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 June 30, 2002
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)
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 August 8, 2002 the Registrant had a total of 14,107,762 shares of Common
Stock, $.01 par value, outstanding.
INDEX
PDI, INC.
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (unaudited)
Balance Sheets
June 30, 2002 and December 31, 2001.................................3
Statements of Operations -- Three and Six Months
Ended June 30, 2002 and 2001........................................4
Statements of Cash Flows -- Six Months
Ended June 30, 2002 and 2001........................................5
Notes to Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
Item 2. Changes in Securities and Use of Proceeds..............Not Applicable
Item 3. Default Upon Senior Securities.........................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders................27
Item 5. Other Information......................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K...................................28
SIGNATURES ............................................................29
2
PDI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2002 2001
----------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 68,925 $ 160,043
Short-term investments ...................................... 19,680 7,387
Inventory, net .............................................. -- 442
Accounts receivable, net of allowance for doubtful
accounts of $1,396 and $3,692 as of June 30, 2002 and
December 31, 2001, respectively ......................... 26,669 52,640
Unbilled costs and accrued profits on contracts in progress . 10,568 6,898
Deferred training ........................................... 5,099 5,569
Other current assets ........................................ 4,734 8,101
Deferred tax asset .......................................... 24,041 24,041
--------- ---------
Total current assets ........................................... 159,716 265,121
Net property, plant & equipment ................................ 22,152 21,044
Other long-term assets ......................................... 16,342 16,506
--------- ---------
Total assets ................................................... $ 198,210 $ 302,671
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 5,119 $ 9,493
Accrued returns, rebates and sales discounts ................ 20,456 68,403
Accrued contract losses ..................................... -- 12,256
Accrued incentives .......................................... 14,639 22,213
Accrued salaries and wages .................................. 5,170 7,167
Unearned contract revenue ................................... 5,658 10,878
Other accrued expenses ...................................... 5,442 21,026
--------- ---------
Total current liabilities ...................................... 56,484 151,436
--------- ---------
Long-term liabilities:
Deferred tax liability .................................... 300 300
--------- ---------
Total long-term liabilities .................................... 300 300
--------- ---------
Total liabilities .............................................. $ 56,784 $ 151,736
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized: shares issued and outstanding, June 30, 2002
- 14,063,438, December 31, 2001 - 13,968,097; restricted
$.01 shares issued and outstanding, June 30, 2002 - 27,937,
December 31, 2001 - 15,388 ................................ $ 141 $ 140
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding .............. -- --
Additional paid-in capital ..................................... 104,252 102,757
Additional paid-in capital, restricted ......................... 1,547 954
Retained earnings .............................................. 36,550 48,008
Accumulated other comprehensive loss ........................... (88) (79)
Unamortized compensation costs ................................. (866) (735)
Treasury stock, at cost: 5,000 shares .......................... (110) (110)
--------- ---------
Total stockholders' equity ..................................... $ 141,426 $ 150,935
--------- ---------
Total liabilities & stockholders' equity ....................... $ 198,210 $ 302,671
========= =========
The accompanying notes are an integral part of these financial statements
3
PDI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2002 2001 2002 2001
-------- -------- --------- --------
(unaudited)
Revenue
Service, net ....................................... $ 66,033 $ 64,789 $ 134,192 $142,876
Product, net ....................................... 500 79,155 6,224 174,133
-------- -------- --------- --------
Total revenue, net .............................. 66,533 143,944 140,416 317,009
-------- -------- --------- --------
Cost of goods and services
Program expenses (including related party amounts of
$8 and $426 for the quarters ended June 30, 2002
and 2001, and $105 and $585 for the six months
ended June 30, 2002 and 2001, respectively) ...... 65,721 53,321 132,998 108,716
Cost of goods sold ................................. -- 51,523 -- 115,738
-------- -------- --------- --------
Total cost of goods and services ................ 65,721 104,844 132,998 224,454
-------- -------- --------- --------
Gross profit .......................................... 812 39,100 7,418 92,555
Compensation expense .................................. 9,294 9,162 17,053 20,177
Other selling, general & administrative expenses ...... 6,450 23,546 9,775 49,273
-------- -------- --------- --------
Total selling, general & administrative expenses ... 15,744 32,708 26,828 69,450
-------- -------- --------- --------
Operating (loss) income ............................... (14,932) 6,392 (19,410) 23,105
Other income, net ..................................... 356 1,537 1,245 3,407
-------- -------- --------- --------
(Loss) income before provision for taxes .............. (14,576) 7,929 (18,165) 26,512
(Benefit) provision for income taxes .................. (5,385) 3,527 (6,707) 11,181
-------- -------- --------- --------
Net (loss) income ..................................... $ (9,191) $ 4,402 $ (11,458) $ 15,331
======== ======== ========= ========
Basic net (loss) income per share ..................... $ (0.66) $ 0.32 $ (0.82) $ 1.11
======== ======== ========= ========
Diluted net (loss) income per share ................... $ (0.66) $ 0.31 $ (0.82) $ 1.08
======== ======== ========= ========
Basic weighted average number of shares outstanding ... 14,003 13,856 13,986 13,849
======== ======== ========= ========
Diluted weighted average number of shares outstanding . 14,003 14,246 13,986 14,189
======== ======== ========= ========
The accompanying notes are an integral part of these financial statements
4
PDI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months
Ended June 30,
----------------------
2002 2001
--------- ---------
(unaudited)
Cash Flows From Operating Activities
Net (loss) income from operations ......................................... $ (11,458) $ 15,331
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 3,046 1,816
Reserve for inventory obsolescence and bad debt ................... (2,262) 3,565
Loss on other investment .......................................... 379 --
Amortized compensation costs ...................................... 218 195
Deferred tax asset, net ........................................... -- --
Other changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................ 28,233 11,825
Decrease (increase) in inventory .................................. 442 (34,810)
(Increase) in unbilled costs ...................................... (3,670) (7,856)
Decrease (increase) in deferred training .......................... 470 (5,714)
Decrease in other current assets .................................. 3,368 1,605
(Increase) decrease in other long-term assets ..................... (143) (250)
(Decrease) increase in accounts payable ........................... (4,374) 11,594
(Decrease) increase in accrued returns, rebates and sales discounts (47,947) 29,193
(Decrease) in accrued contract losses ............................. (12,256) --
(Decrease) increase in accrued liabilities ........................ (8,978) 1,601
(Decrease) increase in unearned contract revenue .................. (5,219) (2,548)
(Decrease) in other current liabilities ........................... (15,935) (13,714)
--------- ---------
Net cash (used in) provided by operating activities ....................... (76,086) 11,833
--------- ---------
Cash Flows From Investing Activities
Sale of short-term investments ....................................... -- --
Purchase of short-term investments ................................... (12,303) (37,022)
Investments in iPhysicianNet and In2Focus ............................ (379) (1,102)
Purchase of property and equipment ................................... (3,847) (5,940)
--------- ---------
Net cash used in investing activities ..................................... (16,529) (44,064)
--------- ---------
Cash Flows From Financing Activities Net proceeds from employee
stock purchase plan and the exercise of stock options ................ 1,497 639
--------- ---------
Net cash provided by financing activities ................................. 1,497 639
--------- ---------
Net decrease in cash and cash equivalents ................................. (91,118) (31,592)
Cash and cash equivalents - beginning ..................................... 160,043 109,000
--------- ---------
Cash and cash equivalents - ending ........................................ $ 68,925 $ 77,408
========= =========
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, 2001 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 six-month periods ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. 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. Ceftin Contract Termination
In October 2000, the Company entered into an agreement with
GlaxoSmithKline (GSK) for the exclusive U.S. marketing, sales and distribution
rights for Ceftin(R) Tablets and Ceftin(R) for Oral Suspension, two dosage forms
of a cephalosporin antibiotic, which agreement was terminated as of February 28,
2002 by mutual agreement of the parties. The agreement had a five-year term but
was cancelable by either party without cause on 120 days notice. From October
2000 through February 2002, the Company marketed and sold Ceftin products,
primarily to wholesale drug distributors, retail chains and managed care
providers.
On August 21 2001, the U.S. Court of Appeals overturned a preliminary
injunction granted by the New Jersey District Court, which allowed for the entry
of a generic competitor to Ceftin immediately upon approval by the FDA. The
affected Ceftin patent had previously been scheduled to run through July 2003.
As a result of this decision and its impact on future sales, in the third
quarter of 2001, PDI recorded a charge to cost of goods sold and a related
reserve of $24.0 million representing the anticipated future loss to be incurred
by the Company under the Ceftin agreement as of September 30, 2001. The recorded
loss was calculated as the excess of estimated costs that PDI was contractually
obligated to incur to complete its obligations under the arrangement, over the
remaining estimated gross profits to be earned under the contract from selling
the inventory. These costs primarily consisted of amounts paid to GSK to reduce
purchase commitments, estimated committed sales force, selling and marketing
costs through the effective date of the termination, distribution costs, and
fees to terminate existing arrangements. The Ceftin agreement was terminated by
the Company and GSK under a mutual termination agreement entered into in
December 2001. Under the termination agreement, the Company agreed to perform
its marketing and distribution services through February 28, 2002. The Company
also maintained responsibility for sales returns for product sold until the
expiration date of the product sold, estimated to be December 31, 2004, and
certain administrative functions regarding Medicaid rebates.
As of June 30, 2002, the Company had no remaining Ceftin contract loss
reserve. At December 31, 2001, the reserve had consisted primarily of the
remaining estimated selling, general and administrative costs required to be
incurred to fulfill remaining obligations under the contract termination. While
the Company has certain responsibilities as discussed above, it had no remaining
Ceftin inventory purchase commitments as of June 30, 2002. The Company also had
approximately $20.5 million in sales discounts, rebates and return reserves
related to Ceftin at June 30,
6
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
2002 for estimated settlement of these obligations through the contract
termination date.
3. Repurchase Program
On September 21, 2001, the Company announced that its Board of Directors
had unanimously authorized management to repurchase up to $7.5 million of its
common stock. Subject to availability, the transactions may be made from time to
time in the open market or directly from stockholders at prevailing market
prices that the Company deems appropriate. The repurchase program was
implemented to ensure stability of the trading in PDI's common shares in light
of the September 11, 2001 terrorist activity. In October 2001, 5,000 shares were
repurchased in open market transaction for a total of $110,000. As of June 30,
2002, no other shares had been repurchased under this program. This program is
ongoing and future purchases may be effected.
4. Performance Based Contracts and Related Contingencies
In October 2001, the Company entered into an agreement with Eli Lilly and
Company (Eli Lilly) to copromote Evista in the U.S. Evista is approved in the
U.S. for the prevention and treatment of osteoporosis in postmenopausal women.
Under the terms of the agreement, the Company provides sales representatives to
copromote Evista to U.S. physicians. These sales representatives augment the Eli
Lilly sales force promoting Evista. Under this agreement, the Company is
entitled to be compensated based on net sales achieved above a predetermined
level. The agreement does not provide for the reimbursement of expenses the
Company incurs.
The Eli Lilly arrangement is a performance based contract for a term
through December 31, 2003, subject to earlier termination upon the occurrence of
specific events. The Company is required to commit a certain level of spending
for promotional and selling activities, including but not limited to sales
representatives, which could range from $9.0 million to $12.0 million per
quarter. The sales force assigned to Evista may be used to promote other
products, including products covered by other PDI copromotion arrangements.
Since the inception of the agreement, the Evista sales force has been used to
promote products covered by other PDI copromotion arrangements, partially
offsetting the costs of the sales force. The Company's compensation for Evista
is determined based upon a percentage of net factory sales of Evista above
contractual baselines. To the extent that such baselines are not exceeded, which
has been the case since the inception of the agreement, including the three and
six months ended June 30, 2002, the Company receives no revenue. Because the
Company has not earned any revenue under the Evista contract this year, it
recognized negative gross profit of approximately $8.7 million and $8.9 million,
respectively, for the quarters ended March 31, 2002 and June 30, 2002,
respectively. Further, because the baseline is cumulative and the Company does
not project Evista sales will exceed the baseline by the end of the third
quarter, it expects to recognize additional negative gross profit under this
contract, ranging from $7.0 million to $10.0 million, for the third quarter
ending September 30, 2002.
Although the Company anticipates negative gross profit for this contract
in the third quarter of 2002, it currently estimates that revenues over the
remaining life of this contract will exceed the future costs associated with
this contract. Factors underlying this estimate include recent prescription
trends following the publication in July 2002 of studies by the Women's Health
Initiative and the National Cancer Institute highlighting new risks associated
with hormone replacement therapy and therefore potentially increasing
prescriptions for osteoporosis products such as Evista. The Company is
continuing to monitor these trends and is evaluating their impact on its
performance under this contract. Consistent with the Company's policy regarding
contract accounting, if at any point it determines that its estimates for the
demand for Evista are not accurate and the Company assesses that it is probable
that revenues over the remaining life of the
7
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
contract will not exceed the future costs associated with the contract, the
Company will record a reserve equal to the estimated loss over the remaining
life of the contract. There is no assurance that actual revenues will exceed the
Company's costs or that it will not determine at a future date that a contract
loss reserve is required. Additionally, continuing operating losses under this
contract or a contract loss reserve could have a material adverse impact on the
Company's results of operations, cash flows and liquidity.
In May 2001, the Company entered into an agreement with Novartis
Pharmaceuticals Corporation (Novartis) for the U.S. sales, marketing and
promotion rights for Lotensin(R) and Lotensin HCT(R), which agreement runs
through December 31, 2003. Under this agreement, the Company provides
promotional, selling and marketing for Lotensin, as well as brand management. In
exchange, the Company is entitled to receive a split of incremental net sales
above specified baselines. Also under this agreement with Novartis, the Company
copromotes Lotrel(R) in the U.S. for which it is entitled to be compensated on a
fixed fee basis with potential incentive payments based upon achieving certain
total prescriptions (TRx) objectives. On May 20, 2002, the Company expanded this
agreement with the addition of Diovan(R) and Diovan HCT(R). As with Lotrel, the
Company copromotes Diovan and Diovan HCT in the U.S. for which it is entitled to
be compensated on a fixed fee basis with potential incentive payments based upon
achieving certain total prescriptions (TRx) objectives. Novartis has retained
regulatory responsibilities for Lotensin, Lotrel and Diovan and ownership of all
intellectual property. Additionally, Novartis will continue to manufacture and
distribute the products. In the event the Company's estimates of the demand for
Lotensin are not accurate or more sales and marketing resources than anticipated
are required, the Novartis transaction could have a material adverse impact on
its results of operations, cash flows and liquidity. During the three and six
months ended June 30, 2002, the Company's efforts on this contract resulted in
an operating loss because the sales of Lotensin did not exceed the specified
baselines by an amount sufficient to cover its operating costs. While the
Company currently estimates that future revenues will exceed costs associated
with this agreement, there is no assurance that actual revenues will exceed
costs; in which event the activities covered by this agreement would continue to
yield an operating loss and a contract loss reserve could be required.
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. InServe is a nationwide supplier of supplemental
field-staffing programs for the medical device and diagnostics industries
("MD&D"). The acquisition has been accounted for as a purchase, subject to the
provisions of SFAS 141 and SFAS 142. The net assets of InServe on the date of
acquisition were approximately $1.3 million. 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 April 2002, $1.2 million of
the escrow was paid to the Seller and $265,265 was returned to the Company due
to nonachievement of a performance benchmark. $1.5 million remains in escrow
subject to certain contingencies. In connection with these transactions, the
Company recorded $6.3 million in goodwill, which is included in other long-term
assets, and the remaining purchase price was allocated to identifiable tangible
and intangible assets and liabilities acquired.
The following unaudited pro forma results of operations for the three and
six months ended June 30, 2001 assume that the Company and InServe had been
combined as of the beginning of the period 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.
8
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
(in thousands, except
for per share data)
(unaudited)
Total revenue, net - pro forma ................ $ 147,019 $322,977
=========== ========
Net income - pro forma ........................ $ 4,504 $ 15,512
=========== ========
Pro forma diluted earnings per share .......... $ 0.32 $ 1.09
=========== ========
6. Other Investments
In February 2002 and in July 2002, the Company made an additional
investment of approximately $379,000 in the preferred stock of iPhysicianNet,
Inc ("iPhysicianNet"). Because iPhysicianNet has only incurred operating losses
to date, the Company was required to write off this investment in the six month
period ended June 30, 2002. During the six months ended June 30, 2001, the
Company made an additional investment of approximately $740,000 in convertible
preferred stock of In2Focus, Inc., a United Kingdom contract sales company,
bringing its total investment as of June 30, 2001 to $1.5 million. During the
remainder of 2001, an additional investment of approximately $400,000 was made,
raising PDI's ownership to approximately 12%. The Company recorded its
investment under the cost method. In light of the negative operating cash flows
and the uncertainty of achieving positive future results, the Company concluded
as of December 31, 2001 that its investment related to In2Focus was other than
temporarily impaired and it was written down to zero, the current estimated net
realizable value.
7. Inventory
At June 30, 2002, there was a zero inventory balance due to the sale of
all remaining inventory prior to the termination of PDI's distribution agreement
with GSK for Ceftin. For the six months ended June 30, 2001, inventory was
valued at the lower of cost or fair value. Cost was determined using the first
in, first out costing method. Inventory consisted of only finished goods and was
recorded net of a provision for obsolescence.
8. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under these new standards, all acquisitions subsequent to
June 30, 2001 must be accounted for under the purchase method of accounting, and
purchased goodwill is no longer amortized over its useful life. Rather, goodwill
will be subject to a periodic impairment test based upon its fair value. Under
these pronouncements, the Company's goodwill of approximately $9.6 million will
no longer be amortized; but will be subject to an annual impairment test. The
Company has assessed the impairment under SFAS 142 and the results are discussed
in footnote number 13.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
9
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and discontinued operations.
The adoption of these SFAS 141 through 144 did not have a material effect
on the consolidated financial position and results of operations of the Company.
PDI adopted these statements effective January 1, 2002.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44,
and 64. Amendment of FAS 13, and Technical Corrections as of April 2002" ("SFAS
145"). The statement rescinds SFAS 4 (as amended by SFAS 64) which required
extraordinary item treatment for gains and losses on extinguishments of debt, as
well as SFAS 44, which does not affect the Company. Additionally, the statement
amends certain provisions of SFAS 13 and other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
145 related to extinguishments of debt are effective for the Company beginning
January 1, 2003, and all other provisions are effective for transactions
occurring on or financial statements issued after May 15, 2002. The Company is
currently evaluating the impact of this statement on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities, and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3, and requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of an entity's commitment to an
exit plan as was the case under EITF 94-3. This Statement also establishes that
fair value is the objective for initial measurement of the liability. SFAS 146
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company is currently evaluating
the impact of this statement on its financial statements.
9. Historical and Pro Forma Basic and Diluted Net Income/Loss Per Share
Historical and pro forma basic and diluted net income/loss per share is
calculated based on the requirements of SFAS No. 128, "Earnings Per Share."
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the three-month and six-month periods ended
June 30, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
Basic weighted average number
of common shares outstanding .. 14,003 13,856 13,986 13,849
Dilutive effect of stock options ... -- 390 -- 340
------ ------ ------ ------
Diluted weighted average number
of common shares outstanding .. 14,003 14,246 13,986 14,189
====== ====== ====== ======
10
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
At June 30, 2002, 1,023,880 stock options were excluded from the
computation of diluted earnings per share due to their antidilutive effect. At
June 30, 2001, 276,135 stock options were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
10. Short-Term Investments
At June 30, 2002, short-term investments were approximately $19.7 million,
including approximately $1.2 million of investments classified as available for
sale securities. At June 30, 2001, short-term investments were $41.9 million,
including approximately $905,000 of investments classified as available for sale
securities. The unrealized after-tax gain/(loss) on the available for sale
securities is included as a separate component of stockholders' equity as
accumulated other comprehensive income (loss). All other short-term investments
are stated at cost, which approximates fair value.
11. Other Comprehensive (Loss) Income
A reconciliation of net (loss) income as reported in the Consolidated
Statements of Operations to Other comprehensive (loss) income, net of taxes is
presented in the table below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
2002 2001 2002 2001
------- ------ -------- --------
(thousands)
Net (loss) income ......................... $(9,191) $4,402 $(11,458) $ 15,331
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on
available-for-sale securities
arising during period .............. (61) 28 (50) (73)
Reclassification adjustment for losses
included in net (loss) income ...... 21 -- 41 10
------- ------ -------- --------
Other comprehensive (loss) income ......... $(9,231) $4,430 $(11,467) $ 15,268
======= ====== ======== ========
12. Commitments and Contingencies
The Company is engaged in the business of providing sales and marketing
services including the detailing of pharmaceutical products and providing after
sales support for medical devices and diagnostics, and through PDI Pharma is
also in the business of selling, marketing and distributing pharmaceutical
products. Such activities could expose the Company to risk of liability for
personal injury or death to persons using such products. The Company seeks to
reduce its potential liability under its service agreements through measures
such as contractual indemnification provisions with clients (the scope of which
may vary from client to client, and the performances of which are not secured)
and insurance. The Company could, however, also be held liable for errors and
omissions of its employees in connection with the services it performs that are
outside the scope of any indemnity or insurance policy. The Company could be
materially adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is outside the scope of the
indemnification agreements; if the indemnity, although applicable, is not
performed in accordance with its terms; or if the Company's liability exceeds
the amount of applicable insurance or indemnity.
11
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
In January and February 2002, the Company, its chief executive officer,
and its chief financial officer were served with three complaints that were
filed in the United States District Court for the District of New Jersey
alleging violations of the Securities Exchange Act of 1934 (the "1934 Act").
These complaints were brought as purported shareholder class actions under
Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder.
On May 23, 2002, the Court consolidated all three lawsuits into a single action
entitled In re PDI Securities Litigation, Master File No. 02-CV-0211, and
appointed lead plaintiffs and lead plaintiffs' counsel. A consolidated and
amended complaint was filed on July 29, 2002.
The consolidated and amended complaint names the Company, its chief
executive officer, and its chief financial officer as defendants; purports to
state claims against them on behalf of all persons who purchased the Company's
common stock between May 22, 2001 and November 12, 2001; and seeks money damages
in unspecified amounts and litigation expenses including attorneys' and experts'
fees. The essence of the allegations in the consolidated and amended complaint
is that the defendants intentionally or recklessly made false or misleading
public statements and omissions concerning the Company's financial condition and
prospects with respect to its marketing of Ceftin in connection with the October
2000 distribution agreement with GlaxoSmithKline, as well as its marketing of
Lotensin in connection with the May 2001 distribution agreement with Novartis
Pharmaceuticals Corp.
As of this filing, the Company has not yet answered the consolidated and
amended complaint and intends to file a motion to dismiss under the Private
Securities Litigation Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the
Federal Rules of Civil Procedure. Discovery has not yet commenced in the
consolidated action. The Company believes that the allegations in this purported
securities class action are without merit and intends to defend the action
vigorously.
The Company has been named as a defendant in numerous lawsuits, including
a class action matter, alleging claims arising from the use of the prescription
compound Baycol that was manufactured by Bayer Pharmaceuticals (Bayer) and
marketed by the Company on Bayer's behalf. The Company expects to be named in
additional similar lawsuits. In August 2001, Bayer announced that it was
voluntarily withdrawing Baycol from the U.S. market. The Company intends to
defend these actions vigorously and has asserted a contractual right of
indemnification against Bayer for all costs and expenses it incurs relating to
these proceedings.
Other than the foregoing, the Company is not currently a party to any
material pending litigation and it is not aware of any material threatened
litigation.
13. Goodwill and Intangible Assets
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" in
fiscal year 2002. The effect of this adoption was to cease amortization of
goodwill and certain other indefinite-lived intangible assets, which resulted in
a decrease in amortization expense in the second quarter and six months ended
June 30, 2002 of approximately $236,000 and $502,000, respectively. The Company
has established reporting units for purposes of testing goodwill for impairment.
Goodwill has been assigned to the reporting units to which the value of the
goodwill relates. The Company completed the first step of the transitional
goodwill impairment test and has determined that no impairment existed at
January 1, 2002. The Company will evaluate goodwill and other intangible assets
at least on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable based on the estimated
future cash flows. The Company's total goodwill which is not subject to
amortization is $9.6 million as of June 30, 2002, all of which relates to the
sales and marketing services segment.
12
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
The statements of operations adjusted to exclude amortization expense for
2001 related to goodwill and related taxes are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2002 2001 2002 2001
------- ------ -------- -------
(in thousands)
Net (loss) income, as reported ......... $(9,191) $4,402 $(11,458) $15,331
Pro forma goodwill amortization expense,
net of tax ........................ -- 62 -- 126
------- ------ -------- -------
Net (loss) income pro forma ............ $(9,191) $4,464 $(11,458) $15,457
======= ====== ======== =======
Net (loss) earnings per share
diluted pro forma ..................... $ (0.66) $ 0.31 $ (0.82) $ 1.09
======= ====== ======== =======
14. Segment Information
The Company operates under two reporting segments: sales and marketing
services, and PDI Pharma, both of which have been changed since the December 31,
2001 financial presentation. Since the termination of the Ceftin contract and
the elimination of product sales, effective February 28, 2002, the shift in
management's focus on the business has been to view the traditional fee for
service type arrangements (offered by the "sales and marketing services"
segment) in the aggregate and to view the performance based contracts - those
for which the Company is compensated based largely on the performance of the
products that it is responsible for marketing and/or selling ("PDI Pharma"
segment) - also in the aggregate. The sales and marketing services segment
includes the Company's CSO business units; the Company's marketing services
business unit, which includes marketing research and medical education and
communication services; and the Company's medical device and diagnostics
business unit. The PDI Pharma segment includes the Company's LifeCycle Extension
services, product commercialization services and copromotion services, including
product sales. The segment information from prior periods has been restated to
conform to the current year's presentation.
In the Company's Quarterly Report on Form 10-Q for the three and six
months ended June 30, 2001 and Annual Report on Form 10-K for the year ended
December 31, 2001, the Company had "contract sales and marketing services" and
"product sales and distribution" reporting segments. "Product sales and
distribution" was comprised only of the Ceftin contract which was a performance
based contract and is now included in the PDI Pharma segment. The PDI Pharma
segment now also includes the Company's other performance based contracts, such
as for Lotensin and Evista; previously these contracts were combined in the
Company's "contract sales and marketing services" segment. The "sales and
marketing services" segment is comprised of all non performance based contracts.
Segment data includes a charge allocating all corporate headquarters costs
to each of the operating segments on the basis of total salary costs. Corporate
headquarters costs have been allocated to prior periods also on the basis of
total salary costs.
13
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
(thousands)
Revenue
Sales and marketing services $ 50,882 $ 84,192 $ 107,339 $ 178,891
PDI Pharma ................. 15,897 85,436 33,447 181,192
-------- --------- --------- ---------
Total .................... $ 66,779 $ 169,628 $ 140,786 $ 360,083
======== ========= ========= =========
Revenue, intersegment
Sales and marketing services $ 246 $ 25,684 $ 370 $ 43,074
PDI Pharma ................. -- -- -- --
-------- --------- --------- ---------
Total .................... $ 246 $ 25,684 $ 370 $ 43,074
======== ========= ========= =========
Revenue, less intersegment
Sales and marketing services $ 50,636 $ 58,508 $ 106,969 $ 135,817
PDI Pharma ................. 15,897 85,436 33,447 181,192
-------- --------- --------- ---------
Total .................... $ 66,533 $ 143,944 $ 140,416 $ 317,009
======== ========= ========= =========
EBIT
Sales and marketing services $ 3,212 $ 6,069 $ 6,232 $ 18,595
PDI Pharma ................. (15,156) 2,476 (20,155) 8,994
Corporate charges .......... (2,988) (2,153) (5,487) (4,484)
-------- --------- --------- ---------
Total .................... $(14,932) $ 6,392 $ (19,410) $ 23,105
======== ========= ========= =========
EBIT, intersegment
Sales and marketing services $ 247 $ 2,898 $ 302 $ 6,465
PDI Pharma ................. (247) (2,898) (302) (6,465)
Corporate charges .......... -- -- -- --
-------- --------- --------- ---------
Total .................... $ -- $ -- $ -- $ --
======== ========= ========= =========
EBIT, less intersegment,
before corporate allocations
Sales and marketing services $ 2,965 $ 3,171 $ 5,930 $ 12,130
PDI Pharma ................. (14,909) 5,374 (19,853) 15,459
Corporate charges .......... (2,988) (2,153) (5,487) (4,484)
-------- --------- --------- ---------
Total .................... $(14,932) $ 6,392 $ (19,410) $ 23,105
======== ========= ========= =========
Corporate allocations
Sales and marketing services $ (994) $ (398) $ (1,740) $ (1,683)
PDI Pharma ................. (1,994) (1,755) (3,747) (2,801)
Corporate charges .......... 2,988 2,153 5,487 4,484
-------- --------- --------- ---------
Total .................... $ -- $ -- $ -- $ --
======== ========= ========= =========
EBIT less corporate allocations
Sales and marketing services $ 1,971 $ 2,773 $ 4,190 $ 10,447
PDI Pharma ................. (16,903) 3,619 (23,600) 12,658
Corporate charges .......... -- -- -- --
-------- --------- --------- ---------
Total .................... $(14,932) $ 6,392 $ (19,410) $ 23,105
======== ========= ========= =========
14
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
(continued) 2002 2001 2002 2001
-------- ------ -------- -------
(thousands)
Reconciliation of EBIT to income
before provision for income taxes
Total EBIT for operating groups $(14,932) $6,392 $(19,410) $23,105
Other income, net ............. 356 1,537 1,245 3,407
-------- ------ -------- -------
Income before provision
for income taxes ............. $(14,576) $7,929 $(18,165) $26,512
======== ====== ======== =======
Capital expenditures
Sales and marketing services .. $ 1,235 $3,086 $ 3,630 $ 4,963
PDI Pharma .................... 217 819 217 977
-------- ------ -------- -------
Total ....................... $ 1,452 $3,905 $ 3,847 $ 5,940
======== ====== ======== =======
Depreciation expense
Sales and marketing services .. $ 1,460 $ 808 $ 2,680 $ 1,563
PDI Pharma .................... 31 6 59 10
-------- ------ -------- -------
Total ....................... $ 1,491 $ 814 $ 2,739 $ 1,573
======== ====== ======== =======
15
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 "Risk Factors Relating to Performance
Based Contracts" set forth below and "Certain Factors That May Affect Future
Growth," set forth under Part I, Item 1, of the Company's Annual Report on Form
10-K for the year ended December 31, 2001 as filed with the Securities and
Exchange Commission.
RISK FACTORS RELATING TO PERFORMANCE BASED CONTRACTS
In addition to the factors set forth in "Certain Factors that May Affect
Future Growth" under Part 1, Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 2001 and other information provided in our reports, you
should consider the following carefully in evaluating our business and an
investment in our common stock. Additional risks and uncertainties not presently
known to us, that we currently deem immaterial or that are similar to those
faced by other companies in our industry or business in general, such as
competitive conditions, may also impair our business operations. If any of these
risks occur, our business, financial condition, or results of operations could
be materially adversely affected.
We have incurred operating losses under our performance based contracts
which, if they continue, could have a material adverse affect on our results of
operations and liquidity.
Some of our programs, including our Evista and Lotensin programs, require
us to increase sales of the product beyond minimum threshold requirements in
order to earn enough revenue to recoup our costs associated with the programs.
Since inception of the Evista program, we have not exceeded contract baselines
in our promotion of Evista and therefore have not earned any revenue under this
contract. As a result, we recognized negative gross profit for the six months
ended June 30, 2002 of approximately $17.6 million. Further, as the baseline is
cumulative and we do not project sales to exceed the baseline by the end of the
third quarter, we do not expect to earn revenue in the third quarter and as a
result we expect to incur negative gross profit of between $7.0 million and
$10.0 million on the Evista program in the quarter ending September 30, 2002.
Since inception of the Lotensin program, we have not sufficiently exceeded
contract baselines to cover the costs incurred in our promotion of Lotensin
which also resulted in a loss for the six months ended June 30, 2002. There is
no assurance that actual revenues in future periods will exceed our costs under
these programs. Further, while we currently believe that estimated revenues over
the remaining lives of these programs will exceed future estimated costs, any
adverse development in prescription trends could require us to book a reserve
with respect to these contracts and could have a material adverse impact on our
results
16
of operations, cash flows and liquidity.
Overview
We are an innovative sales and marketing company serving the
pharmaceutical, biotech, and medical devices and diagnostics industries.
Partnering with clients, we provide product-specific programs designed to
maximize profitability throughout a product's lifecycle from pre-launch through
maturity. We are recognized as an industry leader based on our track record of
innovation and our ability to keep pace in a rapidly changing industry. We
leverage our expertise in sales, brand management and product marketing,
marketing research, medical education, medical affairs, and managed markets and
trade relations to help meet strategic objectives and provide incremental value
for product sales. We operate under two reporting segments: sales and marketing
services and PDI Pharma. Within our two reporting segments we provide the
following services:
o Sales and marketing services:
o dedicated contract sales services;
o shared contract sales 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).
o PDI Pharma:
o LifeCycle Extension services (LCXT);
o product commercialization services (PCS);and
o copromotion services.
Our contracts within the LCXT, PCS and copromotion subcategories are more
heavily performance based and have a higher risk potential and correspondingly
an opportunity for higher profitability. These contracts involve significant
startup expenses and a greater risk of operating losses. These contracts
normally require significant participation from our PDI Pharma and TVG
professionals whose skill sets include marketing, brand management, trade
relations and marketing research.
Sales and Marketing Services
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee for services, i.e., the client pays a fee for a specified package of
services. These contracts typically include operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by built-in incentives we can earn
based on our performance. In these situations, we have the opportunity to earn
additional fees based on enhanced program results.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason on 30 to 90 days notice. These
contracts typically, but not always, provide for termination payments in the
event they are terminated by the client without cause. While the cancellation of
a contract by a client without cause may result in the imposition of penalties
on the client, these penalties may not act as an adequate deterrent to the
termination of any contract. In addition, we cannot assure you that these
penalties will offset the revenue we could have earned under the contract or the
costs we may incur as a result of its termination. The loss or termination of a
large contract or the loss of multiple contracts could adversely affect our
future revenue and profitability. As an example, in February 2002, Bayer
notified us that they were exercising their right to terminate their contract
with us without cause. Contracts may also be terminated
17
for cause if we fail to meet stated performance benchmarks. To date, no programs
have been terminated for cause.
On September 10, 2001, we acquired InServe Support Solutions (InServe) in
a transaction treated as an asset acquisition for tax purposes. The acquisition
was accounted for as a purchase in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) 141 and SFAS 142. The net assets of
InServe on the date of acquisition were approximately $1.3 million. At closing,
we paid the former stockholders of InServe $8.5 million, net of cash acquired.
Additionally, we deposited $3.0 million in escrow related to contingent payments
payable during 2002 if certain defined benchmarks are achieved. In April 2002,
$1.2 million of the escrow was paid to the Seller and $265,265 was returned to
us due to nonachievement of a performance benchmark. $1.5 million remains in
escrow subject to certain contingencies. In connection with these transactions,
we recorded $6.3 million in goodwill, which is included in other long-term
assets, and the remaining purchase price was allocated to identifiable tangible
and intangible assets and liabilities acquired.
InServe is a leading nationwide supplier of supplemental field-staffing
programs for the medical device and diagnostics industries. InServe provides
hands-on clinical education and after-sales support to maximize product
utilization and customer satisfaction. InServe's clients include many of the
leading medical device and diagnostics companies, including Becton Dickinson,
Roche Diagnostics and Johnson & Johnson.
PDI Pharma
Beginning in the fourth quarter of 2000 we entered into a number of
significant performance based contracts and we use a variety of structures for
such contracts. Our agreement with GlaxoSmithKline (GSK) regarding Ceftin(R) was
a marketing and distribution contract, under which we had the exclusive right to
market and distribute the designated Ceftin products in the U.S. The agreement
had a five-year term but was cancelable by either party without cause on 120
days notice. The agreement was terminated by mutual consent, effective February
28, 2002. Contracts such as the Ceftin agreement, which require us to purchase
and distribute product, have a greater number of risk factors than a traditional
fee for service contract. Any future agreement that involves in-licensing or
product acquisition would have similar risk factors.
In May 2001, we entered into an agreement with Novartis Pharmaceuticals
Corporation (Novartis) for the U.S. sales, marketing and promotion rights for
Lotensin(R) and Lotensin HCT(R), which agreement runs through December 31, 2003.
Under this agreement, we provide promotional, selling and marketing for
Lotensin, as well as brand management. In exchange, we are entitled to receive a
split of incremental net sales above specified baselines. Also under this
agreement with Novartis, we copromote Lotrel(R) in the U.S. for which we are
entitled to be compensated on a fixed fee basis with potential incentive
payments based upon achieving certain total prescriptions (TRx) objectives. On
May 20, 2002, we expanded this agreement with the addition of Diovan(R) and
Diovan HCT(R). As with Lotrel, we copromote Diovan and Diovan HCT in the U.S.
for which we are entitled to be compensated on a fixed fee basis with potential
incentive payments based upon achieving certain total prescriptions (TRx)
objectives. Novartis has retained regulatory responsibilities for Lotensin,
Lotrel and Diovan and ownership of all intellectual property. Additionally,
Novartis will continue to manufacture and distribute the products. In the event
our estimates of the demand for Lotensin are not accurate or more sales and
marketing resources than anticipated are required, the Novartis transaction
could have a material adverse impact on our results of operations, cash flows
and liquidity. During the three and six months ended June 30, 2002, our efforts
on this contract resulted in an operating loss because the sales of Lotensin did
not exceed the specified baselines by an amount sufficient to cover our
operating costs. While we currently estimate that future revenues will exceed
costs associated with this agreement, there is no assurance that actual revenues
will exceed costs; in which event the activities covered by this agreement would
continue to yield an operating loss and a contract loss reserve could be
required.
18
In October 2001, we entered into an agreement with Eli Lilly to copromote
Evista in the U.S. Evista is approved in the U.S. for the prevention and
treatment of osteoporosis in postmenopausal women. Under the terms of the
agreement, we provide sales representatives to copromote Evista to U.S.
physicians. Our sales representatives augment the Eli Lilly sales force
promoting Evista. Under this agreement, we are entitled to be compensated based
on net sales achieved above a predetermined level. The agreement does not
provide for the reimbursement of expenses we incur.
The Eli Lilly arrangement is a performance based contract for a term
through December 31, 2003, subject to earlier termination upon the occurrence of
specific events. We are required to commit a certain level of spending for
promotional and selling activities, including but not limited to sales
representatives, which could range from $9.0 million to $12.0 million per
quarter. The sales force assigned to Evista may be used to promote other
products, including products covered by other PDI copromotion arrangements.
Since the inception of the agreement, this sales force has been used to promote
products covered by other PDI copromotion arrangements, partially offsetting the
costs of the sales force. Our compensation for Evista is determined based upon a
percentage of net factory sales above contractual baselines. To the extent that
such baselines are not exceeded, which has been the case since the inception of
the agreement, including the three and six months ended June 30, 2002, we
receive no revenue. Because we have not earned any revenue under the Evista
contract this year, we recognized negative gross profit of approximately $8.7
million and $8.9 million, respectively, for the quarters ended March 31, 2002
and June 30, 2002, respectively. Further, because the baseline is cumulative and
we do not project Evista sales will exceed the baseline by the end of the third
quarter, we expect to recognize additional negative gross profit under this
contract, ranging from $7.0 million to $10.0 million, for the third quarter
ending September 30, 2002.
Although we anticipate negative gross profit for this contract in the
third quarter of 2002, we currently estimate that revenues over the remaining
life of this contract will exceed the future costs associated with this
contract. Factors underlying this estimate include recent prescription trends
following the publication in July 2002 of studies by the Women's Health
Initiative and the National Cancer Institute highlighting new risks associated
with hormone replacement therapy and therefore potentially increasing
prescriptions for osteoporosis products such as Evista. We are continuing to
monitor these trends and are evaluating their impact on our performance under
this contract. Consistent with our policy regarding contract accounting, if at
any point we determine that our estimates for the demand for Evista are not
accurate and we assess that it is probable that revenues over the remaining life
of the contract will not exceed our future costs associated with the contract,
we will record a reserve equal to the estimated loss over the remaining life of
the contract. There is no assurance that actual revenues will exceed our costs
or that we will not determine at a future date that a contract loss reserve is
required. Additionally, continuing operating losses under this contract could
have a material adverse impact on our results of operations, cash flows and
liquidity.
Revenues and expenses
Our revenues and cost of goods and services are classified between service
and product sales for reporting purposes. Historically, we have derived a
significant portion of our service revenue from a limited number of clients.
However, concentration of business in the pharmaceutical outsourcing industry is
common and the industry continues to consolidate. Accordingly, we are likely to
continue to experience significant client concentration in future periods. Our
three largest clients accounted for approximately 69.3% and 59.0%, of our
service revenue for the quarters ended June 30, 2002 and 2001, respectively, and
73.7% and 61.3% of our service revenue for the six-month periods ended June 30,
2002 and 2001, respectively. For the quarter ended June 30, 2001, revenue from
sales of Ceftin primarily came from two customers who accounted for
approximately 69.7% of total net product revenue. Of the $6.2 million recorded
as product revenue for the six months ended June 30, 2002, only approximately
$716,000 was from the sale of inventory. The balance of $5.5 million resulted
from the net positive adjustments recorded in sales returns and allowances,
discounts and rebates for the first six months of 2002 that occurred as we
continue to satisfy our liabilities relating to the previous reserves recorded
as a result of
19
Ceftin sales in prior periods. Because those reserves were initially set up as
estimates, using historical data and other information, there may be both
positive and negative adjustments made as the liabilities are settled in future
periods and such adjustment will be reflected in product revenue with the
classification of such accruals when initially recorded.
Service revenue and program expenses
Sales and marketing services revenue is earned primarily by performing
product detailing programs and other marketing and promotional services under
contracts. Revenue is recognized as the services are performed and the right to
receive payment for the services is assured. Revenue is recognized net of any
potential penalties until the performance criteria eliminating the penalties
have been achieved. Bonus and other performance incentives, as well as
termination payments, are recognized as revenue in the period earned and when
payment of the bonus, incentive or other payment is assured. Under performance
based contracts revenue is recognized when the performance based parameters are
attained.
Program expenses consist primarily of the costs associated with executing
product detailing programs, performance based contracts or other sales and
marketing services identified in the contract. Program expenses include
personnel costs 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. Such costs include, but are not limited
to, facility rental fees, honoraria and travel expenses, sample expenses and
other promotional expenses. Personnel costs, which constitute the largest
portion of program expenses, include all labor related costs, such as salaries,
bonuses, fringe benefits and payroll taxes for the sales representatives and
sales managers and professional staff who are directly responsible for executing
a particular program. Initial direct program costs are those costs associated
with initiating a product detailing program, such as recruiting, hiring and
training the sales representatives who staff a particular product detailing
program. All personnel costs and initial direct program costs, other than
training costs, are expensed as incurred for service offerings. Training costs
include the costs of training the sales representatives and managers on a
particular product detailing program so that they are qualified to properly
perform the services specified in the related contract. Training costs are
deferred and amortized on a straight-line basis over the shorter of the life of
the contract to which they relate or 12 months. Expenses related to the product
detailing of products we distribute such as Ceftin (as discussed below under
Product revenue and cost of goods sold) are recorded as a selling expense and
are included in other selling, general and administrative expenses in the
consolidated statements of operations.
As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing program. We typically
receive an initial contract payment upon commencement of a product detailing
program as compensation for recruiting, hiring and training services associated
with staffing that program. In these cases, the initial payment is recorded as
revenue in the same period in which the costs of the services are expensed. Our
inability to specifically negotiate in our product detailing contracts payments
that are specifically attributable to recruiting, hiring or training services
could adversely impact our operating results for periods in which the costs
associated with the product detailing services are incurred.
Product revenue and cost of goods sold
Our only product revenue to date related to the Ceftin contract which
terminated effective February 28, 2002. 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
20
on sales under the Ceftin agreement fluctuated based on our quantity of product
purchased, and our contractual unit costs including applicable discounts, as
well as fluctuations in the selling price for our products including applicable
discounts.
Corporate overhead
Selling, general and administrative expenses (SG&A) include compensation
and general corporate overhead. Compensation expense consists primarily of
salaries, bonuses, training and related benefits for senior management and other
administrative, marketing, finance, information technology and human resources
personnel who are not directly involved with executing a particular program.
Other selling, general and administrative expenses include corporate overhead
such as facilities costs, depreciation and amortization expenses and
professional services fees; and with respect to product that we distribute,
other SG&A also includes product detailing, marketing and promotional expenses.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, 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 Six Months Ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Revenue
Service, net ..................................... 99.2% 45.0% 95.6% 45.1%
Product, net ..................................... 0.8 55.0 4.4 54.9
----- ----- ----- -----
Total revenue, net ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods and services
Program expenses ................................. 98.8 37.0 94.7 34.3
Cost of goods sold ............................... 0.0 35.8 0.0 36.5
----- ----- ----- -----
Total cost of goods and services ............... 98.8% 72.8% 94.7% 70.8%
Gross profit ........................................ 1.2 27.2 5.3 29.2
Compensation expense ................................ 14.0 6.5 12.2 6.4
Other selling, general and administrative expenses .. 9.7 16.3 7.1 15.5
----- ----- ----- -----
Total selling, general and administrative expenses 23.7 22.8 19.3 21.9
----- ----- ----- -----
Operating (loss) income ............................. (22.5) 4.4 (14.0) 7.3
Other income, net ................................... 0.6 1.2 0.9 1.2
----- ----- ----- -----
(Loss) income before provision for income taxes .. (21.9) 5.6 (13.1) 8.5
(Benefit) provision for income taxes ................ (8.1) 2.4 (4.8) 3.6
----- ----- ----- -----
Net income ....................................... (13.8)% 3.2% (8.3)% 4.9%
===== ===== ===== =====
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Revenue. Net revenue for the quarter ended June 30, 2002 was $66.5
million, 53.8% less than net revenue of $143.9 million for the quarter ended
June 30, 2001. Net revenue from the sales and marketing services segment for the
quarter ended June 30, 2002 was $50.6 million, $7.9 million less than net
revenue of $58.5 million from that segment for the comparable prior year period.
This decrease was primarily attributable to the loss of one large dedicated CSO
contract, partially offset by the addition of MD&D. Net PDI Pharma revenue for
the quarter ended June 30, 2002 was $15.9 million, of which $500,000 was product
revenue attributable to the changes in estimates related to sales allowances and
returns, and discounts and rebates recorded on previous Ceftin sales. As during
the fourth quarter of 2001 and the first
21
quarter of 2002, sales of Evista were below the contractual baseline and
therefore we did not earn any revenue from that contract during the current
quarter. The balance of $15.4 million in revenue was from other performance
based contracts. PDI Pharma revenue for the three months ended June 30, 2001 was
$85.4 million; of that amount, net product revenue was $79.2 million and $6.2
million was from other performance based contracts.
Cost of goods and services. Cost of goods and services for the quarter
ended June 30, 2002 was $65.7 million, 37.3% less than cost of goods and
services of $104.8 million for the quarter ended June 30, 2001. The decrease was
primarily attributable to the termination of the Ceftin contract and the related
cost of goods sold. As a percentage of total net revenue, cost of goods and
services increased to 98.8% for the quarter ended June 30, 2002 from 72.8% in
the comparable prior year period. This increase was primarily attributable to
the negative gross profit associated with the Eli Lilly and Novartis contracts.
Program expenses (i.e., cost of services) associated with the sales and
marketing services segment for the quarter ended June 30, 2002 were $35.6
million, 16.7% less than program expenses of $42.7 million for the prior year
period. As a percentage of sales and marketing services segment revenue, program
expenses for the quarters ended June 30, 2002 and 2001 were 70.3% and 73.0%,
respectively, primarily due to the favorable mix of projects in the TVG
business. Cost of goods and services associated with the PDI Pharma segment were
$30.1 million and $62.2 million for the quarters ended June 30, 2002 and 2001,
respectively. As a percentage of PDI Pharma revenue, cost of goods and services
for the quarters ended June 30, 2002 and 2001 were 189.6% and 72.7%,
respectively. To date the revenues earned from the performance based contracts
for Eli Lilly and Novartis have fallen short of sales and marketing costs
associated with those contracts. Performance based contracts can achieve a gross
profit percentage above our historical averages for contract sales programs if
the performance of the product(s) meets or exceeds expectations, but can be
below normal gross profit standards if the performance of the product falls
short of baselines, as was the case for the fourth quarter of 2001, the first
quarter of 2002 and the current quarter. While we currently estimate that future
revenues will equal or exceed costs associated with these agreements, there is
no assurance that these events will occur; in which event the activities covered
by these agreements would continue to yield an operating loss and could require
a future contract loss reserve.
Compensation expense. Compensation expense for the quarter ended June 30,
2002 was $9.3 million, 1.4% more than $9.2 million for the comparable prior year
period. As a percentage of total net revenue, compensation expense increased to
14.0% for the quarter ended June 30, 2002 from 6.4% for the quarter ended June
30, 2001. The increase in compensation expense as a percentage of revenue in the
current period for the PDI Pharma segment was due to the termination of the
Ceftin agreement, which led to lower revenues in the second quarter, while
compensation expense remained relatively fixed. Compensation expense for the
quarters ended June 30, 2002 and June 30, 2001 attributable to the PDI Pharma
segment was $1.9 million for each period; as a percentage of revenue,
compensation expense was 12.1% for the quarter ended June 30, 2002 compared to
2.2% in the prior year period. Compensation expense for the quarter ended June
30, 2002 attributable to the sales and marketing services segment was $7.4
million compared to $7.2 million for the quarter ended June 30, 2001. As a
percentage of net revenue from the sales and marketing services segment,
compensation expense increased to 14.6% for the quarter ended June 30, 2002 from
12.4% for the quarter ended June 30, 2001.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $6.4 million for the quarter ended June
30, 2002, 72.6% less than other selling, general and administrative expenses of
$23.5 million for the quarter ended June 30, 2001. As a percentage of total net
revenue, total other selling, general and administrative expenses decreased to
9.7% for the quarter ended June 30, 2002 from 16.3% for the quarter ended June
30, 2001. Other selling, general and administrative expenses attributable to
sales and marketing services segment for the quarter ended June 30, 2002 were
$5.7 million, slightly less than other selling, general and administrative
expenses of $5.8 million attributable to that segment for the comparable prior
year period. As a percentage of net revenue from sales and marketing services,
other selling, general and administrative expenses were 11.2% and 9.9% for the
quarters ended June 30, 2002 and 2001, respectively. The most prominent variance
was the increase in depreciation expense resulting from continued discretionary
expenditures in information technology.
22
Other selling, general and administrative expenses attributable to the PDI
Pharma segment for the quarter ended June 30, 2002 were approximately $741,000,
or 4.6% of revenue, compared to $17.7 million for the prior year period.
Excluding the $16.4 million associated with the Ceftin field and other
promotional expenses in the prior year period, other selling, general and
administrative expenses were $1.4 million or 1.6% of revenue.
Operating (loss) income. There was an operating loss for the quarter ended
June 30, 2002 of $14.9 million, compared to operating income of $6.4 million for
the quarter ended June 30, 2001. The consolidated operating loss was primarily
the result of losses generated by the performance based contracts in 2002.
Operating income for the quarter ended June 30, 2002 for the sales and marketing
services segment was $2.0 million, or 28.9% less than the sales and marketing
services operating income for the quarter ended June 30, 2001 of $2.8 million.
As a percentage of net revenue from the sales and marketing services segment,
operating income for that segment decreased to 3.9% for the quarter ended June
30, 2002, from 4.7% for the comparable prior year period. There was an operating
loss for the PDI Pharma segment for the quarter ended June 30, 2002 of $16.9
million, compared to operating income of $3.6 million for the prior year period,
primarily attributable to the Ceftin contract.
Other income, net. Other income, net, for the quarters ended June 30, 2002
and 2001 was $356,000 and $1.5 million, respectively. For the quarter ended June
30, 2002, other income, net, was comprised primarily of $400,000 in interest
income, which was significantly lower than the prior year period due to lower
available cash balances and significantly lower interest rates. Additionally,
there was net other expense during the quarter of $44,000. Other income, net,
for the prior year period was comprised primarily of interest income.
(Benefit) provision for income taxes. There was an income tax benefit of
$5.4 million for the quarter ended June 30, 2002, compared to income tax expense
of $3.5 million for the quarter ended June 30, 2001, which consisted of Federal
and state corporate income taxes. The effective tax benefit rate for the quarter
ended June 30, 2002 was 36.9%, compared to an effective tax rate of 44.5% for
the quarter ended June 30, 2001. The reduction in the effective tax rate is due
primarily to the reverse impact that certain permanent differences have on the
tax calculation due to the fact that we have a loss this year versus income in
the prior year.
Net (loss) income. There was a net loss for the quarter ended June 30,
2002 of $9.2 million, compared to net income of $4.4 million for the quarter
ended June 30, 2001 due to the factors discussed previously.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenue. Net revenue for the six months ended June 30, 2002 was $140.4
million, 55.7% less than net revenue of $317.0 million for the six months ended
June 30, 2001. Net revenue from the sales and marketing services segment for the
six months ended June 30, 2002 was $107.0 million, $28.8 million less than net
revenue of $135.8 million from that segment for the comparable prior year
period. This decrease was primarily attributable to the loss of several
significant dedicated CSO contracts, partially offset by the addition of MD&D.
Net PDI Pharma revenue for the six months ended June 30, 2002 was $33.4 million,
of which $6.2 million was product revenue. Within product revenue, approximately
$716,000 was attributable to sales of Ceftin and $5.5 million was attributable
to the changes in estimates related to sales allowances and returns, and
discounts and rebates recorded on previous Ceftin sales. As during the fourth
quarter of 2001, sales of Evista were below the contractual baseline and
therefore we did not earn any revenue from that contract during the first six
months of 2002. The balance of $27.2 million was from other performance based
contracts, notably the Novartis contract which now includes Diovan as well as
Lotrel and Lotensin. PDI Pharma revenue for the six months ended June 30, 2001
was $181.2 million; of that amount, net product revenue was $174.1 million and
$7.1 in revenue was from other performance based contracts.
23
Cost of goods and services. Cost of goods and services for the six months
ended June 30, 2002 was $133.0 million, 40.7% less than cost of goods and
services of $224.5 million for the six months ended June 30, 2001. The decrease
was primarily attributable to the termination of the Ceftin contract and the
related cost of goods sold. As a percentage of total net revenue, cost of goods
and services increased to 94.7% for the six months ended June 30, 2002 from
70.8% in the comparable prior year period. This increase was primarily
attributable to the negative gross profit associated with the Eli Lilly and
Novartis contracts. Program expenses (i.e., cost of services) associated with
the sales and marketing services segment for the six months ended June 30, 2002
were $79.1 million, 19.0% less than program expenses of $97.7 million for the
prior year period. As a percentage of sales and marketing services segment
revenue, program expenses for the six months ended June 30, 2002 and 2001 were
73.9% and 71.9%, respectively, due to lower gross profits associated with
startup programs in shared sales. Cost of goods and services associated with the
PDI Pharma segment was $53.9 million and $126.8 million for the six months ended
June 30, 2002 and 2001, respectively. As a percentage of PDI Pharma revenue,
cost of goods and services for the six months ended June 30, 2002 and 2001 was
161.2% and 70.0%, respectively. To date the revenues earned from the performance
based contracts for Eli Lilly and Novartis have fallen short of sales and
marketing costs associated with those contracts. Performance based contracts can
achieve a gross profit percentage above our historical averages for contract
sales programs if the performance of the product(s) meets or exceeds
expectations, but can be below normal gross profit standards if the performance
of the product falls short of baselines, as was the case for the fourth quarter
of 2001 and the first six months of 2002. While we currently estimate that
future revenues will equal or exceed costs associated with these agreements,
there is no assurance that these events will occur; in which event the
activities covered by these agreements would continue to yield an operating loss
and could require a future contract loss reserve.
Compensation expense. Compensation expense for the six months ended June
30, 2002 was $17.1 million, 15.5% less than $20.2 million for the comparable
prior year period. As a percentage of total net revenue, compensation expense
increased to 12.2% for the six months ended June 30, 2002 from 6.4% for the six
months ended June 30, 2001. Compensation expense for the six months ended June
30, 2002 attributable to the sales and marketing services segment was $13.1
million compared to $16.9 million for the six months ended June 30, 2001. As a
percentage of net revenue from the sales and marketing services segment,
compensation expense decreased slightly to 12.3% for the six months ended June
30, 2002 from 12.4% for the six months ended June 30, 2001. Compensation expense
for the six months ended June 30, 2002 attributable to the PDI Pharma segment
was $3.9 million, or 11.8% of PDI Pharma revenue, compared to $3.3 million, or
1.8% in the prior year period. The increase in compensation expense as a
percentage of revenue for the first six months of 2002 for the PDI Pharma
segment was due to the termination of the Ceftin agreement as well as
recognizing no revenue on the Evista contract, which led to lower revenues in
the first six months of 2002, while compensation expense remained relatively
fixed.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $9.8 million for the six months ended
June 30, 2002, 80.2% less than other selling, general and administrative
expenses of $49.3 million for the six months ended June 30, 2001. As a
percentage of total net revenue, total other selling, general and administrative
expenses decreased to 7.1% for the six months ended June 30, 2002 from 15.5% for
the six months ended June 30, 2001. Other selling, general and administrative
expenses attributable to sales and marketing services segment for the six months
ended June 30, 2002 were $10.6 million, slightly less than other selling,
general and administrative expenses of $10.8 million attributable to that
segment for the comparable prior year period. As a percentage of net revenue
from sales and marketing services, other selling, general and administrative
expenses were 9.9% and 8.0% for the six months ended June 30, 2002 and 2001,
respectively. The most prominent variance was the increase in depreciation
expense resulting from continued discretionary expenditures in information
technology. Other selling, general and administrative expenses attributable to
the PDI Pharma segment for the six months ended June 30, 2002 consisted of $1.5
million of expenses reduced by a credit of $2.3 million due to the reversal of
bad debt reserve, leaving a net credit in this category of approximately
$792,000. For the six months ended June 30, 2001, other selling, general and
administrative expenses were $38.5 million. Excluding $33.5 million in Ceftin
field and other promotional expenses, other selling, general and administrative
expenses were $5.0 million.
24
Operating (loss) income. There was an operating loss for the six months
ended June 30, 2002 of $19.4 million, compared to operating income of $23.1
million for the six months ended June 30, 2001. The operating loss was primarily
the result of losses generated by the performance based contracts in 2002.
Operating income for the six months ended June 30, 2002 for the sales and
marketing services segment was $4.2 million, or 59.9% less than the sales and
marketing services operating income for the six months ended June 30, 2001 of
$10.4 million. As a percentage of net revenue from the sales and marketing
services segment, operating income for that segment decreased to 3.9% for the
six months ended June 30, 2002, from 10.4% for the comparable prior year period.
There was an operating loss for the PDI Pharma segment for the six months ended
June 30, 2002 of $23.6 million due primarily to the performance of the Evista
and Lotensin contracts, compared to operating income of $12.7 million for the
prior year period, all of which was attributable to the Ceftin contract.
Other income, net. Other income, net, for the six months ended June 30,
2002 and 2001 was $1.2 million and $3.4 million, respectively. For the six
months ended June 30, 2002, other income, net, was comprised of primarily of
$1.4 million in interest income, which was significantly lower than the prior
year period due to lower available cash balances and significantly lower
interest rates. Other income, net, for the prior year period was comprised
primarily of interest income.
(Benefit) provision for income taxes. There was an income tax benefit of
$6.7 million for the six months ended June 30, 2002, compared to income tax
expense of $11.2 million for the six months ended June 30, 2001, which consisted
of Federal and state corporate income taxes. The effective tax benefit rate for
the six months ended June 30, 2002 was 36.9%, compared to an effective tax rate
of 42.2% for the six months ended June 30, 2001. The reduction in the effective
tax rate is due primarily to the reverse impact that certain permanent
differences have on the tax calculation due to the fact that we have a loss this
year versus income in the prior year.
Net (loss) income. There was a net loss for the six months ended June 30,
2002 of $11.5 million, compared to net income of $15.3 million for the six
months ended June 30, 2001 due to the factors discussed previously.
Liquidity and capital resources
As of June 30, 2002, we had cash and cash equivalents and short-term
investments of approximately $88.6 million and working capital of $103.2 million
compared to cash and cash equivalents and short-term investments of
approximately $119.3 million and working capital of $131.4 million at June 30,
2001.
For the six months ended June 30, 2002, net cash used in operating
activities was $76.1 million, compared to $11.8 million cash provided by
operating activities for the same period in 2001. The main components of cash
used in operating activities were a net loss from operations of $11.5 million,
along with a net positive non-cash adjustment for depreciation, amortization,
reversal of a bad debt reserve and the amortization of deferred compensation
costs of approximately $1.4 million and a negative cash impact of $66.0 million
from changes in "Other assets and liabilities." During the fourth quarter of
2001 we agreed with GSK to terminate the Ceftin marketing and distribution
agreement as of February 28, 2002, thus the decline in inventory and the
reduction in accounts receivable, accrued returns, rebates and discounts,
accrual for contract losses, and other liability accounts were associated with
the winding down of Ceftin activities. 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.
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
25
accrued profits. As of June 30, 2002, we had $5.7 million of unearned contract
revenue and $10.6 million of unbilled costs and accrued profits. Substantially
all deferred and unbilled costs and accrued profits are earned or billed, as the
case may be, within 12 months of the end of the respective period.
For the six months ended June 30, 2002, net cash used in investing
activities was $16.5 million, comprised of the purchase of $12.3 million of
short-term investments, $379,000 in other investments and $3.8 million in
additions to property, plant and equipment.
For the six months ended June 30, 2002, net cash provided by financing
activities was $1.5 million. This increase in cash is due to the net proceeds
received from the employee stock purchase plan of $1.4 million and approximately
$131,000 in proceeds received from the exercise of common stock options by
employees.
Capital expenditures during the six months ended June 30, 2002 and 2001
were $3.8 million and $5.9 million, respectively, and were funded from available
cash.
We entered into a credit agreement dated as of March 30, 2001 with a
syndicate of banks, for which PNC Bank, National Association acted as
Administrative and Syndication Agent, that provided for both a three-year, $30
million unsecured revolving credit facility and a one-year, renewable, $30
million unsecured revolving credit facility. The credit facilities were
structured to accommodate certain provisions within the Ceftin agreement.
Borrowings under the agreement bore 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 were 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 contained customary affirmative and negative
covenants including financial covenants requiring the maintenance of a specified
consolidated minimum fixed charge coverage ratio, a maximum leverage ratio, a
minimum consolidated net worth and a capital expenditure limitation (as defined
in the agreement). At December 31, 2001, we were in compliance with these
covenants, except for the minimum fixed charge coverage ratio. Since the
inception of these credit facilities there have been no draw downs and there was
no outstanding balance as of December 31, 2001. In light of the Ceftin agreement
termination, we terminated these credit facilities, effective April 2002. We are
currently exploring opportunities for an asset based credit facility.
We believe that our cash and cash equivalents, short-term investments 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 and financing
opportunities in the ordinary course of business.
26
Part II - Other Information
Item 1 - Legal Proceedings
In January and February 2002, the Company, its chief executive officer,
and its chief financial officer were served with three complaints that were
filed in the United States District Court for the District of New Jersey
alleging violations of the Securities Exchange Act of 1934 (the "1934 Act").
These complaints were brought as purported shareholder class actions under
Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder.
On May 23, 2002, the Court consolidated all three lawsuits into a single action
entitled In re PDI Securities Litigation, Master File No. 02-CV-0211, and
appointed lead plaintiffs and lead plaintiffs' counsel. A consolidated and
amended complaint was filed on July 29, 2002.
The consolidated and amended complaint names the Company, its chief
executive officer, and its chief financial officer as defendants; purports to
state claims against them on behalf of all persons who purchased the Company's
common stock between May 22, 2001 and November 12, 2001; and seeks money damages
in unspecified amounts and litigation expenses including attorneys' and experts'
fees. The essence of the allegations in the consolidated and amended complaint
is that the defendants intentionally or recklessly made false or misleading
public statements and omissions concerning the Company's financial condition and
prospects with respect to its marketing of Ceftin in connection with the October
2000 distribution agreement with GlaxoSmithKline, as well as its marketing of
Lotensin in connection with the May 2001 distribution agreement with Novartis
Pharmaceuticals Corp.
As of this filing, the Company has not yet answered the consolidated and
amended complaint and intends to file a motion to dismiss under the Private
Securities Litigation Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the
Federal Rules of Civil Procedure. Discovery has not yet commenced in the
consolidated action. The Company believes that the allegations in this purported
securities class action are without merit and intends to defend the action
vigorously.
The Company has been named as a defendant in numerous lawsuits, including
a class action matter, alleging claims arising from the use of the prescription
compound Baycol that was manufactured by Bayer Pharmaceuticals (Bayer) and
marketed by the Company on Bayer's behalf. The Company expects to be named in
additional similar lawsuits. In August 2001, Bayer announced that it was
voluntarily withdrawing Baycol from the U.S. market. The Company intends to
defend these actions vigorously and has asserted a contractual right of
indemnification against Bayer for all costs and expenses it incurs relating to
these proceedings.
Item 2 - Not Applicable
Item 3 - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
On July 18, 2002, the Company held its 2002 Annual Meeting of
Stockholders. At the meeting John C. Federspiel and Jan Martens Vecsi were
re-elected as Class III Directors of the Company for three year terms with
13,200,883 and 12,777,546 votes cast in favor of their election, respectively,
and 190,054 and 613,391 votes withheld, respectively. In addition, a proposed
amendment to the Company's 2000 Omnibus Incentive Compensation Plan to increase
the number of authorized shares from 1,500,000 to 2,200,000 was approved
(12,034,294 votes in favor, 954,859 votes against, and 401,784 votes withheld);
and the appointment of PricewaterhouseCoopers LLP as independent auditors of the
Company for fiscal 2002 was ratified (12,764,899 votes in favor, 624,929 votes
against, and 1,109 votes withheld).
Item 5 - Not Applicable
27
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No.
- -------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
During the three months ended June 30, 2002, the Company filed the
following report on Form 8-K:
Date Item Description
- ------------ ---- -------------------------------------------------------
May 13, 2002 5 Earnings Press Release
28
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.
August 14, 2002 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
29