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, 2001
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
PDI, INC.
---------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2919486
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 8, 2002 was approximately $134,312,858.
The number of shares outstanding of the registrant's common stock, $.01
par value, as of March 8, 2002 was 14,012,732 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PDI, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
Page
PART 1........................................................................3
Item 1. Business..........................................................3
Item 2. Properties.......................................................18
Item 3. Legal Proceedings................................................18
Item 4. Submission of Matters to a Vote of Security Holders..............19
PART II......................................................................20
Item 5. Market for our Common Equity and Related Stockholder Matters.....20
Item 6. Selected Financial Data..........................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......34
Item 8. Financial Statements and Supplementary Data......................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures........................................34
PART III.....................................................................35
Item 10. Directors and Executive Officers.................................35
Item 11. Executive Compensation...........................................38
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................42
Item 13. Certain Relationships and Related Transactions...................43
PART IV......................................................................44
Item 14. Exhibits and Financial Statement Schedules..........................44
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."
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PART 1
ITEM 1. BUSINESS
Summary of business
We are an innovative sales and marketing company serving the
pharmaceutical, biotech, and medical devices and diagnostics (MD & D)
industries. Partnering with clients, we provide product-specific programs
designed to maximize profitability throughout a product's lifecycle from
pre-launch through maturity. We are recognized as an industry-leader based on
our track record of innovation and our ability to keep pace in a rapidly
changing industry. We leverage our expertise in sales, brand management and
product marketing, marketing research, medical education, medical affairs, and
managed markets and trade relations to help meet strategic objectives and
provide incremental value for product sales.
We create and execute sales and marketing solutions which are intended to
maximize sales and marketing impact. These solutions are designed both for
clients' products we promote either in exchange for fees or percentages of
sales, as well as products that we may distribute, license, or own outright. We
have assembled a broad range of sales and marketing capabilities, both through
acquisition and through internal expansion. These capabilities are both stand
alone and integrated, enabling us to provide a wide range of marketing and
promotional services that can benefit many different products throughout the
various stages of their life cycles.
Our sales and marketing capabilities enable us to take commercial
responsibility for pharmaceutical and MD&D brands. Our capabilities include many
of the support functions necessary to effectively and legally market
pharmaceutical and medical products in the U.S. These functions include medical
affairs, regulatory, managed markets and trade relations, and distribution;
which we have developed either in-house or through strategic alliances.
Our strategy is to leverage our sales and marketing expertise by sourcing
products to market and sell employing either our contract sales outsourcing or
copromotion models or our emerging in-licensing and product ownership models.
These products could range from compounds in their late stages of development to
products in various stages of their patent life. During 2000, approximately 75%
of our revenues came from our traditional contract sales and marketing
services. For 2001 that amount decreased to approximately 40%, reflecting this
shift to a product driven strategy.
We operate under two reporting segments: "contract sales and marketing
services" and "product sales and distribution". Contract sales and marketing
services include the services we provide for our clients. Product sales and
distribution includes the partnerships where we have commercial responsibility
for a brand, provide distribution and recognize revenue from product sales.
Contract sales and marketing may include partnerships where we have commercial
responsibility for a brand and recognize revenue from product sales even if we
do not provide distribution.
Contract sales and marketing services
Contract sales
Our clients engage us on a contractual basis to design and implement
product detailing programs for both prescription and over-the-counter 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.
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We have achieved a leadership position in the pharmaceutical services
industry based on 15 years of designing and executing customized sales and
marketing programs for many of the pharmaceutical industry's largest companies,
including Abbott, Allergan, AstraZeneca, Bayer, Eli Lilly, GlaxoSmithKline,
Johnson & Johnson, Novartis, Pfizer, Pharmacia, Procter & Gamble, Schering
Plough, and Hoffman LaRoche. We have designed and implemented sales and
marketing programs for more than 100 products, including some of the leading
prescription medications.
Dedicated sales
When we deploy a contract sales team on behalf of a client, it is
dedicated to that client. The members do not represent products of other
manufacturers and often carry business cards of the client. The sales team is
customized to meet the specifications of our client with respect to the
representative profile, physician targeting, product training, incentive
compensation plans, integration with clients' in-house sales force, the call
reporting platform and data integration. The sales team looks just like it would
if the client were to build it themselves. The primary difference is that the
client gets a high quality, industry standard sales team without committing to
the permanent headcount themselves.
Shared sales
In order to make a face-to-face selling resource available to those
products that cannot support the cost of a dedicated team, we create shared
teams. These teams sell multiple, non-competitive brands from different
pharmaceutical companies. Because the costs of the resource are shared among
various pharmaceutical companies, these programs may be less expensive than
programs involving a dedicated sales force. The client still gets targeted
coverage of their physician audience within the representatives' geographic
territory. The power of the shared sales resource is that it makes face-to-face
selling available to products that usually cannot obtain it through other means.
The PDI Shared Sales team (formerly known as ProtoCall) is a leading provider of
these detailing programs in the U.S.
Copromotion
Copromotion arrangements are agreements with a company to mutually promote
a product. Each party to the agreement contributes toward the sales and
marketing effort and expenses with the financial risks and rewards being shared
on a predetermined basis. Copromotion is a frequently used promotional strategy
within the pharmaceutical industry.
In October 2001, we signed an agreement with Eli Lilly and Company (Eli
Lilly) to copromote Evista(R) in the U.S. Evista is approved in the U.S. for the
prevention and treatment of osteoporosis in postmenopausal women. Since its
launch in 1998, more than 10 million prescriptions have been written for Evista
in the U.S. Annual net sales were approximately $526 million in 2001. Under the
terms of the agreement, we provide a significant number of sales representatives
to copromote Evista to U.S. physicians. Our sales representatives augment the
Eli Lilly sales force promoting Evista. Under this agreement, we are entitled to
be compensated based on net sales achieved above a predetermined level. In the
event these predetermined net sales levels are not achieved, we will not receive
any revenue to offset expenses incurred. The agreement runs through December 31,
2003, subject to earlier termination upon the occurrence of specific events.
Medical education and communications
Our medical education and communications group creates custom-designed
programs focusing on informing our clients' target audiences about the benefits
of their products. Depending on the needs of our clients and their products,
programs may include evening teleconferences, telesymposia, audio seminars,
medical center briefings, advisory boards, sales support programs, speaker
development meetings, investigators' meetings, publication planning, scientific
manuscripts, poster session preparations and continuing medical education (CME)
programs.
Marketing research
Employing leading edge, often proprietary research methodologies, we
provide qualitative and quantitative
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marketing research to healthcare providers, patients and managed care customers
in the U.S. and globally. We offer a full range of pharmaceutical marketing
research services, which include studies to identify the most impactful business
strategy, profile, positioning, message, execution, implementation and post
implementation for a product. Correctly implemented, our marketing model
improves the knowledge clients obtain about how physicians and other healthcare
professionals will react to the product.
We utilize a systematic approach to pharmaceutical marketing research.
Recognizing that every marketing need, and therefore every marketing research
solution, is unique, we have developed our marketing model to help identify the
work that needs to be done to identify critical paths to marketing goals. At
each step of the marketing model we offer proven research techniques,
proprietary methodologies and custom study designs to address specific product
needs.
Medical devices and diagnostics
In 2001 we created a business unit to focus on the MD&D market segment.
Many of the sales and marketing activities we have historically provided to the
pharmaceutical industry are also conducted in the MD&D market. We believe that
the infrastructure we have built in support of the pharmaceutical industry, in
conjunction with a new staff of experienced MD&D managers, can be leveraged to
take advantage of opportunities in the MD&D market.
On September 10, 2001, we acquired InServe Support Solutions ("InServe").
InServe is a leading nationwide supplier of supplemental field-staffing programs
for the MD&D industry. InServe employs approximately 800 field-based flex and
full-time employees comprised of nurses, medical technicians and other
clinicians who visit hospital and alternate-site accounts and provide hands-on
clinical education and after-sales support to maximize product utilization and
customer satisfaction. In 2001 InServe had 33 full-time employees. InServe's
clients include many of the leading medical device and diagnostics companies,
including Becton Dickinson, Roche Diagnostics and Johnson & Johnson.
Product commercialization
Product commercialization is a solution we offer for products in the
pre-launch phase of their lifecycle. It integrates many of the capabilities we
have built or acquired. With product commercialization we gain greater
involvement in the commercialization of the brand. We can execute our marketing
solutions within a range of deal structures from a fee for service basis to a
partnership in which we receive a portion of product sales.
The pre-launch activities include extensive market research, advocacy
development, market awareness activities and preparations for launching the
sales force. PDI product commercialization is well positioned for companies with
little sales and marketing infrastructure and a product in the later stages of
development. PDI product commercialization is also designed to meet the needs of
a large pharmaceutical company that has a product coming to market and, due to
resource allocation constraints, chooses not to utilize its own sales and
marketing infrastructure to commercialize the product.
LifeCycle X-tension
LifeCycle X-tension is our name for an arrangement in which a
pharmaceutical company with a product nearing patent expiration no longer
desires to support that product with its own sales and marketing resources. When
a company decides to no longer support a product, sales of the product will
likely decline. Such declines are typically a result of reduced promotional
activities such as detailing, medical education and other components of a
pharmaceutical marketing plan. It is also common that pharmaceutical companies
will reduce internally dedicated management resources.
Through a life cycle extension solution, a focused marketing effort for
the brand should result in improved sales when compared to the forecasted
declining sales line associated with the strategy of no longer providing sales
and marketing resources. When successful this creates incremental revenue, which
may be shared between PDI and the pharmaceutical company. We take on brand
responsibility, which could include distribution, managed care contracting,
medical affairs and trade relations. The pharmaceutical company may benefit by
being able to get an
5
incremental return for the product while freeing up the sales and marketing
resources previously assigned to that product.
In May 2001, we entered an agreement with Novartis Pharmaceuticals
Corporation (Novartis) for the U.S. sales, marketing and promotion rights for
Lotensin(R) and Lotensin HCT(R), which agreement runs through December 31, 2003.
Under this agreement, we provide promotional, selling and marketing for
Lotensin, an ACE inhibitor, as well as brand management. In exchange, we are
entitled to receive a split of incremental net sales generated above specified
baselines. Also, under this agreement, we copromote Lotrel(R) in the U.S. for
which we are entitled to be compensated on a fee for service basis with
potential incentive payments based on achieving certain net sales objectives.
Lotrel is a combination of the ACE inhibitor benazepril and the calcium channel
blocker amlodipine. In 2001 approximately 8.1 million Lotrel prescriptions were
dispensed. Novartis has retained certain regulatory responsibilities for
Lotensin and Lotrel and ownership of all intellectual property. Additionally,
Novartis will continue to manufacture and distribute the products and provide
all managed care and trade activities and pricing. In the event our estimates of
the demand for Lotensin are not accurate or more sales and marketing resources
than anticipated are required, the Novartis transaction could have a material
adverse impact on our results of operations, cash flows and liquidity.
Product sales and distribution
We have developed the capabilities to take on commercial responsibility
for pharmaceutical and MD&D brands through either an in-licensing or
distribution agreement. In these instances, we have total commercial
responsibility for a brand, including pricing, but another company retains
ownership of the brand. When we provide the distribution of the product, we
recognize product revenue which is currently reported in our product segment.
In October 2000, we signed a five-year agreement with GlaxoSmithKline
(GSK) for the exclusive U.S. marketing, sales and distribution rights for
Ceftin(R) Tablets and Ceftin(R) for Oral Suspension, two dosage forms of a
cephalosporin antibiotic. From October 2000 through February 2002, we marketed
and sold Ceftin products primarily to wholesale drug distributors, retail chains
and managed care providers.
On December 21, 2000, the United States District Court for New Jersey
granted a preliminary injunction which enjoined Ranbaxy Pharmaceuticals Inc.
(Ranbaxy) from offering for sale or selling in the U.S. any generic versions of
Ceftin. In August 2001, the United States Federal Court of Appeals, D.C Circuit,
overturned that injunction, allowing Ranbaxy to commence manufacturing and
marketing a Ceftin tablet generic equivalent upon approval from the U.S. Food
and Drug Administration (FDA). As a result, during the fourth quarter, we
reached a mutual agreement with GSK to terminate the Ceftin distribution
agreement effective February 28, 2002. Subsequently, on February 18, 2002,
Ranbaxy announced that it had received manufacturing and marketing approval from
the FDA for cefuroxime axetil 125mg, 250mg and 500mg tablets.
We intend to continue to pursue in-licensing and distribution agreements
or outright product acquisitions, where we have commercial responsibility for a
brand, inclusive of distribution, and the direct recognition of revenue from
product sales.
Corporate strategy
Our strategy is to continue to find opportunities to leverage the
infrastructure we have built providing services to the pharmaceutical,
biotechnology and MD&D industries. Those opportunities include a focused effort
to identify products that we can completely commercialize through in-licensing
and copromotion arrangements. Additionally, we may acquire products. These type
arrangements typically provide longer-term contracts with greater upside
potential and reduced provisions for at will termination by clients than
traditional fee for service contracts. However, in that we will typically be
responsible for promotional expenses, with our compensation based upon brand
performance, these type arrangements could result in substantial losses.
Our strategy also includes a strong contribution from our traditional
services. Contract sales, shared sales, marketing research and medical education
remain important strategic capabilities for us. Additionally, we intend to
commercialize a new service aimed at managed markets and trade relations.
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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 prescription
pharmaceuticals; and
o managed care's preference for drug therapies over other treatment methods.
The primary users of our contract sales services, which have been large
pharmaceutical companies, are facing the following dynamics which should create
incremental demand for our services:
o pharmaceutical companies are focusing their marketing efforts on drugs
with high volume sales, newer or novel drugs and products which fit within
core therapeutic or marketing priorities. As a result, major
pharmaceutical companies will continue to seek alternatives to maximize
the value of their entire portfolios;
o pharmaceutical companies will continue to expand their product portfolios
and as a result will need to add sales and marketing capacity; and
o pharmaceutical companies will continue to face margin pressures and will
seek to maintain flexibility over both resource strategies and portfolio
management.
We further believe that smaller pharmaceutical companies, biotechnology
companies and others will have increased demand for our services due to the
tremendous influx of investment dollars into the specialty pharmaceutical and
biotechnology industries that 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 corporate strategy
emphasizes:
o maintaining our leadership position in our traditional service areas of
contract sales, shared sales and marketing research;
o expanding our concentrated efforts for sourcing products for our
commercialization capabilities of copromotion, in-licensing and
acquisition; and
o continuing our investment in our commercialization infrastructure, thereby
enhancing our ability to generate demand for the products which we will
sell and market.
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 operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by incentives we can earn. In these
situations, we have the opportunity to earn additional fees based typically on
product sales 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, these penalties may not 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. As an
example, in February 2001, GSK notified us that they were exercising their right
to terminate one of our contracts without cause. The termination was effective
April 18 2001. Contracts may also be terminated for cause if we fail to meet
stated performance benchmarks. To date, no programs have been terminated for
cause.
Beginning with the fourth quarter of 2000, we have entered into a number
of significant performance based contracts, and we will also use a variety of
structures for these type contracts. Our agreement with GSK regarding
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Ceftin was an exclusive marketing and distribution contract. The agreement had a
five-year term but was cancelable by either party without cause on 120 days
notice. The agreement was terminated by mutual consent, effective February 28,
2002. Contracts such as the Ceftin agreement, which require us to take title and
distribute product, have a greater number of risk factors than traditional fee
for service contracts. Any future agreement that involves in-licensing or
product acquisition would have similar type risks. Some of these risks
associated with distribution, in-licensing, or product acquisitions are
described in "Certain Factors That May Affect Future Growth," beginning on page
11 of this report.
We have also entered into other performance based agreements that do not
require the distribution, in-licensing or ownership of product. An important
performance parameter is normally the level of sales or prescriptions attained
by the product during the period of our marketing or promotional responsibility,
and in some cases for periods after promotional activities have ended.
For example, in May 2001 we entered an agreement with Novartis for the
U.S. sales, marketing and promotion rights for Lotensin and Lotensin HCT. Under
this agreement, we provide promotional, selling and marketing for Lotensin, an
ACE inhibitor, as well as brand management. In exchange, we are entitled to
receive a split of incremental net sales above specified baselines. Also under
this agreement with Novartis, we copromote Lotrel in the U.S. for which we are
entitled to be compensated on a fee for service basis with potential incentive
payments based upon achieving certain net sales objectives. Novartis has
retained certain regulatory responsibilities for Lotensin and Lotrel and
ownership of all intellectual property. Additionally, Novartis will continue to
manufacture and distribute the products.
Also, under the terms of an agreement entered into in October 2001 with
Eli Lilly, we copromote Evista in the U.S. Our sales representatives augment the
Eli Lilly sales force promoting Evista. Under this agreement, we are entitled to
be compensated based on net sales achieved above a predetermined level. The
agreement runs through December 31, 2003, subject to earlier termination upon
the occurrence of specific events.
Our product detailing contracts and copromotion contracts typically
contain cross-indemnification provisions between our client and us. 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, no client has asserted any claim for
indemnification against us under any contract. We have asserted a claim for
indemnification against Bayer Pharmaceuticals in connection with the Baycol
legal proceedings. See Item 3. - Legal Proceedings.
Significant customers
Our significant customers are discussed in note 12 to the consolidated
financial statements included elsewhere in this report.
Marketing
Our marketing efforts are targeted toward the pharmaceutical and MD&D
industries. Companies with large product portfolios have been the most likely
customers for the services and solutions we provide, but smaller, emerging
companies have also been clients and partners of ours. Our marketing and new
business development efforts are primarily targeted toward the senior sales and
marketing personnel within these companies. A range of personnel within
marketing departments, including vice presidents, group product managers and
product managers, purchases our services and solutions. Our marketing research
services are primarily targeted toward the marketing research departments within
large pharmaceutical companies. Increasingly, we expect to target the most
senior managers of our target customers.
Our marketing efforts are designed to reach these audiences, with the goal
of making them aware of our full range of services, and projecting us as a high
quality sales and marketing organization. Our tactical plan includes advertising
in trade publications, direct mail, presence at industry seminars and a direct
selling effort. We have a dedicated team of business development specialists who
work across the organization to identify needs within the pharmaceutical and
MD&D industries which we can satisfy.
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A multidisciplinary team of senior managers reviews possible business
opportunities as identified by the business development team, and determines
strategies and negotiation positions to contract for the most attractive
business opportunities.
Competition
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. Our competition
includes in-house sales and marketing departments of pharmaceutical companies,
emerging pharmaceutical companies, wholesale drug distributors, and other
contract sales organizations (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. 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.
For the distribution and marketing of pharmaceutical products, we
primarily compete with pharmaceutical companies. These competitors include all
of the major pharmaceutical companies as well as emerging pharmaceutical
companies including Reliant, Bradley Pharmaceuticals, Inc., Dura
Pharmaceuticals, Inc. (purchased in 2000 by Elan Corporation PLC), King
Pharmaceuticals, Inc., and other companies that acquire branded products and
product lines from other pharmaceutical companies. Competing to copromote,
license and/or acquire brands is an entirely new business for us and, as such,
we face all the risks generally associated with identifying, assessing and
contracting effectively for products in addition to the marketing and
distribution of the products we obtain.
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.
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 approval, the
provision, licensing, labeling, marketing, promotion, price, 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 FDA 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.
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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 and policies have been adopted by other professional and industry
organizations, such as Pharmaceutical Research and Manufacturers of America, an
industry trade group.
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 review our policies and limits from time to time
and may adjust them to meet our business needs. 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.
Product liability insurance
In connection with our marketing and distribution of Ceftin, we maintained
product liability insurance. To date, to our knowledge, no product liability
claim has been asserted 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
10
us against any claim. In connection with the termination of our agreement to
distribute Ceftin, we have cancelled our product liability insurance as of the
termination date of the agreement. We have purchased a policy extension rider to
cover claims which may be asserted after the termination date of the contract.
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 maintained insurance to protect the inventory of Ceftin while in
storage. We also maintained business interruption insurance to protect against
sudden and unexpected events where manufacturing problems might make Ceftin
unavailable to us. In connection with the termination of our agreement to
distribute Ceftin we cancelled these policies.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
In addition to the other information provided in our reports, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
We are in the process of implementing our evolving business model, which
includes copromotion and brand ownership. We cannot assure you that we will
successfully execute this business plan.
Our growth strategy contemplates agreements and other arrangements whereby
we would acquire distribution or ownership rights in products. Despite our
Ceftin experience, these types of arrangements are relatively new to our
business model and, as such, we face all the risks generally associated with
emerging pharmaceutical companies. These risks include the following:
o identifying and obtaining the rights to sell and distribute pharmaceutical
products;
o assessing intellectual property protection;
o establishing and maintaining relationships with wholesale drug
distributors, third party payors, retail drug chains and other
distributors;
o obtaining capital to finance the expansion of the business;
o our success in accurately forecasting the demand for our current and
future products;
o attracting, hiring and retaining qualified personnel;
o complying with regulatory requirements;
11
o establishing inventory control procedures; and
o establishing and maintaining relationships with contract manufacturers and
contract research organizations.
In addition, these types of arrangements can significantly increase our
operating expenditures. These expenditures could include minimum purchase
requirements, payments to third parties for inventory maintenance and control,
distribution services and accounts receivable administration, as well as
expenditures for sales and marketing.
If we are unable to increase sales of products we market and promote, our
profitability could be adversely affected, which could adversely affect the
price of our common stock.
Some of our programs require us to increase sales of the products beyond
minimum threshold requirements in order for the program to be profitable for us.
Decreased or lower-than-anticipated demand could have a material negative affect
on our operating results and our share price, which could in turn limit our
access to new capital. The market demand for any product could be adversely
affected by many unforeseen events including:
o competition from new or existing drug products, including introduction of
generic equivalents;
o our ability to maintain adequate and uninterrupted sources of supply to
meet demand;
o contamination of product lots or product recalls;
o changes in private health insurer reimbursement rates or policies; and
o changes in government reimbursement rates or polices.
If we acquire ownership or marketing rights in drugs under development, the
clinical trial and regulatory approval process for these products will be
expensive and time consuming, and the outcome is uncertain.
If we acquire or license rights to development stage products, in order to
sell these products we must receive regulatory approvals for each product. The
FDA and comparable agencies in foreign countries extensively and rigorously
regulate the testing, manufacturing, distribution, advertising, pricing and
marketing of the drugs. This approval process includes preclinical studies and
clinical trials of each pharmaceutical compound to establish its safety and
effectiveness and confirmation by the FDA and comparable agencies in foreign
countries that the manufacturer maintains good laboratory and manufacturing
practices during testing and manufacturing. The process is lengthy, expensive
and outcomes are uncertain. It is also possible that the FDA or comparable
foreign regulatory authorities could interrupt, delay or halt our clinical
trials. If we, or any regulatory authorities, believe that trial participants
face unacceptable health risks, the trials could be suspended or terminated. We
also may not reach agreement with the FDA and/or comparable foreign agencies on
the design of clinical studies necessary for approval. In addition, conditions
imposed by the FDA and comparable agencies in foreign countries on clinical
trials could significantly increase the time required for completion of our
clinical trials and the costs of conducting the clinical trials. If we
experience unexpected delays and expenditures in the FDA regulatory process our
business and results of operation could be adversely affected.
We may require additional funds.
Although we do not have any present need or intention to raise additional
funds, certain economic and strategic factors could change that may require us
to seek substantial additional funds in order to:
o license or acquire additional pharmaceutical products or technologies;
o pursue regulatory approvals;
o develop incremental marketing and sales capabilities;
o prosecute and defend intellectual property rights; and
o pursue other business opportunities or meet future operating requirements.
We may seek additional funding through public or private equity or debt
financing or other arrangements with collaborative partners. If we raise
additional funds by issuing equity securities, further dilution to existing
stockholders may result. In addition, as a condition to providing us with
additional funds, future investors may
12
demand, and may be granted, rights superior to those of existing stockholders.
We cannot be sure, however, that additional financing will be available from any
of these sources or, if available, will be available on acceptable or affordable
terms. If adequate additional funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of our programs.
If a manufacturer fails to supply us with sufficient quantities of a compound to
meet continued demand for the product, our business and financial results may be
adversely affected.
We do not currently manufacture any pharmaceutical compounds and do not
anticipate engaging in these activities. We expect to continue to depend on
third parties to provide us with sufficient quantities of products to meet
demand. We will try to maintain inventory levels that are no greater than
necessary to meet our projected needs. Although third parties will generally be
contractually bound to meet our supply requirements, we cannot assure you that
they will be able to manufacture sufficient quantities to meet demand. Limits on
our 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. Any disruption in the supply of raw materials or
an increase in the cost of raw materials to our supplier could have a
significant effect on its ability to supply us with products.
If we are unable to attract key employees and consultants, we may be unable to
develop our emerging business model.
Successful execution 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 our programs and strategy.
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 business.
Failure to have products we market designated for reimbursement by third party
payors will adversely affect our sales.
The amount of sales of any given pharmaceutical product depends
substantially on our success in contracting with governmental agencies, private
health insurers and health maintenance organizations which reimburse patients
for the cost of prescriptions. There are many considerations that determine
whether a particular product will be approved by these agencies and
organizations, including price. If products we promote are not reimbursed or
included on formulary lists of these agencies and organizations, and therefore
not approved for use by affiliated physicians, demand for them 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 a compound.
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 products. We have been named in several
lawsuits as a result of our distribution of Baycol(R) on behalf of Bayer
Pharmaceutical. 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 with respect to our distribution of Ceftin, there is no
assurance that this coverage or that any other coverage will be adequate to
offset potential damages.
If our performance based programs under perform, it could have a negative impact
on our financial results.
As part of our growth strategy, we have entered into arrangements in which
we take on some of the risk of the potential success or failure of the
customer's product. For example, we may build a sales organization for a
13
biotechnology customer to commercialize a new product in exchange for a share in
the revenues of the product. We must carefully analyze and select the customers
and products with which we are willing to structure our risk-based deals. 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.
We and two of our officers are defendants in a class-action shareholder lawsuit
which could divert our time and attention from more productive activities.
Beginning on January 24, 2002, several purported class action complaints
were filed in the U.S. District Court for the District of New Jersey, against
us and certain of our officers on behalf of persons who purchased our common
stock during the period between May 22, 2001 and November 12, 2001. We believe
that the named defendants have meritorious defenses to the allegations asserted
in these lawsuits and we intend to vigorously defend these actions. Although we
currently maintain director and officer 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.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large sales and marketing projects.
This practice has grown substantially over the past decade, and we have
benefited from this trend. Recently there has been a reduced level of
outsourcing activity. Some industry commentators believe that this trend will
continue. If these industries reduce their tendency to outsource those projects,
our operations, financial condition and growth rate could be materially and
adversely affected. We also believe that we have recently been negatively
impacted by pending mergers and other factors in the pharmaceutical industry,
which appear to have slowed decision making by our customers and delayed certain
trials. A continuation of these trends would have an ongoing 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 in part
upon 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 depends to a great extent on our
relationships with a limited number of large pharmaceutical companies. In 2001,
we had two major clients that accounted for approximately 31.8% and 21.4%,
respectively, or a total of 53.2%, 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. As an
example, on February 4, 2002, we announced the termination of our fee for
service contract arrangement with Bayer Pharmaceuticals. As a result of this
contract being terminated four and a half months early, we announced that we
expected our 2002 revenues would be reduced by $20 to $25 million and our
earnings would be reduced by approximately $0.25 to $0.30 per share.
14
Our contracts are generally short-term agreements and are generally 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. As an example, on February 4, 2002, we
announced the termination of our fee for service contract arrangement with Bayer
Pharmaceuticals. As a result of this contract being terminated four and a half
months early, we announced that we expected our 2002 revenues would be reduced
by $20 to $25 million and our earnings would be reduced by approximately $0.25
to $0.30 per share. 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, when a contract is terminated, 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.
Government or private initiatives to reduce healthcare costs could have a
material adverse effect on the pharmaceutical industry and on us.
A primary trend in the U.S. 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. 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. Governmental entities are increasingly promulgating measures
targeted at controlling the prices of prescription products. 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 governed by 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 and insurance coverage 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
15
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, our ability to
source new business opportunities and results of operations.
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
three acquisitions: InServe, 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.
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.
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
16
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 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 make if more difficult to remove our directors and management and
may 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 regulatory developments;
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 implementing 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. For these and other reasons, 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 2001 our stock traded at a low of $16.43 and a high of $109.63.
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 regulatory developments;
o changes in product mix;
o changes in revenue and revenue growth rates for us and for our industry as
a whole; and
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.
17
Employees
As of December 31, 2001, we had 4,963 employees, including 3,391 sales
representatives and 730 InServe field representatives, substantially all of whom
were flex-time employees. Approximately 219 employees work out of our
headquarters in Upper Saddle River, New Jersey, 146 employees work out of TVG's
headquarters in Fort Washington, Pennsylvania, 24 employees work out of LCV's
headquarters in Lawrenceville, New Jersey, 21 employees work out of InServe's
headquarters in Novato, California, and 42 employees work out of ProtoCall's
headquarters in Cincinnati, Ohio. In addition, we have 390 field based sales
managers. We are not party to a collective bargaining agreement with a labor
union. 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 space 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 1,200 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. This lease is for a five year term that commenced
in April 2000.
LCV occupies space in two facilities. LCV's main office is located in
Lawrenceville, New Jersey in approximately 14,000 square feet of space. The
lease for this space commenced in October 2000 and expires in July 2003. LCV
also rents a 1,200 square foot sales office in High Point, North Carolina. This
three-year lease commenced in October 2001.
InServe's headquarters are located in Novato, California, in approximately
9,100 square feet of space, under a lease which expires in the second quarter of
2005.
We signed a lease for approximately 7,300 square feet of office space in
Bridgewater, New Jersey that became effective July 1, 2001. The lease is for a
five year term and expires on June 30, 2006.
ITEM 3. LEGAL PROCEEDINGS
In January and February 2002, we, our chief executive officer and our
chief financial officer were served with three complaints that were filed in the
U.S. District Court for the District of New Jersey alleging violations of the
Securities Act of 1934 (the "1934 Act"). These complaints were brought as
purported shareholder class actions under Sections 10(b) and 20(a) of the 1934
Act and Rule 10b-5 promulgated thereunder. Each of the complaints alleges a
purported class period which runs from May 22, 2001 through November 12, 2001;
seeks to represent a class of stockholders who purchased shares of our common
stock during that period; and seeks money damages in unspecified amounts and
litigation expenses including attorneys' and experts' fees.
Each of these complaints contain substantially similar allegations, the
essence of which is that the defendants intentionally or recklessly made false
or misleading public statements and omissions concerning our financial condition
and prospects with respect to our marketing of Ceftin in connection with the
October 2000 distribution
18
agreement with GlaxoSmithKline, as well as our marketing of Lotensin and Lotrel
in connection with the May 2001 distribution agreement with Novartis
Pharmaceuticals Corp.
We believe that each of these three complaints will ultimately be
consolidated into one action. As of this filing, we have not yet answered any of
the complaints, and discovery has not yet commenced. We believe that the
allegations in these complaints are without merit and we intend to defend these
actions vigorously.
We have been named as a defendant in several lawsuits, including a class
action matter, alleging claims arising from the use of the prescription compound
Baycol that was manufactured by Bayer Pharmaceuticals and marketed by us on
Bayer's behalf. In August 2001, Bayer announced that it was voluntarily
withdrawing Baycol from the U.S. market. We intend to defend these actions
vigorously and have asserted a contractual right of indemnification against
Bayer for all costs and expenses we incur related to these proceedings.
Other than the foregoing, 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.
19
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.
High Low
------ ------
2001
----
First quarter....................................... 106.375 50.688
Second quarter...................................... 96.530 57.500
Third quarter....................................... 88.050 22.780
Fourth quarter ..................................... 33.330 16.580
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 1, 2002, we had approximately 6,500
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 for general working capital purposes.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 are derived from our
audited consolidated financial statements and the accompanying notes. Our
consolidated financial statements for each of the periods prior to 2000
presented reflects our acquisition of TVG in May 1999, which was accounted for
as a pooling of interests, on a pro forma basis as if TVG had been owned by the
Company the entire period. Consolidated balance sheets at December 31, 2001 and
2000 and consolidated statements of operations, stockholders' equity and cash
flows for the three years ended December 31, 2001, 2000 and 1999 and the
accompanying notes are included elsewhere in this Annual Report on Form 10-K and
have been audited by PricewaterhouseCoopers LLP, independent accountants. Our
audited consolidated balance sheets at December 31, 1998 and 1997 and our
consolidated statements of operations, stockholder's equity and cash flows for
the year ended December 31, 1997 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. 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,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share and statistical data)
Revenue
Service, net .......................................... $281,269 $315,867 $174,902 $119,421 $ 75,243
Product, net .......................................... 415,314 101,008 -- -- --
-------- -------- -------- -------- --------
Total revenue, net .................................. 696,583 416,875 174,902 119,421 75,243
-------- -------- -------- -------- --------
Cost of goods and services
Program expenses ...................................... 232,171 235,355 130,121 87,840 55,854
Cost of goods sold .................................... 328,629 68,997 -- -- --
-------- -------- -------- -------- --------
Total cost of goods and services .................... 560,800 304,352 130,121 87,840 55,854
-------- -------- -------- -------- --------
Gross profit ............................................. 135,783 112,523 44,781 31,581 19,389
Compensation expense ..................................... 39,263 32,820 19,611 15,779 12,021
Bonus to controlling stockholder (1) (2) ................. -- -- -- -- 2,243
Stock grant expense (2) (3) .............................. -- -- -- -- 4,470
Other selling, general and administrative expenses ....... 83,815 38,827 9,448 6,546 4,749
Acquisition and related expenses ......................... -- -- 1,246 -- --
-------- -------- -------- -------- --------
Total selling, general and administrative expenses ....... 123,078 71,647 30,305 22,325 23,483
-------- -------- -------- -------- --------
Operating income (loss) (2) .............................. 12,705 40,876 14,476 9,256 (4,094)
Other income, net ........................................ 2,275 4,864 3,471 2,273 376
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes .......... 14,980 45,740 17,947 11,529 (3,718)
Provision for income taxes ............................... 8,626 18,712 7,539 1,691 126
-------- -------- -------- -------- --------
Net income (loss) ........................................ $ 6,354 $ 27,028 $ 10,408 $ 9,838 $ (3,844)
======== ======== ======== ======== ========
Basic net income (loss) per share(5) ..................... $ 0.46 $ 2.00 $ 0.87 $ 0.92 $ (0.44)
======== ======== ======== ======== ========
Diluted net income (loss) per share(5) ................... $ 0.45 $ 1.96 $ 0.86 $ 0.91 $ (0.44)
======== ======== ======== ======== ========
Basic weighted average number of shares outstanding(5) ... 13,886 13,503 11,958 10,684 8,730
======== ======== ======== ======== ========
Diluted weighted average number of shares outstanding(5) . 14,113 13,773 12,167 10,814 8,730
======== ======== ======== ======== ========
Years Ended December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(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)
Pro forma provision for income taxes (4) .......................... 7,677 4,611 --
-------- -------- --------
Pro forma net income (loss) (4) ................................... $ 10,270 $ 6,918 $ (3,718)
======== ======== ========
Pro forma basic net income (loss) per share (4) ................... $ 0.86 $ 0.65 $ (0.43)
======== ======== ========
Pro forma diluted net income (loss) per share (4) ................. $ 0.84 $ 0.64 $ (0.43)
======== ======== ========
Basic weighted average number of shares outstanding (5) ........... 11,958 10,684 8,730
======== ======== ========
Pro forma diluted weighted average number of shares outstanding (5) 12,167 10,814 8,730
======== ======== ========
21
Other operating data (unaudited):
Years Ended December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
Number of sales representatives at end of period:
Full-time............................................. 2,845 2,947 1,669 1,143 529
Part-time............................................. 546 372 433 242 401
------ ------ ----- ----- -----
Total..................................................... 3,391 3,319 2,102 1,385 930
====== ====== ===== ===== =====
Balance sheet data:
As of December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands)
Cash and cash equivalents ......... $160,043 $109,000 $ 57,787 $ 56,989 $ 7,762
Working capital ................... 113,685 120,720 53,144 47,048 584
Total assets ...................... 302,671 270,225 102,960 77,390 21,868
Total long-term debt .............. -- -- -- -- --
Stockholders' equity .............. 150,935 138,110 60,820 50,365 1,647
- -------------
(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 2001, 2000 and 1999, and we do not expect to incur
these charges in future periods. Exclusive of these non-recurring charges,
our operating income for the year ended December 31, 1997 would have been
$2,619. 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 22 to our audited consolidated
financial statements included elsewhere in this report.
(5) See note 9 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.
22
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 11
of this report.
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 an innovative sales and marketing company serving the
pharmaceutical, biotech, and medical devices and diagnostics industries.
Partnering with clients, we provide product-specific programs designed to
maximize profitability throughout a product's lifecycle from pre-launch through
maturity. We are recognized as an industry-leader based on our track record of
innovation and our ability to keep pace in a rapidly changing industry. We
leverage our expertise in sales, brand management and product marketing,
marketing research, medical education, medical affairs, and managed markets and
trade relations to help meet strategic objectives and provide incremental value
for product sales. We operate under two reporting segments: product sales and
distribution; and contract sales and marketing services. Within our two
reporting segments we provide the following services:
o Product sales and distribution;
o Contract sales and marketing services:
o dedicated contract sales services (CSO);
o shared contract sales services (CSO);
o LifeCycle X-Tension services (LCXT);
o product commercialization services (PCS);
o copromotion services;
o medical device and diagnostics sales and marketing services;
o marketing research and consulting services (TVG); and
o medical education and communication services (TVG).
Our contracts within the LCXT, PCS and copromotion subcategories are more
heavily performance based and have a higher risk potential and correspondingly
an opportunity for higher profitability. These contracts involve significant
startup expenses and a greater risk of operating losses. These contracts
normally require significant participation from our LCV and TVG professionals
whose skill sets include marketing, brand management, trade relations and
marketing research.
Contract Sales and Marketing Services
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 operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might 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 on 30 to 90 days notice. These
contracts typically, but not always, provide for termination payments in the
event they are terminated by the client 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. As an example, in February 2002,
23
Bayer notified us that they were exercising their right to terminate their
contract with us without cause. Contracts may also be terminated for cause if we
fail to meet stated performance benchmarks. To date, no programs have been
terminated for cause.
In May 2001 we entered an agreement with Novartis Pharmaceuticals
Corporation for the U.S. sales, marketing and promotion rights for Lotensin(R)
and Lotensin HCT(R), which agreement runs through December 31, 2003. Under this
agreement, we provide promotional, selling and marketing for Lotensin, an ACE
inhibitor, as well as brand management. In exchange, we are entitled to receive
a split of incremental net sales above specified baselines. Also under this
agreement with Novartis, we copromote Lotrel(R) (amlodipine and benazepril HCI)
in the U.S. for which we are entitled to be compensated on a fee for service
basis with potential incentive payments based upon achieving certain net sales
objectives. Lotrel is a combination of the ACE inhibitor benazepril and the
calcium channel blocker amlodipine. Novartis has retained regulatory
responsibilities for Lotensin and Lotrel and ownership of all intellectual
property. Additionally, Novartis will continue to manufacture and distribute the
products. In the event our estimates of the demand for Lotensin are not accurate
or more sales and marketing resources than anticipated are required, the
Novartis transaction could have a material adverse impact on our results of
operations, cash flows and liquidity. During 2001 our efforts on this contract
did result in an operating loss because the sales of Lotensin did not exceed the
specified baselines by an amount great enough to cover our operating costs.
On September 10, 2001, we acquired InServe Support Solutions in a
transaction treated as an asset acquisition for tax purposes. The acquisition
was accounted for as a purchase in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) 141 and SFAS 142. The net assets of
InServe on the date of acquisition were approximately $1.3 million. At closing,
we paid the former stockholders of InServe $8.5 million, net of cash acquired.
Additionally, we deposited $3.0 million in escrow related to contingent payments
payable during 2002 if certain defined benchmarks are achieved. In connection
with this transaction, we recorded $7.9 million in goodwill, which is included
in other long-term assets, and the remaining purchase price was allocated to
identifiable assets and liabilities acquired.
InServe is a leading nationwide supplier of supplemental field-staffing
programs for the medical device and diagnostics industries. InServe provides
hands-on clinical education and after-sales support to maximize product
utilization and customer satisfaction. InServe's clients include many of the
leading medical device and diagnostics companies, including Becton Dickinson,
Roche Diagnostics and Johnson & Johnson.
In October 2001, we signed an agreement with Eli Lilly to copromote Evista
in the U.S. Evista is approved in the U.S. for the prevention and treatment of
osteoporosis in postmenopausal women. Under the terms of the agreement, we
provide a significant number of sales representatives to copromote Evista to
U.S. physicians. Our sales representatives augment the Eli Lilly sales force
promoting Evista. Under this agreement, we are entitled to be compensated based
on net sales achieved above a predetermined level. Since its launch in 1998,
more than 10 million prescriptions have been written for Evista in the U.S.
alone.
The Evista contract is a performance based contract for a term through
December 31, 2003, subject to earlier termination upon the occurrence of
specific events. Our compensation is earned as a percentage of net factory sales
above contractual baselines. To the extent that such baselines are not exceeded,
which was the case in 2001, we receive no revenue. Further, we are required to
commit a certain level of spending for promotional and selling activities
including but not limited to sales force representatives. These costs could
range from $9.0 million to $12.0 million per quarter. The sales force assigned
to Evista may be used to promote other products, including products covered in
other PDI copromotion arrangements which may allow us to generate additional
revenue to cover the costs of the sales force.
Product Sales and Distribution
24
Beginning with the fourth quarter of 2000 we have entered into a number of
significant performance based contracts and we use a variety of structures for
such contracts. Our agreement with GSK regarding Ceftin was a marketing and
distribution contract, under which we had the exclusive right to market and
distribute the designated Ceftin products in the U.S. The agreement had a
five-year term but was cancelable by either party without cause on 120 days
notice. The agreement was terminated by mutual consent, effective February 28,
2002. Contracts such as the Ceftin agreement, which require us to purchase and
distribute product, have a greater number of risk factors than a traditional fee
for service contract. Any future agreement that involves in-licensing or product
acquisition would have similar risk factors. Some of the additional risk factors
associated with distribution, in-licensing, or product acquisitions are
described in this report under, "Certain Factors That May Affect Future Growth",
beginning on page 11 of this report.
We have also entered other performance based agreements that do not
require the distribution, in-licensing or ownership of product. An important
performance parameter is normally the level of sales attained by the product
while we have marketing or promotional responsibility.
Revenues and expenses
Our revenues and expenses are segregated between service and product sales
for reporting purposes. Historically, we have derived a significant portion of
our service revenue from a limited number of clients. However, concentration of
business in the pharmaceutical outsourcing industry is common and we believe
that pharmaceutical companies will continue to outsource large projects as the
pharmaceutical outsourcing industry continues to demonstrate an ability to
successfully implement large programs. Accordingly, we are likely to continue to
experience significant client concentration in future periods. Our three largest
clients accounted for approximately 60%, 62% and 71%, of our service revenue for
the years ended December 31, 2001, 2000 and 1999, respectively. For the years
ended December 31, 2001 and 2000, product revenue from sales of Ceftin primarily
came from two major customers who accounted for approximately 67% and 62%,
respectively, of total net product revenue.
Service revenue and program expenses
Contract sales and marketing services 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. Under performance based contracts revenue is recognized when the
performance based parameters are attained.
Program expenses consist primarily of the costs associated with executing
product detailing programs or other marketing 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 such
as Ceftin (as discussed below under Product revenue and cost of goods sold) are
recorded as a selling expense and are included in other selling, general and
administrative expenses in the consolidated statements of operations.
25
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 program. We typically
receive an initial contract payment upon commencement of a product detailing
program as compensation for recruiting, hiring and training services associated
with staffing that program. In these cases, the initial payment is recorded as
revenue in the same period in which the costs of the services are expensed. Our
inability to specifically negotiate in our product detailing contracts payments
that are specifically attributable to 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
Selling, general and administrative expenses include compensation and
general corporate overhead. Compensation expense consists primarily of salaries,
bonuses, training and related 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 (SG&A) include corporate
overhead such as facilities costs, depreciation and amortization expenses and
professional services fees; and with respect to product that we distribute,
other SG&A also includes product detailing, marketing and promotional expenses.
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.
26
Years Ended December 31,
----------------------------------------------
Operating data 2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Revenue
Service, net 40.4% 75.8% 100.0% 100.0% 100.0%
Product, net 59.6 24.2 -- -- --
------ ------ ------ ------ ------
Total revenue, net 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of goods and services
Program expenses 33.3 56.5 74.4 73.6 74.2
Cost of goods sold 47.2 16.5 -- -- --
------ ------ ------ ------ ------
Total cost of goods and services 80.5 73.0 74.4 73.6 74.2
------ ------ ------ ------ ------
Gross profit 19.5 27.0 25.6 26.4 25.8
Compensation expense 5.7 7.9 11.2 13.2 16.0
Bonus to majority stockholder -- -- -- -- 3.0
Stock grant expense -- -- -- -- 5.9
Other selling, general and administrative
expenses 12.1 9.3 5.4 5.5 6.3
Acquisition and related expenses -- -- 0.7 -- --
------ ------ ------ ------ ------
Total general, selling and administrative
expenses 17.8 17.2 17.3 18.7 31.2
------ ------ ------ ------ ------
Operating income (loss) 1.7 9.8 8.3 7.7 (5.4)
Other income, net 0.3 1.2 2.0 1.9 0.5
------ ------ ------ ------ ------
Income (loss) before provision for income
taxes 2.0 11.0 10.3 9.6 (4.9)
Provision for income taxes 1.2 4.5 4.3 1.4 0.2
------ ------ ------ ------ ------
Net income (loss) 0.8% 6.5% 6.0% 8.2% (5.1)%
====== ====== ====== ====== ======
Pro forma data (unaudited)
Income (loss) before pro forma provision for
income taxes 10.3% 9.6% (4.9)%
Pro forma provision for income taxes 4.4 3.8 --
------ ------ ------
Pro forma net income (loss) 5.9% 5.8% (4.9)%
====== ====== ======
Comparison of 2001 and 2000
Revenue, net. Net revenue for 2001 was $696.6 million, an increase of
67.1% over revenue of $416.9 million for 2000. Net revenue from the contract
sales and marketing services segment for the year ended December 31, 2001 was
$281.3 million, a decrease of $34.6 million, or 11.0%, compared to net revenue
from that segment of $315.9 million for the prior year. This decrease was
primarily attributable to the loss of one large CSO contract, and the reduction
in size, or non-renewal of several others. These losses were partially offset by
moderate gains in new business, generally reflecting slower demand for
traditional contract sales services. We gained two large performance based
contracts during the year, reflecting increased demand for our LCXT and
copromotion services, although both fell short of our 2001 revenue expectations.
Net product revenue for the year ended December 31, 2001 was $415.3 million, an
increase of $314.3 million, or 311.2%, over net product revenue of $101.0
million for the prior year. All product revenue was attributable to sales of
Ceftin, for which we had distribution rights for the entire 2001 year and only
the fourth quarter of 2000.
Cost of goods and services. Cost of goods and services for the year ended
December 31, 2001 was $560.8 million, an increase of 84.3% over cost of goods
and services of $304.3 million for the year ended December 31, 2000. As a
percentage of total net revenue, cost of goods and services increased to 80.5%
in 2001 from 73.0% in 2000. This increase as a percentage of revenue was
primarily attributable to the reserve for losses on the Ceftin contract that
were recorded in the third quarter of 2001 due to the US Court of Appeals
decision in August 2001
27
which allowed for earlier generic competition. This included certain selling,
general and administrative expenses which we were obligated to incur under the
Ceftin contract termination. Program expenses (i.e., cost of services) for 2001
were $232.2 million, a decrease of 1.4% over program expenses of $235.4 million
for 2000. As a percentage of net service revenue, program expenses for 2001 were
82.5%, an increase of 8.0% over program expenses in 2000 of 74.5%, primarily
because of lower than expected revenues for the performance based contracts
(Novartis and Eli Lilly) that we began in the second quarter; excluding the
effect of these contracts, program expenses would have been 67.2% of service
revenue. Performance based contracts can achieve a gross profit percentage above
our historical averages for CSO programs if the performance of the product(s)
meets or exceeds expectations, but can be below normal gross profit standards if
the performance of the product falls short of expectations. Cost of goods sold
was $328.6 million for the year ended December 31, 2001, an increase of $259.6
million, or 376.3% above cost of goods sold of $69.0 million for the prior year.
As a percentage of net product revenue, cost of goods sold for 2001 and 2000 was
79.1% and 68.3%, respectively. The loss on the Ceftin contract includes the
costs we were obligated to incur under the termination agreement with GSK. This
included certain marketing and selling costs previously treated as selling,
general and administrative expenses. Specifically, the associated selling,
general and administrative expenses incurred during the fourth quarter of 2001
of $21.0 million and the $12.3 million of selling, general and administrative
expenses anticipated for the remainder of the contract termination period, which
extends through February 28, 2002, have been classified as cost of goods sold.
Excluding the $21.0 million charge and the remaining reserve of $12.3 million,
cost of goods sold as a percentage of net product revenue would have been 71.1%.
As our previous reports have noted, 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. During the fourth
quarter of 2001, we were adversely affected as our selling price reflected
greater discounts than normal and our purchasing discounts were reduced because
of our agreement with GSK to forego such discounts in exchange for a release
from our contractual minimum inventory purchase requirements for the fourth
quarter.
Compensation expense. Compensation expense for 2001 was $39.3 million
compared to $32.8 million for 2000. As a percentage of total net revenue,
compensation expense decreased to 5.7% for 2001 from 7.9% for 2000. Compensation
expense for the year ended December 31, 2001 attributable to the contract sales
and marketing services segment was $33.2 million compared to $31.8 million for
the year ended December 31, 2000. As a percentage of net revenue from that
segment, compensation expense increased to 11.8% in 2001 from 10.1% in 2000.
Compensation expense for the year ended December 31, 2001 attributable to the
product segment was $6.1 million compared to $1.0 million for the prior year
period. As a percentage of net revenue from the product segment, compensation
expense increased to 1.5% in 2001 from 1.0% in 2000. 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 $83.8 million for the year ended
December 31, 2001, an increase of 115.9% over other selling, general and
administrative expenses of $38.8 million for 2000. As a percentage of total net
revenue, total other selling, general and administrative expenses increased to
12.1% for 2001 from 9.3% for 2000. Other selling, general and administrative
expenses attributable to contract sales and marketing services for the year
ended December 31, 2001 were $22.7 million, an increase of 34.4% over other
selling, general and administrative expenses of $16.9 million attributable to
that segment for 2000. As a percentage of net revenue from contract sales and
marketing services, other selling, general and administrative expenses for 2001
and 2000 were 8.1% and 5.4%, respectively. This increase was primarily due to
facilities expansion resulting in increased rental expense, discretionary
expenditures in information technology resulting in increased depreciation
expense and other expense categories, most notably professional fees; and the
largest increases were marketing expenses related to advertising and promotion
associated with our new service offerings. Other selling, general and
administrative expenses attributable to the product segment for 2001 were $61.1
million, or 14.6% of net product revenue, an increase of $39.2 million, or
178.7%, over other selling, general and administrative expenses of $21.9
million, or 21.7% of net product revenue, for the year ended December 31, 2001.
As discussed previously, approximately $21 million of committed selling expenses
were included in the determination of the loss on the Ceftin contract which was
recorded through cost of goods sold. If this $21.0 million had been included,
total other selling, general and administrative expenses as a percentage of
revenue would have been 19.8%. Other selling, general and administrative
expenses for the product segment consisted primarily of field selling costs,
direct marketing expenses, business insurance and professional fees; all of
these costs were fully implemented in 2001, while during the fourth quarter of
2000 the related capabilities were
28
being developed. The seasonality of Ceftin sales also caused other selling,
general and administrative expenses to vary as a percentage of revenue.
Operating income. Operating income for 2001 was $12.7 million, a decrease
of $28.2 million, or 68.9%, compared to operating income of $40.9 million for
2000. There was an operating loss for 2001 for the contract sales and marketing
services segment of $6.8 million, compared to contract sales and marketing
services operating income in 2000 of $31.8 million. The performance based
contracts instituted beginning in May 2001 incurred a negative gross profit and
a significant operating loss in the third and fourth quarters of 2001, thereby
having an adverse effect on the services segment. Operating income for the
product segment for 2001 was $19.5 million, or 4.7% of net product revenue,
compared to $9.1 million, or 9.0% of net product revenue in 2000.
Other income, net. Other income, net, for 2001 was $2.3 million, compared
to other income, net of $4.9 million for 2000. Interest income of $5.0 million
was the primary component of other income, net in 2001, compared to $7.4 million
in 2000. The $2.4 million decrease in interest income in 2001 compared to 2000
was the result of lower available average cash balances, as well as decreasing
interest rates throughout 2001. The $5.0 million in interest income for 2001 was
partially offset by the $1.9 million loss on investment in in2Focus. In 2000, a
$2.5 million loss was recorded resulting from our investment in iPhysicianNet.
Provision for income taxes. The income tax provision for the year ended
December 31, 2001 was $8.6 million compared to a $18.7 million tax provision for
the year ended December 31, 2000, which consisted of Federal and state corporate
income taxes. The effective tax rate for the year ended December 31, 2001 was
57.6%, compared to an effective tax rate of 40.9% for the prior year. During
2001, the increase in the effective tax rate was attributable to several
specific transactions or situations that when applied to our lower than normal
pretax earnings created a large deviation from our target effective tax rate of
41% to 42%. During 2001, we wrote off our investment in In2Focus in the amount
of $1.9 million which will likely be treated as a capital loss for tax purposes,
the benefit of which can only be realized via an offset against capital gains.
Since we do not anticipate having offsetting capital gains, a valuation
allowance was recorded. In addition, certain nondeductible expenses which are
routinely incurred had a significantly higher impact on the effective tax rate
in 2001, compared to prior years, due to the lower level of pretax profits.
Net income. Net income for 2001 was $6.4 million, 76.5% lower than net
income of $27.0 million in 2000 due to the factors discussed previously.
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.
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.
29
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 services 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 forma 1999
effective tax rate was lower as a result of $1.2 million of non-deductible
acquisition and related expenses.
Liquidity and capital resources
As of December 31, 2001 we had cash and cash equivalents and short-term
investments of approximately $167.4 million and working capital of $113.7
million compared to cash and cash equivalents and short-term investments of
approximately $113.9 million and working capital of $120.7 million at December
31, 2000.
For the year ended December 31, 2001, net cash provided by operating
activities was $80.1 million, compared to $19.1 million cash provided by
operating activities for the same period in 2000. The main components of cash
provided by operating activities were net income from operations of $6.4
million, along with non-cash adjustments
30
for depreciation, amortization, reserves and the write-off of assets and
investments of $10.6 million and a positive cash impact of $82.5 million from
changes in "Other changes in assets and liabilities." During the fourth quarter
of 2001 we agreed with GSK to terminate the Ceftin marketing and distribution
agreement as of February 28, 2002, thus the decline in inventory and the
reduction in accounts receivable were associated with the winding down of Ceftin
activities. This was partially offset by a non-cash adjustment for deferred
income taxes of $19.4 million. The balances in "Other changes in assets and
liabilities" may fluctuate depending on a number of factors, including
seasonality of product sales, the number and size of programs, contract terms
and other timing issues; these fluctuations may vary in size and direction each
reporting period.
Inventory decreased by $35.9 million in 2001. All inventory is associated
with our Ceftin distribution agreement with GSK. Accrued rebates and discounts
increased by $44.0 million in 2001. This entire amount is associated with the
chargebacks, rebates and discounts owed to wholesalers, managed care
organizations and state medicaid organizations in connection with sales of
Ceftin.
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, 2001, we had $10.9 million of unearned contract revenue and $6.9 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.
For the year ended December 31, 2001, net cash used in investing
activities was $31.1 million including $15.6 million for purchases of property
and equipment, $1.1 million invested in In2Focus, $11.9 million paid for the
acquisition of InServe and $2.5 million of short-term investments. Capital
expenditures were funded out of cash generated from operations.
For the year ended December 31, 2001, net cash provided by financing
activities was $2.0 million. This increase in cash is due to the net proceeds
received from the employee stock purchase plan implemented in June 2001 of $1.4
million, $709,000 in proceeds received from the exercise of common stock options
by employees, partially offset by net cash paid for treasury stock of $110,000.
Capital expenditures during the periods ended December 31, 2001, 2000, and
1999, were $15.6 million, $7.9 million and $1.4 million, respectively, and were
funded out of cash generated from operations.
We have a credit agreement dated as of March 30, 2001 with a syndicate of
banks, for which PNC Bank, National Association is acting as Administrative and
Syndication Agent, that provides for both a three-year, $30 million unsecured
revolving credit facility and a one-year, renewable, $30 million unsecured
revolving credit facility. Borrowings under the agreement bear interest equal to
either an average London interbank offered rate (LIBOR) plus a margin ranging
from 1.5% to 2.25%, depending on our ratio of funded debt to earnings before
interest, taxes depreciation and amortization (EBITDA); or the greater of prime
or the federal funds rate plus a margin ranging from zero to 0.25%, depending on
our ratio of funded debt to EBITDA. We are required to pay a commitment fee
quarterly in arrears for each of the long-term and short-term credit facilities.
These fees range from 0.175% to 0.325% for the long-term credit facility and
from 0.25% to 0.40% for the short-term credit facility, depending on our ratio
of funded debt to EBITDA. The credit agreement contains customary affirmative
and negative covenants including financial covenants requiring the maintenance
of a specified consolidated minimum fixed charge coverage ratio, a maximum
leverage ratio, a minimum consolidated net worth and a capital expenditure
limitation (as defined in the agreement). At December 31, 2001 we were in
compliance with these covenants, except for the minimum fixed charge coverage
ratio. Since the inception of these credit facilities there have been no draw
downs and there was no outstanding balance as of December 31, 2001. The credit
facilities were structured to accommodate our needs to fulfill the Ceftin
agreement. In light of the Ceftin agreement termination, we anticipate that
these credit facilities will be restructured to align better with our emerging
business needs. Until the restructuring of the credit facility is completed we
will not have access to funds under these credit facilities.
We believe that our cash and cash equivalents and future cash flows
generated from operations will be sufficient to meet our foreseeable operating
and capital requirements for the next twelve months. We continue to evaluate and
review acquisition candidates in the ordinary course of business.
31
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.
The following table sets forth quarterly operating results for the eight
quarters ended December 31, 2001:
Quarter Ended
----------------------------------------------------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2001 2001 2001 2001 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
Revenue
Service, net .......................... $ 78,087 $ 64,789 $ 71,129 $ 67,264 $ 71,289 $ 75,789 $ 84,367 $ 84,422
Product, net .......................... 94,978 79,155 44,544 196,637 -- -- -- 101,008
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue, net .................. 173,065 143,944 115,673 263,901 71,289 75,789 84,367 185,430
--------- --------- --------- --------- --------- --------- --------- ---------
Cost of goods and services
Program expenses ...................... 55,395 53,321 59,529 63,926 50,120 58,108 63,233 63,894
Cost of goods sold .................... 64,215 51,523 51,823 161,068 -- -- -- 68,997
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of goods and services .... 119,610 104,844 111,352 224,994 50,120 58,108 63,233 132,891
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ............................. 53,455 39,100 4,321 38,907 21,169 17,681 21,134 52,539
Compensation expense ..................... 11,015 9,162 9,282 9,804 8,394 6,793 7,846 9,787
Other selling, general and
administrative expenses .............. 25,728 23,546 24,560 9,981 4,006 2,973 5,863 25,985
--------- --------- --------- --------- --------- --------- --------- ---------
Total selling, general and
administrative expenses .............. 36,743 32,708 33,842 19,785 12,400 9,766 13,709 35,772
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) .................. 16,712 6,392 (29,521) 19,122 8,769 7,915 7,425 16,767
Other income (expense), net .............. 1,870 1,537 999 (2,132) 684 255 1,984 1,941
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for taxes . 18,582 7,929 (28,522) 16,990 9,453 8,170 9,409 18,708
Provision (benefit) for income taxes ..... 7,653 3,527 (11,266) 8,711 3,839 3,332 3,701 7,840
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) ........................ $ 10,929 $ 4,402 $ (17,256) $ 8,279 $ 5,614 $ 4,838 $ 5,708 $ 10,868
========= ========= ========= ========= ========= ========= ========= =========
Basic net income (loss) per share ........ $ 0.79 $ 0.32 $ (1.24) $ 0.59 $ 0.43 $ 0.36 $ 0.42 $ 0.79
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income (loss) per share ...... $ 0.77 $ 0.31 $ (1.24) $ 0.59 $ 0.43 $ 0.35 $ 0.41 $ 0.77
========= ========= ========= ========= ========= ========= ========= =========
Weighted average number of shares:
Basic ................................ 13,843 13,856 13,876 13,968 13,005 13,592 13,647 13,768
========= ========= ========= ========= ========= ========= ========= =========
Diluted .............................. 14,133 14,246 13,876 14,010 13,183 13,744 13,961 14,174
========= ========= ========= ========= ========= ========= ========= =========
Critical accounting policies
Our consolidated financial statements are presented on the basis of
accounting principles that are generally accepted in the U.S. All professional
accounting standards that were effective as of December 31, 2001 have been taken
into consideration in preparing our consolidated financial statements. We have
chosen to highlight certain policies that we consider critical to the operation
of our business and an understanding of our consolidated financial statements.
Contract sales and marketing services 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,
32
incentive or other payment is assured. Under performance based contracts,
revenue is recognized when the performance based parameters are attained. 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. 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.
We have certain non cancelable contractual obligations accounted for as
operating leases. We lease facilities, automobiles and certain equipment under
agreements classified as operating leases which expire at various dates through
2006.
As of December 31, 2001, 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)
2002............................................................ $ 3,281
2003............................................................ 3,296
2004............................................................ 2,746
2005............................................................ 1,120
2006............................................................ 126
-------
Total........................................................... $11,161
=======
Furthermore, we have an agreement with Eli Lilly to copromote Evista in
the U.S. through December 2003. Under the terms of the agreement, we provide a
significant number of sales representatives to co-promote Evista to U.S.
physicians and only record revenue to the extent we exceed certain contractual
baselines.
Provisions for losses to be incurred on contracts are recognized in full
in the period in which it is determined that a loss will result from a
performance of the contractual arrangement.
Our consolidated balance sheets reflect various financial instruments
including cash and cash equivalents and investments. We do not engage in trading
activities or off-balance sheet financial instruments. As a matter of policy,
excess cash and deposits are held by major banks or in high quality short-term
liquid instruments. We have investments, mainly in equity instruments, that are
carried at fair market value. We do not use derivative instruments such as swaps
or forward contracts.
We apply 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.
Effect of new accounting pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Under these new standards,
all acquisitions subsequent to June 30, 2001 must be accounted for under the
purchase method of accounting, and purchased goodwill is no longer amortized
over its useful life. Rather, goodwill will be subject to a periodic impairment
test based upon its fair value. We applied the provisions of SFAS 141 to our
acquisition of InServe which occurred in September 2001.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of
33
asset retirement obligations. Under SFAS 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises, and will
be amortized to expense over the life of the asset.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and discontinued operations.
We are currently evaluating the impact of these pronouncements to
determine the effect, if any, they may have on the consolidated financial
position and results of operations. We are required to adopt these statements
effective January 1, 2002.
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.
34
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............................... 66 Chairman of the board of directors and director of strategic planning
Charles T. Saldarini........................ 38 Chief executive officer and vice chairman of the board of directors
Steven K. Budd.............................. 45 President and chief operating officer
Bernard C. Boyle............................ 57 Chief financial officer, executive vice president, secretary and treasurer
Stephen Cotugno............................. 42 Executive vice president--corporate development and investor relations
Robert R. Higgins........................... 59 Executive vice president--contract sales and medical education solutions
Christopher Tama............................ 43 Executive vice president--copromotion and lifecycle extension solutions
Len Mormando................................ 62 Executive vice president--corporate operations and support
John M. Pietruski (1)(2).................... 68 Director
Jan Martens Vecsi (2)....................... 58 Director
Gerald J. Mossinghoff (1)................... 66 Director
John C. Federspiel (1)(2)................... 48 Director
- ------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
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 14
years at PDI, his contributions have spanned the full range of our development.
He is responsible for making PDI the largest contract sales organization in the
U.S. 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 has served as our president and chief operating officer
since June 2000. Mr. Budd oversees the management of PDI's operating units and
key internal support functions. He also contributes to the development of PDI's
strategic plans and serves on our executive leadership team. Mr. Budd joined us
in April 1996 as vice president, account group sales. He became executive vice
president in July 1997, chief operating officer in January 1998, and our
president in June 2000. 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
35
William Douglas McAdams, Inc., an advertising agency. From 1966 through 1971,
Mr. Boyle was employed by the national accounting firm then known as 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.
Stephen P. Cotugno became our executive vice president-corporate
development and investor relations 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 a B.A. in finance and economics from Fordham University
in 1981.
Robert R. Higgins became our executive vice president-contract sales and
medical education solutions in January 2002. Prior to that, Mr. Higgins served
as executive vice president-client programs. He joined us in a field management
capacity 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 M.B.A. from North Texas State University in
1971.
Leonard Mormando became our executive vice president-corporate operations
and support for PDI in September 2000. Mr. Mormando joined us in 1997 as the
executive director of training and development. In 1998, he was promoted to vice
president training and development & recruiting and hiring. Prior to joining
PDI, Mr. Mormando spent 32 years at Ciba Geigy Pharmaceuticals, including ten
years as director of U.S. training where he was responsible for training over
5,000 sales representatives. Mr. Mormando is a member of the National Society of
Professional Sales Trainers since 1982.
Christopher Tama joined us as executive vice president-copromotion and
lifecycle extension solutions in January 2000. Mr. Tama has responsibility for
PDI's at risk programs involving integrated sales and marketing solutions. 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 received a B.A. in economics from
Villanova 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 U.S. 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.
36
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.
John C. Federspiel became a director in October 2001. Mr. Federspiel is
president of Hudson Valley Hospital Center, a 120-bed, short-term, acute care,
not-for-profit hospital in Westchester County, New York. Prior to joining Hudson
Valley Hospital in 1987, Mr. Federspiel spent an additional 10 years in health
administration, during which he held a variety of executive leadership
positions. Mr. Federspiel is an appointed Member of the State Hospital Review
and Planning Council, and has served as chairman of the Northern Metropolitan
Hospital Association, as well as other affiliations. Mr. Federspiel received a
B.S. degree from Ohio State University in 1975 and a M.B.A. from Temple
University in 1977.
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 and Mr. Federspiel serve in the class whose term expires in
2002, and Messrs. Saldarini and Pietruski serve in the class whose term expires
in 2003.
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.
37
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 2001, 2000 and 1999 whose aggregate
compensation exceeded $100,000.
Annual compensation Long-term compensation
-------------------------------------- --------------------------
Shares
of
common
Other Restricted stock
annual stock underlying All other
Name and Principal Position Salary Bonus compensation awards(1) options compensation
- --------------------------- ------ ----- ------------ ---------- ---------- ------------
Charles T. Saldarini
Vice chairman and chief
executive officer
2001................ $ 336,864 $ 179,212 $ 6,264 $ -- 34,066 $ 5,250
2000................ 294,594 506,731 8,713 -- -- 6,203
1999................ 283,254 450,000 5,657 -- -- 2,145
Steven K. Budd
President and chief
operating officer
2001................ 262,500 103,819 2,537 44,494 23,338 4,200
2000................ 225,000 243,003 2,891 104,144 -- 4,744
1999................ 182,053 216,409 2,229 83,591 25,000 3,524
Bernard C. Boyle
Chief financial officer,
executive vice president,
secretary and treasurer
2001................ 232,292 93,863 4,455 40,227 19,900 4,646
2000................ 187,500 207,211 4,706 88,805 -- 4,010
1999................ 167,975 180,180 3,350 77,220 20,000 3,256
Robert R. Higgins
Executive vice president
2001................ 172,917 68,873 3,435 29,517 10,952 3,458
2000................ 141,667 114,042 3,456 48,875 -- 3,000
1999................ 125,567 73,238 1,977 31,387 15,000 2,396
Christopher Tama(2)
Executive vice president
2001................ 189,583 75,561 2,649 32,383 20,168 2,917
2000................ 167,708 210,000 1,828 90,000 5,000 --
1999................ -- -- -- -- -- --
- ----------
(1) For the years ended December 31, 2001, 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, 2001, 2000 and 1999, which was $20.47, $99.42 and $27.25,
respectively. The fair market value of the shares owned by the named
executive officers on December 31, 2001, based upon the closing price of
our common stock of $22.32 on that date, was as follows: Mr. Budd --
$140,348 (6,288 shares); Mr. Boyle -- $127,023 (5,691 shares); Mr. Higgins
-- $68,835 (3,084 shares); and Mr. Tama -- $55,510 (2,487 shares).
(2) Mr. Tama joined us as executive vice president in January 2000.
Option grants. The following table sets forth certain information
regarding options granted by us in 2001 to each of the executives named in the
Summary Compensation Table.
38
Option Grants in Last Fiscal Year
---------------------------------------------------------------------------------
Individual Grants Potential Realizable
------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Shares Total Options Price Appreciation
Underlying Granted Exercise for Option Term (1)
Options to Employees Price Expiration ---------------------
Name Granted in Fiscal Year ($/share) Date 5% 10%
- --------------------------------- ---------- -------------- --------- ---------- --------- ---------
Charles T. Saldarini............. 34,066 6.2% $59.50 2/14/11 $1,274,724 $3,230,400
Steven K. Budd................... 23,338 4.3% 59.50 2/14/11 873,290 2,213,088
Bernard C. Boyle................. 19,900 3.6% 59.50 2/14/11 744,643 1,887,071
Robert R. Higgins................ 10,952 2.0% 59.50 2/14/11 409,815 1,038,553
Christopher Tama................. 20,168 3.7% 59.50 2/14/11 754,671 1,912,485
- ----------
(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 2001 and the number and value of unexercised options held by the Named
Executive Officers as of December 31, 2001.
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 -- -- -- 34,066 -- --
Steven K. Budd -- -- 16,667 31,671 -- --
Bernard C. Boyle -- -- 13,333 26,567 -- --
Robert R. Higgins -- -- 7,500 15,952 $15,800 --
Christopher Tama -- -- 1,667 23,501 -- --
- ----------
(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, 2001 of $22.32 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.
In November 2001, we entered into an employment agreement with Charles T.
Saldarini providing for his employment as our chief executive officer and vice
chairman of the board for a term expiring on October 31, 2005 subject to
automatic one-year renewals unless either party gives written notice one-year
prior to the end of the then current term of the agreement. The agreement
provides for an annual base salary of $350,000 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 Mr. Saldarini's employment is terminated without cause (as defined) or
if he terminates his employment for good reason (as defined), we will pay him an
amount equal to three times the sum of his then current base salary plus the
average incentive compensation paid to him during the three years immediately
preceding the termination date.
In November 2001, we entered into an amended and restated employment
agreement with Steven K. Budd providing for his employment as our president and
chief operating officer for a term expiring on April 30, 2005
39
subject to automatic one-year renewals unless either party gives written notice
one-year 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. Budd will
be entitled to bonus and incentive compensation awards as determined by the
compensation committee. Further, the agreement provides, among other things,
that, if Mr. Budd's employment is terminated without cause (as defined) or if he
terminates his employment for good reason (as defined), we will pay him an
amount equal to three times the sum of his then current base salary plus the
average incentive compensation paid to him during the three years immediately
preceding the termination date.
In November 2001, we entered into an amended and restated employment
agreement with Bernard C. Boyle providing for his employment as our executive
vice president and chief financial officer for a term expiring on April 30, 2004
subject to automatic one-year renewals unless either party gives written notice
one-year prior to the end of the then current term of the agreement. The
agreement provides for an annual base salary of $250,000 and for participation
in all executive benefit plans. The agreement also provides that Mr. Boyle will
be entitled to bonus and incentive compensation awards as determined by the
compensation committee. Further, the agreement provides, among other things,
that, if Mr. Boyle's employment is terminated without cause (as defined) or if
he terminates his employment for good reason (as defined), we will pay him an
amount equal to three times the sum of his then current base salary plus the
average incentive compensation paid to him during the three years immediately
preceding the termination date.
In November 2001, we entered into an amended and restated employment
agreement with Stephen Cotugno providing for his employment as our executive
vice president - corporate development and investor relations for a term
expiring on November 30, 2004 subject to automatic one-year renewals unless
either party gives written notice one-year prior to the end of the then current
term of the agreement. The agreement provides for an annual base salary of
$175,000 and for participation in all executive benefit plans. The agreement
also provides that Mr. Cotugno will be entitled to bonus and incentive
compensation awards as determined by the compensation committee. Further, the
agreement provides, among other things, that, if Mr. Cotugno's employment is
terminated without cause (as defined) or if he terminates his employment for
good reason (as defined), we will pay him an amount equal to three times the sum
of his then current base salary plus the average incentive compensation paid to
him during the three years immediately preceding the termination date.
In January 2000, we entered into an employment agreement with Mr. Tama
providing for his employment as executive vice president - copromotion and
lifecycle extension solutions. 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 agreement provides for an annual base salary of $175,000 and
for Mr. Tama's participation in all executive benefit plans. The agreement also
provides 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.
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
40
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 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 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, 2001, options for an aggregate of 1,125,313 shares were
outstanding under our stock option plans, including 34,066 granted to Charles T.
Saldarini, our chief executive officer and vice chairman, 48,338 granted to
Steven K. Budd, our president and chief operating officer, 39,900 granted to
Bernard C. Boyle, our chief financial officer, 23,452 granted to Robert R.
Higgins, our executive vice president of client programs, 25,168 granted to
Christopher Tama, our executive vice president LifeCycle Ventures. The
outstanding options also include 26,250 granted to each of Gerald J.
Mossinghoff, John M. Pietruski and Jan Martens Vecsi, and 10,000 to John C.
Federspiel, our outside directors. In addition, as of December 31, 2001, options
to purchase 327,367 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 one 401(k) retirement plan (the "PDI plan") intended to
qualify under sections 401(a) and 401(k) of the Internal Revenue Code. These
401(k) plan is a defined contribution plan. Under this plan, we committed to
make mandatory cash contributions to the 401(k) plan to match employee
contributions up to a maximum of 2% of each participating employee's annual base
wages. In addition we can make discretionary contributions to this plan. There
is no option for employees to invest any of their 401k funds in our Common
Stock. Our contribution to the 401(k) plan for 2001 was approximately $1.6
million. In our 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. On January 1, 2001, this plan was
merged into the PDI plan.
41
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.
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 1, 2002 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 PDI, 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 35.0%
Charles T. Saldarini...................................... 811,355 (2) 5.8%
Steven K. Budd............................................ 31,736 (3) *
Bernard C. Boyle.......................................... 25,659 (4) *
Robert R. Higgins......................................... 14,237 (5) *
Christopher Tama.......................................... 12,543 (6) *
John M. Pietruski......................................... 20,750 (7) *
Jan Martens Vecsi......................................... 18,750 (8) *
Gerald J. Mossinghoff..................................... 18,750 (8) *
John C. Federspiel........................................ 3,333 (8) *
All executive officers and directors as a group
(12 persons)............................................. 5,894,729 (9) 42.0%
5% stockholders:
Mellon Financial Corporation(10).......................... 1,714,932 12.2%
One Mellon Center
Pittsburgh, PA 15258
Brown Capital Management, Inc.(10)........................ 1,237,675 8.8%
1201 N. Calvert Street
Baltimore, MD 21202
Franklin Resources, Inc.(10).............................. 893,975 6.4%
One Franklin Parkway
San Mateo, CA 94403-1906
Pilgrim Baxter & Associates(10)........................... 884,900 6.3%
1400 Liberty Ridge Drive
Wayne, PA 19087-5593
- ----------
42
* 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 March 1, 2002 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership
of any other person.
(2) Includes 11,355 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(3) Includes 24,446 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(4) Includes 19,967 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(5) Includes 11,151 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(6) Includes 10,056 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(7) Includes 18,750 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(8) Represents shares issuable pursuant to options exercisable within 60 days
of the date of this report.
(9) Includes 157,589 shares issuable pursuant to options exercisable within 60
days of the date of this report.
(10) This information was derived from the Schedule 13g 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. 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, 2001 we purchased approximately $1.1 million of advertising
through B&S and B&S received commissions of approximately $126,000. 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 vice president - corporate marketing/communications. In 2001,
compensation paid or accrued to Peter Dugan was $155,028.
43
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 PDI, Inc.(1)
3.2. By-Laws of PDI, Inc.(1)
3.3. Certificate of Amendment of Certificate of Incorporation
of PDI, Inc.*
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*
10.5. Agreement between the Company and John P. Dugan(1)
10.6. Form of Amended and Restated Employment Agreement
between the Company and Steven K. Budd*
10.7. Form of Amended and Restated Employment Agreement
between the Company and Bernard C. Boyle*
10.8. Form of Employment Agreement between the Company and
Christopher Tama(4)
10.9. Form of Amended and Restated Employment Agreement
between the Company and Stephen Cotugno*
10.10 Form of Loan Agreements between the Company and Steven
Budd (3)
10.11 Form of Revolving Credit Facility between PDI, Inc. and
PNC Bank, National Association, as Administrative and
Syndication Agent and The Bank of New York, as
Documentation Agent*
21.1. Subsidiaries of the Registrant*
23.1. Consent of PricewaterhouseCoopers 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.
44
(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.
(4) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference.
(b) Reports on Form 8-K
During the three months ended December 31, 2001, the Company filed the following
reports on Form 8-K:
Date Item Description
------------------ ---------- ----------------------------------------------------------------
October 2, 2001 5 Press Release: PDI Partners with Eli Lilly to Copromote Evista(R)
November 12, 2001 5 Press Release: PDI Reports 3rd Quarter Financial Results
December 6, 2001 5 Press Release: PDI and GSK agree to mutual termination of
Ceftin(R) agreement - effective February 28, 2002
45
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, on the 12th day of March, 2002.
PDI, 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 12th day of March, 2002.
Signature Title
--------- -----
/s/ John P. Dugan Chairman of the Board of Directors
- -----------------------------
John P. Dugan
Vice Chairman of the Board of Directors
/s/ Charles T. Saldarini and Chief Executive Officer
- -----------------------------
Charles T. Saldarini
/s/ Steven K. Budd President and Chief Operating Officer
- -----------------------------
Steven K. Budd
Chief Financial Officer (principal
/s/ Bernard C. Boyle accounting 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
/s/ John C. Federspiel Director
- -----------------------------
John C. Federspiel
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
Page
----
PDI, INC.
Report of Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
Schedule II. Valuation and Qualifying Accounts F-23
F-1
Report of Independent Accountants
To the Board of Directors and
Stockholders of PDI, Inc.
In our opinion, based upon our audits, the accompanying consolidated financial
statements listed in the index appearing under Item 14(a)(1) and 14(a)(2) on
page 44, present fairly, in all material respects, the financial position of
PDI, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(1)
and 14(a)(2) on page 44, 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 schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. 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 provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 15, 2002
F-2
PDI, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2001 2000
--------- ---------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents ............................................... $ 160,043 $ 109,000
Short-term investments .................................................. 7,387 4,907
Inventory, net .......................................................... 442 36,385
Accounts receivable, net of allowance for doubtful accounts of
$3,692 and $250 as of December 31, 2001 and 2000, respectively ........ 52,640 84,529
Unbilled costs and accrued profits on contracts in progress ............. 6,898 2,953
Deferred training ....................................................... 5,569 4,930
Other current assets .................................................... 8,101 4,541
Deferred tax asset ...................................................... 24,041 4,758
--------- ---------
Total current assets ....................................................... 265,121 252,003
Net property, plant & equipment ............................................ 21,044 9,965
Other long-term assets ..................................................... 16,506 8,257
--------- ---------
Total assets ............................................................... $ 302,671 $ 270,225
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 9,493 $ 31,328
Accrued rebates, sales discounts and returns ............................ 68,403 24,368
Accrued contract losses ................................................. 12,256 --
Accrued incentives ...................................................... 22,213 19,824
Accrued salaries and wages .............................................. 7,167 6,568
Unearned contract revenue ............................................... 10,878 23,813
Other accrued expenses .................................................. 21,026 25,382
--------- ---------
Total current liabilities .................................................. 151,436 131,283
--------- ---------
Long-term liabilities:
Deferred compensation ................................................... -- 169
Deferred tax liability .................................................. 300 663
--------- ---------
Total long-term liabilities ................................................ 300 832
--------- ---------
Total liabilities .......................................................... $ 151,736 $ 132,115
--------- ---------
Commitments and contingencies (note 19)
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; shares
issued and outstanding, 2001 - 13,968,097; 2000 - 13,837,390;
restricted $.01 par value; shares issued and outstanding, 2001,-15,388;
2000 - 7,972 .......................................................... $ 140 $ 138
Preferred stock, $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding ......................................... -- --
Additional paid-in capital ................................................. 102,757 96,945
Additional paid-in capital, restricted ..................................... 954 217
Retained earnings .......................................................... 48,008 41,654
Accumulated other comprehensive loss ....................................... (79) (34)
Unamortized compensation costs ............................................. (735) (810)
Treasury stock, at cost: 2001 - 5,000 shares; 2000 - 0 shares .............. (110) --
--------- ---------
Total stockholders' equity ................................................. $ 150,935 $ 138,110
--------- ---------
Total liabilities & stockholders' equity ................................... $ 302,671 $ 270,225
========= =========
The accompanying notes are an integral part of these consolidated
financial statements
F-3
PDI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(in thousands, except for per
share and statistical data)
Revenue
Service, net ....................................... $281,269 $315,867 $174,902
Product, net ....................................... 415,314 101,008 --
-------- -------- --------
Total revenue, net ............................... 696,583 416,875 174,902
-------- -------- --------
Cost of goods and services
Program expenses (including related party amounts of
$1,057, $3,781 and $3,064 for the periods ended
December 31, 2001, 2000 and 1999, respectively) ... 232,171 235,355 130,121
Cost of goods sold ................................. 328,629 68,997 --
-------- -------- --------
Total cost of goods and services ................. 560,800 304,352 130,121
-------- -------- --------
Gross profit .......................................... 135,783 112,523 44,781
Compensation expense .................................. 39,263 32,820 19,611
Other general, selling & administrative expenses ...... 83,815 38,827 9,448
Acquisition and related expenses ...................... -- -- 1,246
-------- -------- --------
Total general, selling & administrative expenses ...... 123,078 71,647 30,305
-------- -------- --------
Operating income ...................................... 12,705 40,876 14,476
Other income, net ..................................... 2,275 4,864 3,471
-------- -------- --------
Income before provision for taxes ..................... 14,980 45,740 17,947
Provision for income taxes ............................ 8,626 18,712 7,539
-------- -------- --------
Net income ............................................ $ 6,354 $ 27,028 $ 10,408
======== ======== ========
Basic net income per share ............................ $ 0.46 $ 2.00 $ 0.87
======== ======== ========
Diluted net income per share .......................... $ 0.45 $ 1.96 $ 0.86
======== ======== ========
Basic weighted average number of shares outstanding ... 13,886 13,503 11,958
======== ======== ========
Diluted weighted average number of shares outstanding . 14,113 13,773 12,167
======== ======== ========
Pro forma data (unaudited) (note 22):
Income before provision for taxes, as reported....... $ 17,947
Pro forma provision for income tax................... 7,677
--------
Pro forma net income ................................ $ 10,270
========
Pro forma basic net income per share................. $ 0.86
========
Pro forma diluted net income per share............... $ 0.84
========
Pro forma basic weighted average number of shares outstanding 11,958
========
Pro forma diluted weighted average number of shares outstanding 12,167
========
The accompanying notes are an integral part of these consolidated
financial statements
F-4
PDI, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
----------------------------------------
2001 2000 1999
--------- --------- --------
(in thousands)
Cash Flows From Operating Activities
Net income from operations ....................................... $ 6,354 $ 27,028 $ 10,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 4,676 2,077 1,155
Deferred rent and compensation ........................... -- 11 38
Loss on disposal of asset ................................ 858 -- --
Amortized compensation costs ............................. 318 -- --
Deferred taxes, net ...................................... (19,411) (4,514) 642
Reserve for inventory obsolescence and bad debt .......... 2,995 353 --
Loss on other investments ................................ 1,863 2,500 --
Other changes in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable ............... 31,304 (55,838) (19,071)
Decrease (increase) in inventory ......................... 35,066 (36,488) --
(Increase) decrease in unbilled costs .................... (3,703) (695) 1,321
(Increase) decrease in deferred training ................. (639) (3,931) 223
(Increase) in other current assets ....................... (477) (2,141) (1,658)
(Increase) in other long-term assets ..................... (2,071) (2,931) (469)
(Decrease) increase in accounts payable .................. (21,969) 25,294 3,978
Increase in accrued rebates and sales discounts .......... 44,026 24,368 --
Increase in accrued contract losses ...................... 12,256 -- --
Increase in accrued liabilities .......................... 6,411 11,567 3,960
(Decrease) increase in unearned contract revenue ......... (12,939) 6,140 7,402
(Decrease) in payable to affiliate ....................... -- -- (56)
(Decrease) increase in other current liabilities ......... (4,623) 26,394 (2,279)
(Decrease) increase in other deferred compensation ....... (169) 169 --
(Decrease) in other long-term liabilities ................ -- (256) --
--------- --------- --------
Net cash provided by operating activities ........................ 80,126 19,107 5,594
--------- --------- --------
Cash Flows From Investing Activities
Sale of short-term investments ........................... 6,225 1,551 832
Purchase of short-term investments ....................... (8,750) (4,907) --
Investments in In2Focus and iPhysicianNet ................ (1,103) (3,260) --
Purchase of property and equipment ....................... (15,560) (7,865) (1,442)
Cash paid for acquisition, net of cash acquired .......... (11,902) -- (4,100)
--------- --------- --------
Net cash used in investing activities ............................ (31,090) (14,481) (4,710)
--------- --------- --------
Cash Flows From Financing Activities
Net proceeds from employee stock purchase plan
and the exercise of stock options ....................... 2,117 3,583 --
Purchase of treasury stock ............................... (110) -- --
Net proceeds from issuance of common stock ............... -- 41,584 458
Distributions to S corporation stockholders .............. -- (8) (670)
Repayment of loan to stockholder ......................... -- 1,428 --
Tax benefit relating to employee compensation programs ... -- -- 126
--------- --------- --------
Net cash provided by (used in) financing activities .............. 2,007 46,587 (86)
--------- --------- --------
Net increase in cash and cash equivalents ........................ 51,043 51,213 798
Cash and cash equivalents - beginning ............................ 109,000 57,787 56,989
--------- --------- --------
Cash and cash equivalents - ending ............................... $ 160,043 $ 109,000 $ 57,787
========= ========= ========
Cash paid for interest ........................................... $ 59 $ 19 $ 4
========= ========= ========
Cash paid for taxes ............................................. $ 18,023 $ 18,552 $ 7,864
========= ========= ========
The accompanying notes are an integral part of these consolidated
financial statements
F-5
PDI, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Treasury Stock
------------------ ----------------- Paid in Earnings
Shares Amount Shares Amount Capital (Deficit)
------ ------ ------ ------ ------- ---------
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
Deferred compensation costs
Repayment of loan by officer
------- ------ ------ ------- --------- --------
Balance - December 31, 2000 13,845 138 -- -- 97,162 41,654
======= ====== ====== ======= ========= ========
Net income for the year ended December 31, 2001 6,354
Unrealized investment holding losses, net of tax
Comprehensive income
Issuance of common stock 90 1 1,408
Issuance of officers' restricted common stock 7 737
Purchase of treasury stock 5 (110)
Exercise of common stock options 41 1 709
Tax benefit of nonqualified option exercise 3,695
Realized loss on sale of investment holdings
Amortization of deferred compensation costs
Deferred compensation costs
------- ------ ------ ------- --------- --------
Balance - December 31, 2001 13,983 $ 140 5 $ (110) $ 103,711 $ 48,008
======= ====== ====== ======= ========= ========
Accummulated
Other Unamortized
Comprehensive Deferred Loan to Compensation
Income (Loss) Compensation Officer Costs Total
------------- ------------ ------- ------------ --------
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)
Deferred compensation costs (810) (810)
Repayment of loan by officer 1,428 1,428
--------- ------------ -------- ------ --------
Balance - December 31, 2000 (34) -- -- (810) 138,110
========= ============ ======== ====== ========
Net income for the year ended December 31, 2001 6,354
Unrealized investment holding losses, net of tax (56) (56)
--------
Comprehensive income 6,298
Issuance of common stock 1,409
Issuance of officers' restricted common stock 737
Purchase of treasury stock (110)
Exercise of common stock options 710
Tax benefit of nonqualified option exercise 3,695
Realized loss on sale of investment holdings 11 11
Amortization of deferred compensation costs 318 318
Deferred compensation costs (243) (243)
--------- ------------ -------- -------- ---------
Balance - December 31, 2001 $ (79) $ -- $ -- $ (735) $ 150,935
========= ============ ======== ======== =========
The accompanying notes are an integral part of these consolidated
financial statements
F-6
1. Nature of Business and Significant Accounting Policies
Nature of Business
PDI, 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 U.S. pharmaceutical and medical devices and
diagnostics (MD&D) industries. See note 4 for a description of new business
activity and note 24 for segment information.
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"), InServe Support Solutions, Inc. ("InServe") 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 contract losses, accrued incentives payable to employees, deferred
taxes, allowances for doubtful accounts 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 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.
Under performance based contracts, revenue is recognized when the performance
based parameters are attained. Provisions for losses to be incurred on contracts
are recognized in full in the period in which it is determined that a loss will
result from a performance of the contractual arrangement. Except for the
contractual loss recorded related to the Ceftin agreement discussed in note 2,
no other losses were deemed necessary based on current projections as of
December 31, 2001.
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
F-7
and other costs, including facility rental fees, honoraria and travel expenses,
associated with executing a product detailing of the products distributed by the
Company, such as Ceftin 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
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 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
The Company adopted Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition in Financial Statements," in 2000 the effects of which are
immaterial for all periods presented. The Company recognizes revenue at the time
its products are shipped to its customers as, at that time, the risk of loss or
physical damage to the product passes to the customer, and the obligations of
customers to pay for the products are not dependent on the resale of the
product. Provision is made at the time of sale for all discounts and estimated
sales allowances. As is common in the Company's industry, customers are
permitted to return unused product, after approval from the Company, up to six
months before and one year after the expiration date for the product. The
products sold by the Company prior to the effective date of the Ceftin Agreement
termination of February 28, 2002, have expiration dates up to December, 2004.
Additionally, certain customers are eligible for price rebates or discounts,
offered as an incentive to increase sales volume and achieve favorable formulary
status, on the basis of volume of purchases or increases in the product's market
share over a specified period, and certain customers are credited with
chargebacks on the basis of their resales to end-use customers, such as HMO's,
which have contracted with the Company for quantity discounts. Furthermore, the
Company is also obligated to issue rebates under the federally administered
Medicaid program. In each instance the Company has the historical data and
access to other information, including the total demand for the drug the Company
distributes, the Company's market share, the recent or pending introduction of
new drugs or generic competition, the inventory practices of the Company's
customers and the resales by its customers to end-users having contracts with
the Company, necessary to reasonably estimate the amount of such returns or
allowances, and records reserves for such returns or allowances at the time of
sale as a reduction of revenue. The actual payment of these rebates varies
depending on the program and can take several calendar quarters before final
settlement. As the Company settles these liabilities in future periods all
adjustments, positive or negative, will be recorded through revenue in that
period. Further, after the termination of the Ceftin agreement, the Company will
currently not have any product sales activity and therefore the adjustments
could be the only activity in product revenue for a given period.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, accounts 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
F-8
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 (SFAS) 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 (loss). For the purposes of determining
gross realized gains and losses, the cost of securities sold is based upon
specific identification. The Company also has certain other investments, which
are included in other long-term assets. See note 8.
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. Leasehold improvements
are 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 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
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 the
Accounting Pronouncement Board (APB) Opinion No. 25. The Company has elected to
measure compensation expense based upon the intrinsic value approach under APB
Opinion No. 25. See note 21.
Advertising
The Company recognizes advertising costs as incurred. The total amounts
charged to advertising expense were approximately $547,000, $421,000 and
$267,000 for the years ended December 31, 2001, 2000 and 1999, 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 related 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'
information to the current year presentation.
F-9
2. Ceftin Contract Reserve
In October 2000, the Company entered into an agreement with
GlaxoSmithKline (GSK) for the exclusive U.S. marketing, sales and distribution
rights for Ceftin(R) Tablets and Ceftin(R) for Oral Suspension, two dosage forms
of a cephalosporin antibiotic, which agreement was terminated as of February 28,
2002, by mutual agreement of the parties. The agreement had a five-year term but
was cancelable by either party without cause on 120 days notice. From October
2000 through February 2002, the Company marketed and sold Ceftin products,
primarily to wholesale drug distributors, retail chains and managed care
providers.
On August 21 2001, the U.S. Court of Appeals overturned a preliminary
injunction granted by the New Jersey District Court which allowed for the entry
of a generic competitor to Ceftin immediately upon approval by the FDA. The
affected Ceftin patent had previously been scheduled to run through July 2003.
As a result of this decision and its impact on future sales, in the third
quarter of 2001, PDI recorded a charge to cost of goods sold and a related
reserve of $24.0 million representing the anticipated future loss to be incurred
by the Company under the Ceftin agreement as of September 30, 2001. The recorded
loss was calculated as the excess of estimated costs that PDI was contractually
obligated to incur to complete its obligations under the arrangement over the
remaining estimated gross profits to be earned under the contract from selling
the inventory. These costs primarily consisted of amounts paid to GSK to reduce
the purchase commitments, estimated committed sales force, selling and marketing
costs through the effective date of the termination, distribution costs, and
fees to terminate existing arrangements. The Ceftin agreement was terminated by
the Company and GSK under a mutual termination agreement entered into in
December 2001. Under the termination agreement, the Company agreed to perform
its marketing and distribution services through February 28, 2002. The Company
also maintained responsibility for sales returns for product sold until the
expiration date of the product sold, estimated to be December 31, 2004, and
certain administrative functions regarding Medicaid rebates.
As of December 31, 2001 the Company has approximately $12.3 million
remaining of the Ceftin contract loss reserve which consists primarily of the
remaining estimated costs related to the Company's contracted obligation to
provide detailing services through the termination period. While the Company has
certain performance requirements as discussed above, it had no remaining Ceftin
inventory purchase commitments as of December 31, 2001.
3. Charter Amendment
On October 1, 2001 the Company effected an amendment to its Certificate of
Incorporation (a) changing the Company's name from Professional Detailing, Inc.
to PDI, Inc., and (b) increasing the Company's authorized common stock from 30
million shares to 100 million shares. These changes were approved by the
Company's stockholders at the Company's 2001 annual meeting of stockholders.
4. New Business
LifeCycle Ventures, Inc., (LCV) 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 fully or partially funding and managing the marketing, sales and
distribution efforts for the products in return for performance based
compensation. LCV was merged into PDI, Inc. effective December 31, 2001.
In May 2001 the Company entered an agreement with Novartis Pharmaceuticals
Corporation (Novartis) for the U.S. sales, marketing and promotion rights for
Lotensin(R) and Lotensin HCT(R), which agreement runs through December 31, 2003.
Pursuant to this agreement, the Company provides promotional, selling and
marketing for Lotensin, an ACE inhibitor, as well as brand management. In
exchange, the Company is entitled to receive a split of incremental net sales
above specified baselines. Also pursuant to this agreement the Company
copromotes Lotrel(R) in the U.S. for which it is entitled to be compensated on a
fee for service basis with potential incentive payments based upon achieving
certain net sales objectives. Lotrel is a combination of the ACE inhibitor
benazepril and the calcium channel blocker amlodipine. Novartis has retained
certain regulatory responsibilities for Lotensin and Lotrel and ownership of all
intellectual property. Additionally, Novartis will continue to manufacture and
distribute the products. In the event the Company's estimates of the demand for
Lotensin are not accurate or more sales and
F-10
marketing resources than anticipated are required, the Novartis transaction
could have a material adverse impact on the Company's results of operations,
cash flows and liquidity. During 2001 the Company's efforts on this contract did
result in an operating loss because the sales of Lotensin did not exceed the
specified baselines by an amount great enough to cover its operating costs. The
Company currently estimates that future revenue will exceed costs associated
with the arrangement and therefore no provision for loss is needed.
In October 2001, the Company signed an agreement with Eli Lilly and
Company (Eli Lilly) to copromote Evista in the U.S. Evista is approved in the
U.S. for the prevention and treatment of osteoporosis in postmenopausal women.
Under the terms of the agreement, the Company provides a significant number of
sales representatives to copromote Evista to U.S. physicians. These sales
representatives augment the Eli Lilly sales force promoting Evista. Under this
agreement, the Company is entitled to be compensated based on net sales achieved
above a predetermined level. The Eli Lilly arrangement is a performance based
contract which extends through December 31, 2003, subject to earlier termination
upon the occurrence of specific events. PDI's compensation is earned as a
percentage of net factory sales above contractual baselines. To the extent that
such baselines are not exceeded, which was the case in 2001, the Company
receives no revenue. The Company currently estimates that future revenue will
exceed costs associated with the arrangement and therefore no provision for loss
is needed. Further, the Company is required to commit a certain level of
spending for promotional and selling activities including but not limited to
sales force representatives. Such costs could range from $9.0 million to $12.0
million per quarter. This sales force assigned to Evista may be used to promote
other products, including products covered in other PDI copromotion arrangements
which may allow the Company to generate additional revenue to cover the costs of
this sales force.
5. Public Offerings of Common Stock
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.
6. 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 interests 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
Ended
March 31, 1999
---------------
(in thousands)
Revenue:
PDI..................................................... $ 34,581
TVG..................................................... 5,731
--------
Combined................................................ $ 40,312
========
Net income (loss):
PDI..................................................... $ 2,696
TVG..................................................... 626
--------
Combined................................................ $ 3,322
========
F-11
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 U.S. 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 was being amortized using the straight-line method over
a period of 10 years through December 31, 2001. Beginning in 2002 purchased
goodwill is no longer amortized over its useful life. Rather, goodwill will be
subject to a periodic impairment test based upon its fair value. See note 23.
On September 10, 2001, the Company acquired 100% of the capital stock of
InServe Support Solutions ("InServe") in a transaction treated as an asset
acquisition for tax purposes. InServe is a nationwide supplier of supplemental
field-staffing programs for the medical device and diagnostics industries
(MD&D). The acquisition has been accounted for as a purchase, subject to the
provisions of SFAS 141 and SFAS 142. The net assets of InServe on the date of
acquisition were approximately $1.3 million. We made payments to the Seller at
closing of $8.5 million, net of cash acquired. Additionally, we put $3.0 million
in escrow related to contingent payments payable during 2002 if certain defined
benchmarks are achieved. The Company expects all benchmark performance criteria,
except those related to certain financial measures in the amount of $265,265,
will be achieved in 2002. In connection with this transaction, we recorded $7.9
million in goodwill, which is included in other long-term assets, and the
remaining purchase price was allocated to identifiable assets and liabilities
acquired.
The following unaudited pro forma results of operations for the years
ended December 31, 2001, 2000 and 1999 assume that the Company and InServe had
been combined as of the beginning of the periods presented. The pro forma
results include estimates and assumptions which management believes are
reasonable. However, pro forma results are not necessarily indicative of the
results which would have occurred if the acquisition had been consummated as of
the dates indicated, nor are they necessarily indicative of future operating
results.
Year ended December 31,
------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands, except for per share data)
(unaudited)
Net sales - pro forma $ 702,958 $ 425,516 $ 182,360
----------- ----------- -----------
Net income - pro forma $ 6,440 $ 27,556 $ 10,855
----------- ----------- -----------
Pro forma diluted earnings per share $ 0.46 $ 2.00 $ 0.89
----------- ----------- -----------
7. Short-Term Investments
At December 31, 2001, short-term investments were $7.4 million, including
approximately $928,000 of investments classified as available for sale
securities. At December 31, 2000, short-term investments were $4.9 million,
including approximately $231,000 of investments 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.
8. Other Investments
In February 2000, the Company signed a three-year agreement with
iPhysicianNet Inc. ("IPNI"). In connection with this agreement, the Company made
an investment of $2.5 million in preferred stock of IPNI. Under the agreement,
the Company was appointed as the exclusive contract sales organization in the
U.S. to be affiliated with the IPNI network, prospectively allowing the Company
to offer e-detailing capabilities to its existing and potential clients. In
December 2001, IPNI had an additional offering of preferred stock to its
investors and the Company made an additional investment of approximately
$189,000 in preferred stock to maintain its percentage of ownership. This
additional investment was then immediately expensed as the Company's cumulative
share of IPNI's losses would still require the investment to be recorded at
zero. For the year ended December 31, 2000, the Company recorded net losses of
$2.5 million under the equity method related to this investment, which
represented its share of IPNI's losses until the investment was reduced to zero.
Such losses were included in other income, net, in the consolidated statement of
operations. The Company has no further commitments under this agreement.
F-12
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. In 2001, the Company made further
investments in this stock of approximately $1.1 million raising its ownership to
approximately 12%. The Company recorded its investment under the cost method. In
light of the negative operating cash flows to date and the uncertainty of
achieving positive future results, the Company concluded as of December 31,
2001, that its investment related to in2Focus was other than temporarily
impaired and was written down to zero, its current estimated net realizable
value. As a result the Company recorded a net loss in the fourth quarter of 2001
of $1.9 million which is included in other income, net, in the consolidated
statement of operations.
9. 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, 2001, 2000 and
1999 is as follows:
Years Ended December 31,
---------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Basic weighted average number of common
shares outstanding................................... 13,886 13,503 11,958
Dilutive effect of stock options....................... 227 270 209
-------- -------- --------
Diluted weighted average number of common shares
outstanding.......................................... 14,113 13,773 12,167
-------- -------- --------
Outstanding options at December 31, 2001 to purchase 1,003,162 shares of
common stock with exercise prices of $27.00 to $98.70 per share were not
included in the 2001 computation of historical and pro forma diluted net income
per share because to do so would have been antidilutive. There were no
antidilutive options at December 31, 2000. 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.
10. Property, Plant and Equipment
Property, plant and equipment consists of the following as of December 31,
2001 and 2000:
December 31,
-----------------------
2001 2000
-------- -------
(in thousands)
Furniture and fixtures $ 3,667 $ 2,574
Office equipment 3,001 2,357
Computer equipment 10,273 10,044
Computer software 12,348 -
Leasehold improvements 1,737 953
-------- -------
Total property, plant and equipment 31,026 15,928
Less accumulated depreciation and amortization (9,982) (5,963)
-------- -------
Property, plant and equipment, net $ 21,044 $ 9,965
-------- -------
11. Operating Leases
The Company leases facilities, automobiles and certain equipment under
agreements classified as operating leases which expire at various dates through
2006. Lease expense under these agreements for the years ended
F-13
December 31, 2001, 2000 and 1999 was approximately $28.4 million, $16.1 million
and $6.5 million, respectively, of which $24.8 million in 2001, $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 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 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,
the Company signed a lease for additional office space for PDI in Mahwah, New
Jersey, commencing in September 2000 and expiring in March 2003. In December
2000 and October 2001, the Company signed three-year leases for two operating
offices in High Point, North Carolina. Each lease is for approximately 1,200
square feet of office space. As a result of the Company's acquisition of
InServe, it assumed the obligations under their lease. This lease is for
approximately 9,100 square feet of space and expires in the second quarter of
2005. The Company also signed a lease for approximately 7,300 square feet of
office space in Bridgewater, New Jersey that became effective July 1, 2001. The
lease is for a five year term and expires on June 30, 2006. The Company records
lease expense on a straight line basis over the lease term.
As of December 31, 2001, 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)
2002.............................................. $ 3,281
2003.............................................. 3,296
2004.............................................. 2,746
2005.............................................. 1,120
2006.............................................. 126
--------
Total............................................. $ 11,161
========
12. Significant Customers
Service and other
During 2001, 2000 and 1999 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 2001 2000 1999
--------- ------- ------- -------
(in thousands)
A......................... $89,522 $90,976 $52,359
B......................... 60,120 -- --
C......................... -- 67,071 33,781
D......................... -- 37,038 38,101
At December 31, 2001 and 2000, these customers represented 41.3% and
61.7%, 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.
F-14
Product
During 2001, the Company had several significant customers for which it
provided products related to its distribution arrangement with GSK. The
following sets forth the product revenue generated by customers who accounted
for more than 10% of the Company's product revenue during the years ended
December 31, 2001 and 2000.
Years Ended December 31,
--------------------------
Customers 2001 2000
--------- ----------- ----------
(in thousands)
A........................................ $157,541 $30,825
B........................................ 122,063 31,733
C........................................ 53,392 --
At December 31, 2001 and 2000 these customers represented 91.1% and 48.4%,
respectively, of aggregated outstanding net product accounts receivable.
13. 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 amounts charged to the Company for these
purchases totaled approximately $1.1 million, $3.8 million and $3.1 million for
the years ended December 31, 2001, 2000 and 1999.
14. Income Taxes
TVG was treated as an S corporation through the time of merger with PDI in
May 1999. Consequently, during the periods in which TVG was treated as an S
corporation, it was not subject to Federal income taxes and they were not
subject to state income tax at the regular corporate rates. See note 22.
The provisions for income taxes for the years ended December 31, 2001,
2000 and 1999 are summarized as follows:
2001 2000 1999
--------- ------- --------
(in thousands)
Current:
Federal................................. $ 23,346 $18,993 $ 6,027
State................................... 4,691 4,233 870
--------- ------- --------
Total current........................... 28,037 23,226 6,897
Deferred................................... (19,411) (4,514) 642
--------- ------- --------
Provision for income taxes................. $ 8,626 $18,712 $ 7,539
--------- ------- --------
A reconciliation of the difference between the Federal statutory tax rates
and the Company's effective tax rate is as follows:
2001 2000 1999
------ ------ ------
Federal statutory rate ...................... 35.0% 35.0% 35.0%
State income tax rate, net of Federal benefit 9.8 5.3 4.1
Effect of S corporation status .............. -- -- (1.6)
Non-deductible acquisition expenses ......... -- (0.4) 2.4
Meals and entertainment ..................... 6.7 0.7 0.9
Valuation allowance ......................... 4.8 1.9 --
Other ....................................... 1.3 (1.6) 1.2
------ ------ ------
Effective tax rate .......................... 57.6% 40.9% 42.0%
------ ------ ------
F-15
The tax effects of significant items comprising the Company's deferred tax
assets and (liabilities) as of December 31, 2001 and 2000 are as follows:
2001 2000
-------- -------
Deferred tax assets (liabilities) -- current
Allowances and reserves $ 23,641 $ 3,251
Inventory 0 1,059
Compensation 400 169
Other 0 280
-------- -------
$ 24,041 $ 4,759
-------- -------
Deferred tax assets (liabilities) -- non current
Property, plant and equipment $ (580) $ (664)
State taxes 93 93
Intangible assets 217 142
Equity investment 1,808 989
Other (30) --
Valuation allowance on deferred tax assets (1,808) (989)
-------- -------
$ (300) $ (429)
-------- -------
Net deferred tax asset $ 23,741 $ 4,330
-------- -------
For the years ended December 31, 2001 and 2000, the Company has recorded a
valuation allowance of $1,808,046 and $989,000 against the deferred tax asset
related to the Company's equity investments 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 year ended December 31, 1999.
15. 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, 2001 and 2000, there were no issued and outstanding shares of
preferred stock.
16. 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.
17. Retirement Plans
During 2001, 2000 and 1999, the Company provided its employees with two
qualified profit sharing plans with 401(k) features. Under one plan (the "PDI
plan"), the Company expensed contributions of approximately $1.6 million,
$975,000 and $533,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. Under this plan, the Company is required to make mandatory cash
contributions each year equal to 100% of the amount contributed by each employee
up to 2% of the employee's wages. There is no option for employees to invest any
of their 401k funds in the Company's Common Stock. Any additional contribution
to this plan is at the discretion of the Company.
F-16
Under the other 401(k) plan, the Company expensed contributions of
approximately $195,000 and $346,000 for the years ended December 31, 2000 and
1999, respectively. Under this plan the 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. The Company could also make discretionary
contributions. Effective January 1, 2001, this plan was merged into the PDI plan
as amended.
18. 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 approximately $30,000 and $59,000 during
2001 and 2000, respectively. The total value of the Rabbi Trust at December 31,
2001 and 2000 was approximately $928,000 and $231,000, respectively.
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 $316,000 and $810,000 during 2001
and 2000, respectively, which will be amortized over the three-year vesting
period. The unamortized compensation costs have been classified as a separate
component of stockholders' equity.
19. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and, through LCV was 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 agreements 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 January and February 2002, the Company, its chief executive officer and
its chief financial officer were served with three complaints that were filed in
the U.S. District Court for the District of New Jersey alleging violations of
the Securities Act of 1934 (the "1934 Act"). These complaints were brought as
purported shareholder class actions under Sections 10(b) and 20(a) of the 1934
Act and Rule 10b-5 promulgated thereunder. Each of the complaints alleges a
purported class period which runs from May 22, 2001 through November 12, 2001;
seeks to represent a class of stockholders who purchased shares of the Company's
common stock during that period; and seeks money damages in unspecified amounts
and litigation expenses including attorneys' and experts' fees.
Each of these three complaints contain substantially similar allegations,
the essence of which is that the defendants intentionally or recklessly made
false or misleading public statements and omissions concerning the Company's
financial condition and prospects with respect to its marketing of Ceftin in
connection with the October 2000 distribution agreement with GlaxoSmithKline, as
well as its marketing of Lotensin and Lotrel in connection with the May 2001
distribution agreement with Novartis Pharmaceuticals Corporation.
F-17
The Company believes that each of these three complaints will ultimately
be consolidated into one action. As of this filing, it has not yet answered any
of the complaints, and discovery has not yet commenced. The Company believe that
the allegations in these complaints are without merit and it intends to defend
these actions vigorously.
The Company has been named as a defendant in several lawsuits, including a
class action matter, alleging claims arising from the use of the prescription
compound Baycol that was manufactured by Bayer Pharmaceuticals and marketed by
the Company on Bayer's behalf. In August 2001, Bayer announced that it was
voluntarily withdrawing Baycol from the U.S. market. The Company intends to
defend these actions vigorously and has asserted a contractual right of
indemnification against Bayer for all costs and expenses it incurs related to
these proceedings.
Other than the foregoing, the Company is not currently a party to any
material pending litigation and it is not aware of any material threatened
litigation.
20. Repurchase Program
On September 21, 2001, the Company announced that its Board of Directors
had unanimously authorized management to repurchase up to $7.5 million of its
Common Stock. Subject to availability, the transactions may be made from time to
time in the open market or directly from stockholders at prevailing market
prices that the Company deems appropriate. The repurchase program was
implemented to ensure stability of the trading in PDI's common shares in light
of the September 11, 2001 terrorist activity. In October 2001, 5,000 shares were
repurchased in open market transaction for a total of $110,000.
21. Stock Option Plans
In May 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 the changing needs of the Company, its 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 2000 Plan is 1.5 million shares.
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. The right to grant Awards under the 2000 Plan will terminate 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 approved the 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. 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.
At December 31, 2001, options for an aggregate of 1,125,313 shares were
outstanding under the Company's stock option plans and options to purchase
327,367 shares of common stock had been exercised since its inception.
F-18
The activity for the 2000 and 1998 Plans during the years ended December
31, 1999, 2000 and 2001 is set forth in the table below:
Exercise Weighted
Number price average
of shares per share exercise price
--------- ----------- --------------
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
Granted 548,848 18.26 - 98.70 71.17
Exercised (40,733) 16.00 - 27.19 17.41
Terminated (36,723) 16.00 - 80.00 63.06
- -----------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2001 1,125,313 $ 16.00 - 98.70 $ 53.60
===========================================================================================================
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Exercise Number Remaining Number
price of options contractual of options Exercise
per share outstanding life (years) exercisable price
--------------- ------------ -------------- ------------- -------------
$ 16.00 118,324 6.4 118,324 $ 16.00
18.26 3,000 9.9 -- 18.26
18.38 3,000 9.9 -- 18.38
21.69 10,000 10.0 3,333 21.69
23.73 2,500 9.8 -- 23.73
27.00 11,250 7.4 11,250 27.00
27.19 157,961 7.8 88,069 27.19
27.50 3,000 9.9 -- 27.50
27.84 22,500 8.4 15,000 27.84
29.53 5,000 8.1 1,667 29.53
29.88 22,238 7.6 12,584 29.88
38.20 2,500 8.6 833 38.20
59.50 471,406 9.1 -- 59.50
80.00 253,134 8.8 72,477 80.00
83.69 22,500 9.5 7,500 83.69
93.75 6,000 9.1 -- 93.75
96.19 2,500 9.4 -- 96.19
98.70 8,500 9.1 -- 98.70
------------------------------------------------- -------------------------------
$16.00 - 98.70 1,125,313 8.5 331,307 $ 36.14
================================================= ===============================
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 and pro forma basic and diluted net income
per share would have been adjusted to the amounts indicated below:
F-19
As of December 31,
------------------------------------------
2001 2000 1999*
----------- ---------- -----------
(in thousands, except per share data)
Net income - as reported...................................... $ 6,354 $27,028 $ 10,270
Net income - as adjusted...................................... $ 585 $25,131 $ 9,623
Basic income per share - as reported.......................... $ 0.46 $ 2.00 $ 0.86
Basic net income per share - as adjusted...................... $ 0.04 $ 1.86 $ 0.80
Diluted net income per share - as reported.................... $ 0.45 $ 1.96 $ 0.84
Diluted net income per share - as adjusted.................... $ 0.04 $ 1.82 $ 0.79
- ----------
* 1999 data represents pro forma 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 5.01%, 5.74% and 6.21% at December 31, 2001, 2000 and 1999,
respectively; (ii) expected life of 5 years for 2001, 2000 and 1999; (iii)
expected dividends - $0 for 2001, 2000 and 1999; and (iv) volatility of 90% for
2001, 80% for 2000 and 60% for 1999. The weighted average fair value of options
granted during 2001, 2000 and 1999 was $43.56, $51.48 and $15.78, respectively.
22. 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 statement of
operations for the year ended December 31, 1999 includes a pro forma adjustment
for the income taxes which would have been recorded had TVG been a C corporation
for the period presented based on the tax laws in effect during that period. The
pro forma adjustment for income taxes is based upon the statutory rate in effect
for C corporations during the year ended December 31, 1999, and also reflects
the non-deductibility of certain acquisition related costs.
23. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Under these new standards,
all acquisitions subsequent to June 30, 2001 must be accounted for under the
purchase method of accounting, and purchased goodwill is no longer amortized
over its useful life. Rather, goodwill will be subject to a periodic impairment
test based upon its fair value. Under these pronouncements, the Company's
goodwill of approximately $11.0 million will no longer be amortized; but will be
subject to an annual impairment test.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and discontinued operations.
The Company does not expect the adoption of these accounting
pronouncements to have a material effect, if any, on the consolidated financial
position and results of operations. PDI is required to adopt these statements
effective January 1, 2002.
24. Segment Information
The Company operates under two reporting segments: contract sales and
marketing services, and product sales and distribution, which has been changed
since the December 31, 2000 financial presentation. This change is in
recognition of the evolution of the Company's business from one in which the
service segment was dominated by one service offering, its CSO segment, to a
company that now has a much broader service offering encompassing the group of
services listed in the Overview section of the Management's Discussion and
Analysis of Financial Condition and Results on Operations beginning on page 22.
The segment information from prior periods has been restated to conform to the
current year's presentation. The product sales and distribution category has not
changed from prior
F-20
reporting periods. The contract sales and marketing services category includes
the Company's CSO business units; the Company's marketing services business
unit, which includes marketing research and medical education and communication
services; the Company's medical device and diagnostics business unit and the
Company's LifeCycle X-Tension services, Product Commercialization Services and
copromotion services. This combines and replaces the "contract sales" and
"marketing services" reporting segments included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 and Quarterly Report on Form
10-Q for the quarter ended March 31, 2001 and is consistent with the reporting
in the Form 10-Q for the quarters ended June 30, 2001 and September 30, 2001.
The accounting policies of the segments are described in note 1. Segment
data includes a charge allocating all corporate headquarters costs to each of
the operating segments on the basis of revenue.
For the Year
Ended December 31,
----------------------------------------
2001 2000 1999
--------- --------- --------
Revenue
Contract sales and marketing services ............ $ 385,845 $ 334,937 $174,974
Product sales and distribution ................... 415,314 101,008 --
--------- --------- --------
Total ........................................ $ 801,159 $ 435,945 $174,974
========= ========= ========
Revenue, intersegment
Contract sales and marketing services ............ $ 104,576 $ 19,070 $ 72
Product sales and distribution ................... -- -- --
--------- --------- --------
Total ........................................ $ 104,576 $ 19,070 $ 72
========= ========= ========
Revenue, less intersegment
Contract sales and marketing services ............ $ 281,269 $ 315,867 $174,902
Product sales and distribution ................... 415,314 101,008 --
--------- --------- --------
Total ........................................ $ 696,583 $ 416,875 $174,902
========= ========= ========
EBIT (Earnings Before Interest and Taxes)
Contract sales and marketing services ............ $ 8,346 $ 41,693 $ 15,722
Product sales and distribution ................... 15,228 6,108 --
Corporate charges ................................ (10,869) (6,925) --
--------- --------- --------
Total ........................................ $ 12,705 $ 40,876 $ 15,722
========= ========= ========
EBIT, intersegment
Contract sales and marketing services ............ $ 10,736 $ 4,660 $ --
Product sales and distribution ................... (10,736) (4,660) --
Corporate charges ................................ -- -- --
--------- --------- --------
Total ........................................ $ -- $ -- $ --
========= ========= ========
EBIT, less intersegment, before corporate allocations
Contract sales and marketing services ............ $ (2,390) $ 37,033 $ 15,722
Product sales and distribution ................... 25,964 10,768 --
Corporate charges ................................ (10,869) (6,925) --
--------- --------- --------
Total ........................................ $ 12,705 $ 40,876 $ 15,722
========= ========= ========
Corporate allocations
Contract sales and marketing services ............ $ (4,389) $ (5,247) $ --
Product sales and distribution ................... (6,480) (1,678) --
Corporate charges ................................ 10,869 6,925 --
--------- --------- --------
Total ........................................ $ -- $ -- $ --
========= ========= ========
EBIT, less corporate allocations
Contract sales and marketing services ............ $ (6,779) $ 31,786 $ 15,722
Product sales and distribution ................... 19,484 9,090 --
Corporate charges ................................ -- -- --
--------- --------- --------
Total ........................................ $ 12,705 $ 40,876 $ 15,722
========= ========= ========
F-21
(continued) For the Year
Ended December 31,
-------------------------------------
2001 2000 1999
-------- -------- ---------
Reconciliation of EBIT to income before provision
for income taxes
Total EBIT for operating groups .............. $ 12,705 $ 40,876 $ 15,722
Acquisition costs ............................ -- -- (1,246)
Other income, net ............................ 2,275 4,864 3,471
-------- -------- ---------
Income before provision for income taxes . $ 14,980 $ 45,740 $ 17,947
======== ======== =========
Capital expenditures
Contract sales and marketing services ........ $ 14,387 $ 7,836 $ 1,442
Product sales and distribution ............... 1,173 29 --
-------- -------- ---------
Total .................................... $ 15,560 $ 7,865 $ 1,442
======== ======== =========
Total Assets
Contract sales and marketing services ........ $240,782 $174,697 $ 102,960
Product sales and distribution ............... 65,945 95,528 --
-------- -------- ---------
Total .................................... $306,727 $270,225 $ 102,960
======== ======== =========
Depreciation expense
Contract sales and marketing services ........ $ 3,868 $ 1,608 $ 1,012
Product sales and distribution ............... 120 -- --
-------- -------- ---------
Total .................................... $ 3,988 $ 1,608 $ 1,012
======== ======== =========
F-22
Schedule II
PROFESSIONAL DETAILING, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 1999, 2000 AND 2001
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, 1999
Allowance for doubtful accounts....... -- -- -- --
Year ended December 30, 2000
Allowance for doubtful accounts....... -- 250,000 -- 250,000
Year ended December 30, 2001
Allowance for doubtful accounts....... 250,000 8,590,676 (5,148,629) 3,692,047
Against taxes--
Year ended December 30, 1999
Tax valuation allowance............... -- -- -- --
Year ended December 30, 2000
Tax valuation allowance............... -- 989,000 -- 989,000
Year ended December 30, 2001
Tax valuation allowance............... 989,000 819,046 -- 1,808,046
- ----------
(1) Accounts written-off.
(2) Reserves reversed.
F-23