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 September 30, 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
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, New Jersey 07458
------------------------------------
(Address of principal executive offices)
(201) 258-8450
--------------
(Registrant's telephone number, including area code)
PROFESSIONAL DETAILING, INC.
(Former Name - Changed Since Last Report)
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 November 9, 2001 the Registrant had a total of 13,892,880 shares of Common
Stock, $.01 par value, outstanding.
PDI, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements
Balance Sheets -- September 30, 2001 and December 31, 2000......... 3
Statements of Operations -- Three and Nine months
Ended September 30, 2001 and 2000.................................. 4
Statements of Cash Flows -- Nine months
Ended September 30, 2001 and 2000 ................................ 5
Notes to Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds.......................... 21
Item 3. Default Upon Senior Securities.......................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders................ 22
Item 5. Other Information....................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................... 22
SIGNATURES ................................................................ 23
2
PDI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 59,939 $ 109,000
Short-term investments ................................ 18,114 4,907
Inventory, net ........................................ 91,023 36,385
Accounts receivable, net of allowance for doubtful
accounts of $2,666 and $250 as of September 30,
2001 and December 31, 2000, respectively ............ 69,374 84,529
Unbilled costs and accrued profits on contracts
in progress ......................................... 5,804 2,953
Deferred training ..................................... 4,934 4,930
Other current assets .................................. 9,514 4,541
Deferred tax asset .................................... 4,758 4,758
---------- ----------
Total current assets ..................................... 263,460 252,003
Net property, plant & equipment .......................... 18,013 9,965
Other investments ........................................ 1,862 760
Other long-term assets ................................... 15,116 7,497
---------- ----------
Total assets ............................................. $ 298,451 $ 270,225
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 38,404 $ 31,328
Accrued rebates and sales discounts ................... 52,639 24,368
Accrued contract losses ............................... 24,000 --
Accrued incentives .................................... 23,292 19,824
Accrued salaries and wages ............................ 7,152 6,568
Unearned contract revenue ............................. 11,491 23,813
Other accrued expenses ................................ 3,585 25,382
---------- ----------
Total current liabilities ................................ 160,563 131,283
---------- ----------
Long-term liabilities:
Deferred compensation ................................. 169 169
Deferred tax liability ................................ 663 663
Other long-term liabilities .............................. -- --
---------- ----------
Total long-term liabilities .............................. 832 832
---------- ----------
Total liabilities ........................................ $ 161,395 $ 132,115
---------- ----------
Stockholders' equity:
Common stock, $.01 par value; 30,000,000
shares authorized; shares issued and
outstanding September 30, 2001 - 13,877,492;
December 31, 2000 - 13,837,390; restricted
$.01 par value; shares issued and
outstanding, September 30, 2001 - 7,972;
December 31, 2000 - 7,972 ........................... 139 138
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding ........ -- --
Additional paid-in capital ............................... 97,643 96,945
Additional paid-in capital, restricted ................... 217 217
Retained earnings ........................................ 39,729 41,654
Accumulated other comprehensive loss ..................... (119) (34)
Unamortized compensation costs ........................... (553) (810)
---------- ----------
Total stockholders' equity ............................... 137,056 138,110
---------- ----------
Total liabilities & stockholders' equity ................. $ 298,451 $ 270,225
========== ==========
The accompanying notes are an integral part of these financial statements
3
PDI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited)
Revenue
Service, net ................................................. $ 71,129 $ 84,367 $ 214,005 $ 231,445
Product, net ................................................. 44,544 -- 218,676 --
------------ ------------ ------------ ------------
Total revenue, net ........................................ 115,673 84,367 432,681 231,445
------------ ------------ ------------ ------------
Cost of goods and services
Program expenses (including related party
amounts of $100 and $731 for the quarters
ended September 30, 2001 and 2000, and $685
and $1,795 for the nine months ended
September 30, 2001 and 2000, respectively) ................. 59,529 63,232 168,245 171,461
Cost of goods sold (see note 13) ............................. 51,823 -- 167,561 --
------------ ------------ ------------ ------------
Total cost of goods and services .......................... 111,352 63,232 335,806 171,461
------------ ------------ ------------ ------------
Gross profit .................................................... 4,321 21,135 96,875 59,984
Compensation expense ............................................ 9,282 7,847 29,459 23,034
Other selling, general & administrative expenses ................ 24,560 5,863 73,833 12,841
------------ ------------ ------------ ------------
Total selling, general & administrative expenses ............. 33,842 13,710 103,292 35,875
------------ ------------ ------------ ------------
Operating (loss) income ......................................... (29,521) 7,425 (6,417) 24,109
Other income, net ............................................... 999 1,984 4,407 2,923
------------ ------------ ------------ ------------
(Loss) income before provision for taxes ........................ (28,522) 9,409 (2,010) 27,032
(Benefit) provision for income taxes ............................ (11,266) 3,701 (85) 10,872
------------ ------------ ------------ ------------
Net (loss) income ............................................... $ (17,256) $ 5,708 $ (1,925) $ 16,160
============ ============ ============ ============
Basic net (loss) income per share ............................... $ (1.24) $ 0.42 $ (0.14) $ 1.20
============ ============ ============ ============
Diluted net (loss) income per share ............................. $ (1.24) $ 0.41 $ (0.14) $ 1.18
============ ============ ============ ============
Basic weighted average number of shares outstanding.............. 13,876,341 13,646,817 13,858,331 13,414,680
============ ============ ============ ============
Diluted weighted average number of shares outstanding ........... 13,876,341 13,960,762 13,858,331 13,639,397
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
PDI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
-------------------------------
2001 2000
--------- ---------
(unaudited)
Cash Flows From Operating Activities
Net (loss) income ................................................... $ (1,925) $ 16,160
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................... 3,060 1,326
Reserves for inventory and bad debt expense ................. 3,337 --
Non-cash compensation expense - stock options ............... -- 11
Amortized compensation costs ................................ 257 --
Loss on other investments ................................... -- 2,500
Other changes in assets and liabilities, net of acquisition:
(Increase) in inventory ..................................... (55,552) --
Decrease (increase) in accounts receivable .................. 14,266 172
(Increase) in unbilled costs ................................ (2,610) (1,229)
(Increase) in deferred training ............................. (4) (6,791)
(Increase) in other current assets .......................... (1,890) (2,452)
(Increase) in other long-term assets ........................ (250) (410)
Increase (decrease) in accounts payable ..................... 6,942 (2,475)
Increase in accrued rebates and discounts ................... 28,262 --
Increase in accrued contract losses ......................... 24,000 --
Increase in accrued liabilities ............................. 3,286 4,856
(Decrease) increase in unearned contract revenue ............ (12,326) 3,692
(Decrease) increase in other current liabilities ............ (22,067) 5,703
Increase in other long-term liabilities ..................... -- 4
--------- ---------
Net cash (used in) provided by operating activities ................. (13,214) 21,067
--------- ---------
Cash Flows From Investing Activities
Sale of short-term investments ................................. -- 1,585
Purchase of short-term investments ............................. (13,291) --
Cash paid for acquisition, net of cash acquired ................ (11,777) --
Other investments .............................................. (1,102) (2,500)
Purchase of property and equipment ............................. (10,376) (3,412)
--------- ---------
Net cash used in investing activities ............................... (36,546) (4,327)
--------- ---------
Cash Flows From Financing Activities
Net proceeds from secondary offering ........................... -- 41,611
Net proceeds from the exercise of stock options ................ 699 1,073
Distributions to S corporation stockholders .................... -- (8)
Repayment of loan from officer ................................. -- 1,428
--------- ---------
Net cash provided by financing activities ........................... 699 44,104
--------- ---------
Net (decrease) increase in cash and cash equivalents ................ $ (49,061) $ 60,844
Cash and cash equivalents - beginning ............................... 109,000 57,787
--------- ---------
Cash and cash equivalents - ending .................................. $ 59,939 $ 118,631
========= =========
The accompanying notes are an integral part of these financial statements
5
PDI, 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 PDI, 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 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 and nine-month periods ended September 30, 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. Charter Amendment
On October 1, 2001 the Company effected an amendment to the 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.
3. Repurchase Program
On September 21, 2001, the Company announced that its Board of Directors
had unanimously authorized management to allocate up to $7.5 million to
repurchase shares 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. No shares were purchased in the third quarter of 2001.
4. 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.
5. Acquisition
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. The acquisition has
6
been accounted for as a purchase, subject to 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. The Company
made payments to the Seller at closing of $8.5 million, net of cash acquired.
Additionally, the Company put $3.0 million in escrow related to contingent
payments payable during 2002 if certain defined benchmarks are achieved. In
connection with this transaction, the Company recorded $7.5 million in goodwill
and other identifiable intangibles, which are included in other long-term
assets.
InServe is a 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.
The following unaudited pro forma results of operations for the nine-month
periods ended September 30, 2001 and 2000 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.
Nine Months Ended
September 30,
-------------------------------
2001 2000
----------- -----------
(in thousands, except for per share data)
Net sales $ 439,056 $ 237,653
=========== ===========
Net (loss) income $ (1,732) $ 16,486
=========== ===========
(Loss) earnings per share $ (0.12) $ 1.21
=========== ===========
6. 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 a specified
consolidated minimum fixed charge coverage ratio, a maximum leverage ratio, a
minimum consolidated net worth and a capital expenditure limitation. At
September 30, 2001 the Company was in compliance with such covenants, except for
the minimum fixed charge coverage ratio. The Company is in discussions with the
Administrative Agent with respect to obtaining a waiver from the lenders of this
non-compliance at September 30, 2001. Continued non-compliance with this
covenant could adversely impact the availability to the Company of draw-downs
under these facilities. There were no amounts outstanding under these facilities
at September 30, 2001.
7. 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 U.S. to be
affiliated with the iPhysicianNet network, allowing PDI to offer e-detailing
capabilities to its
7
existing and potential clients. For the three and nine months ended September
30, 2000, the Company recorded a loss related to this investment of $0 and
$2,500,000, respectively, which represented its share of iPhysicianNet's losses
from the date of the investment through September 30, 2000. As of September 30,
2000, the investment in iPhysicianNet had been reduced to zero.
In the fourth quarter of 2000 and first six months of 2001, the Company
made an investment of approximately $1.9 million in convertible preferred stock
of In2Focus, Inc., a United Kingdom contract sales company. The Company recorded
this investment under the cost method.
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. See note 13.
9. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141, "Business Combinations," that, among other provisions, requires all
business combinations initiated after June 30, 2001 to be accounted for as
purchases. The adoption of this pronouncement is not expected to have a material
impact on the Company's earnings, comprehensive income and financial position.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," that, among other provisions, requires that all intangible assets
without a contractual life no longer be amortized but reviewed at least annually
for impairment. The Company will adopt SFAS 142 when required to do so. The
Company does not expect the adoption of SFAS 142 to have a material impact on
the Company's earnings, comprehensive income and financial position.
10. 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 and nine-month periods ended
September 30, 2001 and 2000 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Basic weighted average number
of common shares outstanding ........... 13,876,341 13,646,817 13,858,331 13,414,680
Dilutive effect of stock options ............ -- 313,945 -- 224,717
------------ ------------ ------------ ------------
Diluted weighted average number
of common shares outstanding ........... 13,876,341 13,960,762 13,858,331 13,639,397
============ ============ ============ ============
At September 30, 2001, 1,141,288 stock options were excluded from the
computation of diluted earnings per share due to their antidilutive effect.
11. Short-Term Investments
At September 30, 2001, short-term investments were $18.1 million,
including approximately $865,000 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.
8
12. 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(thousands)
Net (loss) income .............................. $ (17,256) $ 5,708 $ (1,925) $ 16,160
Other comprehensive (loss) income,
net of tax:
Unrealized holding loss on
available-for-sale securities
arising during period ................... (56) -- (129) --
Reclassification adjustments for
loss (gain) included in net income ...... -- -- 10 (92)
------------ ------------ ------------ ------------
Other comprehensive (loss) income .............. $ (17,312) $ 5,708 $ (2,044) $ 16,068
============ ============ ============ ============
13. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and through its LifeCycle Ventures, Inc. (LCV) subsidiary it is also
in the business of distributing product under an agreement with GlaxoSmithKline
(GSK) 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 GSK Ceftin agreement, the Company has minimum
product purchase commitments. As a result, the Company is required to purchase
certain 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. At September 30, 2001,
the total non-cancelable commitments outstanding were approximately $99.8
million.
At September 30, 2001, the Company recorded a contract loss of $24.0
million in connection with the Ceftin agreement. The Company has modified the
terms of its supply arrangement to substantially reduce its required purchase
commitments. In addition, the Company is currently in negotiations with GSK to
mutually terminate the agreement, effective February 28, 2002. The Company has
recorded in cost of goods sold the anticipated loss on the contract during the
estimated remaining contractual period. The loss represents the excess of
inventory on hand plus other committed costs under the contract, including costs
to substantially reduce purchase commitments, over the estimated net selling
proceeds less reasonably predictable selling costs. The Company will continue to
have the exclusive right to market and sell its
9
existing inventory through the termination date. In addition, the Company will
continue to have certain agreed upon promotional commitments through the
termination date.
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, in management's judgement, have a
material adverse effect on the business, financial condition, results of
operations or cash flows of the Company.
14. Segment Information
The Company operates under two reporting segments: product sales and
distribution, and contract sales and marketing services, 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 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 12. The segment information from prior periods has
been restated to conform to the current quarter and year-to-date presentation.
The product sales and distribution category has not changed from prior 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; this
category also includes the Company's LifeCycle X-Tension services, Product
Commercialization Services and co-promotion 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 quarter ended June 30,
2001.
The accounting policies of the segments are described in the "Nature of
Business and Significant Accounting Policies" footnote to the Company's
financial statements 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 on the basis of
revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(thousands)
Revenue
Contract sales and marketing services .... $ 101,317 $ 84,367 $ 287,268 $ 231,445
Product sales and distribution ........... 44,544 -- 218,677 --
------------ ------------ ------------ ------------
Total .................................. $ 145,861 $ 84,367 $ 505,945 $ 231,445
============ ============ ============ ============
Revenue, intersegment
Contract sales and marketing services .... $ 30,189 $ -- $ 73,264 $ --
Product sales and distribution ........... -- -- -- --
------------ ------------ ------------ ------------
Total .................................. $ 30,189 $ -- $ 73,264 $ --
============ ============ ============ ============
Revenue, less intersegment
Contract sales and marketing services .... $ 71,129 $ 84,367 $ 214,005 $ 231,445
Product sales and distribution ........... 44,544 -- 218,676 --
------------ ------------ ------------ ------------
Total .................................. $ 115,673 $ 84,367 $ 432,681 $ 231,445
============ ============ ============ ============
10
14. Segment Information
(continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(thousands)
EBIT
Contract sales and marketing services .... $ 2,284 $ 8,832 $ 16,806 $ 28,041
Product sales and distribution ........... (29,727) -- (16,661) --
Corporate charges ........................ (2,078) (1,407) (6,562) (3,392)
------------ ------------ ------------ ------------
Total .................................. $ (29,521) $ 7,425 $ (6,417) $ 24,109
============ ============ ============ ============
EBIT, intersegment
Contract sales and marketing services .... $ 2,948 $ -- $ 9,413 $ --
Product sales and distribution ........... (2,948) -- (9,413) --
Corporate charges ........................ -- -- -- --
------------ ------------ ------------ ------------
Total .................................. $ -- $ -- $ -- $ --
============ ============ ============ ============
EBIT, less intersegment,
before corporate allocations
Contract sales and marketing services .... $ (664) $ 8,832 $ 7,393 $ 28,041
Product sales and distribution ........... (26,779) -- (7,248) --
Corporate charges ........................ (2,078) (1,407) (6,562) (3,392)
------------ ------------ ------------ ------------
Total .................................. $ (29,521) $ 7,425 $ (6,417) $ 24,109
============ ============ ============ ============
Corporate allocations
Contract sales and marketing services .... $ (1,278) $ (1,407) $ (3,245) $ (3,392)
Product sales and distribution ........... (800) -- (3,317) --
Corporate charges ........................ 2,078 1,407 6,562 3,392
------------ ------------ ------------ ------------
Total .................................. $ -- $ -- $ -- $ --
============ ============ ============ ============
EBIT less corporate allocations
Contract sales and marketing services .... $ (1,942) $ 7,425 $ 4,148 $ 24,109
Product sales and distribution ........... (27,579) -- (10,565) --
Corporate charges ........................ -- -- -- --
------------ ------------ ------------ ------------
Total .................................. $ (29,521) $ 7,425 $ (6,417) $ 24,109
============ ============ ============ ============
Reconciliation of EBIT to income
before provision for income taxes
Total EBIT for operating groups .......... $ (29,521) $ 7,425 $ (6,417) $ 24,109
Other income, net ........................ 999 1,984 4,407 2,923
------------ ------------ ------------ ------------
Income before provision
for income taxes ........................ $ (28,522) $ 9,409 $ (2,010) $ 27,032
============ ============ ============ ============
Capital expenditures
Contract sales and marketing services .... $ 4,260 $ 1,715 $ 9,223 $ 3,412
Product sales and distribution ........... 176 -- 1,153 --
------------ ------------ ------------ ------------
Total .................................. $ 4,436 $ 1,715 $ 10,376 $ 3,412
============ ============ ============ ============
Depreciation expense
Contract sales and marketing services .... $ 1,061 $ 389 $ 2,624 $ 1,011
Product sales and distribution ........... 51 -- 61 --
------------ ------------ ------------ ------------
Total .................................. $ 1,112 $ 389 $ 2,685 $ 1,011
============ ============ ============ ============
11
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 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. As referenced in Footnote 14 to the consolidated financial
statements, 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 co-promotion 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).
The contract sales and marketing services category includes our CSO
business units; our marketing services business unit, which includes marketing
research and medical education and communication services; our newly organized
medical device and diagnostic marketing services business unit, provided
primarily through InServe(R), our latest acquisition. This category also
includes our LifeCycle X-Tension (LCXT) services, Product Commercialization
Services (PCS) and co-promotion services. Our contracts
12
within the LCXT, PCS and co-promotion 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
the risk of operating losses. These contracts normally require significant
participation from our LCV and TVG professionals whose skill sets include
marketing, brand management, contracting and marketing research.
Contract Sales and Marketing Services
Our contract sales and marketing services contracts generally are for
terms of one to five years and may be renewed or extended. However, the majority
of these contracts are terminable by the client for any reason upon 30 to 120
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 contract sales and marketing services 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 claims for indemnification have been asserted against us
under any contract.
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.
In May 2001, we entered into an agreement with Novartis Pharmaceuticals
Corporation for the U.S. sales, marketing and promotion rights for Lotensin(R)
(benazepril HCI) and Lotensin HCT(R) (benazepril HCI and hydrochlorothiazide
USP) and co-promotion rights for Lotrel(R) (amlodipine and benazepril HCI).
Novartis will retain certain regulatory responsibilities for Lotensin and Lotrel
and will retain ownership of all intellectual property. Additionally, Novartis
will continue to manufacture and distribute the products. Pursuant to the
agreement, which runs through December 31, 2003, PDI will provide promotional,
selling and marketing services for Lotensin, an ACE inhibitor, as well as brand
management services. In exchange for such services, PDI will receive a split of
incremental net sales above specified baselines. PDI will also co-promote Lotrel
for which it will 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. 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.
On September 10, 2001, we acquired 100% of the capital stock of InServe
Support Solutions ("InServe") in a transaction treated as an asset acquisition
for tax purposes. The acquisition has been accounted for as a purchase, subject
to 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. 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. In connection with this transaction, we recorded $7.5 million in
goodwill and other identifiable intangibles, which are included in other
long-term assets.
13
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.
Product Sales and Distribution
In October 2000, LCV signed a five-year agreement with GSK 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 a leading oral cephalosporin in the U.S.
and throughout the world, which is indicated for acute bacterial respiratory
infections such as acute sinusitis, bronchitis and otitis media. GSK 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 GSK is cancelable by either party on 120 days written notice.
At September 30, 2001, we recorded a contract loss of $24.0 million in
connection with the Ceftin agreement. We have modified the terms of our supply
arrangement to substantially reduce our required purchase commitments. In
addition, we are currently in negotiations with GSK to mutually terminate the
agreement, effective February 28, 2002. We have recorded in cost of goods sold
the anticipated loss on the contract during the estimated remaining contractual
period. The loss represents the excess of inventory on hand plus other committed
costs under the contract, including costs to substantially reduce purchase
commitments, over the estimated net selling proceeds less reasonably predictable
selling costs. We will continue to have the exclusive right to market and sell
our existing inventory through the termination date. In addition, we will
continue to have certain agreed upon promotional commitments through the
termination date.
Revenues and expenses
Our revenues and expenses are segregated between service and product sales
for reporting purposes. Our operations are currently organized around two
principal activities and business segments:
o contract sales and marketing services; and
o product sales and distribution.
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 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. Our three largest
clients accounted for approximately 69.2% and 63.8%, of our service revenue for
the quarters ended September 30, 2001 and 2000, respectively, and 60.1% and
67.1% of our service revenue for the nine-month periods ended September 30, 2001
and 2000, respectively. For the quarter ended September 30, 2001, product
revenue from sales of Ceftin primarily came from two major customers who
accounted for approximately 52.8% 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.
14
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 (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.
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 state in our product detailing contracts that the
payments are 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. See note 13 to the consolidated financial statements.
Corporate overhead
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; with respect to product that we distribute, other
SG&A also includes product detailing, marketing and promotional expenses.
15
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.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
Revenue
Service, net ..................................... 61.5% 100.0% 49.5% 100.0%
Product, net ..................................... 38.5 0.0 50.5 0.0
------ ------ ------ ------
Total revenue, net ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods and services
Program expenses ................................. 51.4 74.9 38.9 74.1
Cost of goods sold ............................... 44.8 0.0 38.7 0.0
------ ------ ------ ------
Total cost of goods and services ............... 96.3% 74.9% 77.6% 74.1%
Gross profit ........................................ 3.7 25.1 22.4 25.9
Compensation expense ................................ 8.1 9.4 6.8 10.0
Other selling, general and administrative expenses .. 21.2 6.9 17.1 5.5
------ ------ ------ ------
Total selling, general and administrative expenses 29.3 16.3 23.9 15.5
------ ------ ------ ------
Operating (loss) income ............................. (25.6) 8.8 (1.5) 10.4
Other income, net ................................... 0.9 2.4 1.0 1.3
------ ------ ------ ------
(Loss) income before provision for income taxes ..... (24.7) 11.2 (0.5) 11.7
(Benefit) provision for income taxes ................ (9.8) 4.4 (0.0) 4.7
------ ------ ------ ------
Net (loss) income ................................ (14.9)% 6.8% (0.5)% 7.0%
====== ====== ====== ======
Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2000
Revenue. Total net revenue for the quarter ended September 30, 2001 was
$115.7 million, an increase of $31.3 million, or 37.1%, over total net revenue
of $84.4 million for the quarter ended September 30, 2000. Net revenue from the
contract sales and marketing services segment for the quarter ended September
30, 2001 of $71.1 million was $13.2 million, or 15.7% less than net revenue of
$84.4 million from that segment for the comparable prior year period. This
decrease was primarily attributable to the loss of a significant CSO contract,
and the reduction in size, or non-renewal of several others, generally
indicating slower demand for contract sales services. Net product revenue for
the quarter ended September 30, 2001 was $44.5 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 September 30, 2001 were $111.4 million, an increase of 76.1% over cost of
goods and services of $63.2 million for the quarter ended September 30, 2000. As
a percentage of total net revenue, cost of goods and services increased to 96.3%
for the quarter ended September 30, 2001 from 74.9% in the comparable prior year
period. This increase as a percentage of revenue was primarily attributable to
the estimated future losses on the Ceftin contract of $24.0 million that was
reserved for in the third quarter. Program expenses (i.e., cost of services) for
the quarter ended September 30, 2001 were $59.5 million, a decrease of 5.9%
compared to program expenses of $63.2 million for the quarter ended September
30, 2000. As a percentage of net contract sales and marketing services segment
revenue, program expenses for the quarter ended September 30, 2001 of 83.7% were
8.8% higher than program expenses of 74.9% for the comparable prior year period,
primarily because of high net expenses for the performance-based contracts that
we began in the second quarter; excluding the effect of these contracts, program
expenses would have been 75.6% of service revenue. Cost of goods sold was $51.8
million for the quarter ended September 30, 2001. As a percentage of net product
revenue, cost of goods sold for the quarter ended September 30, 2001 was
16
116.3%. This was due to the loss on the Ceftin contract that we reserved for in
the third quarter. 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 September
30, 2001 was $9.3 million compared to $7.8 million for the comparable prior year
period. As a percentage of total net revenue, compensation expense decreased to
8.1% for the quarter ended September 30, 2001 from 9.4% for the quarter ended
September 30, 2000. Compensation expense for the quarter ended September 30,
2001 attributable to the contract sales and marketing services segment was $7.9
million compared to $7.8 million for the quarter ended September 30, 2000. As a
percentage of net revenue from the contract sales and marketing services
segment, compensation expense increased to 11.1% for the quarter ended September
30, 2001 from 9.3% for the quarter ended September 30, 2000. Compensation
expense for the quarter ended September 30, 2001 attributable to the product
segment was $1.4 million, or 3.1% 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. 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 $24.6 million for the quarter ended
September 30, 2001, an increase of 318.9% over other selling, general and
administrative expenses of $5.9 million for the quarter ended September 30,
2000. As a percentage of total net revenue, total other selling, general and
administrative expenses increased to 21.2% for the quarter ended September 30,
2001 from 6.9% for the quarter ended September 30, 2000. Other selling, general
and administrative expenses attributable to the contract sales and marketing
services segment for the quarter ended September 30, 2001 of $5.6 million were
$226,000, or 3.9%, less than other selling, general and administrative expenses
of $5.9 million attributable to that segment for the comparable prior year
period. As a percentage of net revenue from the contract sales and marketing
service segment, other selling, general and administrative expenses were 7.9%
and 6.9% for the quarters ended September 30, 2001 and 2000, respectively. This
increase was primarily due to facilities expansion resulting in increased rental
expense, discretionary investments in information technology resulting in
increased depreciation expense, and increased 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 the quarter ended September 30, 2001 were $18.9 million, or 42.4% 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, direct marketing expenses, business insurance and
professional fees. The seasonality of Ceftin sales may also cause other selling,
general and administrative expenses to vary as a percentage of revenue.
Operating (loss) income. There was an operating loss for the quarter ended
September 30, 2001 of $29.5 million compared to operating income of $7.4 million
for the quarter ended September 30, 2000. For the contract sales and marketing
services segment, there was an operating loss of $1.9 million for the quarter
ended September 30, 2001, compared to operating income of $7.4 million in the
comparable prior year period. The performance based contracts instituted during
May 2001 incurred a negative gross profit and a significant operating loss in
the third quarter, thereby having a severe adverse effect on the services
segment; a smaller operating loss is expected to occur in the fourth quarter of
2001. For the product segment, there was an operating loss of $27.6 million for
the quarter ended September 30, 2001. For the third quarter, sales of Ceftin
were substantially under budget due to lower TRx demand than budgeted. Also, the
August 20, 2001 unfavorable court ruling concerning Ranbaxy's generic
cephalosporin negatively impacted our August and September sales as wholesalers
began to anticipate availability of generic product. In addition to lower
revenue, we incurred a substantially higher cost of goods sold in the quarter as
a result of reserving $24.0 million for estimated future contract losses
associated with the Ceftin contract. This caused a severe adverse effect on
gross profit and operating income for the third quarter.
17
Other income, net. Other income, net, for the quarter ended September 30,
2001 was $999,000 and was comprised primarily of interest income. Other income,
net, for the quarter ended September 30, 2000, was $2.0 million, also consisting
primarily of interest income of $1.9 million.
(Benefit) provision for income taxes. There was an income tax benefit of
$11.3 million for the quarter ended September 30, 2001 compared to a $3.7
million tax provision for the quarter ended September 30, 2000, which consisted
of Federal and state corporate income taxes. The effective rate for the benefit
for the quarter ended September 30, 2001 was 39.5%, compared to an effective tax
rate of 39.3% for the quarter ended September 30, 2000.
Net (loss) income. There was a net loss for the quarter ended September
30, 2001 of $17.3 million, compared to net income of $5.7 million for the
quarter ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenue. Total net revenue for the nine months ended September 30, 2001
was $432.7 million, an increase of 86.9% over total net revenue of $231.4
million for the nine months ended September 30, 2000. Net revenue from the
contract sales and marketing services segment for the nine months ended
September 30, 2001 of $214.0 million was $17.4 million, or 7.5% less than net
revenue of $231.4 million from that segment for the comparable prior year
period. This decrease was primarily attributable to the loss of a significant
CSO contract, and the reduction in size, or non-renewal of several others,
generally indicating slower demand for contract sales services. Net product
revenue for the nine months ended September 30, 2001 was $218.7 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 nine months
ended September 30, 2001 were $335.8 million, an increase of 95.8% over cost of
goods and services of $171.5 million for the nine months ended September 30,
2000. As a percentage of total net revenue, cost of goods and services increased
to 77.6% for the nine months ended September 30, 2001 from 74.1% in the
comparable prior year period. This increase was primarily attributable to the
reserve accrued in the third quarter for estimated future losses on the Ceftin
contract of $24.0 million. Program expenses (i.e., cost of services) for the
nine months ended September 30, 2001 were $168.2 million, a decrease of 1.9%
compared to program expenses of $171.5 million for the nine months ended
September 30, 2000. As a percentage of net contract sales and marketing services
segment revenue, program expenses for the nine months ended September 30, 2001
and 2000 were 78.6% and 74.1%, respectively. This increase was primarily due to
high net expenses for the performance based contracts that we began in the
second quarter 2001; excluding the effect of these contracts, program expenses
would have been 73.6% of service revenue. Cost of goods sold was $167.6 million
for the nine months ended September 30, 2001. As a percentage of net product
revenue, cost of goods sold for the nine months ended September 30, 2001 was
76.6%. This sharp increase over prior quarters was primarily due to the
estimated future losses on the Ceftin contract that we reserved for in the third
quarter. 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 nine months ended
September 30, 2001 was $29.5 million compared to $23.0 million for the
comparable prior year period. As a percentage of total net revenue, compensation
expense decreased to 6.8% for the nine months ended September 30, 2001 from
10.0% for the nine months ended September 30, 2000. Compensation expense for the
nine months ended September 30, 2001 attributable to the contract sales and
marketing services segment was $25.1 million compared to $23.0 million for the
nine months ended September 30, 2000. As a percentage of net revenue from the
contract sales and marketing services segment, compensation expense increased to
11.7% for the nine months ended September 30, 2001 from 10.0% for the nine
months ended September 30, 2000. Compensation expense for the nine months ended
September 30, 2001 attributable to the product segment was $4.3 million, or 2.0%
of product revenue. The low compensation expense for this segment
18
contributed greatly to the overall reduction in compensation expense as a
percentage of total net revenue. 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 $73.8 million for the nine months ended
September 30, 2001, an increase of 475.0% over other selling, general and
administrative expenses of $12.8 million for the nine months ended September 30,
2000. As a percentage of total net revenue, total other selling, general and
administrative expenses increased to 17.1% for the nine months ended September
30, 2001 from 5.5% for the nine months ended September 30, 2000. Other selling,
general and administrative expenses attributable to the contract sales and
marketing services segment for the nine months ended September 30, 2001 were
$16.5 million, an increase of 28.3% over other selling, general and
administrative expenses of $12.8 million attributable to that segment for the
comparable prior year period. As a percentage of net revenue from contract sales
and marketing services, other selling, general and administrative expenses were
7.7% and 5.5% for the quarters ended September 30, 2001 and 2000, respectively.
This increase was primarily due to facilities expansion resulting in increased
rental expense, discretionary investments in information technology resulting in
increased depreciation expense, and increased 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 the nine months ended September 30, 2001 were $57.4 million, or 26.1% 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, direct marketing expenses, business insurance, increases
in the allowances for bad debts, and professional fees. The seasonality of
Ceftin sales may also cause other selling, general and administrative expenses
to vary as a percentage of revenue.
Operating (loss) income. There was an operating loss for the nine months
ended September 30, 2001 of $6.4 million, compared to operating income of $24.1
million for the nine months ended September 30, 2000. Operating income for the
nine months ended September 30, 2001 for the contract sales and marketing
services segment was $4.1 million, a decrease of 82.8% compared to the contract
sales and marketing services segment operating income for the nine months ended
September 30, 2000 of $24.1 million. As a percentage of net revenue from the
contract sales and marketing services segment, operating income for the those
segments decreased to 1.9% for the nine months ended September 30, 2001, from
10.4% for the comparable prior year period. The performance based contracts
initiated during the second quarter of 2001 have resulted in a negative gross
profit and a significant operating loss for the nine-month period ended
September 30, 2001, thereby having a severe adverse effect on the services
segment; a smaller operating loss is also expected to occur in the fourth
quarter of 2001. For the product segment, there was an operating loss of $10.6
million for the quarter ended September 30, 2001. For the third quarter, sales
of Ceftin were substantially under budget due to lower TRx demand than budgeted.
Also, the August 20, 2001 unfavorable court ruling concerning Ranbaxy's generic
cephalosporin negatively impacted our August and September sales as wholesalers
began to anticipate availability of generic product. In addition to lower
revenue, we incurred a substantially higher cost of goods sold in the third
quarter as a result of reserving $24.0 million for estimated future losses
associated with the Ceftin contract. This caused a severe adverse effect on
gross profit and operating income for the nine months ended September 30, 2001.
Other income, net. Other income, net, for the nine months ended September
30, 2001 was $4.4 million and was comprised primarily of interest income. Other
income, net, for the nine months ended September 30, 2000, was $2.9 million,
consisting primarily of interest income of $5.4 million, partially offset by our
share in the losses of iPhysicianNet of $2.5 million. Generally, lower interest
rates during 2001 have caused a reduction in our interest income earnings.
(Benefit) provision for income taxes. There was an income tax benefit of
$85,000 for the nine months ended September 30, 2001 compared to a tax provision
of $10.9 million for the nine months ended September 30, 2000, which consisted
of Federal and state corporate income taxes.
19
Net (loss) income. There was a net loss for the nine months ended
September 30, 2001 of $1.9 million, compared to net income of $16.2 million for
the nine months ended September 30, 2000.
Liquidity and capital resources
As of September 30, 2001, we had cash and cash equivalents and short-term
investments of approximately $78.1 million and working capital of $102.9 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 nine months ended September 30, 2001, net cash used in operating
activities was $13.2 million, compared to $21.1 million cash provided by
operating activities for the same period in 2000. The main components of cash
used in operating activities for the nine months ended September 30, 2001 were a
net loss from operations of $1.9 million and net cash outflows from "Other
assets and liabilities" of $17.9 million, partially offset by non-cash
adjustments for depreciation, amortization and reserves of $6.7 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. "Other changes in assets and
liabilities" during the nine-month period ended September 30, 2000 provided net
cash inflows of $1.1 million.
Inventory increased by $55.6 million in the first nine months of 2001. All
inventory is associated with our Ceftin distribution agreement with
GlaxoSmithKline. Accrued rebates and discounts increased by $28.3 million in the
first nine months of 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. As a result of our reserve accrued in the third quarter in anticipation
of contract losses associated with the Ceftin contract, our inventory levels
will be substantially reduced over the next two reporting periods.
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 September
30, 2001, we had $11.5 million of unearned contract revenue and $5.8 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 nine months ended September 30, 2001, net cash used in investing
activities was $36.5 million including $13.3 million of short-term investments,
$11.8 million cash paid for the InServe acquisition, including $3.0 million in
escrow for contingent payments, and $10.4 million of capital expenditures. The
increase in short-term investments resulted from the purchase of securities that
have a maturity date of more than 90 days past the balance sheet date of
September 30, 2001, and therefore have been classified as short-term investments
rather than cash and cash equivalents. Net cash provided by financing activities
was $699,000 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
20
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. At September 30,
2001 we were in compliance with such covenants, except for the minimum fixed
charge coverage ratio. We are in discussions with the Administrative Agent with
respect to obtaining a waiver from the lenders of this non-compliance at
September 30, 2001. Continued non-compliance with this covenant could adversely
impact the availability to us of draw-downs under these facilities. There were
no amounts outstanding under these facilities at September 30, 2001.
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.
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 September 30, 2001.
Item 3 - Not Applicable
21
Item 4 - Submission of matters to a vote of security holders
On July 11, 2001, the Company held its 2001 Annual Meeting of
Stockholders. At the meeting John P. Dugan and Gerald J. Mossinghoff were
re-elected as Class I Directors of the Company for three year terms with
12,303,820 and 12,308,742 votes cast in favor of their election, respectively,
and 199,221 and 194,229 votes withheld, respectively. In addition: (a) a
proposed amendment to the Company's Certificate of Incorporation to increase its
authorized common shares from 30 million to 100 million was approved (9,261,573
votes in favor, 3,238,480 votes against, and 2,988 votes withheld); (b) a
proposed amendment to the Company's Certificate of Incorporation to change the
Company's name to PDI, Inc. was approved (12,496,306 votes in favor, 5,334 votes
against, and 1,401 votes withheld); and (c) the appointment of
PricewaterhouseCoopers LLP as independent auditors of the Company for fiscal
2001 was ratified (12,287,336 votes in favor, 214,472 votes against, and 1,233
votes withheld).
Item 5 - Not Applicable
Item 6 - Reports on Form 8-K
During the three months ended September 30, 2001, the Company filed the
following reports on Form 8-K:
Date Item Description
--------------- ---- ----------------------------------------
August 15, 2001 5 Press Release: June 30, 2001 earnings
August 22, 2001 5 Press Release: Ceftin patent development
August 24, 2001 5 Press Release: Ceftin patent development
and non-binding letter of intent
22
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.
November 14, 2001 PDI, 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
23