UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to _______
Commission File Number 0-24249
PROFESSIONAL DETAILING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2919486
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Mountainview Road
Upper Saddle River, New Jersey 07458
----------------------------------------
(Address of principal executive offices)
(201) 258-8450
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of August 13, 2001 the Registrant had a total of 13,882,539 shares of Common
Stock, $.01 par value, outstanding.
INDEX
PROFESSIONAL DETAILING, INC.
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements
Balance Sheets -- June 30, 2001 and December 31, 2000...... 3
Statements of Operations -- Three and Six Months
Ended June 30, 2001 and 2000............................... 4
Statements of Cash Flows -- Six Months
Ended June 30, 2001 and 2000.............................. 5
Notes to Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds.................. 20
Item 3. Default Upon Senior Securities....................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders........ 21
Item 5. Other Information.................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K........................... 21
SIGNATURES........................................................... 22
2
PROFESSIONAL DETAILING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 77,408 $ 109,000
Short-term investments ........................... 41,900 4,907
Inventory, net ................................... 70,281 36,385
Accounts receivable, net of allowance for doubtful
accounts of $2,566 and $250 as of June 30, 2001
and December 31, 2000, respectively ............ 70,052 84,529
Unbilled costs and accrued profits on contracts
in progress .................................... 10,809 2,953
Deferred training ................................ 10,645 4,930
Other current assets ............................. 2,936 4,541
Deferred tax asset ............................... 4,758 4,758
--------- ---------
Total current assets ................................ 288,789 252,003
Net property, plant & equipment ..................... 14,332 9,965
Other investments ................................... 1,862 760
Other long-term assets .............................. 7,504 7,497
--------- ---------
Total assets ........................................ $ 312,487 $ 270,225
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 42,921 $ 31,328
Accrued rebates and sales discounts .............. 53,561 24,368
Accrued incentives ............................... 20,748 19,824
Accrued salaries and wages ....................... 7,244 6,568
Unearned contract revenue ........................ 21,265 23,813
Other accrued expenses ........................... 11,669 25,382
--------- ---------
Total current liabilities ........................... 157,408 131,283
--------- ---------
Long-term liabilities:
Deferred compensation .......................... 169 169
Deferred tax liability ........................... 663 663
Other long-term liabilities ......................... -- --
--------- ---------
Total long-term liabilities ......................... 832 832
--------- ---------
Total liabilities ................................... $ 158,240 $ 132,115
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding June
30, 2001 - 13,873,867; December 31, 2000 -
13,837,390; restricted $.01 par value; shares
issued and outstanding, June 30, 2001 - 7,972;
December 31, 2000 - 7,972 ...................... 139 138
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding ... -- --
Additional paid-in capital .......................... 97,583 96,945
Additional paid-in capital, restricted .............. 217 217
Retained earnings ................................... 56,985 41,654
Accumulated other comprehensive loss ................ (63) (34)
Unamortized compensation costs ...................... (614) (810)
--------- ---------
Total stockholders' equity .......................... 154,247 138,110
--------- ---------
Total liabilities & stockholders' equity ............ $ 312,487 $ 270,225
========= =========
The accompanying notes are an integral part of these financial statements
3
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------- -----------
2001 2000 2001 2000
------------ ------------ ----------- -----------
(unaudited)
Revenue
Service, net ....................................... $ 64,789 $ 75,789 $ 142,876 $ 147,078
Product, net ....................................... 79,155 -- 174,133 --
----------- ----------- ----------- -----------
Total revenue, net .............................. 143,944 75,789 317,009 147,078
----------- ----------- ----------- -----------
Cost of goods and services
Program expenses (including related party amounts
of $426 and $361 for the quarters ended June 30,
2001 and 2000, and $585 and $1,064 for the six
months ended June 30, 2001 and 2000, respectively) 53,321 58,108 108,716 108,228
Cost of goods sold ................................. 51,523 -- 115,738 --
----------- ----------- ----------- -----------
Total cost of goods and services ................ 104,844 58,108 224,454 108,228
----------- ----------- ----------- -----------
Gross profit .......................................... 39,100 17,681 92,555 38,850
Compensation expense .................................. 9,162 6,794 20,177 15,187
Other selling, general & administrative expenses ...... 23,546 2,972 49,273 6,979
----------- ----------- ----------- -----------
Total selling, general & administrative expenses ... 32,708 9,766 69,450 22,166
----------- ----------- ----------- -----------
Operating income ...................................... 6,392 7,915 23,105 16,684
Other income, net ..................................... 1,537 255 3,407 939
----------- ----------- ----------- -----------
Income before provision for taxes ..................... 7,929 8,170 26,512 17,623
Provision for income taxes ............................ 3,527 3,332 11,181 7,171
----------- ----------- ----------- -----------
Net income ............................................ $ 4,402 $ 4,838 $ 15,331 $ 10,452
=========== =========== =========== ===========
Basic net income per share ............................ $ 0.32 $ 0.36 $ 1.11 $ 0.79
=========== =========== =========== ===========
Diluted net income per share .......................... $ 0.31 $ 0.35 $ 1.08 $ 0.78
=========== =========== =========== ===========
Basic weighted average number of shares outstanding ... 13,855,662 13,592,028 13,849,327 13,298,612
=========== =========== =========== ===========
Diluted weighted average number of shares outstanding . 14,245,993 13,774,124 14,189,349 13,478,765
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
4
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
-------------------------
2001 2000
---------- ----------
(unaudited)
Cash Flows From Operating Activities
Net income ............................................. $ 15,331 $ 10,452
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 1,816 857
Reserves for inventory and bad debt expense .... 3,565 --
Non-cash compensation expense - stock options .. -- 11
Amortized compensation costs ................... 195 --
Loss on other investments ...................... -- 2,500
Other changes in assets and liabilities:
(Increase) in inventory ........................ (34,810) --
Decrease (increase) in accounts receivable ..... 11,825 (6,672)
(Increase) in unbilled costs ................... (7,856) (2,252)
(Increase) in deferred training ................ (5,714) (4,214)
Decrease (increase) in other current assets .... 1,605 (1,159)
(Increase) in other long-term assets ........... (250) (17)
Increase (decrease) in accounts payable ........ 11,594 (349)
Increase in accrued rebates and discounts ...... 29,193 --
Increase in accrued liabilities ................ 1,601 2,847
(Decrease) increase in unearned contract revenue (2,548) 9,156
(Decrease) increase in other current liabilities (13,714) 1,890
--------- ---------
Net cash provided by operating activities .............. 11,833 13,050
--------- ---------
Cash Flows From Investing Activities
Sale of short-term investments .................... -- 1,585
Purchase of short-term investments ................ (37,022) --
Other investments ................................. (1,102) (2,500)
Purchase of property and equipment ................ (5,940) (1,773)
--------- ---------
Net cash used in investing activities .................. (44,064) (2,688)
--------- ---------
Cash Flows From Financing Activities
Net proceeds from secondary offering .............. -- 41,675
Net proceeds from the exercise of stock options ... 639 587
Distributions to S corporation stockholders ....... -- (8)
Repayment of loan from officer .................... -- 1,428
--------- ---------
Net cash provided by financing activities .............. 639 43,682
--------- ---------
Net (decrease) increase in cash and cash equivalents ... $ (31,592) 54,044
Cash and cash equivalents - beginning .................. 109,000 57,787
--------- ---------
Cash and cash equivalents - ending ..................... $ 77,408 $ 111,831
========= =========
The accompanying notes are an integral part of these financial statements
5
PROFESSIONAL DETAILING, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements and related notes
should be read in conjunction with the financial statements of Professional
Detailing, Inc. and its subsidiaries (the "Company" or "PDI") and related notes
as included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 as filed with the Securities and Exchange Commission. The
unaudited interim financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The unaudited interim financial statements include all adjustments (consisting
only of normal recurring adjustments) which, in the judgement of management, are
necessary for a fair presentation of such financial statements. Operating
results for the three-month and six-month periods ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. Certain prior period amounts have been reclassified to
conform with the current presentation with no effect on financial position, net
income or cash flows.
2. Secondary Public Offering of Common Stock
On January 26, 2000, a public offering of 2,800,000 shares of the
Company's common stock was completed at a public offering price per share of
$28.00, yielding net proceeds per share after deducting underwriting discounts
of $26.35 (before deducting expenses of the offering). Of the shares offered,
1,399,312 shares were sold by the Company and 1,400,688 shares were sold by
certain selling shareholders. In addition, in connection with the exercise of
the underwriters' over-allotment option, an additional 420,000 shares were sold
to the underwriters on February 1, 2000 on the same terms and conditions
(210,000 shares were sold by the Company and 210,000 shares were sold by a
selling shareholder). Net proceeds to the Company after expenses of the offering
were approximately $41.6 million.
3. Credit Line
The Company entered into a credit agreement dated as of March 30, 2001
with a syndicate of banks, for which PNC Bank, National Association is acting as
Administrative and Syndication Agent, that provides for both a three-year, $30
million unsecured revolving credit facility and a one-year, renewable, $30
million unsecured revolving credit facility. Borrowings under the agreement bear
interest equal to either an average London interbank offered rate (LIBOR) plus a
margin ranging from 1.5% to 2.25%, depending on the Company's ratio of funded
debt to earnings before interest, taxes depreciation and amortization (EBITDA);
or the greater of prime or the federal funds rate plus a margin ranging from
zero to 0.25%, depending on the Company's ratio of funded debt to EBITDA. The
Company is required to pay a commitment fee quarterly in arrears for each of the
long-term and short-term credit facilities. These fees range from 0.175% to
0.325% for the long-term credit facility and from 0.25% to 0.40% for the
short-term credit facility, depending on the Company's ratio of funded debt to
EBITDA. The credit agreement contains customary affirmative and negative
covenants including financial covenants requiring the maintenance of specified
consolidated interest coverage, leverage ratios and a minimum net worth. At June
30, 2001 the Company was in compliance with such covenants. There were no
amounts outstanding under these facilities at June 30, 2001.
4. Other Investments
In February 2000, the Company signed a three-year agreement with
iPhysicianNet Inc. ("iPhysicianNet.") In connection with this agreement, the
Company made an investment of $2.5 million in
6
preferred stock of iPhysicianNet. Under the agreement PDI was appointed as the
exclusive CSO in the United States to be affiliated with the iPhysicianNet
network, allowing PDI to offer e-detailing capabilities to its existing and
potential clients. For the three and six months ended June 30, 2000, the Company
recorded a loss related to this investment of $1,555,109 and $2,500,000,
respectively, which represented its share of iPhysicianNet's losses from the
date of the investment through June 30, 2000. As of June 30, 2000, the
investment in iPhysicianNet had been reduced to zero.
In the fourth quarter of 2000 and first quarter of 2001, the Company made
an investment of approximately $1.5 million in convertible preferred stock of
In2Focus, Inc., a United Kingdom contract sales company. The Company recorded
this investment under the cost method.
5. Inventory
Inventory is valued at the lower of cost or fair value. Cost is determined
using the first in, first out costing method. Inventory consists of only
finished goods and is recorded net of a provision for obsolescence.
6. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," that requires all business combinations initiated after June 30,
2001 to be accounted for as purchases. The adoption of this pronouncement is not
expected to have an impact on the Company's earnings, comprehensive income and
financial position.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
requiring that all intangible assets without a contractual life no longer be
amortized but reviewed at least annually for impairment. The Company will adopt
SFAS No. 142 when required to do so on January 1, 2002. The Company does not
expect the adoption of SFAS No. 142 to have a material impact on the Company's
earnings, comprehensive income and financial position.
7. Basic and Diluted Net Income Per Share
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the three-month and six-month periods ended
June 30, 2001 and 2000 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------- ---------- ---------- ----------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic weighted average number
of common shares outstanding 13,855,622 13,592,028 13,849,327 13,298,612
Dilutive effect of stock options 390,331 182,096 340,022 180,153
---------- ---------- ---------- ----------
Diluted weighted average number
of common shares outstanding 14,245,993 13,774,124 14,189,349 13,478,765
========== ========== ========== ==========
8. Short-Term Investments
At June 30, 2001, short-term investments were $41.9 million, including
approximately $905,000 of investments classified as available for sale
securities. The unrealized after-tax loss on the available for sale securities
is included as a separate component of stockholders' equity as accumulated other
comprehensive income. All other short-term investments are stated at cost, which
approximates fair value.
7
9. Comprehensive Income
A reconciliation of net income as reported in the Consolidated Statements
of Operations to Other comprehensive income, net of taxes is presented in the
table below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2001 2000 2001 2000
------ ------ -------- --------
(thousands)
Net income $4,402 $4,838 $15,331 $10,452
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on
available-for-sale securities
arising during period 28 -- (73) --
Reclassification adjustments for
loss (gain) included in net income -- -- 10 (92)
------ ------ -------- --------
Other comprehensive income $4,430 $4,838 $15,268 $10,360
====== ====== ======== ========
10. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and through our LifeCycle Ventures, Inc. (LCV) subsidiary is also in
the business of distributing product under an agreement with GlaxoSmithKline for
the exclusive marketing, sales and distribution rights for Ceftin(R) Tablets and
Ceftin(R) for Oral Suspension (cefuroxime axetil), two dosage forms of a
cephalosporin antibiotic. Such activities could expose the Company to risk of
liability for personal injury or death to persons using such products. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability under its service agreement through measures such as contractual
indemnification provisions with clients (the scope of which may vary from client
to client, and the performances of which are not secured) and insurance. The
Company could, however, also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity or insurance policy. The Company could be materially adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of the indemnification agreements; if the
indemnity, although applicable, is not performed in accordance with its terms;
or if the Company's liability exceeds the amount of applicable insurance or
indemnity.
In connection with the GlaxoSmithKline Ceftin agreement, the Company has
product purchase commitments. The Company is required to purchase certain
minimum levels of product, in various dosage forms, during each calendar quarter
during the term of the agreement. This agreement is cancelable by either party
upon not less than 120 days written notice. The quarterly commitments range from
$40.1 million to $77.9 million over the five-year term. At June 30, 2001, the
total non-cancelable commitment outstanding was approximately $67.6 million.
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
8
11. Segment Information
The Company is now operating under two reporting segments: product sales
and distribution, and contract sales and marketing services. This change is in
recognition of the evolution of the Company's business from one in which the
service segment was dominated by one service offering, its CSO segment, to a
company that now has the group of services listed in the Overview section of the
Management's Discussion and Analysis of Financial Condition and Results on
Operations beginning on page 11. The segment information from prior periods has
been restated to conform to the current quarter and year-to-date presentation.
The product sales and distribution category has not changed from prior reporting
periods. The contract sales and marketing services category includes the
Company's CSO business units; the Company's marketing services business unit,
which includes marketing research and medical education and communication
services; this category also includes the Company's LifeCycle X-Tension
services, Product Commercialization Services and co-promotion services. This
combines and replaces the "contract sales" and "marketing services reporting
segments included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 and Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.
The accounting policies of the segments are the same as those described in
the "Nature of Business and Significant Accounting Policies" footnote to the
Company's financial statements, which are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. Segment data includes
a charge allocating all corporate headquarters costs to each of the operating
segments on the basis of revenue.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(thousands)
Revenue
Contract sales and marketing services $ 90,473 $ 75,789 $ 185,950 $ 147,078
Product sales and distribution 79,155 -- 174,133 --
--------- -------- --------- ---------
Total $ 169,628 $ 75,789 $ 360,083 $ 147,078
========= ======== ========= =========
Revenue, intersegment
Contract sales and marketing services $ 25,684 $ -- $ 43,074 $ --
Product sales and distribution -- -- -- --
--------- -------- --------- ---------
Total $ 25,684 $ -- $ 43,074 $ --
========= ======== ========= =========
Revenue, less intersegment
Contract sales and marketing services $ 64,789 $ 75,789 $ 142,876 $ 147,078
Product sales and distribution 79,155 -- 174,133 --
--------- -------- --------- ---------
Total $ 143,944 $ 75,789 $ 317,009 $ 147,078
========= ======== ========= =========
EBIT
Contract sales and marketing services $ 1,730 $ 9,156 $ 14,610 $ 19,210
Product sales and distribution 6,815 -- 12,979 --
Corporate charges (2,153) (1,241) (4,484) (2,526)
--------- -------- --------- ---------
Total $ 6,392 $ 7,915 $ 23,105 $ 16,684
========= ======== ========= =========
EBIT, intersegment
Contract sales and marketing services $ 2,898 $ -- $ 6,465 $ --
Product sales and distribution (2,898) -- (6,465) --
Corporate charges -- -- -- --
--------- -------- --------- ---------
Total $ -- $ -- $ -- $ --
========= ======== ========= =========
9
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
(continued) 2001 2000 2001 2000
------- ------- -------- --------
(thousands)
EBIT, less intersegment,
before corporate allocations
Contract sales and marketing services $(1,168) $ 9,156 $ 8,145 $ 19,210
Product sales and distribution 9,713 -- 19,444 --
Corporate charges (2,153) (1,241) (4,484) (2,526)
------- ------- -------- --------
Total $ 6,392 $ 7,915 $ 23,105 $ 16,684
======= ======= ======== ========
Corporate allocations
Contract sales and marketing services $ (969) $(1,241) $ (2,021) $ (2,526)
Product sales and distribution (1184) -- (2,463) --
Corporate charges 2,153 1,241 4,484 2,526
------- ------- -------- --------
Total $ -- $ -- $ -- $ --
======= ======= ======== ========
EBIT less corporate allocations
Contract sales and marketing services $(2,137) $ 7,915 $ 6,124 $ 16,684
Product sales and distribution 8,529 -- 16,981 --
Corporate charges -- -- -- --
------- ------- -------- --------
Total $ 6,392 $ 7,915 $ 23,105 $ 16,684
======= ======= ======== ========
Reconciliation of EBIT to income
before provision for income taxes
Total EBIT for operating groups $ 6,392 $ 7,915 $ 23,105 $ 16,684
Other income, net 1,537 255 3,407 939
------- ------- -------- --------
Income before provision
for income taxes $ 7,929 $ 8,170 $ 26,512 $ 17,623
======= ======= ======== ========
Capital expenditures
Contract sales and marketing services $ 1,877 $ 1,026 $ 4,963 $ 1,773
Product sales and distribution 158 -- 977 --
------- ------- -------- --------
Total $ 2,035 $ 1,026 $ 5,940 $ 1,773
======= ======= ======== ========
Depreciation expense
Contract sales and marketing services $ 755 $ 356 $ 1,563 $ 622
Product sales and distribution 4 -- 10 --
------- ------- -------- --------
Total $ 759 $ 356 $ 1,573 $ 622
======= ======= ======== ========
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Various statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgements about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by forward-looking statements include, but are
not limited to, the factors set forth in "Certain Factors That May Affect Future
Growth," under Part I, Item 1, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 as filed with the Securities and Exchange
Commission.
Overview
We are a leading provider of sales and marketing services to the United
States pharmaceutical industry. Our clients, which include some of the largest
pharmaceutical companies in the world, engage us on a contractual basis to
design and implement sales and marketing services programs for both prescription
and over-the-counter (OTC) pharmaceutical products. As discussed in Footnote 11
to the consolidated financial statements, we are now operating under two
reporting segments: product sales and distribution, and contract sales and
marketing services. Within our two reporting segments we provide the following
services:
o Product Sales and Distribution;
o Contract Sales and Marketing Services:
o dedicated contract sales services (CSO);
o shared contract sales services (CSO);
o LifeCycle X-Tension services (LCXT);
o Product Commercialization Services (PCS);
o co-promotion services;
o marketing research and consulting services (TVG); and
o medical education and communication services (TVG).
The product sales and distribution category has not changed. The contract
sales and marketing services category includes our CSO business units; our
marketing services business unit, which includes marketing research and medical
education and communication services; this category also includes our LifeCycle
X-Tension (LCXT) services, Product Commercialization Services (PCS) and
co-promotion services. Our contracts within the LCXT, PCS and co-promotion
subcategories are more heavily performance based and have a higher risk
potential and correspondingly an opportunity for higher profitability. These
contracts involve significant startup expenses and the risk of operating losses.
These contracts
11
normally require significant participation from our LCV and TVG professionals
whose skill sets include: marketing, brand management, contracting, marketing
research.
Contract Sales and Marketing Services
Our contract sales and marketing services contracts generally are for
terms of one to five years and may be renewed or extended. However, the majority
of these contracts are terminable by the client for any reason upon 30 to 120
days notice. These contracts typically provide for termination payments by the
client upon a termination without cause. While the cancellation of a contract by
a client without cause may result in the imposition of penalties on the client,
these penalties may not act as an adequate deterrent to the termination of any
contract. In addition, we cannot assure you that these penalties will offset the
revenue we could have earned under the contract or the costs we may incur as a
result of its termination. The loss or termination of a large contract or the
loss of multiple contracts could adversely affect our future revenue and
profitability.
Our contract sales and marketing services contracts typically contain
cross-indemnification provisions between us and our client. The client will
usually indemnify us against product liability and related claims arising from
the sale of the product and we indemnify the clients with respect to the errors
and omissions of our sales representatives in the course of their detailing
activities. To date, we have not asserted, nor has there been asserted against
us, any claim for indemnification under any contract.
Product detailing involves meeting face-to-face with targeted prescribers
to provide a technical review of the product being promoted. Since the early
1990s, the United States pharmaceutical industry has increasingly used CSOs to
provide detailing services to introduce new products and supplement existing
sales efforts.
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee-for-services, i.e., the client pays a fee for a specified package of
services. These contracts typically include performance benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. More
recently, our contracts tend to have a lower base fee but built-in incentives
based on our performance. In these situations, we have the opportunity to earn
additional fees based on enhanced program results.
In June 2000, we formed LCV to compete more fully for pharmaceutical
commercialization opportunities. LCV undertakes performance-based sales,
marketing and distribution assignments, taking over completely, or in
cooperation with the client, the sales, marketing and distribution function of
brands. This service has a broad target customer base, including all tiers of
the pharmaceutical and biotechnology sectors. Over the next several years, we
expect this new service offering to be an important contributor to our growth.
In November 2000, LCV signed a five-year agreement with United
Therapeutics Corporation under which LCV will provide a broad range of
pre-launch and launch commercialization services for Beraprost, a compound under
development for peripheral vascular disease.
On February 2, 2001, GlaxoSmithKline exercised its right to terminate,
without cause, our fee for services contract. The termination was effective as
of April 18, 2001. As a result, we expect 2001 consolidated revenues to be
reduced by approximately $40 million, and earnings per share to be reduced by
$0.35 to $0.40 per share.
In May 2001, we entered into an agreement with Novartis Pharmaceuticals
Corporation for the U.S. sales, marketing and promotion rights for Lotensin(R)
(benazepril HCI) and Lotensin HCT(R) (benazepril HCI and hydrochlorothiazide
USP) and co-promotion rights for Lotrel(R) (amlodipine and benazepril HCI).
Novartis will retain certain regulatory responsibilities for Lotensin and Lotrel
and will retain ownership of all intellectual property. Additionally, Novartis
will continue to manufacture and distribute the products. Pursuant to the
agreement, which runs through December 31, 2003, PDI will provide promotional,
selling
12
and marketing services for Lotensin, an ACE inhibitor, as well as brand
management services. In exchange for such services, PDI will receive a split of
incremental net sales above specified baselines. PDI will also co-promote Lotrel
for which it will be compensated on a fee for service basis with potential
incentive payments based upon achieving certain net sales objectives. Lotrel is
a combination of the ACE inhibitor benazepril and the calcium channel blocker
amlodipine. In the event our estimates of the demand for Lotensin are not
accurate or more sales and marketing resources than anticipated are required,
the Novartis transaction could have a material adverse impact on our results of
operations, cash flows and liquidity.
Product Sales and Distribution
In October 2000, LCV signed a five-year agreement with GlaxoSmithKline for
the exclusive U.S. marketing, sales and distribution rights for Ceftin Tablets
and Ceftin for Oral Suspension (cefuroxime axetil), two dosage forms of a
cephalosporin antibiotic. Ceftin is the top selling oral cephalosporin in the
United States and throughout the world. Ceftin, which is indicated for acute
bacterial respiratory infections such as acute sinusitis, bronchitis and otitis
media, generated over $332 million in United States sales in 1999.
GlaxoSmithKline retains some regulatory responsibilities for Ceftin and
ownership of all intellectual property relevant to Ceftin and will continue to
manufacture the product. The agreement with GlaxoSmithKline is cancelable by
either party on 120 days written notice.
Under the agreement with GlaxoSmithKline, LCV is required to purchase
certain minimum levels of Ceftin during each calendar quarter. In order to meet
anticipated demand, LCV intends to maintain an inventory of Ceftin that we
expect to average between $45 to $75 million. In the event our estimates of the
demand for Ceftin are not accurate, or the timing on collections of Ceftin
related receivables is slower than anticipated, the LCV-Ceftin transaction could
have a material adverse impact on our results of operations, cash flows and
liquidity.
Revenues and expenses
Our revenues and expenses are segregated between service and product sales
for reporting purposes. Our operations are currently organized around two
principal activities and business segments:
13
o contract sales and marketing services; and
o product sales and distribution.
Historically, we have derived a significant portion of our service revenue
from a limited number of clients. However, concentration of business in the
pharmaceutical outsourcing industry is common and we believe that pharmaceutical
companies will continue to outsource large projects as the pharmaceutical
outsourcing industry grows and continues to demonstrate an ability to
successfully implement large programs. Accordingly, we are likely to continue to
experience significant client concentration in future periods. Our three largest
clients accounted for approximately 59.0% and 66.0%, of our service revenue for
the quarters ended June 30, 2001 and 2000, respectively, and 61.3% and 68.8% of
our service revenue for the six-month periods ended June 30, 2001 and 2000,
respectively. This decline in client concentration reflects our continued
efforts to expand our client base. For the quarter ended June 30, 2001, revenue
from sales of Ceftin primarily came from two major customers who accounted for
approximately 69.7% of total net product revenue.
Service revenue and program expenses
Contract sales and marketing services revenue is earned primarily by
performing product detailing programs and other marketing and promotional
services under contracts. Revenue is recognized as the services are performed
and the right to receive payment for the services is assured. Revenue is
recognized net of any potential penalties until the performance criteria
eliminating the penalties have been achieved. Bonus and other performance
incentives as well as termination payments are recognized as revenue in the
period earned and when payment of the bonus, incentive or other payment is
assured.
Program expenses consist primarily of the costs associated with executing
product detailing programs or other marketing services identified in the
contract. Program expenses include personnel costs and other costs, including
facility rental fees, honoraria and travel expenses, associated with executing a
product detailing or other marketing or promotional program, as well as the
initial direct costs associated with staffing a product detailing program.
Personnel costs, which constitute the largest portion of program expenses,
include all labor related costs, such as salaries, bonuses, fringe benefits and
payroll taxes for the sales representatives and sales managers and professional
staff who are directly responsible for executing a particular program. Initial
direct program costs are those costs associated with initiating a product
detailing program, such as recruiting, hiring and training the sales
representatives who staff a particular product detailing program. All personnel
costs and initial direct program costs, other than training costs, are expensed
as incurred for service offerings. Training costs include the costs of training
the sales representatives and managers on a particular product detailing program
so that they are qualified to properly perform the services specified in the
related contract. Training costs are deferred and amortized on a straight-line
basis over the shorter of the life of the contract to which they relate or 12
months. Expenses related to the product detailing of products we distribute (as
discussed below under "Product revenue and costs of goods sold") are recorded as
a selling expense and are included in other selling, general and administrative
expenses in the consolidated statements of operations.
As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing program. We typically
receive an initial payment upon commencement of a product detailing program and,
as appropriate, characterize that payment as compensation for recruiting, hiring
and training services associated with staffing that program. This permits us to
record the initial payment as revenue in the same period in which the costs of
the services are expensed. Our inability to specifically provide in our product
detailing contracts that we are being compensated for recruiting, hiring or
training services could adversely impact our operating results for periods in
which the costs associated with the product detailing services are incurred.
14
Product revenue and cost of goods sold
Product revenue is recognized when products are shipped and title to
products is transferred to the customer. Provision is made at the time of sale
for all discounts and estimated sales allowances. We prepare our estimates for
sales returns and allowances, discounts and rebates based primarily on
historical experience updated for changes in facts and circumstances, as
appropriate.
Cost of goods sold includes all expenses for both product distribution
costs and manufacturing costs of product sold. Inventory is valued at the lower
of cost or fair value. Cost is determined using the first in, first out costing
method. Inventory consists of only finished goods. Cost of goods sold and gross
margin on sales could fluctuate based on our quantity of product purchased, and
our contractual unit costs including applicable discounts, as well as
fluctuations in the selling price for our products including applicable
discounts.
Corporate overhead
Selling, general and administrative expenses include compensation and
general corporate overhead. Compensation expense consists primarily of salaries,
bonuses, training and related fringe benefits for senior management and other
administrative, marketing, finance, information technology and human resources
personnel who are not directly involved with executing a particular program.
Other selling, general and administrative expenses include corporate overhead
such as facilities costs, depreciation and amortization expenses and
professional services fees; with respect to product that we distribute, other
SG&A also includes product detailing, marketing and promotional expenses.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future results.
Three Months Ended Six Months Ended
June 30, June 30,
-------- -------- ------- -------
2001 2000 2001 2000
------- ------- ------- -------
Revenue
Service, net ..................................... 45.0% 100.0% 45.1% 100.0%
Product, net ..................................... 55.0 0.0 54.9 0.0
------- ------- ------- -------
Total revenue, net ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods and services
Program expenses ................................. 37.0 76.7 34.3 73.6
Cost of goods sold ............................... 35.8 0.0 36.5 0.0
------- ------- ------- -------
Total cost of goods and services ............... 72.8% 76.7% 70.8% 73.6%
Gross profit ........................................ 27.2 23.3 29.2 26.4
Compensation expense ................................ 6.5 9.0 6.4 10.3
Other selling, general and administrative expenses .. 16.3 3.9 15.5 4.8
------- ------- ------- -------
Total selling, general and administrative expenses 22.8 12.9 21.9 15.1
------- ------- ------- -------
Operating income .................................... 4.4 10.4 7.3 11.3
Other income, net ................................... 1.2 0.4 1.2 0.7
------- ------- ------- -------
Income before provision for income taxes ......... 5.6 10.8 8.5 12.0
Provision for income taxes .......................... 2.4 4.4 3.6 4.9
------- ------- ------- -------
Net income ....................................... 3.2% 6.4% 4.9% 7.1%
======= ======= ======= =======
15
Quarter Ended June 30, 2001 Compared to Quarter Ended June 30, 2000
Revenue. Total net revenue for the quarter ended June 30, 2001 was $143.9
million, an increase of $68.2 million, or 89.9%, over total net revenue of $75.8
million for the quarter ended June 30, 2000. Net revenue from the contract sales
and marketing services segment for the quarter ended June 30, 2001 of $64.8
million was $11.0 million, or 14.5%, less than net revenue of $75.8 million from
that segment for the comparable prior year period. This decrease was primarily
attributable to the loss of a significant CSO contract, and the reduction in
size, or non-renewal of several others, generally indicating slower demand for
contract sales services. Additionally, an increase in revenues from our
performance based contracts should occur over the next several quarters. Net
product revenue for the quarter ended June 30, 2001 was $79.2 million, all of
which was attributable to sales of Ceftin. There were no product sales in the
comparable prior year period.
Cost of goods and services. Cost of goods and services for the quarter
ended June 30, 2001 were $104.8 million, an increase of 80.4% over cost of goods
and services of $58.1 million for the quarter ended June 30, 2000. As a
percentage of total net revenue, cost of goods and services decreased to 72.8%
for the quarter ended June 30, 2001 from 76.7% in the comparable prior year
period. This decrease was primarily attributable to the lower cost of goods sold
from our product sales and distribution segment. Program expenses (i.e., cost of
services) for the quarter ended June 30, 2001 were $53.3 million, a decrease of
8.2% compared to program expenses of $58.1 million for the quarter ended June
30, 2000. As a percentage of net contract sales and marketing services segment
revenue, program expenses for the quarter ended June 30, 2001 of 82.3% were 5.6%
higher than program expenses of 76.7% for the comparable prior year period,
primarily because of high startup expenses for the performance-based contracts
that we began in the quarter; excluding the effect of these contracts, program
expenses would have been 73.2% of service revenue. Cost of goods sold was $51.5
million for the quarter ended June 30, 2001. As a percentage of net product
revenue, cost of goods sold for the quarter ended June 30, 2001 was 65.1%. Cost
of goods sold and gross margin on sales could fluctuate based on our quantity of
product purchased, and our contractual unit costs including applicable
discounts, as well as fluctuations in the selling price for our products
including applicable discounts.
Compensation expense. Compensation expense for the quarter ended June 30,
2001 was $9.2 million compared to $6.8 million for the comparable prior year
period. As a percentage of total net revenue, compensation expense decreased to
6.4% for the quarter ended June 30, 2001 from 9.0% for the quarter ended June
30, 2000. Compensation expense for the quarter ended June 30, 2001 attributable
to the contract sales and marketing services segment was $7.6 million compared
to $6.8 million for the quarter ended June 30, 2000. As a percentage of net
revenue from the contract sales and marketing services segment, compensation
expense increased to 11.8% for the quarter ended June 30, 2001 from 9.0% for the
quarter ended June 30, 2000. Generally, we anticipate that revenues in the
services segment will increase in the third and fourth quarters and that
compensation expense as a percentage of revenue will become lower. Compensation
expense for the quarter ended June 30, 2001 attributable to the product segment
was $1.5 million, or 1.9% of product revenue. The low compensation expense for
this segment contributed greatly to the overall reduction in compensation
expense as a percentage of total net revenue. In future periods we expect the
staffing for the product segment to continue to increase as capabilities are
added. Also, since the sales of Ceftin are seasonal, compensation as a
percentage of sales may vary from quarter to quarter with the level of sales.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $23.5 million for the quarter ended
June 30, 2001, an increase of 692.3% over other selling, general and
administrative expenses of $3.0 million for the quarter ended June 30, 2000. As
a percentage of total net revenue, total other selling, general and
administrative expenses increased to 16.3% for the quarter ended June 30, 2001
from 3.9% for the quarter ended June 30, 2000. Other selling, general and
administrative expenses attributable to the contract sales and marketing
services segment for the quarter ended June 30, 2001 were $6.0 million, an
increase of 100.5% over other selling, general and administrative expenses of
$3.0 million attributable to that segment for the comparable prior year period.
16
As a percentage of net revenue from the contract sales and marketing service
segment, other selling, general and administrative expenses were 9.1% and 3.9%
for the quarters ended June 30, 2001 and 2000, respectively. This increase was
primarily due to several factors: facilities expansion resulting in increased
rental expense; discretionary investments in information technology resulting in
increased depreciation expense; establishment of an allowance for bad debt;
professional fees and increased marketing expenses related to advertising and
promotion associated with our new service offerings. Other selling, general and
administrative expenses attributable to the product segment for the quarter
ended June 30, 2001 were $17.6 million, or 22.1% of net product revenue, greatly
impacting the total other selling, general and administrative expenses as a
percentage of total net revenue. Other selling, general and administrative
expenses for the product segment consisted primarily of field selling costs,
direct marketing expenses, business insurance and professional fees. We believe
that we currently have adequate reserves to cover losses for bad debts and do
not anticipate similar increases during the remainder of 2001. The seasonality
of Ceftin sales may also cause other selling, general and administrative
expenses to vary as a percentage of revenue.
Operating income. Operating income for the quarter ended June 30, 2001 was
$6.4 million, 19.2% less than operating income of $7.9 million for the quarter
ended June 30, 2000. As a percentage of total net revenue, operating income
decreased to 4.4% for the quarter ended June 30, 2001 from 10.4% for the
comparable prior year period. For the contract sales and marketing services
segment, there was an operating loss of $2.1 million for the quarter ended June
30, 2001, compared to operating income of $7.9 million in the comparable prior
year period. The performance based contracts instituted during May 2001 incurred
a negative gross profit and a significant operating loss in the second quarter,
thereby having a severe adverse effect on the services segment; an operating
loss may also occur in the third quarter of 2001, after which future periods are
expected to be profitable. Operating income for the product segment for the
quarter ended June 30, 2001 was $8.5 million, or 10.8% of net product revenue.
Other income, net. Other income, net, for the quarter ended June 30, 2001
was $1.5 million and was comprised primarily of interest income. Other income,
net, for the quarter ended June 30, 2000, was $255,000, consisting primarily of
interest income of $1.9 million, partially offset by our share in the losses of
iPhysicianNet of $1.6 million.
Provision for income taxes. Income taxes of $3.5 million for the quarter
ended June 30, 2001 and $3.3 million for the quarter ended June 30, 2000
consisted of Federal and state corporate income taxes. The effective tax rate
for the quarter ended June 30, 2001 was 44.5%, compared to an effective tax rate
of 40.8% for the quarter ended June 30, 2000. Liabilities were accrued for taxes
in additional states where we are now doing business. The effective tax rate for
the year should approximate 42.0%.
Net income. Net income for the quarter ended June 30, 2001 was $4.4
million, compared to net income of $4.8 million for the quarter ended June 30,
2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenue. Total net revenue for the six months ended June 30, 2001 was
$317.0 million, an increase of 115.5% over total net revenue of $147.1 million
for the six months ended June 30, 2000. Net revenue from the contract sales and
marketing services segment for the six months ended June 30, 2001 of $142.9
million was $4.2 million, or 2.9%, less than net revenue of $147.1 million from
that segment for the comparable prior year period. This decrease was primarily
attributable to the loss of a significant CSO contract, and the reduction in
size, or non-renewal of several others, generally indicating slower demand for
contract sales services. Additionally, an increase in revenues from our
performance based contracts should occur over the next several quarters. Net
product revenue for the six months ended June 30, 2001 was $174.1 million, all
of which was attributable to sales of Ceftin. There were no product sales in the
comparable prior year period.
17
Cost of goods and services. Cost of goods and services for the six months
ended June 30, 2001 were $224.4 million, an increase of 107.4% over cost of
goods and services of $108.2 million for the six months ended June 30, 2000. As
a percentage of total net revenue, cost of goods and services decreased to 70.8%
for the six months ended June 30, 2001 from 73.6% in the comparable prior year
period. This decrease was primarily attributable to the lower cost of goods sold
from our product sales and distribution segment. Program expenses (i.e., cost of
services) for the six months ended June 30, 2001 were $108.7 million, an
increase of 0.5% over program expenses of $108.2 million for the six months
ended June 30, 2000. As a percentage of net contract sales and marketing
services segment revenue, program expenses for the six months ended June 30,
2001 and 2000 were 76.1% and 73.6%, respectively. This was primarily because of
high startup expenses for the performance based contracts that we began in the
second quarter 2001; excluding the effect of these contracts, program expenses
would have been 71.9% of service revenue. Cost of goods sold was $115.7 million
for the six months ended June 30, 2001. As a percentage of net product revenue,
cost of goods sold for the six months ended June 30, 2001 was 66.5%. Cost of
goods sold and gross margin on sales could fluctuate based on our quantity of
product purchased, and our contractual unit costs including applicable
discounts, as well as fluctuations in the selling price for our products
including applicable discounts.
Compensation expense. Compensation expense for the six months ended June
30, 2001 was $20.2 million compared to $15.2 million for the comparable prior
year period. As a percentage of total net revenue, compensation expense
decreased to 6.4% for the six months ended June 30, 2001 from 10.3% for the six
months ended June 30, 2000. Compensation expense for the six months ended June
30, 2001 attributable to the contract sales and marketing services segment was
$17.3 million compared to $15.2 million for the six months ended June 30, 2000.
As a percentage of net revenue from the contract sales and marketing services
segment, compensation expense increased to 12.1% for the six months ended June
30, 2001 from 10.3% for the six months ended June 30, 2000. Generally, we
anticipate that revenues in the services segment will increase in the third and
fourth quarters and that compensation expense as a percentage of revenue will
become lower. Compensation expense for the six months ended June 30, 2001
attributable to the product segment was $2.9 million, or 1.7% of product
revenue. The low compensation expense for this segment contributed greatly to
the overall reduction in compensation expense as a percentage of total net
revenue. In future periods we expect the staffing for the product segment to
continue to increase as capabilities are added. Also, since the sales of Ceftin
are seasonal, compensation as a percentage of sales may vary from quarter to
quarter with the level of sales.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $49.3 million for the six months ended
June 30, 2001, an increase of 606.3% over other selling, general and
administrative expenses of $7.0 million for the six months ended June 30, 2000.
As a percentage of total net revenue, total other selling, general and
administrative expenses increased to 15.4% for the six months ended June 30,
2001 from 4.7% for the six months ended June 30, 2000. Other selling, general
and administrative expenses attributable to the contract sales and marketing
services segment for the six months ended June 30, 2001 were $10.8 million, an
increase of 54.1% over other selling, general and administrative expenses of
$7.0 million attributable to that segment for the comparable prior year period.
As a percentage of net revenue from contract sales and marketing services, other
selling, general and administrative expenses were 7.4% and 4.7% for the quarters
ended June 30, 2001 and 2000, respectively. This increase was primarily due to
several factors: facilities expansion resulting in increased rental expense;
discretionary investments in information technology resulting in increased
depreciation expense; establishment of an allowance for bad debt; and increased
marketing expenses related to advertising and promotion associated with our new
service offerings. Other selling, general and administrative expenses
attributable to the product segment for the six months ended June 30, 2001 were
$38.5 million, or 22.0% of net product revenue, greatly impacting the total
other selling, general and administrative expenses as a percentage of total net
revenue. Other selling, general and administrative expenses for the product
segment consisted primarily of field selling costs, direct marketing expenses,
business insurance, increases in the allowances for bad debts, and professional
fees. We believe that we currently have adequate reserves to cover losses for
bad debts and do not anticipate similar increases during the remainder of 2001.
The seasonality of Ceftin sales may also cause other selling, general and
administrative expenses to vary as a percentage of revenue.
18
Operating income. Operating income for the six months ended June 30, 2001
was $23.1 million, an increase of 38.5% over operating income of $16.7 million
for the six months ended June 30, 2000. As a percentage of total net revenue,
operating income decreased to 7.3% for the six months ended June 30, 2001 from
11.3% for the comparable prior year period. Operating income for the six months
ended June 30, 2001 for the contract sales and marketing services segment was
$6.1 million, a decrease of 63.3% compared to the contract sales and marketing
services segment operating income for the six months ended June 30, 2000 of
$16.7 million. As a percentage of net revenue from the contract sales and
marketing services segment, operating income for the those segments decreased to
4.3% for the six months ended June 30, 2001, from 11.3% for the comparable prior
year period. The performance-based contracts initiated during the second quarter
of 2001 resulted in a negative gross profit and a significant operating loss for
the six-month period ended June 30, 2001, thereby having a severe adverse effect
on the services segment; an operating loss may also occur in the third quarter
of 2001, after which future periods are expected to be profitable. Operating
income for the product segment for the six months ended June 30, 2001 was $17.0
million, or 9.8% of net product revenue.
Other income, net. Other income, net, for the six months ended June 30,
2001 was $3.4 million and was comprised primarily of interest income. Other
income, net, for the six months ended June 30, 2000, was $939,000, consisting
primarily of interest income of $3.5 million, partially offset by our share in
the losses of iPhysicianNet of $2.5 million.
Provision for income taxes. Income taxes of $11.2 million for the six
months ended June 30, 2001 and $7.2 million for the six months ended June 30,
2000 consisted of Federal and state corporate income taxes. The effective tax
rate for the six months ended June 30, 2001 was 42.2%, compared to an effective
tax rate of 40.7% for the six months ended June 30, 2000. Liabilities were
accrued in the second quarter for taxes in additional states where we are now
doing business. The effective tax rate for the year should approximate 42.0%.
Net income. Net income for the six months ended June 30, 2001 was $15.3
million, an increase of 46.7% from net income of $10.5 million for the six
months ended June 30, 2000.
Liquidity and capital resources
As of June 30, 2001, we had cash and cash equivalents and short-term
investments of approximately $119.3 million and working capital of $131.4
million compared to cash and cash equivalents and short-term investments of
approximately $113.9 million and working capital of $120.7 million at December
31, 2000.
For the six months ended June 30, 2001, net cash provided by operating
activities was $11.8 million, a decrease of $1.2 million from cash provided by
operating activities of $13.0 million for the same period in 2000. The main
components of cash provided by operating activities for the six months ended
June 30, 2001 were net income from operations of $15.3 million plus non-cash
adjustments for depreciation, amortization and reserves of $5.6 million, offset
by changes in "Other assets and liabilities." The balances in "Other changes in
assets and liabilities" may fluctuate depending on a number of factors,
including seasonality of product sales, the number and size of programs,
contract terms and other timing issues; these fluctuations may vary in size and
direction each reporting period. "Other changes in assets and liabilities"
resulted in a net cash outflow of $9.1 million during the six-month period ended
June 30, 2001 as compared to $771,000 net cash inflow during the comparable
period in 2000.
Inventory increased $34.8 million in the first six months of 2001. All
inventory is associated with our distribution agreement with GlaxoSmithKline
regarding Ceftin. Accrued rebates and discounts increased by $29.2 million in
the first sixth months of 2001. This entire amount is associated with the
chargebacks, rebates and discounts owed to wholesalers, managed care
organizations and state medicaid organizations in connection with sales of
Ceftin.
19
When we bill clients for services before they have been completed, billed
amounts are recorded as unearned contract revenue, and are recorded as income
when earned. When services are performed in advance of billing, the value of
such services is recorded as unbilled costs and accrued profits. As of June 30,
2001, we had $21.3 million of unearned contract revenue and $10.8 million of
unbilled costs and accrued profits. Substantially all deferred and unbilled
costs and accrued profits are earned or billed, as the case may be, within
twelve months of the end of the respective period.
For the six months ended June 30, 2001, net cash used in investing
activities was $44.1 million including $37.0 million of short-term investments
and $5.9 million of capital expenditures. The increase in short-term investments
resulted from the purchase of securities that have a maturity date of more than
90 days past the balance sheet date of June 30, 2001, and therefore have been
classified as short-term investments rather than cash and cash equivalents. Net
cash provided by financing activities was $639,000 and consisted of the proceeds
received upon exercise of employee stock options.
We have a credit agreement dated as of March 30, 2001 with a syndicate of
banks, for which PNC Bank, National Association is acting as Administrative and
Syndication Agent, that provides for both a three-year, $30 million unsecured
revolving credit facility and a one-year, renewable, $30 million unsecured
revolving credit facility. Borrowings under the agreement bear interest equal to
either an average London interbank offered rate (LIBOR) plus a margin ranging
from 1.5% to 2.25%, depending on our ratio of funded debt to earnings before
interest, taxes depreciation and amortization (EBITDA); or the greater of prime
or the federal funds rate plus a margin ranging from zero to 0.25%, depending on
our ratio of funded debt to EBITDA. We are required to pay a commitment fee
quarterly in arrears for each of the long-term and short-term credit facilities.
These fees range from 0.175% to 0.325% for the long-term credit facility and
from 0.25% to 0.40% for the short-term credit facility, depending on our ratio
of funded debt to EBITDA. The credit agreement contains customary affirmative
and negative covenants including financial covenants requiring the maintenance
of specified consolidated interest coverage, leverage ratios and a minimum net
worth. At June 30, 2001 we were in compliance with such covenants. There were
no amounts outstanding under these facilities at June 30, 2001.
We believe that our cash and cash equivalents, availability under our
credit facilities and future cash flows generated from operations will be
sufficient to meet our foreseeable operating and capital requirements for the
next twelve months. We continue to evaluate and review acquisition candidates in
the ordinary course of business.
Part II - Other Information
Item 1 - Not Applicable
Item 2 - Changes in Securities and Use of Proceeds
On May 19, 1998, the Company completed its initial public offering (the
"IPO") of 3,220,000 shares of Common Stock (including 420,000 shares in
connection with the exercise of the underwriters' over-allotment option) at a
price per share of $16.00. Net proceeds to the Company after expenses of the IPO
were approximately $46.4 million.
(1) Effective date of Registration Statement: May 19, 1998 (File No.
333-46321).
(2) The Offering commenced on May 19, 1998 and was consummated on May
22, 1998.
(3) Not applicable.
(4)(i) All securities registered in the Offering were sold.
20
(4)(ii) The managing underwriters of the Offering were Morgan Stanley Dean
Witter, William Blair & Company and Hambrecht & Quist.
(4)(iii) Common Stock, $.01 par value.
(4)(iv) Amount registered and sold: 3,220,000 shares.
Aggregate purchase price: $51,520,000.
All shares were sold for the account of the Issuer.
(4)(v) $3,606,400 in underwriting discounts and commissions were paid to
the underwriters. $1,490,758 of other expenses were incurred,
including estimated expenses.
(4)(vi) $46,422,842 of net Offering proceeds to the Issuer.
(4)(vii) Use of Proceeds: $46,422,000 of temporary investments with average
maturities of three months as of June 30, 2001.
Item 3 - Not Applicable
Item 4 - Submission of matters to a vote of security holders
On July 11, 2001, the Company held its 2001 Annual Meeting of
Stockholders. At the meeting John P. Dugan and Gerald J. Mossinghoff were
re-elected as Class I Directors of the Company for three year terms with
12,303,820 and 12,308,742 votes cast in favor of their election, respectively,
and 199,221 and 194,229 votes withheld, respectively. In addition: a proposed
amendment to the Company's Certificate of Incorporation to increase its
authorized common shares from 30 million to 100 million was approved (9,261,573
votes in favor, 3,238,480 votes against, and 2,988 votes withheld); a proposed
amendment to the Company's Certificate of Incorporation to change the Company's
name to PDI, Inc. was approved (12,496,306 votes in favor, 5,334 votes against,
and 1,401 votes withheld); and the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for fiscal 2001 was ratified (12,287,336
votes in favor, 214,472 votes against, and 1,233 votes withheld).
Item 5 - Not Applicable
Item 6 - Reports on Form 8-K
During the three months ended June 30, 2001, the Company filed the
following reports on Form 8-K:
Date Item Description
------------ ---- ----------------------------------------------
May 9, 2001 5 Earnings Press Release
May 22, 2001 5 Novartis contract - Lotensin and Lotrel Press
Release
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
August 14, 2001 PROFESSIONAL DETAILING, INC.
By: /s/ Charles T. Saldarini
------------------------------------
Charles T. Saldarini
Chief Executive Officer
By: /s/ Bernard C. Boyle
------------------------------------
Bernard C. Boyle
Chief Financial and Accounting
Officer
22