UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(Mark One) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
For the fiscal year ended December 31, 2007 |
OR |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from ____________to_________________
Commission file Number: 0-24249
| PDI, Inc. |
| (Exact name of registrant as specified in its charter) |
| | | |
| Delaware | | 22-2919486 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
Saddle River Executive CentreMorris Corporate Center 1, Building A
1 Route 17 South, Saddle River,300 Interpace Parkway, Parsippany, NJ 0745807054
|
| (Address of principal executive offices and zip code) |
| |
(201) 258-8450(862) 207-7800 |
| (Registrant's telephone number, including area code) |
|
| Securities registered pursuant to Section 12(b) of the Act: |
|
| Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | The Nasdaq Stock Market LLC |
(Title of each class) | (Name of each exchange on which registered) | |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by checkmarkcheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by checkmarkcheck mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by checkmarkcheck 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such short period that the registrant was required to submit and post such files). Yes o No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ýo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (check one):
| | | |
Large accelerated filer o | Accelerated filer ýo | Non-accelerated filer o | Smaller reporting company oý |
| | | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the registrant'sregistrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on June 29, 2007,30, 2009, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, was $73,621,933$29,231,073 (based on the closing sales price of the registrant's common stock on that date). Shares of the registrant's common stock held by each officer and director and each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in thatbecause such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February
29, 2008, 14,292,22026, 2010, 14,242,715 shares of the
registrant'sregistrant’s common stock, $0.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20082010 Annual Meeting of Stockholders (the Proxy Statement), to be filed within 120 days of the end of the fiscal year ended December 31, 2007,2009, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K (the Form 10-K), the Proxy Statement is not deemed to be filed as part hereof.
PDI, Inc.
Annual Report on Form 10-K
| | | | |
| PART I | | |
| | Item 1. | | 5 |
| | Item 1A. | | 9 |
| | Item 1B. | | 1516 |
| | Item 2. | | 1516 |
| | Item 3. | | 16 |
| | Item 4. | Submission of Matters to a Vote of Security Holders | 1617 |
| | | |
| PART II | | |
| | Item 5. | and Issuer Purchases of Equity Securities | 17 |
| | Item 6. | | 1918 |
| | Item 7. | | 20 |
| | Item 7A. | | 36 |
| | Item 8. | | 3736 |
| | Item 9. | | 3736 |
| | Item 9A. | | 3736 |
| | Item 9B. | | 39 |
| | | |
| PART III | | |
| | Item 10. | | 39 |
| | Item 11. | | 39 |
| | Item 12. | | 39 |
| | Item 13. | | 39 |
| | Item 14. | | 39 |
| | | |
| PART IV | | |
| | Item 15. | | 40 |
| | | | |
| 4243 |
PDI, Inc.
Annual Report on Form 10-K
| FORWARD LOOKING STATEMENT INFORMATION |
ThisThis Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). Statements that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar words and expressions. These forward-looking statementsstatement s are contained throughout this Form 10-K, including, but not limited to, statements found in Part I – Item 1 – “Business,” Part II – Item 5 – “Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Securities,” Part II – Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operation”Operations” and “Part II – Item 7A – “Quantitative and Qualitative Disclosures About Market Risk”.Risk.”
Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. These statementspredictions are also involveaffected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
| · | The effects of the current worldwide economic and financial crisis; |
| · | Changes in outsourcing trends or a reduction in promotional, marketing and sales expenditures in the |
| pharmaceutical, biotechnology and life sciences industries; |
| · | LossEarly termination of a significant services contract or the loss of one or more of our significant customers or a material reduction in service revenues from such customers; |
· | Our ability to fund and successfully implement our long-term strategic plan; |
| · | Our ability to successfully develop product commercialization opportunities;obtain additional funds in order to implement our business model; |
| · | Our ability to successfully identify, complete and integrate any future acquisitions and the effects of any |
| such acquisitions on our ongoing business; |
| · | Our ability to meet performance goals in incentive-based and revenue sharing arrangements with customers; |
| · | Competition in our industry; |
| · | Continued consolidation within the life sciences industry; |
| · | Our ability to attract and retain qualified sales representatives and other key employees and management personnel; |
| · | Product liability claims against us; |
| · | Changes in laws and healthcare regulations applicable to our industry or our, or our customers’, failure to |
| comply with such laws and regulations; |
| · | The sufficiency of our insurance and self-insurance reserves to cover future liabilities; |
| · | Our ability to successfully develop and generate sufficient revenue from product commercialization opportunities; |
| · | Failure of third-party service providers to perform their obligations to us; |
| · | Our ability to increase our revenues and successfully manage the size of our operations; |
| · | Volatility of our stock price and fluctuations in our quarterly revenues and earnings; |
| · | Potential liabilities associated with insurance claims;Our ability to sublease the unused office space in Saddle River, New Jersey and Dresher, Pennsylvania; |
| · | Failure of, or significant interruption to, the operation of our information technology and communicationscommunication systems; and |
| | systems.· | The results of any future impairment testing for goodwill and other intangible assets. |
Please see Part I – Item 1A – “Risk Factors” of this Form 10-K, as well as other documents we file with the United States Securities and Exchange Commission (SEC) from time to time,time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed in this Form 10-K.herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of the report in which they are set forththis Form 10-K and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
PDI, Inc.
Annual Report on Form 10-K (continued)
PART I
We provide promotional services to established and emerging companies in the pharmaceutical, biotechnology and healthcare industries. We are a leading provider of contractoutsourced pharmaceutical sales teams to pharmaceutical companies,that target healthcare providers, offering a range of complementary sales support services designed to achieve theirour customers’ strategic and financial product objectives. In addition to contractoutsourced sales teams, we also provide other promotional services including interaction program services, call centers and marketing research, physician interaction and medical education programs. Ourresearch. Combined, our services offer customers a range of promotional and educational options for the commercialization of their products throughout their lifecycles, from development through maturity. We provide innovative and flexible service offerings designed to drive our customers’ businessesbusines ses forward and successfully respond to a continually changing market. Our services provide a vital link between our customers and the medical community through the communication of product information to physicians and other healthcare professionals for use in the care of their patients.
We are among the leaders in outsourced pharmaceutical sales and marketingcommercialization services in the United States. We have evolved our commercial capabilities through innovation, organic growth and acquisitions. We have designed and implemented programs for many large pharmaceutical companies, as well as a variety of emerging and specialty pharmaceutical companies.companies as well as nutritional, diagnostic and other healthcare service providers. We recognize that our relationships with customers are dependent upon the quality of our performance, and our focus is to flawlessly execute our customers’ programs in order to consistently deliver their desired results.
Typically, our customers engage us on a contractual basis to design and implement promotional and educational programs for both prescription, over-the-counter, nutritional, diagnostic and over-the-counterother healthcare products. The programs are tailored to meet the specific needs of the product and the customer. These services are provided predominantly on a fee-for-service basis. These contracts canmay include incentive payments that canwill be earned if our activities generate results that meet or exceed performance targets. Contracts may generally be terminated with or without cause by our customers. Certain contracts provide that we may incur specific penalties if we fail to meet stated performance benchmarks.
We commenced operations as a contractan outsourced sales organization (CSO) in 1987 and we completed our initial public offering in May 1998. OurIn December 2009, we relocated our executive offices are located at Saddle River Executive Centre,to Morris Corporate Center 1, Route 17 South, Saddle River,Building A, 300 Interpace Parkway, Parsippany, New Jersey 07458 and our07054. Our telephone number is (800) 242-7494.
Under the direction of our chief executive officer, the entire executive team is fully committed to establishing PDI as the best-in-class outsourced promotional services organization in the United States. With a focus on best-in-class quality and cost effectiveness, we have intensified our focus on strengthening all aspects of our core outsourced promotional services business.
In 2007addition to concentrating our efforts on strengthening our core outsourced sales business, we initiatedalso continue to focus on enhancing our commercialization capabilities by aggressively promoting and broadening the implementation of a five-year strategic plan that is intended to drive revenue growth, diversify the sourcesdepth of our revenue, increase profit margins, and further enhancevalue-added service offerings. While our competitivenessprimary approach in broadening our value-added services offerings will be through internal development, we do not exclude the markets we serve. We further refined this strategic plan in the first quarterpossibility of 2008. The primary components of this strategic plan include the following:growth through acquisition.
| · | Recapture our position as the leading contract sales organization. We endeavor to restore our position as the number one contract sales organization in the U.S. In order to achieve this goal, we have strengthened our business development strategy, process and implementation through the expansion of these capabilities and the development of relationships with alternate business development channels, including a focus on opportunities in the emerging pharmaceutical market. Furthermore, we are actively building a corporate culture that fosters continuous innovation with the purpose of creating new and differentiated offerings that enable emerging and established pharmaceutical companies to address their evolving business needs. One such example is our “PDI ON DEMAND” suite of sales support services, which we introduced during 2007.
|
In April 2009, we ended our sole product commercialization arrangement; however, we continue to evaluate potential opportunities for similar types of promotional arrangements on a very selective and opportunistic basis to the extent we are able to mitigate certain risks relating to the investment of our resources.
| · | Enhance our commercialization capabilities in order to provide a broader base of services and more diversified sources of revenue. We believe that it is critical to the growth of our business to identify and build internally and/or acquire complementary commercialization services that add-value and even greater depth to the already robust suite of services we presently offer. We intend to focus our efforts adding services that strengthen our core business, expand the scope of our current service offerings and/or provide our customers alternative methods for physician and healthcare professional engagement. We believe that these complementary services will provide us with additional avenues for revenue growth and increased profit margins while simultaneously increasing our ability to meet the particular demands of emerging pharmaceutical companies that typically seek a broad range of outsourced commercialization services from a single supplier.Reporting Segments and Operating Groups |
PDI, Inc.
Annual Report on Form 10-K (continued)
| · | Leverage our sales and marketing expertise to capitalize on product commercialization opportunities. We intend to identify and take advantage of attractive opportunities to enter into arrangements with pharmaceutical companies to provide sales and marketing support services and potentially limited capital in connection with the promotion of pharmaceutical products in exchange for a percentage of product sales. These types of arrangements will likely involve a significant upfront investment of our resources with no guaranteed return on investment and are expected to generate losses in the first year of the contract as program ramp up occurs. However, these opportunities are intended to provide us with the ability to extend our revenue streams through multi-year arrangements and with profit margins that are significantly higher than typical fee for service arrangements over the term of the contract.
|
Reporting Segments and Operating Groups |
For 2007,2009, we reported under the following three segments: Sales Services; Marketing Services; and Product Commercialization Services Marketing Services and PDI Products Group (PPG)(PC Services). For details on revenue, operating results and total assets by segment, see Note 1819, Segment Information, to the consolidated financial statements.statements included in this Form 10-K.
Sales Services
This segment, which focuses primarily on product detailing, includes our Performance Sales Teams and Select Accessä Teams (formerly referred to as Shared Teams).outsourced sales teams. This segment which focuses on product detailing, represented 74.1%86% of our consolidated revenue for the year ended December 31, 2007.
2009. Product detailing involves a sales representative meeting face-to-face with targeted physicians and other healthcare decision makers to provide a technical review of the product being promoted. ContractOutsourced sales teams can be deployed on either a customer dedicated or shared basis.
basis, and may use either full-time or flex-time sales representatives. This segment also includes a portfolio of expanded sales services known as “PDI ON DEMAND”, which includes talent acquisition services, pulsingshort-term teams and vacancy coverage services. Our talent acquisition platform provides pharmaceutical customers with an outsourced, stand-alonestand-alo ne sales force recruiting and on-boarding service. Pulsing teamsShort-term programs provide temporary full or flex-time sales teams, of any size anywhere in the United States whichand are designed to help our customers increase brand impact during key market cycles, or rapidly respond to regional opportunities.opportunities, or conduct pilot programs. Our vacancy coverage service provides customers with outsourced temporary full or flex-time sales representatives to fill temporary territory vacancies created by leaves of absence within our customers’ internal sales forces, which allowsthereby allowing our customers to maintain continuity of services.
PDI, Inc.
Annual Report on Form 10-K
Dedicated Sales Teams
A performance contract sales teamDedicated Sales Team works exclusively on behalf of one customer. The sales team is customized to meet the customer’s specifications with respect to sales representative profile, physician targeting, product training, incentive compensation plans, integration with the customers’customer’s in-house sales forces, call reporting platform and data integration. Without adding permanent personnel, our customer gets acustomers receive high quality, industry-standard sales teamteams comparable to itstheir internal sales force.
Shared Sales Teams
Select Access
Select Access represents a shared sales teamOur Shared Sales Teams business model centers around an existing PDI-managed team where multiple non-competing brands are representedpromoted for different pharmaceutical companies. Using these teams, we make a face-to-face selling resource available to those customers who want an alternative to a dedicated team.Dedicated Sales Team. We are a leading provider of this type of detailing program in the United States. Since costs are shared among various companies, these programs may be less expensive for the customer than programs involving a dedicated sales force. With a shared sales team,Shared Sales Team, our customers receive targeted coverage of itstheir physician audience within the representatives’ geographic territories.audience.
Marketing Services
This segment whichcurrently includes ourtwo business units: Pharmakon and TVG Marketing Research & Consulting and(TVG). This segment also included our continuing medical education business unit, Vital Issues in Medicine business units,(VIM), which ceased operations in the third quarter of 2009. This segment represented 25.9%20% of consolidated revenue for the year ended December 31, 2007.2009.
Pharmakon
Pharmakon’s emphasisbusiness is focused on the creation, design and implementation of promotional physician interaction programs.peer interactive programming targeted to healthcare professionals. Each marketing program can be offereddelivered through a number of different mediavenues including: teleconferences; dinner meetings; webcasts; satellite; and venues, including teleconferences, dinner meetings, “lunch and learns” and webcasts.other alternative media. Within each of our programs, we offer a number of services including strategic design, tactical execution, technology support, audience recruitment,generation, moderator
PDI, Inc.
Annual Report on Form 10-K (continued)
services and thought leader management. In the last ten years, Pharmakon has conducted over 45,000 physician interactionpeer interactive programs with more than 550,000 participants. Pharmakon’s peer programs can be designed as promotional or marketing research/advisory programs. In addition to physician interactionour peer interactive programs, Pharmakon also provides promotional communications activities. We acquired Pharmakon in August 2004.activities, thought leader training and content development.
TVG Marketing Research & Consulting
TVG Marketing Research & Consulting (TVG) employs leading edge, and in some instances proprietary, research methodologies to provideprovides qualitative and quantitative marketing research to pharmaceutical companies with respect to healthcare providers, patients and managed care customers in the United States and globally.worldwide. We offer a full range of leading edge and in some cases proprietary, pharmaceutical marketing research services, including studies designed to identify the highest impact business strategy, profile, positioning, message, execution, implementation and post implementation for a product. We believe our marketing research model improves our customers’ knowledge about how physicians and other healthcare professionals will likely react to products.
We utilize a systematic approach to pharmaceutical marketing research. Recognizing that every marketing need, and therefore every marketing research solution, is unique, we have developed our marketing model to help identify the work that needs to be done in order to identify critical paths to marketing goals. At each step of the marketing model, we can offer proven research techniques, proprietary methodologies and customized study designs to address specific product needs.
Vital IssuesProduct Commercialization Services
In March 2008, we announced a new strategic initiative to identify and take advantage of opportunities to enter into arrangements with pharmaceutical companies to provide sales and marketing support services and potentially limited capital in Medicineconnection with the promotion of pharmaceutical products in exchange for a percentage of product sales above a certain threshold amount. On April 11, 2008, we announced that we had entered into our first arrangement under our product commercialization strategic initiative to provide sales and marketing support services in connection with the promotion of a pharmaceutical product on behalf of Novartis Pharmaceuticals Corporation. On April 22, 2009, we announced the termination of this agreement with Novartis.
Our Vital Issues in Medicine (VIM®) business unit develops and executes continuing medical education services funded by the biopharmaceutical and medical device and diagnostics industries. Using an expert-driven, customized approach, we provide faculty development/advocacy, continuing medical education activities in a wide variety6
Contents
PDI, Products Group (PPG)Inc.
Annual Report on Form 10-K
Contracts
In the past, the goal
Set forth below is a general description of the PPGour service contracts within each of our business segments.
Sales Services
Contracts within our Sales Services business segment was to source biopharmaceutical products in the United States through licensing, co-promotion, acquisition or integrated commercialization services arrangements. This segment did not have any revenue for the years ended December 31, 2007consist primarily of detailing agreements and 2006. We are no longer pursuing licensing or acquisition of pharmaceutical products.
However, we currently contemplate that any product commercialization arrangements described above under “—Strategy” that we may engage in will be included within this segment.
Our contracts are nearly all feefee-for-service arrangements. The term of these contracts is typically between one and two years and may be renewed or extended upon mutual agreement of the parties. The majority of these contracts, however, are terminable by the customer for service. Theyany reason upon 30 to 90 days’ notice. The loss or termination of a large contract or the loss of multiple Sales Services contracts could have a material adverse effect on our business, financial condition, results of operations and cash flow. Our Sales Services contracts include standard mutual representations and warranties as well as mutual confidentiality and indemnification provisions, including product liability indemnification f or our benefit. Some of these contracts (including contracts with significant customers of ours) may also contain operationalperformance benchmarks, such as a minimum amount of detailing activity to certain physician targets within a specified amount of time. Thesetime, and our failure to meet these stated benchmarks may result in specific financial penalties for us. Certain contracts canmay also include incentive payments that can be earned if our activities generate results that meet or exceed agreedagreed-upon performance targets. Contracts may generally be terminated with or without cause by our clients. Certain contracts provide that we may incur specific penalties if we fail to meet stated performance benchmarks.
Sales Services
Historically, the majority of our revenue has been generated by contracts for dedicated sales teams. These contracts are generally for terms of one to two years and may be renewed or extended. The majority of these contracts, however, are terminable by the client for any reason upon 30 to 90 days’ notice. Certain contracts provide for termination payments if the client terminates the contract without cause. Typically, however, these penalties do not offset the revenue we could have earned under the contract or the costs we may incur as a result of its termination. The loss or termination of a large contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition, or results of operations or cash flow.
Marketing Services
Our marketing servicesMarketing Services contracts generally take the form of either master service agreements with a term of one to three years, or contracts specifically related to particular projects with terms forequal to the duration of the project, typically lasting from two to six months. These contracts include standard representations and warranties as well as confidentiality and indemnification obligations and are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment forof all work completed to date, plus the cost of any nonrefundable commitments made by us on behalf of the customer. There is significant customer concentration in our Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements could have a materialma terial adverse effect on our business, financial condition or results of operations. Due to the typical
PDI, Inc.
Annual Report on Form 10-K (continued)
size of most of TVG’s and VIM’s contracts, it is unlikely that the loss or termination of any individual TVG or VIM contract would have a material adverse effect on our business, financial condition, results of operations or cash flow.
Product Commercialization Services
In April 2008, we entered into a contract under our product commercialization initiative with Novartis. On April 22, 2009, we announced the termination of this agreement with Novartis. See Note 11 to the condensed consolidated financial statements for additional information relating to the agreement. However we continue to evaluate potential opportunities within this segment on a very selective and opportunistic basis and may pursue additional opportunities in the future to the extent we are able to mitigate certain risks relating to the investment of our resources.
Significant Customers
Historically, we have experienced a high degree of customer concentration in our businesses. Our threetwo largest customers as of December 31, 2007were Pfizer Inc. and Roche Laboratories Inc., which accounted for 13.7%, 12.9%approximately 42.0% and 11.3%16.5%, respectively, or approximately 37.9%58.5% in the aggregate, of our revenue for the year ended December 31, 2007. On March 21, 2007, we announced that a large pharmaceutical company customer had notified us of its intention not to renew its contract sales engagement with us upon its scheduled expiration on May 12, 2007. This contract accounted for 12.8% of our revenue in 2007.2009.
Our marketing efforts target established and emerging companies in the biopharmaceutical and life sciences industries. Our marketing efforts are designed to reach the senior sales, marketing, and business development personnel within these companies, with the goal of informing them of the services we offer and the value we can bring to their products. Our tactical plan usually includes advertising in trade publications, direct mail campaigns, presence at industry seminars and conferences and a direct selling effort. We have a dedicated team of business development specialists who work within our business units to identify needs and opportunities within the biopharmaceutical and life sciences industries that we can address. We review possible business opportunities as identified by our business developmentdevelopm ent team and develop a customized strategy and solution for each attractive business opportunity.
PDI, Inc.
Annual Report on Form 10-K
Competition
With respect to our sales servicesSales Services segment, we compete with our customers’ ability to manage their needs internally. In addition, a small number of providers comprise the market for outsourced pharmaceutical sales teams, and we believe that PDI, inVentiv Health Inc., Innovex Inc. and Publicis Groupe SA combined accounted for the majority of the U.S. outsourced sales team market share in 2007.the United States in 2009. Our marketing servicesMarketing Services segment operates in a highly fragmented and competitive market.
There are relatively fewmodest barriers to entry into the businesses in which we operate and, as the industry continues to evolve, new competitors are likely tomay emerge. We compete on the basis of such factors as reputation, service quality, management experience, performance record, customer satisfaction, ability to respond to specific customer needs, integration skills and price. Increased competition and/or a decrease in demand for our services may also lead to other forms of competition. While we believe we compete effectively with respect to each of these factors, most certain of our current and potential competitors are larger than we are and have substantially greater capital, personnel and other resources than we have. Increased competition may lead to pricing pressures and competitive practices that could have a material adverse effect on our market share and our ability to source new business opportunities as well as our business, financial condition and results of operations.
As of February 29, 2008,28, 2010, we had approximately 1,1001,200 employees, including approximately 550650 full-time employees. Approximately 85%90% of our employees are field sales representatives and sales managers. We are not party to a collective bargaining agreement with any labor union. We believe our relationship with our employees is generally positive.
Our website address is www.pdi-inc.com. We are not including the information contained on our website as part of, or incorporating itsuch information by reference into, this Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.Securities and Exchange Commission (SEC).
The public may read and copy any materials we file with the SEC at the SEC'sSEC’s Public Reference Room at 100 F Street, N.E.,NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding registrants such as us that file electronically with the SEC. The website address is www.sec.gov.
PDI, Inc.
Annual Report on Form 10-K (continued)
Government and Industry Regulation
The healthcare sector is heavily regulated by both government and industry. Various laws, regulations and guidelines established by government, industry and professional bodies affect, among other matters, the approval, provision, licensing, labeling, marketing, promotion, price, sale and reimbursement of healthcare services and products, including pharmaceutical products. The federal government has extensive enforcement powers over the activities of pharmaceutical manufacturers, including authority to withdraw product approvals, commence actions to seize and prohibit the sale of unapproved or non-complying products, to halt manufacturing operations that are not in compliance with good manufacturing practices, and to impose or seek injunctions, voluntary recalls, and civil, monetary, and criminal penalties.
The Food, Drug and Cosmetic Act, as supplemented by various other statutes, regulates, among other matters, the approval, labeling, advertising, promotion, sale and distribution of drugs, including the practice of providing product samples to physicians. Under this statute, the Food and Drug Administration (FDA) regulates all promotional activities involving prescription drugs. The distribution of pharmaceutical products is also governed by the Prescription Drug Marketing Act (PDMA), which regulates promotional activities at both the federal and state level. The PDMA imposes extensive licensing, personnel record keeping, packaging, quantity, labeling, product handling and facility storage and security requirements intended to prevent the sale of pharmaceutical product samples or other diversions. Under the PDMA and its implementing regulations, states are permitted to require registration of manufacturers and distributors who provide pharmaceutical products even if such manufacturers or distributors have no place of business within the state. States are also permitted to adopt regulations limiting the distribution of product samples to licensed practitioners and require extensive record keeping and labeling of such samples for tracing purposes. The sale or distribution of pharmaceutical products is also governed by the Federal Trade Commission Act.
PDI, Inc.
Annual Report on Form 10-K
Some of the services that we currently perform or that we may provide in the future may also be affected by various guidelines established by industry and professional organizations. For example, ethical guidelines established by the American Medical Association (AMA) govern, among other matters, the receipt by physicians of gifts from health-related entities. These guidelines govern honoraria and other items of economic value that AMA member physicians may receive, directly or indirectly, from pharmaceutical companies. Similar guidelines and policies have been adopted by other professional and industry organizations, such as Pharmaceutical Research and Manufacturers of America, an industry trade group.group. In addition, the Office of the Inspector General has also issued guidance for pharmaceutical manufacturers and the Accreditation Council for Continuing Medical Education has issued guidelines for providers of continuing medical education.
There are also numerous federal and state laws pertaining to healthcare fraud and abuse as well as increased scrutiny regarding the off-label promotion and marketing of pharmaceutical products and devices. In particular, certain federal and state laws prohibit manufacturers, suppliers and providers from offering, giving or receiving kickbacks or other remuneration in connection with ordering or recommending the purchase or rental of healthcare items and services. The federal anti-kickback statute imposes both civil and criminal penalties for, among other things, offering or paying any remuneration to induce someone to refer patients to, or to purchase, lease or order (or arrange for or recommend the purchase, lease or order of) any item or service for which payment may be made by Medicare or other federally-funded state healthcare programspro grams (e.g., Medicaid). This statute also prohibits soliciting or receiving any remuneration in exchange for engaging in any of these activities. The prohibition applies whether the remuneration is provided directly or indirectly, overtly or covertly, in cash or in kind. Violations of the statute can result in numerous sanctions, including criminal fines, imprisonment and exclusion from participation in the Medicare and Medicaid programs. Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies, but may apply to all healthcare items or services, regardless of whether Medicare or Medicaid funds are involved.
In addition to the other information provided in this Annual Report on Form 10-K, you should carefully consider the following factors in evaluating our business, operations and financial condition. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that are similar to those faced by other companies in our industry or businesses in general, such as competitive conditions, may also impair our business operations. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition or results of operations.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries could materially and
PDI, Inc.
Annual Report on Form 10-K (continued)
adversely affect our business, financial condition and results of operations.
Our business depends in large part on demand from the pharmaceutical, biotechnology and life scienceshealthcare industries for outsourced marketing and salescommercialization services. The practice of many companies in these industries has been to hire outside organizations like usPDI to conduct large sales and marketing projects on their behalf. However, companies may elect to perform these services internally for a variety of reasons, including the rate of new product development and FDA approval of those products, the number of sales representatives employed internally in relation to demand, for or the need to promote new and existing products, and competition from other suppliers. Recently,During the past few years, there has been a slow-down in the rate of approval of new products by the FDA and this trend may continue. Additionally, several largelarg e pharmaceutical companies have recently made changes to their commercial model by reducing the number of sales representatives employed internally and through outside organizations like us.PDI. These and other developments within the pharmaceutical industry have resulted in a decrease in the market for outsourced sales and marketing services during the last few years, and there can be no assurances regarding the timing or extent of any reversal of these trends. If the pharmaceutical and life sciences industries reduce their tendency to outsource these projects, our business financial condition and results of operations could be materially and adversely affected.
If companies in the life sciences industries significantly reduce their promotional, marketing and sales expenditures or significantly reduce or eliminate the role of pharmaceutical sales representatives in the promotion of their products, our business financial condition and results of operations would be materially and adversely affected.
Our revenues depend on promotional, marketing and sales expenditures by companies in the life sciences industries, including the pharmaceutical and biotechnology industries. Promotional, marketing and sales expenditures by pharmaceutical manufacturers have in the past been, and could in the future be, negatively impacted by, among other things, governmental reform or private market initiatives intended to reduce the cost of pharmaceutical products or by governmental, medical association or pharmaceutical industry initiatives designed to regulate the manner in which pharmaceutical manufacturers promote their products.products as well as the high level of patent expiration and related introduction of generic versions of branded medicine within the industry. Furthermore, the trend in the life sciences industries toward consolidation may result in a reduction in overall sales and marketing expenditures and, potentially, a reduction in the use of contractoutsourced sales and marketing services providers. This reduction in demand for outsourced pharmaceutical sales and marketing services could be further exacerbated by the current economic and financial crisis occurring in the United States and worldwide. If companies in the life sciences industries significantly reduce their promotional, marketing and sales expenditures or significantly reduce or eliminate the role of pharmaceutical sales representatives in the promotion of their products, our business financial condition and results of operations would be materially and adversely affected.
PDI, Inc.
Annual Report on Form 10-K
Our service contracts are generally short-term agreements and are cancelable at any time, which may result in lost revenue and additional costs and expenses.
Our service contracts are generally for a term of one to two years (certain of our operating entities have contracts of shorter duration) and many may be terminated by the customer at any time for any reason. In addition, many of our customers may internalize the contracted sales teams we provide under the terms of the contract or otherwise significantly reduce the number of representatives we deploy on their behalf. The early termination or significant reduction of a contract by one of our customers not only results in lost revenue, but also typically causes us to incur additional costs and expenses.expenses, such as termination expenses relating to excess employee capacity. All of our sales representatives are employees rather than independent contractors. Accordingly, when a contract is significantly reduced or terminated, unless we can immediately transfer the related sales force to a new program, if permitted under the contract, we must either continue to compensate those employees, without realizing any related revenue, or terminate their employment. If we terminate their employment, we may incur significant expenses relating to their termination. The loss, termination or significant reduction of a large contract or the loss of multiple contracts could have a material adverse effect on our business financial condition and results of operations.
MostThe majority of our revenue is derived from a very limited number of customers, the loss of any one of which could materially and adversely affect our business, financial condition orand results of operations.
Our revenue and profitability depend to a great extent on our relationships with a very limited number of large pharmaceutical companies. As of December 31, 2007,2009, our two largest customers accounted for approximately 42.0% and 16.5%, or a total of 58.5%, of our service revenue for 2009. As of December 31, 2008, our three largest customers accounted for approximately 13.7%28.2%, 12.9%13.6%, and 11.3%10.7%, respectively, or approximately 37.9%52.5% in the aggregate, of our revenue for the year ended December 31, 2007. For the year ended December 31, 2006, our three largest customers accounted for 28.5%, 18.3% and 9.9%, respectively, or approximately 56.7% in the aggregate, of our revenue. For the year ended December 31, 2005, our three largest customers, each of whom represented 10% or more of our revenue, accounted for, in the aggregate, approximately 73.6% of our revenue.2008. We are likely to continue tobelieve that we may experience a highan even higher degree of customer concentration particularly if there is furtherduring 2010 and this trend may continue beyond 2010 in light of continued consolidation within the pharmaceutical industry.
TheIn order to increase our revenues, we will need to attract additional significant customers on an ongoing basis. Our failure to attract a sufficient number of such customers during a particular period, or our inability to replace the loss of or a significant reduction ofin business from any of oura major customers couldcustomer would have a material adverse effect on our business, financial condition orand results of operations. For example, during 2006 and 2007, we announced the termination and expiration of a number of significant service contracts, including ourcontracts. In addition, another customer terminated a significant sales force engagements with AstraZeneca, GlaxoSmithKline (GSK), sanofi-aventis and another large pharmaceutical company
PDI, Inc.
Annual Report on Form 10-K (continued)
customer. These four customersprogram effective September 30, 2008 due to generic competition. This sales force program accounted for approximately $150.9 million in9.5% of our revenue during 20062008.
We incurred substantial losses in connection with our recently terminated promotional agreement under our product commercialization initiative, and $15.9 million inif we are unable to generate sufficient revenue during 2007.
Our senior management team is currently in the process of implementing our long-term strategic plan. There can be no assurancefrom any future product commercialization or other similar opportunities that we will successfully implement this plan.may pursue, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
In May 2006, Michael MarquardEffective April 22, 2009, we and Jeffrey Smith joined us as our chief executive officer and chief financial officer, respectively. In 2007, we initiatedNovartis mutually agreed to terminate the implementation of a five-year strategic planpromotional agreement that was further refinedentered into in April 2008 in connection with our product commercialization initiative. During the first quarterterm of 2008. In orderthis promotion agreement, we incurred significant expenses in connection with implementing and maintaining the program while required product sales levels necessary to implement our strategic plan,receive revenue under the agreement were never achieved, and therefore we may seek to do one or more of the following:did not generate any revenue from this agreement during its term.
· | introduce new sales support services that provide greater flexibility to our customers; |
· | organically develop or acquire complementary commercialization services in order to expand our portfolio of service offerings to the biopharmaceutical and life sciences industries and to strengthen our contract sales offerings; and |
· | explore attractive product commercialization opportunities. |
While we expectare not actively engaged in any additional product commercialization opportunities at this time, we continue to expend significant fundsevaluate potential opportunities on a very selective and other resources implementing this strategy,opportunistic basis. To the extent we enter into any arrangements in the future in which all or a portion of our anticipated revenue is based on sales of the product, there can be no assurance that weour promotional activities will successfully implement this strategy or be able to expand our market share, increase revenue, yield a return on investment and/or improve stockholder value.
If we pursuegenerate sufficient product commercialization opportunities as part of our long-term strategic plan, we cannot assure you that we can successfully develop this business.
In accordance with our strategic plan, we intend to explore opportunities to enter into arrangements with biopharmaceutical companies to provide sales and marketing support services and potentially limited capital in connection with the promotion of pharmaceutical products in exchange for a percentage of product sales. It is likely that these types of arrangements will require us to make a significant upfront investment of our resources and are expected to generate losses in the first year of the contract as program ramp up occurs. In addition, we envision that these types of contracts will have limited termination rights and the compensation we will receive is expected to consist entirely of a percentage of sales of the product, and in certain arrangements we may not receive any compensation unless product sales exceed an agreed upon baseline. There can be no assurance that our forecasts relating to product sales will prove to be accurate.profitable for us and our business, financial condition, results of operations and cash flows could be materially and adversely affected. In addition, there are a number of factors that could negatively impact product sales during the term of a sales force promotional program, many of which are beyond our control, including the contract, includinglevel of promo tional response to the product, withdrawal of the product from the market, the launch of a therapeutically equivalent generic version of the product, the introduction of a competing product, loss of managed care covered lives, a significant disruption in the manufacture or supply of the product as well as other significant events that could affect sales of the product or the prescription market for the product. Therefore, the revenue we receive, if any, from product sales under these types
PDI, Inc.
Annual Report on Form 10-K
We may make acquisitions in the future which may lead to disruptions to our ongoing business.
Historically, we have made a number of acquisitions, and our strategic plan contemplates pursuing new acquisition opportunities. If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business. The success of an acquisition will depend upon, among other things, our ability to:
· | assimilate the operations and services or products of the acquired company; |
· | integrate new personnel associated with the acquisition; |
· | retain and motivate key employees; |
· | minimize the diversion of management’s attention from other business concerns. |
In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business, including goodwill and other intangible assets identified at time of acquisition.
In addition, the current market for acquisition targets in our industry is extremely competitive, and there can be no assurance that we will be able to successfully identify, bid for and complete acquisitions necessary or desirable to achieve our goals.
If we do not meet performance goals established in our incentive-based and revenue-sharing arrangements with customers, our revenue could be materially and adversely affected.
We have entered into a number of incentive-based arrangements with our pharmaceutical company customers,
PDI, Inc.
Annual Report on Form 10-K (continued)
and our strategic plan contemplates an increased focus on these types of arrangements.customers. Under incentive-based arrangements, we are typically paid a lower fixed fee and, in addition, have an opportunity to earn additional compensation upon achieving specific performance metrics with respect to the products being detailed. Typically, these performance metrics relate to targeted sales or prescription volumes, sales force performance metrics or a combination thereof. In addition, we have entered into and may in the future enter into revenue sharing arrangements with customers. Under revenue sharing arrangements, we are typically paid a fixed fee covering all or a portion of our direct costs with our remaining compensation based on the market performance of the products being promoted by us , usually expressed as a percentage of product sales. These types ofincentive-based and revenue sharing arrangements transfer some or most of the market risk from our customers to us. In addition, these arrangements can result in variability in our incentive-basedrevenue and earnings (and therefore our revenue) due to seasonality of product usage, changes in market share, new product introductions (including the introduction of competing generic products into the market), overall promotional efforts and other market related factors. If we are unable to meet the performance goals established in our incentive-based arrangements or the expected product market performance goals in our revenue sharing arrangements, our revenue could be materially and adversely affected.affected
Additionally, certain of our service contracts may contain penalty provisions pursuant to which our fixed fees may be significantly reduced if we do not meet certain minimum performance metrics, which may include number and timing of sales calls, physician reach, territory vacancies and/or sales representative turnover.
Our industry is highly competitive and our failure to address competitive developments promptly will limit our ability to retain and increase our market share.
Our primary competitors for sales and marketing services include in-house sales and marketing departments of pharmaceutical companies, other CSOs and providers of marketing and related services, including medical education and marketing research providers. There are relatively few barriers to entry in the businesses in which we compete and, as the industry continues to evolve, new competitors are likely to emerge. Most of our current and potential competitors are larger than we are and have substantially greater capital, personnel and other resources than we have. Increasedhave and certain of our competitors currently offer a broader range of personal and non-personal promotional and other related commercialization services than we do. Our inability to continue to remain competitive with respect to the range of service offerings that we can provide companies within the pharmaceutical industry or any other factors that result in increased competition may lead to pricing pressures and competitive practices that could have a material adverse effect on our market share and our ability to source new business opportunities as well as our business financial condition and results of operations.
Due to the expiration and termination of several significant contracts during 2006 and 2007 and the implementation of our new long-term strategic plan, our historical revenue and results of operations cannot be relied upon as representative of the revenue and results of operations that we may achieve in 2008 and future periods.
As noted above, during 2006 and the first half of 2007, we experienced the expiration and termination of several significant contracts, including termination of our AstraZeneca contract sales force agreement effective as of April 30, 2006, the termination of our contract sales force agreement with sanofi-aventis effective as of December 1, 2006, the expiration of our contract sales force agreement with GSK on December 31, 2006 and the expiration of our contract sales force agreement with a large pharmaceutical company customer on May 12, 2007. These four customers accounted for an aggregate of approximately $150.9 million of revenue during 2006 and $15.9 million of revenue during 2007. Unless and until we generate sufficient new business to offset the loss of these contracts, our financial results for previous periods will not be duplicated in future periods, and future revenue and cash flows from operations will be significantly less than in previous periods. In addition, we expect to incur a net loss for 2008 and may incur net losses in future periods. Our senior management is also in the process of implementing our long-term strategic plan. This plan includes, in part, a focus on supplementing our current service offerings with complementary commercialization service offerings to the biopharmaceutical and life sciences industries. To the extent this element of our strategic plan is realized during 2008 and in future periods, these may constitute new service offerings for which there were no comparable financial results during 2006 or 2007. We may also make significant expenditures in connection with any acquisitions that we may pursue in connection with our strategic plan. Additionally, if we pursue product commercialization opportunities as contemplated by our strategic plan, these types of arrangements will require us to incur significant costs with no guarantee that any revenue we would receive from product sales would be sufficient to offset such costs.
We may require additional funds in order to implement our strategic plan and evolving business model.model, which we may be unable to obtain on favorable terms, if at all.
In accordance with our strategic plan discussed above, weWe may require additional funds in order to pursue othercertain business opportunities or meet future operating requirements, develop incremental marketing and sales capabilities; and/or acquire other services businesses. We may seek additional funding through public or private equity or debt financing or other arrangements with collaborative partners. Our ability to secure any future debt financing on favorable terms or at all may be materially and adversely affected by the current credit market turmoil. In addition, any debt financing arrangements that we enter into may require us to comply with specified financial ratios, including ratios regarding interest coverage, total leverage, senior secured leverage and fixed charge coverage. Our ability to comply with these ratios may be affected by ev ents beyond our control. If we raise additional funds by issuing equity securities, further dilution to existing stockholders may result. As a condition to providing us with additional funds, future investors may demand, and may be granted, rights superior to those of existing stockholders. In addition, any future debt financing we may enter into may require us to comply with specified financial ratios, including ratios
PDI, Inc.
Annual Report on Form 10-K (continued)
regarding interest coverage, total leverage, senior secured leverage and fixed charge coverage. Our ability to comply with these ratios may be affected by events beyond our control.
We cannot be certain; however, that additional financing will be available from any of these sources or, if available, will be available on acceptable or affordable terms. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our strategic initiatives.
Due to the expiration and termination of several significant contracts during 2006, 2007 and 2008, our historical revenue and results of operations cannot be relied upon as representative of the revenue and results of operations that we may achieve in 2010 and future periods.
PDI, Inc.
Annual Report on Form 10-K
As noted above, during 2006 and the first half of 2007, we experienced the expiration and termination of several significant contracts which accounted for an aggregate of approximately $150.9 million of revenue during 2006 and $15.9 million of revenue during 2007. In addition, another significant sales force program was terminated in 2008 which accounted for approximately $10.7 million of revenue during 2008. Unless and until we generate sufficient new business to offset the loss of these contracts, our financial results for these previous periods will not be duplicated in future periods, and future revenue and cash flows from operations will be significantly less than in previous periods.
The current worldwide economic and financial crisis may have a material and adverse effect on our business, financial condition and results of operations.
The current global financial crisis involves, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide. Sustained downturns in the economy generally affect the markets in which we operate. If our customers’ access to capital or willingness to make expenditures is curtailed as a result of the current economic and financial crisis, the demand for our services may decrease and our business, financial condition and results of operations could be materially and adversely affected. For example, certain customers within our Marketing Services segment delayed the implementation or reduced the scope of a number of marketing initiatives during 2009. 60;In addition, economic conditions could affect the financial strength of our vendors and their ability to fulfill their commitments to us, and could also affect the financial strength of our customers and our ability to collect accounts receivable. Recent disruptions in the credit markets may also negatively impact our ability to obtain additional sources of financing. The potential effects of the current economic and financial crisis are difficult to forecast and mitigate and are likely to continue to have a significant adverse impact on our customers, vendors and our business for the next several years.
Our liquidity, business and financial condition could be materially and adversely affected if the financial institutions which hold our funds fail.
We have substantial funds held in bank deposits, money market funds and other accounts at certain financial institutions. A significant portion of the funds held in these accounts exceeds the Federal Deposit Insurance Corporation’s insurance limits. If any of the financial institutions where we have deposited funds were to fail, we may lose some or all of our deposited funds that exceed the insurance coverage limit. Such a loss would have a material and adverse effect on our liquidity, business and financial condition.
Our business may suffer if we fail to attract and retain qualified sales representatives.
The success and growth of our business depends in large part on our ability to attract and retain qualified pharmaceutical sales representatives. There is intense competition for pharmaceutical sales representatives from CSOs and pharmaceutical companies. In addition, in certain instances, we offer customers the option to permanently hire our sales representatives, and on occasion, our customers have hired the sales representatives that we trained to detail their products. We cannot assure you that we will continue to attract and retain qualified personnel. If we cannot attract and retain qualified sales personnel, we will not be able to maintain or expand our Sales Services business and our ability to perform under our existing sales force contracts will be impaired.
Product liability claims could harm our business.business, and result in substantial penalties.
We could face substantial product liability claims in the event any of the pharmaceutical or other products we have previously marketed or market now or may in the future market areis alleged to cause negative reactions or adverse side effects or in the event any of these products causes injury, is alleged to be unsuitable for its intended purpose or is alleged to be otherwise defective. For example, in the past we have beenwere named as a defendant in numerous lawsuits as a result of our detailing of Baycolâ on behalf of Bayer Corporation (Bayer). Product liability claims, regardless of their merits, could be costly and divert management'smanagement’s attention or adverselyfrom our business operations; could adve rsely affect our reputation and the demand for our servicesservices; and could result in substantial civil, criminal, or products.other sanctions. Additionally, such litigation may incur investigation or enforcement action by the FDA, Department of Justice, state agencies, or other legal authorities, and may result in substantial civil, criminal, or other sanctions. Any action against us, even if we successfully defend against it, could have a material adverse effect on our business and results of operations. While we rely on contractual indemnification provisions with our customers to protect us against certain product liability related claims, we cannot assure you that these provisions will be fully enforceable or that they will provide adequate protection against claims intended to be covered. We currently have product liability insurance in the aggregate amount of $5.0 million but cannot assure youensure that our insurance will be sufficient to cover fully all potential claims. Also, adequate insurance coverage might not be available in the future at acceptable costs, if at all.
PDI, Inc.
Annual Report on Form 10-K
If we do not increase our revenues and successfully manage the size of our operations, our business, financial condition and results of operations could be materially and adversely affected.
The majority of our operating expenses are personnel-related costs such as employee compensation and benefits as well as the cost of infrastructure to support our operations, including facility space and equipment. During 2009, we instituted a number of cost-saving initiatives, including a reduction in employee headcount. In addition, we are currently seeking to sublet unused office space in our Saddle River, New Jersey and Dresher, Pennsylvania facilities, although there is no guarantee that we will be able to successfully sublet this unused office space, particularly in light of the current economic and financial crisis. If we are unable to achieve revenue growth in the future or fail to adjust our cost infrastructure to the appropriate level to support our revenues, our business, financial cond ition and results of operations could be materially and adversely affected.
Our business may suffer if we are unable to hire and retain key management personnel to fill critical vacancies.
The success of our business also depends on our ability to attract and retain qualified senior management and experienced financial executives who are in high demand and who often have competitive employment options. Currently, we have a significant vacancy in our executive management. Steven K. Budd, the former president of our sales services segment, resigned effective April 6, 2007. Michael J. Marquard, our Chief Executive Officer, is currently assuming these responsibilities as we engage in a process to identify Mr. Budd’s successor. Our failure to attract and retain qualified individuals could have a material adverse effect on our business, financial condition orand results of operations.operations.
Our business may suffer if we fail to attract and retain qualified sales representatives.
The success and growth of our business depends in large part on our ability to attract and retain qualified pharmaceutical sales representatives. During 2006 and 2007, we experienced an unusually high turnover rate among our sales representatives due to the expiration and early termination of a number of significant sales force arrangements. There is intense competition for pharmaceutical sales representatives from CSOs and pharmaceutical companies. On occasion, our customers have hired the sales representatives that we trained to detail their products. We cannot assure you that we will continue to attract and retain qualified personnel. If we cannot attract and retain qualified sales personnel, we will not be able to maintain or expand our sales services business and our ability to perform under our existing sales force contracts will be impaired.
Changes in governmental regulation could negatively impact our business operations.operations and increase our costs.
The pharmaceutical and life sciences industries are subject to a high degree of governmental regulation. Significant changes in these regulations affecting the services we provide, including pharmaceutical product promotional and marketing research services and physician interaction programs, and medical educational services, could result in the imposition of additional restrictions on these types of activities, impose additional costs onto us in providing these services to our customers or otherwise negatively impact our business operations. For example,Changes in governmental regulations mandating price controls and limitations on patient access to our customers’ products could also reduce, eliminate or otherwise negatively impact our customers’ utilization of our sales and marketing services. In addition, potential healthcare reform legislation cu rrently under consideration by the Accreditation Council for Continuing Medical Education (ACCME) has several new policies,U.S. Congress could significantly increase our costs in providing healthcare benefits to our employees, including a revisionpossible mandate requiring that certain benefits be provided to ACCME’s definition of “commercial interests”, which may restrict the medical education services provided by our VIM business unit and/or could require us to incur additional time and expense in order to comply with these policies upon becoming effective.part-time employees.
Our failure, or that of our customers, to comply with applicable healthcare regulations could limit, prohibit or otherwise adversely impact our business activities.activities and could result in substantial penalties.
Various laws, regulations and guidelines established by government, industry and professional bodies affect, among other matters, the provision, of, licensing, labeling, marketing, promotion, sale and distribution of healthcare services and products, including pharmaceutical products. In particular, theThe healthcare industry also is governedregulated by various federal and state laws pertaining to healthcare fraud and abuse, including prohibitions on the payment or
PDI, Inc.
Annual Report on Form 10-K (continued)
acceptance of kickbacks or other remuneration in return for the purchase or lease of products that are paid for by Medicare or Medicaid. Violations of these regulations may incur investigation or enforcement action by the FDA, Department of Justice, state agencies, or other legal authorities, and may result in substantial civil, criminal, or other sanctions. Sanctions for violatin g the fraud and abuse laws also may include possible exclusion from Medicare, Medicaid and other federal or state healthcare programs. Additionally, violations of these regulations could result in litigation which could result in substantial civil, criminal, or other sanctions. Further, violations of these regulations may, among other things, limit or prohibit our or our customers’ current or business activities, subject us or our customers to adverse publicity, and increase the cost of regulatory compliance. Sanctions for violating these laws include civil and criminal fines and penalties and possible exclusion from Medicare, Medicaid and other federal or state healthcare programs. Although we believe our current business arrangements do not violate these federal and state fraud and abuse laws, we cannot assure you that our business practices will not be challenged under these laws in the future or that a challenge would not have a material adverse effect on our business, financial condition or results of operations. Our failure, or the failure ofoperations, even if we successfully defend against such claims. While we rely on contractual indemnification provisions with our customers to comply withprotect us against certain claims, we cannot assure you that these laws, regulationsprovisions will be fully enforceable or that they will provide adequate protection against claims intended to be covered.
We have and guidelines,may continue to experience additional impairment charges of our goodwill and other intangible assets.
We are required to evaluate goodwill for impairment at least annually, and between annual tests if events or anycircumstances warrant such a test. These events or circumstances could include a significant long-term adverse change in these laws, regulationsthe business climate, poor indicators of operating performance or a sale or disposition of a significant portion of a reporting unit. We test goodwill for impairment at the reporting unit level, which is one level below our operating segments. Goodwill has been assigned to the reporting units to which the value of the goodwill relates. We currently have five reporting units; however, only one reporting unit, Pharmakon, includes goodwill. If we determine that the fair value is less than the carrying value, an impairment loss will be recorded in our stateme nt of operations. The determination of fair value is a highly subjective exercise and guidelines may, among other things, limitcan produce significantly different results based on the assumptions used and methodologies employed. If our projected long-term sales growth rate, profit margins or prohibit our terminal growth rate are considerably lower and/or our customers’ current or business activities, subject us or our customers to adverse publicity, increase the assumed weighted-average cost of regulatory compliancecapital is considerably higher, future testing may indicate impairment and insurance coverage or subject us orwe would have to record a non-cash goodwill impairment loss in our customersstatement of operations. During the year ended December 31, 2009, we recorded an impairment charge of $18.1 million related to monetary fines orgoodwill and other sanctions or penalties.intangible assets. See Note 6, Goodwill and Other Intangible Assets, in Part II – “Financial Statements and Supplementary Data” for further information.
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Annual Report on Form 10-K
If our insurance and self-insurance reserves are insufficient to cover our future liabilities for workers compensation, automobile and general liability and employee health care benefits, our business, financial condition and results of operations could be materially and adversely affected.
We use a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability and employee health care benefits. Although we have reserved for these liabilities not covered by third-party insurance, our reserves are only an estimate based on estimates developed using actuarial data as well as on historical trends, and anytrends. Any projection of these losses is subject to a high degree of variability and we may not be able to accurately predict the number or value of the claims that occur in the future. In the event that our actual liability exceeds our reserves for any given period or if we are unable to control rapidly increasing health care costs, our business, financial condition and results of operations could be materially and adversely affected.
If our information technology and communications systems fail or we experience a significant interruption in their operation, our reputation, business and results of operations could be materially and adversely affected.
The efficient operation of our business is dependent on our information technology and communications systems. The failure of these systems to operate as anticipated could disrupt our business and result in decreased revenue and increased overhead costs. In addition, we do not have complete redundancy for all of our systems and our disaster recovery planning cannot account for all eventualities. Our information technology and communications systems, including the information technology systems and services that are maintained by third party vendors, are vulnerable to damage or interruption from natural disasters, fire, terrorist attacks, malicious attacks by computer viruses or hackers, power loss or failure of computer systems, Internet, telecommunications or data networks. If these systems or services become unavailable or suffer a security breach, we may expend significant resources to address these problems, and our reputation, business and results of operations could be materially and adversely affected.
If we incur problems with any of our third party service providers, our business operations could be adversely affected.
We have historically relied on outside vendors for a variety of services and functions significant to our businesses. In the event one or more of our vendors ceases operations, terminates its service contract or otherwise fails to perform its obligations to us in a timely and efficient manner, we may be unable to replace these vendors on a timely basis at comparable prices, which could adversely affect our ability to satisfy our contractual obligations to our customers or otherwise meet business objectives and could lead to increases in our cost structure.
If we are unable to successfully sublet unused office space, our financial condition and cash flows could be materially and adversely affected.
During the fourth quarter of 2009, we exited our Saddle River, New Jersey facility and relocated our corporate headquarters to a smaller, less costly and more strategically located office space in Parsippany, New Jersey. We are currently seeking to sublease our third floor office space, approximately 47,000 square feet, in Saddle River, New Jersey. At December 31, 2009, we had future minimum lease payments associated with the Saddle River, New Jersey facility totaling $14.2 million offset by future minimum sublease rental income totaling $5.7 million. Additionally, we are currently seeking to sublease approximately 22,100 square feet of unused space at our Dresher, Pennsylvania facility. There can be no assurance, however, that we will be able to successfully sublet any or all of our unused office space, on favorable terms or at all, particularly in light of the current economic conditions. The recognition of these charges requires estimates and judgments regarding lease termination costs and other exit costs when these actions take place. Actual results may vary from these estimates.
PDI, Inc.
Annual Report on Form 10-K
We may make acquisitions in the future which may lead to disruptions to our ongoing business.
Historically, we have made a number of acquisitions, and we may pursue new acquisition opportunities in the future. If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business. The success of an acquisition will depend upon, among other things, our ability to:
| · | assimilate the operations and services or products of the acquired company; |
| · | integrate new personnel associated with the acquisition; |
| · | retain and motivate key employees; |
| · | minimize the diversion of management’s attention from other business concerns. |
In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business, including goodwill and other intangible assets identified at time of acquisition.
In addition, the current market for acquisition targets in our industry is extremely competitive, and there can be no assurance that we will be able to successfully identify, bid for and complete acquisitions necessary or desirable to achieve our goals.
Our quarterly revenues and operating results may vary, which may cause the price of our common stock to fluctuate.
Our quarterly operating results may vary as a result of a number of factors, including:
| · | the commencement, delay, cancellation or completion of sales and marketing programs; |
| · | regulatory developments; |
| · | uncertainty about when, if at all, revenue from any product commercialization arrangements and/or other incentive-based arrangements with our customers will be recognized; |
| · | mix of services provided and/or mix of programs during the period; |
| · | timing and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs; |
| · | timing and integration of any acquisitions; |
| · | changes in regulations related to pharmaceutical companies; and |
| · | general economic conditions, including the current economic and financial crisis. |
In addition, in the case of revenue related to service contracts, we recognize revenue as services are performed, while program costs, other than training costs, are expensed as incurred. For all contracts, 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. As a result, during the first two to three months of a new contract, we may incur substantial expenses associated with implementing that new program without recognizing any revenue under that contract. This could have a material adverse impact on our operating results and the price of our common stock for the quarters in which these expenses are incurred. For these and other reasons, we believe that quarterl y comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Fluctuations in quarterly results could materially and adversely affect the market price of our common stock in a manner unrelated to our long-term operating performance.
Our stock price is volatile and could be further affected by events not within our control, and an investment in our common stock could suffer a decline in value.
The market for our common stock is volatile. During 2007,2009, our stock traded at a low of $8.56$2.80 and a high of $12.40.$6.25. In 2006,2008, our stock traded at a low of $9.37$3.10 and a high of $15.69, and in 2005, our stock traded at a low of $11.12 and a high of $22.26.$9.40. The trading price of our common stock has been and will continue to be subject to:
| | · | volatility in the trading markets generally;generally, including volatility associated with the current economic and financial crisis in the United States and worldwide; |
| | · | significant fluctuations in our quarterly operating results; |
| | · | significant changes in our cash and cash equivalent reserves; |
| | · | announcements regarding our business or the business of our competitors; |
| | · | strategic actions by us or our competitors, such as acquisitions or restructurings; |
| | · | industry and/or regulatory developments; |
| | · | changes in revenue and revenue growth rates for us and for our industry as a whole; |
PDI, Inc.
Annual Report on Form 10-K
| | · | changes in accounting standards, policies, guidance, interpretations or principles; and |
| | · | statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate. |
Our quarterly revenues and operating results may vary, which may cause the price of our common stock to fluctuate.
Our quarterly operating results may vary as a result of a number of factors, including:
| · | the commencement, delay, cancellation or completion of sales and marketing programs;
|
PDI, Inc.
Annual Report on Form 10-K (continued)
| · | uncertainty about when, if at all, revenue from any product commercialization arrangements and/or other incentive-based arrangements with our customers will be recognized;
|
| · | mix of services provided and/or mix of programs during the period;
|
| · | timing and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs;
|
| · | timing and integration of any acquisitions;
|
| · | changes in regulations related to pharmaceutical companies; and
|
| · | general economic conditions.
|
In addition, in the case of revenue related to service contracts, we recognize revenue as services are performed, while program costs, other than training costs, are expensed as incurred. For all contracts, 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. As a result, during the first two to three months of a new contract, we may incur substantial expenses associated with implementing that new program without recognizing any revenue under that contract. In addition, if we pursue product commercialization opportunities as contemplated by our strategic plan, we will incur similar implementation expenses and likely will not be able to recognize revenue from the contract, if any, for an even greater period of time after commencement of these types of programs. This could have a material adverse impact on our operating results and the price of our common stock for the quarters in which these expenses are incurred. For these and other reasons, we believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Fluctuations in quarterly results could materially and adversely affect the market price of our common stock in a manner unrelated to our long-term operating performance.
Our controlling stockholder continues to have effective control of us, which could delay or prevent a change in corporate control that may otherwise be beneficial to our stockholders.
John P. Dugan, our chairman, beneficially owns approximately 35%34% of our outstanding common stock. As a result, Mr. Dugan is able to exercise substantial control over the election of all of our directors and to determine the outcome of most corporate actions requiring stockholder approval, including a merger with or into another company, the sale of all or substantially all of our assets and amendments to our certificate of incorporation. This ownership concentration will limit our stockholdersstockholders’ ability to influence corporate matters and, as a result, we may take actions that other stockholders do not view as beneficial, which may adversely affect the market price of our common stock.
We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.
Our certificate of incorporation and bylaws include provisions, such as providing for three classes of directors, which may make it more difficult to remove our directors and management and may adversely affect the price of our common stock. In addition, our certificate of incorporation authorizes the issuance of "blank check" preferred stock. This provision could have the effect of delaying, deterring or preventing a future takeover or a change in control, unless the takeover or change in control is approved by our board of directors. We are also subject to laws that may have a similar effect. For example, section 203 of the General Corporation Law of the State of Delaware prohibits us from engaging in a business combination with an interested stockholder for a period of three years from the date the person becamebeca me an interested stockholder unless certain conditions are met. As a result of the foregoing, it will be difficult for another company to acquire us and, therefore, could limit the price that possible investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future.
| UNRESOLVED STAFF COMMENTS |
None.
Our corporate headquarters are located in, Saddle River,and our Sales Services and PC Services segments are operated out of Parsippany, New Jersey where we lease approximately 84,00023,000 square feet. The lease runs for a term ofthrough June 30, 2017. We also lease approximately 12 years, which began in July 2004. We entered into a sublease for approximately 16,00084,000 square feet of office space in Saddle River, New Jersey (our former corporate headquarters), which lease terminates in January 2016 and is cancellable on June 30, 2015. We have entered into two subleases for a combined total of approximately 37,000 square feet at our Saddle River facility which run for a term of five years which began in July 2005. The sublease allows the subtenant to renew for an additional term of two years. In July 2007, we entered into an additional sublease for approximately 20,000 square feet of space in our Saddle River facility for
PDI, Inc.
Annual Report on Form 10-K (continued)
the remaining term of our lease, approximately eight and one-half years.lease. TVG operates out of a 37,00038,000 square foot facility in Dresher, Pennsylvania under a lease that runs for a term of approximately twelve years;12 years, which began in January 2005.December 2004. Our Marketing Services business unit, TVG, entered into two subleases in 2007, beginning in August and October of 2007, each for terms of five years, and are approximately 3,000 and 4,7004,900 square feet, respectively. Our Marketing Services business unit, Pharmakon, operates out of a 6,700 square foot facility in Schaumburg, Illinois under a lease that expires in February 2010.2015. We believe that our current facilities are adequate for our current and foreseeable operations and that suitable additional space will be available if needed.
In 2007, we hadWe are seeking to sublease approximately $1.0 million of net charges related to unused office space capacity22,100 square feet and asset impairments related to the vacated space. In 2006, we had net charges of approximately $657,000 related to unused office space capacity at our Saddle River, New Jersey and Dresher, Pennsylvania locations and $1.3 million in asset impairment charges for leasehold improvements and furniture and fixtures associated with the unused office space at those facilities. In the fourth quarter of 2005, we recorded charges of approximately $2.4 million related to unused office space capacity at our Saddle River and Dresher locations. There is approximately 4,10047,000 square feet of unused office space at our Dresher and Saddle River locations, respectively. There can be no assurance, however, that we are seekingwill be able to subleasesuccessfully sublet unused office space, on favorable terms or at all, particularly in 2008.light of current economic conditions.
Bayer-Baycol Litigation
We have beenwere named as a defendant in numerous lawsuits, including two class action matters, alleging claims arising from the use of Baycol, a prescription cholesterol-lowering medication. Baycol was distributed, promoted and sold by Bayer in the United States until early August 2001, at which time Bayer voluntarily withdrew Baycol from the U.S. market. Bayer had retained certain companies, such as us, to provide detailing services on its behalf pursuant to contract sales force agreements. We may be named in additional similar lawsuits. To date, we have defended these actions vigorously and have asserted a contractual right of defense and indemnification against Bayer for all costs and expenses we incur relating to these proceedings. In February 2003, we entered into a joint defense and indemnification agreement with Bayer, pursuant to which Bayer has agreed to assume substantially all of our defense costs in pending and prospective proceedings and to indemnify us in these lawsuits, subject to certain limited exceptions. Further, Bayer agreed to reimburse us for all reasonable costs and expenses incurred through such date in defending these proceedings. As of December 31, 2007, Bayer has reimbursed us for approximately $1.6 million in legal expenses, the majority of which was received in 2003 and was reflected as a credit within selling, general and administrative expense. We did not incur any costs or expenses relating to these matters during 2005, 2006 orthe years ended December 31, 2009, 2008 and 2007. In July 2009, the final Baycol lawsuit in which we were named as a defendant was dismissed, and as of December 31, 2009, there were no pending Baycol-related claims against us.
California Class Action Litigation16
PDI, Inc.
Annual Report on behalf of certain of our current and former employees, alleging violations of certain sections of the California Labor Code. During the quarter ended September 30, 2005, we accrued approximately $3.3 million for potential penalties and other settlement costs relating to both asserted and unasserted claims relating to this matter. In October 2005, we filed an answer generally denying the allegations set forth in the complaint. In December 2005, we reached a tentative settlement of this action, subject to court approval. In October 2006, we received preliminary settlement approval from the court and the final approval hearing was held in January 2007. Pursuant to the settlement, we have made all payments to the class members, their counsel and the California Labor and Workforce Development Agency in an aggregate amount of approximately $50,000, and the lawsuit was dismissed with prejudice in May 2007.Form 10-K
Other Legal Proceedings
We are currently a party to other legal proceedings incidental to our business. As required, we have accrued our estimate of the probable costs for the resolution of these claims. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business, financial condition, or results of operations or cash flow, litigation is subject to inherent uncertainties. Were we to settle a proceeding for a material amount or were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial condition or results of operations. Legal fees are expensed as incurred.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSRESERVED |
None.
PDI, Inc.
Annual Report on Form 10-K (continued)
PART II
| MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS |
| AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the Nasdaq Global Market under the symbol “PDII.” The price range per share of common stock presented below represents the highest and lowest sales price for our common stock on the Nasdaq Global Market for the last two years by quarter:
| | | 2009 | | | 2008 | |
| | | HIGH | | | LOW | | | HIGH | | | LOW | |
| First quarter | | $ | 6.25 | | | $ | 2.80 | | | $ | 9.40 | | | $ | 7.01 | |
| Second quarter | | $ | 4.56 | | | $ | 2.93 | | | $ | 9.15 | | | $ | 7.61 | |
| Third quarter | | $ | 5.83 | | | $ | 3.90 | | | $ | 9.23 | | | $ | 7.22 | |
| Fourth quarter | | $ | 5.27 | | | $ | 3.78 | | | $ | 7.80 | | | $ | 3.10 | |
| | | 2007 | | | 2006 | |
| | | HIGH | | | LOW | | | HIGH | | | LOW | |
| First quarter | | $ | 10.98 | | | $ | 9.21 | | | $ | 15.11 | | | $ | 9.37 | |
| Second quarter | | $ | 11.28 | | | $ | 9.00 | | | $ | 14.98 | | | $ | 9.87 | |
| Third quarter | | $ | 12.40 | | | $ | 9.09 | | | $ | 15.69 | | | $ | 10.15 | |
| Fourth quarter | | $ | 10.68 | | | $ | 8.56 | | | $ | 11.97 | | | $ | 9.50 | |
Holders
We had 327324 stockholders of record as of February 29, 2008.March 1, 2010. Not reflected in the number of record holders are persons who beneficially own shares of common stock held in nominee or street name.
We have not declared any cash dividends and do not intend to declare or pay any cash dividends in the foreseeable future. Future earnings, if any, will be used to finance the future operation and growth of our business.
Securities Authorized For Issuance UnderSecurities Authorized For Issuance under Equity Compensation Plans |
We have in effect a number of stock-based incentive and benefit programs designed to attract and retain qualified directors, executives and management personnel. All equity compensation plans have been approved by security holders. The following table sets forth certain information with respect to our equity compensation plans as of December 31, 2007:2009:
PDI, Inc.
Annual Report on Form 10-K
| | | | | | | Number of securities |
| | | | | | | remaining available for |
| | | Number of securities to | | Weighted-average | | future issuance |
| | | be issued upon exercise | | exercise price of | | (excluding securities |
| Plan Category | | of outstanding options (a)(1) | | outstanding options (b) | | reflected in column (a)) (1) |
| Equity compensation plans | | | | | | |
| approved by security holders | | | | | |
| (2004 Stock Award and | | | | | | |
| Incentive Plan, 2000 Omnibus | | | | | |
| Incentive Compensation Plan, | | | | | |
| and 1998 Stock Option Plan) | | 372,441 | | $ 23.37 | | 1,519,043 |
| | | | | | | |
| Equity compensation plans not | | | | | |
| approved by security holders | - | | - | | - |
| Total | | 372,441 | | $ 23.37 | | 1,519,043 |
| | | | | | | |
| (1) Excludes restricted stock and stock-settled stock appreciation rights. | | |
| Equity Compensation Plan Information | |
| Year Ended December 31, 2009 | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| Equity compensation plans approved by security holders (2004 Stock Award and Incentive Plan, 2000 Omnibus Incentive Compensation Plan, and 1998 Stock Option Plan) | | | 236,355 | | | $ | 23.79 | | | | 980,294 | |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
| Total | | | 236,355 | | | $ | 23.79 | | | | 980,294 | |
Issuer Purchases of Equity Securities
Issuer Purchases Of Equity Securities |
From time to time,time-to-time, we repurchase our common stock on the open market or in privately negotiated transactions or both. On November 7, 2006, we announced that our Board of Directors authorized us to repurchase up to one million shares of our common stock, none of which have been repurchased. We did not repurchase any shares of our common stock on the open market during the years ended December 31, 2009, 2008 or 2007. Purchases, if any,Any future repurchases of shares will be made from available cash.
Comparative Stock Performance Graph
PDI, Inc.
Annual Report on Form 10-K (continued)
The graph below compares the yearly percentage change in the cumulative total stockholder return on our common stock, based on the market price of our common stock, with the total return of companies included within the Nasdaq Composite Index and the Nasdaq Biotech Index (NDQBTI) for the period commencing December 31, 2002 and ending2004 through December 31, 2007.2009. The calculation of total cumulative return assumes a $100 investment in our common stock and the Nasdaq Composite Index on December 31, 2002,2004, and the reinvestment of all dividends.
18
PDI, Inc.
Annual Report on Form 10-K (continued)
The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. The operations data for the years ended December 31, 2007, 2006,2009, 2008, and 20052007 and the balance sheet data at December 31, 20072009 and 20062008 are derived from our audited consolidated financial statements appearing elsewhere in this Form 10-K. The operations data for the years ended December 31, 20042006 and 20032005 and the balance sheet data at December 31, 2005, 20042007, 2006 and 20032005 are derived from our audited consolidated financial statements that are not included in this Form 10-K. &# 160;The historical results are not necessarily indicative of the results to be expected in any future period. No cash dividends have been declared for any period.
PDI, Inc.
Annual Report on Form 10-K
| (in thousands, except per share data) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Continuing operations data: | | | | | | | | | | | | | | | |
| Total revenues, net | | $ | 84,871 | | | $ | 112,528 | | | $ | 117,131 | | | $ | 239,242 | | | $ | 305,205 | |
| Gross profit | | | 26,280 | | | | 4,513 | (3) | | | 31,615 | | | | 55,844 | | | | 52,402 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | 48,739 | (1) | | | 40,917 | (4) | | | 45,853 | (5) | | | 49,931 | (6) | | | 65,064 | (7) |
| Asset impairment | | | 18,118 | (2) | | | 23 | | | | 42 | | | | - | | | | 6,178 | (8) |
| Total operating expenses | | | 66,857 | | | | 40,940 | | | | 45,895 | | | | 49,931 | | | | 71,242 | |
| | | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations | | $ | (33,560 | ) | | $ | (34,461 | ) | | $ | (9,974 | ) | | $ | 11,375 | | | $ | (11,407 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Per share data from continuing operations: | | | | | | | | | | | | | | | | | |
| (Loss) income per share of common stock | | | | | | | | | | | | | | | | | |
| Basic | | $ | (2.36 | ) | | $ | (2.42 | ) | | $ | (0.70 | ) | | $ | 0.81 | | | $ | (0.79 | ) |
| Diluted | | $ | (2.36 | ) | | $ | (2.42 | ) | | $ | (0.70 | ) | | $ | 0.81 | | | $ | (0.79 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | |
| Basic | | | 14,219 | | | | 14,240 | | | | 14,150 | | | | 14,046 | | | | 14,366 | |
| Diluted | | | 14,219 | | | | 14,240 | | | | 14,150 | | | | 14,075 | | | | 14,366 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance sheet data: | | | | | | | | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 72,627 | | | $ | 90,233 | | | $ | 106,985 | | | $ | 114,684 | | | $ | 97,634 | |
| Working capital | | | 71,631 | | | | 81,639 | | | | 110,739 | | | | 112,186 | | | | 92,264 | |
| Total assets | | | 109,776 | | | | 149,036 | | | | 179,554 | | | | 201,636 | | | | 200,159 | |
| Total long-term debt | | | - | | | | - | | | | - | | | | - | | | | - | |
| Stockholders' equity | | | 74,890 | | | | 107,107 | | | | 140,189 | | | | 149,197 | | | | 135,610 | |
| | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
| Continuing operations data: | | | | | | | | | | |
| Total revenues, net | | $ 117,131 | | $ 239,242 | | $ 305,205 | | $ 345,797 | (5) | $ 330,547 |
| Gross profit | | 31,615 | | 55,844 | | 52,402 | | 92,633 | | 84,960 |
| | | | | | | | | | | |
| Operating expenses | | 45,853 | (1) | 49,931 | (2) | 65,064 | (3) | 58,554 | | 65,897 |
| Asset impairment | | 42 | | - | | 6,178 | (4) | - | | - |
| Total operating expenses | | 45,895 | | 49,931 | | 71,242 | | 58,554 | | 65,897 |
| | | | | | | | | | | |
| (Loss) income from | | | | | | | | | | |
| continuing operations | | $ (9,974) | | $ 11,375 | | $ (11,407) | | $ 20,435 | | $ 11,931 |
| | | | | | | | | | | |
| Per share data from continuing operations: | | | | | | | | |
| (Loss) income per share of common stock | | | | | | | | |
| Basic | | $ (0.72) | | $ 0.82 | | $ (0.80) | | $ 1.40 | | $ 0.84 |
| Diluted | | $ (0.72) | | $ 0.81 | | $ (0.80) | | $ 1.37 | | $ 0.83 |
| | | | | | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | |
| Basic | | 13,940 | | 13,859 | | 14,232 | | 14,564 | | 14,231 |
| Diluted | | 13,940 | | 13,994 | | 14,232 | | 14,893 | | 14,431 |
| | | | | | | | | | | |
| Balance sheet data: | | | | | | | | | | |
| Cash and short-term investments | $ 106,985 | | $ 114,684 | | $ 97,634 | | $ 109,498 | | $ 114,632 |
| Working capital | | 111,587 | | 112,186 | | 92,264 | | 96,156 | | 100,009 |
| Total assets | | 179,554 | | 201,636 | | 200,159 | | 224,705 | | 219,623 |
| Total long-term debt | | - | | - | | - | | - | | - |
| Stockholders' equity | | 140,189 | | 149,197 | | 135,610 | | 165,425 | | 138,488 |
| | (1) | Includes $8.7 million in facilities realignment costs. See Note 16, Facilities Realignment, to the consolidated financial statements for additional details. |
| (2) | Represents $18.1 million in non-cash charges for the impairment of goodwill and intangible assets related to our Pharmakon business unit. See Note 6, Goodwill and Other Intangible Assets, to the consolidated financial statements for additional details. |
| (3) | Includes $10.3 million in charges related to an accrued contract loss. See Note 11, Product Commercialization Contract, to the consolidated financial statements for additional details. |
| (4) | Includes $1.2 million in charges for executive severance costs and $0.1 million in facilities realignment costs. See Notes 15, Executive Severance, and Note 16, Facilities Realignment, to the consolidated financial statements for additional details. |
| (5) | Includes $1.0 million in charges for facilities realignment costs. See Note 1416, Facilities Realignment, to the consolidated financial statements for moreadditional details. |
| | (2)(6) | Includes $4.0 million in credits to legal expense related to settlements in the Cellegysettlement of certain litigation matter and the California class action lawsuitmatters and $2.0 million in charges for facilities realignment costs. See Note 9 and Note 14 to the consolidated financial statements for more details. As a result of adopting FAS 123R in 2006 there was an additional $290,000 recognized in stock compensation expense. |
| | (3)(7) | Includes $5.7 million for executive severance costs and $2.4 million for facilities realignment costs. See Notes 13 and 14 to the consolidated financial statements for more details. |
| | (4)(8) | Asset impairment charges include a $3.3 million non-cash charge for the impairment of the goodwill associated with the Select Access reportingShared Sales Teams business unit; and a $2.8 million non-cash charge for the impairment of the Siebel sales force automation platform. See Note 1 to the consolidated financial statements for more details. |
| (5) | Includes revenue of $4.9 million associated with the acquisition of Pharmakon on August 31, 2004. |
| (6) | Includes product revenue of negative $11.6 million in 2003. |
PDI, Inc.
Annual Report on Form 10-K (continued)
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We make forward-looking statements that involve risks, uncertainties and assumptions in this Form 10-K. Actual results may differ materially from those anticipated by these forward-looking statements as a result of various factors, including, but not limited to, those presented under the captions “Forward-Looking Statement Information” and “Risk Factors” contained elsewhere in this Form 10-K.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
We are a leading provider of contract sales teamsoutsourced promotional services in the United States to pharmaceutical companies, offering a range of sales support services designed to achieve their strategic and financial product objectives. In addition to contract sales teams,companies. Additionally, we also provide marketing research and physician interaction and medical education programs.programs to the same customer base. Our services offer customers a range of promotional and educational options for the commercialization of their products throughout theirthose products’ lifecycles, from development through maturity. We
Our business depends in large part on demand from the pharmaceutical and healthcare industries for outsourced sales and marketing services. In recent years, this demand has been adversely impacted by certain industry-wide factors affecting pharmaceutical companies, including, among other things, pressures on pricing and access, successful challenges to intellectual property rights (including the introduction of competitive generic products), a strict regulatory environment and decreased pipeline productivity. Recently, there has been a slow-down in the rate of approval of new products by the FDA and this trend may continue. Additionally, a number of pharmaceutical companies have recently made changes to their commercial models by reducing the number of sales representatives employed internally and thro ugh outside organizations like PDI. A very significant portion of our revenue is derived from our sales force arrangements with large pharmaceutical companies, and we have therefore been significantly impacted by cost control measures implemented by these companies, including a substantial reduction in the number of sales representatives deployed. These trends culminated in the expiration or termination of a number of our significant sales force contracts during the past three years, which resulted in a significant decrease in our revenue. This reduction in demand for outsourced pharmaceutical sales and marketing services has been further exacerbated by the recent economic and financial crisis occurring worldwide. For example, during 2008 and 2009, certain Marketing Services customers delayed the implementation or reduced the scope of a number of marketing initiatives. In addition, we continue to experience a high degree of customer concentration, and th is trend may continue as a result of recent and continuing consolidation within the pharmaceutical industry. If companies in the life sciences industries significantly reduce their promotional, marketing and sales expenditures or significantly reduce or eliminate the role of pharmaceutical sales representatives in the promotion of their products, our business, financial condition and results of operations would be materially and adversely affected.
While we recognize that there is currently significant volatility in the markets in which we provide innovativeservices, we believe there are opportunities for growth of our Sales Services and flexible service offerings designedMarketing Services businesses, which provide our pharmaceutical company customers with the flexibility to drive our customers’ businesses forward and successfully respond to a continuallyconstantly changing market. Our services providemarket and a vital link between our customers andmeans of controlling costs through promotional outsourcing partnerships. In particular, we believe that the medical community through the communication of product information to physicians and other healthcare professionals for usesignificant reduction in the carenumber of their patients.pharmaceutical sales representatives within the industry during the past few years is placing increasing demands on our customers’ product portfolios and therefore we expect the market share penetration of outsourced sales organizations to increase in order to address these needs. We have recently intensified our focus on strengthening all aspects of the core outsourced pharmaceutical sales teams business that we believe will most favorably position PDI as the best-in-class outsourced promotional services organization in the United States. In addition, we also continue to focus on enhancing our commercialization capabilities by aggressively promoting and broadening the depth of the value-added service offerings of our existing Marketing Services segment.
DESCRIPTION OF REPORTING SEGMENTS AND NATURE OF CONTRACTS |
AtFor the year ended December 31, 2007,2009, our three reporting segments were as follows:
| | ¨ | Sales Services:Services, which is comprised of the following business units: |
| | · | PerformanceDedicated Sales Teams; and |
| | · | Select Access.Shared Sales Teams. |
| | ¨ | Marketing Services:Services, which is comprised of the following business units: |
| | · | TVG Marketing Research and Consulting (TVG); and. |
| | ·¨ | Vital Issues in Medicine (VIM)®Product Commercialization Services (PC Services). |
| ¨ | PDI Products Group (PPG). |
In the fourth quarter of 2005, we announced that we would be discontinuing our medical devices and diagnostics (MD&D) business unit. Beginning in the second quarter of 2006, the MD&D business unit was reported as discontinued operations. An analysisSelected financial information for each of these reporting segments and their results of operations areis contained in Note 1819, Segment Information, to ourthe consolidated financial statements and in the discussion under “Consolidated Results of OperationsOperations.” discussion below.
Nature of Contracts by Segment
Our contracts are nearly all fee for service. They may contain operational benchmarks, such as a minimum amount of activity within a specified amount of time. These contracts may include incentive payments that can be earned if our activities generate results that meet or exceed performance targets. Contracts may be terminated with or without cause by our customers. Certain contracts provide that we may incur specific penalties if we fail to meet stated performance benchmarks. Occasionally, our contracts may require us to meet certain financial covenants, such as maintaining a specified minimum amount of working capital.
Sales Services
During fiscal 2007, approximately half of our revenue was generated by contracts for Performance Sales teams. These contracts are generally for a term of one to two years and may be renewed or extended. The majority of these contracts, however, are terminable by the customer for any reason upon 30 to 90 days’ notice. Certain contracts provide for termination payments if the customer terminates the contract without cause. Typically, however, these penalties do not offset the revenue we could have earned under the contract or the costs we may incur as a result of its termination. The loss or termination of a large contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition or results of operations.
PDI, Inc.
Annual Report on Form 10-K (continued)
Marketing ServicesCRITICAL ACCOUNTING POLICIES
Our marketing services contracts generally take the form of either master service agreements with a term of one to three years or contracts specifically related to particular projects with terms typically lasting from two to six months. These contracts are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment for all work completed to date, plus the cost of any nonrefundable commitments made on behalf of the customer. There is significant customer concentration in our Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements could have a material adverse effect on our business, financial condition or results of operations. Due to the typical size of most of TVG’s and VIM’s contracts, it is unlikely the loss or termination of any individual TVG or VIM contract would have a material adverse effect on our business, financial condition or results of operations.
PPG
The contracts within the products group were either performance based or fee for service and may have required sales, marketing and distribution of a product. In performance based contracts, we typically provided and financed a portion, if not all, of the commercial activities in support of a brand in return for a percentage of product sales. An important performance parameter was normally the level of sales or prescriptions attained by the product during the period of our marketing or promotional responsibility, and in some cases, for periods after our promotional activities have ended.
CRITICAL ACCOUNTING POLICIES |
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements and related disclosures in conformity with GAAP requires our management to make judgments, estimates and assumptions at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. These assumptions and estimates are inherently uncertain. Outlined below are accounting policies, which are important to our financial position and results of operations, and require the most significant judgments on the part of our management in their application. Some of those judgments can be subjective and complex. Management’s estimates are based on historical experience, informationinfor mation from third-party professionals, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. Actual results could differ from those estimates. Additionally, changes in estimates could have a material impact on our consolidated results of operations in any one period. For a summary of all of our significant accounting policies, including the accounting policies discussed below, see Note 1, Nature of Business and Significant Account Policies, to our consolidated financial statements.
Revenue Recognition and Associated Costs
Revenue and associated costsCost of Services
We recognize revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. Many of the product detailing contracts allow for additional periodic incentive fees to be earned if certain performance benchmarks have been attained.
Revenue under pharmaceutical detailing contracts areis generally based on the number of physician details made or the number of sales representatives utilized. With respect to risk-based contracts, all or a portion of revenues earned are based on contractually defined percentages of either product revenues or the market value of prescriptions written and filled in a given period. These contracts are generally for terms of one to two years and may be renewed or extended. The majority of these contracts, however, are terminable by the customer for any reason upon 30 to 90 days’ notice. Certain contracts provide for termination payments if the customer terminates usthe agreement without cause. Typically, however, these penalties do not offset the revenue we could have earned under thet he contract or the costs we may incur as a result of its termination.
Revenue earned from incentive fees is recognized in the period earned and when we are reasonably assured that payment will be made. Under performance based contracts, revenue is recognized when the performance criteria has been achieved. Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. Revenue is recognized net of any potential penalties until the performance criteria relating to the penalties have been achieved. Commission based revenue is recognized when performance is completed. Revenue from recruiting and hiring contracts is recognized at the time the candidate begins full-time employment less a provision for sales allowances based on contractual commitments and historical experience.
The loss or termination of a large pharmaceutical detailing contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition or results of operations. Historically, we have derived a significant portion of service revenue from a limited number of customers. Concentration of business in the pharmaceutical services industry is common and the industry continues to consolidate. As a result, we are likely to continue to experience significant customer concentration in future periods. For the year ended December 31, 2009 our two largest customers, who each individually represented 10% or more of our service revenue, together accounted for approximately 58.5% of our service revenue. For the years ended December 31, 2008 and 2007, our th ree largest customers, who each individually represented 10% or more of our service revenue, together accounted for approximately 52.5% and 37.9% of our service revenue, respectively. See Note 14, Significant Customers, to our consolidated financial statements for additional information.
Revenue and associated costs under marketing service contracts are generally based on a singleseries of deliverable such as aservices associated with the design and execution of interactive promotional program, accredited continuing medical education seminarprograms or marketing research/advisory program.programs. The contracts are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment for all work completed to date, plus the cost of any nonrefundable commitments made on behalf of the customer. There is significant customer concentration in our Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements wouldcould have a material adverse effect on our business financial condition orand results of operations. Due to the typical size of most contracts of TVG and VIM,contracts, it is unlikely the loss or termination of any individual TVG or VIM contract would have a material adverse effect on our business, financial condition or results of operations.
Revenue from certain promotional contracts that include more than one service offering is accounted for as multiple-element arrangements. For these contracts, the deliverable elements are divided into separate units of accounting provided the following criteria are met: the price is fixed and determinable; the delivered elements have stand-alone value to the customer; there is objective and reliable evidence of the fair value of the undelivered elements; and there is no right of return or refund. The contract revenue is then allocated to the separate units of accounting based on their relative fair values. Revenue and cost of services are recognized for each unit of accounting separately as the related services are rendered.
PDI, Inc.
Annual Report on Form 10-K (continued)
Revenue is recognized on product detailing programs and certain marketing, promotional and medical education contracts as services are performed and the right to receive payment for the services is assured. Many of the product detailing contracts allow for additional periodic incentive fees to be earned if certain performance benchmarks have been attained. Revenue earned from incentive fees are recognized in the period earned and when we are reasonably assured that payment will be made. Under performance based contracts, revenue is recognized when the performance based parameters are achieved. Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. Revenue is recognized net of any potential penalties until the performance criteria relating to the penalties have been achieved. Commissions based revenue is recognized when performance is completed less an allowance for estimated cancellations based on contractual commitments and experience.
Revenue and associated costs from marketing research contracts areis recognized upon completion of the contract. These contracts are generally short-term in nature typically lasting from two to six months.
Cost of services consistsconsist primarily of the costs associated with executing product detailing programs, performance based contracts or other sales and marketing services identified in the contract. Cost of services includesinclude personnel costs and other 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.These costs are expensed as incurred.
Personnel costs, which constitute the largest portion of cost of services, include all labor related costs, such as salaries, bonuses, fringe benefits and payroll taxes for the sales representatives, and sales managers and professional staff that 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.
Reimbursable out-of-pocket expenses include those relating to travel and other similar costs, for which we are reimbursed at cost by our customers. In accordance with the requirements of Emerging Issues Task Force No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred” (EITF 01-14), reimbursements received for out-of-pocket expenses incurred are characterized as revenue and an identical amount is included as cost of services in the consolidated statements of operations.
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. For allthe majority of our contracts, training costs are reimbursable out-of-pocket expenses. For contracts where we are responsible for training costs, these 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. When we receive a specific contract payment from a customer upon commencement of a product detailing program expressly
Contract Loss Provisions
Provisions for losses to compensate us for recruiting, hiring and training services associated with staffing that program, such payment is deferred andbe incurred on contracts are recognized as revenuein full in the same period in which it is determined that the recruiting and hiring expenses are incurred and amortizationa loss will result from performance of the deferred training is expensed. When we do not receive a specific contract payment for training, all revenue is deferred and recognized over the life of the contract.contractual arrangement.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review a customer’s credit history before extending credit. We establish an allowance for doubtful accounts based on the aging of a customer’s accounts receivable or when we become aware of a customer’s inability to meet its financial obligations (e.g., a bankruptcy filing). We operate almost exclusively in the pharmaceutical industry and to a great extent our revenue is dependent on a limited number of large pharmaceutical companies. We also partner with customers in the emerging pharmaceutical sector, some of whom may have limited financial resources. A general downturn in the pharmaceutical industry or a material adverse event to one or more of our emerging pharmaceutical customers could result in higher than expected customer defaults requiring additional allowances.
PDI, Inc.
Annual Report on Form 10-K (continued)
Goodwill, Intangibles and Other Long-Lived Assets
We allocate the cost of the acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Since the entities we have acquired do not have significant tangible assets, a significant portion of the purchase price has been allocated to intangible assets and goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of annual impairment tests require significant management judgments and estimates. These estimates are made based on, among other factors, consultations with an accredited independent valuation consultant, reviews of projected future operating results and business plans, economic projections, anticipatedan ticipated future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to the Company’sour results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments thereby impacting the fair value of these assets, which could result in an impairment of the goodwill and acquired intangible assets.
We have elected to do the annual teststest goodwill for indications of goodwill impairment asat least annually (as of December 3131) and whenever events or circumstances change that indicate impairment may have occurred. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of each year.operating performance or a sale or disposition of a significant portion of a reporting unit. We utilizetest goodwill for impairment at the reporting unit level, which is one level below its operating segments. Goodwill has been assigned to the reporting units to which the value of the goodwill relates. We currently have five reporting units; however, only one reporting unit, Pharmakon, includes goodwill. We tested goodwill by estimating the fair value of the reporting unit using a discounted cash flow model and a market multiple approach. The estimated fair value of the reporting unit is then compared with its carrying value including goodwill, to determine fair value in the goodwillif any impairment evaluation.exists. In assessing the recoverability of goodwill, projections regarding the highest and best use of estimated future cash flows and other factors are made to determine the fair value of the respective reporting units. The key estimates and factors used in the discounted cash flow valuation include revenue growth rates and profit margins based on internal forecasts, terminal value and a market participant’s weighted-average cost of capital used to discount future cash flows. During our 2009 annual impairment testing as of December 31, 2009, we recognized an $8.5 million impairment charge.
PDI, Inc.
Annual Report on Form 10-K (continued)
We review the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. Duri ng the fourth quarter of 2009, we recognized an impairment charge of $9.6 million related to our customer relationships and tradename. In addition, future events impacting cash flows for existing assets could render a write-down or write-off necessary that was not previously required no such write-down or write-off.required.
While we use available information to prepare our estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in additional impairment and losses related to recorded goodwill or long-lived assetasset balances.
We are self-insured for certain losses for claims filed and claims incurred but not reported relating to workers’ compensation and automobile-related losses for our company-leased cars. Our liability for these losses is estimated on an actuarial undiscounted basis using individual case-based valuations and statistical analysis supplied by our insurance brokers and insurers and is based upon judgment and historical experience; however, the final cost of many of these claims may not be known for five years or longer. In 2007, we also were self-insured for certain benefits paid under our employee healthcare programs. Our liability for medical claims is estimated using an underwriting determination that is based on current year’s average number of days between when a claim is incurred and when it is paid; however, the final cost of medical claims incurred in 2007 may not be known until second quarter of 2008.
We maintain stop-loss coverage with third-party insurers to limit our total exposure on these programs. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based on risk tolerance and premium expense. Management reviews these accruals on a quarterly basis. At December 31, 2007 and 2006, self-insurance accruals totaled $2.9 million and $2.5 million, respectively.
Contingencies
In the normal course of business, we are subject to various contingencies. ContingenciesLoss contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated, or otherwise disclosed, in accordance with SFAS No. 5, “Accounting for Contingencies” (SFAS 5).estimated. We are currently involved in certain legal proceedings and, as required, we have accrued our estimate of the probable costs for the resolution of these claims. These estimates are developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Predicting the outcome of claims and litigation is an inherently subjective and complex process and estimating related costs and exposures involves substantial uncertainties that couldmay cause actual costsresults to vary materiallydiffer m aterially from our estimates.
PDI, Inc.
Annual Report on Form 10-K (continued)
Income Taxes
We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of our assets and liabilities based on enacted tax laws and rates. A valuation allowance is established, when necessary, to reduce the deferred income tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We operate in multiple tax jurisdictions and provide taxes in each jurisdiction where we conduct business and are subject to taxation. The breadth of our operations and the complexity of the various tax laws require assessments of uncertainties and judgments in estimating the ultimate taxes we will pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of proposed assessments arising from federal and state audits. We have established estimated liabilities for uncertain federal and state income tax exposures that arise and meet the criteria for accrual under FIN 48.positions. These accruals represent accounting estimates that are subject to inherent uncertainties associated with the tax audit process.proc ess. We adjust these accruals as facts and circumstances change, such as the progress of a tax audit. We believe that any potential audit adjustments will not have a material adverse effect on our financial condition or liquidity. However, any adjustments made may be material to our consolidated results of operations for a reporting period.
Significant judgment is also required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. We currently have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences. The realization of these assets is dependent on generating future taxable income. We perform an analysis quarterly to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. Our recent operating results and projections of future income weighed heavily in our overall assessment. The minimum amount of future taxable income that would have to be generated to realize our net deferred tax assets is approximately $30$46 million and the existing and forecas ted levels of pretax earnings for financial reporting purposes are not sufficient to generate this amount of future taxable income.income and realize our deferred tax assets. As a result, we established a full federal and state valuation allowance for the net deferred tax assets at December 31, 20072009 and 20062008 because we determined that it was more likely than not that these assets would not be realized. At December 31, 2007
PDI, Inc.
Annual Report on Form 10-K (continued)
Self-Insurance Accruals
We are self-insured for benefits paid under employee healthcare programs. Our liability for healthcare claims is estimated using an underwriting determination which is based on the current year’s average lag days between when a claim is incurred and 2006,when it is paid. We maintain stop-loss coverage with third-party insurers to limit our total exposure on all of these programs. Periodically, we hadevaluate the level of insurance coverage and adjust insurance levels based on risk tolerance and premium expense. Management reviews the self-insurance accruals on a valuation allowancequarterly basis. Actual results may vary from these estimates, resulting in an adjustment in the period of approximately $11.7 millionthe change in estimate. Prior to Octobe r 1, 2008, we were also self-insured for certain losses for claims filed and $6.8 million, respectively, relatedclaims incurred but not reported relating to workers’ compensation and automobile-related liabilities for Company-leased cars. Beginning October 1, 2008, we became fully insured through an outside carrier for these losses. Our liability for claims filed and claims incurred but not reported prior to October 1, 2008 is estimated on an actuarial undiscounted basis supplied by our net deferred tax assets that cannotinsurance brokers and insurers using individual case-based valuations and statistical analysis. These estimates are based upon judgment and historical experience. The final cost of many of these claims may not be carried back.known for five years or longer.
The estimated compensation cost associated with the granting of stock-based awards is based on the grant date fair value of the stock award on the date of grant.award. We recognize the compensation cost, net of estimated forfeitures, over the shorter of the vesting term.period or the period from the grant date to the date when retirement eligibility is achieved. Forfeitures are initially estimated based on historical information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period to period.
period-to-period.
We primarily use the Black-Scholes option pricing model to determine the fair value of stock options and stock-based stock appreciation rights (SARs). The determination of the fair value of stock-based payment awards is made on the date of grant and is affected by our stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions includinginclude: our expected stock price volatility over the term of the awards,the awards; actual and projected employee stock option exercise behaviors,behaviors; the risk-free interest rate,rate; and expected dividend yield. Our assumptions are detailedmore fully described in Note 1113, Stock-Based Compensation, to our consolidated financial statements.
Changes in the valuation assumptions could result in a significant change to the cost of an individual award. However, the total cost of an award is also a function of the number of awards granted, and as result, we have the ability to manage the cost and value of our equity awards by adjusting the number of awards granted.
Restructuring, Facilities Realignment and Related Costs
From time to time,time-to-time, in order to consolidate operations, downsize and improve operating efficiencies, we recognize restructuring or facilities realignment charges. The recognition of these charges requires estimates and judgments regarding employee termination benefits, lease termination costs and other exit costs to be incurred when these actions take place. Actual results canWe reassess the cost to compete the restructurings and facility realignment and related costs on a quarterly basis. These estimates may vary significantly from actual costs depending, in part, upon factors that may be beyond our control; resulting in changes to these estimates which results in adjustments incurrent operations.
Revenue, net
We derive revenues primarily from:
| · | pharmaceutical detailing contracts based on the number of physician details made or the number of sales representatives utilized; and |
| · | marketing service contracts based on a series of deliverable services associated with the design and execution of interactive promotional programs or marketing research/advisory programs. |
Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. Revenue is recognized net of any potential penalties until the period ofperformance criteria relating to the change in estimate.
benchmarks have been achieved.
PDI, Inc.
Annual Report on Form 10-K (continued)
Cost of services
CONSOLIDATED RESULTS OF OPERATIONS |
Cost of services include personnel costs and other costs associated with executing a product detailing or other marketing or promotional program, as well as the initial direct costs associated with product detailing or other marketing or promotional programs such as facility rental fees, honoraria and travel expenses, sample expenses and other promotional expenses.
Compensation expense
Compensation expense includes corporate payroll and related payroll benefits, stock-based compensation, recruiting and hiring and staff training and development expenses.
Other selling, general and administrative expenses
Other selling, general and administrative expenses include professional fees, investor relations costs, rent and other office expenses, depreciation expense for furniture, equipment, software and leasehold improvements, amortization expense for intangible assets associated with the Pharmakon acquisition, and business development costs.
Asset impairment
These charges are associated with the impairment of goodwill or other long-lived assets at the Pharmakon reporting unit.
Facilities realignment
Facility realignment costs are associated with the consolidation of operations, downsizing and/or improvement of operating efficiencies and include lease termination costs and other exit costs when these actions take place.
Other income, net
Other income, net includes investment income earned on our cash and cash equivalents less associated fees and realized gains or losses on our available for sale and held to maturity investments.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth for the periods indicated below selected statement of continuing operations data as a percentage of revenue. The trends illustrated in this table may not be indicative of future operating results.
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| Continuing operations data | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| Revenues: | | | | | | | | | | | | | | | |
| Service, net | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.4 | % | | | 103.5 | % |
| Product, net | | | - | | | | - | | | | - | | | | (0.4 | %) | | | (3.5 | %) |
| Total revenues, net | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods and services: | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 73.0 | % | | | 76.7 | % | | | 82.8 | % | | | 73.1 | % | | | 73.9 | % |
| Cost of goods sold | | | - | | | | - | | | | - | | | | 0.1 | % | | | 0.4 | % |
| Total cost of goods and services | | | 73.0 | % | | | 76.7 | % | | | 82.8 | % | | | 73.2 | % | | | 74.3 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 27.0 | % | | | 23.3 | % | | | 17.2 | % | | | 26.8 | % | | | 25.7 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Compensation expense | | | 20.9 | % | | | 11.7 | % | | | 8.5 | % | | | 8.9 | % | | | 10.6 | % |
| Other selling, general and administrative | | | 17.1 | % | | | 9.5 | % | | | 9.6 | % | | | 7.2 | % | | | 8.6 | % |
| Asset impairment | | | 0.1 | % | | | - | | | | 2.0 | % | | | - | | | | - | |
| Executive severance | | | - | | | | 0.2 | % | | | 1.9 | % | | | 0.1 | % | | | - | |
| Legal and related costs, net | | | 0.3 | % | | | (1.4 | %) | | | 0.6 | % | | | 0.7 | % | | | 0.7 | % |
| Facilities realignment | | | 0.9 | % | | | 0.8 | % | | | 0.8 | % | | | - | | | | - | |
| Total operating expenses | | | 39.2 | % | | | 20.9 | % | | | 23.3 | % | | | 16.9 | % | | | 19.9 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating (loss) income | | | (12.2 | %) | | | 2.5 | % | | | (6.2 | %) | | | 9.9 | % | | | 5.8 | % |
| Gain (loss) on investments | | | - | | | | - | | | | 1.5 | % | | | (0.3 | %) | | | - | |
| Interest income, net | | | 5.2 | % | | | 2.0 | % | | | 1.0 | % | | | 0.5 | % | | | 0.3 | % |
| (Loss) income from continuing operations | | | | | | | | | | | | | | | | | |
| before income taxes | | | (7.0 | %) | | | 4.5 | % | | | (3.7 | %) | | | 10.1 | % | | | 6.1 | % |
| Income tax expense (benefit) | | | 1.5 | % | | | (0.3 | %) | | | 0.1 | % | | | 4.2 | % | | | 2.5 | % |
| (Loss) income from continuing operations | | | (8.5 | %) | | | 4.8 | % | | | (3.7 | %) | | | 5.9 | % | | | 3.6 | % |
Comparison of 2007 and 2006 |
| Revenue (in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Change | | | Change | |
| | | 2007 | | | 2006 | | | ($) | | | (%) | |
| Sales services | | $ | 86,766 | | | $ | 202,748 | | | $ | (115,982 | ) | | | (57.2 | %) |
| Marketing services | | | 30,365 | | | | 36,494 | | | | (6,129 | ) | | | (16.8 | %) |
| PPG | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 117,131 | | | $ | 239,242 | | | $ | (122,111 | ) | | | (51.0 | %) |
The decrease in total revenues of $122.1 or 51.0% was primarily related to the termination of several large contracts in 2006.
PDI, Inc.
Annual Report on Form 10-K (continued)
Effective April 30, 2006, AstraZeneca terminated its
| | | Years Ended December 31, | |
| Continuing operations data | | 2009 | | | 2008 | | | 2007 | |
| Revenue, net | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of services | | | 69.0 | % | | | 96.0 | % | | | 73.0 | % |
| Gross profit | | | 31.0 | % | | | 4.0 | % | | | 27.0 | % |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Compensation expense | | | 26.3 | % | | | 20.3 | % | | | 20.9 | % |
| Other selling, general and administrative | | | 20.6 | % | | | 14.9 | % | | | 17.3 | % |
| Asset impairment | | | 21.3 | % | | | 0.0 | % | | | 0.0 | % |
| Executive severance | | | 0.3 | % | | | 1.1 | % | | | 0.0 | % |
| Facilities realignment | | | 10.3 | % | | | 0.1 | % | | | 0.9 | % |
| Total operating expenses | | | 78.8 | % | | | 36.4 | % | | | 39.2 | % |
| | | | | | | | | | | | | |
| Operating loss | | | (47.8 | %) | | | (32.4 | %) | | | (12.2 | %) |
| Other income, net | | | 0.2 | % | | | 2.5 | % | | | 5.2 | % |
| | | | | | | | | | | | | |
| Loss before income tax | | | (47.6 | %) | | | (29.8 | %) | | | (7.0 | %) |
| Income tax (benefit) expense | | | (8.1 | %) | | | 0.8 | % | | | 1.5 | % |
| Net loss | | | (39.5 | %) | | | (30.6 | %) | | | (8.5 | %) |
Comparison of 2009 and 2008
| | | Sales | | | Marketing | | | PC | | | | | | | |
| (in thousands) | | Services | | | Services | | | Services | | | Eliminations | | | Consolidated | |
| Year ended December 31, 2009: | | | | | | | | | | | | | | | |
| Revenue | | $ | 73,232 | | | $ | 16,748 | | | $ | - | | | $ | (5,109 | ) | | $ | 84,871 | |
| Cost of Services | | $ | 57,541 | | | $ | 8,704 | | | $ | (2,497 | ) | | $ | (5,157 | ) | | $ | 58,591 | |
| Gross Profit | | $ | 15,691 | | | $ | 8,044 | | | $ | 2,497 | | | $ | 48 | | | $ | 26,280 | |
| Gross Profit % | | | 21.4 | % | | | 48.0 | % | | | - | | | | 0.9 | % | | | 31.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 89,656 | | | $ | 23,872 | | | $ | (1,000 | ) | | $ | - | | | $ | 112,528 | |
| Cost of Services | | $ | 71,266 | | | $ | 14,121 | | | $ | 22,628 | | | $ | - | | | $ | 108,015 | |
| Gross Profit | | $ | 18,390 | | | $ | 9,751 | | | $ | (23,628 | ) | | $ | - | | | $ | 4,513 | |
| Gross Profit % | | | 20.5 | % | | | 40.8 | % | | | - | | | | - | | | | 4.0 | % |
Revenue, net
Revenue for the year ended December 31, 2009 was $84.9 million, or 24.6% less than revenue of $112.5 million for the year ended December 31, 2008. Sales Services’ revenue for the year ended December 31, 2009 decreased by approximately $16.4 million, or 18.3%, as compared to the year ended December 31, 2008 primarily due to a reduction in sales force engagements. Sales Services’ revenue from new contracts and expansions of existing contracts was more than offset by lost revenue from the internalization of our contract sales force arrangement with us, which representedby one of our long-term customers and the expiration or termination of certain sales force arrangements in effect during 2008.
Marketing Services’ revenue for the year ended December 31, 2009 decreased by approximately $43.0$7.1 million, or 29.8%, as compared to the year ended December 31, 2008. This was primarily attributable to a decrease in revenue within our TVG business unit of $2.8 million due to fewer projects in 2009, and a decrease in our Pharmakon business unit of $2.0 million due to a reduction in the number of projects performed for its two largest customers due to delays in the implementation or reduced scope of a number of marketing initiatives in the first six months of 2009. The segment was also affected by a decrease in revenue of approximately $2.3 million in our Vital Issues in Medicine business unit which closed in 2009.
PDI, Inc.
Annual Report on Form 10-K (continued)
PC Services had no revenue in 2006. On September 26, 2006, we announced that GSK would not be renewing its contract with us when it expired onfor the year ended December 31, 2006. This contract represented $67.42009 and had negative revenue of $1.0 million for the year ended December 31, 2008 due to a non-refundable upfront payment made to Novartis as per the terms of our former promotion agreement.
Cost of services
Cost of services for the year ended December 31, 2009 was $58.6 million, or 45.8% less than the cost of services of $108.0 million for the year ended December 31, 2008. Sales Services’ cost of services decreased for the year ended December 31, 2009 versus the comparable prior year period primarily due to a reduction in revenuethe average sales representative headcount and related costs correlating to an overall reduction in 2006. On October 25, 2006, we announced that we had received notification from sanofi-aventisthe number and size of its intentionour sales force engagements. Marketing Services’ cost of services decreased $5.4 million for the year ended December 31, 2009 versus the comparable prior year period due to terminate its contract sales engagement with us effective December 1, 2006. This contract represented approximately $18.3 million in revenue in 2006. Additionally, on March 21, 2007, we announced that a large pharmaceutical company customer had notified us of its intention not to renew its contract sales engagement with us upon its scheduled expiration on May 12, 2007. This contract, which had a one-year term, provided for approximately $37 million in annual revenue and represented a $7.1 millionthe decline in revenue whenattributable to the overall continued softness in the market for these types of services. PC Services’ cost of services was a credit of $2.5 million for th e year ended December 31, 2009 due to the reversal of the excess amount of our 2008 contract loss accrual. PC Services had cost of services of $22.6 million for the year ended December 31, 2008, including $10.3 million that was recorded in the fourth quarter of 2008 related to the accrued contract loss. See Note 11, Product Commercialization Contract, to our consolidated financial statements for additional details.
Gross profit
The overall increase in gross profit percentage from 4.0% for the year ended December 31, 2008 to 31.0% for the year ended December 31, 2009 was primarily the result of the impact of our product commercialization contract with Novartis. The year ended December 31, 2009 benefited from the reversal of the excess contract loss accrual of approximately $2.5 million associated with the settlement of our promotional agreement within PC Services. The year ended December 31, 2008 had negative gross profit of approximately $23.6 million associated with the promotion agreement, including $10.3 million related to the contract loss accrual mentioned above. Sales Services’ gross profit percentages were 21.4% and 20.5% for the years ended December 31, 2009 and 2008, respectively. The 2009 increase i n gross profit was attributable to an increase in gross profit percentage within the Shared Sales Teams business unit due to: lower fuel and mileage reimbursement costs; lower insurance costs; and certain operating efficiencies within our Shared Sales Teams. Gross profit percentage for the Marketing Services increased to 48.0% for the year ended December 31, 2009 from 40.8% for the year ended December 31, 2008. This increase was driven by improved margins at Pharmakon and TVG, both of which had increases of approximately five percentage points, as well as closing our lower-margin Vital Issues in Medicine business unit during the quarter ended September 30, 2009. The Pharmakon margin improvement was driven primarily by a change in its product mix on a year-over-year basis.
Note: Compensation expense and Other selling, general and administrative (other SG&A) expense amounts for each segment include allocated corporate overhead.
| Compensation expense (in thousands) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Sales | | | % of | | | Marketing | | | % of | | | PC | | | % of | | | | | | % of | |
| December 31, | | Services | | | revenue | | | Services | | | revenue | | | Services | | | revenue | | | Total | | | revenue | |
| 2009 | | $ | 13,601 | | | | 18.6 | % | | $ | 8,335 | | | | 49.8 | % | | $ | 374 | | | | - | | | $ | 22,310 | | | | 26.3 | % |
| 2008 | | | 13,176 | | | | 14.7 | % | | | 8,361 | | | | 35.0 | % | | | 1,301 | | | | - | | | | 22,838 | | | | 20.3 | % |
| Change | | $ | 425 | | | | | | | $ | (26 | ) | | | | | | $ | (927 | ) | | | | | | $ | (528 | ) | | | | |
The decrease in compensation expense for the year ended December 31, 2009 was primarily the result of 2008 costs of approximately $0.5 million related to replacing our former chief executive officer not recurring in 2009. As a percentage of revenue, compensation expense for the year ended December 31, 2009 increased to 26.3% as compared to 2006. The loss in revenue from those terminated and expired contracts20.3% for the year ended December 31, 2008. This percentage increase was partially offset by new sales force arrangements we entered into during 2007, including a contract sales force engagement for our Select Access business unit in March 2007, which generated approximately $12.0 million in revenue in 2007 and a dedicated contract sales force engagement entered into during June 2007 which generated approximately $14.6 million in revenue in 2007.
The sales services segment revenue decreased by $116.0 million compared to 2006 primarily due to the contract terminations.decrease in revenue in 2009. The increase in Sales Services was primarily attributable to greater recruiting and hiring costs during the year ended December 31, 2009. Marketing Services’ compensation expense was comparable in both periods. Compensation expense for the year ended December 31, 2009 in Marketing Services included approximately $0.8 million in severance costs which were essentially offset by our savings from headcount reductions.
PC Services’ compensation expense decreased for the year ended December 31, 2009 as compared to the prior year period as a result of the April 2009 termination of our promotion agreement within PC Services.
PDI, Inc.
Annual Report on Form 10-K (continued)
| Other selling, general and administrative expenses (in thousands) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Sales | | | % of | | | Marketing | | | % of | | | PC | | | % of | | | | | | % of | |
| December 31, | | Services | | | revenue | | | Services | | | revenue | | | Services | | | revenue | | | Total | | | revenue | |
| 2009 | | $ | 13,181 | | | | 18.0 | % | | $ | 4,017 | | | | 24.0 | % | | $ | 276 | | | | - | | | $ | 17,474 | | | | 20.6 | % |
| 2008 | | | 11,745 | | | | 13.1 | % | | | 3,872 | | | | 16.2 | % | | | 1,150 | | | | - | | | | 16,767 | | | | 14.9 | % |
| Change | | $ | 1,436 | | | | | | | $ | 145 | | | | | | | $ | (874 | ) | | | | | | $ | 707 | | | | | |
Total other selling, general and administrative expenses increased by approximately $0.7 million, or 4.2%, for the year ended December 31, 2009. This increase was primarily due to higher consulting costs, partially offset by lower facility and depreciation costs. As a percentage of revenue, other selling, general and administrative expenses increased to 20.6% in 2009 from 14.9% in 2008. This percentage increase can be attributed to lower revenue in 2009. The increase in the Sales Services segment of $1.4 million was primarily due to the redistribution of corporate costs that were allocated to PC Services in 2008.
Executive severance
For the year ended December 31, 2009, we incurred approximately $0.2 million in executive severance costs associated with the departure of an executive in Marketing Services. During the year ended December 31, 2008, we incurred approximately $1.2 million in executive severance costs that related to the departure of our former chief executive officer and an executive departure in Marketing Services.
Asset impairment
For the year ended December 31, 2009, we incurred approximately $18.1 million in asset impairment charges within Marketing Services. These impairment charges were associated with the write-down of goodwill of $8.5 million and other intangible assets of $9.6 million in our Pharmakon business unit. The recent decline in revenue from significant customers in the business unit, the decrease in new business generated by this business unit and uncertain economic conditions within the United States and the pharmaceutical industry were the main factors contributing to the impairment.
Facilities realignment
For the year ended December 31, 2009, Sales Services incurred charges of approximately $4.7 million related to office space at our Saddle River facility and approximately $1.9 million related to the impairment of fixed assets associated with the office space. For the year ended December 31, 2009, Marketing Services incurred charges of approximately $1.4 million related to office space at our Dresher facility and approximately $0.7 million related to the impairment of fixed assets associated with the office space. In 2008, we had charges of approximately $75,000 related to the excess office space at our Dresher facility.
Operating loss
There was an operating loss of $40.6 million and $36.4 million during the years ended December 31, 2009 and 2008, respectively. The operating loss in 2009 was primarily attributable to the asset impairment charges of $18.1 million and the facilities realignment charges of $8.7 million discussed above. The operating loss in 2008 is primarily attributable to the $26.2 million in negative revenue and expenses associated with our promotional program within PC Services in 2008. Excluding the impact of the asset impairment and facilities realignment charges, both the 2009 and 2008 operating results were negatively impacted by declining revenues over relatively flat operating expenses.
Other income, net
Other income, net for the years ended December 31, 2009 and 2008 was approximately $0.2 million and $2.8 million, respectively, and consisted primarily of interest income. The decrease in interest income is primarily due to lower interest rates and lower average cash balances for the year ended December 31, 2009.
Provision for income taxes
We recorded a benefit for income tax of $6.8 million in 2009 and a provision for income taxes of $0.9 million for 2008. Our overall effective tax rate was a benefit of 16.9% and a provision of 2.6% for 2009 and 2008, respectively. The tax benefit for 2009 was primarily attributable to the ability to carry back federal net operating losses to additional tax years under the Worker, Homeownership, and Business Assistance Act, (the “Act”) passed in November 2009. Prior to the passing of the Act, we had established a full valuation allowance against our net operating losses. In connection with the impairment of goodwill at the Pharmakon business unit during 2009, the deferred tax liabil ity at December 31, 2008 reversed and resulted in a current year tax benefit of approximately $1.4 million.
PDI, Inc.
Annual Report on Form 10-K (continued)
Comparison of 2008 and 2007
| | | Sales | | | Marketing | | | PC | | | | |
| (in thousands) | | Services | | | Services | | | Services | | | Consolidated | |
| Year ended December 31, 2008: | | | | | | | | | | | | |
| Revenue, net | | $ | 89,656 | | | $ | 23,872 | | | $ | (1,000 | ) | | $ | 112,528 | |
| Cost of Services | | $ | 71,266 | | | $ | 14,121 | | | $ | 22,628 | | | $ | 108,015 | |
| Gross Profit | | $ | 18,390 | | | $ | 9,751 | | | $ | (23,628 | ) | | $ | 4,513 | |
| Gross Profit % | | | 20.5 | % | | | 40.8 | % | | | - | | | | 4.0 | % |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2007: | | | | | | | | | | | | | | | | |
| Revenue, net | | $ | 86,766 | | | $ | 30,365 | | | $ | - | | | $ | 117,131 | |
| Cost of Services | | $ | 68,554 | | | $ | 16,962 | | | $ | - | | | $ | 85,516 | |
| Gross Profit | | $ | 18,212 | | | $ | 13,403 | | | $ | - | | | $ | 31,615 | |
| Gross Profit % | | | 21.0 | % | | | 44.1 | % | | | - | | | | 27.0 | % |
Revenue, net
The decrease in total revenues of $4.6 million, or 3.9%, was primarily related to a decrease in revenue in Marketing Services. Sales Services revenue increased by $2.9 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to new and expanded sales force engagements for our Shared Sales Teams business unit during 2008, which contributed to a 32.6% increase in that business unit’s revenue.
Revenue for the marketing services segmentMarketing Services decreased by $6.1 million or 16.8% whichapproximately 21.4% as revenue at our TVG and our Pharmakon business units was attributablelower due in part to a $3.9 million decrease in TVG revenue,new projects as well as decreases at boththe curtailment or postponement of certain existing projects within these business units. Pharmakon and VIMrevenue decreased by 28.5% as its two major customers postponed many of their projects with Pharmakon due to fewer projects at all three business units.budget constraints.
The PPGPC Services recorded negative revenue of $1.0 million. This pertained to a non-refundable upfront payment we made to Novartis as per the terms of our promotion agreement. This segment did not have anyhad no revenue in either period.2007.
| Cost of services (in thousands) | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Change | | | Change | |
| | | 2007 | | | 2006 | | | ($) | | | (%) | |
| Sales services | | $ | 68,554 | | | $ | 163,735 | | | $ | (95,181 | ) | | | (58.1 | %) |
| Marketing services | | | 16,962 | | | | 19,663 | | | | (2,701 | ) | | | (13.7 | %) |
| PPG | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 85,516 | | | $ | 183,398 | | | $ | (97,882 | ) | | | (53.4 | %) |
The salesincrease of approximately $22.5 million in costs of services was primarily attributed to cost of services of $22.6 million associated with our promotional program within PC Services for the year ended December 31, 2008. Included within that amount is $10.3 million associated with an accrued contract loss, which represented the future loss expected to be incurred by us to fulfill our contractual obligations under the promotional program until February 1, 2010, the early termination date for this program. See Note 11, Product Commercialization Contract, to our consolidated financial statements for more details. This segment had a reductionno activity in the year ended December 31, 2007. Sales Services had an increase of $95.2 million$2.7 mi llion in cost of services, which is primarily attributable to the contract terminations mentioned above.increase in revenue at the Shared Sales Teams business unit. Cost of services within the marketing services segmentMarketing Services decreased approximately $2.7$2.8 million, or 13.7%16.7% primarily due to fewerthe decrease in new projects and the curtailment or postponement of certain existing projects at all threeour Pharmakon business units. The PPG segment had no costs of services expenseunit.
Gross profit
Gross profit in either 2007 or 2006.
| Gross profit (in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2007 | | | revenue | | | 2006 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 18,212 | | | | 21.0 | % | | $ | 39,013 | | | | 19.2 | % | | $ | (20,801 | ) | | | (53.3 | %) |
| Marketing services | | | 13,403 | | | | 44.1 | % | | | 16,831 | | | | 46.1 | % | | | (3,428 | ) | | | (20.4 | %) |
| PPG | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 31,615 | | | | 27.0 | % | | $ | 55,844 | | | | 23.3 | % | | $ | (24,229 | ) | | | (43.4 | %) |
The two primary reasonsSales Services increased slightly on higher revenue for the increaseyear ended December 31, 2008 as compared to year ended December 31, 2007. For the year ended December 31, 2007, we recognized $0.6 million in gross profit percentage were: 1) the higher margin businesses within marketing services were a greater portion of consolidated revenue than they were in the prior period (25.9% in 2007 vs. 15.3% in 2006); and 2) the gross profit percentage for Select Access increased from 15.2% in 2006 to 21.4% in 2007. This increase was primarily a result of fixed service costs (i.e. sales force management) being a smaller percentage of total revenue as Select Access revenue increased approximately 63.7% in 2007.
The increase in gross profit percentage for the sales services segment can be primarily attributed to Select Access. The decrease in total sales services’ gross profit can be attributed to the contract terminations discussed above. The segment benefited from recognizing $550,000 in revenue and gross profit in 2007 associated with a contract with a former emerging pharmaceutical clientcustomer for services performed infor the year ended December 31, 2006. Because of the uncertainty surrounding collections, we recognized revenue from this clientcustomer on a cash basis. Allbasis and all costs associated with this
contract were recognized in the year ended December 31, 2006.
PDI, Inc.
Annual Report on Form 10-K (continued)
contract were recognized in 2006. The segment also benefited from recognizing $558,000 in revenue and gross profit in 2007 associated with accrued penalties with a former sales force client. Because the likelihood of paying these penalties was deemed remote, the accrual was reversed in the fourth quarter of 2007 and recognized as revenue.
The decrease in gross profit attributable to the marketing services segmentMarketing Services was commensurate with the decrease in revenue discussed above as total gross profit decreased at all three business units.units within Marketing Services. The gross profit percentage decreased to 44.1%40.8% for the year ended December 31, 2008 from 46.1%44.1% in the comparable prior year period.period primarily due to a decrease in margin percentage at our TVG business unit attributed to a change in product mix.
The PPG segment had noPC Services’ negative gross profit in 2007 or 2006.was attributable to our sales force, promotional costs and contract loss accrual associated with our promotional program plus the $1.0 million non-refundable upfront payment we made to Novartis as per the terms of our promotion agreement.
(Note:(Note: Compensation and other Selling, GeneralOther selling, general and Administrativeadministrative (other SG&A) expense amounts for each segment containinclude allocated corporate overhead.)
| Compensation expense (in thousands) | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2007 | | | revenue | | | 2006 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 15,973 | | | | 18.4 | % | | $ | 19,410 | | | | 9.6 | % | | $ | (3,437 | ) | | | (17.7 | %) |
| Marketing services | | | 8,543 | | | | 28.1 | % | | | 8,665 | | | | 23.7 | % | | | (122 | ) | | | (1.4 | %) |
| PPG | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 24,516 | | | | 20.9 | % | | $ | 28,075 | | | | 11.7 | % | | $ | (3,559 | ) | | | (12.7 | %) |
| Compensation expense (in thousands) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Sales | | | % of | | | Marketing | | | % of | | | PC | | | % of | | | | | | % of | |
| December 31, | | Services | | | revenue | | | Services | | | revenue | | | Services | | | revenue | | | Total | | | revenue | |
| 2008 | | $ | 13,176 | | | | 14.7 | % | | $ | 8,361 | | | | 35.0 | % | | $ | 1,301 | | | | - | | | $ | 22,838 | | | | 20.3 | % |
| 2007 | | | 15,973 | | | | 18.4 | % | | | 8,543 | | | | 28.1 | % | | | - | | | | - | | | | 24,516 | | | | 20.9 | % |
| Change | | $ | (2,797 | ) | | | | | | $ | (182 | ) | | | | | | $ | 1,301 | | | | | | | $ | (1,678 | ) | | | | |
The decrease in compensation expense for the year ended December 31, 2008 was primarily a result of a reduction in incentive compensation accrued for the year ended December 31, 2008 due to our financial performance relative to the financial targets established for the year ended December 31, 2008 under our incentive compensation plan. The decrease for both Sales Services and Marketing Services for the year ended December 31, 2008 can be attributed to the reason discussed above.
PC Services had compensation costs of $1.3 million. This was primarily attributable to employee and sales services and marketing services segments in 2007support costs. There was the result of reduced headcount and unfilled executive positions when compared to 2006. As a percentage of total revenue,no compensation expense increasedattributable to 20.9%this segment for 2007 from 11.7% in 2006 primarily due to the decrease in revenue.year ended December 31, 2007.
The PPG segment did not have any compensation expense in 2007 or 2006.| Other selling, general and administrative expenses (in thousands) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Sales | | | % of | | | Marketing | | | % of | | | PC | | | % of | | | | | | % of | |
| December 31, | | Services | | | revenue | | | Services | | | revenue | | | Services | | | revenue | | | Total | | | revenue | |
| 2008 | | $ | 11,745 | | | | 13.1 | % | | $ | 3,872 | | | | 16.2 | % | | $ | 1,150 | | | | - | | | $ | 16,767 | | | | 14.9 | % |
| 2007 | | | 15,295 | | | | 17.6 | % | | | 5,021 | | | | 16.5 | % | | | - | | | | - | | | | 20,316 | | | | 17.3 | % |
| Change | | $ | (3,550 | ) | | | | | | $ | (1,149 | ) | | | | | | $ | 1,150 | | | | | | | $ | (3,549 | ) | | | | |
| Other SG&A (in thousands) | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2007 | | | revenue | | | 2006 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 15,033 | | | | 17.3 | % | | $ | 18,109 | | | | 8.9 | % | | $ | (3,076 | ) | | | (17.0 | %) |
| Marketing services | | | 4,948 | | | | 16.3 | % | | | 4,501 | | | | 12.3 | % | | | 447 | | | | 9.9 | % |
| PPG | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 19,981 | | | | 17.1 | % | | $ | 22,610 | | | | 9.5 | % | | $ | (2,629 | ) | | | (11.6 | %) |
Total other SG&Aselling, general and administrative expenses decreased primarily due to the following: 1) a decrease in audit and related costsdepreciation expense of $1.5 million;approximately $0.7 million primarily due to the conversion to a new financial reporting system that was at a much lower capitalized cost than our previous system; 2) a decrease in facility costsnet franchise taxes of approximately $390,000;$1.0 million primarily due to the settlement of one state’s assessment for less than the $0.6 million that had been accrued in 2007; 3) a reduction in executive consulting of approximately $1.0 million; and 4) a reduction in business insurance expense of approximately $400,000; and 4) approximately $600,000 less in marketing expense. These decreases were partially offset by an approximately $550,000 accrual in state franchise taxes pertaining to one particular state’s assessment.$0.4 million. As a percentage of total revenue, other SG&Aselling, general and administrative expenses increaseddecreased to 14.7% for the year ended December 31, 2008 from 17.1% from 9.5% in 2006 due tof or the decrease in revenue inyear ended December 31, 2007.
Executive severance
In 2007, we did not have any executive severance costs. In 2006,For the year ended December 31, 2008, we incurred approximately $573,000$1.2 million in executive severance costs that related to the departure of our chief executive officer and one other executive.
Legal and related costs
In the year ended December 31, 2007, we did not have any executive severance costs.
Facilities realignment
For the year ended December 31, 2008, we had legal expensescharges of approximately $335,000, which primarily pertained to legal expenses incurred by us in the ordinary course of business. In 2006, we had a net credit to legal expense of $3.3 million. The credit to legal expense included approximately $3.5 million in cash received in relation to the Cellegy litigation matter and approximately $516,000 in credits$75,000 related to the reversing ofexcess office space at our Dresher, Pennsylvania location. For the California class action lawsuit accrual. For details on both legal matters, see Note 9 to the consolidated financial statements.
PDI, Inc.
Annual Report on Form 10-K (continued)
Facilities realignment
Inyear ended December 31, 2007, we had net charges of approximately $1.0 million primarily related to the impairment of fixed assets and other expenses related to our exiting the computer data center space at our Saddle River, New Jersey location in December 2007. Total charges infor the year ended December 31, 2007 for the sales services segmentSales Services were approximately $1.0 million and approximately $26,000 was credited to the marketing services segment. In 2006, we had net chargesMarketing Services.
PDI, Inc.
Annual Report on Form 10-K (continued)
Operating loss
The increased operating loss for the sales services segment were approximately $1.3 million and approximately $675,000year ended December 31, 2008 was charged to the marketing services segment.
| Operating (loss) income (in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2007 | | | revenue | | | 2006 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | (13,918 | ) | | | (16.0 | %) | | $ | 33 | | | | 0.0 | % | | $ | (13,951 | ) | | | 42,275.8 | % |
| Marketing services | | | (362 | ) | | | (1.2 | %) | | | 2,798 | | | | 7.7 | % | | | (3,160 | ) | | | 112.9 | % |
| PPG | | | - | | | | - | | | | 3,082 | | | | - | | | | (3,082 | ) | | | 100.0 | % |
| Total | | $ | (14,280 | ) | | | (12.2 | %) | | $ | 5,913 | | | | 2.5 | % | | $ | (20,193 | ) | | | 341.5 | % |
The operating loss in 2007 is primarily attributable to the decline$26.2 million in negative revenue and gross profitexpenses associated with our promotional program within PC Services. This was partially offset by a reduction in the sales services segment due to the terminationour total operating expenses of sales force contracts mentioned previously. There was an operating loss in 2007approximately $5.0 million, or 10.8%.
Other income, net
Other income, net for the marketing services segment of $362,000 compared to operating income ofyears ended December 31, 2008 and 2007 was approximately $2.8 million in 2006.and $6.1 million, respectively, and consisted primarily of interest income. The decrease in operatinginterest income from marketing services segmentfor the year ended December 31, 2008 was primarily attributable to a decrease in revenue and gross profit at all three units due to fewer projects. There was operating income of $3.1 million in 2006 in the PPG segment which consisted entirely of settlement payments from Cellegy, net of legal expenses. There was no operating income from PPG in 2007.
Interest income, net
Interest income, net, for 2007 and 2006 was approximately $6.1 million and $4.7 million, respectively. The increase is primarily attributable to an increase inlower interest rates and lower average cash balances for 2007 as well as larger available cash balances.that year.
Provision for income taxes
We recorded a provision for income taxes of $0.9 million for the year ended December 31, 2008 and $1.8 million for 2007, compared to a benefit for income taxes of $724,000 for 2006.the year ended December 31, 2007. Our overall effective tax rate was a provision of 2.6% and 21.5% for 2008 and a benefit of 6.8% for 2007, and 2006, respectively. The tax provision for the year ended December 31, 2007 is primarily attributable to the full valuation allowance on the net deferred tax assets except for the basis difference in goodwill. Federal tax attribute carryforwards at December 31, 2007, consist2008, consisted primarily of approximately $9.7$29.2 million of net operating losses and $339,000 of capital losses. In addition, at December 31, 2008, we havehad approximately $47.9$63.5 million of state net operating losses carryforwards. The utilization of the federal carryforwards as an available offset to future taxableta xable income is subject to limitations under federal income tax laws. If the federal net operating losses are not utilized, they will begin to expire in 2027.2027 and if the current state net operating losses are not utilized they begin to expire in 2009. The capital losses can only be utilized against capital gains and $339,000 will expire in 2009.
(Loss) income from continuing operations
There was a loss from continuing operations for 2007 of approximately $10.0 million, compared to income from continuing operations of approximately $11.4 million for 2006.
Discontinued operations
Revenue from discontinued operations for 2006 was approximately $1.9 million. There was income from discontinued operations before income tax for 2006 of $693,000. Income from discontinued operations, net of tax, for 2006 was approximately $434,000.
Net (loss) income
There was a net loss of $10.0 million in 2007, compared to net income of $11.8 million in 2006, due to the factors discussed above.
PDI, Inc.
Annual Report on Form 10-K (continued)
Comparison of 2006 and 2005 |
| Revenue (in thousands) | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Change | | | Change | |
| | | 2006 | | | 2005 | | | ($) | | | (%) | |
| Sales services | | $ | 202,748 | | | $ | 270,420 | | | $ | (67,672 | ) | | | (25.0 | %) |
| Marketing services | | | 36,494 | | | | 34,785 | | | | 1,709 | | | | 4.9 | % |
| PPG | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 239,242 | | | $ | 305,205 | | | $ | (65,963 | ) | | | (21.6 | %) |
The decrease in revenue was primarily related to the termination of the AstraZeneca sales force effective April 30, 2006, which consisted of approximately 800 representatives. The AstraZeneca termination accounted for approximately $63.8 million of the decrease.
The decrease in revenue from the sales services segment was primarily related to the AstraZeneca sales force arrangement termination mentioned above.
On September 26, 2006, we announced that we had received verbal notification from GSK of its intention not to renew its contract sales engagement with us for 2007. The contract, which represented approximately $65 million to $70 million in revenue on an annual basis, expired as scheduled on December 31, 2006.
On October 25, 2006, we also announced that we had received notification from sanofi-aventis of its intention to terminate its contract sales engagement with us effective December 1, 2006. The contract, which represented approximately $18 million to $20 million in revenue on an annual basis, was previously scheduled to expire on December 31, 2006.
The marketing services segment generated increased revenues of $1.7 million or 4.9% in which was attributable to a $4.7 million increase in Pharmakon revenue, partially offset by declines in revenue at both the TVG and VIM units.
The PPG segment did not have any revenue in 2006.
| Cost of services (in thousands) | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Change | | | Change | |
| | | 2006 | | | 2005 | | | ($) | | | (%) | |
| Sales services | | $ | 163,735 | | | $ | 231,768 | | | $ | (68,033 | ) | | | (29.4 | %) |
| Marketing services | | | 19,663 | | | | 21,035 | | | | (1,372 | ) | | | (6.5 | %) |
| PPG | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 183,398 | | | $ | 252,803 | | | $ | (69,405 | ) | | | (27.5 | %) |
The sales services segment had a reduction of $68.0 million in cost of services, which was primarily attributable to the reduction in the size of the sales force due to the AstraZeneca termination mentioned above. Cost of services within the marketing services segment decreased approximately $1.4 million, or 6.5% primarily due to lower sales volume at TVG and VIM. The PPG segment had no costs of services expense in either 2006 or 2005.
| Gross profit (in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2006 | | | revenue | | | 2005 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 39,013 | | | | 19.2 | % | | $ | 38,652 | | | | 14.3 | % | | $ | (361 | ) | | | 0.9 | % |
| Marketing services | | | 16,831 | | | | 46.1 | % | | | 13,750 | | | | 39.5 | % | | | (3,081 | ) | | | 22.4 | % |
| PPG | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 55,844 | | | | 23.3 | % | | $ | 52,402 | | | | 17.2 | % | | $ | (3,442 | ) | | | 6.6 | % |
LIQUIDITY AND CAPITAL RESOURCES
PDI, Inc.
Annual Report on Form 10-K (continued)
The primary reasons for the increase in gross profit percentage for sales services segment were as follows:
· | an increase in incentive revenue earned - $3.2 million greater in 2006 than 2005; |
· | the higher margin businesses within marketing services were a greater portion of consolidated revenue than they were in the prior period (15.3% in 2006 vs. 11.4% in 2005); and |
· | the gross profit percentage from our two largest customers was higher in 2006 than in 2005. The primary reasons for this improvement were: 1) greater incentive revenue earned; 2) fewer net contractual penalties incurred for failing to meet stated performance benchmarks; and 3) more stable service costs. In 2005, the sharp increase in fuel and travel costs was greater than the rates specified in our contracts, which lowered our gross profit percentages; whereas in 2006 there was not a large disparity in fuel and travel costs when compared to our contractual reimbursements. |
The increase in gross profit attributable to the marketing services segment was due to the increase in gross profit associated with Pharmakon which had greater revenue in 2006. The gross profit percentage increased to 46.1% from 39.5% in the comparable prior year period due primarily to the increase in gross profit at Pharmakon as well as an increase in gross profit percentage at VIM.
The PPG segment had no gross profit in 2006 or 2005.
(Note: Compensation and other Selling, General and Administrative (other SG&A) expense amounts for each segment contain allocated corporate overhead.)
| Compensation expense (in thousands) | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2006 | | | revenue | | | 2005 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 19,410 | | | | 9.6 | % | | $ | 18,397 | | | | 6.8 | % | | $ | 1,013 | | | | 5.5 | % |
| Marketing services | | | 8,665 | | | | 23.7 | % | | | 7,499 | | | | 21.6 | % | | | 1,166 | | | | 15.5 | % |
| PPG | | | - | | | | - | | | | 1 | | | | - | | | | (1 | ) | | | (100.0 | %) |
| Total | | $ | 28,075 | | | | 11.7 | % | | $ | 25,897 | | | | 8.5 | % | | $ | 2,178 | | | | 8.4 | % |
The increase in compensation expense was primarily attributed to an increase in incentive compensation accruals in 2006 as compared to 2005 due to our improved performance of the company as compared to the incentive compensation accrued in 2005. Increases in incentive accruals were partially offset by decreases in salaries of approximately $2.9 million and the absence of a national managers meeting, which cost approximately $800,000 in 2005. As a percentage of total revenue, compensation expense increased to 11.7% for 2006 from 8.5% in 2005 primarily due to the decrease in revenue.
The increase in compensation expense for the marketing services segment was primarily due to the increased amount of incentives accrued within the segment in 2006.
The PPG segment did not have any compensation expense in 2006 or 2005.
| Other SG&A (in thousands) | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2006 | | | revenue | | | 2005 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 18,109 | | | | 8.9 | % | | $ | 23,607 | | | | 8.7 | % | | $ | (5,498 | ) | | | (23.3 | %) |
| Marketing services | | | 4,501 | | | | 12.3 | % | | | 5,775 | | | | 16.6 | % | | | (1,274 | ) | | | (22.1 | %) |
| PPG | | | - | | | | - | | | | 10 | | | | - | | | | (10 | ) | | | (100.0 | %) |
| Total | | $ | 22,610 | | | | 9.5 | % | | $ | 29,392 | | | | 9.6 | % | | $ | (6,782 | ) | | | (23.1 | %) |
Total other SG&A decreased due to: 1) a decrease in facility costs of approximately $1.2 million; 2) a reduction in bad debt expense of $1.8 million, $755,000 of which was recorded in 2005 that pertained to the TMX loan (see Note 5 to the consolidated financial statements for further information); and 3) a reduction in miscellaneous office operations expense of $1.9 million. Some of the main categories within office operations expense are business insurance, software licenses and maintenance, and telephone and Internet charges. As a percentage of total revenue, other SG&A expenses decreased to 9.5% from 9.6% in 2005.
PDI, Inc.
Annual Report on Form 10-K (continued)
Other SG&A expenses in the PPG segment were zero in 2006 and approximately $10,000 in 2005.
Asset impairment
We recognized asset impairment charges of $6.2 million for 2005. The charges related to Select Access goodwill impairment - $3.3 million in the fourth quarter of 2005; and $2.8 million associated with the write-down of our Siebel sales force automation software in the second quarter of 2005. See Notes 1 and 4 to the consolidated financial statements for more details on these asset impairments.
Executive severance
In 2006, we incurred approximately $573,000 in executive severance costs that related to the departure of one executive. In 2005 we incurred approximately $5.7 million in executive severance costs. These expenses were primarily attributable to resignations of our CEO - $2.8 million, and our CFO - $1.6 million. The remaining costs pertained to other executives who resigned during the year or for which settlements were reached during that period.
Legal and related costs
In 2006, we had a net credit to legal expense of $3.3 million as compared to $1.7 million in expense in 2005. The credit to legal expense included approximately $3.5 million in cash received in relation to the Cellegy litigation matter and approximately $516,000 in credits related to the reversing of the California class action lawsuit accrual. For details on both legal matters, see Note 9 to the consolidated financial statements. In 2005, legal expense primarily consisted of legal fees associated with the Cellegy litigation matter, net of any settlement payments received and $566,000 that was accrued for the California class action lawsuit.
Facilities realignment
In 2006, we had net charges of approximately $657,000 related to unused office space capacity at our Saddle River, New Jersey and Dresher, Pennsylvania locations and approximately $1.3 million in expense related to the impairment of fixed assets associated with the unused office space at these facilities. Total charges in 2006 for the sales services segment were approximately $1.3 million and approximately $675,000 was charged to the marketing services segment. In 2005, we took charges of approximately $2.4 million related to unused office space capacity at our Saddle River and Dresher locations. There was a charge of approximately $1.1 million recorded in the sales services segment and a charge of approximately $1.3 million recorded in the marketing services segment.
| Operating income (loss) (in thousands) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | % of | | | | | | % of | | | Change | | | Change | |
| | | 2006 | | | revenue | | | 2005 | | | revenue | | | ($) | | | (%) | |
| Sales services | | $ | 33 | | | | 0.0 | % | | $ | (17,386 | ) | | | (6.4 | %) | | $ | 17,419 | | | | 100.2 | % |
| Marketing services | | | 2,798 | | | | 7.7 | % | | | (1,186 | ) | | | (3.4 | %) | | | 3,984 | | | | 335.9 | % |
| PPG | | | 3,082 | | | | 0.0 | % | | | (268 | ) | | | 0.0 | % | | | 3,350 | | | | 1,250.0 | % |
| Total | | $ | 5,913 | | | | 2.5 | % | | $ | (18,840 | ) | | | (6.2 | %) | | $ | 24,753 | | | | 131.4 | % |
The large increase in operating income was attributable to several factors, including the following: 1) a reduction in corporate overhead; 2) an improved contribution from the marketing services segment; 3) net $3.1 million in operating income that pertained primarily to the settling of the Cellegy litigation matter; 4) asset impairments totaling $6.2 million that impacted 2005; and 5) improved performance of Select Access, which showed a $4.4 million increase in gross profit that led to higher operating income. The asset impairments in 2005 and the improved performance of Select Access were two of the main factors for this increase. The loss in marketing services segment in 2005 was primarily attributable to the facilities realignment expenses associated with this segment. There was operating income of $3.1 million in 2006 in the PPG segment, which consisted entirely of settlement payments from Cellegy, net of legal expenses. There was an operating loss for the PPG segment in 2005 of $268,000 that was attributable to Cellegy litigation expenses, net of settlements received.
Gain/loss on investment
We recognized a gain on sale of our In2Focus investment of approximately $4.4 million in the second quarter of 2005.
PDI, Inc.
Annual Report on Form 10-K (continued)
Interest income, net
Interest income, net, for 2006 and 2005 was approximately $4.7 million and $3.2 million, respectively. The increase was primarily attributable to an increase in interest rates for 2006 as well as larger available cash balances.
Provision for income taxes
We recorded a benefit for income taxes of $724,000 for 2006, compared to a provision for income taxes of $201,000 for 2005. Our overall effective tax rate was a benefit of 6.8% and a provision of 1.8% for 2006 and 2005, respectively. The 2006 rate included: 1) a reduction in valuation allowance of $2.9 million related to deferred tax assets realized in 2006 which corresponded to a rate benefit of 26.9%; 2) tax-exempt income of $1.8 million that corresponded to a rate benefit of 6.0%; and 3) state tax benefits of $1.2 million that corresponded to a rate benefit of 11.3%. Without those items, we would have had a 37.4% effective tax rate in 2006.
Income (loss) from continuing operations
There was income from continuing operations for 2006 of approximately $11.4 million, compared to a loss from continuing operations of approximately $11.4 million for 2005.
Discontinued operations
Revenue from discontinued operations for 2006 and 2005 was approximately $1.9 million and $14.2 million, respectively. There was income from discontinued operations before income tax for 2006 of $693,000 and a loss from discontinued operations before income tax for 2005 of $8.0 million. Income from discontinued operations, net of tax, for 2006 was approximately $434,000. There was a loss from discontinued operations for 2005 of approximately $8.0 million, primarily attributable to the write-off of MD&D goodwill.
Net income (loss)
There was net income of $11.8 million in 2006, compared to a net loss for 2005 of $19.5 million, due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES |
As of December 31, 2007,2009, we had cash and cash equivalents and short-term investments of approximately $107.0$72.6 million and working capital of $111.6$71.6 million, compared to cash and cash equivalents and short-term investments of approximately $114.7$90.2 million and working capital of approximately $112.2$81.6 million at December 31, 2006.2008. As of December 31, 2009 and 2008, we had no outstanding commercial debt.
During 2007,the years ended December 31, 2009 and 2008, net cash used in operating activities was $6.2$16.0 million as compared to netand $16.0 million, respectively. The main components of cash provided byused in operating activities during the year ended December 31, 2009 was a net loss of $19.7$33.6 million, during 2006. The primarily usea reduction in the accrued contract loss of cash was to fund operations due to the decline in operating revenue in all segments in 2007. Additionally, unearned revenue declined by $5.8$10.0 million due to the decline in revenue and a significant customer revising its procurement policy (we can no longer pre-bill for services),$3.3 million increase in income tax receivable. This was partially offset by the collection ofa reduction in accounts receivable of $2.7$3.9 million and receiptnon-cash items of a Federal income tax refund of $1.9$23.6 million. The net changes in the “other changes in assetsnon-cash items consist primarily of asset impairment charges of $18.1 million, depreciation and liabilities” sectionamortization of the consolidated statement$2.8 million, non-cash facility realignment charges of cash flows may fluctuate depending on a number$2.6 million and stock-based compensation of factors, including the number and size of programs, contract terms and other timing issues. These variations may change in size and direction with each reporting period.$1.4 million.
As of December 31, 2007,2009, we had $3.5 million of unbilled costs and accrued profits on contracts in progress. When services are performed in advance of billing, the value of such services is recorded as unbilled costs and accrued profits on contracts in progress. Normally all unbilled costs and accrued profits on contracts in progress are earned and billed within 12a few months from the end of the respective period.period they are originally recognized. As of December 31, 2007,2009, we had $8.5approximately $6.8 million of unearned contract revenue. When we billUnearned contract revenue represents amounts billed to customers for services before the revenue hasthat have not been earned, billedperformed. These amounts are recorded as unearned contract revenue and are recorded as incomein the periods when earned.
For the year ended December 31, 2007,2009, net cash used in investing activities was approximately $1.6 million as compared to net cash provided by investing activities was $60.6 million. The main components consisted of $6.9 million during the following:
· | Approximately $61.5 million provided by the sale of short-term investments for the year ended December 31, 2007 as compared to $63.9 million used in the purchase of short term investments for the year ended December 31, 2006. This reflected a movement towards investments that have greater liquidity and shorter-term maturities when compared to the prior year period. |
PDI, Inc.
Annual Report on Form 10-K (continued)
· | Capital expenditures for the year ended December 31, 2007 of $1.0 million and for the year ended December 31, 2006 of $1.8 million, which consisted primarily of capital expenditures associated with information technology and other computer–related expenditures in both years. |
year ended December 31, 2008. For the year ended December 31, 2007,2009, this consisted of capital expenditures of $1.7 million which were primarily associated with our new corporate office and with a new sales force automation platform.
During 2009 and 2008, net cash used in financing activities was approximately $460,000. Approximately $219,000 $63,000 and $62,000, respectively. This represents shares that were delivered back to us and included in treasury stock for the payment of taxes resulting from the vesting of restricted stock. Approximately $241,000 represents the excess tax expense on stock compensation. For the year ended December 31, 2006, net cash provided by financing activities consisted of $110,000 related to the exercise of stock options, net of related tax effects.
We had standby letters of credit of approximately $7.3$5.7 million and $9.7$5.9 million at December 31, 20072009 and 2006,2008, respectively, as collateral for our existing insurance policies and our facility leases. Our standby letters of credit are evergreen in that they automatically renew every year unless cancelled in writing by us with consent of the beneficiary, generally not less than 60 days before the expiry date.
PDI, Inc.
Annual Report on Form 10-K (continued)
We recorded facility realignment charges totaling approximately $6.1 million, $75,000 and $1.0 million during the years ended December 31, 2009, 2008 and 2007, respectively, that were for costs related to excess leased office space at our Saddle River, New Jersey and Dresher, Pennsylvania facilities. We currently have secured subleases through the remainder of the lease term for approximately 37,000 square feet out of approximately 84,000 square feet at our Saddle River location and approximately 26 percent of the vacant space at our Dresher location has been subleased through 2012. We are currently seeking to sublease the remaining excess space at both our Dresher and Saddle River locations. A rollforward of the activity for the facili ty realignment accrual is as follows: (in thousands)
| Balance as of December 31, 2007 | | $ | 675 | |
| Accretion | | | 13 | |
| Payments | | | (204 | ) |
| Adjustments | | | 75 | |
| Balance as of December 31, 2008 | | $ | 559 | |
| Accretion | | | 37 | |
| Payments | | | (442 | ) |
| Additions | | | 6,099 | |
| Balance as of December 31, 2009 | | $ | 6,253 | |
Charges for facility lease obligations relate to real estate lease contracts where we have exited certain space and are required to make payments over the remaining lease term (January 2016 for the Saddle River, New Jersey facility and November 2016 for the Dresher, Pennsylvania facility). All lease termination amounts are shown net of projected sublease income.
Our revenue and profitability depend to a great extent on our relationships with a limited number of large pharmaceutical companies. ForOur two largest customers in 2009 accounted for approximately 42.0% and 16.5%, respectively, or approximately 58.5% in the aggregate, of our revenue for the year ended December 31, 2007,2009. We believe that we had three major customers that accounted for approximately 13.7%, 12.9% and 11.3%, respectively, or a total of 37.9% of our service revenue. We are likely towill continue to experience a high degree of customer concentration, particularly if there is further consolidation within the pharmaceutical industry.concentration. The loss or a significant reduction of business from any of our major customers, or a decrease in demand for our services, could have a material adverse effect on our business, financial condition orand results of operations. For example, on March 21, 2007,In addition, Shared Sales Teams’ services to a significant customer are seasonal in nature, occurring primarily in the winter season.
The majority of our operating expenses are personnel-related costs such as employee compensation and benefits as well as the cost of infrastructure to support our operations, including facility space and equipment. In 2009 we announced thatinstituted a large pharmaceutical company customer – our largestnumber of cost-saving initiatives, including a reduction in 2007, had notified us of its intention notemployee headcount and office relocation. In addition, we are currently seeking to renew its contract sales engagement with us upon its scheduled expiration on May 12, 2007.
In 2007, we had net charges of approximately $1.0 million primarily related to the impairment of fixed assets and other expenses related to exiting our computer data center space at our Saddle River, New Jersey location. In 2006, we had net charges of approximately $657,000 related tosublet additional unused office space capacity atin our Saddle River, New Jersey and Dresher, Pennsylvania locations and $1.3 million in asset impairment charges for leasehold improvements and furniture and fixtures associated with thefacilities, although there is no guarantee that we will be able to successfully sublet this unused office space, at those facilities.particularly in light of the current economic and financial crisis. If we are unable to achieve revenue growth in the future or fail to adjust our cost infrastructure to the appropriate level to support our revenues, our business, financial condition and results of operations could be materially and adversely affected.
Our primary sources of liquidity are cash generated from our operations and available cash and cash equivalents. These sources of liquidity are needed to fund our working capital requirements, contractual obligations and estimated capital expenditures of approximately $1.0 million in 2010. We expect our working capital requirements to increase as a result of new customer contracts generally providing for longer than historical payment terms.
We continue to right-size our facilities and corporate structure on a go-forward basis. In 2007,2009, we entered into subleases for the remainingincurred approximately $8.7 million in facilities realignment charges pertaining to office space at our Saddle River as well as twoand Dresher facilities. During the third quarter of the three vacant spaces at Dresher. There is2009, management committed to a cost savings initiative to exit our three-floor Saddle River, New Jersey facility and relocate our corporate headquarters to a smaller, strategically located office space in Parsippany, New Jersey. In November 2009, we signed a seven and one-half year lease for approximately 4,10023,000 square feet of office space in Parsippany, New Jersey commencing on or about January 1, 2010. The minimum lease payments associated with this lease total $4.4 million. We are currently seeking to sublease ou r third floor office space, approximately 47,000 square feet, in Saddle River, New Jersey. Additionally, we are currently seeking to sublease approximately 22,000 square feet of unused office space at our Dresher, which we are seeking to sublease in 2008. We do not anticipate any significant capital expenditures or charges related to the remaining unused office space in 2008. A rollforward of the activity for the facility realignment plan is as follows:
| Balance as of December 31, 2005 | | $ | 2,335 | |
| Accretion | | | 51 | |
| Payments | | | (680 | ) |
| Adjustments | | | 606 | |
| Balance as of December 31, 2006 | | $ | 2,312 | |
| | | | | |
| Accretion | | | 21 | |
| Payments | | | (1,378 | ) |
| Adjustments | | | (280 | ) |
| Balance as of December 31, 2007 | | $ | 675 | |
Cash flows from discontinued operations are included in the consolidated statement of cash flows for the years ended December 31, 2006 and 2005. The absence of cash flows from the discontinued operations has had no material impact on cash flows. We are not expecting any material cash outlays with regards to this discontinued operation in the future.
As discussed above under “Business – Strategy”, in connection with the implementation of our long-term strategic plan, we intend to explore product commercialization opportunities in which we would enter into arrangements with biopharmaceutical companies to provide sales and marketing support services and potentially limited capital in connection with the promotion of pharmaceutical products in exchange for a percentage of product sales. Due to the structure of these types of arrangements, it is likely that we will incur substantial losses in the first year of the contract as program ramp up occurs. While we expect to achieve increased profit margins over the duration of the contract, therePennsylvania facility. There can be no assurance, however, that any revenue under these types of arrangementswe will be sufficientable to offsetsuccessfully sublet all of our unused office space, on favorable terms or at all, particularly in light of the significantcurrent economic conditions. The recognition of these charges requires certain sublease assumptions and estimates and judgments regarding lease termination costs associated with implementing and maintainingother exit costs when these programs.
actions take place. Actual results may vary from these estimates.
PDI, Inc.
Annual Report on Form 10-K (continued)
Acquisitions are a part of our corporate strategy. Although we expect to incur a net loss for the year ending December 31, 20082010, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at leastbeyond the next 12 months. However, we may require alternative forms of financing if and when we make acquisitions.to achieve our longer-term strategic plans.
We have committed cash outflow related to operating lease agreements and other contractual obligations. Minimum payments for these long-termThe following table summarizes our contractual obligations are:and commercial commitments as of December 31, 2009 (in thousands):
| | | | | | Less than | | | 1 to 3 | | | 3 to 5 | | | After | | | | | | Less than | | | 1 to 3 | | | 3 to 5 | | | After | |
| | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | |
Contractual obligations (1) | | $ | 3,977 | | | $ | 2,545 | | | $ | 1,432 | | | $ | - | | | $ | - | | | $ | 617 | | | $ | 617 | | | $ | - | | | $ | - | | | $ | - | |
| Operating lease obligations | | | | | | | | | | | | | | | | | | | | | |
| Operating lease | | | | | | | | | | | | | | | | | | | | | |
| Minimum lease payments | | 27,573 | | | 3,226 | | | 6,529 | | | 6,526 | | | 11,292 | | | | 25,093 | | | | 3,418 | | | | 7,677 | | | | 7,981 | | | | 6,017 | |
Less minimum sublease rentals (2) | | | (6,171 | ) | | | (1,058 | ) | | | (1,992 | ) | | | (1,357 | ) | | | (1,764 | ) | |
Less: minimum sublease rentals (2) | | | | (6,039 | ) | | | (1,025 | ) | | | (2,065 | ) | | | (1,913 | ) | | | (1,036 | ) |
| Net minimum lease payments | | | 21,402 | | | | 2,168 | | | | 4,537 | | | | 5,169 | | | | 9,528 | | | | 19,054 | | | | 2,393 | | | | 5,612 | | | | 6,068 | | | | 4,981 | |
| Total | | $ | 25,379 | | | $ | 4,713 | | | $ | 5,969 | | | $ | 5,169 | | | $ | 9,528 | | | $ | 19,671 | | | $ | 3,010 | | | $ | 5,612 | | | $ | 6,068 | | | $ | 4,981 | |
| | (1) | Amounts represent contractual obligations related to software license contracts, data center hosting, and outsourcing contracts for software system support. |
| | (2) | In June 2005,November 2009, we signed an agreement to extend our existing sublease of approximately 16,000 square feet of the first floor at our corporate headquarters facility in Saddle River, New Jersey. The sublease is for a five-year term commencing July 15, 2005,Jersey through the remainder of our lease, and provides for approximately $2$2.2 million in lease payments over the five-yearthat period. In July 2007, we signed an agreement to sublease approximately 20,000 square feet of the second floor at our corporate headquarters. The sublease term is through the remainder of our lease, which is approximately eight and one-half years and will provide for approximately $4.4$4.5 million in lease payments over that period. Also in 2007, we signed two separate subleases at our facility in Dresher, Pennsylvania. These subleases are for five-year terms and will provide approximately $650,000$0.7 million combined in lease payments over the five-year period. |
As a result of the net operating loss carryback claims which have been filed or are expected to be filed by us, and the impact of those claims on the relevant statuestatute of limitations, it is not practicable to predict the amount or timing of the impact of FIN 48uncertain tax liabilities in the table above and, therefore, these liabilities have been excluded from the table above.
Off-Balance Sheet Arrangements
Off-Balance Sheet Arrangements |
As of December 31, 2007,2009, we had no off-balance sheet arrangements.
PDI, Inc.
Annual Report on Form 10-K (continued)
| Selected Quarterly Financial Information (unaudited) |
The following tabletables set forth selected quarterly financial information for the years ended December 31, 20072009 and 20062008 (in thousands except per share data):
| | | For the Quarters ended | | | For the Quarters ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| 2007 Quarters: | | | | | | | | | | | | | |
| 2009 Quarters: | | | | | | | | | | | | | |
| Revenues, net | | $ | 32,802 | | | $ | 27,784 | | | $ | 23,969 | | | $ | 32,576 | | | $ | 23,531 | | | $ | 16,291 | | | $ | 21,041 | | | $ | 24,008 | |
| Gross profit | | 8,975 | | | 7,151 | | | 5,766 | | | 9,723 | | | | 4,972 | | | | 6,882 | | | | 6,859 | | | | 7,568 | |
Operating (loss) (1) | | (2,243 | ) | | (3,887 | ) | | (5,250 | ) | | (2,900 | ) | |
Operating loss (1) | | | | (5,579 | ) | | | (4,682 | ) | | | (4,566 | ) | | | (25,749 | ) |
| Net loss | | (1,901 | ) | | (2,497 | ) | | (4,057 | ) | | (1,519 | ) | | | (5,715 | ) | | | (4,835 | ) | | | (4,562 | ) | | | (18,447 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.14 | ) | | $ | (0.18 | ) | | $ | (0.29 | ) | | $ | (0.11 | ) | | $ | (0.40 | ) | | $ | (0.34 | ) | | $ | (0.32 | ) | | $ | (1.30 | ) |
| Diluted | | $ | (0.14 | ) | | $ | (0.18 | ) | | $ | (0.29 | ) | | $ | (0.11 | ) | | $ | (0.40 | ) | | $ | (0.34 | ) | | $ | (0.32 | ) | | $ | (1.30 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares: | Weighted average number of shares: | | | | | | | | | | | | | | Weighted average number of shares: | | | | | | | | | | | | | |
| Basic | | 13,908 | | | 13,931 | | | 13,956 | | | 13,965 | | | | 14,223 | | | | 14,210 | | | | 14,216 | | | | 14,227 | |
| Diluted | | 13,908 | | | 13,931 | | | 13,956 | | | 13,965 | | | | 14,223 | | | | 14,210 | | | | 14,216 | | | | 14,227 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarters ended | | | For the Quarters ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| 2006 Quarters: | | | | | | | | | | | | | | | | | |
| Total revenues, net | | $ | 77,144 | | | $ | 54,951 | | | $ | 51,317 | | | $ | 55,830 | | |
| 2008 Quarters: | | | | | | | | | | | | | | | | | |
| Revenues, net | | | $ | 32,229 | | | $ | 30,399 | | | $ | 24,496 | | | $ | 25,404 | |
| Gross profit | | 18,704 | | | 11,958 | | | 12,403 | | | 12,779 | | | | 8,699 | | | | 3,590 | | | | 412 | | | | (8,189 | ) |
Operating income (loss) (2) | | 7,504 | | | 37 | | | (611 | ) | | (1,017 | ) | |
| Income from | | | | | | | | | | | | | | | | | |
| continuing operations | | 5,422 | | | 707 | | | 409 | | | 4,837 | | |
| Income (loss) from discontinued | | | | | | | | | | | | | | |
| operations, net of tax | | 199 | | | 188 | | | 54 | | | (7 | ) | |
| Net income | | 5,621 | | | 895 | | | 463 | | | 4,830 | | |
Operating loss (2) | | | | (1,708 | ) | | | (7,900 | ) | | | (9,589 | ) | | | (17,231 | ) |
| Net loss | | | | (1,060 | ) | | | (7,477 | ) | | | (9,004 | ) | | | (16,920 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | | | | | | |
| Loss per share: | | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | | | $ | (0.07 | ) | | $ | (0.52 | ) | | $ | (0.63 | ) | | $ | (1.19 | ) |
| Continuing operations | | $ | 0.39 | | | $ | 0.05 | | | $ | 0.03 | | | $ | 0.35 | | |
| Discontinued operations | | | 0.01 | | | | 0.01 | | | | 0.00 | | | | (0.00 | ) | |
| | | $ | 0.41 | | | $ | 0.06 | | | $ | 0.03 | | | $ | 0.35 | | |
| Diluted | | | | | | | | | | | | | | | | | | $ | (0.07 | ) | | $ | (0.52 | ) | | $ | (0.63 | ) | | $ | (1.19 | ) |
| Continuing operations | | $ | 0.39 | | | $ | 0.05 | | | $ | 0.03 | | | $ | 0.35 | | |
| Discontinued operations | | | 0.01 | | | | 0.01 | | | | 0.00 | | | | (0.00 | ) | |
| | | $ | 0.40 | | | $ | 0.06 | | | $ | 0.03 | | | $ | 0.35 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares: | Weighted average number of shares: | | | | | | | | | | | | | | Weighted average number of shares: | | | | | | | | | | | | | |
| Basic | | 13,824 | | | 13,857 | | | 13,871 | | | 13,883 | | | | 14,223 | | | | 14,292 | | | | 14,243 | | | | 14,202 | |
| Diluted | | 13,914 | | | 13,953 | | | 13,987 | | | 13,995 | | | | 14,223 | | | | 14,292 | | | | 14,243 | | | | 14,202 | |
Note: Quarterly information in 2006 reflects our results of operations shown excluding the MD&D unit, which was reported as a discontinued operation beginning in the second quarter of 2006. QuarterlyQuarterly- and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year.
| (1) | The quarter ended June 30, 2009 includes facilities realignment charges of $1.8 million. The quarter ended September 30, 20072009 includes executive severance costs of $0.2 million and facilities realignment charges of $1.2 million. The quarter ended December 31, 2009 includes facilities realignment costs of $5.7 million and goodwill and intangible asset impairment charges of $18.1 million. |
| (2) | The quarters ended June 30, 2008 and September 30, 2008 include executive severance costs of $0.7 million and $0.4 million, respectively. The quarter ended December 31, 2008 includes facilities realignment costs of $0.1 million. The quarter ended December 31, 2007 includes facilities realignment costsmillion and an accrued contract loss of $0.9$10.3 million. |
| (2)(3) | The quarter ended June 30, 2006 includes facilities realignment costsfirst and fourth quarters of $0.3 million. The quarter ended December 31, 2006 includeseach year were positively impacted by a $2.5 million credit to expense as a result of the Cellegy litigation settlement;seasonally promoted product. |
PDI, Inc.
Annual Report on Form 10-K (continued)
| $1.6 million in facilities realignment costs; and $0.6 million in executive severance costs. |
Our results of operations have varied, and are expected to continue to vary, from quarter to quarter. These fluctuations result from a number of factors including, among other things, seasonality of the products we promote and the timing of commencement, completion or cancellation of major contracts. In the future, our revenue may also fluctuate as a result of a number of additional factors, including the types of products we market and sell, delays or costs associated with acquisitions, government regulatory initiatives and conditions in the healthcare industry generally. Revenue, generally, is recognized as services are performed. Program costs, other than training costs, are expensed as incurred. As a result, we may incur substantial expenses associated with staffing a new detailing program during the first two to three months of a contract without recognizing any revenue under that contract. This could have an adverse impact on our operating results for the quarters in which those expenses are incurred. Revenue related to performance incentives is recognized in the period when the performance based parameters are achieved and payment is assured. A significant portion of this revenue could be recognized in the first and fourth quarters of a year. Costs
PDI, Inc.
Annual Report on Form 10-K (continued)
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS |
Recent Adopted Standards
The following represent recently issued accounting pronouncements that will affect reporting and disclosures in future periods. See Note 1 to
In June 2009, the consolidated financial statements for a further discussion of each item.
We adopted Financial Accounting Standards Board (FASB) Interpretationissued Statement of Financial Accounting Standards (SFAS) No. 48, “168, “The FASB Accounting for Uncertainty in Income Taxes - an InterpretationStandards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement 109” (FIN 48) on January 1, 2007. FIN 48 prescribes a recognition thresholdNo. 162” (SFAS No. 168). SFAS No. 168 was codified as Accounting Standards Codification (ASC) Topic 105-10 and measurement attributes for financial statement recognition and measurementreplaces SFAS No. 162, “The Hierarchy of tax positions taken or expectedGenerally Accepted Accounting Principles,” to be taken in tax returns. In addition, FIN 48 provides guidance on derecognition, classification and disclosure of tax positions, as wellestablish the FASB ASC as the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. We began using the new guidelines and numbering system prescribed by the ASC when referring to GAAP in the third quarter of 2009. As the ASC was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
Effective April 1, 2009, we adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for related interestestimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairments of debt securities by replacing the current requirement that a holder have the positive intent and penalties. Ourability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to and it will not be required to sell the impaired security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of FIN 48these accounting standard updates did not have a material effectimpact on our consolidated financial position or results of operations.statements.
In September 2006, the FASB issued SFAS No. 157 (FAS 157), “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard is to be applied when other standards require or permit the use of fair value measurement of an asset or liability. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. However, on February 12, 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delaysan accounting standard update that, as codified in ASC 820-10, delayed the effective date of FAS 157fair value measurements accounting until the beginning of the first quarter of fiscal 2009 for nonfinancialall non-financial assets and nonfinancialnon-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 defers the effective date, including goodwill and other non-amortizable intangible assets. The provisions of FAS 157 to fiscal years beginning after November 15, 2008,ASC 820-10 will be applied at such time a fair value measurement of a non-financial asset or non-financial liability is required and interim periods within those fiscal years for items within the scope of FSP 157-2.may result in a fair value that is materially different. We adopted the required provision of FAS 157 as ofthis accounting standard update effective January 1, 2008. We do not expect2009. The adoption of this update had no impact on our consolidated financial statements.
Effective January 1, 2009, we adopted a new accounting standard update regarding business combinations. As codified under ASC 805, this update requires that the purchase method be used for all business combinations and for an acquirer be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer in a business combination, including business combinations achieved in stages (step acquisitions), to recognize the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value, with limited exceptions. It also requires the acquisition-date recognition of ass ets acquired and liabilities assumed arising from certain contractual contingencies at their acquisition-date fair value. Additionally, ASC 805 requires that acquisition-related costs be recognized in theperiod in which the costs are incurred and services are received. Excluding the accounting for valuation allowances on deferred taxes and acquired contingencies under ASC 805-740, any impact resulting from the adoption of FAS 157ASC 805 is being applied on a prospective basis for all business combinations with an acquisition date on or after January 1, 2009. The adoption of this update had no impact on our consolidated financial statements.
Effective January 1, 2009, we adopted a new accounting standard update from the Emerging Issues Task Force (EITF) consensus regarding unvested share-based payment awards that contain nonforfeitable rights to dividends. This update, as codified in ASC 260-10-45, requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid), are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The provisions of ASC 260 10-45 did not have a material impact on its consolidated financial position or resultsour earnings per share calculation.
PDI, Inc.
Annual Report on Form 10-K (continued)
Accounting Standards Updates Not Yet Effective
In February 2007,September 2009, the FASB issued SFASUpdate No. 159, “2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25. The Fair Value Optionrevised guidance eliminates the need for Financial Assetsobjective and Financial Liabilities-including an amendmentreliable evidence of FASB Statement No. 115” (FAS 159). FAS 159 permits entities to elect to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been electedfor the undelivered element in earnings at each subsequent reporting date,order for a delivered item to be treated as a separate unit of accounting and recognize upfront costs and fees relatedeliminates the residual method to those items in earnings as incurred and not deferred. The provisions of this standard will beallocate arrangement consideration. In addition, the updated guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 is effective for our 2008 fiscal year. Although we adopted SFAS 159 as ofus beginning January 1, 2008, we have not yet elected2011 and can be applied prospectively or retrospectively. We are currently evaluating the fair value option for any items permitted under SFAS 159.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141Rimpact this update will have, an impactif any, on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.
our consolidated financial statements.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk for changes in the market values of some of our investments (investment risk) and the effect of interest rate changes (interest rate risk). Our financial instruments are not currently subject to
PDI, Inc.
Annual Report on Form 10-K (continued)
foreign currency risk or commodity price risk. We have no financial instruments held for trading purposes and we have no interest bearing long termlong-term or short termshort-term debt. At December 31, 2007, 2006,2009, 2008, and 2005,2007, we did not hold any derivative financial instruments.
The objectives of our investment activities are: to preserve capital, maintain liquidity, and maximize returns without significantly increasing risk. In accordance with our investment policy, we attempt to achieve these objectives by investing our cash in a variety of financial instruments. These investments are principally restricted to government sponsored enterprises, high-grade bank obligations, investment-grade corporate bonds, certain money market funds of investment grade debt instruments such as obligations of the U.S. Treasury and U.S. Federal Government Agencies, municipal bonds and commercial paper.
Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. Our cash and cash equivalents and short termshort-term investments at December 31, 20072009 were composed of the instruments described in the preceding paragraph. All of those investments mature by June 2008, with the majority maturing within the first four months of 2008. If interest rates were to increase or decrease by one percent, the fair valuev alue of our investments would have an insignificant increase or decrease primarily due to the quality of the investments and the relative near term maturity.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financialFinancial statements and requiredthe financial statement schedule specified by this Item 8, together with the reports thereon of Ernst & Young LLP, are included herein beginning on page F-1.presented following Item 15 of this report.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
Disclosure Controls and Procedures
(a) | Disclosure Controls and Procedures |
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our chief executive officer anda nd chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within PDI, Inc. have been detected.Management's Annual Report on Internal Control over Financial Reporting
(b) | Management's Annual Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2007.2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2007,2009, our internal control over financial reporting is effective based on these criteria. The effectiveness of our internal control over financial reporting as of December 31, 20072009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report appearing in this Form 10-K, which report expressed an unqualified opinion
PDI, Inc.
Annual Report on Form 10-K (continued)
on the effectiveness of our internal control over financial reporting as of December 31, 2007.2009.
(c) | Changes in Internal Control over Financial Reporting |
36
PDI, Inc.
Annual Report on Form 10-K (continued)
Changes in Internal Control over Financial Reporting
There were no changes in our internal controlscontrol over financial reporting during the quarter ended December 31, 20072009 that have materially affected, or are reasonably likely to materially affect our internal controlscontrol over financial reporting.
(d) | Report of Independent Registered Public Accounting Firm |
37
ThePDI, Inc.
Annual Report on Form 10-K (continued)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PDI, Inc.
We have audited PDI, Inc.’s internal control over financial reporting as of December 31, 2007,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PDI Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PDI, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PDI, Inc. as of December 31, 20072009 and 2006,2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20072009 of PDI, Inc. and our report dated March 7, 20085, 2010 expressed an unqualified opinion thereon.
| | /s/Ernst &Young LLP |
| | |
Iselin,MetroPark, New Jersey | |
March 7, 20085, 2010 | |
PDI, Inc.
Annual Report on Form 10-K (continued)
None.
PART III
| DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information relating to directors and executive officers of the registrant that is responsive to Item 10 of this Form 10-K will be included in our Proxy Statement in connection with our 20082010 annual meeting of stockholders and such information is incorporated by reference herein.
Information relating to executive compensation that is responsive to Item 11 of this Form 10-K will be included in our Proxy Statement in connection with our 20082010 annual meeting of stockholders and such information is incorporated by reference herein.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information relating to security ownership of certain beneficial owners and management that is responsive to Item 12 of this Form 10-K will be included in our Proxy Statement in connection with our 20082010 annual meeting of stockholders and such information is incorporated by reference herein.
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information relating to certain relationships and related transactions that is responsive to Item 13 of this Form 10-K will be included in our Proxy Statement in connection with our 20082010 annual meeting of stockholders and such information is incorporated by reference herein.
| PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information relating to principal accounting fees and services that is responsive to Item 14 of this Form 10-K will be included in our Proxy Statement in connection with our 20082010 annual meeting of stockholders and such information is incorporated by reference herein.
PDI, Inc.
Annual Report on Form 10-K (continued)
PART IV
| EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | The following documents are filed as part of this Form 10-K: |
| | (1) | Financial Statements – See Index to Financial Statements on page F-1 of this report. |
| | (2) | Financial Statement Schedule |
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
| Exhibit No. | | Description |
| | |
| | |
| 3.1 | | Certificate of Incorporation of PDI, Inc. (1) |
| | | |
| 3.2 | | By-Laws of PDI, Inc. (1) |
| | | |
| 3.3 | | Certificate of Amendment of Certificate of Incorporation of PDI, Inc. (3) |
| | | |
| 4.1 | | Specimen Certificate Representing the Common Stock (1) |
| | | |
| 10.1* | | Form of 1998 Stock Option Plan (1)
|
| | | |
| 10.2* | | Form of 2000 Omnibus Incentive Compensation Plan (2)
|
| | | |
| 10.3* | | Executive Deferred Compensation Plan, filed herewith |
| | |
| 10.4* | | 2004 Stock Award and Incentive Plan (4) |
| | |
| 10.5* | | Form of Restricted Stock Unit Agreement for Employees (13) |
| | |
| 10.6* | | Form of Stock Appreciation Rights Agreement for Employees (13) |
| | |
| 10.7* | | Form of Restricted Stock Unit Agreement for Directors (13) |
| | |
| 10.8* | | Form of Restricted Share Agreement, filed herewith |
| | |
| 10.9* | | Agreement between the Company and John P. Dugan (1) |
| | | |
10.4*10.10* | | Form of Employment Separation Agreement between the Company and Steven K. Budd,Nancy Lurker (9) |
| | |
| 10.11* | | Amended and Restated Employment Agreement between the Company and Jeffrey Smith (10) |
| | |
| 10.12* | | Employment Separation Agreement between the Company and David Kerr, filed herewith |
| | | |
10.5*10.13* | | Form of Amended and Restated Employment Separation Agreement between the Company and Stephen CotugnoRich Micali (3)(14)
|
| | | |
10.610.14* | | Employment Separation Agreement between the Company and Howard Drazner (14) |
| | |
| 10.15 | | Saddle River Executive Centre Lease (5) |
| | | |
10.7*10.16 | | 2004 Stock Award and Incentive Plan (4)
|
| | |
10.8* | | Form of Agreement between the Company and Larry EllbergerSaddle River Executive Centre 2005 Sublease (5)
|
| | | |
10.9*10.17 | | Form of Agreement between the Company and Bernard C. BoyleSaddle River Executive Centre 2007 Sublease (5)(8)
|
PDI, Inc.
Annual Report on Form 10-K (continued)
| | |
| Exhibit No. | | Description |
| | |
| 10.18 | | First Amendment to Saddle River Executive Centre 2005 Sublease (12) |
| | | |
10.10*10.19 | | Memorandum of Understanding between the Company and Bernard C. BoyleMorris Corporate Center Lease (5)(11)
|
| | |
10.11* | | Amendment to Memorandum of Understanding between the Company and Bernard C. Boyle (5)
|
| | |
10.12 | | Saddle River Executive Centre 2005 Sublease Agreement (5)
|
| | |
10.13* | | Form of Agreement between the Company and Michael J. Marquard (6)
|
| | |
10.14* | | Form of Agreement between the Company and Jeffrey E. Smith (6)
|
| | |
10.15* | | Form of Agreement between the Company and Kevin Connolly(7)
|
| | |
10.16 | | Saddle River Executive Centre 2007 Sublease Agreement, filed herewith |
| | | |
| 21.1 | | Subsidiaries of the Registrant (3)(13) |
| | | |
| | Consent of Ernst & Young LLP, filed herewith. |
PDI, Inc.
Annual Report on Form 10-K (continued)
Exhibit No. | | Description |
| 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | | |
| | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | | |
| 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | | |
| 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | | |
| | |
| * | | Denotes compensatory plan, compensation arrangement or management contract. |
| | | |
| (1) | | Filed as an exhibit to our Registration Statement on Form S-1 (File No 333-46321), and incorporated herein by reference. |
| | | |
| (2) | | Filed as an exhibit to our definitive proxy statement dated May 10, 2000, and incorporated herein by reference. |
| | | |
| (3) | | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated herein by reference. |
| | | |
| (4) | | Filed as an exhibit to our definitive proxy statement dated April 28, 2004, and incorporated herein by reference. |
| | | |
| (5) | | Filed as an exhibit to our Form 10-K for the year ended December 31, 2005, and incorporated herein by reference. |
| | | |
| (6) | | Filed as an exhibit to our Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference. |
| | | |
| (7) | | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006, and incorporated herein by reference. |
(b) | We have filed, | |
| (8) | | Filed as exhibitsan exhibit to thisour Annual Report on Form 10-K for the exhibits requiredyear ended December 31, 2007, and incorporated herein by Item 601 of the Regulation S-K.reference. |
| | |
| (9) | | Filed as an exhibit to our Current Report on Form 8-K filed on November 18, 2008, and incorporated herein by reference. |
| | |
| (10) | | Filed as an exhibit to our Current Report on Form 8-K filed on January 7, 2009, and incorporated herein by reference. |
PDI, Inc.
Annual Report on Form 10-K (continued)
| (11) | | Filed as an exhibit to our Quarterly Report on Form 10-Q filed on November 5, 2009, and incorporated herein by reference. |
| | |
| (12) | | Filed as an exhibit to our Current Report on Form 8-K filed on December 4, 2009, and incorporated herein by reference. |
| | |
| (13) | | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008, and incorporated herein by reference. |
| | |
| (14) | | Filed as an exhibit to our Current Report on Form 8-K filed on April 7, 2009, and incorporated herein by reference. |
PDI, Inc.
Annual Report on Form 10-K (continued)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th5th day of March, 2008.2010.
| | PDI, INC. | |
| | |
| | /s/ Michael J. MarquardNancy Lurker | |
| | Michael J. MarquardNancy Lurker | |
| | Chief Executive Officer |
| |
PDI, Inc., a Delaware Corporation, and each person whose signature appears below constitutes and appoints each of Michael J. MarquardNancy Lurker and Jeffrey E. Smith, and either of them, such person’s true and lawful attorney-in-fact, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign on such person’s behalf, individually and in each capacity stated below, any and all amendments to this Annual Report on Form 10-K and other documents in connection therewith, and to file the same and all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable tot o be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities indicated and on the 13th5th day of March, 2008.2010.
| Signature | | Title |
| | |
| /s/ John P. Dugan | | Chairman of the Board of Directors |
| John P. Dugan | | |
| | | |
/s/ Michael J. MarquardNancy Lurker | | Chief Executive Officer and Director |
Michael J. MarquardNancy Lurker | | (principal executive officer) |
| | | |
| /s/ Jeffrey E. Smith | | Chief Financial Officer and Treasurer |
| Jeffrey E. Smith | | (principal accounting and financial officer) |
| | | |
| /s/ John M. Pietruski | | Director |
| John M. Pietruski | | |
| | | |
| /s/ Jan Martens Vecsi | | Director |
| Jan Martens Vecsi | | |
| | | |
| /s/ Frank Ryan | | Director |
| Frank Ryan | | |
| | | |
| /s/ John Federspiel | | Director |
| John Federspiel | | |
| | | |
/s/ Dr. Joseph T. Curti | | Director |
Dr. Joseph T. Curti | | |
| | |
/s/ Stephen J. Sullivan | | Director |
| Stephen J. Sullivan | | |
| | | |
| /s/ Jack E. Stover | | Director |
| Jack E. Stover | | |
| | |
| /s/ Gerald Belle | | Director |
| Gerald Belle | | |
| | |
| /s/ Veronica Lubatkin | | Director |
| Veronica Lubatkin | | |
PDI, Inc.
Index to Consolidated Financial Statements
and Financial Statement Schedules
| | | Page |
| | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Financial Statements | |
| | Consolidated Balance Sheets at December 31, 20072009 and 20062008 | F-3 |
| | | |
| | Consolidated Statements of Operations for each of the three years | |
| in the period ended December 31, 2009, 2008 and 2007 | F-4 |
| | | |
| | Consolidated Statements of Stockholders’ Equity for each of the three years | |
| in the period ended December 31, 2009, 2008 and 2007 | F-5 |
| | | |
| | Consolidated Statements of Cash Flows for each of the three years | |
| in the period ended December 31, 2009, 2008 and 2007 | F-6 |
| | | |
| | Notes to Consolidated Financial Statements | F-7 |
| | | |
| Schedule II. Valuation and Qualifying Accounts | F-30 |
| | |
| | |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of PDI, Inc.: |
The Board of Directors and Stockholders of PDI, Inc.:
We have audited the accompanying consolidated balance sheets of PDI, Inc. as of December 31, 20072009 and 2006,2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007.2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PDI, Inc. at December 31, 20072009 and 2006,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007,2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PDI, Inc.’s internal control over financial reporting as of December 31, 2007,2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 20085, 2010 expressed an unqualified opinion thereon.
| | /s/Ernst &Young LLP |
| | |
Iselin,MetroPark, New Jersey | |
March 7, 2008 | |
| 5, 2010 | |
| | | PDI, INC. | |
| CONSOLIDATED BALANCE SHEETS | CONSOLIDATED BALANCE SHEETS | | CONSOLIDATED BALANCE SHEETS | |
| (in thousands, except share and per share data) | | |
| (in thousands, except share data) | | (in thousands, except share data) | |
| | | | | | | | | | | | | |
| | | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 99,185 | | | $ | 45,221 | | | $ | 72,463 | | | $ | 90,074 | |
| Short-term investments | | 7,800 | | | 69,463 | | | | 164 | | | | 159 | |
| Accounts receivable, net of allowance for doubtful accounts of | | | | | | | | | |
| $0 and $36, respectively | | 22,751 | | | 25,416 | | |
| Accounts receivable, net | | | | 11,858 | | | | 15,786 | |
| Unbilled costs and accrued profits on contracts in progress | | 3,481 | | | 4,224 | | | | 3,483 | | | | 2,469 | |
| Income tax refund receivable | | | | 3,298 | | | | - | |
| Other current assets | | | 7,558 | | | | 12,416 | | | | 5,245 | | | | 4,511 | |
| Total current assets | | 140,775 | | | 156,740 | | | | 96,511 | | | | 112,999 | |
| Property and equipment, net | | 8,348 | | | 12,809 | | | | 3,530 | | | | 5,423 | |
| Goodwill | | 13,612 | | | 13,612 | | | | 5,068 | | | | 13,612 | |
| Other intangible assets, net | | 14,669 | | | 15,950 | | | | 2,542 | | | | 13,388 | |
| Other long-term assets | | | 2,150 | | | | 2,525 | | | | 2,125 | | | | 3,614 | |
| Total assets | | $ | 179,554 | | | $ | 201,636 | | | $ | 109,776 | | | $ | 149,036 | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 2,792 | | | $ | 3,915 | | | $ | 1,994 | | | $ | 2,298 | |
| Unearned contract revenue | | 8,459 | | | 14,252 | | | | 6,793 | | | | 3,678 | |
| Accrued incentives | | 5,953 | | | 9,009 | | |
| Accrued salary and bonus | | | | 6,071 | | | | 5,640 | |
| Accrued contract loss | | | | - | | | | 10,021 | |
| Other accrued expenses | | | 11,984 | | | | 17,378 | | | | 10,022 | | | | 9,723 | |
| Total current liabilities | | 29,188 | | | 44,554 | | | | 24,880 | | | | 31,360 | |
| Long-term liabilities | | | 10,177 | | | | 7,885 | | | | 10,006 | | | | 10,569 | |
| Total liabilities | | 39,365 | | | 52,439 | | | | 34,886 | | | | 41,929 | |
| | | | | | | | | | | | | | | | | |
| Commitments and contingencies (Note 9) | | | | | | | | | |
| Commitments and contingencies (Note 10) | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity: | | | | | | | | | | | | | | | | |
| Preferred stock, $.01 par value; 5,000,000 shares authorized, no | | | | | | | | | |
| shares issued and outstanding | | - | | | - | | |
| Common stock, $.01 par value; 100,000,000 shares authorized; | | | | | | | | | |
| 15,222,715 and 15,096,976 shares issued, respectively; | | | | | | | | | |
| 14,183,236 and 14,078,970 shares outstanding, respectively | | 152 | | | 151 | | |
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding | | | | - | | | | - | |
Common stock, $.01 par value; 100,000,000 shares authorized; 15,308,160 and 15,272,704 shares issued, respectively; 14,242,715 and 14,223,669 shares outstanding, respectively | | | | 153 | | | | 153 | |
| Additional paid-in capital | | 120,422 | | | 119,189 | | | | 123,295 | | | | 121,908 | |
| Retained earnings | | 33,018 | | | 42,992 | | |
| Accumulated other comprehensive income | | 30 | | | 79 | | |
| Treasury stock, at cost (1,039,479 and 1,018,006 shares, respectively) | | | (13,433 | ) | | | (13,214 | ) | |
| Accumulated deficit | | | | (35,003 | ) | | | (1,443 | ) |
| Accumulated other comprehensive (loss) income | | | | 3 | | | | (16 | ) |
| Treasury stock, at cost (1,065,445 and 1,049,035 shares, respectively) | | | | (13,558 | ) | | | (13,495 | ) |
| Total stockholders' equity | | | 140,189 | | | | 149,197 | | | | 74,890 | | | | 107,107 | |
| Total liabilities and stockholders' equity | | $ | 179,554 | | | $ | 201,636 | | | $ | 109,776 | | | $ | 149,036 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | | The accompanying notes are an integral part of these consolidated financial statements | |
| PDI, INC. | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| (in thousands, except for per share data) | |
| | | | | | | | | | |
| | | For The Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | |
| Revenue, net | | $ | 117,131 | | | $ | 239,242 | | | $ | 305,205 | |
| Cost of services | | | 85,516 | | | | 183,398 | | | | 252,803 | |
| Gross profit | | | 31,615 | | | | 55,844 | | | | 52,402 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Compensation expense | | | 24,516 | | | | 28,075 | | | | 25,897 | |
| Other selling, general and administrative expenses | | | 19,981 | | | | 22,610 | | | | 29,392 | |
| Asset impairment | | | 42 | | | | - | | | | 6,178 | |
| Executive severance | | | - | | | | 573 | | | | 5,730 | |
| Legal and related costs, net | | | 335 | | | | (3,279 | ) | | | 1,691 | |
| Facilities realignment | | | 1,021 | | | | 1,952 | | | | 2,354 | |
| Total operating expenses | | | 45,895 | | | | 49,931 | | | | 71,242 | |
| | | | | | | | | | | | | |
| Operating (loss) income | | | (14,280 | ) | | | 5,913 | | | | (18,840 | ) |
| Gain on investments | | | - | | | | - | | | | 4,444 | |
| Interest income, net | | | 6,073 | | | | 4,738 | | | | 3,190 | |
| | | | | | | | | | | | | |
| (Loss) income before income tax | | | (8,207 | ) | | | 10,651 | | | | (11,206 | ) |
| Provision (benefit) for income tax | | | 1,767 | | | | (724 | ) | | | 201 | |
| | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | (9,974 | ) | | | 11,375 | | | | (11,407 | ) |
| | | | | | | | | | | | | |
| Income (loss) from discontinued operations, | | | | | | | | | | | | |
| net of tax | | | - | | | | 434 | | | | (8,047 | ) |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (9,974 | ) | | $ | 11,809 | | | $ | (19,454 | ) |
| | | | | | | | | | | | | |
| (Loss) income per share of common stock: | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | |
| Continuing operations | | $ | (0.72 | ) | | $ | 0.82 | | | $ | (0.80 | ) |
| Discontinued operations | | | - | | | | 0.03 | | | | (0.57 | ) |
| | | $ | (0.72 | ) | | $ | 0.85 | | | $ | (1.37 | ) |
| Assuming dilution: | | | | | | | | | | | | |
| Continuing operations | | $ | (0.72 | ) | | $ | 0.81 | | | $ | (0.80 | ) |
| Discontinued operations | | | - | | | | 0.03 | | | | (0.57 | ) |
| | | $ | (0.72 | ) | | $ | 0.84 | | | $ | (1.37 | ) |
| | | | | | | | | | | | | |
| Weighted average number of common shares and | | | | | | | | | | | | |
| common share equivalents outstanding: | | | | | | | | | | | | |
| Basic | | | 13,940 | | | | 13,859 | | | | 14,232 | |
| Assuming dilution | | | 13,940 | | | | 13,994 | | | | 14,232 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | |
| PDI, INC. | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| (in thousands, except for per share data) | |
| | | | | | | | | | |
| | | For The Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Revenue, net | | $ | 84,871 | | | $ | 112,528 | | | $ | 117,131 | |
| Cost of services | | | 58,591 | | | | 108,015 | | | | 85,516 | |
| Gross profit | | | 26,280 | | | | 4,513 | | | | 31,615 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Compensation expense | | | 22,310 | | | | 22,838 | | | | 24,516 | |
| Other selling, general and administrative expenses | | | 17,474 | | | | 16,767 | | | | 20,316 | |
| Executive severance | | | 221 | | | | 1,237 | | | | - | |
| Asset impairment | | | 18,118 | | | | 23 | | | | 42 | |
| Facilities realignment | | | 8,734 | | | | 75 | | | | 1,021 | |
| Total operating expenses | | | 66,857 | | | | 40,940 | | | | 45,895 | |
| | | | | | | | | | | | | |
| Operating loss | | | (40,577 | ) | | | (36,427 | ) | | | (14,280 | ) |
| Other income, net | | | 183 | | | | 2,841 | | | | 6,073 | |
| | | | | | | | | | | | | |
| Loss before income tax | | | (40,394 | ) | | | (33,586 | ) | | | (8,207 | ) |
| (Benefit) provision for income tax | | | (6,834 | ) | | | 875 | | | | 1,767 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (33,560 | ) | | $ | (34,461 | ) | | $ | (9,974 | ) |
| | | | | | | | | | | | | |
| Loss per share of common stock: | | | | | | | | | | | | |
| Basic | | $ | (2.36 | ) | | $ | (2.42 | ) | | $ | (0.70 | ) |
| Diluted | | $ | (2.36 | ) | | $ | (2.42 | ) | | $ | (0.70 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted average number of common shares and common share equivalents outstanding: | | | | | | | | | | | | |
| Basic | | | 14,219 | | | | 14,240 | | | | 14,150 | |
| Diluted | | | 14,219 | | | | 14,240 | | | | 14,150 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | |
| PDI, INC. | PDI, INC. | | PDI, INC. | |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |
| (in thousands) | (in thousands) | | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For The Years Ended December 31, | | | For The Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2009 | | | 2008 | | | 2007 | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
| Common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | 15,097 | | | $ | 151 | | | 14,948 | | | $ | 149 | | | 14,820 | | | $ | 148 | | | | 15,273 | | | $ | 153 | | | | 15,223 | | | $ | 152 | | | | 15,097 | | | $ | 151 | |
| Common stock issued | | - | | | - | | | - | | | - | | | 68 | | | 1 | | | | 62 | | | | - | | | | 64 | | | | 1 | | | | - | | | | - | |
| Restricted stock issued | | 167 | | | 1 | | | 155 | | | 2 | | | 43 | | | - | | | | | | | | | | | | 122 | | | | 1 | | | | 167 | | | | 1 | |
| Restricted stock forfeited | | (41 | ) | | - | | | (23 | ) | | - | | | (24 | ) | | - | | | | (27 | ) | | | - | | | | (136 | ) | | | (1 | ) | | | (41 | ) | | | - | |
| SARs exercised | | - | | | - | | | 1 | | | - | | | - | | | - | | |
| Stock options exercised | | | - | | | | - | | | | 16 | | | | - | | | | 41 | | | | - | | |
| Balance at December 31 | | | 15,223 | | | | 152 | | | | 15,097 | | | | 151 | | | | 14,948 | | | | 149 | | | | 15,308 | | | | 153 | | | | 15,273 | | | | 153 | | | | 15,223 | | | | 152 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | 1,018 | | | (13,214 | ) | | 1,018 | | | (13,214 | ) | | 5 | | | (110 | ) | | | 1,049 | | | | (13,495 | ) | | | 1,039 | | | | (13,433 | ) | | | 1,018 | | | | (13,214 | ) |
| Treasury stock purchased | | | 21 | | | | (219 | ) | | | - | | | | - | | | | 1,013 | | | | (13,104 | ) | | | 16 | | | | (63 | ) | | | 10 | | | | (62 | ) | | | 21 | | | | (219 | ) |
| Balance at December 31 | | | 1,039 | | | | (13,433 | ) | | | 1,018 | | | | (13,214 | ) | | | 1,018 | | | | (13,214 | ) | | | 1,065 | | | | (13,558 | ) | | | 1,049 | | | | (13,495 | ) | | | 1,039 | | | | (13,433 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Additional paid-in capital: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | | | | | 119,189 | | | | | | | 118,325 | | | | | | | 116,737 | | | | | | | | 121,908 | | | | | | | | 120,422 | | | | | | | | 119,189 | |
| Common stock issued | | | | | | - | | | | | | | - | | | | | | | 699 | | | | | | | | - | | | | | | | | 299 | | | | | | | | - | |
| Restricted stock issued | | | | | | (1 | ) | | | | | | (2 | ) | | | | | | 533 | | | | | | | | - | | | | | | | | (1 | ) | | | | | | | (1 | ) |
| Restricted stock forfeited | | | | | | (164 | ) | | | | | | (95 | ) | | | | | | (494 | ) | | | | | | | - | | | | | | | | (7 | ) | | | | | | | (164 | ) |
| Stock-based compensation expense | Stock-based compensation expense | | | 1,640 | | | | | | | 1,755 | | | | | | | 259 | | Stock-based compensation expense | | | | 1,387 | | | | | | | | 1,195 | | | | | | | | 1,640 | |
| Stock grants exercised | | | | | | - | | | | | | | 87 | | | | | | | 591 | | |
| Excess tax (expense) benefit | | | | | | | | | | | | | | | | | | | | | | | | | |
| on stock-based compensation | | | (242 | ) | | | | | | 23 | | | | | | | - | | |
| Reclassification of unamortized compensation | | | - | | | | | | | | (904 | ) | | | | | | | - | | |
Excess tax expense on stock-based compensation | | | | | | | | - | | | | | | | | - | | | | | | | | (242 | ) |
| Balance at December 31 | | | | | | | 120,422 | | | | | | | | 119,189 | | | | | | | | 118,325 | | | | | | | | 123,295 | | | | | | | | 121,908 | | | | | | | | 120,422 | |
| Retained earnings: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Accumulated deficit)retained earnings: | | (Accumulated deficit)retained earnings: | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | | | | | 42,992 | | | | | | | 31,183 | | | | | | | 50,637 | | | | | | | | (1,443 | ) | | | | | | | 33,018 | | | | | | | | 42,992 | |
| Net (loss) income | | | | | | | (9,974 | ) | | | | | | | 11,809 | | | | | | | | (19,454 | ) | | | | | | | (33,560 | ) | | | | | | | (34,461 | ) | | | | | | | (9,974 | ) |
| Balance at December 31 | | | | | | | 33,018 | | | | | | | | 42,992 | | | | | | | | 31,183 | | | | | | | | (35,003 | ) | | | | | | | (1,443 | ) | | | | | | | 33,018 | |
| Accumulated other | | | | | | | | | | | | | | | | | | | | | | | | | |
| comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | | | | | 79 | | | | | �� | | 71 | | | | | | | 76 | | | | | | | | (16 | ) | | | | | | | 30 | | | | | | | | 79 | |
| Reclassification of realized gain, net of tax | | | (76 | ) | | | | | | (33 | ) | | | | | | (49 | ) | |
| Unrealized holding gain, net of tax | | | | 27 | | | | | | | | 41 | | | | | | | | 44 | | |
| Balance at December 31 | | | | | | | 30 | | | | | | | | 79 | | | | | | | | 71 | | |
| Unamortized compensation costs: | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1 | | | | | | - | | | | | | | (904 | ) | | | | | | (2,063 | ) | |
| Restricted stock issued | | | | | | - | | | | | | | - | | | | | | | (533 | ) | |
| Restricted stock forfeited | | | | | | - | | | | | | | - | | | | | | | 494 | | |
| Restricted stock vested | | | | | | - | | | | | | | - | | | | | | | 1,198 | | |
| Reclassification to additional paid-in capital | | | - | | | | | | | | 904 | | | | | | | | - | | |
| Reclassification of realized loss (gain), net of tax | | Reclassification of realized loss (gain), net of tax | | | | 8 | | | | | | | | (17 | ) | | | | | | | (76 | ) |
| Unrealized holding gain (loss), net of tax | | Unrealized holding gain (loss), net of tax | | | | 11 | | | | | | | | (29 | ) | | | | | | | 27 | |
| Balance at December 31 | | | | | | | - | | | | | | | | - | | | | | | | | (904 | ) | | | | | | | 3 | | | | | | | | (16 | ) | | | | | | | 30 | |
| Total stockholders' equity | | | | | | | 140,189 | | | | | | | | 149,197 | | | | | | | | 135,610 | | | | | | | | 74,890 | | | | | | | | 107,107 | | | | | | | | 140,189 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive (loss) income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | | | | | $ | (9,974 | ) | | | | | | $ | 11,809 | | | | | | | $ | (19,454 | ) | | | | | | $ | (33,560 | ) | | | | | | $ | (34,461 | ) | | | | | | $ | (9,974 | ) |
| Reclassification of realized gain, net of tax | | | (76 | ) | | | | | | (33 | ) | | | | | | (49 | ) | |
| Unrealized holding gain, net of tax | | | | 27 | | | | | | | | 41 | | | | | | | | 44 | | |
| Reclassification of realized loss (gain), net of tax | | Reclassification of realized loss (gain), net of tax | | | | 8 | | | | | | | | (17 | ) | | | | | | | (76 | ) |
| Unrealized holding gain (loss), net of tax | | Unrealized holding gain (loss), net of tax | | | | 11 | | | | | | | | (29 | ) | | | | | | | 27 | |
| Total comprehensive (loss) income | | | | | | $ | (10,023 | ) | | | | | | $ | 11,817 | | | | | | | $ | (19,459 | ) | | | | | | $ | (33,541 | ) | | | | | | $ | (34,507 | ) | | | | | | $ | (10,023 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | | The accompanying notes are an integral part of these consolidated financial statements | |
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (in thousands) | |
| | | | | | | | | | |
| | | For The Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| Cash Flows From Operating Activities | | | | | | | | | |
| Net (loss) income from operations | | $ | (9,974 | ) | | $ | 11,809 | | | $ | (19,454 | ) |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Depreciation, amortization and accretion | | | 5,607 | | | | 5,764 | | | | 5,820 | |
| Deferred income taxes, net | | | 1,113 | | | | 2,710 | | | | 6,447 | |
| (Recovery of) provision for bad debt, net | | | (15 | ) | | | (728 | ) | | | 730 | |
| (Recovery of) provision for doubtful notes, net | | | (150 | ) | | | (250 | ) | | | 655 | |
| Stock-based compensation | | | 1,476 | | | | 1,660 | | | | 1,457 | |
| Excess tax expense (benefit) from stock-based compensation | | | 242 | | | | (23 | ) | | | - | |
| Loss on disposal of assets | | | 48 | | | | - | | | | 269 | |
| Asset impairment | | | 42 | | | | - | | | | 14,351 | |
| Non-cash facilities realignment | | | 796 | | | | 1,295 | | | | - | |
| Gain on investment | | | - | | | | - | | | | (4,444 | ) |
| Other changes in assets and liabilities: | | | | | | | | | | | | |
| Decrease (increase) in accounts receivable | | | 2,680 | | | | 2,460 | | | | (1,229 | ) |
| Decrease (increase) in unbilled costs | | | 743 | | | | 1,750 | | | | (2,581 | ) |
| Decrease (increase) in other current assets | | | 4,858 | | | | 4,593 | | | | (5,697 | ) |
| Decrease in other long-term assets | | | 375 | | | | 185 | | | | 218 | |
| Decrease in accounts payable | | | (1,123 | ) | | | (1,778 | ) | | | (41 | ) |
| (Decrease) increase in unearned contract revenue | | | (5,793 | ) | | | 1,654 | | | | 5,674 | |
| Decrease in accrued incentives | | | (3,056 | ) | | | (3,170 | ) | | | (5,470 | ) |
| (Decrease) increase in accrued liabilities | | | (5,224 | ) | | | (8,489 | ) | | | 1,869 | |
| Increase in long-term liabilities | | | 1,179 | | | | 243 | | | | 4,541 | |
| Net cash (used in) provided by operating activities | | | (6,176 | ) | | | 19,685 | | | | 3,115 | |
| Cash Flows From Investing Activities | | | | | | | | | | | | |
| Sales (purchases) of short-term investments, net | | | 61,460 | | | | (63,881 | ) | | | 21,686 | |
| Repayments from Xylos | | | 150 | | | | 250 | | | | 100 | |
| Purchase of property and equipment | | | (1,009 | ) | | | (1,770 | ) | | | (5,832 | ) |
| Cash paid for acquisition, including acquisition costs | | | - | | | | - | | | | (1,936 | ) |
| Proceeds from sale of assets and investments | | | - | | | | - | | | | 4,507 | |
| Net cash provided by (used in) investing activities | | | 60,601 | | | | (65,401 | ) | | | 18,525 | |
| Cash Flows From Financing Activities | | | | | | | | | | | | |
| Excess tax (expense) benefit from stock-based compensation | | | (242 | ) | | | 23 | | | | - | |
| Proceeds from exercise of stock options | | | - | | | | 87 | | | | 1,291 | |
| Cash paid for repurchase of shares | | | - | | | | - | | | | (13,104 | ) |
| Cash paid for repurchase of restricted shares | | | (219 | ) | | | - | | | | - | |
| Net cash (used in) provided by financing activities | | | (461 | ) | | | 110 | | | | (11,813 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 53,964 | | | | (45,606 | ) | | | 9,827 | |
| Cash and cash equivalents – beginning | | | 45,221 | | | | 90,827 | | | | 81,000 | |
| Cash and cash equivalents – ending | | $ | 99,185 | | | $ | 45,221 | | | $ | 90,827 | |
| | | | | | | | | | | | | |
| Cash paid for interest | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Cash paid for taxes | | $ | 123 | | | $ | 640 | | | $ | 1,513 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | |
| PDI, INC. | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (in thousands) | |
| | | | | | | | | | |
| | | For The Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Cash Flows From Operating Activities | | | | | | | | | |
| Net loss from operations | | $ | (33,560 | ) | | $ | (34,461 | ) | | $ | (9,974 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Depreciation, amortization and accretion | | | 2,838 | | | | 4,613 | | | | 5,607 | |
| Deferred income taxes, net | | | (1,443 | ) | | | 331 | | | | 1,113 | |
| Provision for (recovery of) bad debt, net | | | 30 | | | | 31 | | | | (15 | ) |
| Recovery of doubtful notes, net | | | - | | | | - | | | | (150 | ) |
| Stock-based compensation | | | 1,387 | | | | 1,487 | | | | 1,476 | |
| Excess tax expense from stock-based compensation | | | - | | | | - | | | | 242 | |
| Asset impairment | | | 18,118 | | | | 23 | | | | 42 | |
| Non-cash facilities realignment | | | 2,584 | | | | 75 | | | | 796 | |
| Other losses and expenses (gains), net | | | 38 | | | | (38 | ) | | | 48 | |
| Other changes in assets and liabilities: | | | | | | | | | | | | |
| Decrease in accounts receivable | | | 3,928 | | | | 6,965 | | | | 2,680 | |
| (Increase) decrease in unbilled costs | | | (1,014 | ) | | | 1,012 | | | | 743 | |
| (Increase) decrease in income tax receivable | | | (3,298 | ) | | | - | | | | 1,888 | |
| Decrease in other current assets | | | 558 | | | | 554 | | | | 2,970 | |
| Decrease in other long-term assets | | | - | | | | 1,023 | | | | 375 | |
| Decrease in accounts payable | | | (304 | ) | | | (494 | ) | | | (1,123 | ) |
| Increase (decrease) in unearned contract revenue | | | 2,490 | | | | (4,781 | ) | | | (5,793 | ) |
| Increase (decrease) in accrued salaries and bonus | | | 431 | | | | (1,496 | ) | | | (3,056 | ) |
| (Decrease) increase in accrued contract loss | | | (10,021 | ) | | | 10,021 | | | | - | |
| Decrease in accrued liabilities | | | (107 | ) | | | (829 | ) | | | (5,224 | ) |
| Increase (decrease) in long-term liabilities | | | 1,373 | | | | (27 | ) | | | 1,179 | |
| Net cash used in operating activities | | | (15,972 | ) | | | (15,991 | ) | | | (6,176 | ) |
| Cash Flows From Investing Activities | | | | | | | | | | | | |
| Purchase of available-for-sale investments | | | - | | | | - | | | | (11,700 | ) |
| Proceeds from sales of available-for-sale investments | | | - | | | | - | | | | 44,285 | |
| Purchase of held-to-maturity investments | | | (5,546 | ) | | | (15,050 | ) | | | (24,290 | ) |
| Proceeds from maturities of held-to-maturity investments | | | 5,700 | | | | 22,391 | | | | 53,165 | |
| Repayments from Xylos | | | - | | | | - | | | | 150 | |
| Purchase of property and equipment | | | (1,730 | ) | | | (399 | ) | | | (1,009 | ) |
| Net cash (used in) provided by investing activities | | | (1,576 | ) | | | 6,942 | | | | 60,601 | |
| Cash Flows From Financing Activities | | | | | | | | | | | | |
| Excess tax expense from stock-based compensation | | | - | | | | - | | | | (242 | ) |
| Cash paid for repurchase of restricted shares | | | (63 | ) | | | (62 | ) | | | (219 | ) |
| Net cash used in financing activities | | | (63 | ) | | | (62 | ) | | | (461 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (17,611 | ) | | | (9,111 | ) | | | 53,964 | |
| Cash and cash equivalents – beginning | | | 90,074 | | | | 99,185 | | | | 45,221 | |
| Cash and cash equivalents – ending | | $ | 72,463 | | | $ | 90,074 | | | $ | 99,185 | |
| | | | | | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | | | $ | 1 | |
| Cash paid for taxes | | $ | 267 | | | $ | 211 | | | $ | 123 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | |
PDI, Inc.
Notes to the Consolidated Financial Statements
| 1. | Nature of Business and Significant Accounting Policies |
Nature of Business
PDI, Inc. together with its wholly-owned subsidiaries (PDI or the Company) is a diversified sales and marketingan outsourced promotional services company serving the biopharmaceutical and life scienceshealthcare industries. See Note 18,19, Segment Information, for additionalfurther information.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include accounts of PDI, Inc. and its wholly owned subsidiaries (TVG, Inc., ProtoCall, Inc., InServe Support Solutions, (InServe), and PDI Investment Company, Inc.) All significant intercompany balances and transactions have been eliminated in consolidation. In the second quarter of 2006, the Company discontinued its Medical Device and Diagnostic (MD&D) business. The MD&D business was part of the Company's sales services reporting segment. The MD&D business is accounted for as a discontinued operation under GAAP and, therefore, the MD&D business results of operations have been removed from the Company's results of continuing operations for all prior periods presented. See Note 17, Discontinued Operations.
Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Management's estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances. Significant estimates include incentives earned or penalties incurred on contracts, loss contract provisions, valuation allowances related to deferred income taxes, self-insurance loss accruals, allowances for doubtful accounts and notes, fair value of assets, income tax accruals, asset i mpairments and facilities realignment accrualsaccruals. The Company periodically reviews these matters and sales returns.reflects changes in estimates as appropriate. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist ofinclude unrestricted cash accounts, money market investments and highly liquid investment instruments and certificates of deposit with an original maturity of three months or less at the date of purchase.
Investments in Marketable Securities
Available-for-sale securities are carried at fair value with the unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income (expense), net. The fair values for marketable equity securities are based on quoted market prices. Held-to-maturity investments are stated at amortized cost. Interest income is accrued as earned. Realized gains and losses are computed based upon specific identification and included in interest income, net in the consolidated statement of operations. The Company does not have any investments classified as “trading.”
Receivables and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews a customer’s credit history before extending credit. The Company has recordedrecords a provision for estimated losses resulting frombased upon the inability of its customers to make required payments based onusing historical experience and periodically adjusts these provisions to reflect actual experience. Additionally, the Company will establish a specific allowance for doubtful accounts when the Companyit becomes aware of a specific customer’s inability or unwillingness to meet its financial obligations (e.g., bankruptcy filing). AllowanceThere was no allowance for doubtful accounts was $0 and approximately $36,000 as of December 31, 20072009 and 2006, respectively.
2008. The Company operates almost exclusively in the pharmaceutical industry and to a great extent its revenuerev enue is dependent on a limited number of large pharmaceutical companies. The Company also partners with customers in the emerging pharmaceutical sector, some of whom may have limited financial resources. A general downturn in the pharmaceutical industry or adverse material event to one or more of the Company’s emerging pharmaceutical customers could result in higher than expected customer defaults and additional allowances may be required.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
Unbilled Costs and Accrued Profits and Unearned Contract Revenue
In general, contractual provisions, including predetermined payment schedules or submission of appropriate billing detail, establish the prerequisites for billings. Unbilled costs and accrued profits arise when services have been rendered and payment is assured but customers have not been billed. These amounts are classified as a current asset.
Normally, in the case of detailing contracts, the customers agree to pay the Company a portion of the fee due under a contract in advance of performance of services because of large recruiting and employee development costs associated with the beginninginitial phase of a contract.contract performance. The excess of amounts billed over revenue recognized represents unearned contract revenue, which is classified as a current liability.
Loans and Investments in Privately Held Entities
From time to time,time-to-time, the Company makes investments in and/or loans to privately-held companies. The Company determines whether the fair values of any investments in privately held entities have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, and the overall health of the investee’s industry), a write-down is recorded to estimated fair value. Additionally, onOn a quarterly basis, the Company reviews outstanding loans receivable to determine if a provision for doubtful notes is necessary. These reviews include discussions with senior management of the investee, and evaluations of , among other things, the investee’s progress against its business plan, its product development activities and customer base, industry market conditions, historical and projected financial performance, expected cash needs and recent funding events. The Company records interest income on the impaired loans; however, that amount is fully reserved if the investee is not making theirits interest payments. Subsequent cash receipts on the outstanding interest would beare applied against the outstanding interest receivable balance and the corresponding allowance. The Company’s assessments of value are highly subjective given that these companiesthe investees may be at an early stage of development and rely regularly on their investors for cash infusions. AtAs of December 31, 20072009 and 2006,2008, the allowance for doubtful notesCompany had a loan receivable balance of $0.5 million which was approximately $500,000 and $700,000, respectively. See Note 5, Loans and Investments in Privately-Held Entities, for additional information.fully reserved.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization is computedrecognized on a straight-line basis, using the straight-line method, based on estimated useful lives ofof: seven to ten years for furniture and fixtures, threefixtures; two to five years for office and computer equipmentequipment; and ten years for phone systems. Leaseholdleasehold improvements are amortized over the shorter of the estimated service lives or the terms of the related leases. Repairs and maintenance are charged to expense as incurred. Upon disposition, the asset and related accumulated depreciation are removed from the related accounts and any gains or losses are reflected in operations. As the prices of computer desktops and laptops continue to decline, more of these computer purchases are falling short of the Company’s minimum price threshold for capitalization and are being expensed. The Company expects that trend to continue.
Software Costs
It is the Company’s policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Capitalized software costs are included in property and equipment on the consolidated balance sheet and amortized over the software'ssoftware’s useful life, generally three to seven years. Software costs that do not meet capitalization criteria are expensed immediately.
Fair ValueConcentration of Credit Risk
Financial Instruments
instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and investments in marketable securities. The Company considers carrying amountsmaintains deposits in federally insured financial institutions. The Company also holds investments in Treasury money market funds that maintain an average portfolio maturity less than 90 days and, under the temporary guarantee program for money market funds, are insured by the United States Treasury. Deposits held with financial institutions may exceed the amount of cash, accounts receivable, accounts payable and accrued expensesinsurance provided on such deposits; however, management believes the Company is not exposed to approximate fair valuesignificant credit risk due to the short-termfinancial position of the financial institutions in which those deposits are held and the nature of these financial instruments. Marketable securities classified as “available for sale” are carried at fair value. Marketable securities classified as “held-to-maturity” are carried at amortized cost, which approximates fair value. The fair value of letters of credit is determined to be $0 as management does not expect any material losses to result from these instruments because performance is not expected to be required.the investments.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
Goodwill and Other Intangible Assets
The Company allocates the cost of the acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Since the entities the Company has acquired do not have significant tangible assets, a significant portion of the purchase price has been allocated to intangible assets and goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of annual impairment tests require significant management judgments and estimates. These estimates are made based on, among other factors, consultations with an accredited independent valuation consultant, reviews of projected future operating resultsresu lts and business plans, economic projections, anticipated highest and best use of future cash flows and the market participant cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to the Company’s results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments thereby impacting the fair value of these assets, which could result in an impairment of the goodwill and acquired intangible assets.
The Company has elected to do the annual tests goodwill for indications of goodwill impairment asat least annually (as of December 3131) and whenever events or circumstances change that indicate impairment may have occurred. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of each year.operating performance or a sale or disposition of a significant portion of a reporting unit. The Company utilizestests goodwill for impairment at the reporting unit level, which is one level below its operating segments. Goodwill has been assigned to the reporting units to which the value of the goodwill relates. The Company currently has five reporting units; however, only one reporting unit, Pharmakon, includes goodwill. Goodwill is tested by estimating the fair value of the reporting unit using a discounted cash flow modelsmodel. The estimated fair value of the reporting unit is then compared with the carrying value including goodwill, to determine fair value in the goodwillif any impairment evaluation.exists. In assessing the recoverability of goodwill, projections regarding estimated future cash flows and other factors are made to determine thatthe fair value of the respective reporting units. The key estimates and factors used in the highest and best use discounted cash flow valuation include revenue growth rates and profit margins based on internal forecasts, terminal value and the market participant weighted-average cost of capital used to discount future cash flows. While the Company uses available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in impairment related to recorded goodwill balances.
During the Company’s 2009 annual impairment test of goodwill, management identified potential impairment. The 2007 and 2006 evaluations indicated that there was no impairment of goodwill. The 2005 evaluation indicated thatCompany’s management then determined the Pharmakon reporting unit’s goodwill recorded in the MD&D and Select Access reporting units was impaired and accordingly,recognized an impairment loss of $8.5 million since the Company recognized non-cash chargescarrying value of approximately $7.8 millionthe Pharmakon reporting unit was in excess of its fair value. If Pharmakon’s projected long-term sales growth rate, profit margins, or terminal rate continue to change, or the assumed weighted-average cost of capital is considerably higher, future testing may indicate additional impairment in this reporting unit and, $3.3 million, respectively, in 2005.as a result, the remaining goodwill may also be impaired. See Note 4,3, Fair Value Measurements, and Note 6, Goodwill and Other Intangible Assets, for additional information.
Long-Lived Assets
The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. In addition, future events impacting cash flows for existing assets could render a write-down or write-off necessary that was not previously required no such write-down or write-off.required.
During the year ended December 31, 2009, the Company recorded a non-cash charge of approximately $9.6 million related to the impairment of the Pharmakon intangible assets. See Note 6, Goodwill and Other Intangible Assets, for additional information. During the year ended December 31, 2009, the Company recorded non-cash charges of approximately $2.6 million for the impairment of certain furniture, leasehold improvements and office equipment due to the relocation of the Company’s headquarters and the consolidation of certain operations. In December 2007, the Company relocated its data center to a secured, hosted facility and recorded a non-cash charge of approximately $1.1 million related to computer equipment, furniture and leasehold improvements primarily due topreviously used in that data center. Also in 2007, the outsourcing ofCompany subleased the Company’s computerspace formerly occupied by the data center space atin its Saddle River, New Jersey location. In December 2007, the Company relocated its data center to a secured, hosted facility. See Note 14,16, Facilities Realignment, for additional information. Additionally, in 2007, the Company recorded a non-cash charge of approximately $42,000 related to the impairment of certain capitalized software development costs associated with one of its web portals. In 2006, the Company recorded a non-cash charge of approximately $1.3 million for furniture and leasehold improvements related to the excess leased space at its Saddle River, New Jersey and Dresher, Pennsylvania locations. See Note 14, Facilities Realignment, for additional information. In 2005, the Company recorded a non-cash charge of approximately $2.8 million related to the impairment of its Siebel sales force automation software due to the migration of the Company’s sales force automation software to the Dendrite platform. Also in 2005, the Company recorded a non-cash charge of approximately $349,000 related to the impairment of the InServe intangible assets. See Note 4, Goodwill and Other Intangible Assets, for additional information.
Self-Insurance Accruals
The Company is self-insured for certain losses for claims filed and claims incurred but not reported relating to workers’ compensation and automobile-related liabilities for Company-leased cars. The Company’s liability is estimated on an actuarial undiscounted basis supplied by its insurance brokers and insurers using individual case-based valuations and statistical analysis and is based upon judgment and historical experience, however, the final cost of many of these claims may not be known for five years or longer. In 2007, the Company also is self-insured for benefits paid under employee healthcare programs. The Company’s liability for healthcare
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
claims is estimated using an underwriting determination which is based on the current year’s average lag days between when a claim is incurred toand when it is paid.
The Company maintains stop-loss coverage with third-party insurers to limit its total exposure on all of these programs. Periodically, the Company evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense. Management reviews itsthe self-insurance accruals on a quarterly basis. Actual results may vary from these estimates, resulting in an adjustment in the period of the change in estimate. Prior to October 1, 2008, the Company was also self-insured for certain losses for claims filed and claims incurred but not reported relating to workers’ compensation and automobile-related liabilities for Company-leased cars. Beginning October 1, 2008, the Company became fully-insured through an outside carrier for these losses. The Company’s liability for claims filed and claims incurred but not reported prior to October 1, 2008 is estimated on an actuarial undiscounted basis supplied by our insurance brokers and insurers using individual case-based valuations and statistical analysis. These estimates are based upon judgment and historical experience. However, the final cost of many of these claims may not be known for five years or more after filing of the claim. At December 31, 20072009 and 2006,2008, self-insurance accruals totaled $2.9$1.0 million and $2.5$1.9 million, respectively, and are included in other accrued expenses on the balanceba lance sheet.
Treasury Stock
F-9
Treasury stock purchases
Contingencies
In the normal course of business, the Company is subject to various contingencies. Loss contingencies are accounted for underrecorded in the cost method wherebyconsolidated financial statements when it is probable that a liability will be incurred and the entire costamount of the acquired stockloss can be reasonably estimated, or otherwise disclosed. The Company is recordedcurrently involved in certain legal proceedings and, as treasury stock. Upon reissuance of shares of treasury stock,required, the Company records any difference betweenhas accrued its estimate of the weighted-average costprobable costs for the resolution of such sharesthese claims. These estimates are developed in consultation with outside counsel and any proceeds received asare based upon an adjustmentanalysis of potential results, assuming a combination of litigation and settlement strategies. Predicting the outcome of claims and litigation, and estimating related costs and exposures, involves substantial uncertainties that could cause actual costs to additional paid-in capital.va ry materially from estimates.
Revenue Recognition and Associated Costs
Revenue and associated costsCost of Services
The Company recognizes revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. Many of the product detailing contracts allow for additional periodic incentive fees to be earned if certain performance benchmarks have been attained.
Revenue under pharmaceutical detailing contracts are generally is based on the number of physician details made or the number of sales representatives utilized. With respect to risk-based contracts, all or a portion of revenues earned are based on contractually defined percentages of either product revenues or the market value of prescriptions written and filled in a given period. These contracts are generally for terms of one to two years and may be renewed or extended. The majority of these contracts, however, are terminable by the customer for any reason upon 30 to 90 days’ notice. Certain contracts provide for termination payments to the Company if the customer terminates the agreement without cause. Typically, however, these penalties do notonly partially offset the revenue the Company could have earned under the contract or the costs the Company may incur as a result of its termination. The loss or termination of a large pharmaceutical detailing contract or the loss of multiple contracts could have a material adverse effect on the Company’s business, financial condition or results of operations. See Note 12, Significant Customers.
Revenue and associated costs under marketing service contracts are generally based on a single deliverable such as a promotional program, accredited continuing medical education seminar or marketing research/advisory program. The contracts are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment for all work completed to date, plus the cost of any nonrefundable commitments made on behalf of the customer. There is significant customer concentration in the Company’s Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements could have a material adverse effect on the Company’s business, financial condition or results of operations. Due to the typical size of most contracts of TVG Marketing Research and Consulting (TVG) and Vital Issues in Medicine (VIM)®, it is unlikely the loss or termination of any individual TVG or VIM contract would have a material adverse effect on the Company’s business, financial condition or results of operations.
Service revenue is recognized on product detailing programs and certain marketing, promotional and medical education contracts as services are performed and the right to receive payment for the services is assured. Many of the product detailing contracts allow for additional periodic incentive fees to be earned if certain performance benchmarks have been attained. Revenue earned from incentive fees is recognized in the period earned and when the Company iswe are reasonably assured that payment will be made. Under performance based contracts, revenue is recognized when the performance based parameters are achieved. Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. Revenue is recognized net of any potential penalties until the performance criteria relating to the penalties have been achieved. Commissions based revenue is recognized when performance is completed. Revenue from recruiting and hiring contracts is recognized at the time the candidate begins full-time employment less a provision for sales allowances based on contractual commitments and historical experience. Revenue
The loss or termination of large pharmaceutical detailing contracts could have a material adverse effect on the Company’s business, financial condition and associated costs from marketing research contracts are recognized upon completionresults of the contract. These contracts are generally short-term in nature typically lasting two to six months.
operations. Historically, the Company has derived a significant portion of its service revenue from a limited number of customers. Concentration of business in the pharmaceutical services industry is common and the industry continues to consolidate. As a result, the Company is likely to continue to experience significant customer concentration in future periods. For the years ended December 31, 2007 and 2005, the Company’s three largest customers, who each individually represented 10% or more of its service revenue, together accounted for
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
approximately 37.9% and 73.6% of its service revenue, respectively. For the year ended December 31, 20062009, the Company’s two largest customers, who each of whom individually represented 10% or more of its service revenue, together accounted for approximately 46.8%58.5% of its service revenue. For the years ended December 31 , 2008 and 2007, the Company’s three largest customers, each of whom individually represented 10% or more of its service revenue, together accounted for approximately 52.5% and 37.9% of its service revenue, respectively. See Note 14, Significant Customers, for additional information.
Revenue under marketing service contracts are generally based on a series of deliverable services associated with the design and execution of interactive promotional programs or marketing research/advisory programs. The contracts are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment for all work completed to date, plus the cost of any nonrefundable commitments made on behalf of the customer. There is significant customer concentration in the Company’s Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements could have a material adverse effect on the Company’s business, and results of operations. Due to the typical small s ize of most contracts of TVG Marketing Research and Consulting (TVG) it is unlikely the loss or termination of any individual TVG contract would have a material adverse effect on the Company’s business, financial condition or results of operations.
Revenue from certain promotional contracts that include more than one service offering is accounted for as multiple-element arrangements. For these contracts, the deliverable elements are divided into separate units of accounting provided the following criteria are met: the price is fixed and determinable; the delivered elements have stand-alone value to the customer; there is objective and reliable evidence of the fair value of the undelivered elements; and there is no right of return or refund. The contract revenue is then allocated to the separate units of accounting based on their relative fair values. Revenue and cost of services are recognized for each unit of accounting separately as the related services are rendered.
Revenue from marketing research contracts is recognized upon completion of the contract. These contracts are generally short-term in nature typically lasting two to six months.
Cost of services consist primarily of the costs associated with executing product detailing programs, performance based contracts or other sales and marketing services identified in the contract. Cost of services include personnel costs and other 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. These costs are expensed as incurred.
Personnel costs, which constitute the largest portion of cost of services, include all labor related costs, such as salaries, bonuses, fringe benefits and payroll taxes for the sales representatives, sales managers and professional staff that 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.
Reimbursable out-of-pocket expenses include those relating to travel and other similar costs, for which the Company is reimbursed at cost by its customers. Reimbursements received for out-of-pocket expenses incurred are characterized as revenue and an identical amount is included as cost of goods and services in the consolidated statements of operations. For the years ended December 31, 2007, 20062009, 2008 and 2005,2007, reimbursable out-of-pocket expenses were $14.3$8.2 million, $25.3$12.6 million and $35.2$14.3 million, respectively.
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. For allthe majority of the Company’s contracts, training costs are reimbursable out-of-pocket expenses. For contracts where the Company is responsible for training costs, these 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. When
Contract Loss Provisions
Provisions for losses to be incurred in connection with contract performance are recognized in full in the period in which it is determined that a loss will result from performance of the contractual arrangement. The Company recognized a contract loss related to its existing product commercialization agreement in 2008. At December 31, 2009, the Company receives a specifichad no accrued contract payment from a customer upon commencement of a product detailing program expressly to compensate the Companylosses. See Note 11, Product Commercialization Contract, for recruiting, hiring and training services associated with staffing that program, such payment is deferred and recognized as revenue in the same period that the recruiting and hiring expenses are incurred and amortization of the deferred training is expensed. When the Company does not receive a specific contract payment for training, all revenue is deferred and recognized over the life of the contract.further information.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, (Revised 2004) “Share-Based Payment” (FAS 123R), using the modified prospective approach. Under the modified prospective approach, the amount ofThe compensation cost recognized includes: (i) compensation cost for all share-based payments granted before but not yet vested asassociated with the granting of January 1, 2006,stock-based awards is based on the grant date fair value estimated in accordance withof the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (FAS No.123) and (ii)stock award. The Company recognizes the compensation cost, for all share-based payments grantednet of estimated forfeitures, over the shorter of the vesting period or modified subsequentthe period from the grant date to January 1, 2006,the date when retirement eligibility is achieved. Forfeitures are initially estimated based on historical information and subsequently updated over the estimatedlife of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period to period.
The Company primarily uses the Black-Scholes option pricing model to determine the fair value atof stock options and stock-based stock appreciation rights (SARs). The determination of the fair value of stock-based payment awards is made on the date of grant or subsequent modification dateand is affected by the Company’s stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions include: expected stock price volatility over the term of the awards; actual and projected employee stock option exercise behaviors; the risk-free interest rate; and expected dividend yield. These assumptions are more fully described in accordance with the provisions of FAS 123R. PriorNote 13, Stock-Based Compensation, to January 1, 2006, the Company accounted for stock-based employee compensation using the intrinsicour consolidated financial statements. The fair value method under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).
FAS No. 123R also required us to change the classification in the consolidated statement of cash flows of any income tax benefits realized upon the exercise of stock options or issuance of restricted share awards in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as a financing activity rather than as an operating activity in the consolidated statement of cash flows.
FAS 123R also requires that the Company recognize compensation expense for only the portion of stock options, stock-settled stock appreciation rights (SARs) orunits (RSUs) and restricted shares that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. The Company applied a forfeiture rate to certain grants in 2007 and 2006. If the actual number of forfeitures differs from those estimated by management, adjustments to compensation expense might be required in future periods.
The Company had no cumulative effect adjustment upon adoption of FAS 123R under the modified prospective
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
method. As a result of adopting FAS 123R on January 1, 2006, net income and net income per share for the year ended December 31, 2006 were $290,000 and $0.02 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25. See Note 11, Stock-Based Compensation, for further information regarding the Company’s stock-based compensation assumptions and expenses.
In accordance with APB 25, the Company did not recognize stock-based compensation expense with respect to options granted with an exercise priceis equal to the market value of the underlying commonclosing stock p rice on the date of grant. As
Changes in the valuation assumptions could result in a result, prior to 2006, the recognition of stock-based compensation expense was generally limitedsignificant change to the expense relatedcost of an individual award. However, the total cost of an award is also a function of the number of awards granted, and as result, we have the ability to restricted share awards. The following table illustratesmanage the effect oncost and value of our equity awards by adjusting the net loss andnumber of awards granted.
Treasury Stock
Treasury stock purchases are accounted for under the loss per share ifcost method whereby the entire cost of the acquired stock is recorded as treasury stock. Upon reissuance of shares, the Company had appliedrecords any difference between the fair value recognition provisionsweighted-average cost of FAS 123such shares and any proceeds received as an adjustment to stock-based employee compensation for the year ended December 31, 2005.additional paid-in capital.
| | | For the Year Ended | |
| | | December 31, 2005 | |
| Net loss, as reported | | $ | (19,454 | ) |
| Add: Stock-based employee | | | | |
| compensation expense included | | | | |
| in reported net loss, net of | | | | |
| related tax effects | | | 974 | |
| Deduct: Total stock-based | | | | |
| employee compensation expense | | | | |
| determined under fair value based | | | | |
| methods for all awards, net of | | | | |
| related tax effects | | | (6,670 | ) |
| Pro forma net loss | | $ | (25,150 | ) |
| Loss per share | | | | |
| Basic—as reported | | $ | (1.37 | ) |
| Basic—pro forma | | $ | (1.77 | ) |
| | | | | |
| Diluted—as reported | | $ | (1.37 | ) |
| Diluted—pro forma | | $ | (1.77 | ) |
Rent Expense
Minimum rental expenses are recognized over the term of the lease. The Company recognizes minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction period prior to occupancy. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as a deferred lease credits.rent liability. The Company may also may receive tenant allowances including cash or rent abatements, which are reflected in other accrued expenses and long-term liabilities on the consolidated balance sheet andsheet. These allowances are amortized as a reduction toof rent expense over the term of the lease. CertainC ertain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based upon use of utilities and the landlord’s operating expenses. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
Advertising
The Company recognizes advertising costs as incurred. The total amounts charged to advertising expense, which is included in other SG&A, were approximately $290,000, $825,000 and $335,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Income taxes
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (FIN 48)taxes are based on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attributesincome for financial statement recognitionreporting purposes calculated using the Company’s expected annual effective rate and measurement ofreflect a current tax positions takenliability or expected to be taken in tax returns. In addition, FIN 48 provides guidance on derecognition, classification and disclosure of tax positions, as well asasset for the accounting for related interest and
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
penalties. The Company’s adoption of FIN 48 did not have a material effectestimated taxes payable or recoverable on the Company’s financial positioncurrent year tax return and expected annual changes in deferred taxes. Any interest or resultspenalties on income tax are recognized as a component of operations.income tax expense.
The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities based on enacted tax laws and rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. A valuation allowance is established, when necessary, to reduce the deferred income tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
The Company operates in multiple tax jurisdictions and pays or provides for the payment of taxes in each jurisdiction where it conducts business and is subject to taxation. The breadth of the Company’s operations and the complexity of the tax law require assessments of uncertainties and judgments in estimating the ultimate taxes the Company will pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of proposed assessments arising from federal and state audits. Uncertain tax positions are accounted for under FIN 48. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that thea position taken or expected to be taken in a tax return would be sustainedsust ained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured atas the largest amount of benefit that is greater than fifty percent likely of beingto be realized upon ultimate settlement. The Company adjusts accruals for unrecognized tax benefits as facts and circumstances change, such as the progress of a tax audit. The Company believes that any potential audit adjustments will not have a material adverse effect on its financial condition or liquidity. However, any adjustments made may be material to the Company’s consolidated results of operations or cash flows for a reporting period.
Significant judgment is also required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
Earnings per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of share outstanding during the year. Diluted earnings per common share are computed by dividing net income by the sum of the weighted average number of shares outstanding and dilutive common shares under the treasury method.
Comprehensive Income
Comprehensive income includes net income and the net unrealized net gains and losses on investment securities.securities, net of tax. Other comprehensive income is net of reclassification adjustments to adjust for items currently included in net income, such as realized gains and losses on investment securities. The deferred tax expense for unrealized holding gains arising from investment securities during the yearsyear ended December 31, 2009 and 2007 2006was $7,000 and 2005 was $18,000, $26,000 and $27,000, respectively. The deferred tax benefit for unrealized holding losses arising from investment securities during the year ended December 31, 2008 was $11,000. The deferred tax benefit for reclassification adjustments for losses included in net income on investment securities during the year ended December 31, 2009 was $5,000. The deferred ta x expense for reclassification adjustments for gains included in net income on investment securities during the years ended December 31, 2008 and 2007 2006was $11,000 and 2005 was $48,000, $20,000 and $30,000, respectively.
New Accounting Pronouncements –Subsequent Events
The Company has determined that there were no subsequent events to recognize or disclose in these audited consolidated financial statements.
Reclassifications
The Company reclassified certain prior period financial statement balances to conform to the current year presentation.
| 2. | Recent Accounting Standards |
Recently Adopted Standards to be Implemented
In September 2006,June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (SFAS No. 168). SFAS No. 168 was codified as Accounting Standards Codification (ASC) Topic 105-10 and replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” to establish the FASB issued SFAS No. 157 (FAS 157), “Fair Value Measurements.”ASC as the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritati ve GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the ASC when referring to GAAP in the third quarter of 2009. As the ASC was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements. This statement defines
Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value establishes a frameworkmeasurements and impairments of securities. They also provide additional guidelines for measuringestimating fair value and expands disclosures aboutin accordance with fair value measurements. This standard isaccounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairments of debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to and it will not be applied when other standards require or permitrequired to sell the useimpaired security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value measurement of an asset or liability. The statement isdisclosures. These updates were effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. However,ended after June 15, 2009. The adoption of these accounting standard updates did not have a material impact on the Company’s consolidated financial statements.
In February 12, 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delaysan accounting standard update that, as codified in ASC 820-10, delayed the effective date of FAS 157fair value measurements accounting until the beginning of the first quarter of fiscal 2009 for nonfinancialall non-financial assets and nonfinancialnon-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 defers the effective date, including goodwill and other non-amortizable intangible assets. The provisions of FAS 157 to fiscal years beginning after November 15, 2008,ASC 820-10 will be applied at such time a fair value measurement of a non-financial asset or non-financial liability is required and interim periods within those fiscal years for items within the scope of FSP 157-2.may result in a fair value that is materially different. The Company adopted the required provision of FAS 157 as ofthis accounting standard update effective January 1, 2008.2009. The adoption of this update had no impact on the Company’s consolidated finan cial statements.
Effective January 1, 2009, the Company does not expectadopted a new accounting standard update regarding business combinations. As codified under ASC 805, this update requires that the purchase method be used for all business combinations and that an acquirer is identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer in a business combination, including business combinations achieved in stages (step acquisitions), to recognize the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value, with limited exceptions. It also requires the acquisition-date recognition o f assets acquired and liabilities assumed arising from certain contractual contingencies at their acquisition-date fair value. Additionally, ASC 805 requires that acquisition-related costs be recognized in the period in which the costs are incurred and services are received. Excluding the accounting for valuation allowances on deferred taxes and acquired contingencies under ASC 805-740, any impact resulting from the adoption of FAS 157ASC 805 is being applied on a prospective basis for all business combinations with an acquisition date on or after January 1, 2009. The adoption of this update had no impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted a new accounting standard update from the Emerging Issues Task Force (EITF) consensus regarding unvested share-based payment awards that contain nonforfeitable rights to dividends. This update, as codified in ASC 260-10-45, requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid), are participating securities and are included in the computation of earnings per share pursuant to the two-class method. As a result of adopting ASC 260-10-45, the Company restated prior year earnings per share calculations. The provisions of ASC 260-10-45 did not have a material impact on the Company’s earnings per share calculation.
Accounting Standards Updates Not Yet Effective
In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25. The revised guidance eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting and eliminates the residual method to allocate arrangement consideration. In addition, the updated guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 is effective for the Company beginning January 1, 2011 and can be applied prospectively or retrospectively. The Company is currently evaluating the impact this update will have, if any, on its consolidated financial positionstatements.
| 3. | Fair Value Measurements |
Fair value is the price that would be received to sell an asset or results of operations.
paid to transfer a liability in an orderly transaction between market participants at the measurement date. In February 2007,determining fair value, the FASB issued SFAS No. 159, “The Fair Value Option for Financial AssetsCompany uses various methods including market, income and Financial Liabilities-including an amendment of FASB Statement No. 115” (FAS 159). FAS 159 permits entitiescost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to elect to measure eligible financial instruments at fair value.the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company would report unrealized gainsutilizes valuation techniques that maximize the use of observable inputs and losses on items for whichminimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred.hierarchy. The Company adopted FAS 159 as of January 1, 2008. The Company has not elected the fair value option for any items
hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
PDI, Inc.
Notes to the Consolidated Financial Statements
(tabular information in thousands, except share and per share data)
| Level 1: | Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
| Level 2: | Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
| Level 3: | Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
A description of the valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
The fair value of marketable securities is valued using market prices in active markets (level 1). As of December 31, 2009, the Company did not have any marketable securities in less active markets (level 2) or without observable market values that would require a high level of judgment to determine fair value (level 3).
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2009:
| | | As of December 31, 2009 | | | Fair Value Measurements | |
| | | Carrying | | | Fair | | | as of December 31, 2009 | |
| | | Amount | | | Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Marketable securities: | | | | | | | | | | | | | | | |
| Money market funds | | $ | 202 | | | $ | 202 | | | $ | 202 | | | $ | - | | | $ | - | |
| Mutual funds | | | 74 | | | | 74 | | | | 74 | | | | - | | | | - | |
| U.S. Treasury securities | | | 2,814 | | | | 2,814 | | | | 2,814 | | | | - | | | | - | |
| Government agency securities | | | 2,782 | | | | 2,782 | | | | 2,782 | | | | - | | | | - | |
| | | $ | 5,872 | | | $ | 5,872 | | | $ | 5,872 | | | $ | - | | | $ | - | |
The Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments. The fair value of letters of credit is determined to be $0 as management does not expect any material losses to result from these instruments because performance is not expected to be required.
The Company’s non-financial assets, such as goodwill and intangible assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized. The following table summarizes the Company’s financial assets measured at fair value on a nonrecurring basis as of December 31, 2009:
| | | Carrying Amount as of December 31, 2009 | | | Fair Value Measurements | |
| | | | | as of December 31, 2009 | |
| | | | | Level 1 | | | Level 2 | | | Level 3 | |
| Long-lived assets held and used: | | | | | | | | | | | | |
| Other intangible assets | | $ | 2,542 | | | | - | | | | - | | | $ | 2,542 | |
| Goodwill | | | 5,068 | | | | - | | | | - | | | | 5,068 | |
| | | $ | 7,610 | | | $ | - | | | $ | - | | | $ | 7,610 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
permitted under FAS 159.
In December 2007,A review of Pharmakon’s historic, current and forecasted operating results indicated that the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (FAS 141R). FAS 141R will changecarrying amount of the accounting for business combinations. Under FAS 141R, an acquiring entity willCompany’s finite-lived intangible assets may not be requiredrecoverable from the sum of future undiscounted cash flows. As a result, customer relationships and the corporate tradename were written down to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-datetheir fair value with limited exceptions. FAS 141R will changeof approximately $2.5 million, resulting in an impairment charge of approximately $9.6 million included in asset impairment in the accounting treatment and disclosure for certain specific items in a business combination. FAS 141R applies prospectively to business combinations for whichconsolidated statements of operations. Goodwill was tested by estimating the acquisition date is on or after the beginningfair value of the first annual reporting period beginning on or after December 15, 2008. FAS 141R will have an impact on accountingunit using a consideration of market multiples and a discounted cash flow model and was written down to its implied fair value. See Note 6, Goodwill and Other Intangible Assets, for business combinations once adopted but the effect is dependent upon acquisitions at that time.additional information.
Reclassifications
The Company reclassified certain prior period financial statements balances to conform to the current year presentation.
2.4. | Investments in Marketable Securities |
Available-for-sale securities are carried at fair value with the unrealized holding gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses on available-for-sale securities are computed based upon specific identification and included in other income (expense), net in the consolidated statement of operations. Declines in value judged to be other-than-temporary on available-for-sale securities are recorded as realized in other income (expense), net in the consolidated statement of operations and the cost basis of the security is reduced. The fair values for marketable equity securities are based on quoted market prices. Held-to-maturity investments are stated at amortized cost which approximates fair value. & #160;Interest income is accrued as earned. Realized gains and losses on held-to-maturity investments are computed based upon specific identification and included in interest income, net in the consolidated statement of operations. The Company does not have any investments classified as trading.
Available-for-sale securities consist of assets in a Rabbi Trustrabbi trust associated with the Company’sits deferred compensation plan. For the year endedAt December 31, 2006 available-for-sale securities also included auction rate securities (ARSs) held by the Company. For the years ended December 31, 20072009 and 2006,2008, the carrying value of available-for-sale securities was approximately $459,000$164,000 and $33.2 million,$159,000, respectively, andwhich are included in short-term investments. For the year ended December 31, 2006, there was $32.6 million invested in ARSs. The ARSs were invested in high-grade municipal bonds that had a weighted average maturity date of 27.2 years with an average interest rate reset period of 33.5 days. The available-for-sale securities within the Company’s deferred compensation plan for the years endedat December 31, 20072009 and 20062008 consisted of approximately $198,000$90,000 and $215,000$103,000, respectively, in money market accounts, and approximately $261,000$74,000 and $447,000,$56,000, respectively, in mutual funds. At December 31, 2007 and 2006, included in2009 accumulated other comprehensive income wereincluded gross unrealized holding gains of approximately $51,000$6,000 and $131,000, respectively,no gross unrealized holding losses. At December 31, 2008 accumulated other comprehensive income included no gross unrealized holding gains and gross unrealized holding losses of approximately $2,000 and $3,000, respectively. At$27,000. During the year ended December 31, 2007 and 2006, included in interest2009, other income, net wereincluded gross realized losses of $15,000 and $1,000 of net realized gains. During the year ended December 31, 2008, other income, net included gross realized gains of approximately $126,000$29,000 and $65,000, respectively, andno gross realized losses of approximately $0 and $12,000, respectively.losses.
The Company’s other marketable securities consist of a laddered portfolio of investment grade debt instruments such as obligations of U.S. Treasury and U.S. Federal Government agencies municipal bonds and commercial paper.are maintained in separate accounts to support the Company’s letters-of-credit. These investments are categorized as held-to-maturity because the Company’s management has the intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost, which approximates fair value, and have a weighted average maturity of 3.5 months at December 31, 2007. The Company also maintains held-to-maturity securities which are in separate accounts to support the Company’shad standby letters of credit. The weighted average maturity of those investments is 17.6 months at December 31, 2007.
The Company has standby letters of creditletters-of-credit of approximately $7.3$5.7 million and $9.7$5.9 million at December 31, 20072009 and 2006,2008, respectively, as collateral for its existing insurance policies and its facility leases. At December 31, 20072009, approximately $3.6 million and 2006,$2.1 million of held-to-maturity securitiesinvestments were included in short-term investments (approximately $7.3 million and $36.2 million, respectively), other current assets (approximately $5.1 million and $7.2 million, respectively) and other long-term assets, (approximatelyrespectively. At D ecember 31, 2008, approximately $2.2 million and $2.5$3.6 million respectively). For the years endedof held-to-maturity investments were included in other current assets and other long-term assets, respectively.
At December 31, 20072009 and 20062008, held-to-maturity securitiesinvestments included:
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| Cash/money accounts | | $ | 2,390 | | | $ | 332 | |
| Municipal securities | | | - | | | | 32,843 | |
| US Treasury obligations | | | 1,498 | | | | 1,499 | |
| Government agency obligations | | | 3,400 | | | | 8,394 | |
| Other securities | | | 7,340 | | | | 2,879 | |
| Total | | $ | 14,628 | | | $ | 45,947 | |
| | | | | | Maturing | | | | | | Maturing | |
| | | | | | | | | after 1 year | | | | | | | | | after 1 year | |
| | | December 31, | | | within | | | through | | | December 31, | | | within | | | through | |
| | | 2009 | | | 1 year | | | 3 years | | | 2008 | | | 1 year | | | 3 years | |
| Cash/money market funds | | $ | 112 | | | $ | 112 | | | $ | - | | | $ | 733 | | | $ | 733 | | | $ | - | |
| US Treasury securities | | | 2,814 | | | | 1,911 | | | | 903 | | | | 2,043 | | | | 1,000 | | | | 1,043 | |
| Government agency securities | | | 2,782 | | | | 1,635 | | | | 1,147 | | | | 3,071 | | | | 500 | | | | 2,571 | |
| Total | | $ | 5,708 | | | $ | 3,658 | | | $ | 2,050 | | | $ | 5,847 | | | $ | 2,233 | | | $ | 3,614 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
Property and equipment consisted of the following as of December 31, 20072009 and 2006:
| | | December 31, | |
| | | 2007 | | | 2006 | |
| Furniture and fixtures | | $ | 3,281 | | | $ | 3,549 | |
| Office equipment | | | 1,465 | | | | 1,461 | |
| Computer equipment | | | 4,773 | | | | 8,265 | |
| Computer software | | | 9,496 | | | | 9,355 | |
| Leasehold improvements | | | 6,023 | | | | 6,698 | |
| | | | 25,038 | | | | 29,328 | |
| Less accumulated depreciation | | | (16,690 | ) | | | (16,519 | ) |
| | | $ | 8,348 | | | $ | 12,809 | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Furniture and fixtures | | $ | 3,673 | | | $ | 3,281 | |
| Office equipment | | | 1,228 | | | | 1,306 | |
| Computer equipment | | | 5,902 | | | | 4,800 | |
| Computer software | | | 9,058 | | | | 9,580 | |
| Leasehold improvements | | | 6,903 | | | | 6,036 | |
| | | | 26,764 | | | | 25,003 | |
| Less accumulated depreciation | | | (23,234 | ) | | | (19,580 | ) |
| | | $ | 3,530 | | | $ | 5,423 | |
Depreciation expense was approximately $3.1$1.5 million, $3.3 million and $2.6$3.1 million, for the years ended December 31, 2009, 2008 and 2007, 2006 and 2005, respectively. AmortizationIncluded in depreciation expense is amortization expense for capitalized computer software cost wasof approximately $0.1 million, $0.9 million and $1.2 million, $1.1respectively.
During the year ended December 31, 2009, the Company recorded a non-cash charge of approximately $2.6 million for furniture, leasehold improvements and $1.3 million, respectively.
Inoffice equipment related to the vacated space in Saddle River, New Jersey and for furniture and leasehold improvements related to the Dresher, Pennsylvania facility. During the year ended December 31, 2007, the Company recorded a non-cash charge of approximately $1.0 million for furniture and leasehold improvements related to the excess leased space at its Saddle River New Jersey and Dresher, Pennsylvania locations. In 2006, the Company recorded a non-cash charge of approximately $1.3 million for furniture and leasehold improvements related to the excess leased space at its Saddle River and Dresher locations. The charges discussed above can be found in the facilities realignment line on the income statement in their respective period. See Note 14,16, Facilities Realignment, for additional information.
4.6. | Goodwill and Other Intangible Assets |
InGoodwill and finite-lived intangible assets recorded as of December 2007, 200631, 2009 and 2005,2008 are attributable to the Company performed its2004 acquisition of Pharmakon. During the Company’s annual goodwill impairment evaluation. Goodwill has been assigned totest as of December 31, 2009, management identified a potential impairment. The Company’s management then determined the Pharmakon reporting units to whichunit’s goodwill was impaired and recognized an impairment loss of $8.5 million since the carrying value of the goodwill relates. The 2007 and 2006 evaluation indicated that goodwill was not impaired. The 2005 evaluation indicated that goodwill recorded in the MD&D and Select AccessPharmakon reporting units was impaired and accordingly, the Company recognized non-cash charges of approximately $7.8 million and $3.3 million, respectively, in 2005. On December 4, 2005 the Company announced it was discontinuing its MD&D business unit, which ceased operations in the second quarter of 2006. (See Note 17, Discontinued Operations, for additional information.) As a result of that decision and the expected cash flows that the unit was expected to generate in 2006, an impairment chargeexcess of $7.8 million was recorded in operating expense in the sales services segment, which represented allits fair value. As of the goodwill associated with the InServe acquisition. That charge is currently included in discontinued operations as MD&D is no longer part of the sales services segment. The loss of a key customer that historically represented between 25%December 31, 2009 and 35% of revenue and the lack of new business projected at the time within Select Access were the main factors for the $3.3 million goodwill impairment charge and was recorded in the sales services segment.
Additionally, due to the discontinuation of the MD&D business unit, the Company evaluated the recoverability of MD&D long-lived assets and determined that those assets were impaired. The Company recorded a non-cash charge of approximately $349,000 in 2005. This was also recorded in operating expense to discontinued operations.
Changes in2008, the carrying amount of goodwill was $5.1 million and $13.6 million, respectively.
During the Company’s annual budgeting process and based on the evaluation of historic, current, budgeted and forecasted operating results, there were indications that the carrying amount of the Company’s finite-lived intangible assets, customer relationships and corporate tradename, may not be recoverable from the sum of future undiscounted cash flows. Impairments of $0.8 million for the years endedcorporate tradename and $8.8 million for the customer relationships were calculated as the amount by which the carrying value of each asset exceeded its fair value and was recorded within asset impairment in the consolidated statement of operations.
The fair value of the corporate tradename, with the assistance of third-party valuation analysts, was determined using the “Relief from Royalty Method” (RFRM), a variation of the “Income Approach” to valuing tradenames. The RFRM is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate is based on empirical, market-derived royalty rates for guideline intangible assets when available. The royalty rate is applied to the projected revenue over the expected remaining life of the intangible asset to estimate the royalty savings. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to prese nt value. Additionally, as part of the analysis, the operating income of Pharmakon was benchmarked to determine a range of royalty rates that would be reasonable based on a profit-split methodology. The profit-split methodology is based upon assumptions that the total amount of royalties paid for licensable intellectual property should approximate in order to determine a reasonable royalty rate to estimate the fair value of the corporate tradename. As of December 31, 20072009, the amortizable life of the corporate tradename was determined to be seven years.
The fair value of the customer relationship was determined using the “Excess Earnings Method” a variation of the “Income Approach” to valuing customer relationships. This method reflects the present value of the operating cash flows generated by existing customer relationships after taking into account the cost to realize the revenue, and 2006 were as follows:
| | | Marketing | |
| | | Services | |
| | | | |
| Balance as of December 31, 2005 | | $ | 13,112 | |
| Goodwill additions | | | 500 | |
| Balance as of December 31, 2006 | | $ | 13,612 | |
| | | | | |
| Goodwill additions | | | - | |
| Balance as of December 31, 2007 | | $ | 13,612 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
The increase in goodwill for the year ended December 31, 2006 was associated with the final escrow payment made to the members of Pharmakon, LLC, pursuant to the Pharmakon acquisition agreement.
All intangible assets recorded as of December 31, 2007 are attributable to the acquisition of Pharmakon and are being amortized on a straight-line basis over the lives of the intangibles, which range from 5 to 15 years. The net carrying value of the identifiable intangible assets for the years ended December 31, 2007 and 2006 is as follows:
| | | As of December 31, 2009 | | | As of December 31, 2008 | |
| | | Carrying | | | Accumulated | | | | | | Carrying | | | Accumulated | | | | |
| | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
| Noncompete covenant | | $ | 140 | | | $ | 140 | | | $ | - | | | $ | 140 | | | $ | 121 | | | $ | 19 | |
| Customer relationships | | | 1,751 | | | | - | | | | 1,751 | | | | 16,300 | | | | 4,709 | | | | 11,591 | |
| Corporate tradenames | | | 791 | | | | - | | | | 791 | | | | 2,500 | | | | 722 | | | | 1,778 | |
| Total | | $ | 2,682 | | | $ | 140 | | | $ | 2,542 | | | $ | 18,940 | | | $ | 5,552 | | | $ | 13,388 | |
| | | As of December 31, 2007 | | | As of December 31, 2006 | |
| | | Carrying | | | Accumulated | | | | | | Carrying | | | Accumulated | | | | |
| | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
| Covenant not to compete | | $ | 140 | | | $ | 93 | | | $ | 47 | | | $ | 140 | | | $ | 65 | | | $ | 75 | |
| Customer relationships | | | 16,300 | | | | 3,622 | | | | 12,678 | | | | 16,300 | | | | 2,536 | | | | 13,764 | |
| Corporate tradename | | | 2,500 | | | | 556 | | | | 1,944 | | | | 2,500 | | | | 389 | | | | 2,111 | |
| Total | | $ | 18,940 | | | $ | 4,271 | | | $ | 14,669 | | | $ | 18,940 | | | $ | 2,990 | | | $ | 15,950 | |
Amortization expense related to continuing operations for the years ended December 31, 2007, 20062009, 2008 and 20052007 was approximately $1.3 million for each of the three years, respectively. Estimated amortization expense for the next five years is as follows:
| 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
| $ | 363 | | | $ | 363 | | | $ | 363 | | | $ | 363 | | | $ | 363 | |
| 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | |
| $ | 1,281 | | | $ | 1,272 | | | $ | 1,253 | | | $ | 1,253 | | | $ | 1,253 | |
5. | Loans and Investments in Privately-Held Entities |
In May 2004, the Company entered into a loan agreement with TMX Interactive, Inc. (TMX), a provider of sales force effectiveness technology. Pursuant to the loan agreement, the Company provided TMX with a term loan facility of $500,000 and a convertible loan facility of $500,000, both of which were due on November 26, 2005. In 2005, due to TMX’s continued losses and uncertainty regarding its future prospects, the Company established an allowance for credit losses against the TMX loans. For the years ended 2007, 2006 and 2005, TMX provided services to the Company valued at $9,000, $246,000, and $245,000 respectively. The receipt of services in lieu of cash payment was recorded as a credit to bad debt expense and a reduction of the receivable in the respective periods. At December 31, 2007, the loan receivable has a balance of $500,000, which is fully reserved.
In October 2002, the Company acquired $1.0 million of preferred stock of Xylos Corporation (Xylos). In addition, the Company provided Xylos with short-term loans totaling $500,000 in the first half of 2004. The Company determined its $1.0 million investment and $500,000 short-term loan to Xylos were impaired as of December 31, 2004. The Company wrote its $1.0 million investment down to zero and established an allowance for credit losses against the $500,000 short-term loan. Xylos made loan payments totaling $150,000, $250,000, and $100,000 in 2007, 2006 and 2005, respectively and the loan has been repaid in full. These payments were recorded as credits to bad debt expense in the periods in which they were received.
In June 2005, the Company sold its approximately 12% ownership share in In2Focus Sales Development Services Limited, (In2Focus), a United Kingdom contract sales company. The Company’s original investment of $1.9 million had been written down to zero in the fourth quarter of 2001. The Company received approximately $4.4 million, net of deal costs, which was included in gain on investments in 2005.
The Company offers an employee 401(k) saving plan. Under the PDI, Inc. 401(k) Plan, employees may contribute up to 25% of their pre-tax compensation. Effective January 1, 2004, the Company makes a safe harbor non-elective contribution in an amount equal to 100% of the first 3% of the participant’s contributed base salary contributed up to 3% plus 50% of the participant’s base salary contributed exceeding 3% but not more than 5%. Prior to January 1, 2004, the Company made cash contributions in an amount equal to 100% of the participant’s base salary contributed up to 2%. Participants are not allowed to invest any of their 401(k) funds in the Company’s common stock. The Company’s total contribution expense related to the Company’s 401(k) plans for 2007, 2006the years ended December 31, 2009, 2008 and 20052007 was approximately $725,000, $1.3$0.6 million, $0.8 million, and $2.1$0.7 million, respectively.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
7.8. | Deferred Compensation Arrangements |
Beginning in 2000, the Company established a deferred compensation arrangement whereby a portion of certain employees’ salaries is withheld and placed in a Rabbi Trust.rabbi trust. The plan permits the employeesparticipants to diversify these assets through a variety of investment options. Members of the Company’s Board of Directors (Board) also have the opportunity to defer their compensation through this arrangement. The Company adopted the provisions of EITF No. 97-14 "Accounting for Deferred Compensation Arrangement Where Amounts are Earned and Held in a Rabbi Trust and Invested” which requires the Company to consolidate into its financial statementsincludes the net assets of the trust.trust in its financial statements. The deferred compensation obligation has been classified as a current liability and the net assets in the trust are classified as available-for-sale securities and are included in short-term investments.
8.9. | Long-termLong-Term Liabilities |
Long-term liabilities consisted of the following as of December 31, 20072009 and 2006:2008:
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Deferred tax | | $ | - | | | $ | 1,443 | |
| Rent payable | | | 2,458 | | | | 2,736 | |
| Accrued income taxes | | | 3,920 | | | | 6,003 | |
| Facilities realignment | | | 3,628 | | | | 387 | |
| | | $ | 10,006 | | | $ | 10,569 | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| Deferred tax | | $ | 1,113 | | | $ | - | |
| Rent payable | | | 2,959 | | | | 2,970 | |
| Accrued income taxes | | | 5,765 | | | | 3,592 | |
| Other | | | 340 | | | | 1,323 | |
| | | $ | 10,177 | | | $ | 7,885 | |
9.10. | Commitments and Contingencies |
The Company leases facilities, automobiles and certain equipment under agreements classified as operating leases, which expire at various dates through 2016.2017. Substantially all of the property leases provide for increases based upon use of utilities and landlord’s operating expenses.expenses as well as pre-defined rent escalations. Lease and auto expense under these agreements for the years ended December 31, 2007, 20062009, 2008 and 20052007 was approximately $5.0 $4.0 million, $15.0$4.9 million, and $22.9$5.0 million, respectively, of which $2.2 million, $2.9 million in 2007, $12.7and $2.9 million, in 2006, and $19.3 million in 2005respectively, related to automobiles leased for use by employees for a term of one year from the date of delivery with yearly annual renewal options.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
As of December 31, 2007,2009, contractual obligations with terms exceeding one year and estimated minimum future rental payments required by non-cancelable operating leases with initial or remaining lease terms exceeding one year are as follows:
| | | | | | Less than | | | 1 to 3 | | | 3 to 5 | | | After | | | | | | Less than | | | 1 to 3 | | | 3 to 5 | | | After | |
| | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | |
Contractual obligations (1) | | $ | 3,977 | | | $ | 2,545 | | | $ | 1,432 | | | $ | - | | | $ | - | | | $ | 617 | | | $ | 617 | | | $ | - | | | $ | - | | | $ | - | |
| Operating lease obligations | | | | | | | | | | | | | | | | | | | | | |
| Operating lease | | | | | | | | | | | | | | | | | | | | | |
| Minimum lease payments | | 27,573 | | | 3,226 | | | 6,529 | | | 6,526 | | | 11,292 | | | | 25,093 | | | | 3,418 | | | | 7,677 | | | | 7,981 | | | | 6,017 | |
Less minimum sublease rentals (2) | | | (6,171 | ) | | | (1,058 | ) | | | (1,992 | ) | | | (1,357 | ) | | | (1,764 | ) | |
Less: minimum sublease rentals (2) | | | | (6,039 | ) | | | (1,025 | ) | | | (2,065 | ) | | | (1,913 | ) | | | (1,036 | ) |
| Net minimum lease payments | | | 21,402 | | | | 2,168 | | | | 4,537 | | | | 5,169 | | | | 9,528 | | | | 19,054 | | | | 2,393 | | | | 5,612 | | | | 6,068 | | | | 4,981 | |
| Total | | $ | 25,379 | | | $ | 4,713 | | | $ | 5,969 | | | $ | 5,169 | | | $ | 9,528 | | | $ | 19,671 | | | $ | 3,010 | | | $ | 5,612 | | | $ | 6,068 | | | $ | 4,981 | |
| | (1) | Amounts represent contractual obligations related to software license contracts, data center hosting, and outsourcing contracts for software system support. |
| (2) | In June 2005, the CompanyAugust 2009, we signed an agreement to extend our existing sublease of approximately 16,000 square feet of the first floor at itsour then corporate headquarters facility in Saddle River, New Jersey (approximately 16,000 square feet). The sublease is for a five-year term commencing on July 15, 2005, andthrough the remainder of our lease. This agreement provides for approximately $2$2.2 million in lease payments over that period. In JuneJuly 2007, the Companywe signed an agreement to sublease approximately 20,000 square feet of the second floor at itsour corporate headquarters (approximately 20,000 square feet).headquarters. The sublease term is through January 2016the remainder of our lease and will provide for approximately $4.4$4.5 million in lease payments over that period. Also induring the year ended December 31, 2007, the Companywe signed two separate subleases at its TVGour facility in Dresher, Pennsylvania. These subleases are for five-year terms and will provide approximately $650,000$0.7 million combined in lease payments over thatthe five-year period. |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
Litigation
Due to the nature of the businesses in which the Company is engaged, such as product detailing and in the past, the distribution of products, it could be exposed to certain risks. Such risks include, among others, risk of liability for personal injury or death to persons using products the Company promotes or distributes. There can be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business activities and recent increases in litigation related to healthcare products, including pharmaceuticals. 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 an indemnification agreement; 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.
California Class Action Litigation
On September 26, 2005, the Company was served with a complaint in a purported class action lawsuit that was commenced against the Company in the Superior Court of the State of California for the County of San Francisco on behalf of certain of its current and former employees, alleging violations of certain sections of the California Labor Code. During the quarter ended September 30, 2005, the Company accrued approximately $3.3 million for potential penalties and other settlement costs relating to both asserted and unasserted claims relating to this matter. In December 2005, the Company reached a tentative settlement of this action, subject to court approval. In October 2006, the Company received preliminary settlement approval from the court and the final approval hearing was held in January 2007. Pursuant to the settlement, the Company has made all payments to the class members, their counsel and the California Labor and Workforce Development Agency in an aggregate amount of approximately $50,000, and the lawsuit was dismissed with prejudice in May 2007.
Cellegy Litigation
On April 11, 2005, the Company settled a lawsuit which was pending in the U.S. District Court for the Northern District of California against Cellegy Pharmaceuticals, Inc. (Cellegy). Under the terms of the settlement, in exchange for executing a stipulation of dismissal with prejudice of the lawsuit, Cellegy agreed to and did deliver to the Company: (i) a cash payment in the amount of $2.0 million; (ii) a Secured Promissory Note in the principal amount of $3.0 million, with a maturity date of October 11, 2006; (iii) a Security Agreement, granting the Company a security interest in certain collateral; and (iv) a Nonnegotiable Convertible Senior Note, with a face value of $3.5 million, with a maturity date of April, 11, 2008.
In addition to the initial $2.0 million received on April 11, 2005, Cellegy had paid $200,000 in 2005 and $458,500 through June 30, 2006 towards the outstanding principal balance of the Secured Promissory Note. These payments were recorded as a credit to litigation expense in the periods in which they were received.
On December 1, 2005, the Company commenced a breach of contract action against Cellegy in the U.S. District Court for the Southern District of New York (PDI, Inc. v. Cellegy Pharmaceuticals, Inc., 05 Civ. 10137 (PKL)). The Company alleged that Cellegy breached the terms of the Security Agreement and Secured Promissory Note that it received in connection with the settlement. For Cellegy's breach of contract, the Company sought damages in the total amount of $6.4 million plus default interest from Cellegy.
On December 27, 2005, Cellegy filed an answer to the Company’s complaint, denying the allegations contained therein, and asserting affirmative defenses. Discovery subsequently commenced and pursuant to a scheduling order entered by the court, was to be completed by November 21, 2006. On June 22, 2006, the parties appeared before the court for a status conference and agreed to a dismissal of the lawsuit without prejudice because, among other reasons, discovery would not be complete before October 11, 2006, the maturity date of the Secured Promissory Note, at which time Cellegy would owe the Company the entire unpaid principal balance and interest on the Secured Promissory Note. On July 13, 2006, the court dismissed the December 1, 2005 breach of contract lawsuit without prejudice. This had no effect on the original settlement.
On September 27, 2006, Cellegy announced that it had entered into an asset purchase agreement to sell its intellectual property rights and other assets relating to certain of its products and product candidates to Strakan
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
International Limited (the Sale). Pursuant to a letter agreement between Cellegy and the Company, Cellegy agreed to pay the Company $3.0 million (the Payoff Amount) in full satisfaction of Cellegy’s obligations to the Company under the Secured Promissory Note, which had an outstanding principal amount of approximately $2.34 million, and the $3.5 million Nonnegotiable Convertible Senior Note. Pursuant to the letter agreement, $500,000 of the Payoff Amount was paid to the Company in September 2006, and the remaining $2.5 million was paid to the Company in December 2006 upon consummation of the Sale.
The Company had previously established an allowance for doubtful notes for the outstanding balance of the Notes; therefore, the Agreement did not result in the recognition of a loss. The $3.0 million received was recorded as a credit to litigation expense.
Bayer-Baycol Litigation
The Company has been named as a defendant in numerous lawsuits, including two class action matters, alleging claims arising from the use of Baycol, a prescription cholesterol-lowering medication. Baycol was distributed, promoted and sold by Bayer AG (Bayer) in the U.S. through early August 2001, at which time Bayer voluntarily withdrew Baycol from the U.S. market. Bayer had retained certain companies, such as the Company, to provide detailing services on its behalf pursuant to contract sales force agreements. The Company may be named in additional similar lawsuits. To date, the Company has defended these actions vigorously and has asserted a contractual right of defense and indemnification against Bayer for all costs and expenses that it incurs relating to these proceedings. In February 2003, the Company entered into a joint defense and indemnification agreement with Bayer, pursuant to which Bayer has agreed to assume substantially all of the Company’s defense costs in pending and prospective proceedings and to indemnify the Company in these lawsuits, subject to certain limited exceptions. Further, Bayer agreed to reimburse the Company for all reasonable costs and expenses incurred through such date in defending these proceedings. As of December 31, 2007, Bayer has reimbursed the Company for approximately $1.6 million in legal expenses, the majority of which was received in 2003 and was reflected as a credit within selling, general and administrative expense. The Company did not incur any costs or expenses relating to these matters during 2005, 2006 or 2007.
Letters of Credit
As of December 31, 2007,2009, the Company has $7.3$5.7 million in letters of credit outstanding as required by its existing insurance policies and its facility leases.
Due to the nature of the businesses in which the Company is engaged, such as product detailing and in the past, the distribution of products, it could be exposed to certain risks. Such risks include, among others, risk of liability for personal injury or death to persons using products the Company promotes or distributes. There can be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business activities and recent increases in litigation related to healthcare products, including pharmaceuticals. The Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification provisions with customers (the scope of which may vary from customer to customer, and the performance of which is not secured) and insuranc e. 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 an indemnification agreement; 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.
Bayer-Baycol Litigation
The Company was named as a defendant in numerous lawsuits, including two class action matters, alleging claims arising from the use of Baycol, a prescription cholesterol-lowering medication. Baycol was distributed, promoted and sold by Bayer in the United States until early August 2001, at which time Bayer voluntarily withdrew Baycol from the U.S. market. Bayer had retained certain companies, such as the Company, to provide detailing services on its behalf pursuant to contract sales force agreements. In February 2003, the Company entered into a joint defense and indemnification agreement with Bayer, pursuant to which Bayer has agreed to assume substantially all of the Company’s defense costs in pending and prospective proceedings and to indemnify the Company in these lawsuits, subject to certain limited exceptions. The Company did not incur any costs or expenses relating to these matters during 2007, 2008 or 2009. In July 2009 the final Baycol lawsuit in which the Company was named as a defendant was dismissed, and as of December 31, 2009, there were no pending Baycol-related claims against the Company.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
10.11. | Product Commercialization Contract: |
On April 11, 2008, the Company announced the signing of a promotion agreement with Novartis Pharmaceuticals Corporation (Novartis). Pursuant to the agreement, the Company had the co-exclusive right to promote on behalf of Novartis the pharmaceutical product Elidel® (pimecrolimus) Cream 1% (Product) to physicians in the United States.
At December 31, 2008, the Company accrued a contract loss of approximately $10.3 million, representing the anticipated future loss that the Company expected to incur to fulfill its contractual obligations under this product commercialization agreement through February 2010, the earliest termination date for this contract. The loss contract provision for this agreement included the cost of the sales force needed to deliver the contracted number of sales calls.
On April 22, 2009, the Company and Novartis mutually agreed to terminate this promotion agreement. In connection with the termination, the Company entered into an amendment to a currently existing fee for service sales force agreement (the Sales Force Agreement) with Novartis relating to another Novartis branded product, whereby the Company agreed to provide Novartis a credit of approximately $5 million to be applied to the services provided by the Company under the Sales Force Agreement through the scheduled December 31, 2009 agreement expiration date. Under the amendment to the Sales Force Agreement, the Company also agreed to provide Novartis with an additional credit of approximately $250,000 to be applied against any services that the Company may perform for Novartis during 2010. The Company recog nized a benefit of approximately $2.5 million due to the reversal of excess contract loss accrual in the second quarter of 2009.
At December 31, 2009, the Company owes Novartis approximately $45,000 under the Sales Force Agreement, as amended.
The Company's Board is authorized to issue, from time to time,time-to-time, up to 5,000,000 shares of preferred stock in one or more series. The Board is authorized to fix the rights and designation of each series, including dividend rights and rates, conversion rights, voting rights, redemption terms and prices, liquidation preferences and the number of shares of each series. As of December 31, 20072009 and 2006,2008, there were no issued and outstanding shares of preferred stock.
On January 1, 2006, the Company adopted FAS 123R. See Note 1, Nature of Business and Significant Accounting Policies, for a description of the adoption of FAS 123R. The Company’s stock-incentive program is a long termlong-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. The Company considers its stock-incentive program critical to its operations and productivity. Currently, the Company grants options, SARs and restricted shares from the PDI, Inc. 2004 Stock Award and Incentive Plan (the 2004 Plan), which is described below.
The Company currentlyprimarily uses the Black-Scholes option pricing model to determine the fair value of stock options and SARs. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatility wasis based on historical volatility. As there is no trading volume for the Company’s options, implied volatility wasis not representative of the Company’s current volatility so the historical volatility wasis determined to be more indicative of the Company’s expected future stock performance. The expected life wasis determined using the safe-harbor method permitted by Securities Exchange Commission’s Staff Accounting Bulletin (SAB) No. 107 (SAB 107).method. The Company expects to use
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
this simplified method for valuing employee SARs grants as permitted by the provisions of SAB 107 until more detailed information about exercise behavior becomes available over time. The Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options or SARs. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. The CompanyC ompany recognizes compensation cost, net of estimated forfeitures, arising from the issuance of stock options and SARs on a straight-line basis over the vesting period of the grant.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
The estimated compensation cost associated with the granting of restricted stock and restricted stock units is based on the fair value of the Company’s common stock on the date of grant. The Company recognizes the compensation cost, net of estimated forfeitures, arising from the issuance of restricted stock and restricted stock units on a straight-line basis over the vesting term.
The Company recognizes the estimated compensation cost of performance contingent shares, net of estimated forfeitures, based on the probability that the performance condition will be achieved. These awards are earned upon attainment of identified performance goals. The fair valueshorter of the awardsvesting period or the period from the grant date to the date when retirement eligibility is based on the measurement date. The awards will be amortized over the performance period. Compensation cost for performance contingent shares is estimated based on the number of awards that are expected to vest and is adjusted for those awards that do ultimately vest.achieved.
The following table provides the weighted average assumptions used in determining the fair value of the non-performance based stock-based awards granted during the years ended December 31, 2007, 2006,2009, 2008, and 20052007 respectively:
| | 2009 | | 2008 | | 2007 |
| Risk-free interest rate | 1.38% | | 2.25% | | 4.54% |
| Expected life | 3.5 years | | 3.5 years | | 3.5 years |
| Expected volatility | 44.99% | | 41.31% | | 50.87% |
| | 2007 | | 2006 | | 2005 |
| Risk-free interest rate | 4.54% | | 4.81% | | 3.79% |
| Expected life | 3.5 years | | 3.5 years | | 5 years |
| Expected volatility | 50.87% | | 66.12% | | 100% |
Stock Incentive Plan
In June 2004, the Board and stockholders approved the 2004 Plan. The 2004 Plan replaced the 1998 Stock Option Plan (the 1998 Plan) and the 2000 Omnibus Incentive Compensation Plan (the 2000 Plan). The 2004 Plan reserved an additional 893,916 shares for new awards as well asand combined the remaining shares available under the 1998 Plan and 2000 Plan. The maximum number of shares that can be granted under the 2004 Plan is approximately 2.9 million shares. Eligible participants under the 2004 Plan include officers and other employees of the Company, members of the Board and outside consultants, as specified under the 2004 Plan and designated by the Compensation and Management Development Committee of the Board. Unless earlier terminated by action of the Board, the 2004 Plan will remain in effecteff ect until such time as no stock remains available for delivery under the 2004 Plan and the Company has no further rights or obligations under the 2004 Plan with respect to outstanding awards under the 2004 plan.thereunder. No participant may be granted more than the annual limit of 400,000 shares plus the amount of the participant'sparticipant’s unused annual limit relating to share-based awards as of the close of the previous year, subject to adjustment for splits and other extraordinary corporate events.
StockHistorically, stock options arewere generally granted with an exercise price equal to the market value of the common stock on the date of grant, expireexpired 10 years from the date they are granted, and generally vestvested over a two-year period for members of the Board of Directors and a three-year period for employees. Upon exercise, new shares are issued by the Company. The Company has not issued stock options since 2005. SARs are generally granted with a grant price equal to the market value of the common stock on the date of grant, vest one-third each year on the anniversary of the date of grant and expire five years from the date of grant. The restricted shares and restricted stock units generally have vesting periods that range from eighteen months to three years and are subject to accelerated vestingv esting and forfeiture under certain circumstances.
On February 9, 2005,In November 2008, the Company acceleratedCompany’s chief executive officer was granted 140,000 restricted stock units and 280,000 performance contingent SARs. The restricted stock units will vest into shares of the Company’s common stock, in five equal installments, with the initial 20% of the units vesting of all outstanding unvested underwater stock options. Accelerated stock options totaled 473,334 and impacted 43 employees and seven board members. There was no compensation expense recognized as a result of this acceleration. On December 30, 2005, prior to the adoption of FAS 123R, the Company accelerated the vesting of 97,706 SARs and placed a restrictionimmediately on the transfer or salegrant date and an additional 20% of the common stock received upon the exercise of these SARs that matched the originalunits vesting scheduleon each anniversary of the SARs. This impacted 38 employees and resulted in $86,000 in compensation expense.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
grant date over a four year period. The Company accelerated the vesting of all outstanding unvested underwater stock options and SARs in 2005 to avoid recognizing compensation expense in future periods.
On March 29, 2005, the Company issued 54,903 performance contingent sharesSARs have an exercise price of its common stock$4.28, a seven year term to be issued upon the attainment of all established performance goals by March 2008. At December 31, 2007 there are 3,602 performance contingent shares outstanding. There were three levels of performance that dictate the number of shares to be issued. Throughout 2005, the Company had recognized compensation expense related to this award on its expectation of the probability that the performance conditions would be satisfiedexpiration, and subsequently reversed that expense in 2006 as the probability that the performance conditions, even at the marginal level, would be satisfied was deemed remote. The Company currently expects 539 shares to be awarded and as such, recognized approximately $11,000 in compensation expense in 2007.
The weighted averagea weighted-average fair value of options$0.86. The fair value estimate of the performance contingent SARs was calculated using a Monte Carlo Simulation model. The performance contingent SARs are subject to the same vesting schedule as the restricted stock units but are only exercisable if the following stock performance-based conditions are satisfied: (1) with respect to the initial 94,000 performance contingent SARs, the closing price of the Company’s common stock is at least $10.00 per share for 60 consecutive trading days anytime within five years from the grant date; (2) with respect to the next 93,000 performance contingent SARs, the closing price of the Company’s common stock is at least $15.00 per share for 60 consecutive trading days anytime within five years from the grant date; and (3) with respect to the final 93,000 performance contingent SARs, the closing price of the Company’s common stock is at least $20.00 per share for 60 consecutive trading days anytime within five years from the grant date. The weighted-average fair value of non-performance based SARs granted during the years ended December 31, 2007, 20062009, 2008 and 20052007 was estimated to be $1.99, $2.54 and $3.97, $6.31 and $9.10 respectively. ForThere were no exercises of options or SARs during the years ended December 31, 2006 and 2005,2009, 2008 or 2007. Historically, shares issued upon the aggregate intrinsic valuesexercise of options have been new shares and SARs exercised under the Company’s stock option plans were approximately $130,000 and $243,000, respectively, determined as of the date of exercise. There were no exercises in 2007.have not come from treasury shares. As of December 31, 2007,2009, there was $2.0$1.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested SARs and restricted stock that are expected to be recognized over a weighted-average period of approximately 2.02.2 years. Cash received from options exercised under the Company’s stock option plans for the years ended December 31, 2006 and 2005 was $87,000, and $591,000, respectively. Historically, shares issued upon the exercise of options have been new shares and have not come from treasury shares.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
The impact of stock options, SARs, performance shares, RSUs and restricted stock on net (loss) income and cash flow for the years ended December 31, 2009, 2008 and 2007 2006 and 2005 wasis as follows:
| | | 2007 | | | 2006 | | | 2005 | |
| Stock options and SARs | | $ | 455 | | | $ | 361 | | | $ | 142 | |
| Conditional grant | | | - | | | | 104 | | | | - | |
| Performance shares | | | 11 | | | | (60 | ) | | | 60 | |
| Restricted stock | | | 1,163 | | | | 1,198 | | | | 973 | |
| | | | 1,629 | | | | 1,603 | | | | 1,175 | |
| Acceleration of vesting - restricted stock | | | 54 | | | | 233 | | | | 531 | |
| Acceleration of vesting - SARs | | | - | | | | - | | | | 57 | |
| Forfeitures | | | (207 | ) | | | (176 | ) | | | (306 | ) |
| Total stock-based compensation expense | | | 1,476 | | | | 1,660 | | | | 1,457 | |
| Tax impact | | | (565 | ) | | | (408 | ) | | | (483 | ) |
| Reduction to net income | | $ | 911 | | | $ | 1,252 | | | $ | 974 | |
| | | | | | | | | | | | | |
| Increase (reduction) in cash flow | | | | | | | | | | | | |
| from operating activies | | $ | 242 | | | $ | (23 | ) | | $ | - | |
| (Reduction) increase in cash flow | | | | | | | | | | | | |
| from financing activies | | $ | (242 | ) | | $ | 23 | | | $ | - | |
| | | 2009 | | | 2008 | | | 2007 | |
| Stock options and SARs | | $ | 252 | | | $ | 260 | | | $ | 435 | |
| Common stock awards | | | - | | | | 300 | | | | - | |
| Performance awards | | | 78 | | | | 9 | | | | 11 | |
| RSUs and restricted stock | | | 1,057 | | | | 918 | | | | 1,030 | |
| Total stock-based compensation expense | | $ | 1,387 | | | $ | 1,487 | | | $ | 1,476 | |
A summary of stock option and SARs activity for the year ended December 31, 20072009 and changes during the year then ended is presented below:
| | | | | | Weighted- | | | | | | | | | | | | Weighted- | | | Weighted-Average | | | | |
| | | | | | Average | | | Contractual | | | Intrinsic | | | | | | Average | | | Remaining | | | Aggregate | |
| | | Shares | | | Grant Price | | | Period (in years) | | | Value | | | | | | Grant | | | Contractual | | | Intrinsic | |
| Outstanding at January 1, 2007 | | 1,016,618 | | | $ | 23.44 | | | 5.23 | | | $ | 36 | | |
| | | | Shares | | | Price | | | Period (in years) | | | Value | |
| Outstanding at January 1, 2009 | | | | 797,377 | | | $ | 13.04 | | | | 4.77 | | | $ | - | |
| Granted | | 157,304 | | | 9.52 | | | 4.25 | | | - | | | | 166,445 | | | | 5.45 | | | | 4.59 | | | | 41 | |
| Exercised | | - | | | - | | | | | | | | | | | | - | | | | - | | | | | | | | | |
| Forfeited or expired | | | (527,097 | ) | | | 25.74 | | | | | | | | | | | | (179,710 | ) | | | 13.76 | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 646,825 | | | | 18.18 | | | | 4.18 | | | | 19 | | |
| Outstanding at December 31, 2009 | | | | 784,112 | | | | 11.26 | | | | 4.41 | | | | 192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2007 | | 447,835 | | | $ | 21.61 | | | 4.28 | | | $ | 19 | | |
| Exercisable at December 31, 2009 | | | | 320,387 | | | | 20.33 | | | | 3.11 | | | | - | |
| | | | | | | | | | | | | | | | | | |
| Vested and expected to vest | | | | 568,402 | | | | 13.63 | | | | 4.05 | | | | 111 | |
A summary of the status of the Company’s nonvested SARs for the year ended December 31, 2009 and changes during the year ended December 31, 2009 is presented below:
| | | Shares | | | Weighted- Average Grant Date Fair Value | |
| | | | | | | |
| Nonvested at January 1, 2009 | | | 370,548 | | | $ | 1.82 | |
| Granted | | | 166,445 | | | | 1.80 | |
| Vested | | | (126,612 | ) | | | 2.32 | |
| Forfeited | | | (64,906 | ) | | | 2.47 | |
| Nonvested at December 31, 2009 | | | 345,475 | | | $ | 1.50 | |
A summary of the Company’s nonvested shares of restricted stock and restricted stock units for the year ended December 31, 2009 and changes during the year then ended is presented below:
| | | | | | Weighted- | | | Average | | | | |
| | | | | | Average | | | Remaining | | | Aggregate | |
| | | | | | Grant Date | | | Vesting | | | Intrinsic | |
| | | Shares | | | Fair Value | | | Period (in years) | | | Value | |
| Nonvested at January 1, 2009 | | | 324,425 | | | $ | 7.20 | | | | 2.56 | | | $ | 1,301 | |
| Granted | | | 299,632 | | | | 4.10 | | | | 2.41 | | | | 1,444 | |
| Vested | | | (127,047 | ) | | | 8.32 | | | | | | | | | |
| Forfeited | | | (56,435 | ) | | | 6.42 | | | | | | | | | |
| Nonvested at December 31, 2009 | | | 440,575 | | | $ | 4.87 | | | | 2.28 | | | $ | 2,124 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
| 14. | Significant Customers |
A summary of
During the status of the Company’s nonvested options and SARs for the yearyears ended December 31, 20072009, 2008 and changes during the year ended December 31, 2007, is presented below:
| | | Shares | | | Weighted- Average Grant Date Fair Value | |
| | | | | | | |
| Nonvested at January 1, 2007 | | | 150,291 | | | $ | 6.76 | |
| Granted | | | 157,304 | | | | 3.97 | |
| Vested | | | (46,646 | ) | | | 7.49 | |
| Forfeited | | | (61,959 | ) | | | 5.73 | |
| Nonvested at December 31, 2007 | | | 198,990 | | | $ | 4.71 | |
A summary of the Company’s outstanding shares of restricted stock for the year ended December 31, 2007 and changes during the year then ended is presented below:
| | | | | | Weighted- | | | Average | | | Aggregate | |
| | | | | | Average | | | Remaining | | | Intrinsic | |
| | | | | | Grant Date | | | Vesting | | | Value | |
| | | Shares | | | Fair Value | | | Period (in years) | | | (in thousands) | |
| Outstanding at January 1, 2007 | | | 196,738 | | | $ | 14.57 | | | | 1.31 | | | $ | 2,286 | |
| Granted | | | 166,603 | | | | 9.87 | | | | 2.37 | | | | 1,561 | |
| Vested | | | (107,849 | ) | | | 16.24 | | | | | | | | | |
| Forfeited | | | (41,528 | ) | | | 11.27 | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 213,964 | | | $ | 10.71 | | | | 2.07 | | | $ | 2,005 | |
During 2007, 2006 and 2005 the Company had several significant customers for which it provided services under specific contractual arrangements. The following sets forth the net revenue generated by customers who accounted for more than 10% of the Company's revenue during each of the periods presented.
| | | | Years Ended December 31, | |
| Customer | | | 2007 | | | 2006 | | | 2005 | |
| | A | | | $ | 15,992 | | | $ | - | | | $ | - | |
| | B | | | | 15,155 | | | | - | | | | - | |
| | C | | | | 13,259 | | | | - | | | | - | |
| | D | | | | - | | | | 68,240 | | | | 69,452 | |
| | E | | | | - | | | | 43,603 | | | | 107,260 | |
| | F | | | | - | | | | - | | | | 48,051 | |
For all the customers listed above, excluding customer B, the| | | | Years Ended December 31, | |
| Customer | | | 2009 | | | 2008 | | | 2007 | |
| A | | | $ | 35,739 | | | $ | 31,697 | | | $ | 15,155 | |
| B | | | | 13,946 | | | | 15,304 | | | | - | |
| C | | | | - | | | | 12,072 | | | | 13,259 | |
| D | | | | | | | | - | | | | 15,992 | |
The Company recorded revenue in both segments. Sales Services and Marketing Services for each of the customers above.
For customer B, all the year ended December 31, 2009 the Company’s two largest customers, each represented 10% or more of its revenue, wasaccounted for, in the sales services segment.
aggregate, approximately 58.5% of its revenue. For the years ended December 31, 2007,2008, and 2005,2007, the Company’s three largest customers, who each individually represented 10% or more of its revenue, accounted for in the aggregate, approximately 37.9%52.5% and 73.6%37.9% respectively, of its revenue. For the year endedAt December 31, 20062009 and 2008, the Company’s two and three largest customers each of whomrespectively, represented 10% or more of its revenue, accounted for, in the aggregate, approximately 46.8% of its revenue.
At December 31, 200753.5% and 2006, the Company’s three and two largest customers represented 21.4% and 11.7%72.2%, respectively, of the aggregate of outstanding accounts receivable and unbilled services.
On February 28, 2006, the Company announced that it has been notified by AstraZeneca that its fee-for-service agreements with the Company would be terminated effective April 30, 2006, reducing revenue by approximately $63.8 million in 2006.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
On September 26, 2006, the Company announced that it had received verbal notification from GSK of its intention not to renew its contract sales engagement with the Company for 2007. The contract, which represented approximately $65 million to $70 million in revenue on an annual basis, expired as scheduled on December 31, 2006.
On October 25, 2006, the Company also announced that it had received notification from sanofi-aventis of its intention to terminate its contract sales engagement with the Company effective December 1, 2006. The contract, which represented approximately $18 million to $20 million in revenue on an annual basis, was previously scheduled to expire on December 31, 2006.
On March 21, 2007, the Company announced that a large pharmaceutical company customer had notified them of its intention not to renew its contract sales engagement with the Company upon its scheduled expiration on May 12, 2007. This contract which had a one-year term and represented approximately $37 million in annual revenue.
In the third quarter of 2009, there was an executive departure within the Company’s Marketing Services segment. The Company incurred approximately $0.2 million in compensation expense related to this executive departure. On October 21, 2005,June 20, 2008, the Company announced the resignationretirement of Charles T. Saldarini as vice chairman of the Board andits former chief executive officer. Mr. Saldarini also resigned as aofficer and board member and recorded approximately $0.9 million of compensation expense. In the Company’s Board. As per the terms of his employment agreement, Mr. Saldarini was entitled to approximately $2.8 million in cash and stock compensation, which was recognized in the fourththird quarter of 2005.
On August 10, 2005,2008, the Company also announced that Bernard C. Boyle, the Company’s Chief Financial Officer would resign from his position with the Company effective December 31, 2005. The Company recognizedan executive departure and incurred approximately $1.6$0.3 million in additional compensation expense in the third quarter of 2005 as per the terms of his employment agreement. Effective December 31, 2005, the Company entered into an amended memorandum of understanding with the Company, pursuant to which Mr. Boyle deferred his resignation until March 31, 2006.
The Company also announced the resignation of three other executive vice presidents during 2005, one other executive vice president during 2006 and its president of its sales services segment during 2007. The Company recognized charges of approximately $5.7 million and $573,000 related to executive resignations/settlements in 2005 and 2006, respectively. These amounts are shown separately within operating expenses on the consolidated statement of operations for the years ended December 31, 2005 and 2006.expense. There were no executive severance charges for the year ended December 31, 2007.
TheAs part of the Company’s cost savings initiative, the Company relocated its corporate headquarters to a smaller office space located in Parsippany, New Jersey in December 2009. As a result of exiting the Saddle River, New Jersey facility, the Company recorded facility realignment charges totalingof approximately $1.0$3.9 million $2.0in the December 2009. The Company also recorded a non-cash impairment charge of approximately $1.5 million and $2.4 million during 2007, 2006 and 2005, respectively. These charges were for costs related to excess leasedfurniture, leasehold improvements and office spaceequipment in the office space. Effective September 1, 2009, the Company has atextended the sublease for the first floor of its Saddle River, New Jersey facility through the remainder of the facility lease term. The sublease is expected to provide approximately $2.3 million in sublease income through January 2016, but w ill not fully offset the Company’s lease obligations for this space. As a result, the Company recorded a $0.8 million facility realignment charge in the third quarter of 2009. The Company also recorded a non-cash impairment charge of approximately $0.4 million related to furniture and Dresher, Pennsylvania facilities.leasehold improvements in the office space. In 2007, the Company sub-leasedentered into a sublease for the excess office space atsecond floor of its Saddle River, New Jersey location and also secured sub-leases for twofacility through the end of the three vacant spaces at its Dresher location.facility’s lease term, January 2016. This sublease will not fully offset the Company’s lease obligations for this space; therefore, the Company recorded a $1.0 million charge for facility realignment and related asset impairment for furniture and leasehold improvements in the office space. The Company is currently seeking to sublease the remaining excessoffice space, approximately 47,000 square feet, at its Saddle River, New Jersey facility.
The Company continues to rightsize its operations in Dresher, Pennsylvania. As a result, the Company recorded facility realignment charges totaling approximately $1.4 million in 2009 related to exited space of approximately 18,000 square feet at its Dresher, Pennsylvania facility. The Company also recorded a non-cash impairment charge of approximately $0.7 million related to furniture and leasehold improvements in the unused office space as the Company determined it was unlikely that it will be able to recover the carrying value of these long-lived assets. In 2007, the Company secured subleases for approximately 8,000 square feet of the approximately 12,000 square feet exited in 2005. The Company is currently seeking to sublease approximately 22,000 square feet of the remaining unused space at its Dresher location. Dres her, Pennsylvania facility.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
A summary of the significant components of the facility realignment charges for the years ended December 31, 2005, 20062007, 2008 and 20072009 by segment is as follows:
| | | Sales | | | Marketing | | | | |
| 2007: | | Services | | | Services | | | Total | |
| Facility lease obligations | | $ | (198 | ) | | $ | (82 | ) | | $ | (280 | ) |
| Asset impairments | | | 1,020 | | | | 56 | | | | 1,076 | |
| Related charges | | | 225 | | | | - | | | | 225 | |
| Total facility realignment charge | | $ | 1,047 | | | $ | (26 | ) | | $ | 1,021 | |
| 2008: | | | | | | | | | | | | |
| Facility lease obligations | | $ | - | | | $ | 75 | | | $ | 75 | |
| Total facility realignment charge | | $ | - | | | $ | 75 | | | $ | 75 | |
| 2009: | | | | | | | | | | | | |
| Facility lease obligations | | $ | 4,674 | | | $ | 1,374 | | | $ | 6,048 | |
| Asset impairments | | | 1,881 | | | | 703 | | | | 2,584 | |
| Related charges | | | 54 | | | | 48 | | | | 102 | |
| Total facility realignment charge | | $ | 6,609 | | | $ | 2,125 | | | $ | 8,734 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
| | | Sales | | | Marketing | | | | |
| 2005: | | Services | | | Services | | | Total | |
| Facility lease obligations | | $ | 1,057 | | | $ | 1,297 | | | $ | 2,354 | |
| Total facility realignment charge | | $ | 1,057 | | | $ | 1,297 | | | $ | 2,354 | |
| 2006: | | | | | | | | | | | | |
| Facility lease obligations | | $ | 803 | | | $ | (146 | ) | | $ | 657 | |
| Asset impairments (1) | | | 474 | | | | 821 | | | | 1,295 | |
| Total facility realignment charge | | $ | 1,277 | | | $ | 675 | | | $ | 1,952 | |
| 2007: | | | | | | | | | | | | |
| Facility lease obligations | | $ | (198 | ) | | $ | (82 | ) | | $ | (280 | ) |
| Asset impairments (1) | | | 1,020 | | | | 56 | | | | 1,076 | |
| Related charges | | | 225 | | | | - | | | | 225 | |
| Total facility realignment charge | | $ | 1,047 | | | $ | (26 | ) | | $ | 1,021 | |
| | | | | | | | | | | | | |
| (1) The asset impairments resulted in changes to the accumulated depreciation balance | |
The following table presents a reconciliation of the restructuring charges in 20062008 and 20072009 to the balance at December 31, 20072009 and 2006,2008, which is included in other accrued expenses ($305,0002.6 million and $1.0$0.2 million, respectively) and in long-term liabilities ($370,0003.6 million and $1.3$0.4 million, respectively):
| Balance as of December 31, 2005 | | $ | 2,335 | |
| Accretion | | | 51 | |
| Payments | | | (680 | ) |
| Adjustments | | | 606 | |
| Balance as of December 31, 2006 | | $ | 2,312 | |
| | | | | |
| Accretion | | | 21 | |
| Payments | | | (1,378 | ) |
| Adjustments | | | (280 | ) |
| Balance as of December 31, 2007 | | $ | 675 | |
| | | Sales | | | Marketing | | | | |
| | | Services | | | Services | | | Total | |
| | | | | | | | | | |
| Balance as of December 31, 2007 | | $ | 273 | | | $ | 402 | | | $ | 675 | |
| Accretion | | | 6 | | | | 7 | | | | 13 | |
| Adjustments | | | - | | | | 75 | | | | 75 | |
| Payments | | | (87 | ) | | | (117 | ) | | | (204 | ) |
| Balance as of December 31, 2008 | | $ | 192 | | | $ | 367 | | | $ | 559 | |
| Accretion | | | 12 | | | | 25 | | | | 37 | |
| Additions | | | 4,694 | | | | 1,405 | | | | 6,099 | |
| Payments | | | (168 | ) | | | (274 | ) | | | (442 | ) |
| Balance as of December 31, 2009 | | $ | 4,730 | | | $ | 1,523 | | | $ | 6,253 | |
Charges for facility lease obligations relate to real estate lease contracts where the Company has exited certain space and is required to make payments over the remaining lease term (January 2016 and November 2016 for the Saddle River, New Jersey facility and for the Dresher, Pennsylvania facility, respectively). All lease termination amounts are shown net of projected sublease income. The charges in 2008 pertained to a change in the estimated time it will take to sublet the remaining Dresher space. The charges in 2007 were primarily related to the exiting of the computer data center space at its Saddle River location as the Company is now outsourcing that capability. The charges in 2006 reflected additional space exited as well as additional charges to reflect the softness of the real estate market in both areas as neither sublet despite actively marketing the spaces. Additionally, in 2006, the Company recorded an impairment charge related to leasehold improvements in both spaces as the Company determined it was unlikely that it will be able to recover the carrying value of these assets.
Deferred tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statements and tax bases of assets and liabilities, as measured by the current enacted tax rates. Deferred tax expense (credit) is the result of changes in the deferred tax asset and liability.
The (benefit) provision (credit) for income taxes from continuing operations for the years ended December 31, 2007, 20062009, 2008 and 20052007 is comprised of the following:
| | | 2009 | | | 2008 | | | 2007 | |
| Current: | | | | | | | | | |
| Federal | | $ | (5,518 | ) | | $ | 278 | | | $ | 465 | |
| State | | | 195 | | | | 266 | | | | 189 | |
| Total current | | | (5,323 | ) | | | 544 | | | | 654 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | (1,386 | ) | | | 314 | | | | 1,058 | |
| State | | | (125 | ) | | | 17 | | | | 55 | |
| Total deferred | | | (1,511 | ) | | | 331 | | | | 1,113 | |
| (Benefit) provision for income taxes | | $ | (6,834 | ) | | $ | 875 | | | $ | 1,767 | |
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
| | | 2007 | | | 2006 | | | 2005 | |
| Current: | | | | | | | | | |
| Federal | | $ | 465 | | | $ | (1,520 | ) | | $ | (5,867 | ) |
| State | | | 189 | | | | (1,914 | ) | | | (379 | ) |
| Total current | | | 654 | | | | (3,434 | ) | | | (6,246 | ) |
| | | | | | | | | | | | | |
| Federal | | | 1,058 | | | | 2,592 | | | | 3,662 | |
| State | | | 55 | | | | 118 | | | | 2,785 | |
| Total deferred | | | 1,113 | | | | 2,710 | | | | 6,447 | |
| Provision for income taxes | | $ | 1,767 | | | $ | (724 | ) | | $ | 201 | |
| | | | | | | | | | | | | |
Total income tax expense in 2007, 2006 and 2005, including taxes associated with discontinued operations was $1.8 million, ($465,000) and $201,000, respectively.
The tax effects of significant items comprising the Company’s deferred tax assets and (liabilities) as of December 31, 2007 and 2006 are as follows:
| | | 2007 | | | 2006 | |
| Current deferred tax assets (liabilities) | | | | | | |
| included in other current assets: | | | | | | |
| Allowances and reserves | | $ | 1,402 | | | $ | 1,580 | |
| Contract costs | | | - | | | | 31 | |
| Compensation | | | 905 | | | | 835 | |
| Valuation allowance on deferred tax assets | | | (2,307 | ) | | | (2,446 | ) |
| | | | - | | | | - | |
| Noncurrent deferred tax assets (liabilities) | | | | | |
| included in other long-term assets: | | | | | | | | |
| State net operating loss carryforwards | | | 2,221 | | | | 2,048 | |
| Federal net operating loss carryforwards | | | 3,148 | | | | - | |
| State taxes | | | 1,066 | | | | 1,016 | |
| Equity investment | | | 128 | | | | 505 | |
| Self insurance and other reserves | | | 1,940 | | | | 2,703 | |
| Property, plant and equipment | | | 178 | | | | (1,133 | ) |
| Intangible assets | | | (291 | ) | | | (172 | ) |
| Other reserves - restructuring | | | (64 | ) | | | (629 | ) |
| Valuation allowance on deferred tax assets | | | (9,439 | ) | | | (4,338 | ) |
| | | | (1,113 | ) | | | - | |
| Net deferred tax liability | | $ | (1,113 | ) | | $ | - | |
The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. The Company's recent operating results and projections of future income weighed heavily in the Company's overall assessment. As a result, the Company established a full federal and state valuation allowance for the net deferred tax assets at December 31, 20072009 and 20062008 because the Company determined that it was more likely than not that these assets would not be realized. In connection with the Worker, Homeownership, and Business Assistance Act (“Act”), passed in November 2009, the Company was able to carry back net operating losses incurred during the December 31, 2008 tax year to the 2003 and 2004 tax years. This carry back resulted in a benefit of approximately $3.3 million related to 2008 net operating losses for which a valuation allowance had been previously established. At December 31, 20072009 and 2006,2008, the Company had a valuation allowance of approximately $11.7$34.2 million and $6.8$25.6 million, respectively, related to the Company's net deferred tax assets. The tax effects of significant items comprising the Company’s deferred tax assets that cannot be carried back.and (liabilities) as of December 31, 2009 and 2008 are as follows:
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
| | | 2009 | | | 2008 | |
Current deferred tax assets (liabilities) included in other current assets: | | | | | | |
| Allowances and reserves | | $ | 1,401 | | | $ | 4,931 | |
| Compensation | | | 2,390 | | | | 3,022 | |
| Valuation allowance on deferred tax assets | | | (3,791 | ) | | | (7,953 | ) |
| | | | - | | | | - | |
Noncurrent deferred tax assets (liabilities) included in other long-term assets: | | | | | | | | |
| State net operating loss carryforwards | | | 4,318 | | | | 3,171 | |
| Federal net operating loss carryforwards | | | 13,848 | | | | 10,218 | |
| State taxes | | | 1,087 | | | | 1,052 | |
| Compensation | | | - | | | | (474 | ) |
| Equity investment | | | - | | | | 135 | |
| Self insurance and other reserves | | | 1,388 | | | | 1,736 | |
| Property, plant and equipment | | | 2,318 | | | | 978 | |
| Intangible assets | | | 5,529 | | | | (681 | ) |
| Other reserves - restructuring | | | 1,899 | | | | 25 | |
| Valuation allowance on deferred tax assets | | | (30,387 | ) | | | (17,603 | ) |
| | | | - | | | | (1,443 | ) |
| Net deferred tax liability | | $ | - | | | $ | (1,443 | ) |
The noncurrent net deferred tax liability as of December 31, 2008 relates to tax amortization of the tax basis in goodwill associated with the Pharmakon acquisition. Prior to 2007, the Company included in net deferred tax assets, the deferred tax liability related to the Pharmakon acquisition. In the first quarter of 2007 theThe Company determined that this deferred tax liability would not be realizable for an indeterminate time in the future and consequently should not be included in net deferred tax assets for purposes of calculating the valuation allowance in any period. As a result,In connection with the Company increasedimpairment of goodwill at the valuation allowance by $882,000 inPharmakon business unit during 2009, the first quarter. The Company does not believe this increase was material to the results of operations or its financial position in 2007. The Company
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
also believes that the additional valuation allowance that would have resulted as ofdeferred tax liability at December 31, 20062008 reversed and 2005 was not material to the resultsresulted in a current year tax benefit of operations or the financial position of the Company in those years.approximately $1.4 million.
Federal tax attribute carryforwards at December 31, 2007,2009, consist primarily of approximately $9.7$46.0 million of net operating losses and $339,000 of capital losses. In addition, the Company has approximately $47.9$92.9 million of state net operating losses carryforwards. The utilization of the federal carryforwards as an available offset to future taxable income is subject to limitations under federal income tax laws. If the federal net operating losses are not utilized, they begin to expire in 2027. The capital2027, and if the current state net operating losses can only beare not utilized against capital gains and $339,000 willthey begin to expire in 2009.2010.
A reconciliation of the difference between the federal statutory tax rates and the Company's effective tax rate is as follows:
| | | 2007 | | | 2006 | | | 2005 | |
| Federal statutory rate | | | (35.0 | %) | | | 35.0 | % | | | (35.0 | %) |
| State income tax rate, net | | | | | | | | | | | | |
| of Federal tax benefit | | | 1.0 | % | | | (11.0 | %) | | | 17.9 | % |
| Meals and entertainment | | | 0.4 | % | | | 0.3 | % | | | 0.7 | % |
| Valuation allowance | | | 46.8 | % | | | (26.9 | %) | | | 18.4 | % |
| Other non-deductible | | | 0.2 | % | | | (2.0 | %) | | | - | |
| Tax exempt income | | | (2.7 | %) | | | (6.0 | %) | | | (2.9 | %) |
| Net change in Federal and state reserves | | | 10.8 | % | | | 3.8 | % | | | 2.7 | % |
| Effective tax rate | | | 21.5 | % | | | (6.8 | %) | | | 1.80 | % |
| | | 2009 | | | 2008 | | | 2007 | |
| Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State income tax rate, net of Federal tax benefit | | | 0.1 | % | | | (1.8 | %) | | | (1.0 | %) |
| Meals and entertainment | | | 0.1 | % | | | (0.1 | %) | | | (0.4 | %) |
| Valuation allowance | | | (27.0 | %) | | | (34.1 | %) | | | (46.8 | %) |
| Goodwill Impairment | | | 3.6 | % | | | 0.0 | % | | | 0.0 | % |
| Other non-deductible | | | 0.0 | % | | | (0.9 | %) | | | (0.2 | %) |
| Tax exempt income | | | 0.0 | % | | | 0.0 | % | | | 2.7 | % |
| Net change in Federal and state uncertain tax positions | | | (5.1 | %) | | | (0.7 | %) | | | (10.8 | %) |
| Effective tax rate | | | 16.9 | % | | | (2.6 | %) | | | (21.5 | %) |
The
On January 1, 2007, the Company adopted the provision of FIN48 on January 1, 2007. As a result of the implementation of FIN 48,authoritative guidance related to accounting for uncertainty in income taxes. Upon adoption, the Company recognized nodid not recognize a material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $4.0 million of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. At December 31, 2007, the Company had $4.1 million of unrecognized tax benefits, all of which would affect its effective tax rate if recognized.
| Upon adoption of FIN 48, the Company’s income tax liabilities as of January 1, 2007 included a totalF-26
PDI, Inc. Notes to the Consolidated Financial Statements (Continued) (tabular information in thousands, except share and per share data)
The Company’s income tax liabilities as of January 1, 2007 included approximately $4.0 million for unrecognized tax benefits, excluding approximately $0.9 million of related accrued interest, and approximately $0.3 million for unrecognized tax benefits, excluding approximately $925,000 of related accrued interest, and approximately $300,000 of related penalties. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows: |
| | | Unrecognized | |
| | | Tax Benefits | |
| | | | |
| Balance of unrecognized benefits as of January 1, 2007 | | $ | 4,027 | |
| Additions for tax positions related to the current year | | | 11 | |
| Additions for tax positions of prior years | | | 209 | |
| Reductions for tax positions of prior years | | | (137 | ) |
| Balance as of December 31, 2007 | | $ | 4,110 | |
| Reductions for tax positions of prior years | | | (157 | ) |
| Balance as of December 31, 2008 | | $ | 3,953 | |
| Reductions for tax positions of prior years | | | (17 | ) |
| Balance as of December 31, 2009 | | $ | 3,936 | |
| | | Unrecognized | |
| | | Tax Benefits | |
| | | | |
| Balance of unrecognized benefits as of January 1, 2007 | | $ | 4,027 | |
| Additions for tax positions related to the current year | | | 11 | |
| Additions for tax positions of prior years | | | 209 | |
| Reductions for tax positions of prior years | | | (137 | ) |
| Balance as of December 31, 2007 | | $ | 4,110 | |
The Company recognizes interest and penalties if any,accrued related to unrecognizeduncertain tax benefitspositions in income tax expense. As ofAt December 31, 2007,2009 and 2008, accrued interest and penalties, net were $2.3 million and $2.1 million, respectively.
During 2009 the Company recognized approximately $475,000, respectively, of such interest expense asrecorded a component ofreduction to its “Provision (benefit) for income taxes." The liability fornet unrecognized tax benefits included accrued interest of $1.4 million and $925,000 at December 31, 2007 and January 1, 2007, respectively. The Company has approximately $300,000 of accrued liabilities or expense for penalties$2.3 million. This reduction was primarily related to unrecognized taxthe Act which would allow the Company to utilize its existing NOLs if these uncertain benefits for the years ended December 31, 2007 and 2006.resulted in additional taxable income.
The Company and its subsidiaries file a U.S. Federal consolidated income tax return and consolidated and separate income tax returns in numerous state and local tax jurisdictions. The following tax years remain subject to examination as of December 31, 2007:2009:
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
| Jurisdiction | | Tax Years |
| Federal | | 20062003-2008 |
| State and Local | | 2002 - 20062002-2008 |
The Company reached an agreement with the Internal Revenue Service (IRS) examiner in regards to the audit of the 2003, 2004 and 2005 tax years. The adjustments are not material to the Company's financial position, results of operations or cash flows. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
The Company is currentlyF-27
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in the examination phase of a statethousands, except share and local income tax audit for the years 2002 through 2006, and expects this audit to be completed within the next 12 months with no material adjustments.per share data)
16.18. | Historical Basic and Diluted Net (Loss)/IncomeLoss per Share |
Historical basic and diluted net (loss)/income per share is calculated based on the requirements of SFAS No. 128, “Earnings Per Share.”A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the years ended December 31, 2007, 20062009, 2008 and 20052007 is as follows:
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Basic weighted average number of common shares | | | 14,219 | | | | 14,240 | | | | 14,150 | |
| Potential dilutive effect of stock-based awards | | | - | | | | - | | | | - | |
| Diluted weighted average number of common shares | | | 14,219 | | | | 14,240 | | | | 14,150 | |
| | | Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (in thousands) | | | (in thousands) | | | (in thousands) | |
| Basic weighted average number of common shares | | | 13,940 | | | | 13,859 | | | | 14,232 | |
| Dilutive effect of stock options, SARs, and | | | | | | | | | | | | |
| restricted stock | | | - | | | | 135 | | | | - | |
| Diluted weighted average number | | | | | | | | | | | | |
| of common shares | | | 13,940 | | | | 13,994 | | | | 14,232 | |
Outstanding options at December 31, 2007 to purchase 372,441 shares of common stock with exercise prices of $7.70 to $83.69The following outstanding stock-based awards were not included inexcluded from the computation of historical and pro forma diluted net incomethe effect of dilutive securities on loss per share because to do sofor the following periods as they would have been antidilutive, as a result of the Company’s net loss in 2007. In addition, there were 274,384 outstanding SARs with exercise prices $9.52 to $20.15 that were not included in the computation of earnings per share as a result of the Company’s net loss.anti-dilutive:
Outstanding options at December 31, 2006 to purchase 734,404 shares of common stock with exercise prices of $14.16 to $93.75 were not included in the 2006 computation of historical and pro forma diluted net income per share because the exercise prices of the options were greater than the average market price per share of the common stock and therefore, the effect would have been antidilutive. In addition, there were 81,856 outstanding SARs with exercise prices $12.52 to $20.15 that were not included in the 2006 computation of historical and pro forma diluted net income per share because the exercise prices of the options were greater than the average market price per share of the common stock and therefore, the effect would have been antidilutive.| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Options | | | 236,355 | | | | 304,531 | | | | 372,441 | |
| Stock-settled stock appreciation rights (SARs) | | | 242,757 | | | | 212,846 | | | | 274,384 | |
| Restricted stock units (RSUs) | | | 410,712 | | | | 203,304 | | | | - | |
| Performance contingent SARs | | | 305,000 | | | | 280,000 | | | | - | |
| Performance shares | | | - | | | | - | | | | 3,602 | |
| | | | 1,194,824 | | | | 1,000,681 | | | | 650,427 | |
Outstanding options at December 31, 2005 to purchase 1,271,890 shares of common stock with exercise prices of $5.21 to $93.75 per share were not included in the 2005 computation of historical and pro forma diluted net income per share because to do so would have been antidilutive, as a result of the Company’s net loss in 2005. Additionally, 109,206 SARs were outstanding at December 31, 2005, and were not included in the computation of earnings per share as a result of the Company’s net loss.
17.19. | Segment Information |
The Company discontinued its MD&D business in the second quarter of 2006. The MD&D business included the Company’s MD&D contract sales and clinical sales teams and was previously reported in the sales services reporting segment. The MD&D business was abandoned through the run off of operations (i.e., to cease accepting new business but to continue to provide service under remaining contracts until they expire or terminate). In accordance with FAS No. 144, operations must be abandoned prior to reporting them as discontinued operations. The last active contract within MD&D ended in the second quarter of 2006. There was no activity within discontinued operations in 2007. All prior periods have been restated to reflect the treatment of this unit as a discontinued operation. Summarized selected financial information for the discontinued operations is as follows:
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
| | | For the Year Ended December 31, | |
| | | 2006 | | | 2005 | |
| Revenue, net | | $ | 1,876 | | | $ | 14,210 | |
| | | | | | | | | |
| Income (loss) from discontinued | | | | | | | | |
| operations before income tax | | $ | 693 | | | $ | (8,047 | ) |
| Income tax expense | | | 259 | | | | - | |
| Net income (loss) from | | | | | | | | |
| discontinued operations | | $ | 434 | | | $ | (8,047 | ) |
The accounting policies followed by the segments are described in Note 1, Nature of Business and Significant Accounting Policies. Corporate charges are allocated to each of the operating segments on the basis of total salary costs. Corporate charges include corporate headquarter costs and certain depreciation expenses. Certain corporate capital expenditures have not been allocated from the sales services segmentSales Services to the other operating segments since it is impracticable to do so.
The Company reports under the following three segments:
Sales servicesServices segment – includes the Company’s PerformanceDedicated Sales Teams and Select Access teams.Shared Sales Teams. This segment uses teams to deliver services to a wide base; they have similar long-term average gross margins, contract terms, types of customers and regulatory environments. One segment manager oversees the operations of all of these units and regularly discusses the results of operations, forecasts and activities of this segment with the chief operating decision maker;
Marketing servicesServices segment – includes the Company’s marketing research and medical education and communication services. This segment is project driven; the units comprising it have a large number of smaller contracts, share similar gross margins, have similar customers, and have low barriers to entry for competition. There are many discreteThe offerings within this segment including: accreditedinclude marketing research and communications and formerly continuing medical education (CME), content development for. The CME promotional medical education, marketing research and communications. Oneportion of this segment manager overseeswas discontinued in 2009. Two unit managers oversee the operations of all of these units and regularly discussesdiscuss the results of operations, forecasts and activities of this segment with the chief operating decision maker; and
PDI products group (PPG)PC Services segment – includedincludes revenues that were earned throughand expenses associated with the Company’s licensing and co-promotion of pharmaceutical and MD&D products. There are currently no ongoing operationsIn 2008, this segment consisted of our now terminated promotional agreement with Novartis which was terminated in this segment.April 2009. Any business opportunities are reviewed by the chief executive officer and other members of senior management.
PDI, Inc.
Notes to the Consolidated Financial Statements (Continued)
(tabular information in thousands, except share and per share data)
data)
| | | For the Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| Revenue: | | | | | | | | | |
| Sales services | | $ | 86,766 | | | $ | 202,748 | | | $ | 270,420 | |
| Marketing services | | | 30,545 | | | | 36,494 | | | | 34,785 | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 117,311 | | | $ | 239,242 | | | $ | 305,205 | |
| Revenue, intersegment: | | | | | | | | | | | | |
| Sales services | | $ | - | | | $ | - | | | $ | - | |
| Marketing services | | | 180 | | | | - | | | | - | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 180 | | | $ | - | | | $ | - | |
| Revenue, less intersegment: | | | | | | | | | | | | |
| Sales services | | $ | 86,766 | | | $ | 202,748 | | | $ | 270,420 | |
| Marketing services | | | 30,365 | | | | 36,494 | | | | 34,785 | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 117,131 | | | $ | 239,242 | | | $ | 305,205 | |
| Operating (loss) income: | | | | | | | | | | | | |
| Sales services | | $ | (13,918 | ) | | $ | 33 | | | $ | (17,386 | ) |
| Marketing services | | | (362 | ) | | | 2,798 | | | | (1,186 | ) |
| PPG | | | - | | | | 3,082 | | | | (268 | ) |
| Total | | $ | (14,280 | ) | | $ | 5,913 | | | $ | (18,840 | ) |
| Reconciliation of (loss) income from operations to | | | | | | | | | | | | |
| (loss) income before income taxes: | | | | | | | | | | | | |
| Total (loss) income from operations | | | | | | | | | | | | |
| from operating groups | | $ | (14,280 | ) | | $ | 5,913 | | | $ | (18,840 | ) |
| Gain on investments | | | - | | | | - | | | | 4,444 | |
| Interest income, net | | | 6,073 | | | | 4,738 | | | | 3,190 | |
| (Loss) income before income taxes | | $ | (8,207 | ) | | $ | 10,651 | | | $ | (11,206 | ) |
| Capital expenditures: (1) | | | | | | | | | | | | |
| Sales services | | $ | 870 | | | $ | 1,508 | | | $ | 2,901 | |
| Marketing services | | | 139 | | | | 262 | | | | 2,881 | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 1,009 | | | $ | 1,770 | | | $ | 5,782 | |
| Depreciation expense: (1) | | | | | | | | | | | | |
| Sales services | | $ | 3,477 | | | $ | 3,671 | | | $ | 3,260 | |
| Marketing services | | | 828 | | | | 679 | | | | 550 | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 4,305 | | | $ | 4,350 | | | $ | 3,810 | |
| Total assets | | | | | | | | | | | | |
| Sales services | | $ | 140,161 | | | $ | 157,750 | | | $ | 148,642 | |
| Marketing services | | | 39,393 | | | | 43,886 | | | | 51,517 | |
| PPG | | | - | | | | - | | | | - | |
| Total | | $ | 179,554 | | | $ | 201,636 | | | $ | 200,159 | |
| | | | | | | | | | | | | |
| (1) Capital expenditures and depreciation expense do not include amounts for discontinued operations. | |
| | | Sales | | | Marketing | | | PC | | | | | | | |
| | | Services | | | Services | | | Services | | | Eliminations | | | Consolidated | |
| For the year ended December 31, 2009: | | | | | | | | | | | | | | | |
| Revenue | | $ | 73,232 | | | $ | 16,748 | | | $ | - | | | $ | (5,109 | ) | | $ | 84,871 | |
| Operating (loss) income | | $ | (16,724 | ) | | $ | (25,748 | ) | | $ | 1,847 | | | $ | 48 | | | $ | (40,577 | ) |
| Capital expenditures | | $ | 2,148 | | | $ | 241 | | | $ | - | | | $ | - | | | $ | 2,389 | |
| Depreciation expense | | $ | 1,096 | | | $ | 417 | | | $ | 23 | | | $ | - | | | $ | 1,536 | |
| Total assets | | $ | 94,714 | | | $ | 15,062 | | | $ | - | | | $ | - | | | $ | 109,776 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 89,656 | | | $ | 23,872 | | | $ | (1,000 | ) | | $ | - | | | $ | 112,528 | |
| Operating loss | | $ | (7,196 | ) | | $ | (3,070 | ) | | $ | (26,161 | ) | | $ | - | | | $ | (36,427 | ) |
| Capital expenditures | | $ | 339 | | | $ | 60 | | | $ | - | | | $ | - | | | $ | 399 | |
| Depreciation expense | | $ | 2,570 | | | $ | 652 | | | $ | 97 | | | $ | - | | | $ | 3,319 | |
| Total assets | | $ | 112,469 | | | $ | 36,567 | | | $ | - | | | $ | - | | | $ | 149,036 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 86,766 | | | $ | 30,365 | | | $ | - | | | $ | - | | | $ | 117,131 | |
| Operating loss | | $ | (13,918 | ) | | $ | (362 | ) | | $ | - | | | $ | - | | | $ | (14,280 | ) |
| Capital expenditures | | $ | 870 | | | $ | 139 | | | $ | - | | | $ | - | | | $ | 1,009 | |
| Depreciation expense | | $ | 3,477 | | | $ | 828 | | | $ | - | | | $ | - | | | $ | 4,305 | |
| Total assets | | $ | 140,161 | | | $ | 39,393 | | | $ | - | | | $ | - | | | $ | 179,554 | |
| PDI, INC. | PDI, INC. | | PDI, INC. | |
| VALUATION AND QUALIFYING ACCOUNTS | VALUATION AND QUALIFYING ACCOUNTS | | VALUATION AND QUALIFYING ACCOUNTS | |
| YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 | | |
| YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 | | YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at | | | Additions | | | | (1) | | | Balance at | | | Balance at | | | Additions | | | (1) | | | Balance at | |
| | | Beginning | | | Charged to | | | Deductions | | | end | | | Beginning | | | Charged to | | | Deductions | | | end | |
| Description | | of Period | | | Operations | | | Other | | | of Period | | | of Period | | | Operations | | | Other | | | of Period | |
| 2005 | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 73,584 | | | $ | 713,669 | | | $ | (8,847 | ) | | $ | 778,407 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Allowance for doubtful notes | | 500,000 | | | 842,378 | | | (100,000 | ) | | 1,242,378 | | | | 686,345 | | | | 30,417 | | | | - | | | | 716,762 | |
| Tax valuation allowance | | 2,204,287 | | | 9,318,890 | | | (1,703,076 | ) | | 9,820,101 | | | | 25,555,804 | | | | - | | | | 8,621,675 | | | | 34,177,479 | |
| Accrued sales returns | | 4,315,768 | | | 31,551 | | | (4,116,460 | ) | | 230,859 | | | | 230,859 | | | | - | | | | - | | | | 230,859 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 778,407 | | | $ | 35,713 | | | $ | (778,407 | ) | | $ | 35,713 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Allowance for doubtful notes | | 1,242,378 | | | 38,051 | | | (495,837 | ) | | 784,592 | | | | 655,845 | | | | 30,500 | | | | - | | | | 686,345 | |
| Tax valuation allowance | | 9,820,101 | | | - | | | (3,035,884 | ) | | 6,784,217 | | | | 11,744,803 | | | | - | | | | 13,811,001 | | | | 25,555,804 | |
| Accrued sales returns | | 230,859 | | | - | | | - | | | 230,859 | | | | 230,859 | | | | - | | | | - | | | | 230,859 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 35,713 | | | $ | - | | | $ | (35,713 | ) | | $ | - | | | $ | 35,713 | | | $ | - | | | $ | (35,713 | ) | | $ | - | |
| Allowance for doubtful notes | | 784,592 | | | 30,416 | | | (159,163 | ) | | 655,845 | | | | 784,592 | | | | 30,416 | | | | (159,163 | ) | | | 655,845 | |
| Tax valuation allowance | | 6,784,217 | | | - | | | 4,960,586 | | | 11,744,803 | | | | 6,784,217 | | | | - | | | | 4,960,586 | | | | 11,744,803 | |
| Accrued sales returns | | 230,859 | | | - | | | - | | | 230,859 | | | | 230,859 | | | | - | | | | - | | | | 230,859 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| (1) Includes payments and actual write offs, as well as changes in estimates in the reserves and | | |
| the impact of acquisitions. | | |
(1) Includes payments and actual write offs, as well as changes in estimates in the reserves and the impact of acquisitions.
F-30
