer and vice president of the Citibank
Private Bank. Ms. Vecsi received a B.A. in psychology and elementary education
from Immaculata College in 1965.
Our board of directors is divided into three classes. Each year the
stockholders elect the members of one of the three classes to a three-year term
of office. Messrs. Dugan and Mossinghoff serve in the class whose term expires
in 2001; Ms. Vecsi serves in the class whose term expires in 2002, and Messrs.
Saldarini and Pietruski serve in the class whose term expires in 2003.
31
Our board of directors has an audit committee and a compensation
committee. The audit committee reviews the scope and results of the audit and
other services provided by our independent accountants and our internal
controls. The compensation committee is responsible for the approval of
compensation arrangements for our officers and the review of our compensation
plans and policies.
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten-percent stockholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
Forms 5 were required, we believe that all Section 16(a) filing requirements
applicable to our officers and directors were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Summary compensation. The following table sets forth certain information
concerning compensation paid for services in all capacities awarded to, earned
by or paid to our chief executive officer and the other four most highly
compensated executive officers during 2000, 1999 and 1998 whose aggregate
compensation exceeded $100,000.
Annual compensation Long-term compensation
-------------------------------- -----------------------
Shares
of
common
Restricted stock All
Name and Principal Other annual stock underlying other
Position Salary Bonus compensation awards$(1) options compensation
- ----------------------- ------ ----- ------------ ---------- ---------- ------------
Charles T. Saldarini
President and chief
executive officer
2000............ 294,594 506,731 8,713 -- -- 6,203
1999............ 283,254 450,000 5,657 -- -- 2,145
1998............ 233,744 275,000 2,394 -- -- --
Stephen K. Budd
Chief operating
officer and executive
vice president
2000............ 225,000 243,003 2,891 104,144 -- 4,744
1999............ 182,053 216,409 2,229 83,591 25,000 3,524
1998............ 168,678 178,000 2,302 -- -- 3,373
Bernard C. Boyle
Chief financial
officer, executive
vice president,
secretary and
treasurer
2000............ 187,500 207,211 4,706 88,805 -- 4,010
1999............ 167,975 180,180 3,350 77,220 20,000 3,256
1998............ 155,833 165,000 4,170 -- -- 825
Robert R. Higgins
Executive vice
president
2000............ 141,667 114,042 3,456 48,875 -- 3,000
1999............ 125,567 73,238 1,977 31,387 15,000 2,396
1998............ 101,186 45,000 2,104 -- 7,500 1,373
Christopher Tama(2)
Executive vice
president
2000............ 167,708 210,000 1,828 90,000 5,000 --
1999............ -- -- -- -- -- --
1998............ -- -- -- -- -- --
- ------------------------
(1) For the years ended December 31, 2000 and 1999, a portion of the named
executive officers' annual bonus was paid in restricted stock. The number of
shares were calculated by dividing the portion of bonus expense attributable to
restricted stock by a trailing 20-day average stock price on December 31, 2000
and 1999, which was $99.42 and $27.25, respectively. The fair market value of
the shares owned by the named executive officers on December 31, 2000 at the end
of 2000, based upon the
32
closing price of our common stock of $105.766 on that date, was as follows: Mr.
Budd -- $435,121.32 (4,114 shares); Mr. Boyle -- $394,084 (3,726 shares); Mr.
Higgins -- $173,668 (1,642 shares); and Mr. Tama -- $95,718 (905 shares).
(2) Mr. Tama joined us as executive vice president in January 2000.
Option grants. The following table sets forth certain information
regarding options granted by us in 2000 to each of the executives named in the
Summary Compensation Table.
Option Grants in Last Fiscal Year
-------------------------------------------------------------------------------------
Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Shares Total Options Price Appreciation
Underlying Granted Exercise for Option Term (1)
Options to Employees Price Expiration ----------------------
Name Granted in Fiscal Year ($/share) Date 5% 10%
- -------------------------------- ------------- --------------- ------------- ---------- ---------- ---------
Charles T. Saldarini............ -- -- -- -- -- --
Steven K. Budd.................. -- -- -- -- -- --
Bernard C. Boyle................ -- -- -- -- -- --
Robert R. Higgins............... -- -- -- -- -- --
Christopher Tama................ 5,000 1.8% $29.53 1/17/10 $92,056 $235,316
- -------------------
(1) Potential realizable values are net of exercise price but before taxes,
and are based on the assumption that our common stock appreciates at the
annual rate shown (compounded annually) from the date of grant until the
expiration date of the options. These numbers are calculated based on
Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Actual gains, if any,
on stock option exercises are dependent on our future financial
performance, overall market conditions and the option holder's continued
employment through the vesting period. This table does not take into
account any appreciation in the price of the common stock from the date of
grant to the date of this Form 10-K.
Option exercises and year-end option values. The following table provides
information with respect to options exercised by the Named Executive Officers
during 2000 and the number and value of unexercised options held by the Named
Executive Officers as of December 31, 2000.
Aggregated Option Exercise in Last Fiscal Year and Year-End Option Values
Number of Shares Underlying Value of Unexercised In-the-
Unexercised Options at Fiscal Money Options At Fiscal
Year-End Year-End (2)
----------------------------- ----------------------------
Shares Acquired
Name on Exercise (#) Value Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------------ ------------- -------------- ----------- --------------
Charles T. Saldarini -- -- -- -- -- --
Steven K. Budd 39,189 $4,317,621 8,333 16,667 $ 654,821 $ 1,309,642
Bernard C. Boyle 22,992 2,693,979 6,667 13,333 523,857 1,047,713
Robert R. Higgins 10,000 909,832 -- 12,500 -- 1,010,200
Christopher Tama -- -- -- 5,000 -- 381,180
- ---------
(1) For the purposes of this calculation, value is based upon the difference
between the exercise price of the options and the stock price at date of
exercise.
(2) For the purposes of this calculation, value is based upon the difference
between the exercise price of the exercisable and unexercisable options
and the stock price at December 31, 2000 of $105.766 per share.
Employment contracts
In January 1998, we entered into an agreement with John P. Dugan providing
for his appointment as chairman of the board and director of strategic planning.
The agreement provides for an annual salary of $125,000, no cash bonuses and for
participation in all executive benefit plans.
In April 1998, we entered into an employment agreement with Charles T.
Saldarini providing for his employment, as president and chief executive officer
for a term expiring on February 28, 2003 subject to automatic one-year renewals
unless either party gives written notice 180 days prior to the end of the then
current term of the agreement. The agreement provides for an annual base salary
of $275,000 and for participation in all executive benefit plans. The agreement
also provides that Mr. Saldarini will be entitled to bonus and incentive
compensation awards as determined by the compensation committee. Further, the
agreement provides, among other things, that, if
33
his employment is terminated without cause (as defined) or if Mr. Saldarini
terminates his employment for good reason (as defined), we will pay him an
amount equal to the salary which would have been payable over the unexpired term
of his employment agreement.
In March 1998, we entered into employment agreements with each of Messrs.
Boyle and Budd, providing for Mr. Boyle's employment as chief financial officer
and Mr. Budd's employment as chief operating officer. Mr. Boyle's agreement
terminates on December 31, 2001 and Mr. Budd's agreement terminates on March 31,
2002. Each agreement is subject to automatic one-year renewals unless either
party gives written notice 180 days prior to the end of the then current term of
the agreement. The agreements provide for an annual base salary of $165,000 for
Mr. Boyle and $178,605 for Mr. Budd and for their participation in all executive
benefit plans. The agreements also provide that Messrs. Boyle and Budd are
entitled to bonus and incentive compensation awards as determined by the
compensation committee. Each agreement also provides, among other things, that,
if we terminate the employee's employment without cause (as defined) or the
employee terminates his employment for good reason (as defined), we will pay the
employee an amount equal to the salary which would have been payable over the
unexpired term of the employment agreement.
In January 2000, we entered into an employment agreement with Mr. Tama
providing for Mr. Tama's employment as executive vice president -- Life Cycle
Ventures. Mr. Tama's agreement terminates on December 31, 2002. The agreement is
subject to automatic one-year renewals unless either party gives written notice
180 days prior to the end of the then current term of the agreement. The
agreements provide for an annual base salary of $175,000 and for Mr. Tama's
participation in all executive benefit plans. The agreements also provide that
Mr. Tama is entitled to bonus and incentive compensation awards as determined by
the compensation committee. The agreement also provides, among other things,
that, if we terminate the employee's employment without cause (as defined) or
the employee terminates his employment for good reason (as defined), we will pay
the employee an amount equal to the salary which would have been payable over
the unexpired term of the employment agreement.
In September 2000, we entered into employment agreements with Mr. Cotugno
providing for Mr. Cotugno's employment as executive vice president - corporate
development. Mr. Cotugno 's agreement terminates on August 31, 2002. The
agreement is subject to automatic one-year renewals unless either party gives
written notice 180 days prior to the end of the then current term of the
agreement. The agreements provide for an annual base salary of $155,000 and for
Mr. Cotugno's participation in all executive benefit plans. The agreements also
provide that Mr. Cotugno is entitled to bonus and incentive compensation awards
as determined by the compensation committee. The agreement also provides, among
other things, that, if we terminate the employee's employment without cause (as
defined) or the employee terminates his employment for good reason (as defined),
we will pay the employee an amount equal to the salary which would have been
payable over the unexpired term of the employment agreement.
Compensation committee interlocks and insider participation in compensation
decisions
None of the directors serving on the compensation committee of the board
of directors is employed by us. In addition, none of our directors or executive
officers is a director or executive officer of any other corporation that has a
director or executive officer who is also a member of our board of directors.
Stock compensation plans
2000 Omnibus Incentive Compensation Plan
On May 5, 2000 our board of directors approved our 2000 Omnibus Incentive
Compensation Plan. The purpose of the Omnibus Plan is to provide a flexible
framework that will permit the board to develop and implement a variety of
stock-based incentive compensation programs based on our changing needs, our
competitive market and the regulatory climate. The maximum number of shares as
to which awards or options may at any time be granted under the Omnibus Plan is
1.5 million shares of the our common stock. The Omnibus Plan is administered by
the compensation committee of the board, which is responsible for developing and
implementing specific stock-based plans that are consistent with the intent and
specific terms of the framework created by the Omnibus Plan. Eligible
participants under the Omnibus Plan include our officers and other employees,
members of our board, and outside consultants. The right to grant awards under
the Omnibus Plan will terminate upon the expiration of 10 years after
34
the date the Omnibus Plan was adopted. No Participant may be granted more than
100,000 shares of company stock from all awards under the Omnibus Plan.
1998 Stock Option Plan
In order to attract and retain persons necessary for our success, in March
1998, our board of directors adopted our 1998 stock option plan reserving for
issuance up to 750,000 shares. Officers, directors, key employees and
consultants are eligible to receive incentive and/or non-qualified stock options
under this plan. The plan, which has a term of ten years from the date of its
adoption, is administered by the compensation committee. The selection of
participants, allotment of shares, determination of price and other conditions
relating to the purchase of options is determined by the compensation committee
in its sole discretion. Incentive stock options granted under the plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the common stock on the
date of the grant, except that the term of an incentive stock option granted
under the plan to a stockholder owning more than 10% of the outstanding common
stock may not exceed five years and its exercise price may not be less than 110%
of the fair market value of the common stock on the date of the grant.
At December 31, 2000, options for an aggregate of 653,921 shares were
outstanding under our stock option plans, including 25,000 granted to Steven
Budd, our president and chief operating officer, 20,000 granted to Bernard
Boyle, our chief financial officer, 12,500 granted to Robert Higgins, our
executive vice president of client programs, 16,670 granted to Stephen Cotugno,
our executive vice president of corporate development, 5,000 granted to
Christopher Tama, our executive vice president - LifeCycle Ventures and 18,750
granted to each of Gerald J. Mossinghoff, John M. Pietruski and Jan Martens
Vecsi, our outside directors. In addition, as of December 31, 2000, options to
purchase 286,634 shares of common stock had been exercised.
Compensation of directors
Each non-employee director receives an annual director's fee of $20,000,
payable quarterly in arrears, plus $1,000 for each meeting attended in person
and $500 for each meeting attended telephonically and reimbursement for travel
costs and other out-of-pocket expenses incurred in attending each directors'
meeting. In addition, committee members receive $500 for each committee meeting
attended in person and $200 for each committee meeting attended telephonically.
Under our stock option plans, each non-employee director is granted options to
purchase 10,000 shares upon first being elected to our board of directors. In
addition, each non-employee director will receive options to purchase an
additional 7,500 shares of common stock on the date of our annual stockholders'
meeting. All options have an exercise price equal to the fair market value of
the common stock on the date of grant and vest one-third on the date of grant
and one-third at the end of each subsequent year of service on the board.
401(k) plan
We maintain two 401(k) retirement plans intended to qualify under sections
401(a) and 401(k) of the Internal Revenue Code. These 401(k) plans are defined
contribution plans. Under one plan, we committed to make mandatory contributions
to the 401(k) plan to match employee contributions up to a maximum of 2% of each
participating employee's annual wages. Under the other 401(k) plan, we committed
to match 100% of the first $1,250 contributed by each employee, 75% of the next
$1,250, 50% of the next $1,250 and 25% of the next $1,250 contributed. In
addition we can make discretionary contributions to this plan. Our contribution
to the 401(k) plan for 2000 was approximately $1.2 million.
Limitation of directors' liability and indemnification
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors of corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Our certificate of incorporation limits the liability of our directors to
the fullest extent permitted by Delaware law.
Our certificate of incorporation provides mandatory indemnification rights
to any officer or director who, by reason of the fact that he or she is an
officer or director, is involved in a legal proceeding of any nature. These
indemnification rights include reimbursement for expenses incurred by an officer
or director in advance of the final disposition of a legal proceeding in
accordance with the applicable provisions of the DGCL. We have been informed
that, in the opinion of the Securities and Exchange Commission, indemnification
for liabilities under the Securities Act is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
35
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification by us is
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 23, 2001 by:
o each person known to us to be the beneficial owner of more than 5% of
our outstanding shares;
o each of our directors;
o each executive officer named in the Summary Compensation Table
above;
o all of our directors and executive officers as a group.
Except as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all shares of common stock owned by them.
All information with respect to beneficial ownership has been furnished to us by
the respective stockholder. The address for each of Messrs. Dugan and Saldarini
is c/o Professional Detailing, Inc., 10 Mountainview Road, Upper Saddle River,
New Jersey 07458.
Number of Shares Percentage of Shares
Name of Beneficial Owner Beneficially Owned(1) Beneficially Owned
- ------------------------ --------------------- --------------------
Executive officers and directors:
John P. Dugan .............................................. 4,909,878 35.4%
Charles T. Saldarini ....................................... 800,000 5.8%
Steven K. Budd ............................................. 113,848 (2) *
Bernard C. Boyle ........................................... 10,394 (3) *
Robert Higgins ............................................. 5,491 *
Christopher Tama ........................................... 2,572 (4) *
John M. Pietruski .......................................... 14,500 (5) *
Jan Martens Vecsi .......................................... 12,500 (6) *
Gerald J. Mossinghoff ...................................... 12,500 (6) *
All executive officers and directors as a group (11 persons) 5,783,501 (7) 41.6%
5% stockholders:
Driehaus Capital Management, Inc(8) ........................ 878,513 6.3%
25 East Erie Street
Chicago, IL 60611-2703
Navellier & Associates Inc(9) .............................. 707,514 5.1%
One East Liberty, Third Floor
Reno, NV 89501
- ---------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options and warrants held by that person
that are currently exercisable or exercisable within 60 days of February
28, 2001 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes 8,333 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(3) Includes 6,667 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(4) Includes 1,667 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(5) Includes 12,500 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(6) Represents shares issuable pursuant to options exercisable within 60 days
of the date of this report.
(7) Includes 54,170 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(8) This information was derived from the Schedule 13g filed by the reporting
person.
(9) This information was derived from the Schedule 13f filed by the reporting
person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with our efforts to recruit sales representatives, we place
advertisements in various print publications. These ads are placed on our behalf
through Boomer & Son, Inc., which receives commissions from the publications.
Prior to 1998, B&S was wholly-owned by John P. Dugan, our chairman of the board.
At the end of 1997 Mr. Dugan transferred his interest in B&S to his son, Thomas
Dugan, and daughter-in-law, Kathleen Dugan.
36
John P. Dugan is not actively involved in B&S; however, his son, Thomas Dugan,
is active in B&S. For the year ended December 31, 2000 we purchased $2.1 million
of advertising through B&S and B&S received commissions of approximately
$380,000. All ads were placed at the stated rates set by the publications in
which they appeared. In addition, we believe that the amounts paid to B&S were
no less favorable than would be available in an arms-length negotiated
transaction with an unaffiliated entity.
Peter Dugan, the son of John P. Dugan, our chairman of the board, is
employed by us as executive director of marketing. In 2000, compensation paid or
accrued to Peter Dugan was $192,820.
In April 1998, we loaned $1.4 million to our president and chief executive
officer, Charles T. Saldarini. The proceeds of this loan were used by Mr.
Saldarini to pay income taxes relating to his receipt of shares of common stock
in January 1997. This loan is for a term of three years, bears interest at a
rate equal to 5.4% per annum payable quarterly in arrears and is secured by a
pledge of the shares held by Mr. Saldarini. In February 2000, Mr. Saldarini
repaid this loan in full.
37
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)(1) Financial Statements - See Index to Financial Statements on page F-1
of this report.
(a)(2) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included elsewhere in
the financial statements or notes thereto.
(a) (3) Exhibits
Exhibit
No. Description
--- -----------
3.1. Certificate of Incorporation of Professional Detailing, Inc.(1)
3.2. By-Laws of Professional Detailing, Inc.(1)
4.1. Specimen Certificate Representing the Common Stock(1)
10.1. Form of 1998 Stock Option Plan(1)
10.2 Form of 2000 Omnibus Incentive Compensation Plan(2)
10.3. Office Lease for Upper Saddle River, NJ corporate headquarters(1)
10.4. Form of Employment Agreement between the Company and Charles T. Saldarini(1)
10.5. Agreement between the Company and John P. Dugan(1)
10.6. Form of Employment Agreement between the Company and Steven K. Budd(1)
10.7. Form of Employment Agreement between the Company and Bernard C. Boyle(1)
10.8. Form of Employment Agreement between the Company and Christopher Tama*
10.9. Form of Employment Agreement between the Company and Stephen Cotugno*
10.10. Form of Loan Agreements between the Company and Steven Budd (3)
21.1. Subsidiaries of the Registrant*
23.1. Consent of PricewaterhouseCoopers LLP*
23.2 Consent of Grant Thornton LLP*
-----------------------
* Filed herewith
(1) Filed as an exhibit to our Registration Statement on Form S-1 (File
No 333-46321), and incorporated herein by reference.
(2) Filed as an Exhibit to our definitive proxy statement dated May 10
2000, and incorporated herein by reference.
(3) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1999, and incorporated herein by reference.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the Quarter ended December 31,
2000.
38
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Upper Saddle River, State
of New Jersey, on the 28th day of March, 2001.
PROFESSIONAL DETAILING, INC.
/s/ Charles T. Saldarini
------------------------
Charles T. Saldarini,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Form 10-K has been signed by the following persons in the capacities
indicated and on the 28th day of March, 2001.
Signature Title
--------- -----
/s/ John P. Dugan Chairman of the Board of Directors
- ------------------------------------
John P. Dugan
Vice Chairman of the Board of Directors and
/s/ Charles T. Saldarini Chief Executive Officer
- ------------------------------------
Charles T. Saldarini
/s/ Steven K. Budd President and Chief Operating Officer
- ------------------------------------
Steven K. Budd
Chief Financial Officer (principal accounting
/s/ Bernard C. Boyle and financial officer)
- ------------------------------------
Bernard C. Boyle
/s/ Gerald J. Mossinghoff Director
- ------------------------------------
Gerald J. Mossinghoff
/s/ John M. Pietruski Director
- ------------------------------------
John M. Pietruski
/s/ Jan Martens Vecsi Director
- ------------------------------------
Jan Martens Vecsi
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
Page
----
PROFESSIONAL DETAILING, INC.
Reports of Independent Accountants F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Stockholders' Equity F-7
Notes to Consolidated Financial Statements F-8
Schedule II. Valuation and Qualifying Accounts F-21
F-1
Report of Independent Accountants
To the Board of Directors and
Stockholders of Professional Detailing, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated financial statements listed in the index appearing
under Item 14(a)(1) and 14(a)(2) on page 38, present fairly, in all material
respects, the financial position of Professional Detailing, Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(1) and 14(a)(2) on page
38, present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We did not audit the financial statements of TVG, Inc. a
wholly-owned subsidiary, which statements reflects revenues of $18,340,216 for
the year ended December 31, 1998. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for TVG, Inc. is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
February 13, 2001
F-2
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
TVG, Inc.
We have audited the accompanying balance sheet of TVG, Inc. (a Delaware
corporation), as of December 31, 1998, and the related statement of income and
comprehensive income, changes in shareholders' equity, and cash flows for the
year then ended. These financial statements (not presented separately herein)
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 generally accepted auditing
standards. 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 (not presented
separately herein) present fairly, in all material respects, the financial
position of TVG, Inc., as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
February 3, 1999
F-3
PROFESSIONAL DETAILING, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
2000 1999
--------- ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 109,000 $ 57,787
Short-term investments .................................................. 4,907 1,677
Inventory, net .......................................................... 36,385 --
Accounts receivable, net of allowance for doubtful accounts of
$250 and $0 as of December 31, 2000 and 1999, respectively ............ 84,529 28,941
Unbilled costs and accrued profits on contracts in progress ............. 2,953 2,258
Deferred training ....................................................... 4,930 999
Other current assets .................................................... 4,541 2,439
Deferred tax asset ...................................................... 4,758 352
--------- ---------
Total current assets ...................................................... 252,003 94,453
Net property, plant & equipment ........................................... 9,965 3,707
Other long-term assets .................................................... 8,257 4,800
--------- ---------
Total assets .............................................................. $ 270,225 $ 102,960
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 31,328 $ 6,034
Accrued rebates and sales discounts ..................................... 24,368 --
Accrued incentives ...................................................... 19,824 10,361
Accrued salaries and wages .............................................. 6,568 3,871
Unearned contract revenue ............................................... 23,813 17,673
Other accrued expenses .................................................. 25,382 3,370
--------- ---------
Total current liabilities ................................................. 131,283 41,309
--------- ---------
Long-term liabilities:
Deferred compensation ................................................... 169 --
Deferred tax liability .................................................. 663 575
Other long-term liabilities ............................................. -- 256
--------- ---------
Total long-term liabilities ............................................... 832 831
--------- ---------
Total liabilities ......................................................... $ 132,115 $ 42,140
--------- ---------
Commitments and contingencies (note 17)
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares authorized; shares
issued and outstanding, 2000 - 13,837,390; 1999 - 11,975,097;
restricted $.01 par value; shares issued and outstanding, 2000 - 7,972;
1999 - 0 .............................................................. $ 138 $ 120
Preferred stock, $.01 par value, 5,000,000 shares authorized, no
shares issued and outstanding ......................................... -- --
Additional paid-in capital ................................................ 96,945 47,413
Additional paid-in capital, restricted .................................... 217 --
Retained earnings ......................................................... 41,654 14,634
Accumulated other comprehensive (loss) income ............................. (34) 92
Unamortized compensation costs ............................................ (810) --
Deferred compensation ..................................................... -- (11)
Loan to officer ........................................................... -- (1,428)
--------- ---------
Total stockholders' equity ................................................ $ 138,110 $ 60,820
--------- ---------
Total liabilities & stockholders' equity .................................. $ 270,225 $ 102,960
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-4
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
-------- -------- --------
2000 1999 1998
-------- -------- --------
(in thousands, except for per share and statistical data)
Revenue
Service, net ................................................ $315,867 $174,902 $119,421
Product, net ................................................ 101,008 -- --
-------- -------- --------
Total revenue, net ........................................ 416,875 174,902 119,421
-------- -------- --------
Cost of goods and services
Program expenses (including related party amounts of
$2,117, $2,024 and $1,753 for the periods ended
December 31, 2000, 1999 and 1998, respectively) ............ 235,355 130,121 87,840
Cost of goods sold .......................................... 68,997 -- --
-------- -------- --------
Total cost of goods and services .......................... 304,352 130,121 87,840
-------- -------- --------
Gross profit .................................................. 112,523 44,781 31,581
Compensation expense .......................................... 32,820 19,611 15,779
Other general, selling & administrative expenses .............. 38,827 9,448 6,546
Acquisition and related expenses .............................. -- 1,246 --
-------- -------- --------
Total general, selling & administrative expenses .............. 71,647 30,305 22,325
-------- -------- --------
Operating income .............................................. 40,876 14,476 9,256
Other income, net ............................................. 4,864 3,471 2,273
-------- -------- --------
Income before provision for taxes ............................. 45,740 17,947 11,529
Provision for income taxes .................................... 18,712 7,539 1,691
-------- -------- --------
Net income .................................................... $ 27,028 $ 10,408 $ 9,838
======== ======== ========
Basic net income per share .................................... $ 2.00 $ 0.87 $ 0.92
-------- -------- --------
Diluted net income per share .................................. $ 1.96 $ 0.86 $ 0.91
-------- -------- --------
Basic weighted average number of shares outstanding ........... 13,503 11,958 10,684
-------- -------- --------
Diluted weighted average number of shares outstanding ......... 13,773 12,167 10,814
-------- -------- --------
Pro forma data (unaudited) (note 19):
Income before provision for taxes, as reported ................ $ 17,947 $ 11,529
Pro forma provision for income tax ............................ 7,677 4,611
-------- --------
Pro forma net income .......................................... $ 10,270 $ 6,918
======== ========
Pro forma basic net income per share .......................... $ 0.86 $ 0.65
======== ========
Pro forma diluted net income per share ........................ $ 0.84 $ 0.64
======== ========
Pro forma basic weighted average number of shares outstanding . 11,958 10,684
======== ========
Pro forma diluted weighted average number of shares outstanding 12,167 10,814
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
PROFESSIONAL DETAILING, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash Flows From Operating Activities
Net income from operations ...................................... $ 27,028 $ 10,408 $ 9,838
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 2,077 1,155 697
Deferred rent and compensation ............................ -- (7) (106)
Loss on disposal of equipment ............................. -- -- 88
Deferred compensation ..................................... 11 45 45
Deferred taxes, net ....................................... (4,514) 642 (336)
Reserve for inventory obsolescence and bad debt ........... 353 -- --
Loss on other investments ................................. 2,500 -- --
Other changes in assets and liabilities, net of acquisitions:
(Increase) in accounts receivable ......................... (55,838) (19,071) (1,750)
(Increase) in inventory ................................... (36,488) -- --
(Increase) decrease in unbilled costs ..................... (695) 1,321 111
(Increase) decrease in deferred training .................. (3,931) 223 (815)
(Increase) in other current assets ........................ (2,141) (1,658) (406)
(Increase) in other long-term assets ...................... (2,931) (469) (543)
Increase in accounts payable .............................. 25,294 3,978 477
Increase in accrued rebates and sales discounts ........... 24,368 -- --
Increase in accrued liabilities ........................... 11,567 3,960 4,792
Increase in unearned contract revenue ..................... 6,140 7,402 615
(Decrease) increase in payable to affiliate ............... -- (56) 56
Increase (decrease) in other current liabilities .......... 26,394 (2,279) 2,453
Increase in other deferred compensation ................... 169 -- --
(Decrease) in other long-term liabilities ................. (256) -- (162)
--------- --------- ---------
Net cash provided by operating activities ....................... 19,107 5,594 15,054
--------- --------- ---------
Cash Flows From Investing Activities
Sale of short-term investments ............................ 1,551 832 (1,189)
Purchase of short-term investments ........................ (4,907) -- --
Investments in In2Focus and iPhysicianNet ................. (3,260) -- --
Purchase of property and equipment ........................ (7,865) (1,442) (2,196)
Repayments of advances from affiliate ..................... -- -- 27
Cash paid for acquisition ................................. -- (4,100) --
--------- --------- ---------
Net cash used in investing activities ........................... (14,481) (4,710) (3,358)
--------- --------- ---------
Cash Flows From Financing Activities
Payments on note payable .................................. -- -- (68)
Distributions to S corporation stockholders ............... (8) (670) (6,200)
Net proceeds from issuance of common stock ................ 41,584 458 46,431
Net proceeds from exercise of stock options ............... 3,583 -- --
Tax benefit relating to employee compensation programs .... -- 126 --
Loans from stockholders ................................... -- -- (1,285)
Loan to stockholder ....................................... 1,428 -- (1,428)
Repayments of stockholders loans .......................... -- -- 81
--------- --------- ---------
Net cash provided by (used in) financing activities ............. 46,587 (86) 37,531
--------- --------- ---------
Net increase in cash and cash equivalents ....................... 51,213 798 49,227
Cash and cash equivalents - beginning ........................... 57,787 56,989 7,762
--------- --------- ---------
Cash and cash equivalents - ending .............................. $ 109,000 $ 57,787 $ 56,989
========= ========= =========
Cash paid for interest .......................................... $ 19 $ 4 $ 29
--------- --------- ---------
Cash paid for taxes ............................................. $ 18,552 $ 7,864 $ 1,699
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-6
PROFESSIONAL DETAILING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Treasury Stock Additional Retained
------------------- -------------------- Paid in Earnings
Shares Amount Shares Amount Capital (Deficit)
--------- ------ -------- -------- -------- ---------
Balance - December 31, 1997 9,110 $ 91 389 $ (812) $ 5,423 $ (2,926)
Net income for the year ended December 31, 1998 9,838
Unrealized investment holding (losses), net
Comprehensive (loss)
Issuance of common stock 3,225 32 46,399
Stockholders' distribution (4,184) (2,016)
Amortization of deferred compensation expense
Loan to officer
--------- ------ -------- -------- -------- --------
Balance - December 31, 1998 12,335 123 389 (812) 47,638 4,896
--------- ------ -------- -------- -------- --------
Net income for the year ended December 31, 1999 10,408
Unrealized investment holding gains, net
Comprehensive income
Exercise of common stock options 29 458
Retirement of TVG treasury shares (389) (3) (389) 812 (809)
Amortization of deferred compensation expense
Stockholders' distribution (670)
Tax benefit relating to employee
compensation programs 126
--------- ------ -------- -------- -------- --------
Balance - December 31, 1999 11,975 120 -- -- 47,413 14,634
--------- ------ -------- -------- -------- --------
Net income for the year ended December 31, 2000 27,028
Unrealized investment holding losses, net of tax
Comprehensive income
Issuance of common stock 1,609 16 41,568
Issuance of officers' restricted common stock 8 217
Exercise of common stock options 253 2 3,581
Tax benefit of nonqualified option exercise 4,383
Amortization of deferred compensation expense
Stockholders' distribution (8)
Realized gain on sale of investment holdings
Unamortized compensation costs
Repayment of loan by officer
--------- ------ -------- -------- -------- --------
Balance - December 31, 2000 13,845 $ 138 -- $ -- $ 97,162 $ 41,654
========= ====== ======== ======== ======== ========
Accumulated
Other Unamortized
Comprehensive Deferred Loan to Compensation
Income (Loss) Compensation Officer Costs Total
------------- ------------ ------- ------------ ---------
Balance - December 31, 1997 $ 54 $ (102) $ (81) $ -- $ 1,647
Net income for the year ended December 31, 1998 9,838
Unrealized investment holding (losses), net (49) (49)
---------
Comprehensive (loss) 9,789
Issuance of common stock 46,431
Stockholders' distribution (6,200)
Amortization of deferred compensation expense 45 45
Loan to officer (1,347) (1,347)
------ ------- ------ ------- ---------
Balance - December 31, 1998 5 (57) (1,428) -- 50,365
------ ------- ------ ------- ---------
Net income for the year ended December 31, 1999 10,408
Unrealized investment holding gains, net 87 87
---------
Comprehensive income 10,495
Exercise of common stock options 458
Retirement of TVG treasury shares --
Amortization of deferred compensation expense 46 46
Stockholders' distribution (670)
Tax benefit relating to employee
compensation programs 126
------ ------- ------ ------- ---------
Balance - December 31, 1999 92 (11) (1,428) -- 60,820
------ ------- ------ ------- ---------
Net income for the year ended December 31, 2000 27,028
Unrealized investment holding losses, net of tax (34) (34)
---------
Comprehensive income 26,994
Issuance of common stock 41,584
Issuance of officers' restricted common stock 217
Exercise of common stock options 3,583
Tax benefit of nonqualified option exercise 4,383
Amortization of deferred compensation expense 11 11
Stockholders' distribution (8)
Realized gain on sale of investment holdings (92) (92)
Unamortized compensation costs (810) (810)
Repayment of loan by officer 1,428 1,428
------ ------- ------ ------- ---------
Balance - December 31, 2000 $ (34) $ -- $ -- $ (810) $ 138,110
====== ======= ====== ======= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-7
1. Nature of Business and Significant Accounting Policies
Nature of Business
Professional Detailing, Inc. ("PDI" and, together with its wholly owned
subsidiaries, the "Company") is a leading provider of comprehensive sales and
marketing services on an outsourced basis to the United States pharmaceutical
industry. See note 2 and 21.
Principles of Consolidation
The consolidated financial statements include accounts of PDI and its
wholly owned subsidiaries LifeCycle Ventures, Inc. ("LCV"), TVG, Inc. ("TVG"),
ProtoCall, Inc. ("ProtoCall"), and PDI Investment Company, Inc. ("PDII"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Significant estimates include
accrued incentives payable to employees, deferred taxes, allowances for bad debt
and inventory obsolescence, sales returns and other sales rebates and discounts.
Revenue Recognition
Service Revenue
The Company uses a variety of contract structures with its clients.
Product detailing contracts generally are for a term of one year, although some
contracts have terms of up to three years. Generally, contracts provide for a
fee to be paid to the Company based on its ability to deliver a specified
package of services. In the case of product detailing programs, the Company may
also be entitled to additional fees based upon the success of the program and/or
subject to penalties for failing to meet stated performance benchmarks.
Performance benchmarks usually are a minimum number of sales representatives or
minimum number of calls. The Company's contracts also usually provide that it is
entitled to a fee for each sales representative hired by the client during or at
the conclusion of a program.
Most contracts may be terminated by the client for any reason on 30 to 90
days notice. Many of the Company's contracts provide for the client to pay the
Company a termination fee if a contract is terminated without cause. These
penalties may not act as an adequate deterrent to the termination of any
contract and may not offset the revenue which the Company could have earned
under the contract had it not been terminated and it may not be sufficient to
reimburse the Company for the costs which it may incur as a result of its
termination. Contracts may also be terminated for cause if the Company fails to
meet stated performance benchmarks. The loss or termination of a large contract
or of multiple contracts could adversely affect the Company's future revenue and
profitability. To date, no programs have been terminated for cause.
Revenue is earned primarily by performing services under contracts and is
recognized as the services are performed and the right to receive payment for
such services is assured. In the case of contracts relating to product detailing
programs, revenue is recognized net of any potential penalties until the
performance criteria eliminating the penalties have been achieved. Performance
incentives as well as termination payments are recognized as revenue in the
period earned and when payment of the incentive or other payment is assured.
Program expenses consist primarily of the costs associated with the
execution of product detailing programs or other marketing and promotional
services identified in the contract. Program expenses include all personnel
costs and other costs, including facility rental fees, honoraria and travel
expenses, associated with executing a product detailing or other marketing or
promotional program, as well as the initial direct costs associated with
staffing a product detailing program. Personnel costs, which constitute the
largest portion of program expenses, include all labor related costs, such as
salaries, bonuses, fringe benefits and payroll taxes for the sales
representatives, managers and professional staff who are directly responsible
for the rendering of services in connection with a particular program. Initial
direct program costs are the costs associated with initiating a product
detailing program, such as recruiting, hiring and training the sales
representatives who staff a particular product detailing program. All
F-8
personnel costs and initial direct program costs, other than training costs, are
expensed as incurred. Training costs include the costs of training the sales
representatives and managers on a particular product detailing program so that
they are qualified to properly render the services specified in the related
contract. Training costs are deferred and amortized on a straight-line basis
over the shorter of (i) the life of the contract to which they relate or (ii) 12
months. Expenses that are directly reimbursable are netted for income statement
purposes. Expenses related to the product detailing of the Company's own product
are classified in the other selling general and administrative expenses in the
consolidated statements of operations.
Product Revenue
Product revenues are recognized when products are shipped and title to
products is transferred to the customer. The Company has adopted Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, the
effects of which are immaterial for all periods presented. Provision is made at
the time of sale for all discounts and estimated sales allowances. The Company
prepares its estimates for sales returns and allowances, discounts and rebates
based primarily on historical experience updated for changes in facts and
circumstances, as appropriate.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, contract payments
receivable, accounts payable and other financial instruments approximate their
fair values principally because of the short-term maturities of these
instruments.
Unbilled Costs and Accrued Profits and Unearned Contract Revenue
In general, contractual provisions, including predetermined payment
schedules or submission of appropriate billing detail, establish the
prerequisites for billings. Unbilled costs and accrued profits arise when
services have been rendered and payment is assured but clients have not been
billed. These amounts are classified as a current asset. Normally, in the case
of detailing contracts, the clients agree to pay the Company a portion of the
fee due under a contract in advance of performance of services because of large
recruiting and employee development costs associated with the beginning of a
contract. The excess of amounts billed over revenue recognized represents
unearned contract revenue, which is classified as a current liability.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts, highly
liquid investment instruments and certificates of deposit with an original
maturity of three months or less at the date of purchase.
Investments
The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Available-for-sale investments are valued at fair market
value based on quoted market values, with the resulting adjustments, net of
deferred taxes, reported as a separate component of stockholders' equity as
accumulated other comprehensive income. For the purposes of determining gross
realized gains and losses, the cost of securities sold is based upon specific
identification. The Company has certain other investments, which are included in
other long-term assets. See Note 6.
Inventory
Inventory is valued at the lower of cost or fair value. Cost is determined
using the first in, first out costing method. Inventory consists of only
finished goods and is recorded net of a provision for obsolescence.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The estimated useful
lives of asset classifications are five to ten years for furniture and fixtures
and three to seven years for office equipment and computer equipment.
Depreciation is computed using the straight-line method, and the cost of
leasehold improvements is amortized over the shorter of the estimated service
lives or the terms of the related leases. Repairs and maintenance are charged to
expense as incurred. Upon disposition, the asset and related accumulated
depreciation are removed from the related accounts
F-9
and any gains or losses are reflected in operations. Purchased computer software
is capitalized and amortized over the software's useful life.
Internally-developed software is also capitalized and amortized over its useful
life in accordance with of the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use."
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" allows companies a choice of measuring employee
stock-based compensation expense based on either the fair value method of
accounting or the intrinsic value approach under APB Opinion No. 25. The Company
has elected to measure compensation expense based upon the intrinsic value
approach under APB Opinion No. 25.
Advertising
The Company recognizes advertising costs as incurred. The total amounts
charged to advertising expense were approximately $421,000, $267,000 and
$240,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Shipping and Handling Costs
In 2000 the Company adopted Emerging Issues Task Force ("EITF") 00-10
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10 requires costs
billed to customer for shipping and handling to be included in net revenue. The
Company records the costs incurred for shipping and handling in cost of goods
sold.
Income Taxes
The Company applies an asset and liability approach to accounting for
income taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which the differences are expected to reverse. A
valuation allowance is recorded if it is more likely than not that a deferred
tax asset will not be realized.
Reclassifications
Certain reclassifications have been made to conform prior periods' data to
the current year presentation.
2. New Business
LifeCycle Ventures, Inc., was incorporated in June 2000 as a wholly-owned
subsidiary of PDI. The LCV service offering provides pharmaceutical
manufacturers with a new approach toward managing the resource constraints
inherent in a large product portfolio. The mounting pressure to launch new drugs
and quickly maximize sales of products in the growth phase of their lifecycles
often leaves other products that could benefit from intensified sales and
marketing efforts. LCV helps to maximize the sales and profit potential of these
products by funding and managing the marketing, sales and distribution efforts
for the products in return for performance based compensation.
In October 2000, our wholly owned subsidiary, LifeCycle Ventures, Inc.
(LCV), signed a five-year agreement with Glaxo Wellcome Inc., ("Ceftin
Agreement") extending through December 31, 2005, for the exclusive U.S.
marketing, sales and distribution rights for Ceftin Tablets and Ceftin for Oral
Suspension (cefuroxime axetil), two dosage forms of a cephalosporin antibiotic.
Ceftin is indicated for acute bacterial respiratory infections such as acute
sinusitis, bronchitis and otitis media. Glaxo Wellcome retains certain
regulatory responsibilities for Ceftin and ownership of all intellectual
property relevant to Ceftin. Glaxo Wellcome will continue to manufacture the
product.
3. Public Offerings of Common Stock
In May 1998, the Company completed its initial public offering (the "IPO")
of 3,220,000 shares of common stock (including 420,000 shares in connection with
the exercise of the underwriters' over-allotment option) at a price
F-10
per share of $16.00. Net proceeds to the Company after expenses of the IPO were
approximately $46.4 million. The Company made a distribution of $5.8 million to
the S corporation stockholders, representing stockholders' equity of the Company
as of March 31, 1998, plus the earnings of the Company from April 1, 1998 to May
18, 1998.
On January 26, 2000, the Company completed a public offering of 2,800,000
shares of common stock at a public offering price per share of $28.00, yielding
net proceeds per share after deducting underwriting discounts of $26.35 (before
deducting expenses of the offering). Of the shares offered, 1,399,312 shares
were sold by the Company and 1,400,688 shares were sold by certain selling
shareholders. In addition, in connection with the exercise of the underwriters'
over-allotment option, an additional 420,000 shares were sold to the
underwriters on February 1, 2000 on the same terms and conditions (210,000
shares were sold by the Company and 210,000 shares were sold by a selling
shareholder). Net proceeds to the Company after expenses of the offering were
approximately $41.6 million.
4. Acquisitions
On May 12, 1999, PDI and TVG signed a definitive agreement pursuant to
which PDI acquired 100% of the capital stock of TVG in a merger transaction. In
connection with the transaction, PDI issued 1,256,882 shares of common stock in
exchange for the outstanding shares of TVG. The acquisition has been accounted
for as a pooling of interest and, accordingly, all periods presented in the
accompanying consolidated financial statements prior to 2000 have been restated
to include the accounts and operations of TVG.
The results of operations previously reported by separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
Three Months Year
Ended Ended
March 31, 1999 December 31, 1998
-------------- -----------------
(in thousands)
Revenue:
PDI ................................ $ 34,581 $101,081
TVG ................................ 5,731 18,340
-------- --------
Combined ........................... $ 40,312 $119,421
======== ========
Net income (loss):
PDI ................................ $ 2,696 $ 9,492
TVG ................................ 626 346
-------- --------
Combined ........................... $ 3,322 $ 9,838
======== ========
In August 1999, the Company, through its wholly-owned subsidiary,
ProtoCall, Inc. ("ProtoCall"), acquired substantially all of the operating
assets of ProtoCall, LLC, a leading provider of syndicated contract sales
services to the United States pharmaceutical industry. The purchase price was
$4.5 million plus up to an additional $3.0 million in contingent payments
payable if ProtoCall achieves defined performance benchmarks. The Company made
the final contingent payment of approximately $147,000 in the first quarter of
2001. This acquisition was accounted for as a purchase. In connection with this
transaction, the Company recorded $4.3 million in goodwill (included in other
long-term assets) which is being amortized using the straight-line method over a
period of 10 years.
5. Short-Term Investments
At December 31, 2000, short-term investments were $4.9 million, including
approximately $231,000 of investments classified as available for sale
securities. At December 31, 1999, short-term investments of $1.7 million were
classified as available for sale securities. The unrealized after-tax
gain/(loss) on the available for sale securities is included as a separate
component of stockholders' equity as accumulated other comprehensive income. All
other short term investments are stated at cost, which approximates fair value.
6. Other Investments
In February 2000, the Company signed a three-year agreement with
iPhysicianNet Inc. ("iPhysicianNet"). In connection with this agreement, the
Company made an investment of $2.5 million in preferred stock of iPhysicianNet.
Under the agreement, the Company was appointed as the exclusive contract sales
organization in the
F-11
United States to be affiliated with the iPhysicianNet network, prospectively
allowing the Company to offer e-detailing capabilities to its existing and
potential clients. For the year ended December 31, 2000, the Company recorded
net losses under the equity method related to this investment of $2.5 million
included in other income, net, which represented its share of iPhysicianNet's
losses until the investment was reduced to zero. The Company has no further
commitments under this agreement.
In the fourth quarter of 2000, the Company made an investment of
approximately $760,000 in convertible preferred stock of In2Focus, Inc., a
United Kingdom contract sales company. The Company recorded this investment
under the cost method.
7. Historical and Pro Forma Basic and Diluted Net Income/Loss Per Share
Historical and pro forma basic and diluted net income/loss per share is
calculated based on the requirements of SFAS No. 128, "Earnings Per Share."
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the years ended December 31, 2000, 1999 and
1998 is as follows:
Years Ended December 31,
------------------------------
2000 1999 1998
------ ------ ------
(in thousands)
Basic weighted average number of common
shares outstanding ............................ 13,503 11,958 10,684
Dilutive effect of stock options ............... 270 209 130
------ ------ ------
Diluted weighted average number of common shares
outstanding ................................... 13,773 12,167 10,814
------ ------ ------
Outstanding options at December 31, 1999 to purchase 34,562 shares of
common stock with an exercise price of $29.88 per share were not included in the
1999 computation of historical and pro forma diluted net income per share
because to do so would have been antidilutive.
8. Property, Plant and Equipment
Property, plant and equipment consists of the following as of December 31,
2000 and 1999:
December 31,
-----------------------
2000 1999
-------- --------
(in thousands)
Furniture and fixtures $ 2,574 $ 1,339
Office equipment 2,357 1,962
Computer equipment 10,044 3,945
Leasehold improvements 953 892
-------- --------
Total property, plant and equipment 15,928 8,138
Less accumulated depreciation and amortization (5,963) (4,431)
-------- --------
Property, plant and equipment, net $ 9,965 $ 3,707
======== ========
9. Operating Leases
The Company leases facilities, automobiles and certain equipment under
agreements classified as operating leases which expire at various dates through
2005. Lease expense under these agreements for the years ended December 31, 2000
and 1999 was approximately $16.1 million and $6.5 million, respectively, of
which $14.0 million in 2000 and $5.1 million in 1999 related to automobiles
leased for employees for a term of one-year from the date of delivery. The total
lease expense for 1998 was $780,410. In the fourth quarter of 1998, the Company
instituted a leasing program providing most field representatives with an
automobile.
F-12
The Company entered into a new facilities lease in May 1998 for a term
that expires in the fourth quarter of 2004, with an option to extend for an
additional five years, for the premises which house its corporate headquarters.
TVG's office lease is for seven years and commenced in August 1993. TVG extended
their office lease for an additional five years in September 2000. ProtoCall's
office lease is for five years and commenced in April 2000. LCV's office lease
commenced in October 2000 which expires July 2003. In July 2000, we signed a
lease for additional office space for PDI in Mahwah, New Jersey, commencing in
September 2000 and expiring in March 2003. The Company records lease expense on
a straight line basis over the lease term.
As of December 31, 2000, the aggregate minimum future rental payments
required by non-cancelable operating leases with initial or remaining lease
terms exceeding one year are as follows:
(in thousands)
2001................................................... $ 3,121
2002................................................... 3,096
2003................................................... 2,506
2004................................................... 2,086
2005................................................... 728
--------
Total.................................................. $ 11,537
========
10. Significant Customers
Service and other
During 2000, 1999 and 1998 the Company had several significant customers
for which it provided services under specific contractual arrangements. The
following sets forth the service and other revenue generated by customers who
accounted for more than 10% of the Company's service and other revenue during
each of the periods presented.
Years Ended December 31,
-------------------------------
Customers 2000 1999 1998
--------- --------- --------- ------
(in thousands)
A.................................... $90,976 $52,359 $25,272
B.................................... 67,071 33,781 32,008
C.................................... 37,038 38,101 31,576
At December 31, 2000 and 1999, these customers represented 61.7% and
63.4%, respectively, of the aggregate of outstanding service accounts receivable
and unbilled services. The loss of any one of the foregoing customers could have
a material adverse effect on the Company's financial position, results of
operations, and cash flows.
Product
During 2000, the Company had several significant customers for which it
provided products related to its distribution arrangement with GlaxoWelcome. The
following sets forth the product revenue generated by customers who accounted
for more than 10% of the Company's product revenue during the year ended
December 31, 2000.
F-13
Year Ended
December 31,
Customers 2000
--------- --------------
(in thousands)
A..................................... $31,733
B..................................... 16,263
C..................................... 14,562
At December 31, 2000 these customers represented 48.4% of aggregated
outstanding net product accounts receivable. The loss of any one of the forgoing
customers could have a material adverse effect on the Company's financial
position, results of operations, and cash flows.
11. Related Party Transactions
The Company purchases certain print advertising for initial recruitment of
representatives through a company that is wholly-owned by family members of the
Company's largest stockholder. The net amounts charged to the Company for these
purchases totaled approximately $2.1 million, $2.0 million and $1.8 million for
the years ended December 31, 2000, 1999 and 1998.
12. Income Taxes
PDI was treated as an S corporation for Federal and state income tax
purposes until its initial public offering in May 1998. TVG was treated as an S
corporation in 1997, 1998 and through the time of merger with PDI in May 1999.
Consequently, during the periods in which TVG and PDI were treated as S
corporations, they were not subject to Federal income taxes and they were not
subject to state income tax at the regular corporate rates. See note 20.
The provisions for income taxes for the years ended December 31, 2000,
1999 and 1998 are summarized as follows:
2000 1999 1998
-------- -------- --------
(in thousands)
Current:
Federal ............... $ 18,993 $ 6,027 $ 1,631
State ................. 4,233 870 397
-------- -------- --------
Total current ......... 23,226 6,897 2,028
Deferred ................. (4,514) 642 (337)
-------- -------- --------
Provision for income taxes $ 18,712 $ 7,539 $ 1,691
-------- -------- --------
A reconciliation of the difference between the Federal statutory tax rates
and the Company's effective tax rate is as follows:
2000 1999 1998
--------- --------- ------
Federal statutory rate ...................... 35.0% 35.0% 34.0%
State income tax rate, net of Federal benefit 5.3 4.1 4.0
Effect of S corporation status .............. -- (1.6) (24.0)
Non-deductible acquisition expenses ......... (0.4) 2.4 --
Valuation allowance ......................... 1.9 -- --
Other ....................................... (0.9) 2.1 0.7
---- ---- ----
Effective tax rate .......................... 40.9% 42.0% 14.7%
---- ---- ----
F-14
The tax effects of significant items comprising the Company's deferred tax
assets and (liabilities) as of December 31, 2000 and 1999 are as follows:
2000 1999
Deferred tax assets (liabilities)-- current
Allowances and reserves $ 3,251 $ 145
Inventory 1,059 0
Compensation 169 142
Other 280 97
------- -----
$ 4,759 $ 384
------- -----
Deferred tax assets (liabilities) -- non
current
Property, plant and equipment $ (664) $(449)
State taxes 93 (119)
Intangible assets 142 0
Equity investment 989 0
Valuation Allowance on Deferred Tax Assets (989) 0
------- -----
$ (429) $(568)
------- -----
Net deferred tax asset $ 4,330 $(184)
------- -----
For the year ended December 31, 2000 the Company has recorded a valuation
allowance of $989,000 against the deferred tax asset related to the Company's
equity investment since management does not consider it more likely than not
that such deferred tax asset will be realized. No valuation allowance was
recorded for the years ended December 31, 1999 and 1998.
13. Preferred Stock
The Company's board of directors is authorized to issue, from time to
time, up to 5,000,000 shares of preferred stock in one or more series. The board
is authorized to fix the rights and designation of each series, including
dividend rights and rates, conversion rights, voting rights, redemption terms
and prices, liquidation preferences and the number of shares of each series. As
of December 31, 2000 and 1999, there were no issued and outstanding shares of
preferred stock.
14. Loans to Stockholders/Officers
The Company loaned $1.4 million to its President and Chief Executive
Officer, Charles T. Saldarini in April 1998. The proceeds of this loan were used
by Mr. Saldarini to pay income taxes relating to his receipt of shares of common
stock. Such loan was for a term of three years, bore interest at a rate equal to
5.4% per annum payable quarterly in arrears and was secured by a pledge of the
shares of common stock held by Mr. Saldarini. This loan was repaid by Mr.
Saldarini in February 2000.
In November 1998, the Company agreed to lend $250,000 to an executive
officer of which $100,000 was funded in November 1998, and the remaining
$150,000 was funded in February 1999. This amount was recorded in other
long-term assets. Such loan is payable on December 31, 2008 and bears interest
at a rate of 5.5% per annum, payable quarterly in arrears.
15. Retirement Plans
During 2000, 1999 and 1998, the Company provided its employees with two
qualified profit sharing plans with 401(k) features. Under one plan, the Company
expensed contributions of approximately $975,000, $533,000 and $310,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. Under this plan, the
Company is required to make mandatory contributions each year equal to 100% of
the amount contributed by each employee up to 2% of the employee's wages. Any
additional contribution to this plan is at the discretion of the Company.
Under the other 401(k) plan, the Company expensed contributions of
approximately $195,000, $346,000 and $346,000 for the years ended December 31,
2000, 1999 and 1998, respectively. Effective January 1, 1998, the
F-15
Company matched 100% of the first $1,250 contributed by each employee, 75% of
the next $1,250, 50% of the next $1,250 and 25% of the next $1,250 contributed.
In addition the Company can make discretionary contributions.
In 1995, TVG established a deferred compensation plan (the "Plan")
covering full-time employees who meet certain eligibility criteria as defined in
the Plan. Participants become eligible to receive distributions from the Plan
equal to 25% of their net balance after receiving three annual contribution
pledges. Upon retirement from the Company or death, the participant or their
beneficiaries receive the remaining balance in four equal annual installments.
All forfeitures and interest are credited to the Company. Compensation expense
recognized in 1999 and 1998 related to the Plan was $79,113 and $260,009,
respectively. This plan was terminated upon the acquisition of TVG on May 12,
1999.
16. Deferred Compensation Arrangements
Beginning in 2000, the Company established a deferred compensation
arrangement whereby a portion of certain employees salaries are withheld and
placed in a Rabbi Trust. The plan permits the employees to diversify these
assets through a variety of investment options. The Company adopted the
provisions of Emerging Issues Task Force ("EITF") 97-14 "Accounting for Deferred
Compensation Arrangement Where Amounts are Earned and Held in a Rabbi Trust and
Invested" which requires the Company to consolidate into its financial
statements the net assets of the trust. The deferred compensation obligation has
been classified as a long term liability and is adjusted, with the corresponding
charge or credit to compensation expense, to reflect changes in fair value of
the amounts owed to the employee. The assets in the trust are classified as
available for sale. The credit to compensation expense due to a decrease of the
market value of the investments was $58,852 during 2000. The total value of the
Rabbi Trust at December 31, 2000 was approximately $231,000.
In 2000 the Company established a Long-Term Incentive Compensation Plan
whereby certain employees are required to take a portion of their bonus
compensation in the form of restricted common stock. The restricted shares vest
on the third anniversary of the grant date and are subject to accelerated
vesting and forfeiture under certain circumstances. The Company recorded
deferred compensation costs of approximately $800,000 during 2000, which will be
amortized over the three-year vesting period. The unamortized compensation costs
have been classified as a separate component of stockholders' equity.
17. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and, through LCV is also in the business of distributing product under
the Ceftin agreement. Such activities could expose the Company to risk of
liability for personal injury or death to persons using such products. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability under its service agreement through measures such as contractual
indemnification provisions with clients (the scope of which may vary from client
to client, and the performances of which are not secured) and insurance. The
Company could, however, also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity or insurance policy. The Company could be materially adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of the indemnification agreements; if the
indemnity, although applicable, is not performed in accordance with its terms;
or if the Company's liability exceeds the amount of applicable insurance or
indemnity.
In connection with the Glaxo Wellcome Ceftin agreement, the Company has
product purchase commitments. The Company is required to purchase certain
minimum levels of product, in various dosage forms, during each calendar quarter
of the agreement. This agreement is cancelable by either party upon not less
than 120 days written notice. The quarterly commitments range from $40.1 million
to $77.9 million over the five year period. As of December 31, 2000, the total
non-cancelable commitment outstanding is $91.6 million.
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
F-16
18. Stock Option Plans
On May 5, 2000 the Board of Directors (the "Board") approved the
Professional Detailing, Inc. 2000 Omnibus Incentive Compensation Plan (the "2000
Plan"). The purpose of the 2000 Plan is to provide a flexible framework that
will permit the Board to develop and implement a variety of stock-based
incentive compensation programs based on changing needs of the Company, its
competitive market, and regulatory climate. The maximum number of shares as to
which awards or options may at any time be granted under the 2000 Plan is 1.5
million shares of the Company's Common Stock. Eligible participants under the
2000 Plan shall include officers and other employees of the Company, members of
the Board, and outside consultants, as specified under the 2000 Plan and
designated by the Compensation Committee of the Board of Directors. The right to
grant Awards under the 2000 Plan will terminate upon the expiration of 10 years
after the date the 2000 Plan was adopted. No Participant may be granted more
than 100,000 options of Company Stock from all Awards under the 2000 Plan.
In March 1998, the Board of Directors of the Company adopted its 1998
Stock Option Plan (the "1998 Plan") which reserves for issuance up to 750,000
shares of its common stock, pursuant to which officers, directors and key
employees of the Company and consultants to the Company are eligible to receive
incentive and/or non-qualified stock options. The 1998 Plan, which has a term of
ten years from the date of its adoption, is administered by a committee
designated by the Board of Directors. The selection of participants, allotment
of shares, determination of price and other conditions relating to the purchase
of options is determined by the committee, in its sole discretion. Incentive
stock options granted under the 1998 Plan are exercisable for a period of up to
10 years from the date of grant at an exercise price which is not less than the
fair market value of the common stock on the date of the grant, except that the
term of an incentive stock option granted under the 1998 Plan to a shareholder
owning more than 10% of the outstanding common stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of the
common stock on the date of the grant. Options are exercisable either at the
date of grant or in ratable installments over a period from one to three years.
In January 1997, the Company adopted its 1997 Stock Option Plan (the "1997
Plan") which was incorporated into the 1998 Plan March 1998.
At December 31, 2000, options for an aggregate of 653,921 shares were
outstanding under the Company's stock option plans. In addition, as of December
31, 2000, options to purchase 286,634 shares of common stock had been exercised.
The activity for the 2000 and 1998 Plans during the years ended December
31, 1998, 1999 and 2000 is set forth in the table below:
Exercise Weighted
Number price average
of shares per share exercise price
--------- --------- --------------
Options outstanding at December 31, 1997 67,181 $ 1.61 $ 1.61
Granted 367,668 16.00 16.00
Exercised (5,000) 1.61 1.61
Terminated (6,331) 16.00 16.00
===================================================================================
Options outstanding at December 31, 1998 423,518 1.61 - 16.00 13.89
Granted 252,712 27.00 - 29.88 27.58
Exercised (28,653) 16.00 16.00
Terminated (14,743) 16.00 - 29.88 18.64
===================================================================================
Options outstanding at December 31, 1999 632,834 1.61 - 29.88 19.15
Granted 301,560 27.19 -80.00 78.57
Exercised (252,981) 1.61 - 29.88 14.16
Terminated (27,492) 16.00 - 29.88 22.36
===================================================================================
Options outstanding at December 31, 2000 653,921 $16.00 - 80.00 $ 46.60
- -----------------------------------------------------------------------------------
During 1997, there were two grants of stock options to officers of the
Company below the fair market value on the grant date, one in January for 39,189
shares at an exercise price of $1.61 and one in March for 27,992 shares at an
exercise price of $1.61. In connection with the grant of such options, the
Company amortized approximately $144,000 of compensation expense over the
expected vesting period. The options vested as follows: one-third became
exercisable on the date of the IPO (the "Initial Exercise Date"), another third
became exercisable on the first anniversary of the Initial Exercise Date and the
final third became exercisable on the second anniversary of the Initial
F-17
Exercise Date. Compensation expense of approximately $11,000, $45,000 and
$45,000 was recognized for the years ended December 31, 2000, 1999 and 1998,
respectively. All other grants of stock options were at a price not less than
the fair market value on the date of grant, and, therefore the Company has not
recognized any compensation expense related to those options.
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Exercise Number Remaining Number
price of options contractual of options Exercise
per share outstanding life (years) exercisable price
------------ -------------- ------------ ------------ ---------
$ 16.00 153,994 7.4 38,938 $ 16.00
27.00 11,250 8.4 7,500 27.00
27.19 168,453 8.8 28,670 27.19
27.84 22,500 9.4 7,500 27.84
29.88 24,239 8.6 2,131 29.88
38.20 2,500 9.6 -- 38.20
80.00 270,985 9.8 -- 80.00
------------------------------------------- -----------------------
$16.00 -80.00 653,921 8.9 84,739 $ 22.16
=========================================== =======================
Had compensation cost for the Company's stock option grants been
determined for awards consistent with the fair value approach of SFAS No. 123,
"Accounting for Stock Based Compensation," which requires recognition of
compensation cost ratably over the vesting period of the underlying instruments,
the Company's pro forma net income (loss) and pro forma basic and diluted net
income (loss) per share would have been adjusted to the amounts indicated below:
As of December 31,
-----------------------------------------
2000* 1999 1998
--------- --------- --------
(in thousands, except per share data)
Pro forma net income - as reported ................. $ 27,028 $ 10,270 $ 6,918
Pro forma net income - as adjusted ................. $ 25,131 $ 9,623 $ 6,432
Pro forma basic income per share - as reported ..... $ 2.00 $ 0.86 $ 0.65
Pro forma basic net income per share - as adjusted . $ 1.86 $ 0.80 $ 0.60
Pro forma diluted net income per share - as reported $ 1.96 $ 0.84 $ 0.64
Pro forma diluted net income per share - as adjusted $ 1.82 $ 0.79 $ 0.59
- ----------
*2000 data represents actual results
Compensation cost for the determination of Pro forma net income - as
adjusted and related per share amounts were estimated using the Black Scholes
option pricing model, with the following assumptions: (i) risk free interest
rate of 5.74%, 6.21% and 5.62% at December 31, 2000, 1999 and 1998,
respectively; (ii) expected life of 5 years for 2000, 1999 and 1998; (iii)
expected dividends - $0 for 2000, 1999 and 1998; and (iv) volatility of 80% for
2000 and 60% for 1999 and 1998. The weighted average fair value of options
granted during 2000, 1999 and 1998 was $51.48, $15.78 and $9.63, respectively.
19. Pro Forma Information (unaudited)
Prior to its acquisition in May 1999, TVG was an S corporation and not
subject to Federal income tax. During such periods the net income of TVG had
been reported by and taxed directly to the pre-acquisition shareholders rather
than TVG. Accordingly, for informational purposes, the accompanying statements
of operations for the years ended December 31, 1999 and 1998 include a pro forma
adjustment for the income taxes which would have been recorded had TVG been a C
corporation for the periods presented based on the tax laws in effect during
those periods. The pro forma adjustment for income taxes is based upon the
statutory rates in effect for C corporations during the years ended December 31,
1999 and 1998. The pro forma adjustment for income taxes for the year ended
December 31, 1999 also reflects the non-deductibility of certain acquisition
related costs.
F-18
20. New Accounting Pronouncements
The Financial Accounting Standards Board released in June 1998, SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
addressed the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities.
Implementation of SFAS 133 was delayed to fiscal year 2001 by the issuance of
SFAS 137. In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" (SFAS 138) which amended the accounting and reporting
standards of SFAS 133 for certain derivative instruments and certain hedging
activities. The Company does not believe that the adoption of these
pronouncements will have an impact on its earnings, comprehensive income and
financial position.
21. Segment Information
Through three segments, the Company offers six principal service
offerings, including customized contract sales services, product sales and
distribution, marketing research and consulting services, and professional
education and communication services. Marketing research and consulting
services, professional education and communication services, have been combined
to form the Marketing services category. The accounting policies of the segments
are the same as those described in the "Nature of Business and Significant
Accounting Policies" footnote. Segment data includes a charge allocating
corporate headquarters costs to each of the operating segments. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings before interest and taxes (EBIT).
For the Year
Ended December 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
Revenue, net
Contract sales ............................... $ 315,188 $ 151,623 $ 101,081
Product sales and distribution ............... 101,008 -- --
Marketing services ........................... 19,749 23,351 18,340
--------- --------- ---------
Total ..................................... $ 435,945 $ 174,974 $ 119,421
========= ========= =========
Revenue, intersegment
Contract sales ............................... $ (18,848) $ -- $ --
Product sales and distribution ............... -- -- --
Marketing services ........................... (222) (72) --
--------- --------- ---------
Total ........................................ $ (19,070) $ (72) $ --
========= ========= =========
Revenues, less intersegment
Contract sales ............................... $ 296,340 $ 151,623 $ 101,081
Product sales and distribution ............... 101,008 -- --
Marketing services ........................... 19,527 23,279 18,340
--------- --------- ---------
Total ........................................ $ 416,875 $ 174,902 $ 119,421
========= ========= =========
EBIT
Contract sales ............................... $ 30,572 $ 13,643 $ 9,373
Product sales and distribution ............... 9,090 -- --
Marketing services ........................... 1,214 2,079 (117)
--------- --------- ---------
Total ..................................... $ 40,876 $ 15,722 $ 9,256
========= ========= =========
Reconciliation of EBIT to income before provision
for income taxes
Total EBIT for operating groups .............. $ 40,876 $ 15,722 $ 9,256
Acquisition costs ............................ -- (1,246) --
Other income, net ............................ 4,864 3,471 2,273
--------- --------- ---------
Income before provision for income taxes ........ $ 45,740 $ 17,947 $ 11,529
========= ========= =========
F-19
Capital expenditures
Contract sales ............................... $ 7,326 $ 1,293 $ 2,045
Product sales and distribution ............... 29 -- --
Marketing services ........................... 510 149 151
--------- --------- ---------
Total ..................................... $ 7,865 $ 1,442 $ 2,196
========= ========= =========
Depreciation expense
Contract sales ............................... $ 1,272 $ 613 $ 338
Product sales and distribution ............... -- -- --
Marketing services ........................... 336 399 359
--------- --------- ---------
Total ..................................... $ 1,608 $ 1,012 $ 697
========= ========= =========
Total Assets
Contract sales ............................... $ 163,859 $ 91,981 $ 77,390
Product sales and distribution ............... 95,528 -- --
Marketing services ........................... 10,838 10,979 --
--------- --------- ---------
Total ...................................... $ 270,225 $ 102,960 $ 77,390
========= ========= =========
F-20
Schedule II
PROFESSIONAL DETAILING, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS)
BALANCE AT ADDITIONS (1)(2) BALANCE AT
BEGINNING CHARGED TO DEDUCTIONS END
DESCRIPTION OF PERIOD OPERATIONS OTHER OF PERIOD
Against trade receivables--
Year ended December 30, 1998
Allowance for doubtful accounts -- -- -- --
Year ended December 30, 1999
Allowance for doubtful accounts -- -- -- --
Year ended December 30, 2000
Allowance for doubtful accounts -- 250,000 -- 250,000
Against inventories--
Year ended December 30, 1998
Allowance for excess and obsolete -- -- -- --
Year ended December 30, 1999
Allowance for excess and obsolete -- -- -- --
Year ended December 30, 2000
Allowance for excess and obsolete -- 100,000 -- 100,000
- ------------
(1) Accounts written-off.
(2) Merchandise disposals.
PROFESSIONAL DETAILING, INC.
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 2000