INTERPACE BIOSCIENCES, INC. - Quarter Report: 2007 September (Form 10-Q)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2007			2006			2007			2006
Revenue:
Sales services		$	16,890		$	43,486		$	62,595		$	157,599
Marketing services			7,176			7,831			22,108			25,813
PPG			-			-			-			-
Total		$	24,066		$	51,317		$	84,703		$	183,412
Revenue, intersegment:
Sales services		$	-		$	-		$	-		$	-
Marketing services			97			-			148			-
PPG			-			-			-			-
Total		$	97		$	-		$	148		$	-
Revenue, less intersegment:
Sales services		$	16,890		$	43,486		$	62,595		$	157,599
Marketing services			7,079			7,831			21,960			25,813
PPG			-			-			-			-
Total		$	23,969		$	51,317		$	84,555		$	183,412
Operating (loss) income:
Sales services		$	(4,822	)	$	(1,064	)	$	(11,252	)	$	4,225
Marketing services			(428	)		50			(129	)		2,004
PPG			-			403			-			702
Total		$	(5,250	)	$	(611	)	$	(11,381	)	$	6,931
Reconciliation of operating (loss)
income to (loss) income from
continuing operations before
income taxes
Total operating (loss) income from
operating groups		$	(5,250	)	$	(611	)	$	(11,381	)	$	6,931
Other income, net			1,488			1,304			4,425			3,495
(Loss) income from continuing operations
before income taxes		$	(3,762	)	$	693		$	(6,956	)	$	10,426
Capital expenditures:
Sales services		$	163		$	246		$	635		$	927
Marketing services			39			28			133			253
PPG			-			-			-			-
Total		$	202		$	274		$	768		$	1,180
Depreciation expense:
Sales services		$	843		$	883		$	2,639		$	2,744
Marketing services			243			176			635			495
PPG			-			-			-			-
Total		$	1,086		$	1,059		$	3,274		$	3,239

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Report on Form 10-Q for the period ended September 30, 2007 (Form 10-Q) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). Statements that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q.

 

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. These statements also involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

 

·    Changes in outsourcing trends or a reduction in promotional, marketing and sales expenditures in the pharmaceutical, biotechnology and life sciences industries;

·    Loss of one or more of our significant customers or a material reduction in service revenues from such customers;

·    Senior management’s ability to fund and successfully implement our updated long-term strategic plan;

·    Competition in our industry;

·    Our ability to successfully identify, complete and integrate any future acquisitions and the effects of any such acquisitions on our ongoing business;

·    Our ability to meet performance goals in incentive-based and revenue sharing arrangements with customers;

·    Our ability to attract and retain qualified sales representatives and other key employees and management personnel;

·    Our ability to successfully implement any co-promotion, distribution, licensing or brand ownership strategies that we may pursue in the future;

·    Product liability claims against us;

·    Changes in laws and healthcare regulations applicable to our industry or our, or our customers’, failure to comply with such laws and regulations;

·     Potential liabilities associated with insurance claims;

·     Failure or significant interruption in the operation of our information technology and communications systems; and

·    Volatility of our stock price and fluctuations in our quarterly revenues and earnings.

 

Please see Part II - Item 1A - “Risk Factors” in this Form 10-Q and Part I - Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, as well as other documents we file with the United States Securities and Exchange Commission (the SEC) from time to time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed in this Form 10-Q. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of the report in which they are set forth, and we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

Overview

 

We are a provider of commercialization services to the biopharmaceutical industry. We are dedicated to maximizing the return on investment for our clients by providing strategic flexibility, sales, marketing and commercialization expertise and a philosophy of performance. We have a variety of agreement types that we enter into with our customers, from fee for service arrangements to arrangements which involve risk-sharing and incentive based provisions.

 

Reporting Segments and Operating Groups

 

In the fourth quarter of 2005, we announced that we would be discontinuing our MD&D business unit during 2006. For reporting periods beginning in the second quarter of 2006, the MD&D business unit was reported as discontinued operations. For the three and nine months ended September 30, 2007 and 2006, our three reporting segments are as follows:

 

¨

Sales Services Segment, which is comprised of the following business units:

·  Performance Sales Teams; and       

·

Select Access™’

  

 

¨

Marketing Services Segment, which is comprised of the following business units:

·

Pharmakon;

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·

TVG Marketing Research and Consulting; and

·

Vital Issues in Medicine®

 

¨

PDI Products Group Segment

 

An analysis of these reporting segments and their results of operations is contained in Note 12 to the condensed consolidated financial statements and in the discussion under “Consolidated Results of Operations.”

 

Description of Businesses

 

Sales Services

 

This segment includes our Performance Sales Teams and Select Access business units, which are described in more detail below. This segment, which focuses on product detailing, represented 74.0% of consolidated revenue for the nine months ended September 30, 2007.

 

Product detailing involves a representative meeting face-to-face with targeted physicians and other healthcare decision makers to provide a technical review of the product being promoted. Contract sales teams can be deployed on either a dedicated or shared basis.

 

This segment also includes a portfolio of expanded sales services known as “PDI ON DEMAND”, which includes talent acquisition services, pulsing teams and vacancy coverage services. Our talent acquisition platform provides pharmaceutical customers with an outsourced, stand-alone sales force recruiting and on-boarding service. Pulsing teams provide temporary full or flex-time sales teams of any size anywhere in the U.S. which are designed to help our customers increase brand impact during key market cycles or rapidly respond to regional opportunities. Our vacancy coverage service provides customers with outsourced temporary full or flex-time sales representatives to fill temporary territory vacancies created by leaves of absence within our customers’ internal sales forces, which allows our customers to maintain continuity of services.

 

 

Performance Sales Teams

 

A performance contract sales team works exclusively on behalf of one customer. The sales team is customized to meet the specifications of the team’s customer with respect to representative profile, physician targeting, product training, incentive compensation plans, integration with customers’ in-house sales forces, call reporting platform and data integration. Without adding permanent personnel, the customer gets a high quality, industry-standard sales team comparable to its internal sales force.

 

Select Access

 

Select Access represents a shared sales team business model where multiple non-competing brands are represented for different pharmaceutical companies. Using these teams, we make a face-to-face selling resource available to those customers who want an alternative to a dedicated team. We are a leading provider of this type of detailing program in the U.S. Since costs are shared among various companies, these programs may be less expensive for the customer than programs involving a dedicated sales force. With a shared sales team, the customer receives targeted coverage of its physician audience within the representatives’ geographic territories.

 

Marketing Services

 

This segment, which includes our Pharmakon, TVG Marketing Research & Consulting and Vital Issues in Medicine business units, represented 26.0% of consolidated revenue for the nine months ended September 30, 2007.

 

Pharmakon

 

Pharmakon’s emphasis is on the creation, design and implementation of promotional interactive peer persuasion programs. Each marketing program can be offered through a number of different venues, including teleconferences, dinner meetings, “lunch and learns” and web casts. Within each of our programs, we offer a number of services including strategic design, tactical execution, technology support, audience recruitment, moderator services and thought leader management. In the last ten years, Pharmakon has conducted over 45,000 peer persuasion programs with more than 550,000 participants. Pharmakon’s peer programs can be designed as promotional or marketing research/advisory programs. In addition to peer persuasion programs, Pharmakon also provides promotional communications activities. We acquired Pharmakon in August 2004.

 

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TVG Marketing Research & Consulting

 

TVG Marketing Research & Consulting (TVG) employs leading edge, and in some instances proprietary, research methodologies to provide qualitative and quantitative marketing research to pharmaceutical companies with respect to healthcare providers, patients and managed care customers in the U.S. and globally. We offer a full range of pharmaceutical marketing research services, including studies to identify the highest impact business strategy, profile, positioning, message, execution, implementation and post implementation for a product. Our marketing research model improves our customers’ knowledge about how physicians and other healthcare professionals will likely react to products.

 

We utilize a systematic approach to pharmaceutical marketing research. Recognizing that every marketing need, and therefore every marketing research solution, is unique, we have developed our marketing model to help identify the work that needs to be done in order to identify critical paths to marketing goals. At each step of the marketing model, we can offer proven research techniques, proprietary methodologies and customized study designs to address specific product needs.

 

Vital Issues in Medicine

 

Our Vital Issues in Medicine (VIM®) business unit develops and executes continuing medical education services funded by the biopharmaceutical and medical device and diagnostics industries. Using an expert-driven, customized approach, we provide faculty development/advocacy, continuing medical education activities in a wide variety of formats, and interactive initiatives to generate additional value to our customers' portfolios.

 

PDI Products Group

 

The goal of the PDI Products Group (PPG) segment has been to source biopharmaceutical products in the U.S. through licensing, copromotion, acquisition or integrated commercialization services arrangements. This segment did not have any revenue for the nine months ended September 30, 2007 or for the year ended December 31, 2006.

 

We continue to review opportunities which may include copromotion, distribution arrangements, as well as licensing and brand ownership of products. These arrangements may involve placing some or all of the fees for our services at risk based on achieving mutually agreed upon performance metrics such as product sales. We do not currently anticipate any revenue for 2007 from the PPG segment.

 

Discontinued Operations

 

Medical Device and Diagnostic Contract Sales and Clinical Sales Teams

 

Our medical teams group, which was discontinued in the second quarter of 2006, provided an array of sales and marketing services to the Medical Device and Diagnostic (MD&D) industry. It provided dedicated sales teams to the MD&D industry as well as clinical after sales support teams.

 

Nature of Contracts by Segment

 

Our contracts are nearly all fee for service. They may contain operational benchmarks, such as a minimum amount of activity within a specified amount of time. These contracts can include incentive payments that can be earned if our activities generate results that meet or exceed performance targets. Contracts may generally be terminated with or without cause by our clients. Certain contracts provide that we may incur specific penalties if we fail to meet stated performance benchmarks. Occasionally, our contracts may require us to meet certain financial covenants, such as maintaining a specified minimum amount of working capital.

 

Sales Services

 

Historically, the majority of our revenue has been generated by contracts for dedicated sales teams. These contracts are generally for terms of one to two years and may be renewed or extended. The majority of these contracts, however, are terminable by the client for any reason upon 30 to 90 days’ notice. Certain contracts provide for termination payments if the client terminates the contract without cause. Typically, however, these penalties do not offset the revenue we could have earned under the contract or the costs we may incur as a result of its termination. The loss or termination of a large contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition or results of operations.

 

Marketing Services

 

Our marketing services contracts generally take the form of either master service agreements with a term of one to three years or contracts specifically related to particular projects with terms typically lasting from two to six months. These contracts are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment for all work completed to date, plus the cost of any nonrefundable commitments made on behalf of the customer. There is significant customer concentration in our Pharmakon business, and the loss or termination of one or more of Pharmakon’s large master service agreements could have a material adverse effect on our business, financial condition or results of operations.

 

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 Due to the typical size of most of TVG’s and VIM’s contracts, it is unlikely the loss or termination of any individual TVG or VIM contract would have a material adverse effect on our business, financial condition or results of operations.

 

PPG

 

We currently have no contracts in our PPG segment.

 

 

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				Nine Months Ended
	September 30,				September 30,
Operating data	2007		2006		2007		2006
Revenue, net	100.0%		100.0%		100.0%		100.0%
Cost of services	75.9%		75.8%		74.1%		76.5%
Gross profit	24.1%		24.2%		25.9%		23.5%
Compensation expense	24.5%		14.8%		21.6%		11.6%
Other selling, general and administrative expenses	21.5%		10.6%		17.7%		8.1%
Total operating expenses	46.0%		25.4%		39.3%		19.7%
Operating (loss) income	(21.9%)		(1.2%)		(13.4%)		3.8%
Other income, net	6.2%		2.6%		5.2%		1.9%
(Loss) income before income tax	(15.7%)		1.4%		(8.2%)		5.7%
Provision for income tax	1.2%		0.6%		1.8%		2.1%
(Loss) income from continuing operations	(16.9%)		0.8%		(10.0%)		3.6%
Income from discontinued operations, net of tax	-		0.1%		-		0.2%
Net (loss) income	(16.9%)		0.9%		(10.0%)		3.8%

 

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

 

Revenue

 

Revenue for the quarter ended September 30, 2007 was $24.0 million, 53.3% less than revenue of $51.3 million for the quarter ended September 30, 2006.

 

Revenue from the sales services segment for the quarter ended September 30, 2007 was $16.9 million, 61.2% less than revenue of $43.5 million from that segment for the comparable prior year period. This decrease is attributable to the termination and expiration of certain contracts during 2006 as described below.

 

Effective April 30, 2006, AstraZeneca terminated its contract sales force arrangement with us. This contract represented $43.0 million in revenue in 2006, approximately $460,000 of which was earned in the quarter ended September 30, 2006. On September 26, 2006, we announced that GlaxoSmithKline (GSK) would not be renewing its contract with us when it expired on December 31, 2006. This contract represented $67.4 million in revenue in 2006, $16.6 million of which was earned in the quarter ended September 30, 2006. On October 25, 2006, we announced that we had received notification from sanofi-aventis of its intention to terminate its contract sales engagement with us effective December 1, 2006. This contract represented approximately $18.3 million in revenue in 2006, $4.9 million of which was earned in the quarter ended September 30, 2006. Additionally, on March 21, 2007, we announced that a large pharmaceutical company customer had notified us of its intention not to renew its contract sales engagement with us upon its scheduled expiration on May 12, 2007. This contract, which had a one-year term, represented approximately $37 million in annual revenue, $10.8 million of which was earned in the quarter ended September 30, 2006. The loss in revenue from these terminated and expired contracts was partially offset by new sales force arrangements we entered into during the first nine months of 2007, including a contract sales force engagement for our Select Access business unit in March 2007 which is expected to generate approximately $13 million in revenue over its one-year term and a dedicated contract sales engagement entered into during June 2007 which is expected to generate approximately $23 million in revenue over its one-year term. These two sales force contracts accounted for approximately $9.7 million of revenue in the sales services segment for the quarter ended September 30, 2007. For the quarter ended September 30, 2007, we recognized $550,000 in revenue associated with a contract with a former emerging pharmaceutical client for services performed in 2006. Because of the uncertainty surrounding collections, we recognized revenue from this client on a cash basis. All costs associated with this contract were recognized in 2006.

 

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Revenue for the marketing services segment was $7.1 million in the quarter ended September 30, 2007, 9.6% less than the $7.8 million in the comparable prior year period. This decrease is primarily attributed to a decrease in revenue at Pharmakon for the quarter ended September 30, 2007 of approximately $614,000 due to fewer projects. The PPG segment did not have any revenue in the first nine months of 2007 and 2006.

 

Cost of services

 

Cost of services for the quarter ended September 30, 2007 was $18.2 million, 53.2% less than cost of services of $38.9 million for the quarter ended September 30, 2006. Cost of services associated with the sales services segment for the quarter ended September 30, 2007 was $14.0 million, 59.7% less than cost of services of $34.7 million for the prior year period. The decrease is attributable to the contract terminations discussed above. Cost of services associated with the marketing services segment for the quarters ended September 30, 2007 and 2006 were approximately $4.2 million in both periods.

 

Gross Profit

 

The gross profit percentage for the quarter ended September 30, 2007 was 24.1%, a 0.1 percentage point decrease from the comparable prior year period. Despite a decrease in gross profit percentage within both the sales services and marketing services segments, the overall gross margin was comparable to the prior year period because the marketing services segment, and its higher gross margins, constituted a larger percentage of consolidated revenue for the quarter ended September 30, 2007.

 

The gross profit percentage for the quarter ended September 30, 2007 for the sales services segment was 17.2%, a decrease from the 20.2% gross profit percentage in the comparable prior year period. This is a result of the lower margins within the Select Access business unit accounting for a significantly larger percentage of the total gross profit within the sales services segment.

 

The gross margin for the marketing services segment decreased to 40.5% in the quarter ended September 30, 2007 as compared to 46.4% in the comparable prior year period. This decrease in gross profit percentage was attributable to lower margins at all three business units.

 

Compensation expense

 

Compensation expense for the quarter ended September 30, 2007 was $5.9 million, 22.8% less than $7.6 million in the comparable prior year period. This decrease is primarily due to a decrease in salary and incentive compensation costs when compared to the quarter ended September 30, 2006. As a percentage of total net revenue, compensation expense increased to 24.5% for the quarter ended September 30, 2007 as compared to 14.8% in the comparable prior year period. This increase is primarily due to the decrease in revenue in the third quarter of 2007 as compared to the comparable prior year period.

 

Compensation expense for the quarter ended September 30, 2007 attributable to the sales services segment was $3.9 million compared to $5.2 million for the quarter ended September 30, 2006. This can be attributed to a decrease in salary and incentive compensation costs when compared to the comparable prior year period. As a percentage of revenue it increased to 23.1% from 12.0% in the comparable prior year period.

 

Compensation expense for the quarter ended September 30, 2007 attributable to the marketing services segment was $2.0 million, as compared to $2.4 million in the comparable prior year period. This can be primarily attributed to a decrease in incentive compensation expense within the segment. As a percentage of revenue, compensation expense for the quarter ended September 30, 2007 decreased to 27.7% from 30.4% in the comparable prior year period.

 

Other selling, general and administrative expenses

 

Total other selling, general and administrative expenses were approximately $5.2 million for the quarter ended September 30, 2007 compared with $5.4 million for the quarter ended September 30, 2006.

 

Other selling, general and administrative expenses attributable to the sales services segment for the quarter ended September 30, 2007 were $3.8 million, which constituted 22.6% of revenue, compared to other selling, general and administrative expenses for the comparable prior year period of $4.6 million, which constituted 10.6% of revenue for that period. This decrease is primarily due to a decrease in allocated overhead costs.

 

Other selling, general and administrative expenses attributable to the marketing services segment for the quarter ended September 30, 2007 were approximately $1.4 million as compared to $1.2 million for the comparable prior year period.  Included in the period ended September 30, 2007 was $250,000 accrued for a potential settlement of a claim.

 

Other selling, general and administrative expenses attributable to the PPG segment for the quarter ended September 30, 2007 were zero, compared to a credit of $403,000 in the comparable prior year period, which consisted of settlement payments of $500,000, partially offset by related litigation costs totaling $97,000.

 

Operating (loss) income

 

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There was an operating loss of $5.3 million for the quarter ended September 30, 2007 as compared to an operating loss for the quarter ended September 30, 2006 of approximately $611,000. The increased loss is primarily attributable to the decline in revenue and gross profit in the sales services segment discussed previously. There was an operating loss of $4.8 million for the quarter ended September 30, 2007 for the sales services segment, $3.7 million more than the operating loss of $1.1 million for that segment in the comparable prior year period. The increased loss is primarily due to the loss of the significant sales force contracts discussed above.

 

There was an operating loss for the marketing services segment of $428,000 for the quarter ended September 30, 2007 compared to operating income of $50,000 in that segment for the comparable prior year period. The decrease in operating income is due to a decrease in revenue and gross profit within the marketing services segment.

 

The PPG segment had no operating income for the quarter ended September 30, 2007. The PPG segment had operating income for the quarter ended September 30, 2006 of $403,000, which consisted of settlement amounts received, net of related legal expenses.

 

Other income, net

 

Other income, net, for the quarters ended September 30, 2007 and 2006 was $1.5 million and $1.3 million, respectively and consisted primarily of interest income. The increase in interest income is primarily due to higher interest rates and higher cash balances for the quarter ended September 30, 2007.

 

Income tax expense

 

The federal and state corporate income tax expense was approximately $295,000 for the quarter ended September 30, 2007, compared to income tax expense of $284,000 for the quarter ended September 30, 2006. The effective tax rate for the quarter ended September 30, 2007 was 7.8%, compared to an effective tax rate of 41.0% for the quarter ended September 30, 2006. The decrease is primarily attributable to the tax loss for the three-month period ended September 30, 2007 and full valuation allowance on the net deferred tax assets except for the basis difference in goodwill. The tax expense for the three-month period ended September 30, 2007 is attributable to state and local alternative taxes and additional interest accrued on tax reserves.

 

(Loss) income from continuing operations

 

There was a loss from continuing operations for the quarter ended September 30, 2007 of $4.1 million, compared to income from continuing operations of approximately $409,000 in the comparable prior year period.

 

Discontinued operations 

 

There was no income from discontinued operations during the quarter ended September 30, 2007. There was no revenue from discontinued operations for the quarter ended September 30, 2006. Income from discontinued operations before income tax for the quarter ended September 30, 2006 was approximately $88,000. Income from discontinued operations, net of tax, for the quarter ended September 30, 2006 was approximately $54,000.

 

Net (loss) income

 

There was a net loss for the quarter ended September 30, 2007 of approximately $4.1 million, compared to net income of approximately $463,000 in the comparable prior year period due to the factors discussed above.

 

 

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

 

Revenue

 

Revenue for the nine months ended September 30, 2007 was $84.6 million, 53.9% less than revenue of $183.4 million for the nine months ended September 30, 2006.

 

Revenue from the sales services segment for the nine months ended September 30, 2007 was $62.6 million, 60.3% less than revenue of $157.6 million from that segment for the comparable prior year period. This decrease is attributable to the termination and expiration of certain sales force contracts during 2006 and 2007 as described above.

 

Revenue for the marketing services segment was $22.0 million for the nine months ended September 30, 2007, 14.9% less than the $25.8 million in the comparable prior year period. This decrease can be attributed to decreases in revenue at all three business units within the marketing services segment.

 

Cost of services

 

Cost of services for the nine months ended September 30, 2007 was $62.7 million, 55.4% less than cost of services of $140.3 million for the nine months ended September 30, 2006. Cost of services associated with the sales services segment for the nine months ended September 30, 2007 was $50.7 million, 59.9% less than cost of services of $126.4 million for the prior

 

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 year period. The decrease is attributable to the termination and expiration of the sales force contracts discussed above. Cost of services associated with the marketing services segment was $12.0 million, 14.2% less than cost of services of $13.9 million the comparable prior year period.

 

Gross Profit

 

The gross profit percentage for the nine months ended September 30, 2007 was 25.9%, an increase of 2.4 percentage points from the comparable prior year period. This increase in gross margin was mainly attributable to the marketing services segment, and its higher gross margins, constituting a larger percentage of consolidated revenue for the nine months ended September 30, 2007.

 

The gross profit percentage for the nine months ended September 30, 2007 for the sales services segment was 19.0%, a decrease from the 19.8% in the comparable prior year period. The gross margin for the marketing services segment decreased to 45.6% in the nine months ended September 30, 2007 as compared to 46.0% in the comparable prior year period.

 

Compensation expense

 

Compensation expense for the nine months ended September 30, 2007 was $18.3 million, 13.8% less than $21.2 million for the comparable prior year period. This decrease is primarily due to a decrease in salary and incentive compensation costs when compared to the nine months ended September 30, 2006.

 

Compensation expense for the nine months ended September 30, 2007 attributable to the sales services segment was $11.8 million compared to $14.7 million for the nine months ended September 30, 2006; as a percentage of revenue it increased to 18.8% for the nine month period ended September 30, 2007 from 9.4% in the comparable prior year period. Compensation expense increased as a percentage of revenue due to the decline in revenue on a year-over-year basis.

 

Compensation expense attributable to the marketing services segment was approximately $6.5 million for both the nine months ended September 30, 2007 and September 30, 2006. As a percentage of revenue, compensation expense increased to 29.7% from 25.1% in the comparable prior year period.

 

Other selling, general and administrative expenses

 

Total other selling, general and administrative expenses were $15.0 million for the nine months ended September 30, 2007, 0.4% more than other selling, general and administrative expenses of $14.9 million for the comparable prior year period. For the nine months ended September 30, 2006, other selling, general and administrative expenses benefited from $2.0 million in reversals of bad debt and litigation settlement accruals as well as receipt of settlement payments. As a percentage of total net revenue, total other selling, general and administrative expenses increased to 17.7% for the nine months ended September 30, 2007 from 8.1% in the comparable prior year period due to the decrease in revenue in 2007.

 

Other selling, general and administrative expenses attributable to the sales services segment for the nine months ended September 30, 2007 were $11.3 million compared to $12.2 million in the comparable prior year period. As a percentage of revenue it increased to 18.2% from 7.8% in the comparable prior year period. This increase is due to a decrease in revenue within the sales services segment.

 

Other selling, general and administrative expenses attributable to the marketing services segment for the nine month periods ended September 30, 2007 and 2006 were approximately $3.6 million and $3.4 million, respectively. As a percentage of revenue it increased to 16.4% from 13.2% in the comparable prior year period.

 

There were no other selling, general and administrative expenses for the nine months ended September 30, 2007 for PPG. Included in other selling, general and administrative expenses for the PPG segment for the nine months ended September 30, 2006 were settlement payments received and related litigation expenses which resulted in a credit of $702,000.

 

Operating (loss) income

 

There was an operating loss for the nine months ended September 30, 2007 of approximately $11.4 million compared to operating income of $6.9 million in the comparable prior year period. The decrease is primarily attributable to the decline in revenue and gross profit in the sales services segment discussed above.

 

There was an operating loss for the nine months ended September 30, 2007 for the sales services segment of approximately $11.3 million, $15.5 million less than operating income of $4.2 million for that segment in the comparable prior year period. The decrease is primarily attributable to the contract terminations discussed above.

 

There was an operating loss for the marketing services segment of $129,000 for the nine months ended September 30, 2007 compared to operating income of $2.0 million in that segment for the comparable prior year period. The decrease is attributable to decreased operating income from all three business units within the segment.

 

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The PPG segment had no operating income for the nine months ended September 30, 2007. The PPG segment had operating income for the nine months ended September 30, 2006 of $702,000. The operating income was attributable to settlement amounts received, net of related legal expenses.

 

Other income, net

 

Other income, net, for the nine months ended September 30, 2007 and 2006 was $4.4 million and $3.5 million, respectively, and consisted primarily of interest income. The increase in interest income is primarily due to higher interest rates and higher average cash balances for the nine months ended September 30, 2007.

 

Income tax expense

 

The federal and state corporate income tax expense was approximately $1.5 million for the nine months ended September 30, 2007, compared to income tax expense of $3.9 million for the nine months ended September 30, 2006. The effective tax rate for the nine months ended September 30, 2007 was 21.5%, compared to an effective tax rate for the nine months ended September 30, 2006 of 37.3%. The effective tax rate for the nine month period ended September 30, 2007 was impacted by an increase of $882,000 in the valuation allowance on deferred tax for the nine month period ended September 30, 2007. See Note 10 to the condensed consolidated financial statements for details on the increase in the valuation allowance.

 

(Loss) income from continuing operations

 

There was a loss from continuing operations for the nine months ended September 30, 2007 of approximately $8.5 million, compared to income from continuing operations of approximately $6.5 million for the nine months ended September 30, 2006.

 

Discontinued operations

 

There was no income from discontinued operations during the nine months ended September 30, 2007. Revenue from discontinued operations for the nine months ended September 30, 2006 was approximately $1.9 million. Income from discontinued operations before income tax for the nine months ended September 30, 2006 was approximately $696,000. Income from discontinued operations, net of tax, for the nine months ended September 30, 2006 was approximately $441,000.

 

Net (loss) income

 

There was a net loss for the nine months ended September 30, 2007 of $8.5 million. There was net income for the nine months ended September 30, 2006 of $7.0 million.

 

 

Liquidity and Capital Resources

 

As of September 30, 2007, we had cash and cash equivalents and short-term investments of approximately $117.2 million and working capital of $108.4 million, compared to cash and cash equivalents and short-term investments of approximately $114.7 million and working capital of approximately $112.2 million at December 31, 2006.

 

For the nine months ended September 30, 2007, net cash provided by operating activities was $3.4 million, compared to $15.8 million net cash provided by operating activities for the nine months ended September 30, 2006. The main components of cash used by operating activities during the nine months ended September 30, 2007 were:

 

·	the net loss when adjusted for depreciation and other non-cash items of $5.8 million, which includes depreciation expense of $3.3 million and stock compensation expense of $901,000, which resulted in a use of cash of approximately $2.6 million;

 

·   a net increase in other changes in assets and liabilities of $6.0 million, which includes $18.4 million of net collections of accounts receivable, partially offset by $14.7 million decrease

in total liabilities.

 

The net changes in the “Other changes in assets and liabilities” section of the condensed consolidated statement of cash flows may fluctuate depending on a number of factors, including the number and size of sales team programs, contract terms and other timing issues, and these variations may change in size and direction with each reporting period.

 

As of September 30, 2007, we had $3.8 million of unbilled costs and accrued profits on contracts in progress. When services are performed in advance of billing, the value of such services is recorded as unbilled costs and accrued profits on contracts in progress. Normally all unbilled costs and accrued profits are earned and billed within 12 months from the end of the respective period. As of September 30, 2007, we had $7.3 million of unearned contract revenue. 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.

 

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For the nine months ended September 30, 2007, net cash provided by investing activities was $62.4 million as compared to $67.7 million used in investing activities for the comparable prior year period. This change reflects a movement towards investments that have greater liquidity and shorter-term maturities when compared to the comparable prior year period. This change is consistent with the implementation of our strategic plan and the potential need to utilize our cash to make investments in our business, including acquisitions. Our portfolio is currently comprised of U.S. Treasury and U.S. Federal Government agencies’ bonds and commercial paper. We are focused on preserving capital, maintaining liquidity and maximizing returns in accordance with our investment criteria. We had approximately $768,000 of capital expenditures primarily for computer equipment and software during the nine months ended September 30, 2007. Capital expenditures for the nine months ended September 30, 2006 were $1.2 million, also primarily for computer equipment. For both periods, all capital expenditures were funded out of available cash. For the nine months ended September 30, 2007, there was $207,000 of net cash used in financing activities. This represents shares that were delivered back to us and included in treasury stock for the payment of taxes resulting from the vesting of restricted stock. In the comparable prior year period, there was $87,000 of net cash provided by financing activities. This amount represents proceeds received from the exercise of stock options.

 

On November 7, 2006, we announced that our Board of Directors authorized us to repurchase up to one million shares of our common stock. We did not repurchase any shares of our common stock during 2006. In 2007, through the date of this report, we have not repurchased any shares of our common stock in the open market. Due to our current desire to utilize cash to invest in our business and implement our strategic plan, including acquisitions, we do not anticipate repurchasing shares under this program in the immediate future. We will periodically review our uses of cash, including the merits of repurchasing our shares under this program. Purchases, if any, will be made from our available cash.

 

Our revenue and profitability depend to a great extent on our relationships with a limited number of large pharmaceutical companies. For the nine months ended September 30, 2007, we had two major clients that accounted for approximately 18.7% and 11.1%, respectively, or a total of 29.8% of our service revenue. We are likely to continue to experience a high degree of client concentration, particularly if there is further consolidation within the pharmaceutical industry. The loss or a significant reduction of business from any of our major clients, or a decrease in demand for our services, could have a material adverse effect on our business, financial condition and results of operations. For example, on March 21, 2007, we announced that a large pharmaceutical company customer (our largest client in 2007) had given notification of its intention not to renew its contract sales engagement with us when it expired on May 12, 2007. This contract, which was for a term of one-year, represented approximately $37 million in annual revenue. Unless and until we generate sufficient new business to offset the loss of this contract, future revenue and cash flows will further decrease. In addition, Select Access’ services to a significant customer are seasonal in nature, occurring primarily in the winter season.

 

In June 2007, we signed an agreement to sublease all of the excess leased space at our New Jersey location for the remainder of our lease term. This sublease commenced in August 2007 and is expected to provide approximately $4.2 million in lease payments over eight and one half years. In June 2007 and August 2007, we signed two agreements to sublease approximately 65% of the excess leased space at our Pennsylvania location. Both leases are for terms of five years that commenced in August 2007 and October 2007, respectively, and are expected to provide approximately $1.3 million in lease payments combined over the five year period. The table below summarizes, as of September 30, 2007, our contractual obligations for 2007 and beyond with initial terms exceeding one year and estimated minimum future rental payments required by non-cancelable operating leases with initial or remaining lease terms exceeding one year are as follows:

								2008-			2010-			After
		Total			2007			2009			2011			2011
Contractual obligations (1)		$	5,284		$	3,257		$	2,027		$	-		$	-
Operating lease obligations:
Minimum lease payments			32,396			2,336			7,758			7,739			14,563
Less minimum sublease rentals (2)			(6,118	)		(311	)		(2,043	)		(1,527	)		(2,237	)
Net minimum lease payments			26,278			2,025			5,715			6,212			12,326
Total		$	31,562		$	5,282		$	7,742		$	6,212		$	12,326

 

(1)

Amounts represent contractual obligations related to software license contracts, IT consulting contracts and outsourcing contracts for employee benefits administration and software system support.

 

(2)

Consists of two subleases at our New Jersey location and two subleases at our Pennsylvania location.

 

As a result of the net operating loss carryback claims which have been filed or are expected to be filed by us, and the impact of those claims on the relevant statue of limitations, it is not practicable to predict the amount or timing of the impact of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (FIN 48) liabilities in the table above and therefore these liabilities have been excluded from the table above.

 

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Cash flows from discontinued operations are included in the condensed consolidated statement of cash flows in 2006. The absence of cash flows from the discontinued operation has had no material impact on cash flows. We are not expecting any material cash outlays with regards to this discontinued operation in the future.

 

Acquisitions are a part of our corporate strategy. We believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. However, we may require alternative forms of financing if and when we make acquisitions. We continue to evaluate and review financing opportunities and acquisition candidates in the ordinary course of business.

 

We have federal income tax receivables, net of the federal tax provision, of approximately $1.9 million on our balance sheet as of September 30, 2007. We expect to receive these refunds in 2007.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk for changes in the market values of some of our investments (investment risk) and the effect of interest rate changes (interest rate risk). Our financial instruments are not currently subject to foreign currency risk or commodity price risk. We have no financial instruments held for trading purposes and we have no interest bearing long term or short term debt. At September 30, 2007 and December 31, 2006 we did not hold any derivative financial instruments.

 

The objectives of our investment activities are: to preserve capital, maintain liquidity and maximize returns without significantly increasing risk. In accordance with our investment policy, we attempt to achieve these objectives by investing our cash in a variety of financial instruments. These investments are principally restricted to government sponsored enterprises, high-grade bank obligations, high-grade corporate bonds, certain money market funds of investment grade debt instruments such as obligations of the U.S. Treasury and U.S. Federal Government Agencies, municipal bonds and commercial paper.

 

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. Our cash and cash equivalents and short term investments at September 30, 2007 were composed of the instruments described in the preceding paragraph and all of those investments mature by December 2007. If interest rates were to increase or decrease by one percent, the fair value of our investments would have an insignificant increase or decrease primarily due to the quality of the investments and the near term maturity.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within PDI have been detected.

 

Changes in internal controls

 

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Bayer-Baycol Litigation

 

We have been named as a defendant in numerous lawsuits, including two class action matters, alleging claims arising from the use of Baycol, a prescription cholesterol-lowering medication. Baycol was distributed, promoted and sold by Bayer in the U.S. through early August 2001, at which time Bayer voluntarily withdrew Baycol from the U.S. market. Bayer had retained certain companies, such as us, to provide detailing services on its behalf pursuant to contract sales force agreements. We may be named in additional similar lawsuits. To date, we have defended these actions vigorously and have asserted a contractual right of defense and indemnification against Bayer for all costs and expenses we incur relating to these proceedings. In February 2003, we entered into a joint defense and indemnification agreement with Bayer, pursuant to which Bayer has agreed to assume substantially all of our defense costs in pending and prospective proceedings and to indemnify us in these lawsuits, subject to certain limited exceptions. Further, Bayer agreed to reimburse us for all reasonable costs and expenses incurred through such date in defending these proceedings. As of September 30, 2007, Bayer has reimbursed us for approximately $1.6 million in legal expenses, the majority of which was received in 2003 and was reflected as a credit within selling, general and administrative expense. We did not incur any costs or expenses relating to these matters during 2004, 2005, 2006 or the first nine months of 2007.

 

California Class Action Litigation

 

On September 26, 2005, we were served with a complaint in a purported class action lawsuit that was commenced against us in the Superior Court of the State of California for the County of San Francisco on behalf of certain of our current and former employees, alleging violations of certain sections of the California Labor Code. During the quarter ended September 30, 2005, we accrued approximately $3.3 million for potential penalties and other settlement costs relating to both asserted and unasserted claims relating to this matter. In October 2005, we filed an answer generally denying the allegations set forth in the complaint. In December 2005, we reached a tentative settlement of this action, subject to court approval. In October 2006, we received preliminary settlement approval from the court and the final approval hearing was held in January 2007. Pursuant to the settlement, we have made all payments to the class members, their counsel and the California Labor and Workforce Development Agency in an aggregate amount of approximately $50,000, and the lawsuit was dismissed with prejudice in May 2007.

 

Other Legal Proceedings

 

We are currently a party to other legal proceedings incidental to our business. As required, we have accrued our estimate of the probable costs for the resolution of these claims. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business, financial condition or results of operations, litigation is subject to inherent uncertainties. Were we to settle a proceeding for a material amount or were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial condition or results of operations. Legal fees are expensed as incurred.

 

Item 1A. Risk Factors

 

In addition to the factors generally affecting the economic and competitive conditions in our markets, you should carefully consider the additional risk factors that could have a material adverse impact on our business, financial condition or results of operations, which are set forth in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

Other than as described below, there have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

Most of our service revenue is derived from a limited number of customers, the loss of any one of which could materially and adversely affect our business, financial condition or results of operations.

 

Our revenue and profitability depend to a great extent on our relationships with a limited number of large pharmaceutical companies. For the nine months ended September 30, 2007, our two largest customers accounted for approximately 18.7% and 11.1%, respectively, or approximately 29.8% in the aggregate, of our service revenue. For the year ended December 31, 2006, our three largest customers accounted for 28.5%, 18.3% and 9.9%, respectively, or approximately 56.7% in the aggregate, of our service revenue. For the year ended December 31, 2005, our three largest customers, each of whom represented 10% or more of our service revenue, accounted for, in the aggregate, approximately 73.6% of our service revenue. We are likely to continue to experience a high degree of customer concentration, particularly if there is further consolidation within the pharmaceutical industry.

 

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The loss or a significant reduction of business from any of our major customers could have a material adverse effect on our business, financial condition or results of operations. For example, as announced on February 28, 2006, AstraZeneca terminated its contract sales force arrangement with us effective April 30, 2006. The termination affected approximately 800 field representatives, and the impact on revenue was approximately $63.8 million in 2006. Additionally, on September 26, 2006, we announced that GSK would not be renewing its contract with us when it expired on December 31, 2006. This represented a loss of revenue between $65 and $70 million for 2007. Furthermore, on October 25, 2006, we announced that we had received notification from sanofi-aventis of its intention to terminate its contract sales engagement with us effective December 1, 2006. The contract, which represented approximately $18 million to $20 million in revenue on an annual basis, was scheduled to expire on December 31, 2006. In addition, on March 21, 2007, we announced that a large pharmaceutical company customer had provided us with notification of its intention not to renew its contract sales engagement with us upon its scheduled expiration on May 12, 2007. This contract, which was for a term of one year, represented approximately $37 million in annual revenue.

 

Our service contracts are generally short-term agreements and are cancelable at any time, which may result in lost revenue and additional costs and expenses.

 

Our service contracts are generally for a term of one to two years (certain of our operating entities have contracts of shorter duration) and many may be terminated by the customer at any time for any reason. For example, as discussed above, AstraZeneca terminated its contract sales force arrangement with us effective April 30, 2006. The termination affected approximately 800 field representatives. The revenue impact was approximately $63.8 million in 2006. Additionally, the expiration and/or termination of the sales force contracts of GSK, sanofi-aventis and the other large pharmaceutical company customer discussed in the risk factor above represent a loss of approximately $95 million in revenue for 2007 as compared to 2006. In addition, certain of our customers have the ability to significantly reduce the number of representatives we deploy on their behalf.

 

The early termination or significant reduction of a contract by one of our customers not only results in lost revenue, but also typically causes us to incur additional costs and expenses. All of our sales representatives are employees rather than independent contractors. Accordingly, when a contract is significantly reduced or terminated, unless we can immediately transfer the related sales force to a new program, if permitted under the contract, we must either continue to compensate those employees, without realizing any related revenue, or terminate their employment. If we terminate their employment, we may incur significant expenses relating to their termination. The loss, termination or significant reduction of a large contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition or results of operations.

 

Due to the expiration and/or termination of several significant contracts during 2006 and 2007 and management’s intention to implement our long-term strategic plan during 2007 and beyond, our revenue and results of operations for the year ended December 31, 2006 cannot be relied upon as representative of the revenue and results of operations that we may achieve in 2007 and future periods.

 

As noted above, during 2006 and the first half of 2007, we experienced the expiration and/or termination of several significant contracts, including termination of our AstraZeneca sales contract force effective as of April 30, 2006, the termination of our contract sales agreement with sanofi-aventis effective as of December 1, 2006, the expiration of our contract sales agreement with GSK on December 31, 2006 and the expiration of our contract sales arrangement with a large pharmaceutical company customer on May 12, 2007. These four customers accounted for an aggregate of approximately $151 million of revenue during 2006. Unless and until we generate sufficient new business to offset the loss of these contracts, our 2006 financial results will not be duplicated in future periods and future revenue and cash flows from operations will decrease significantly. In addition, we expect to incur a net loss for 2007 and may incur net losses in future periods. Our senior management intends to implement our long-term strategic plan during 2007 and beyond. This plan includes, in part, a focus on supplementing our current service offerings with complementary commercialization service offerings to the biopharmaceutical and life sciences industries. To the extent this element of our strategic plan is implemented during 2007 and in future periods, these will constitute new service offerings for which there were no comparable financial results during 2006.

 

Our service businesses depend on expenditures by companies in the life sciences industries.

 

Our service revenues depend on promotional, marketing and sales expenditures by companies in the life sciences industries, including the pharmaceutical and biotechnology industries. Promotional, marketing and sales expenditures by pharmaceutical manufacturers have in the past been, and could in the future be, negatively impacted by, among other things, governmental reform or private market initiatives intended to reduce the cost of pharmaceutical products or by governmental, medical association or pharmaceutical industry initiatives designed to regulate the manner in which pharmaceutical manufacturers promote their products. Furthermore, the trend in the life sciences industries toward consolidation may result in a reduction in overall sales and marketing expenditures and, potentially, a reduction in the use of contract sales and marketing services providers. If companies in the life sciences industries significantly reduce their promotional, marketing and sales expenditures or significantly reduce or eliminate the role of pharmaceutical sales representatives in the promotion of their products, our business, financial condition and results of operations would be materially and adversely affected.

 

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Our business will suffer if we are unable to hire and retain key management personnel to fill critical vacancies.

 

The success of our business also depends on our ability to attract and retain qualified senior management and experienced financial executives who are in high demand and who often have competitive employment options. Currently, we have a significant vacancy in our executive management. Steven K. Budd, the former president of our sales services segment, resigned effective April 6, 2007. Michael J. Marquard, our Chief Executive Officer, is currently assuming these responsibilities as we engage in a process to identify Mr. Budd’s successor. Our failure to attract and retain qualified individuals could have a material adverse effect on our business, financial condition or results of operations.

 

Risks associated with insurance plan claims could increase future expenses and materially and adversely affect our business, financial condition and results of operations.

 

We use a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability and employee health care benefits. Although the liabilities that have been recorded for these claims represent our best estimate based on actuarial data, as well as on historical trends, any projection of these losses is subject to a high degree of variability and we may not be able to accurately predict the number or value of the claims that occur. In the event that our actual liability exceeds our estimate for any given period or if we are unable to control rapidly increasing health care costs, our business, financial condition and results of operations could be materially and adversely affected.

 

Changes in governmental regulation could negatively impact our business operations.

 

The pharmaceutical and life sciences industries are subject to a high degree of governmental regulation. Significant changes in these regulations affecting the services we provide, including pharmaceutical product promotional and marketing research services, peer persuasion programs and medical educational services, could result in the imposition of additional restrictions on these types of activities, impose additional costs on us in providing these services to our customers or otherwise negatively impact our business operations. For example, the Accredidation Council for Continuing Medical Education (ACCME) has recently announced several new policies, including a revision to the definition of ACCME’s definition of “commercial interests”, which may restrict the medical education services provided by our VIM business unit and/or could require us to incur additional time and expense in order to comply with these policies upon becoming effective.

 

Our stock price is volatile and could be further affected by events not within our control, and an investment in our common stock could suffer a decline in value.

 

The market for our common stock is volatile. During the first nine months of 2007, our stock traded at a low of $9.00 and a high of $12.40. In 2006, our stock traded at a low of $9.37 and a high of $15.69, and in 2005, our stock traded at a low of $11.12 and a high of $22.26. The trading price of our common stock has been and will continue to be subject to:

·

volatility in the trading markets generally;

·

significant fluctuations in our quarterly operating results;

·

significant changes in our cash and cash equivalent reserves;

·

announcements regarding our business or the business of our competitors;

·

strategic actions by us or our competitors, such as acquisitions or restructurings;

·

industry and/or regulatory developments;

·

changes in revenue mix;

·

changes in revenue and revenue growth rates for us and for our industry as a whole;

·

changes in accounting standards, policies, guidance, interpretations or principles; and

·

statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate.

 

If our information technology and communications systems fail or we experience a significant interruption in their operation, our reputation, business and results of operations could be materially and adversely affected.

 

The efficient operation of our business is dependent to an extent on our information technology and communications systems. The failure of these systems to operate as anticipated could disrupt our business and result in decreased revenue and increased overhead costs. In addition, we do not have complete redundancy for all of our systems and our disaster recovery planning cannot account for all eventualities. Our information technology and communications systems, including the information technology systems and services that are maintained by third party vendors, are vulnerable to damage or interruption from natural disasters, fire, terrorist attacks, malicious attacks by computer viruses or hackers, power loss or failure of computer systems, Internet, telecommunications or data networks. If these systems or services become unavailable or suffer a security breach, we may expend significant resources to address these problems, and our reputation, business and results of operations could be materially and adversely affected. In addition, we are currently in the process of relocating our data center to an off-site vendor. If we are unable to successfully implement this relocation, we could experience severe disruptions to our businesses which could result in a material and adverse effect on our results of operations.

 

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Item 6. Exhibits

 

New exhibits, listed as follows, are attached:

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith as Exhibit 31.1.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith as Exhibit 31.2.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith as Exhibit 32.1.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith as Exhibit 32.2.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 9, 2007		PDI, Inc.
		(Registrant)
		/s/ Michael J. Marquard
		Michael J. Marquard
		Chief Executive Officer
		/s/ Jeffrey E. Smith
		Jeffrey E. Smith
		Chief Financial Officer

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