UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to _______
Commission File Number 0-24249
PDI, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2919486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Mountainview Road
Upper Saddle River, New Jersey 07458
(Address of principal executive offices)
(201) 258-8450
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 10, 2002 the Registrant had a total of 14,014,349 shares of Common
Stock, $.01 par value, outstanding.
1
INDEX
PDI, INC.
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (unaudited)
Balance Sheets
March 31, 2002 and December 31, 2001 ............................. 3
Statements of Operations -- Three Months
Ended March 31, 2002 and 2001 .................................... 4
Statements of Cash Flows -- Three
Months Ended March 31, 2002 and 2001 ............................. 5
Notes to Financial Statements .................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds ............ Not Applicable
Item 3. Default Upon Senior Securities ....................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders .. Not Applicable
Item 5. Other Information .................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K ................................. 23
SIGNATURES ............................................................... 24
2
PDI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 147,524 $ 160,043
Short-term investments ............................................. 3,397 7,387
Inventory, net ..................................................... -- 442
Accounts receivable, net of allowance for doubtful accounts of
$1,560 and $3,692 as of March 31, 2002 and December 31, 2001,
respectively ................................................... 33,020 52,640
Unbilled costs and accrued profits on contracts in progress ........ 9,357 6,898
Deferred training .................................................. 4,465 5,569
Other current assets ............................................... 6,336 8,101
Deferred tax asset ................................................. 24,041 24,041
--------- ---------
Total current assets .................................................. 228,140 265,121
Net property, plant & equipment ....................................... 22,132 21,044
Other long-term assets ................................................ 15,796 16,506
--------- ---------
Total assets .......................................................... $ 266,068 $ 302,671
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 5,862 $ 9,493
Accrued rebates and sales discounts ................................ 59,381 68,403
Accrued contract losses ............................................ 600 12,256
Accrued incentives ................................................. 16,960 22,213
Accrued salaries and wages ......................................... 10,648 7,167
Unearned contract revenue .......................................... 10,338 10,878
Other accrued expenses ............................................. 13,151 21,026
--------- ---------
Total current liabilities ............................................. 116,940 151,436
--------- ---------
Long-term liabilities:
Deferred tax liability ........................................... 300 300
--------- ---------
Total long-term liabilities ........................................... 300 300
--------- ---------
Total liabilities ..................................................... $ 117,240 $ 151,736
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized:
shares issued and outstanding, March 31, 2002 - 13,969,389,
December 31, 2001 - 13,968,097; restricted $.01 shares
issued and outstanding, March 31, 2002 - 15,388,
December 31, 2001 - 15,388 ....................................... $ 140 $ 140
Preferred stock, $.01 par value, 5,000,000 shares authorized, no
shares issued and outstanding .................................... -- --
Additional paid-in capital ............................................ 102,777 102,757
Additional paid-in capital, restricted ................................ 954 954
Retained earnings ..................................................... 45,741 48,008
Accumulated other comprehensive loss .................................. (48) (79)
Unamortized compensation costs ........................................ (626) (735)
Treasury stock, at cost: 5,000 shares ................................. (110) (110)
--------- ---------
Total stockholders' equity ............................................ $ 148,828 $ 150,935
--------- ---------
Total liabilities & stockholders' equity .............................. $ 266,068 $ 302,671
========= =========
The accompanying notes are an integral part of these financial statements
3
PDI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2002 2001
-------- --------
(unaudited)
Revenue
Service, net .......................................... $ 68,160 $ 78,087
Product, net .......................................... 5,723 94,978
-------- --------
Total revenue, net ................................ 73,883 173,065
-------- --------
Cost of goods and services
Program expenses (including related party amounts of
$97 and $414 for the periods ended
March 31, 2002 and 2001, respectively) .............. 67,277 55,395
Cost of goods sold .................................... -- 64,215
-------- --------
Total cost of goods and services .................. 67,277 119,610
-------- --------
Gross profit ............................................. 6,606 53,455
Compensation expense ..................................... 7,759 11,015
Other selling, general & administrative expenses ......... 3,325 25,728
-------- --------
Total selling, general & administrative expenses ...... 11,084 36,743
-------- --------
Operating (loss) income .................................. (4,478) 16,712
Other income, net ........................................ 889 1,870
-------- --------
(Loss) income before provision for taxes ................. (3,589) 18,582
(Benefit) provision for income taxes ..................... (1,322) 7,653
-------- --------
Net (loss) income ........................................ $ (2,267) $ 10,929
======== ========
Basic net (loss) income per share ........................ $ (0.16) $ 0.79
======== ========
Diluted net (loss) income per share ...................... $ (0.16) $ 0.77
======== ========
Basic weighted average number of shares outstanding ...... 13,969 13,843
======== ========
Diluted weighted average number of shares outstanding .... 13,969 14,133
======== ========
The accompanying notes are an integral part of these financial statements
4
PDI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
(unaudited)
Cash Flows From Operating Activities
Net (loss) income from operations ................................... $ (2,267) $ 10,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 1,401 878
Reserve for inventory obsolescence and bad debt ............. (2,132) 1,798
Amortized compensation costs ................................ 109 134
Deferred tax asset, net ..................................... -- 184
Other changes in assets and liabilities:
Decrease (increase) in accounts receivable .................. 21,752 (12,088)
Decrease (increase) in inventory ............................ 442 (14,399)
(Increase) in unbilled costs ................................ (2,459) (4,165)
Decrease in deferred training ............................... 1,104 109
Decrease in other current assets ............................ 1,766 237
Decrease (increase) in other long-term assets ............... 556 (216)
(Decrease) increase in accounts payable ..................... (3,631) 17,626
(Decrease) increase in accrued rebates and sales discounts .. (9,021) 13,651
(Decrease) in accrued contract losses ....................... (11,656) --
(Decrease) in accrued liabilities ........................... (1,773) (5,270)
(Decrease) increase in unearned contract revenue ............ (539) 64
(Decrease) in other current liabilities ..................... (7,877) (1,260)
--------- ---------
Net cash (used in) provided by operating activities ................. (14,225) 8,212
--------- ---------
Cash Flows From Investing Activities
Sale of short-term investments ................................. 4,021 --
Purchase of short-term investments ............................. -- (4,826)
Other investments .............................................. -- (740)
Purchase of property and equipment ............................. (2,336) (2,035)
--------- ---------
Net cash provided by (used in) investing activities ................. 1,685 (7,601)
--------- ---------
Cash Flows From Financing Activities
Net proceeds from exercise of stock options .................... 21 148
--------- ---------
Net cash provided by financing activities ........................... 21 148
--------- ---------
Net (decrease) increase in cash and cash equivalents ................ (12,519) 759
Cash and cash equivalents - beginning ............................... 160,043 109,000
--------- ---------
Cash and cash equivalents - ending .................................. $ 147,524 $ 109,759
========= =========
The accompanying notes are an integral part of these financial statements
5
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements and related notes
should be read in conjunction with the financial statements of PDI, Inc. and its
subsidiaries (the "Company" or "PDI") and related notes as included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 as
filed with the Securities and Exchange Commission. The unaudited interim
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The unaudited interim
financial statements include all adjustments (consisting only of normal
recurring adjustments) which, in the judgement of management, are necessary for
a fair presentation of such financial statements. Operating results for the
three-month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. Certain
prior period amounts have been reclassified to conform with the current
presentation with no effect on financial position, net income or cash flows.
2. Ceftin Contract Termination
In October 2000, the Company entered into an agreement with
GlaxoSmithKline (GSK) for the exclusive U.S. marketing, sales and distribution
rights for Ceftin(R) Tablets and Ceftin(R) for Oral Suspension, two dosage forms
of a cephalosporin antibiotic, which agreement was terminated as of February 28,
2002 by mutual agreement of the parties. The agreement had a five-year term but
was cancelable by either party without cause on 120 days notice. From October
2000 through February 2002, the Company marketed and sold Ceftin products,
primarily to wholesale drug distributors, retail chains and managed care
providers.
On August 21 2001, the U.S. Court of Appeals overturned a preliminary
injunction granted by the New Jersey District Court, which allowed for the entry
of a generic competitor to Ceftin immediately upon approval by the FDA. The
affected Ceftin patent had previously been scheduled to run through July 2003.
As a result of this decision and its impact on future sales, in the third
quarter of 2001, PDI recorded a charge to cost of goods sold and a related
reserve of $24.0 million representing the anticipated future loss to be incurred
by the Company under the Ceftin agreement as of September 30, 2001. The recorded
loss was calculated as the excess of estimated costs that PDI was contractually
obligated to incur to complete its obligations under the arrangement, over the
remaining estimated gross profits to be earned under the contract from selling
the inventory. These costs primarily consisted of amounts paid to GSK to reduce
purchase commitments, estimated committed sales force, selling and marketing
costs through the effective date of the termination, distribution costs, and
fees to terminate existing arrangements. The Ceftin agreement was terminated by
the Company and GSK under a mutual termination agreement entered into in
December 2001. Under the termination agreement, the Company agreed to perform
its marketing and distribution services through February 28, 2002. The Company
also maintained responsibility for sales returns for product sold until the
expiration date of the product sold, estimated to be December 31, 2004, and
certain administrative functions regarding Medicaid rebates.
As of March 31, 2002, the Company had approximately $600,000 remaining of
the Ceftin contract loss reserve which consisted primarily of the remaining
estimated selling, general and administrative costs required to be incurred
pursuant to the contract termination, primarily relating to the Company's
obligation to administer product sales returns. While the Company has certain
performance requirements as discussed above, it had no remaining Ceftin
inventory purchase commitments as of March 31, 2002. The Company also had
6
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
approximately $59.4 million in sales discounts, rebates and return reserves
related to Ceftin at March 31, 2002 for estimated settlement of these
obligations through the contract termination date.
3. Charter Amendment
On October 1, 2001 the Company effected an amendment to its Certificate of
Incorporation (a) changing the Company's name from Professional Detailing, Inc.
to PDI, Inc., and (b) increasing the Company's authorized common stock from 30
million shares to 100 million shares. These changes were approved by the
Company's stockholders at the Company's 2001 annual meeting of stockholders.
4. Repurchase Program
On September 21, 2001, the Company announced that its Board of Directors
had unanimously authorized management to repurchase up to $7.5 million of its
common stock. Subject to availability, the transactions may be made from time to
time in the open market or directly from stockholders at prevailing market
prices that the Company deems appropriate. The repurchase program was
implemented to ensure stability of the trading in PDI's common shares in light
of the September 11, 2001 terrorist activity. In October 2001, 5,000 shares were
repurchased in open market transaction for a total of $110,000.
5. New Business
LifeCycle Ventures, Inc., (LCV) was incorporated in June 2000 as a wholly
owned subsidiary of PDI. The LCV service offering provides pharmaceutical
manufacturers with a new approach toward managing the resource constraints
inherent in a large product portfolio. The mounting pressure to launch new drugs
and quickly maximize sales of products in the growth phase of their lifecycles
often leaves other products that could benefit from intensified sales and
marketing efforts. LCV helps to maximize the sales and profit potential of these
products by fully or partially funding and managing the marketing, sales and
distribution efforts for the products in return for performance based
compensation. LCV was merged into PDI, Inc. effective December 31, 2001.
In May 2001, the Company entered into an agreement with Novartis
Pharmaceuticals Corporation (Novartis) for the U.S. sales, marketing and
promotion rights for Lotensin(R) and Lotensin HCT(R), which agreement runs
through December 31, 2003. Pursuant to this agreement, the Company provides
promotional, selling and marketing for Lotensin, as well as brand management. In
exchange, the Company is entitled to receive a split of incremental net sales
above specified baselines. Also pursuant to this agreement the Company
copromotes Lotrel(R) in the U.S. for which it is entitled to be compensated on a
fee for service basis with potential incentive payments based upon achieving
certain net total prescriptions (TRx) objectives. Novartis has retained certain
regulatory responsibilities for Lotensin and Lotrel and ownership of all
intellectual property. Additionally, Novartis will continue to manufacture and
distribute the products. In the event the Company's estimates of the demand for
Lotensin are not accurate or more sales and marketing resources than anticipated
are required, the Novartis transaction could have a material adverse impact on
the Company's results of operations, cash flows and liquidity. During the three
months ended March 31, 2002, the Company's efforts on this contract did result
in an operating loss because the sales of Lotensin did not exceed the specified
baselines by an amount sufficient to cover its operating costs. While the
Company currently estimates that future revenues will exceed costs associated
7
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
with this agreement, there is no assurance that actual revenues will exceed
costs; in which event the activities covered by this agreement would continue to
yield an operating loss.
In October 2001, the Company entered into an agreement with Eli Lilly and
Company (Eli Lilly) to copromote Evista(R) in the U.S. Evista is approved in the
U.S. for the prevention and treatment of osteoporosis in postmenopausal women.
Under the terms of the agreement, the Company provides sales representatives to
copromote Evista to U.S. physicians. These sales representatives augment the Eli
Lilly sales force promoting Evista. Under this agreement, the Company is
entitled to be compensated based on net sales achieved above a predetermined
level. The agreement does not provide for the direct reimbursement of expenses
the Company incurs. The Eli Lilly arrangement is a performance based contract
which extends through December 31, 2003, subject to earlier termination upon the
occurrence of specific events. PDI's compensation is earned as a percentage of
net factory sales above contractual baselines. To the extent that such baselines
are not exceeded, which has been the case since the inception of the agreement,
including the three months ended March 31, 2002, the Company receives no
revenue. Further, the Company is required to commit a certain level of spending
for promotional and selling activities including but not limited to sales
representatives. These costs could range from $9.0 million to $12.0 million per
quarter. Under the contract with Eli Lilly, the sales force assigned to Evista
may also be used to promote other products, including products covered by other
PDI copromotion arrangements which may allow the Company to generate additional
revenue and absorb a portion of the costs related to the sales force. In the
event the Company's estimates of the demand for Evista are not accurate, the Eli
Lilly transaction could have a material adverse impact on its results of
operations, cash flows and liquidity. While the Company currently estimates that
its future revenues from Evista sales will exceed its costs associated with this
agreement, there is no assurance that actual revenues will exceed costs; in
which event the activities covered by this agreement would continue to yield an
operating loss.
6. Acquisition
On September 10, 2001, the Company acquired 100% of the capital stock of
InServe Support Solutions ("InServe") in a transaction treated as an asset
acquisition for tax purposes. InServe is a nationwide supplier of supplemental
field-staffing programs for the medical device and diagnostics industries
("MD&D"). The acquisition has been accounted for as a purchase, subject to the
provisions of SFAS 141 and SFAS 142. The net assets of InServe on the date of
acquisition were approximately $1.3 million. The Company made payments to the
Seller at closing of $8.5 million, net of cash acquired. Additionally, the
Company put $3.0 million in escrow related to contingent payments payable during
2002 if certain defined benchmarks are achieved. The Company expects all
benchmark performance criteria, except those related to certain financial
measures in the amount of $265,265, will be achieved in 2002. In connection with
this transaction, the Company recorded $7.9 million in goodwill, which is
included in other long-term assets, and the remaining purchase price was
allocated to identifiable assets and liabilities acquired.
The following unaudited pro forma results of operations for the quarter
ended March 31, 2001 assume that the Company and InServe had been combined as of
the beginning of the period presented. The pro forma results include estimates
and assumptions which management believes are reasonable. However, pro forma
results are not necessarily indicative of the results which would have occurred
if the acquisition had been consummated as of the dates indicated, nor are they
necessarily indicative of future operating results.
8
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended
March 31, 2001
-----------------------------------------
(in thousands, except for per share data)
(unaudited)
Net sales - pro forma $ 175,210
===========
Net income - pro forma $ 11,004
===========
Pro forma diluted earnings per share $ 0.78
===========
7. Other Investments
During the three months ended March 31, 2001, the Company made an
additional investment of approximately $740,000 in convertible preferred stock
of In2Focus, Inc., a United Kingdom contract sales company, bringing the total
investment as of March 31, 2001 to $1.5 million. During the remainder of 2001,
an additional investment of approximately $400,000 was made, raising PDI's
ownership to approximately 12%. The Company recorded its investment under the
cost method. In light of the negative operating cash flows and the uncertainty
of achieving positive future results, the Company concluded as of December 31,
2001, that its investment related to in2Focus was other than temporarily
impaired and was written down to zero, its current estimated net realizable
value.
8. Inventory
At March 31, 2002, there was a zero inventory balance due to the sale of
all remaining inventory prior to the cancellation of PDI's distribution
agreement with GSK for Ceftin. For the three months ended March 31, 2001,
inventory was valued at the lower of cost or fair value. Cost was determined
using the first in, first out costing method. Inventory consisted of only
finished goods and was recorded net of a provision for obsolescence.
9. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under these new standards, all acquisitions subsequent to
June 30, 2001 must be accounted for under the purchase method of accounting, and
purchased goodwill is no longer amortized over its useful life. Rather, goodwill
will be subject to a periodic impairment test based upon its fair value. Under
these pronouncements, the Company's goodwill of approximately $11.0 million will
no longer be amortized; but will be subject to an annual impairment test. The
Company will assess the impairment under SFAS 142 by June 30, 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
9
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and discontinued operations.
The adoption of these accounting pronouncements did not have a material
effect on the consolidated financial position and results of operations. PDI
adopted these statements effective January 1, 2002.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Statement updates, clarifies and simplifies existing
accounting pronouncements.
The Company does not expect the adoption of this accounting pronouncement
to have a material effect, if any, on the consolidated financial position and
results of operations.
10. Historical and Pro Forma Basic and Diluted Net Income/Loss Per Share
Historical and pro forma basic and diluted net income/loss per share is
calculated based on the requirements of SFAS No. 128, "Earnings Per Share."
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the quarters ended March 31, 2002 and 2001 is
as follows:
Three Months Ended
March 31,
------------------
2002 2001
------ ------
(in thousands)
Basic weighted average number of common
shares outstanding ........................... 13,969 13,843
Dilutive effect of stock options ............... -- 290
------ ------
Diluted weighted average number of common
shares outstanding ........................... 13,969 14,133
====== ======
At March 31, 2002, 1,040,885 stock options were excluded from the
computation of diluted earnings per share due to their antidilutive effect. At
March 31, 2001, 276,735 stock options were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
11. Short-Term Investments
At March 31, 2002, short-term investments were $3.4 million, including
approximately $916,000 of investments classified as available for sale
securities. At March 31, 2001, short-term investments were $9.7 million,
including approximately $840,000 of investments classified as available for sale
securities. The unrealized after-tax gain/(loss) on the available for sale
securities is included as a separate component of stockholders' equity as
accumulated other comprehensive income (loss). All other short-term investments
are stated at cost, which approximates fair value.
10
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
12. Other Comprehensive Income (Loss)
A reconciliation of net income (loss) as reported in the Consolidated
Statements of Operations to Other comprehensive income (loss), net of taxes is
presented in the table below.
Three Months Ended
March 31,
---------------------
2002 2001
------- --------
(thousands)
Net (loss) income ........................................... $(2,267) $ 10,929
Other comprehensive income, net of tax:
Unrealized holding loss on
available-for-sale securities arising during period .. (67) (108)
Reclassification adjustment for losses
included in net (loss) income ........................ 20 17
------- --------
Other comprehensive (loss) income ........................... $(2,314) $ 10,838
======= ========
13. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products, and, through LCV was also in the business of distributing product
under the Ceftin agreement. Such activities could expose the Company to risk of
liability for personal injury or death to persons using such products. The
Company seeks to reduce its potential liability under its service agreements
through measures such as contractual indemnification provisions with clients
(the scope of which may vary from client to client, and the performances of
which are not secured) and insurance. The Company could, however, also be held
liable for errors and omissions of its employees in connection with the services
it performs that are outside the scope of any indemnity or insurance policy. The
Company could be materially adversely affected if it were required to pay
damages or incur defense costs in connection with a claim that is outside the
scope of the indemnification agreements; if the indemnity, although applicable,
is not performed in accordance with its terms; or if the Company's liability
exceeds the amount of applicable insurance or indemnity.
In January and February 2002, the Company, its chief executive officer and
its chief financial officer were served with three complaints that were filed in
the U.S. District Court for the District of New Jersey alleging violations of
the Securities Act of 1934 (the "1934 Act"). These complaints were brought as
purported shareholder class actions under Sections 10(b) and 20(a) of the 1934
Act and Rule 10b-5 promulgated thereunder. Each of the complaints alleges a
purported class period which runs from May 22, 2001 through November 12, 2001;
seeks to represent a class of stockholders who purchased shares of the Company's
common stock during that period; and seeks money damages in unspecified amounts
and litigation expenses including attorneys' and experts' fees.
Each of these three complaints contain substantially similar allegations,
the essence of which is that the defendants intentionally or recklessly made
false or misleading public statements and omissions concerning the Company's
financial condition and prospects with respect to its marketing of Ceftin in
connection with the October 2000 distribution agreement with GlaxoSmithKline, as
well as its marketing of Lotensin and Lotrel in connection with the May 2001
distribution agreement with Novartis Pharmaceuticals Corporation.
11
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
The Company believes that each of these three complaints will ultimately
be consolidated into one action. As of this filing, it has not yet answered any
of the complaints, and discovery has not yet commenced. The Company believes
that the allegations in these complaints are without merit and it intends to
defend these actions vigorously.
The Company has been named as a defendant in several lawsuits, including a
class action matter, alleging claims arising from the use of the prescription
compound Baycol that was manufactured by Bayer Pharmaceuticals and marketed by
the Company on Bayer's behalf. In August 2001, Bayer announced that it was
voluntarily withdrawing Baycol from the U.S. market. The Company intends to
defend these actions vigorously and has asserted a contractual right of
indemnification against Bayer for all costs and expenses it incurs related to
these proceedings.
Other than the foregoing, the Company is not currently a party to any
material pending litigation and it is not aware of any material threatened
litigation.
14. Segment Information
The Company operates under two reporting segments: sales and marketing
services, and PDI Pharma, both of which have been changed since the December 31,
2001 financial presentation. Since the termination of the Ceftin contract and
the elimination of product sales, effective February 28, 2002, the shift in
management's focus on the business has been to view the traditional fee for
service type arrangements (offered by the "sales and marketing services"
segment) in the aggregate and to view the performance based contracts - those
for which the Company is compensated based largely on the performance of the
products that it is responsible for marketing and selling ("PDI Pharma"
segment) - also in the aggregate. The sales and marketing services segment
includes the Company's CSO business units; the Company's marketing services
business unit, which includes marketing research and medical education and
communication services; and the Company's medical device and diagnostics
business unit. The PDI Pharma segment includes the Company's LifeCycle Extension
services, product commercialization services and copromotion services, including
product sales. The segment information from prior periods has been restated to
conform to the current year's presentation.
The "sales and marketing services" segment combines and replaces the
"contract sales" and "marketing services" reporting segments included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
Both of the current segments replace the "contract sales and marketing services"
and "product sales and distribution" reporting segments included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The accounting policies of the segments are described in note 1. Segment
data includes a charge allocating all corporate headquarters costs to each of
the operating segments on the basis of revenue.
12
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
-------- ---------
(thousands)
Revenue
Sales and marketing services .................. $ 56,457 $ 94,699
PDI Pharma .................................... 17,550 95,756
-------- ---------
Total ..................................... $ 74,007 $ 190,455
======== =========
Revenue, intersegment
Sales and marketing services .................. $ 124 $ 17,390
PDI Pharma .................................... -- --
-------- ---------
Total ..................................... $ 124 $ 17,390
======== =========
Revenue, less intersegment
Sales and marketing services .................. $ 56,333 $ 77,309
PDI Pharma .................................... 17,550 95,756
-------- ---------
Total ..................................... $ 73,883 $ 173,065
======== =========
EBIT
Sales and marketing services .................. $ 3,020 $ 11,886
PDI Pharma .................................... (4,999) 7,157
Corporate charges ............................. (2,499) (2,331)
-------- ---------
Total ..................................... $ (4,478) $ 16,712
======== =========
EBIT, intersegment
Sales and marketing services .................. $ (69) $ 2,928
PDI Pharma .................................... (55) (2,928)
Corporate charges ............................. 124 --
-------- ---------
Total ..................................... $ -- $ --
======== =========
EBIT, less intersegment,
before corporate allocations
Sales and marketing services .................. $ 2,965 $ 8,958
PDI Pharma .................................... (4,944) 10,085
Corporate charges ............................. (2,499) (2,331)
-------- ---------
Total ..................................... $ (4,478) $ 16,712
======== =========
Corporate allocations
Sales and marketing services .................. $ (1,905) $ (1,041)
PDI Pharma .................................... (594) (1,290)
Corporate charges ............................. 2,499 2,331
-------- ---------
Total ..................................... $ -- $ --
======== =========
EBIT, less corporate allocations
Sales and marketing services .................. $ 1,060 $ 7,917
PDI Pharma .................................... (5,538) 8,795
Corporate charges ............................. -- --
-------- ---------
Total ..................................... $ (4,478) $ 16,712
======== =========
Reconciliation of EBIT to income before provision
for income taxes
Total EBIT for operating groups ............... $ (4,478) $ 16,712
Other income, net ............................. 889 1,870
-------- ---------
Income before provision for income taxes .. $ (3,589) $ 18,582
======== =========
13
PDI, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended
March 31,
----------------------
2002 2001
------ ------
(thousands)
Capital expenditures
Sales and marketing services .............. $2,395 $1,877
PDI Pharma ................................ -- 158
------ ------
Total ................................. $2,395 $2,035
====== ======
Depreciation expense
Sales and marketing services .............. $1,220 $ 755
PDI Pharma ................................ 28 4
------ ------
Total ................................. $1,248 $ 759
====== ======
14
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, 2001 as filed with the Securities and Exchange
Commission.
Overview
We are an innovative sales and marketing company serving the
pharmaceutical, biotech, and medical devices and diagnostics industries.
Partnering with clients, we provide product-specific programs designed to
maximize profitability throughout a product's lifecycle from pre-launch through
maturity. We are recognized as an industry leader based on our track record of
innovation and our ability to keep pace in a rapidly changing industry. We
leverage our expertise in sales, brand management and product marketing,
marketing research, medical education, medical affairs, and managed markets and
trade relations to help meet strategic objectives and provide incremental value
for product sales. We operate under two reporting segments: sales and marketing
services and PDI Pharma. Within our two reporting segments we provide the
following services:
o Sales and marketing services:
o dedicated contract sales services;
o shared contract sales services;
o medical device and diagnostics sales and marketing services;
o marketing research and consulting services (TVG); and
o medical education and communication services (TVG).
o PDI Pharma:
o LifeCycle Extension services (LCXT);
o product commercialization services (PCS);and
o copromotion services.
Our contracts within the LCXT, PCS and copromotion subcategories are more
heavily performance based and have a higher risk potential and correspondingly
an opportunity for higher profitability. These contracts involve significant
startup expenses and a greater risk of operating losses. These contracts
normally require significant participation from our LCV and TVG professionals
whose skill sets include marketing, brand management, trade relations and
marketing research.
15
Sales and Marketing Services
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts were
fee for services, i.e., the client pays a fee for a specified package of
services. These contracts typically include operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by built-in incentives we can earn
based on our performance. In these situations, we have the opportunity to earn
additional fees based on enhanced program results.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason on 30 to 90 days notice. These
contracts typically, but not always, provide for termination payments in the
event they are terminated by the client without cause. While the cancellation of
a contract by a client without cause may result in the imposition of penalties
on the client, these penalties may not act as an adequate deterrent to the
termination of any contract. In addition, we cannot assure you that these
penalties will offset the revenue we could have earned under the contract or the
costs we may incur as a result of its termination. The loss or termination of a
large contract or the loss of multiple contracts could adversely affect our
future revenue and profitability. As an example, in February 2002, Bayer
notified us that they were exercising their right to terminate their contract
with us without cause. Contracts may also be terminated for cause if we fail to
meet stated performance benchmarks. To date, no programs have been terminated
for cause.
On September 10, 2001, we acquired InServe Support Solutions (InServe) in
a transaction treated as an asset acquisition for tax purposes. The acquisition
was accounted for as a purchase in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) 141 and SFAS 142. The net assets of
InServe on the date of acquisition were approximately $1.3 million. At closing,
we paid the former stockholders of InServe $8.5 million, net of cash acquired.
Additionally, we deposited $3.0 million in escrow related to contingent payments
payable during 2002 if certain defined benchmarks are achieved. In connection
with this transaction, we recorded $7.9 million in goodwill, which is included
in other long-term assets, and the remaining purchase price was allocated to
identifiable assets and liabilities acquired.
InServe is a leading nationwide supplier of supplemental field-staffing
programs for the medical device and diagnostics industries. InServe provides
hands-on clinical education and after-sales support to maximize product
utilization and customer satisfaction. InServe's clients include many of the
leading medical device and diagnostics companies, including Becton Dickinson,
Roche Diagnostics and Johnson & Johnson.
PDI Pharma
Beginning with the fourth quarter of 2000 we have entered into a number of
significant performance based contracts and we use a variety of structures for
such contracts. Our agreement with GlaxoSmithKline (GSK) regarding Ceftin(R) was
a marketing and distribution contract, under which we had the exclusive right to
market and distribute the designated Ceftin products in the U.S. The agreement
had a five-year term but was cancelable by either party without cause on 120
days notice. The agreement was terminated by mutual consent, effective February
28, 2002. Contracts such as the Ceftin agreement, which require us to purchase
and distribute product, have a greater number of risk factors than a traditional
fee for service contract. Any future agreement that involves in-licensing or
product acquisition would have similar risk factors.
In May 2001, we entered into an agreement with Novartis Pharmaceuticals
Corporation (Novartis) for the U.S. sales, marketing and promotion rights for
Lotensin(R) and Lotensin HCT(R), which agreement runs
16
through December 31, 2003. Under this agreement, we provide promotional, selling
and marketing for Lotensin, as well as brand management. In exchange, we are
entitled to receive a split of incremental net sales above specified baselines.
Also under this agreement with Novartis, we copromote Lotrel(R) in the U.S. for
which we are entitled to be compensated on a fee for service basis with
potential incentive payments based upon achieving certain net total
prescriptions (TRx) objectives. Novartis has retained regulatory
responsibilities for Lotensin and Lotrel and ownership of all intellectual
property. Additionally, Novartis will continue to manufacture and distribute the
products. In the event our estimates of the demand for Lotensin are not accurate
or more sales and marketing resources than anticipated are required, the
Novartis transaction could have a material adverse impact on our results of
operations, cash flows and liquidity. During the three months ended March 31,
2002, our efforts on this contract did result in an operating loss because the
sales of Lotensin did not exceed the specified baselines by an amount great
enough to cover our operating costs. While we currently estimate that future
revenues will exceed costs associated with this agreement, there is no assurance
that actual revenues will exceed costs; in which event the activities covered by
this agreement would continue to yield an operating loss.
In October 2001, we entered into an agreement with Eli Lilly to copromote
Evista in the U.S. Evista is approved in the U.S. for the prevention and
treatment of osteoporosis in postmenopausal women. Under the terms of the
agreement, we provide a sales representatives to copromote Evista to U.S.
physicians. Our sales representatives augment the Eli Lilly sales force
promoting Evista. Under this agreement, we are entitled to be compensated based
on net sales achieved above a predetermined level. The agreement does not
provide for the direct reimbursement of expenses we incur.
The Eli Lilly arrangement contract is a performance based contract for a
term through December 31, 2003, subject to earlier termination upon the
occurrence of specific events. Our compensation is earned as a percentage of net
factory sales above contractual baselines. To the extent that such baselines are
not exceeded, which has been the case since the inception of the agreement,
including the three months ended March 31, 2002, we receive no revenue. Further,
we are required to commit a certain level of spending for promotional and
selling activities including but not limited to sales representatives. These
costs could range from $9.0 million to $12.0 million per quarter. The sales
force assigned to Evista may be used to promote other products, including
products covered by other PDI copromotion arrangements, which may allow us to
generate additional revenue to cover the costs of the sales force. In the event
our estimates of the demand for Evista are not accurate, the Eli Lilly
transaction could have a material adverse impact on our results of operations,
cash flows and liquidity. While we currently estimate that future revenues to us
from Evista sales will exceed our costs associated with this agreement, there is
no assurance that actual revenues will exceed costs; in which event the
activities covered by this agreement would continue to yield an operating loss.
We have also entered other performance based agreements that do not
require the distribution, in-licensing or ownership of product. An important
performance parameter is normally the level of sales attained by the product
while we have marketing or promotional responsibility.
Revenues and expenses
Our revenues and cost of goods and services are classified between service
and product sales for reporting purposes. Historically, we have derived a
significant portion of our service revenue from a limited number of clients.
However, concentration of business in the pharmaceutical outsourcing industry is
common and we believe that pharmaceutical companies will continue to outsource
large projects as the pharmaceutical outsourcing industry 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 63.7% and 64.6%
of our service revenue for the three months ended March 31, 2002 and 2001,
respectively. For the three months ended March 31, 2002 and 2001, product
revenue from sales of Ceftin primarily came from three major customers who
accounted for approximately 70.5% and 70.9% respectively, of total net product
revenue. Of the $5.7
17
million recorded as product revenue for the three months ended March 31, 2002,
only approximately $716,000 was from the sale of inventory. The balance of $5.0
million resulted from the net positive adjustments recorded in sales returns and
allowances, discounts and rebates accounts for the first quarter of 2002 that
have occurred as we continue to satisfy our liabilities relating to the previous
reserves recorded as a result of Ceftin sales in prior periods. Because those
reserves were initially set up as estimates, using historical data and other
information, there may be both positive and negative adjustments made as the
liabilities are settled in future periods and such adjustment will be reflected
in product revenue with the classification of such accruals when initially
recorded.
Service revenue and program expenses
Sales and marketing services revenue is earned primarily by performing
product detailing programs and other marketing and promotional services under
contracts. Revenue is recognized as the services are performed and the right to
receive payment for the services is assured. Revenue is recognized net of any
potential penalties until the performance criteria eliminating the penalties
have been achieved. Bonus and other performance incentives as well as
termination payments are recognized as revenue in the period earned and when
payment of the bonus, incentive or other payment is assured. Under performance
based contracts revenue is recognized when the performance based parameters are
attained.
Program expenses consist primarily of the costs associated with executing
product detailing programs, performance based contracts or other sales and
marketing services identified in the contract. Program expenses include
personnel costs 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 such as Ceftin (as discussed below
under Product revenue and cost of goods sold) are recorded as a selling expense
and are included in other selling, general and administrative expenses in the
consolidated statements of operations.
As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing program. We typically
receive an initial contract payment upon commencement of a product detailing
program as compensation for recruiting, hiring and training services associated
with staffing that program. In these cases, the initial payment is recorded as
revenue in the same period in which the costs of the services are expensed. Our
inability to specifically negotiate in our product detailing contracts payments
that are specifically attributable to recruiting, hiring or training services
could adversely impact our operating results for periods in which the costs
associated with the product detailing services are incurred.
Product revenue and cost of goods sold
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.
18
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 (SG&A) include compensation
and general corporate overhead. Compensation expense consists primarily of
salaries, bonuses, training and related benefits for senior management and other
administrative, marketing, finance, information technology and human resources
personnel who are not directly involved with executing a particular program.
Other selling, general and administrative expenses include corporate overhead
such as facilities costs, depreciation and amortization expenses and
professional services fees; and with respect to product that we distribute,
other SG&A also includes product detailing, marketing and promotional expenses.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future results.
Three Months Ended
March 31,
-----------------
2002 2001
------ ------
Revenue
Service, net ........................................... 92.3% 45.1%
Product, net ........................................... 7.7 54.9
------ ------
Total revenue, net ................................... 100.0% 100.0%
Cost of goods and services
Program expenses ....................................... 91.1 32.0
Cost of goods sold ..................................... -- 37.1
------ ------
Total cost of goods and services ..................... 91.1 69.1
Gross profit .............................................. 8.9 30.9
Compensation expense ...................................... 10.5 6.4
Other selling, general and administrative expenses ........ 4.5 14.8
------ ------
Total selling, general and administrative expenses ... 15.0 21.2
------ ------
Operating (loss) income ................................... (6.1) 9.7
Other income, net ......................................... 1.2 1.1
------ ------
(Loss) income before provision for income taxes ........... (4.9) 10.8
(Benefit) provision for income taxes ...................... (1.8) 4.4
------ ------
Net (loss) income ......................................... (3.1)% 6.4%
====== ======
Revenue. Net revenue for the quarter ended March 31, 2002 was $73.9
million, 57.3% less than net revenue of $173.1 million for the quarter ended
March 31, 2001. Net revenue from the sales and marketing services segment for
the quarter ended March 31, 2002 was $56.3 million, $21.0 million less than net
revenue of $77.3 million from those segments for the comparable prior year
period. This decrease was primarily attributable to the loss of one large CSO
contract, and the reduction in size or nonrenewal of several others, generally
reflecting continued slower demand for traditional contract sales services. Net
PDI Pharma revenue for the quarter ended March 31, 2002 was $17.6 million, of
which $5.7 million was product revenue. Within product revenue, approximately
$716,000 was attributable to sales of Ceftin and $5.0 million was attributable
to the changes in estimates related to sales allowances and returns, discounts
19
and rebates recorded on previous Ceftin sales. As during the fourth quarter of
2001, sales of Evista were below the contractual baseline and therefore we did
not earn any revenue from that contract during the current quarter. The balance
of $11.9 million was from other performance based contracts. PDI Pharma revenue
for the three months ended March 31, 2001 was $95.8 million; of that amount, net
product revenue was $95.0 million and the approximately $800,000 remaining
revenue was from other performance based contracts.
Cost of goods and services. Cost of goods and services for the quarter
ended March 31, 2002 was $67.3 million, 43.8% less than cost of goods and
services of $119.6 million for the quarter ended March 31, 2001. The decrease is
primarily attributable to the termination of the Ceftin contract and the related
cost of goods sold. As a percentage of total net revenue, cost of goods and
services increased to 91.1% for the quarter ended March 31, 2002 from 69.1% in
the comparable prior year period. This increase was primarily attributable to
the negative gross profit associated with the Eli Lilly and Novartis contracts.
Program expenses (i.e., cost of services) associated with the sales and
marketing services segment for the quarter ended March 31, 2002 were $43.5
million, 20.9% less than program expenses of $55.0 million for the prior year
period. As a percentage of sales and marketing services segment revenue, program
expenses for the quarters ended March 31, 2002 and 2001 were 77.2% and 71.1%,
respectively, primarily due to higher program costs for the marketing services
provided by the TVG businesses. Cost of goods and services associated with the
PDI Pharma segment was $23.8 million and $64.6 million for the quarters ended
March 31, 2002 and 2001, respectively. As a percentage of PDI Pharma revenue,
cost of goods and services for the quarters ended March 31, 2002 and 2001 were
135.4% and 67.5%, respectively. To date the revenues earned from the performance
based contracts for Eli Lilly and Novartis have fallen short of sales and
marketing costs associated with those contracts. Performance based contracts can
achieve a gross profit percentage above our historical averages for contract
sales programs if the performance of the product(s) meets or exceeds
expectations, but can be below normal gross profit standards if the performance
of the product falls short of expectations, as was the case for the fourth
quarter of 2001 and the current quarter. While we currently estimate that future
revenues will exceed costs associated with these agreements, there is no
assurance that actual revenues will exceed costs; in which event the activities
covered by these agreements would continue to yield an operating loss.
Compensation expense. Compensation expense for the quarter ended March 31,
2002 was $7.8 million, 29.6% less than $11.0 million for the comparable prior
year period. As a percentage of total net revenue, compensation expense
increased to 10.5% for the quarter ended March 31, 2002 from 6.4% for the
quarter ended March 31, 2001. Compensation expense for the quarter ended March
31, 2002 attributable to the sales and marketing services segment was $6.6
million compared to $9.6 million for the quarter ended March 31, 2001. As a
percentage of net revenue from the sales and marketing services segment,
compensation expense decreased to 11.6% for the quarter ended March 31, 2002
from 12.5% for the quarter ended March 31, 2001. Compensation expense for the
quarter ended March 31, 2002 attributable to the PDI Pharma segment was $1.2
million, or 6.8% of PDI Pharma revenue, compared to $1.4 million, or 1.4% in the
prior year period. In future periods we expect the staffing for this segment to
increase as capabilities are added. The increase in compensation expense as a
percentage of revenue in the current period for the PDI Pharma segment was due
to the termination of the Ceftin agreement, which led to lower revenues in the
first quarter, while compensation expense remained relatively fixed.
Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $3.3 million for the quarter ended
March 31, 2002, 87.1% less than other selling, general and administrative
expenses of $25.7 million for the quarter ended March 31, 2001. As a percentage
of total net revenue, total other selling, general and administrative expenses
decreased to 4.5% for the quarter ended March 31, 2002 from 14.8% for the
quarter ended March 31, 2001. Other selling, general and administrative expenses
attributable to sales and marketing services segment for the quarter ended March
31, 2002 were $5.2 million, an increase of 8.8% over other selling, general and
administrative expenses of $4.8 million attributable to that segment for the
comparable prior year period. As a percentage of net revenue from sales and
marketing services, other selling, general and administrative expenses were 9.1%
and 6.2% for the quarters ended March 31, 2002 and 2001, respectively. This
increase was primarily due
20
to continued discretionary expenditures in information technology resulting in
increased depreciation expense. Other selling, general and administrative
expenses attributable to the PDI Pharma segment for the quarter ended March 31,
2002 consisted of a credit of $1.9 million, which was comprised of a $2.1
million reversal of a prior bad debt reserve accrual related to certain Ceftin
product sales which were subsequently settled favorably. This was partially
offset by other expenses for data costs and professional fees. This net credit
in selling, general and administrative expenses significantly impacted the total
other selling, general and administrative expenses as a percentage of total net
revenue. As discussed previously, approximately $12.3 million of committed
selling expenses were included in the determination of the loss on the Ceftin
contract which was recorded through cost of goods sold in the third quarter
2001. Furthermore, during the first quarter the costs related to the Ceftin
sales force were recorded as a selling and administrative expense. Other
selling, general and administrative expenses for the Ceftin product 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 any material increases during
the remainder of 2002.
Operating (loss) income. There was an operating loss for the quarter ended
March 31, 2002 of $4.5 million, compared to operating income of $16.7 million
for the quarter ended March 31, 2001. Operating income for the quarter ended
March 31, 2002 for the sales and marketing services segment was $1.1 million, or
86.6% less than the sales and marketing services operating income for the
quarter ended March 31, 2001 of $7.9 million. As a percentage of net revenue
from the sales and marketing services segment, operating income for that segment
decreased to 1.9% for the quarter ended March 31, 2002, from 10.2% for the
comparable prior year period. The operating loss was primarily the result of
losses generated by the performance based contracts in 2002. There was an
operating loss for the PDI Pharma segment for the quarter ended March 31, 2002
of $5.6 million, compared to operating income of $8.8 million for the prior year
period, all of which was attributable to the Ceftin contract.
Other income, net. Other income, net, for the quarters ended March 31,
2002 and 2001 was $889,000 and $1.9 million, respectively, and was comprised
primarily of interest income due to lower available cash balances and
significantly lower interest rates.
(Benefit) provision for income taxes. There was an income tax benefit of
$1.3 million for the quarter ended March 31, 2002, compared to income tax
expense of $7.6 million for the quarter ended March 31, 2001, which consisted of
Federal and state corporate income taxes. The effective tax rate for the quarter
ended March 31, 2002 was 36.9%, compared to an effective tax rate of 41.2% for
the quarter ended March 31, 2001.
Net (loss) income. There was a net loss for the quarter ended March 31,
2002 of $2.3 million, compared to net income of $10.9 million for the quarter
ended March 31, 2001 due to the factors discussed previously.
Liquidity and capital resources
As of March 31, 2002, we had cash and cash equivalents and short-term
investments of approximately $150.9 million and working capital of $111.2
million compared to cash and cash equivalents and short-term investments of
approximately $119.4 million and working capital of $129.8 million at March 31,
2001.
For the three months ended March 31, 2002, net cash used in operating
activities was $14.2 million, compared to $8.2 million cash provided by
operating activities for the same period in 2001. The main components of cash
used in operating activities were a net loss from operations of $2.3 million,
along with a net negative non-cash adjustment for depreciation, amortization,
reversal of a bad debt reserve and the amortization of deferred compensation
costs of approximately $622,000 and a negative cash impact of $11.3 million from
changes in "Other assets and liabilities." During the fourth quarter of 2001 we
agreed with GSK to terminate the Ceftin marketing and distribution agreement as
of February 28, 2002, thus the
21
decline in inventory and the reduction in accounts receivable, accrued rebates
and discounts, accrual for contract losses, and other liability accounts were
associated with the winding down of Ceftin activities. The balances in "Other
changes in assets and liabilities" may fluctuate depending on a number of
factors, including seasonality of product sales, the number and size of
programs, contract terms and other timing issues; these fluctuations may vary in
size and direction each reporting period.
When we bill clients for services before they have been completed, billed
amounts are recorded as unearned contract revenue, and are recorded as income
when earned. When services are performed in advance of billing, the value of
such services is recorded as unbilled costs and accrued profits. As of March 31,
2002, we had $10.3 million of unearned contract revenue and $9.4 million of
unbilled costs and accrued profits. Substantially all deferred and unbilled
costs and accrued profits are earned or billed, as the case may be, within 12
months of the end of the respective period.
For the three months ended March 31, 2002, net cash provided by investing
activities was $1.7 million, comprised of the sale of $4.0 million of short-term
investments, partially offset by $2.3 million in additions to property, plant
and equipment.
For the three months ended March 31, 2002, net cash provided by financing
activities was approximately $21,000. This increase in cash is due to the net
proceeds received from the exercise of common stock options by employees.
Capital expenditures during the three months ended March 31, 2002 and 2001
were $2.3 million and $2.0 million, respectively, and were funded out of cash
generated from operations.
We entered a credit agreement dated as of March 30, 2001 with a syndicate
of banks, for which PNC Bank, National Association acted as Administrative and
Syndication Agent, that provided for both a three-year, $30 million unsecured
revolving credit facility and a one-year, renewable, $30 million unsecured
revolving credit facility. The credit facilities were structured to accommodate
certain provisions within the Ceftin agreement. Borrowings under the agreement
bore interest equal to either an average London interbank offered rate (LIBOR)
plus a margin ranging from 1.5% to 2.25%, depending on our ratio of funded debt
to earnings before interest, taxes depreciation and amortization (EBITDA); or
the greater of prime or the federal funds rate plus a margin ranging from zero
to 0.25%, depending on our ratio of funded debt to EBITDA. We were required to
pay a commitment fee quarterly in arrears for each of the long-term and
short-term credit facilities. These fees range from 0.175% to 0.325% for the
long-term credit facility and from 0.25% to 0.40% for the short-term credit
facility, depending on our ratio of funded debt to EBITDA. The credit agreement
contained customary affirmative and negative covenants including financial
covenants requiring the maintenance of a specified consolidated minimum fixed
charge coverage ratio, a maximum leverage ratio, a minimum consolidated net
worth and a capital expenditure limitation (as defined in the agreement). At
December 31, 2001, we were in compliance with these covenants, except for the
minimum fixed charge coverage ratio. Since the inception of these credit
facilities there have been no draw downs and there was no outstanding balance as
of December 31, 2001. In light of the Ceftin agreement termination, we
terminated these credit facilities, effective April 2002. We are currently
working with the banks to obtain an asset based credit facility.
We believe that our cash and cash equivalents and future cash flows
generated from operations will be sufficient to meet our foreseeable operating
and capital requirements for the next twelve months. We continue to evaluate and
review acquisition candidates and financing opportunities in the ordinary course
of business.
22
Part II - Other Information
Item 1 - Not Applicable
Item 2 - Not Applicable
Item 3 - Not Applicable
Item 4 - Not Applicable
Item 5 - Not Applicable
Item 6 - Reports on Form 8-K
During the three months ended March 31, 2002, the Company filed the
following reports on Form 8-K:
Date Item Description
----------------- ---- --------------------------
February 4, 2002 5 Bayer Contract Termination
February 19, 2002 5 Earnings Press Release
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
May 15, 2002 PDI, INC.
By: /s/ Charles T. Saldarini
------------------------------------
Charles T. Saldarini
Chief Executive Officer
By: /s/ Bernard C. Boyle
------------------------------------
Bernard C. Boyle
Chief Financial and Accounting
Officer
24