UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------
FORM 10-Q
---------
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to _______
Commission File Number 0-24249
PROFESSIONAL DETAILING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2919486
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10 Mountainview Road
Upper Saddle River, New Jersey 07458
----------------------------------------
(Address of principal executive offices)
(201) 258-8450
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (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 |_|
As of May 7, 2001 the Registrant had a total of 13,861,223 shares of Common
Stock, $.01 par value, outstanding.
INDEX
PROFESSIONAL DETAILING, INC.
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (unaudited)
Balance Sheets
March 31, 2001 and December 31, 2000 ..................................3
Statements of Operations -- Three Months
Ended March 31, 2001 and 2000 .........................................4
Statements of Cash Flows -- Three
Months Ended March 31, 2001 and 2000 ..................................5
Notes to Financial Statements .........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................Not Applicable
Item 2. Changes in Securities and Use of Proceeds ..........................18
Item 3. Default Upon Senior Securities .........................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders ....Not Applicable
Item 5. Other Information ......................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K ...................................18
SIGNATURES .................................................................19
2
PROFESSIONAL DETAILING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2001 2000
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 109,759 $ 109,000
Short-term investments ............................. 9,677 4,907
Inventory, net ..................................... 50,286 36,385
Accounts receivable, net of allowance for doubtful
accounts of $1,550 and $250 as of March 31, 2001
and December 31, 2000, respectively .............. 95,317 84,529
Unbilled costs and accrued profits on contracts in
progress ......................................... 7,118 2,953
Deferred training .................................. 4,821 4,930
Other current assets ............................... 4,304 4,541
Deferred tax asset ................................. 4,575 4,758
--------- ---------
Total current assets ................................. 285,857 252,003
Net property, plant & equipment ...................... 11,240 9,965
Other investments .................................... 1,500 760
Other long-term assets ............................... 7,595 7,497
--------- ---------
Total assets ......................................... $ 306,192 $ 270,225
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 48,953 $ 31,328
Accrued rebates and sales discounts ................ 38,020 24,368
Accrued incentives ................................. 14,207 19,824
Accrued salaries and wages ......................... 6,915 6,568
Unearned contract revenue .......................... 23,878 23,813
Other accrued expenses ............................. 24,123 25,382
--------- ---------
Total current liabilities ............................ 156,096 131,283
--------- ---------
Long-term liabilities:
Deferred compensation .............................. 169 169
Deferred tax liability ............................. 663 663
Other long-term liabilities .......................... -- --
--------- ---------
Total long-term liabilities .......................... 832 832
--------- ---------
Total liabilities .................................... $ 156,928 $ 132,115
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding March
31, 2001 - 13,844,834; December 31, 2000 -
13,837,390; restricted $.01 par value; Shares
issued and outstanding, March 31, 2001 - 7,972;
December 31, 2000 - 7,972 ........................ 138 138
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding ..... --
Additional paid-in capital ........................... 97,093 96,945
Additional paid-in capital, restricted ............... 217 217
Retained earnings .................................... 52,583 41,654
Accumulated other comprehensive loss ................. (91) (34)
Unamortized compensation costs ....................... (676) (810)
--------- ---------
Total stockholders' equity ........................... 149,264 138,110
--------- ---------
Total liabilities & stockholders' equity ............. $ 306,192 $ 270,225
--------- ---------
The accompanying notes are an integral part of these financial statements
3
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended March 31,
----------------------------
2001 2000
------------ -------------
(unaudited)
Revenue
Service, net ................................. $ 78,087 $ 71,289
Product, net ................................. 94,978 --
----------- -----------
Total revenue, net .......................... 173,065 71,289
----------- -----------
Cost of goods and services
Program expenses (including related party
amounts of $159 and $703 for the periods
ended March 31, 2001 and 2000, respectively) 55,395 50,120
Cost of goods sold ........................... 64,215 --
----------- -----------
Total cost of goods and services ........... 119,610 50,120
----------- -----------
Gross profit ................................... 53,455 21,169
Compensation expense ........................... 11,015 8,394
Other selling, general & administrative expenses 25,728 4,006
Total selling, general & administrative
expenses ................................... 36,743 12,400
----------- -----------
Operating income ............................... 16,712 8,769
Other income, net .............................. 1,870 684
----------- -----------
Income before provision for taxes .............. 18,582 9,453
Provision for income taxes ..................... 7,653 3,839
----------- -----------
Net income ..................................... $ 10,929 $ 5,614
----------- -----------
Basic net income per share ..................... $ 0.79 $ 0.43
----------- -----------
Diluted net income per share ................... $ 0.77 $ 0.43
----------- -----------
Basic weighted average number of shares
outstanding .................................. 13,842,991 13,005,196
----------- -----------
Diluted weighted average number of shares
outstanding .................................. 14,132,704 13,183,406
----------- -----------
The accompanying notes are an integral part of these financial statements
4
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
----------------------------
2001 2000
----------- -------------
(unaudited)
Cash Flows From Operating Activities
Net income from operations ........................... $ 10,929 $ 5,614
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 878 384
Deferred compensation ........................... -- 11
Reserve for inventory obsolescence and bad debt . 1,798 --
Amortized compensation costs .................... 134 --
Deferred tax asset, net ......................... 184 --
Loss on other investments ....................... -- 945
Other changes in assets and liabilities:
(Increase) decrease in accounts receivable ...... (12,088) 7,513
(Increase) in inventory ......................... (14,399)
(Increase) in unbilled costs .................... (4,165) (3,997)
Decrease (increase) in deferred training ........ 109 (3,702)
Decrease in other current assets ................ 237 729
Increase in other long-term assets .............. (216) (17)
Increase in accounts payable .................... 17,626 4,152
Increase in accrued rebates and sales discounts . 13,651 --
(Decrease) increase in accrued liabilities ...... (5,270) 204
Increase in unearned contract revenue ........... 64 750
Increase in payable to affiliate ................ -- 307
(Decrease) increase in other current liabilities (1,260) 3,660
--------- ---------
Net cash provided by operating activities ............ 8,212 16,553
--------- ---------
Cash Flows From Investing Activities
Sale of short-term investments .................... -- 1,585
Purchase of short-term investments ................ (4,826) --
Other investments ................................. (740) (2,500)
Purchase of property and equipment ................ (2,035) (744)
--------- ---------
Net cash used in investing activities ................ (7,601) (1,659)
--------- ---------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock ........ -- 41,735
Net proceeds from exercise of stock options ....... 148 11
Distributions to S corporation stockholders ....... -- (8)
Repayment of loan from officer .................... -- 1,428
--------- ---------
Net cash provided by financing activities ............ 148 43,166
--------- ---------
Net increase in cash and cash equivalents ............ 759 58,060
Cash and cash equivalents - beginning ................ 109,000 57,787
--------- ---------
Cash and cash equivalents - ending ................... $ 109,759 $ 115,847
--------- ---------
Cash paid for interest ............................... $ -- $ --
--------- ---------
Cash paid for taxes .................................. $ 585 $ 607
========= =========
The accompanying notes are an integral part of these financial statements
5
PROFESSIONAL DETAILING, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements and related notes
should be read in conjunction with the financial statements of Professional
Detailing, Inc. and its subsidiaries (the "Company" or "PDI") and related notes
as included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (the "Annual Report") as filed with the Securities and
Exchange Commission. The unaudited interim financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited interim financial statements include all
adjustments (consisting only of normal recurring adjustments) which, in the
judgement of management, are necessary for a fair presentation of such financial
statements. Operating results for the three-month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. Certain prior period amounts have been reclassified to
conform with the current presentation with no effect on financial position, net
income or cash flows.
2. Secondary Public Offering of Common Stock
On January 26, 2000, a public offering of 2,800,000 shares of the
Company's common stock was completed 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.
3. Credit Line
The Company entered into 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 the Company's 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 the Company's ratio of funded debt to EBITDA. The
Company is 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 the Company's ratio of funded debt to
EBITDA. The credit agreement contains customary affirmative and negative
covenants including financial covenants requiring the maintenance of specified
consolidated interest coverage, leverage ratios and a minimum net worth.
6
4. Other Investments
In February 2000, the Company signed a three-year agreement with
iPhysicianNet Inc. ("iPhysicianNet"). In connection with this agreement, the
Company made an investment of $2.5 million in preferred stock of iPhysicianNet.
Under the agreement PDI was appointed as the exclusive CSO in the United States
to be affiliated with the iPhysicianNet network, allowing PDI to offer
e-detailing capabilities to its existing and potential clients. For the three
months ended March 31, 2000, the Company recorded a loss related to this
investment of $944,891 which represented its share of iPhysicianNet's losses
from the date of the investment through March 31, 2000. As of December 31, 2000,
the investment in iPhysicianNet had been reduced to zero.
In the fourth quarter of 2000 and first quarter of 2001, the Company made
an investment of approximately $1.5 million in convertible preferred stock of
In2Focus, Inc., a United Kingdom contract sales company. The Company recorded
this investment under the cost method.
5. 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.
6. New Accounting Pronouncements
The Financial Accounting Standards Board released in June 1998, SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
addressed the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities.
Implementation of SFAS 133 was delayed to fiscal year 2001 by the issuance of
SFAS 137. In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" (SFAS 138) which amended the accounting and reporting
standards of SFAS 133 for certain derivative instruments and certain hedging
activities. The adoption of these pronouncements did not have an impact on the
Company's earnings, comprehensive income and financial position.
7. Basic and Diluted Net Income Per Share
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the three-month periods ended March 31, 2001
and 2000 is as follows:
Three Months Ended
March 31,
-----------------------
2001 2000
---------- ----------
Basic weighted average number of common shares
outstanding .................................. 13,842,991 13,005,196
Dilutive effect of stock options ............... 289,713 178,210
---------- ----------
Diluted weighted average number of common shares
outstanding .................................. 14,132,704 13,183,406
---------- ----------
8. Short-Term Investments
At March 31, 2001, short-term investments were $9.7 million, including
approximately $840,000 of investments classified as available for sale
securities. The unrealized after-tax 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.
7
9. Comprehensive Income
A reconciliation of net income as reported in the Consolidated Statements
of Operations to Other comprehensive income, net of taxes is presented in the
table below.
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
(thousands)
Net income $ 10,929 $ 5,614
Other comprehensive income, net of tax:
Unrealized holding loss on available-for-sale
securities arising during period (108) --
Reclassification adjustment for losses (gains)
included in net income 17 (92)
-------- --------
Other comprehensive income $ 10,838 $ 5,522
-------- --------
10. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and through our LifeCycle Ventures, Inc. (LCV) subsidiary is also in
the business of distributing product under an agreement with GlaxoSmithKline for
the exclusive marketing, sales and distribution rights for Ceftin(R) Tablets and
Ceftin(R) for Oral Suspension (cefuroxime axetil), two dosage forms of a
cephalosporin antibiotic. Such activities could expose the Company to risk of
liability for personal injury or death to persons using such products. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability under its service agreement through measures such as contractual
indemnification provisions with clients (the scope of which may vary from client
to client, and the performances of which are not secured) and insurance. The
Company could, however, also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity or insurance policy. The Company could be materially adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of the indemnification agreements; if the
indemnity, although applicable, is not performed in accordance with its terms;
or if the Company's liability exceeds the amount of applicable insurance or
indemnity.
In connection with the GlaxoSmithKline Ceftin agreement, the Company has
product purchase commitments. The Company is required to purchase certain
minimum levels of product, in various dosage forms, during each calendar quarter
during the term of the agreement. This agreement is cancelable by either party
upon not less than 120 days written notice. The quarterly commitments range from
$40.1 million to $77.9 million over the five-year term. As of March 31, 2001,
the total non-cancelable commitment outstanding was approximately $76.0 million.
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
11. Segment Information
Through three segments, the Company offers six principal service
offerings, including customized contract sales services, product sales and
distribution, marketing research and consulting services, and professional
education and communication services. Marketing research and consulting
services,
8
professional education and communication services, have been combined to form
the Marketing services category.
The accounting policies of the segments are the same as those described in
the "Nature of Business and Significant Accounting Policies" footnote to the
Company's financial statements, which are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. Segment data includes
a charge allocating all corporate headquarters costs to each of the operating
segments. PDI evaluates the performance of its segments and allocates resources
to them based on operating income.
Three Months Ended March 31,
----------------------------
2001 2000
------------- ------------
(thousands)
Revenue
Contract sales .................................... $ 90,020 $ 66,671
Product sales and distribution .................... 94,978 --
Marketing services ................................ 5,457 4,618
--------- ---------
Total .......................................... $ 190,455 $ 71,289
--------- ---------
Revenue, intersegment
Contract sales .................................... $ 17,313 $ --
Product sales and distribution .................... -- --
Marketing services ................................ 77 --
--------- ---------
Total .......................................... $ 17,390 $ --
--------- ---------
Revenue, less intersegment
Contract sales .................................... $ 72,707 $ 66,671
Product sales and distribution .................... 94,978 --
Marketing services ................................ 5,380 4,618
--------- ---------
Total .......................................... $ 173,065 $ 71,289
--------- ---------
EBIT before corporate allocations
Contract sales .................................... $ 9,235 $ 9,594
Product sales and distribution .................... 9,731 --
Marketing services ................................ 77 460
Corporate charges ................................. (2,331) (1,285)
--------- ---------
Total .......................................... $ 16,712 $ 8,769
--------- ---------
Corporate allocations
Contract sales .................................... $ (979) $ (1,202)
Product sales and distribution .................... (1,280) --
Marketing services ................................ (72) (83)
Corporate charges ................................. 2,331 1,285
--------- ---------
Total .......................................... $ -- $ --
--------- ---------
EBIT less corporate allocations
Contract sales .................................... $ 8,256 $ 8,392
Product sales and distribution .................... 8,451 --
Marketing services ................................ 5 377
Corporate charges ................................. -- --
--------- ---------
Total .......................................... $ 16,712 $ 8,769
--------- ---------
Reconciliation of EBIT to income before provision
for income taxes
Total EBIT for operating groups ................... $ 16,712 $ 8,769
Other income, net ................................. 1,870 684
--------- ---------
Income before provision for income taxes ....... $ 18,582 $ 9,453
--------- ---------
Capital expenditures
Contract sales .................................... $ 1,760 $ 643
Product sales and distribution .................... 158 --
Marketing services ................................ 117 101
--------- ---------
Total .......................................... $ 2,035 $ 744
--------- ---------
Depreciation expense
Contract sales .................................... $ 693 $ 193
Product sales and distribution .................... 62 --
Marketing services ................................ 4 74
--------- ---------
Total .......................................... $ 759 $ 267
--------- ---------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Various statements made in this Quarterly Report on Form 10-Q 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 judgements 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 our objectives and plans
will be achieved. 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 in "Certain Factors That May Affect Future
Growth," under Part I, Item 1, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 as filed with the Securities and Exchange
Commission.
Overview
We are a leading provider of sales and marketing services to the United
States pharmaceutical industry. Within our three operating segments we provide
the following services:
o dedicated contract sales services;
o syndicated contract sales services;
o LifeCycle X-Tension services;
o LifeCycle Launch services;
o marketing research and consulting services; and
o medical education and communication services.
Our clients, which include some of the largest pharmaceutical companies in
the world, engage us on a contractual basis to design and implement product
detailing programs for both prescription and over-the-counter (OTC)
pharmaceutical products. Product detailing involves meeting face-to-face with
targeted prescribers to provide a technical review of the product being
promoted. Since the early 1990s, the United States pharmaceutical industry has
increasingly used CSOs to provide detailing services to introduce new products
and supplement existing sales efforts.
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee-for-services, i.e., the client pays a fee for a specified package of
services. These contracts typically include performance benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. More
recently, our contracts tend to have a lower base fee but built-in incentives
based on our performance. In these situations, we have the opportunity to earn
additional fees based on enhanced program results.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason upon 30 to
10
90 days notice. These contracts typically provide for termination payments by
the client upon a termination without cause. While the cancellation of a
contract by a client without cause may result in the imposition of penalties on
the client, these penalties may not act as an adequate deterrent to the
termination of any contract. In addition, we cannot assure you that these
penalties will offset the revenue we could have earned under the contract or the
costs we may incur as a result of its termination. The loss or termination of a
large contract or the loss of multiple contracts could adversely affect our
future revenue and profitability.
Our product detailing contracts typically contain cross-indemnification
provisions between us and our client. The client will usually indemnify us
against product liability and related claims arising from the sale of the
product and we indemnify the clients with respect to the errors and omissions of
our sales representatives in the course of their detailing activities. To date,
we have not asserted, nor has there been asserted against us, any claim for
indemnification under any contract.
On February 2, 2001, GlaxoSmithKline exercised its right to terminate,
without cause, our fee for services contract. The termination was effective as
of April 18, 2001. As a result, we expect 2001 consolidated revenues to be
reduced by approximately $45 million, and earnings per share to be reduced by
$0.35 to $0.40 per share. This does not affect revenues or results for the
quarter ended March 31, 2001.
In June 2000, we formed LCV to compete more fully for pharmaceutical
commercialization opportunities. LCV undertakes performance-based sales,
marketing and distribution assignments, taking over completely, or in
cooperation with the client, the sales, marketing and distribution function of
brands. This service has a broad target customer base, including all tiers of
the pharmaceutical and biotechnology sectors. Over the next several years, we
expect this new service offering to be an important contributor to our growth.
In October 2000, LCV signed a five-year agreement with GlaxoSmithKline for
the exclusive U.S. marketing, sales and distribution rights for Ceftin Tablets
and Ceftin for Oral Suspension (cefuroxime axetil), two dosage forms of a
cephalosporin antibiotic. Ceftin is the top selling oral cephalosporin in the
United States and throughout the world. Ceftin, which is indicated for acute
bacterial respiratory infections such as acute sinusitis, bronchitis and otitis
media, generated over $332 million in United States sales in 1999.
GlaxoSmithKline retains some regulatory responsibilities for Ceftin and
ownership of all intellectual property relevant to Ceftin and will continue to
manufacture the product. The agreement with GlaxoSmithKline is cancelable by
either party on 120 days written notice.
Under the agreement with GlaxoSmithKline, LCV is required to purchase
certain minimum levels of Ceftin during each calendar quarter. In order to meet
anticipated demand, LCV intends to maintain an inventory of Ceftin that we
expect to average between $30 to $60 million. In the event our estimates of the
demand for Ceftin are not accurate, or the timing on collections of Ceftin
related receivables is slower than anticipated, the LCV-Ceftin transaction could
have a material adverse impact on our results of operations, cash flows and
liquidity.
In November 2000, LCV signed a five-year agreement with United
Therapeutics Corporation under which LCV will provide a broad range of
pre-launch and launch commercialization services for Beraprost, a compound under
development for peripheral vascular disease.
During the fourth quarter of 2000, we invested approximately $760,000 in
In2Focus Sales Development Services Limited, a United Kingdom contract sales
company. In January 2001, we invested an additional $740,000. In2Focus intends
to provide a full range of sales related services and technologies to the
pharmaceutical industry.
11
Recent developments
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 specified consolidated interest coverage, leverage ratios and a minimum net
worth.
Revenues and expenses
Our revenues are segregated between service and product sales for
reporting purposes. Our operations are currently organized around three
principal activities and business segments:
o contract sales programs;
o product sales; and
o marketing research services.
Historically, we have derived a significant portion of our service revenue
from a limited number of clients. However, concentration of business in the CSO
industry is common and we believe that pharmaceutical companies will continue to
outsource large projects as the CSO industry grows and continues to demonstrate
an ability to successfully implement large programs. Accordingly, we are likely
to continue to experience significant client concentration in future periods
with respect to our CSO segment. Our three largest clients accounted for
approximately 64.6% and 70.7%, of our service revenue for the quarters ended
March 31, 2001 and 2000, respectively. This decline in client concentration
reflects our continued efforts to expand our client base. For the quarter ended
March 31, 2001, revenue from sales of Ceftin primarily came from three major
customers who accounted for approximately 70.9% of total net product revenue.
Service revenue and program expenses
Contract sales revenue is earned primarily by performing product detailing
programs and other marketing and promotional services under contracts. Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured. Revenue is recognized net of any potential penalties
until the performance criteria eliminating the penalties have been achieved.
Bonus and other performance incentives as well as termination payments are
recognized as revenue in the period earned and when payment of the bonus,
incentive or other payment is assured.
Program expenses consist primarily of the costs associated with executing
a product detailing program or the other services identified in the contract.
Program expenses include personnel costs and other costs, including facility
rental fees, honoraria and travel expenses, associated with executing a product
detailing or other marketing or promotional program, as well as the initial
direct costs associated with staffing a product detailing program. Personnel
costs, which constitute the largest portion of program expenses, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives and sales managers and professional staff
who are directly responsible for executing a particular program. Initial direct
program costs are those costs associated with initiating a product detailing
program, such as recruiting, hiring and training the sales representatives who
staff a particular product
12
detailing program. All personnel costs and initial direct program costs, other
than training costs, are expensed as incurred for service offerings. Training
costs include the costs of training the sales representatives and managers on a
particular product detailing program so that they are qualified to properly
perform the services specified in the related contract. Training costs are
deferred and amortized on a straight-line basis over the shorter of the life of
the contract to which they relate or 12 months. Expenses related to the product
detailing of products we distribute (as discussed in the next section) are
recorded as a selling expense and are included in other selling, general and
administrative expenses in the consolidated statements of operations.
As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing contract. We typically
receive an initial payment upon commencement of a product detailing program and,
as appropriate, characterize that payment as compensation for recruiting, hiring
and training services associated with staffing that program. This permits us to
record the initial payment as revenue in the same period in which the costs of
the services are expensed. Our inability to specifically provide in our product
detailing contracts that we are being compensated for recruiting, hiring or
training services could adversely impact our operating results for periods in
which the costs associated with the product detailing services are incurred.
Product revenue and cost of goods sold
Product revenue is recognized when products are shipped and title to
products is transferred to the customer. Provision is made at the time of sale
for all discounts and estimated sales allowances. We prepare our estimates for
sales returns and allowances, discounts and rebates based primarily on
historical experience updated for changes in facts and circumstances, as
appropriate.
Cost of goods sold includes all expenses for both product distribution
costs and manufacturing costs of product sold. Inventory is valued at the lower
of cost or fair value. Cost is determined using the first in, first out costing
method. Inventory consists of only finished goods. Cost of goods sold and gross
margin on sales could fluctuate based on our quantity of product purchased, and
our contractual unit costs including applicable discounts, as well as
fluctuations in the selling price for our products including applicable
discounts.
Corporate overhead and taxes
Selling, general and administrative expenses include compensation and
general corporate overhead. Compensation expense consists primarily of salaries,
bonuses, training and related fringe benefits for senior management and other
administrative, marketing, finance, information technology and human resources
personnel who are not directly involved with executing a particular program.
Other selling, general and administrative expenses include corporate overhead
such as facilities costs, depreciation and amortization expenses and
professional services fees, as well as product detailing, marketing and
promotional expenses associated with product we distribute.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future results.
13
Three Months Ended
March 31,
-------------------
2001 2000
-------- --------
Revenue
Service, net ........................................... 45.1% 100.0%
Product, net ........................................... 54.9 --
----- -----
Total revenue, net .................................... 100.0% 100.0%
Cost of goods and services
Program expenses ....................................... 32.0 70.3
Cost of goods sold ..................................... 37.1 --
----- -----
Total cost of goods and services ...................... 69.1 70.3
Gross profit ............................................. 30.9 29.7
Compensation expense ..................................... 6.4 11.8
Other selling, general and administrative expenses ....... 14.8 5.6
----- -----
Total selling, general and administrative expenses .... 21.2 17.4
----- -----
Operating income ......................................... 9.7 12.3
Other income, net ........................................ 1.1 1.0
----- -----
Income before provision for income taxes ................. 10.8 13.3
Provision for income taxes ............................... 4.4 5.4
----- -----
Net income ............................................... 6.4% 7.9%
----- -----
Revenue. Net revenue for the quarter ended March 31, 2001 was $173.1
million, an increase of 142.8% over net revenue of $71.3 million for the quarter
ended March 31, 2000. Net revenue from the CSO and marketing services segments
for the quarter ended March 31, 2001 was $78.1 million, an increase of $6.8
million, or 9.5%, over net revenue of $71.3 million from those segments for the
comparable prior year period. This increase was primarily attributable to the
continued renewal of existing business, and the carry-over from programs which
began in the second half of 2000. Net revenue from CSO and marketing services
included incentive payments of $5.1 million earned as a result of our sales
force meeting or exceeding established targets for 2000 on several programs.
Incentive payments for the quarter ended March 31, 2000 were $3.9 million.
Incentive payments may be earned in future reporting periods, but they are not
expected to have a material impact on results of operations for the remaining
quarters of 2001. Net product revenue for the quarter ended March 31, 2001 was
$95.0 million, all of which was attributable to sales of Ceftin. There were no
product sales in the comparable prior year period.
Cost of goods and services. Cost of goods and services for the quarter
ended March 31, 2001 were $119.6 million, an increase of 138.6% over cost of
goods and services of $50.1 million for the quarter ended March 31, 2000. As a
percentage of total net revenue, cost of goods and services decreased to 69.1%
for the quarter ended March 31, 2001 from 70.3% in the comparable prior year
period. This decrease was primarily attributable to the lower cost of goods sold
from our product sales and distribution segment. Program expenses (i.e., cost of
services) for the quarter ended March 31, 2001 were $55.4 million, an increase
of 10.5% over program expenses of $50.1 million for the quarter ended March 31,
2000. As a percentage of net CSO and marketing services revenue, program
expenses for the quarters ended March 31, 2001 and 2000 were 70.9% and 70.3%,
respectively. Cost of goods sold was $64.2 million for the quarter ended March
31, 2001. As a percentage of net product revenue, cost of goods sold for the
quarter ended March 31, 2001 was 67.6%. 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 the quarter ended March 31,
2001 was $11.0 million compared to $8.4 million for the comparable prior year
period. As a percentage of total net revenue, compensation expense decreased to
6.4% for the quarter ended March 31, 2001 from 11.8% for the quarter ended March
31, 2000. Compensation expense for the quarter ended March 31, 2001
14
attributable to the CSO and marketing services segments was $9.7 million
compared to $8.4 million for the quarter ended March 31, 2000. As a percentage
of net revenue from the CSO and marketing services segments, compensation
expense increased to 12.4% for the quarter ended March 31, 2001 from 11.8% for
the quarter ended March 31, 2000. This increase reflects the investment in
staffing and related resources needed to manage our growth. Compensation expense
for the quarter ended March 31, 2001 attributable to the product segment was
$1.4 million, or 1.5% 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. In future periods we expect the staffing for
the product segment to increase as capabilities are added. Also, since the sales
of Ceftin are seasonal, compensation as a percentage of sales may vary from
quarter to quarter with the level of sales.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $25.7 million for the quarter ended
March 31, 2001, an increase of 542.1% over other selling, general and
administrative expenses of $4.0 million for the quarter ended March 31, 2000. As
a percentage of total net revenue, total other selling, general and
administrative expenses increased to 14.8% for the quarter ended March 31, 2001
from 5.6% for the quarter ended March 31, 2000. Other selling, general and
administrative expenses attributable to CSO and marketing services for the
quarter ended March 31, 2001 were $4.8 million, an increase of 20.0% over other
selling, general and administrative expenses of $4.0 million attributable to
those segments for the comparable prior year period. As a percentage of net
revenue from CSO and marketing services, other selling, general and
administrative expenses were 6.1% and 5.6% for the quarters ended March 31, 2001
and 2000, respectively. This increase was primarily due to facilities expansion,
which resulted in increased rental expense and discretionary investments in
information technology and other resources needed to manage our growth, which
further resulted in increased depreciation expense. Other selling, general and
administrative expenses attributable to the product segment for the quarter
ended March 31, 2001 were $20.9 million, or 22.0% of net product revenue,
greatly impacting the total other selling, general and administrative expenses
as a percentage of total net revenue. Other selling, general and administrative
expenses for the product segment consisted primarily of field selling costs,
increases in the allowances for bad debts, and professional fees. The company
believes that it currently has adequate reserves to cover losses for bad debts
and does not anticipate similar increases during the remainder of 2001. The
seasonality of Ceftin sales may also cause other selling, general and
adminstrative expenses to vary as a percentage of revenue.
Operating income. Operating income for the quarter ended March 31, 2001
was $16.7 million, an increase of 90.6% over operating income of $8.8 million
for the quarter ended March 31, 2000. As a percentage of total net revenue,
operating income decreased to 9.7% for the quarter ended March 31, 2001 from
12.3% for the comparable prior year period. Operating income for the quarter
ended March 31, 2001 for the CSO and marketing services segment was $8.3
million, a decrease of 5.7% compared to the CSO and marketing services segments
operating income for the quarter ended March 31, 2000 of $8.8 million. As a
percentage of net revenue from the CSO and marketing services segments,
operating income for the those segments decreased to 10.6% for the quarter ended
March 31, 2001, from 12.3% for the comparable prior year period. Operating
income for the product segment for the quarter ended March 31, 2001 was $8.5
million, or 8.9% of net product revenue.
Other income, net. Other income, net, for the quarter ended March 31, 2001
was $1.9 million and was comprised primarily of interest income. Other income,
net, for the quarter ended March 31, 2000, was $684,000, consisting primarily of
interest income of $1.7 million, partially offset by our share in the losses of
iPhysicianNet of $945,000.
Provision for income taxes. Income taxes of $7.7 million for the quarter
ended March 31, 2001 and $3.8 million for the quarter ended March 31, 2000
consisted of Federal and state corporate income taxes. The effective tax rate
for the quarter ended March 31, 2001 was 41.2%, compared to an effective tax
rate of 40.6% for the quarter ended March 31, 2000.
15
Net income. Net income for the quarter ended March 31, 2001 was $10.9
million, an increase of 94.7% from net income of $5.6 million for the quarter
ended March 31, 2000.
Liquidity and capital resources
As of March 31, 2001, we had cash and cash equivalents of approximately
$109.8 million and working capital of $129.8 million compared to cash and cash
equivalents of approximately $109.0 million and working capital of $120.7
million at December 31, 2000.
For the three months ended March 31, 2001, net cash provided by operating
activities was $8.2 million, a decrease of $8.4 million from cash provided by
operating activities of $16.6 million for the same period in 2000. The main
components of cash provided by operating activities for the three months ended
March 31, 2001 were net income from operations of $10.9 million plus non-cash
adjustments for depreciation and reserves of $2.7 million, offset by changes in
"Other assets and liabilities". 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. "Other changes in assets and liabilities" resulted in a net
cash outflow of $5.4 million during the current quarter as compared to $9.5
million net cash inflow during the first quarter of 2000.
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 March 31,
2001, we had $23.9 million of unearned contract revenue and $7.1 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
twelve months of the end of the respective period.
For the three months ended March 31, 2001, net cash used in investing
activities was $7.6 million including $4.8 million of short-term investments and
$2.0 million of capital expenditures. Net cash provided by financing activities
was $148,000 and consisted of the proceeds received upon exercise of employee
stock options.
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 specified consolidated interest coverage, leverage ratios and a minimum net
worth.
We believe that our cash and cash equivalents, availability under our
credit facilities 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.
16
Part II - Other Information
Item 1 - Not Applicable
Item 2 - Changes in Securities and Use of Proceeds
On May 19, 1998, the Company completed its initial public offering (the
"IPO") of 3,220,000 shares of Common Stock (including 420,000 shares in
connection with the exercise of the underwriters' over-allotment option) at a
price per share of $16.00. Net proceeds to the Company 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.
(3) Not applicable.
(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:
$46,422,000 of temporary investments with average maturities of
three months as of March 31, 2001.
Item 3 - Not Applicable
Item 4 - Not Applicable
Item 5 - Not Applicable
Item 6 - Reports on Form 8-K
During the three months ended March 31, 2001, the Company filed the
following reports on Form 8-K:
Date Item Description
- ----------------- ---- -------------------------------------
February 2, 2001 5 GlaxoSmithKline Contract Cancellation
February 15, 2001 5 Earnings Press Release
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
May 9, 2001 PROFESSIONAL DETAILING, INC.
By: /s/ Charles T. Saldarini
------------------------------
Charles T. Saldarini
Chief Executive Officer
By: /s/ Bernard C. Boyle
------------------------------
Bernard C. Boyle
Chief Financial and Accounting
Officer
19