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EX-10.28 - EXHIBIT 10.28 - Interpace Diagnostics Group, Inc.exhibit1028.htm
EX-31.1 - EXHIBIT 31.1 - Interpace Diagnostics Group, Inc.ex3112011q310q.htm
EX-31.2 - EXHIBIT 31.2 - Interpace Diagnostics Group, Inc.ex3122011q310q.htm
EXCEL - IDEA: XBRL DOCUMENT - Interpace Diagnostics Group, Inc.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - Interpace Diagnostics Group, Inc.ex3222011q310q.htm
EX-32.1 - EXHIBIT 32.1 - Interpace Diagnostics Group, Inc.ex3212011q310q.htm
 
 
 
 
 
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 September 30, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _______________
 
Commission File Number: 0-24249
 
PDI, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
22-2919486
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
Morris Corporate Center 1, Building A
300 Interpace Parkway, Parsippany, NJ 07054
(Address of principal executive offices and zip code)
 
(800) 242-7494
(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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer  o
Smaller reporting company  x
 
 
(Do not check if a  smaller
reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
 
Class
Shares Outstanding
November 6, 2011
Common stock, $0.01 par value
14,723,168

 

PDI, Inc.
Form 10-Q for Period Ended September 30, 2011
TABLE OF CONTENTS

 
 
Page No.
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.
 
 
 
 
 
 

2



PDI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)

 
September 30,
2011
 
December 31, 2010
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
65,451

 
$
62,711

Short-term investments
127

 
147

Accounts receivable, net
10,797

 
11,057

Unbilled costs and accrued profits on contracts in progress
2,938

 
3,363

Other current assets
3,536

 
3,374

Total current assets
82,849

 
80,652

Property and equipment, net
2,881

 
3,947

Goodwill
23,976

 
23,976

Other intangible assets, net
9,441

 
10,393

Other long-term assets
5,065

 
5,421

Total assets
$
124,212

 
$
124,389

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,391

 
$
3,266

Unearned contract revenue
21,383

 
13,417

Accrued salary and bonus
9,453

 
10,664

Other accrued expenses
11,920

 
15,981

Total current liabilities
45,147

 
43,328

Long-term liabilities
9,524

 
11,548

Total liabilities
54,671

 
54,876

 
 
 
 
Commitments and contingencies (Note 7)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $.01 par value; 100,000,000 shares authorized;


 


15,797,667 and 15,463,995 shares issued, respectively;
 

 
 

14,723,168 and 14,390,788 shares outstanding, respectively
158

 
155

Additional paid-in capital
126,467

 
124,787

Accumulated deficit
(43,465
)
 
(41,817
)
Accumulated other comprehensive income
12

 
8

Treasury stock, at cost (1,074,499 and 1,073,207 shares, respectively)
(13,631
)
 
(13,620
)
Total stockholders' equity
69,541

 
69,513

Total liabilities and stockholders' equity
$
124,212

 
$
124,389


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

PDI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except for per share data)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Revenue, net
$
37,246

 
$
35,972

 
$
123,974

 
$
99,952

Cost of services
29,073

 
27,489

 
97,828

 
77,209

Gross profit
8,173

 
8,483

 
26,146

 
22,743

 
 
 
 
 
 
 
 
Compensation expense
4,646

 
4,518

 
16,818

 
13,481

Other selling, general and administrative expenses
3,495

 
3,545

 
11,488

 
10,410

Facilities realignment

 

 

 
583

Total operating expenses
8,141

 
8,063

 
28,306

 
24,474

Operating income (loss)
32

 
420

 
(2,160
)
 
(1,731
)
Other (loss) income, net
(40
)
 
58

 
(123
)
 
133

Income (loss) from continuing operations before income tax
(8
)
 
478

 
(2,283
)
 
(1,598
)
Provision (benefit) for income tax
183

 
71

 
(672
)
 
208

(Loss) income from continuing operations
(191
)
 
407

 
(1,611
)
 
(1,806
)
Loss from discontinued operations, net of tax
(11
)
 
(2,081
)
 
(37
)
 
(2,457
)
Net loss
$
(202
)
 
$
(1,674
)
 
$
(1,648
)
 
$
(4,263
)
 
 
 
 
 
 
 
 
Basic (loss) income per share of common stock from:
 

 
 

 
 
 
 
Continuing operations
$
(0.01
)
 
$
0.03

 
$
(0.11
)
 
$
(0.13
)
Discontinued operations

 
(0.15
)
 

 
(0.17
)
Net loss per basic share of common stock
$
(0.01
)
 
$
(0.12
)
 
$
(0.11
)
 
$
(0.30
)
 
 
 
 
 
 
 
 
Diluted (loss) income per share of common stock from:
 

 
 

 
 
 
 
Continuing operations
$
(0.01
)
 
$
0.03

 
$
(0.11
)
 
$
(0.13
)
Discontinued operations

 
(0.14
)
 

 
(0.17
)
Net loss per diluted share of common stock
$
(0.01
)
 
$
(0.11
)
 
$
(0.11
)
 
$
(0.30
)
 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 

 
 

 
 
 
 
Basic
14,479

 
14,325

 
14,417

 
14,291

Diluted
14,479

 
14,661

 
14,417

 
14,291


The accompanying notes are an integral part of these condensed consolidated financial statements.

4

PDI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
Nine Months Ended
 
September 30,
 
2011
 
2010
Cash Flows From Operating Activities
 
 
 
Net loss
$
(1,648
)
 
$
(4,263
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
2,352

 
1,137

Contingent consideration and realignment accrual accretion
257

 
106

Reversal of contingent consideration accrual
(191
)
 

Provision for bad debt
11

 
23

Non-cash facilities realignment

 
575

Stock-based compensation
1,683

 
1,111

Other (gains), losses and expenses, net

 
16

Other changes in assets and liabilities:
 

 
 
Decrease in accounts receivable
260

 
1,601

Decrease (increase) in unbilled costs
425

 
(51
)
Decrease in income tax refund receivable

 
3,298

(Increase) decrease in other current assets
(534
)
 
2,212

Decrease (increase) in other long-term assets
717

 
(2,054
)
(Decrease) increase in accounts payable
(875
)
 
177

Increase in unearned contract revenue
7,966

 
1,695

(Decrease) increase in accrued salaries and bonus
(1,211
)
 
3,427

(Decrease) increase in other accrued expenses
(4,037
)
 
3,785

Decrease in long-term liabilities
(2,090
)
 
(330
)
Net cash provided by operating activities
3,085

 
12,465

 
 
 
 
Cash Flows From Investing Activities
 

 
 

Purchase of property and equipment
(334
)
 
(1,536
)
Net cash used in investing activities
(334
)
 
(1,536
)
 
 
 
 
Cash Flows From Financing Activities
 

 
 

Cash paid for repurchase of restricted shares
(11
)
 
(37
)
Net cash used in financing activities
(11
)
 
(37
)
 
 
 
 
Net increase in cash and cash equivalents
2,740

 
10,892

Cash and cash equivalents – beginning
62,711

 
72,463

Cash and cash equivalents – ending
$
65,451

 
$
83,355


The accompanying notes are an integral part of these condensed consolidated financial statements.

5

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular information in thousands, except per share amounts)
 

1.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements and related notes (the interim financial statements) should be read in conjunction with the consolidated 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, 2010 as filed with the Securities and Exchange Commission (SEC).  The interim financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) 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 GAAP for complete financial statements.  The interim financial statements include all adjustments (consisting of normal recurring adjustments) that, in the judgment of management, are necessary for a fair presentation of such interim financial statements.  All significant intercompany balances and transactions have been eliminated in consolidation.  Operating results for the three- and nine-month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
On July 19, 2010, the Company’s Board of Directors (Board) approved closing the TVG Marketing Research & Consulting (TVG) business unit. The Company completed the closure of TVG operations during the period ended September 30, 2010. These interim financial statements reflect the presentation of TVG as a discontinued operation for the three- and nine-month periods ended September 30, 2011 and 2010.  See Note 13 to the interim financial statements for additional detail regarding the discontinued operations of TVG. 
On November 3, 2010, the Company acquired 100% of the membership interest in Group DCA, LLC (Group DCA), a privately held interactive digital communications company serving the pharmaceutical, biotechnology and healthcare industries.
On August 1, 2011, the Company announced the formation of its new business unit, Interpace BioPharma. Interpace BioPharma provides biopharmaceutical clients with full-service product commercialization solutions. These services include full supply chain management, operations, sales, marketing, compliance, and regulatory/medical management. The revenue and costs associated with this unit are reflected in the Product Commercialization Services (PC Services) segment for both the three- and nine-month periods ended September 30, 2011.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of the interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period.  Management's estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances.  Significant estimates include incentives earned or penalties incurred on contracts, best estimate of selling price in multiple element arrangements, valuation allowances related to deferred income taxes, self-insurance loss accruals, allowances for doubtful accounts and notes, income tax accruals, acquisition accounting, asset impairments and facilities realignment accruals.  The Company periodically reviews these matters and reflects changes in estimates as appropriate.  Actual results could materially differ from those estimates.
Basic and Diluted Net Loss per Share
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted loss per share for the three- and nine-month periods ended September 30, 2011 and 2010 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30
 
2011
 
2010
 
2011
 
2010
Basic weighted average number of common shares
14,479

 
14,325

 
14,417

 
14,291

Dilutive effect of stock-based awards

 
336

 

 

Diluted weighted average number of common shares
14,479

 
14,661

 
14,417

 
14,291


6

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

The following outstanding stock-based awards were excluded from the computation of the effect of dilutive securities on loss per share for the following periods because they would have been anti-dilutive:

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
Options
 
113

 
180

 
113

 
180

Stock-settled stock appreciation rights (SARs)
 
357

 
74

 
357

 
483

Restricted stock/units
 
608

 
18

 
608

 
468

Performance contingent SARs
 
280

 
305

 
280

 
305

 
 
1,358

 
577

 
1,358

 
1,436

Goodwill and Other Intangible Assets
The Company allocates the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. Since the entities the Company has acquired do not have significant tangible assets, a significant portion of the purchase price has been allocated to intangible assets and goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests require significant management judgments and estimates. These estimates are made based on, among other factors, consultations with an accredited independent valuation consultant, reviews of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the market participant cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to the Company's results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments thereby impacting the fair value of these assets, which could result in an impairment of the goodwill.
The Company tests goodwill and indefinite lived intangible assets for impairment at least annually (as of December 31) and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate of the pharmaceutical industry; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill, and indefinite lived intangible assets and our consolidated financial results. At September 30, 2011 no indicators of impairment were identified. 
Long-Lived Assets
The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company did not identify any events or changes in circumstances that indicated that the carrying value of such assets may not be recoverable during the nine-month period ended September 30, 2011.
Reclassifications
The Company reclassified certain prior period financial statement balances to conform to the current year presentation. See Note 13, Discontinued Operations, for further information.
Forward Looking Accounting Standards Updates
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, "Presentation of Comprehensive Income" (ASU 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for periods beginning after December 15, 2011. The adoption of ASU 2011-05 will not have a material effect on the Company's operating results or financial position.

7

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)


In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (ASU 2011-08), "Testing Goodwill for Impairment". ASU 2011-08 updates guidance on the periodic testing of goodwill for impairment. This updated guidance will allow companies to assess qualitative factors to determine if it is more likely than not that goodwill will be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance is effective for the Company for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating ASU 2011-08, but does not believe the adoption will have a material effect on the Company's operating results or financial position.
Recently Adopted Accounting Standards Updates
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (ASU 2009-13), “Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force”. ASU 2009-13 updates the existing multiple-deliverable revenue arrangements guidance included under Accounting Standards Codification 605-25. The revised guidance:
eliminates the need for objective and reliable evidence of fair value of the undelivered element in order for a delivered item to be treated as a separate unit of accounting;
eliminates the residual value method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable's selling price;
establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on:
vendor-specific objective evidence (VSOE) if available;
third party evidence (TPE) if VSOE is not available; or
an estimated selling price if neither VSOE nor TPE is available;
requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis; and
expands the disclosure requirements for multiple-deliverable revenue arrangements.
The Company frequently provides promotional services under multiple-deliverable revenue arrangements (Arrangements) through its Pharmakon, Group DCA and Interpace BioPharma business units. The significant deliverables in these Arrangements generally include:
for Pharmakon:
recruitment mailings (Recruitment) to generate attendance at interactive meetings and events; and
the various forms of interactive meetings and events (Events);
for Group DCA:
the content development phase (Development) of an interactive digital program; and
the hosting period (Delivery) of an interactive digital program, which could include various services, but is primarily comprised of i) the design and delivery of recruitment activities to generate participation in a program and ii) the online hosting, program management and progress reporting services; and
for Interpace BioPharma:
full supply chain management, operations, marketing, compliance, and regulatory/medical management services; and
a dedicated sales team providing product detailing services.
ASU 2009-13 became effective for, and was adopted by, the Company beginning January 1, 2011 on a prospective basis. The adoption of ASU 2009-13 as of January 1, 2011 impacted the revenue recognition policies of these business units in the Company's Marketing Services and Product Commercialization Services segments as follows:
Prior to the Adoption of ASU 2009-13

8

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

Prior to its adoption of ASU 2009-13, the Company separated the deliverables in its Arrangements into separate units of accounting, as required by the applicable revenue recognition accounting guidance in effect at the time, if a) the delivered item(s) had value to the customer on a standalone basis, b) there was objective and reliable evidence of fair value of the undelivered item(s), and c) if an arrangement included a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) was considered probable and substantially in the control of the Company. The application of this guidance resulted in the following accounting treatment at each business unit:
Pharmakon
In general, prior to January 1, 2011 and the adoption of ASU 2009-13, the Company divided the deliverables within these Arrangements into two units of accounting: Recruitment and Events. Recruitment, which is delivered in advance of the Events, was determined to have standalone value to the customer. The Company was able to establish VSOE for the undelivered item, the Events, based on prices charged to its customers when sold on a standalone basis. Revenue was allocated to the deliverables using the residual value method, and was then recognized in accordance with the revenue recognition policies of the individual units of accounting based on the characteristics of the underlying deliverables. Generally, revenue was recognized as Recruitment mailings were mailed and when Events were conducted.
Group DCA
The Company acquired Group DCA on November 3, 2010. Historically, Development and Delivery services provided by Group DCA did not qualify as separate units of accounting under the accounting guidance in effect at the time due to the lack of objective and reliable evidence, either from VSOE or TPE, of the fair value of the Delivery unit of accounting, which was the undelivered item in the arrangements. As a result, the Company grouped the deliverables under these Arrangements into one unit of accounting and deferred all revenue related to the programs until it had achieved the recognition criteria applicable to the combined single unit of accounting. Generally, all revenue recognition criteria were met and revenue recognition commenced at the inception of a program's hosting period, and revenue was recognized ratably over the period. Group DCA revenues were not material to the Company's consolidated financial statements during the year ended December 31, 2010.
For further information on the Company's revenue recognition policy refer to "Revenue & Cost of Services" in Footnote 1 in the Company's 2010 Annual Report on Form 10-K.
Impact of the Adoption of ASU 2009-13
Pharmakon
Effective January 1, 2011, the residual value method was no longer an allowable method of allocating arrangement consideration. Pharmakon now utilizes the selling price hierarchy, described above. In applying this hierarchy, the Company first determined that both VSOE and TPE continue to be unavailable for establishing the relative selling price of Recruitment. Based on that determination, the Company now utilizes its best estimate to determine the selling price of this deliverable. The Company has determined that the rate card price Pharmakon charges for this service represents the best estimate of selling price of the Recruitment deliverable as the business unit has an established pricing policy and the rate card price is the price Pharmakon would charge its customers for this service if provided on a standalone basis. The rate card price was determined by estimating the average cost incurred by Pharmakon to provide this service to its customers plus an average profit margin per the business unit pricing policy, and is consistent with the pricing on all services provided by Pharmakon. The application of ASU 2009-13 resulted in little to no change in the allocation of consideration when compared to the residual value method and therefore the adoption of ASU 2009-13 did not have a material impact on Pharmakon revenue recognition during the nine-month period ended September 30, 2011, and is not expected to have a material impact on subsequent periods.
Group DCA
Under the guidance in ASU 2009-13, Group DCA is now required to estimate the selling price of a deliverable if it has standalone value to the customer and both VSOE and TPE of the selling price are not available. As a result, the deliverables in Group DCA Arrangements have been determined to be separate units of accounting and consideration is allocated based on relative selling prices. Selling prices are estimated for most deliverables through an analysis of historical selling price as well as estimated internal labor hours and an average billing rate based on employee costs. Revenue is recognized for each unit of accounting depending upon the characteristics of their underlying deliverables. For Development, revenue is recognized as the service is being provided to the customer. Revenue allocated to Delivery is recognized ratably over the hosting period. The adoption of the new guidance did not materially impact Group DCA revenue recognition during

9

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

the nine-month period ended September 30, 2011.
Interpace BioPharma
Under the guidance in ASU 2009-13, the Company has determined that there are two units of accounting within its arrangements: the Dedicated Sales Team providing product detailing services; and the Commercial Operations providing full supply chain management, operations, marketing, compliance, and regulatory/medical management services. Due to the significant level of customization, selling prices are determined for the Dedicated Sales Team through internal development of a program budget consistent with the manner of deriving selling prices that the Company employs in its Sales Services segment. Selling prices for Commercial Operations are determined by estimating the expenditures required to perform the services, plus the addition of a reasonable profit margin consistent with the expected profit margin to be generated by the Dedicated Sales Team. Revenue is recognized for Dedicated Sales Team on a straight-line basis over the product detailing service period which begins upon deployment of the sales force. Revenue is recognized for Commercial Operations as services are provided over the term of the service period. As the formation of Interpace BioPharma occurred during the current year, the new guidance did not have a comparative impact.
3.
INVESTMENTS IN MARKETABLE SECURITIES
Available-for-sale securities are carried at fair value with the unrealized holding gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses on available-for-sale securities are computed based upon specific identification and included in other income (expense), net in the consolidated statement of operations.  Declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income (expense), net in the consolidated statement of operations and the cost basis of the security is reduced. The fair values for marketable equity securities are based on quoted market prices.  Held-to-maturity investments are stated at amortized cost which approximates fair value.  Interest income is accrued as earned.  Realized gains and losses on held-to-maturity investments are computed based upon specific identification and included in other income (expense), net in the condensed consolidated statement of operations.  The Company does not have any investments classified as trading.
Available-for-sale securities consist of assets in a rabbi trust associated with the Company’s deferred compensation plan.  As of September 30, 2011 and December 31, 2010, the carrying value of available-for-sale securities was approximately $127,000 and $147,000, respectively, and is included in short-term investments.  Available-for-sale securities at September 30, 2011 and December 31, 2010 consisted of approximately $62,000 and $76,000, respectively, in money market accounts, and approximately $65,000 and $71,000, respectively, in mutual funds.  At September 30, 2011, there were no gross unrealized holding gains and $3,000 of gross unrealized holding losses included in accumulated other comprehensive income.  At December 31, 2010, accumulated other comprehensive income included gross unrealized holding gains of approximately $10,000 and no gross unrealized holding losses.  There were no gross realized gains or losses included in other income, net in the three- and nine-month periods ended September 30, 2011 and 2010.
The Company’s other marketable securities consist of investment grade debt instruments such as obligations of U.S. Treasury and U.S. Federal Government agencies.  These investments are categorized as held-to-maturity since the Company’s management has the ability and intent to hold these securities to maturity.  The Company’s held-to-maturity investments are carried at amortized cost which approximates fair value and are maintained in separate accounts to support the Company’s letters of credit.  The Company had standby letters of credit of approximately $5.0 million and $5.4 million at September 30, 2011 and December 31, 2010, respectively, as collateral for its existing insurance policies and facility leases.
At September 30, 2011 and December 31, 2010, held-to-maturity investments included the following:
 
 
 
Maturing
 
 
 
Maturing
 
September 30,
2011
 
within
1 year
 
after 1 year
through
3 years
 
December 31,
2010
 
within
1 year
 
after 1 year
through
3 years
Cash/money accounts
$
90

 
$
90

 
$

 
$
80

 
$
80

 
$

US Treasury securities
4,293

 
251

 
4,041

 
4,093

 

 
4,093

Government agency securities
871

 

 
871

 
1,181

 

 
1,181

Total
$
5,254

 
$
341

 
$
4,913

 
$
5,354

 
$
80

 
5,274


10

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

At September 30, 2011 and December 31, 2010, held-to-maturity investments were recorded in the following accounts: 
 
September 30,
2011
 
December 31,
2010
Other current assets
$
341

 
$
80

Other long-term assets
4,913

 
5,274

Total
$
5,254

 
$
5,354


4.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and finite-lived intangible assets recorded as of September 30, 2011 are attributable to the 2010 acquisition of Group DCA and the 2004 acquisition of Pharmakon.  As of September 30, 2011 and December 31, 2010, the carrying amount of goodwill was $24.0 million, consisting of $18.9 million and $5.1 million for the Group DCA and Pharmakon reporting units, respectively.  
The net carrying value of the identifiable intangible assets as of September 30, 2011 and December 31, 2010 is as follows:     
 
 
 
As of September 30, 2011
 
As of December 31, 2010
 
Life
 
Carrying
Accumulated
 
 
Carrying
Accumulated
 
 
(Years)
 
Amount
Amortization
Net
 
Amount
Amortization
Net
Pharmakon:
 
 
 
 
 
 
 
 
 
Customer relationships
7
 
$
1,751

$
438

$
1,313

 
$
1,751

$
250

$
1,501

Corporate tradename
7
 
791

198

593

 
791

113

678

Group DCA:
 
 
 
 
 
 
 
 
 
Technology
6
 
4,097

626

3,471

 
4,097

113

3,984

Healthcare professional database
10
 
2,203

202

2,001

 
2,203

36

2,167

Corporate tradename
NA
 
2,063


2,063

 
2,063


2,063

Total
 
 
$
10,905

$
1,464

$
9,441

 
$
10,905

$
512

$
10,393

Amortization expense was $0.3 million and $0.1 million for the three-month periods ended September 30, 2011 and 2010, respectively, and $1.0 million and $0.3 million for the nine-month periods ended September 30, 2011 and 2010, respectively.  Estimated amortization expense for the current and next four years is as follows:

2011
2012
2013
2014
2015
$
1,266

$
1,266

$
1,266

$
1,266

$
1,266


5.
FACILITIES REALIGNMENT
Saddle River, New Jersey Facility
Prior to December 2009, the Company's corporate headquarters were located in a three-floor facility in Saddle River, New Jersey. In December 2009, the Company relocated its corporate headquarters from its Saddle River, New Jersey facility to a smaller office located in Parsippany, New Jersey. Due to the relocation, the Company recorded a facility realignment charge of approximately $3.9 million in December 2009 and a non-cash impairment charge of approximately $1.5 million related to furniture, leasehold improvements and office equipment in the office space. Effective September 1, 2009, the Company extended the sublease for the first floor of its Saddle River, New Jersey facility through the remainder of the facility lease term. The sublease is expected to provide approximately $2.3 million in sublease income through January 2016, but will not fully offset the Company's lease obligations for this space. As a result, the Company recorded a $0.8 million facility realignment charge in the third quarter of 2009. The Company also recorded a non-cash impairment charge of approximately $0.4 million related to furniture and leasehold improvements in the office space.

11

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

In 2007, the Company entered into a sublease for the second floor of its Saddle River, New Jersey facility through the end of the facility's lease term, January 2016. This sublease will not fully offset the Company's lease obligations for this space; therefore, the Company recorded a $1.0 million charge for facility realignment and related asset impairment for furniture and leasehold improvements in the office space.
Due to continued adverse conditions in the real estate market in 2010, the Company adjusted its assumptions regarding its ability to sublease unoccupied space on the third floor of the Saddle River, New Jersey facility resulting in realignment charges of approximately $0.6 million and $1.4 million during the quarters ended June 30, 2010 and December 31, 2010, respectively. In September 2011, the Company secured a sublease for the approximately 47,000 square feet of remaining space in Saddle River, New Jersey. This sublease runs through the end of the facility's lease term, January 2016. The Company expects to receive approximately $2.2 million in lease payments over the life of the sublease.
Dresher, Pennsylvania Facility
During the year ended December 31, 2009, the Company continued to right size its operations in Dresher, Pennsylvania and recorded facility realignment charges of $1.4 million and non-cash impairments of furniture and leasehold improvements of $0.7 million. During 2010, the Company discontinued the operations of its TVG business unit and exited the remaining portion of space at the facility, thus recording additional restructuring charges of $0.3 million for facility realignment and $0.6 million for non-cash asset impairments of furniture and leasehold improvements in discontinued operations for the year ended December 31, 2010. See Note 13, Discontinued Operations, for further information regarding the discontinued operations of TVG.
In the first quarter of 2011, the Company entered into two separate agreements to sublease substantially all of the remaining space in Dresher, Pennsylvania.  These subleases have lease terms that expire on November 30, 2016 in connection with the underlying facility lease.  
The following table presents a rollforward of the Company’s restructuring reserve from December 31, 2010 to September 30, 2011, of which approximately $1.8 million is included in other accrued expenses and $2.8 million is included in long-term liabilities as of September 30, 2011. The Company recognizes accretion expense in Other (loss) income, net in the Condensed Consolidated Statement of Operations. 
 
Sales
Services
 
Marketing
Services
 
Total
Balance as of December 31, 2010
$
5,029

 
$
1,272

 
$
6,301

Accretion
104

 
21

 
125

Adjustments
22

 
(11
)
 
11

Payments
(1,232
)
 
(570
)
 
(1,802
)
Balance as of September 30, 2011
$
3,923

 
$
712

 
$
4,635


6.
FAIR VALUE MEASUREMENTS
The Company's financial assets and liabilities reflected at fair value in the consolidated financial statements include: cash and cash equivalents; short-term investments; accounts receivable; other current assets; accounts payable; and contingent consideration. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
Level 1:
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained

12

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

from third-party pricing services for identical or similar assets or liabilities.
Level 3:
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation methodologies used for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the table below.
 
As of September 30, 2011
 
Fair Value Measurements
 
Carrying
 
Fair
 
as of September 30, 2011
 
Amount
 
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:

 
 
 
 
 
 
 
 
       Cash
$
23,730

 
$
23,730

 
$
23,730

 
$

 
$

       Money Market Funds
41,721

 
41,721

 
41,721

 

 

 
$
65,451

 
$
65,451

 
$
65,451

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
Money Market Funds
$
62

 
$
62

 
$
62

 
$

 
$

Mutual Funds
65

 
65

 
65

 

 

U.S. Treasury securities
4,293

 
4,293

 
4,293

 

 

Government agency securities
871

 
871

 
871

 

 

Total
$
5,291

 
$
5,291

 
$
5,291

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent Consideration
$
1,482

 
$
1,482

 
$

 
$

 
$
1,482

 
The fair value of cash and cash equivalents and marketable securities is valued using market prices in active markets (level 1). As of September 30, 2011, the Company did not have any marketable securities in less active markets (level 2). Contingent consideration does not have observable market value and requires a high level of judgment to determine fair value (level 3).

In connection with the November 3, 2010 acquisition of Group DCA, the Company recorded $1.6 million of contingent consideration. The Company determined the fair value of the contingent consideration based on a probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving the various earn-out criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. During the quarter ended June 30, 2011, the Company determined that a portion of the earn-out was not achievable and reversed the related portion of the contingent consideration within other selling, general and administrative expenses in the condensed consolidated statement of operations. A roll-forward of the contingent consideration is as follows:

13

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

 
Contingent Consideration
Balance as of December 31, 2010
$
1,557

Accretion
116

Adjustment
(191
)
Balance as of September 30, 2011
$
1,482

The Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments. There is no fair value ascribed to the letters of credit as management does not expect any material losses to result from these instruments because performance is not expected to be required.
7.
COMMITMENTS AND CONTINGENCIES
As of September 30, 2011, contractual obligations with terms exceeding one year and estimated minimum future rental payments required by non-cancelable leases with initial or remaining lease terms exceeding one year are as follows:

 
 
 
Less than
 
1 to 3
 
3 to 5
 
After
 
Total
 
1 Year
 
Years
 
Years
 
 5 Years
Contractual obligations (1)
$
272

 
$
209

 
$
38

 
$
15

 
$
10

Operating lease obligations:
 
 
 
 
 
 
 
 
 
  Minimum lease payments
20,280

 
4,301

 
8,944

 
6,437

 
598

  Less minimum sublease rentals (2)
(9,482
)
 
(1,481
)
 
(4,188
)
 
(3,702
)
 
(111
)
       Net minimum lease payments
10,798

 
2,820

 
4,756

 
2,735

 
487

               Total
$
11,070

 
$
3,029

 
$
4,794

 
$
2,750

 
$
497


(1) Amounts represent contractual obligations related to software license contracts, data center hosting, and outsourcing contracts for software system support.
(2) In September 2011, the Company signed an agreement to sublease the remaining space of its former corporate headquarters in Saddle River, New Jersey through the remaining term of the underlying lease. The agreement provides for approximately $2.2 million in lease payments over the remainder of the lease. This sublease, in combination with our previously existing subleases, will provide for aggregated lease payments of approximately $6.3 million over the remaining lease terms. The Company has also sublet substantially all of the space at the Dresher, Pennsylvania facility under various subleases which will provide for aggregated lease payments of approximately $3.2 million over the remaining lease periods.
Letters of Credit
As of September 30, 2011, the Company had outstanding letters of credit of $5.0 million as required by its existing insurance policies and facility leases.  These letters of credit are supported by investments in held-to-maturity securities.  See Note 3, Investments in Marketable Securities, for additional detail regarding investments in marketable securities.
Litigation
Due to the nature of the businesses in which the Company is engaged, such as product detailing and the distribution of products, it could be exposed to certain risks. Such risks include, among others, risk of liability for personal injury or death to persons using products the Company promotes or distributes. There can be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company's business activities and recent increases in litigation related to healthcare products, including pharmaceuticals. The Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification provisions with customers (the scope

14

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

of which may vary from customer to customer, and the performance of which is not secured) and insurance. The Company could, however, also be held liable for errors and omissions of its employees in connection with the services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company's liability exceeds the amount of applicable insurance or indemnity.
8.
COMPREHENSIVE LOSS
 A reconciliation of net loss as reported in the unaudited interim condensed consolidated statements of operations to comprehensive loss, net of taxes is presented in the table below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(202
)
 
$
(1,674
)
 
$
(1,648
)
 
$
(4,263
)
Other comprehensive loss:
 

 
 

 
 
 
 
Unrealized holding gain (loss) on available-for-sale securities, net
2

 
(3
)
 
4

 
(4
)
Comprehensive loss
$
(200
)
 
$
(1,677
)
 
$
(1,644
)
 
$
(4,267
)
9.
LONG-TERM LIABILITIES

Long-term liabilities consisted of the following as of September 30, 2011 and December 31, 2010:
 
September 30, 2011
 
December 31, 2010
Rent Payable
$
2,146

 
$
2,374

Uncertain tax positions
2,926

 
4,088

Restructuring
2,828

 
3,435

Contingent earn-out fee
1,482

 
1,557

Other
142

 
94

 
$
9,524

 
$
11,548

See Note 6, Fair Value Measurements, for additional information related to the Group DCA contingent earn-out fee above.
10.
STOCK-BASED COMPENSATION
On March 3, 2011, under the terms of the stockholder-approved PDI, Inc. 2004 Stock Award Incentive Plan (the 2004 Plan), the Compensation and Management Development Committee of the Board (the Compensation Committee) approved grants of restricted stock to certain executive officers and members of senior management of the Company. The full Board approved the portion of these grants made to the Company’s Chief Executive Officer.  As part of the Company's 2010 long-term incentive plan, these grants aggregated 234,598 shares of restricted stock issued with a grant date fair value of $8.44 per share.
The Company recognized $0.4 million and $0.3 million of stock-based compensation expense for the three-month periods ended September 30, 2011 and 2010, respectively and $1.7 million and $1.1 million of stock-based compensation expense for the nine-month periods ended September 30, 2011 and 2010, respectively. The grant date fair values of SARs awards are determined using a Black-Scholes pricing model.  Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience. The following table provides the weighted average assumptions used in determining the fair value of the non-performance based SARs awards granted during the nine-month period ended September 30, 2010

15

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

 
 
Nine Months Ended
 
 
September 30, 2010
Risk-free interest rate
 
1.34%
Expected life
 
3.5 years
Expected volatility
 
51.08%
Dividend yield
 
0.0%
The Company did not issue any SARs awards during the three months ended September 30, 2010 or during the nine-month period ended September 30, 2011.
11.
INCOME TAXES
Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when it provides a better estimate of income tax expense. Due to the Company's valuation allowance position and the existence of a deferred tax liability related to indefinite lived intangibles, it is the Company's position that the discrete method provides a more accurate estimate of income tax expense and therefore income tax expense for the current quarter has been presented using the discrete method.  As the year progresses, the Company refines its estimate based on the facts and circumstances by each tax jurisdiction.  The following table summarizes income tax expense on income from continuing operations and the effective tax rate for the three- and nine-month periods ended September 30, 2011 and 2010
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011

2010
 
2011
 
2010
Provision (benefit) for income tax
$
183

 
$
71

 
$
(672
)
 
$
208

Effective income tax rate
NM

 
14.9
%
 
(29.4
)%
 
13.0
%
 
 
 
 
 
 
 
 
NM - Not meaningful
 
 
 
 
 
 
 
The income tax benefit for the nine-month period ended September 30, 2011 was primarily due to the release of reserves related to uncertain tax positions that were reversed in connection with the closing of the Company's IRS examination for the 2003, 2004 and 2008 tax years, partially offset by state taxes and tax expense associated with the tax amortization of indefinite lived intangibles. Income tax expense for the three month period ended September 30, 2011 was primarily due to state taxes and recording a deferred tax liability for tax amortization of goodwill. Income tax expense for the three- and nine-month periods ended September 30, 2010 was primarily related to state taxes, as the Company and its subsidiaries file separate income tax returns in numerous state and local jurisdictions.
12.
SEGMENT INFORMATION
The accounting policies of the segments are described in Note 1 of the Company’s audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2010.  Corporate charges are allocated to each of the reporting segments on the basis of total salary expense. Corporate charges include corporate headquarters costs and certain depreciation expenses. Certain corporate capital expenditures have not been allocated from the Sales Services segment to the other reporting segments since it is impracticable to do so.
On August 1, 2011 the Company announced the formation of its new business unit, Interpace BioPharma. Interpace BioPharma provides biopharmaceutical clients with full-service product commercialization solutions. These services include full supply chain management, operations, sales, marketing, compliance, and regulatory/medical management. The initial revenue and costs associated with this unit are reflected in the Product Commercialization Services segment for both the three- and nine-month periods ended September 30, 2011.


16

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

 
Sales
Services
 
Marketing
Services
 
Product Commercialization Services
 
Consolidated
Three months ended September 30, 2011:
 
 
 
 
 
 
 
Revenue
$
29,267

 
$
5,129

 
$
2,850

 
$
37,246

Operating income (loss)
$
539

 
$
(875
)
 
$
368

 
$
32

Capital expenditures
$
59

 
$
26

 
$

 
$
85

Depreciation expense
$
375

 
$
93

 
$
2

 
$
470

 
 
 
 
 
 
 
 
Three months ended September 30, 2010:
 
 
 

 
 

 
 

Revenue
$
33,292

 
$
2,680

 
$

 
$
35,972

Operating income (loss)
$
627

 
$
(207
)
 
$

 
$
420

Capital expenditures
$
512

 
$

 
$

 
$
512

Depreciation expense
$
249

 
$
12

 
$

 
$
261

 
 
 
 
 
 
 
 
Nine months ended September 30, 2011:
 
 
 

 
 

 
 

Revenue
$
106,207

 
$
14,233

 
$
3,534

 
$
123,974

Operating income (loss)
$
2,576

 
$
(5,188
)
 
$
452

 
$
(2,160
)
Capital expenditures
$
178

 
$
156

 
$

 
$
334

Depreciation expense
$
1,111

 
$
287

 
$
2

 
$
1,400

 
 
 
 
 
 
 
 
Nine months ended September 30, 2010:
 
 
 

 
 

 
 

Revenue
$
91,937

 
$
8,015

 
$

 
$
99,952

Operating loss
$
(1,247
)
 
$
(484
)
 
$

 
$
(1,731
)
Capital expenditures
$
1,536

 
$

 
$

 
$
1,536

Depreciation expense
$
729

 
$
44

 
$

 
$
773


13.
DISCONTINUED OPERATIONS
On July 19, 2010, the Board approved closing the TVG business unit. The Company completed the closure of the TVG operations during the quarter ended September 30, 2010, including the completion of all active customer contracts. The financial statements reflect the presentation of TVG as a discontinued operation in all periods presented.
The table below presents the significant components of TVG’s results included in Loss from Discontinued Operations in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2011 and 2010, respectively.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011

2010
 
2011
 
2010
Revenue, net
$

 
$
1,317

 
$

 
$
3,232

 
 
 
 
 
 
 
 
Loss from discontinued operations, before income tax
(10
)
 
(2,080
)
 
(48
)
 
(2,454
)
Provision (benefit) for income tax
1

 
1

 
(11
)
 
3

Loss from discontinued operations, net of tax
$
(11
)
 
$
(2,081
)
 
$
(37
)
 
$
(2,457
)
The major classes of assets and liabilities included in the Condensed Consolidated Balance Sheet for TVG as of

17

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

September 30, 2011 and December 31, 2010 are as follows:
 
September 30,
2011
 
December 31,
2010
Current assets
$
39

 
$
277

Non-current assets
300

 
300

Total assets
$
339

 
$
577

Current liabilities
$
363

 
$
816

Non-current liabilities
1,362

 
1,560

Total liabilities
$
1,725

 
$
2,376



18

PDI, Inc.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
 This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act).  Statements that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking statements.  Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar words and expressions.  These forward-looking statements are contained throughout this Form 10-Q.
Forward-looking statements are only predictions and are not guarantees of future performance.  These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  These statements are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement.  Many of these factors are beyond our ability to control or predict.  Such factors include, but are not limited to, the following: 
·
The effects of the current worldwide economy;
·
Changes in outsourcing trends or a reduction in promotional, marketing and sales expenditures in the pharmaceutical, biotechnology and healthcare industries;
·
Our customer concentration risk in light of continued consolidation within the pharmaceutical industry and our current business development opportunities;
·
Early termination of a significant services contract, the loss of one or more of our significant customers or a material reduction in service revenues from such customers;
·
Our ability to obtain additional funds in order to implement our business model;
·
Our ability to successfully integrate the acquisition of the Group DCA business and the effect of this acquisition on our ongoing business;
·
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 arrangements with customers;
·
Competition in our industry;
·
Our ability to attract and retain qualified sales representatives and other key employees and management personnel;
·
Product liability claims against us;
·
Failure to comply with laws and regulations or changes to such laws and regulations by us, our industry or our customers;
·
The sufficiency of our insurance and self-insurance reserves to cover future liabilities;
·
Our ability to successfully develop and generate revenue from product commercialization opportunities;
·
Failure of third-party service providers to perform their obligations to us;
·
Volatility of our stock price and fluctuations in our quarterly revenues and earnings;
·
As a percentage of our stock outstanding, our controlling stockholder continuing to have significant influence, which could delay or prevent a change in corporate control that may otherwise be beneficial to our other stockholders;
·
Our anti-takeover defenses could delay or prevent an acquisition and could adversely affect the price of our common stock;
·
Failure of, or significant interruption to, the operation of our information technology and communication systems; and
·
The results of any future impairment testing for goodwill and other intangible assets.

19

PDI, Inc.

Please see Part I – Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as other documents we file with the United States Securities and Exchange Commission (SEC) from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations as expressed in 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, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
OVERVIEW
We are a leading provider of integrated multichannel outsourced promotional services to established and emerging pharmaceutical, biotechnology and healthcare companies in the United States. We are a leading provider of outsourced sales teams that target healthcare providers, offering a range of complementary sales support services designed to achieve our customers' strategic and financial product objectives. In addition to outsourced sales teams in the United States, we also provide other promotional services, including clinical educator services, digital communications, medical education, teledetailing and with the formation of our new business unit during the second quarter of 2011, Interpace BioPharma, we provide biopharmaceutical clients with full-service product commercialization solutions. These services include full supply chain management, operations, sales, marketing, compliance, and regulatory/medical management. Combined, our services offer customers a range of both personal and non-personal promotional options for the commercialization of their products throughout the product lifecycle, from development through maturity.  We provide innovative and flexible service offerings designed to drive our customers' businesses forward and successfully respond to a continually changing market. Our services provide a vital link between our customers and the medical community through the communication of product information to physicians and other healthcare professionals for use in the care of their patients. We provide these services through three reporting segments: Sales Services; Marketing Services; and Product Commercialization Services (PC Services). These segments are described in detail under the caption Description of Reporting Segments below.
Our business depends in large part on demand from the pharmaceutical, biotechnology and healthcare industries for outsourced promotional services. In recent years, this demand has been impacted by certain industry-wide factors including, among other things, pressures on pricing, successful challenges to intellectual property rights (including the introduction of competitive generic products), a strict regulatory environment, decreased pipeline productivity, a slow-down in the rate of approval of new products by the Food and Drug Administration (FDA) and diminished access to physicians. Additionally, a number of pharmaceutical companies have made changes to their commercial models by reducing the internal number of sales representatives. A significant portion of our revenue is derived from our sales force arrangements with large pharmaceutical companies, and we believe we have benefited from cost control measures implemented by these companies and their resultant increased reliance on outsourced promotional services. Conversely, certain of our Marketing Services customers delayed the implementation or reduced the scope of a number of marketing initiatives. In addition to fluctuations in customer demand, we continue to experience a high degree of customer concentration and this trend may continue as a result of recent and continuing consolidation within the pharmaceutical industry.
On November 3, 2010, we acquired 100% of the membership interest in Group DCA, LLC (Group DCA), a privately held interactive digital communications company serving the pharmaceutical, biotechnology and healthcare industries. Based in Parsippany, New Jersey, Group DCA leverages the strength of the Internet, multimedia, tablet PCs, dimensional direct mail and its proprietary software, DIAGRAMtm, to deliver non-personal selling solutions via interactive communication exchanges that accommodate the schedules of healthcare providers. Group DCA's proprietary software also yields meaningful response data that allows customers the opportunity to better understand the needs and opinions of their audiences and, in turn, the opportunity to market to their audiences more effectively. With the combination of our traditional outsourced promotional services and Group DCA's e-detailing, patient education communications and other digital communications, we expect to be even better positioned to offer customers increased insight and greater engagement, resulting in integrated information and more impactful messages being delivered to healthcare providers across multiple communication channels.
We paid cash (net) of approximately $23.9 million for Group DCA, of which $1.3 million was placed in escrow. As of September 30, 2011, $1.3 million remains in escrow and any remaining amounts will be paid in May 2012, eighteen months from the date of acquisition. The final purchase price is subject to working capital adjustment in accordance with the purchase agreement. The purchase agreement also provides for the members of Group DCA to earn up to an additional $30 million from the date of acquisition through December 31, 2012. These payouts are based on Group DCA's achievement of revenue and gross profit metrics and range up to: $5.0 million in the period ended December 31, 2010; and $12.5 million in each of the years ending December 31, 2011 and 2012. The metrics for payments related to the period ended December 31, 2010 were not achieved.
On March 3, 2011, we announced the launch of a new business unit within our Sales Services segment, EngageCE, which will provide clinical educator services to our customers. The goal of clinical educators is to work with healthcare providers in the

20

PDI, Inc.

management of chronic diseases to optimize patient care and outcomes. We have seen a growing demand for these types of services by our customers and we believe that the clinical educator services provided via EngageCE will complement traditional sales force efforts and enhance our offerings.
On August 1, 2011, we announced the formation of our newest business unit, Interpace BioPharma. Interpace BioPharma provides biopharmaceutical clients with full-service product commercialization solutions. These services include full supply chain management, operations, sales, marketing, compliance, and regulatory/medical management. The revenue and costs associated with this unit are reflected in the PC Services segment for both the three- and nine-month periods ended September 30, 2011.
While we recognize that there is currently significant volatility in the markets in which we provide services, we believe there are opportunities for growth in our Sales Services, Marketing Services and PC Services segments, which provide our customers with the flexibility to successfully respond to a constantly changing market and a means of controlling costs through promotional outsourcing partnerships. In particular, we believe that the significant reduction in the number of pharmaceutical sales representatives within the industry during the past few years is placing increasing demands on our customers' product portfolios, and, therefore, we expect the market share penetration of outsourced sales organizations to increase in order to address these needs. We have recently intensified our focus on strengthening all aspects of the core outsourced pharmaceutical sales teams business that we believe will most favorably position PDI as the best-in-class outsourced promotional services organization in the United States. In addition, we continue to diligently evaluate the risks and rewards of opportunities within our PC Services segment as they arise, while enhancing future value-added service offerings, as well as continuing to evaluate acquisitions that will enhance our current service offerings and provide new business opportunities.
DESCRIPTION OF REPORTING SEGMENTS
For the quarter ended September 30, 2011, our three reporting segments were as follows:
Sales Services, which is comprised of the following business units:
Dedicated Sales Teams;
Shared Sales Teams; and
EngageCE.
Marketing Services, which is comprised of the following business units:
Pharmakon;
Group DCA; and
Voice.
PC Services:
Interpace BioPharma.
 Selected financial information for each of these segments is contained in Note 12, Segment Information, to these interim financial statements and in the discussion under the caption Consolidated Results of Operations.
Nature of Contracts by Segment
Sales Services
Contracts within our Sales Services reporting segment consist primarily of detailing agreements and are nearly all fee-for-service arrangements.  The term of these contracts is typically between one and two years. On occasion, certain contracts have terms that are shorter or longer due to the seasonal nature of the products or at the request of the customer. All agreements, whether or not specifically provided for by terms within the contract, may be renewed or extended upon mutual agreement of the parties as to revised terms for provisions such as pricing, penalties, incentives and performance metrics.
The majority of our Sales Services contracts are terminable by the customer without cause upon 30 days' to 180 days' prior written notice. Additionally, certain contracts may include provisions mandating that such notice may not be provided prior to a pre-determined future date and also provide for termination payments if the customer terminates the agreement without cause. Typically, however, the total compensation provided by minimum service periods (otherwise referred to as minimum purchase obligations) and termination payments within any individual agreement will not fully offset the revenue we would have earned from fully executing the contract or the costs we may incur as a result of its early termination. The loss or termination of multiple Sales Services contracts could have a material adverse effect on our financial condition, results of operations and cash flow.
Our Sales Services contracts generally include standard mutual representations and warranties as well as mutual confidentiality

21

PDI, Inc.

and indemnification provisions, including product liability indemnification for our protection. Most of our contracts also include exclusivity provisions limiting our ability to promote competing products during the contract service period unless consent has been provided by the customer, and may also require the personnel we utilize to be dedicated exclusively to promoting the customer's product for the term of the contract.
Some of our contracts, including contracts with significant customers of ours, may contain performance benchmarks requiring adherence to certain call plan metrics, such as a minimum amount of detailing activity to certain physician targets within a specified time period. Our failure to meet these benchmarks may result in specific financial penalties for us, such as a reduction in our program management fee on our dedicated sales agreements or a discount on the fee we are permitted to charge per detail on our shared sales agreements. Conversely, these same agreements generally include incentive payments that can be earned if our promotional activities generate results that meet or exceed agreed-upon performance targets, both related to call plan adherence as well as increases in the number of prescriptions written by physician targets.
All of our contracts provide for certain reimbursable out-of-pocket expenses such as travel, meals and entertainment or product sample distribution costs, for which we are reimbursed at cost by our customers. Certain contracts may also provide for reimbursement of other types of expenses depending upon the type of services we are providing to the customer.
Marketing Services
Our Marketing Services reporting segment is comprised of our Pharmakon, Group DCA and Voice business units. Our Pharmakon business unit enters into and performs contracts that generally take the form of either master service agreements (MSAs) with a term of one to three years, or contracts specifically related to particular projects with terms equal to the duration of the project (typically two to six months). These contracts include standard representations and warranties as well as confidentiality and indemnification obligations and are generally terminable by the customer for any reason. Upon termination, the customer is generally responsible for payment of all work completed to date, plus the cost of any nonrefundable commitments made by us on behalf of the customer. There is significant customer concentration in our Pharmakon business, and the loss or termination of one or more of Pharmakon's large MSAs could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Group DCA business unit enters into and performs contracts with our major customers that generally take the form of MSAs and typically have a term of one to three years.  These contracts include standard representations and warranties, as well as confidentiality and indemnification obligations, and are generally terminable by the customer or us for any reason.  There is significant customer concentration within our Group DCA business unit. 
Our Voice business unit enters into and provides services under contracts with terms typically of two to six months. These contracts include standard representations and warranties as well as confidentiality and indemnification obligations and are generally terminable by either party for any reason with notice. Upon termination, the customer is generally responsible for payment of all work completed to date, plus the cost of any nonrefundable commitments made by us on behalf of the customer.
PC Services 
Our PC Services segment currently consists of our Interpace BioPharma business unit. Interpace BioPharma provides biopharmaceutical clients with full-service product commercialization solutions. These services include full supply chain management, operations, sales, marketing, compliance, and regulatory/medical management. There is significant customer concentration within our Interpace BioPharma business unit. 










22

PDI, Inc.



CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data as a percentage of revenue, net (Sales). The trends illustrated in this table may not be indicative of future results.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Revenue, net
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of services
78.1
 %
 
76.4
 %
 
78.9
 %
 
77.2
 %
Gross profit
21.9
 %
 
23.6
 %
 
21.1
 %
 
22.8
 %
 
 
 
 
 
 
 
 
Compensation expense
12.5
 %
 
12.6
 %
 
13.6
 %
 
13.5
 %
Other selling, general and administrative expenses
9.4
 %
 
9.9
 %
 
9.3
 %
 
10.4
 %
Facilities realignment
 %
 
 %
 
 %
 
0.6
 %
Total operating expenses
21.9
 %
 
22.4
 %
 
22.8
 %
 
24.5
 %
Operating income (loss)
 %
 
1.2
 %
 
(1.7
)%
 
(1.7
)%
 
 
 
 
 
 
 
 
Other (loss) income, net
(0.1
)%
 
0.2
 %
 
(0.1
)%
 
0.1
 %
Income (loss) from continuing operations before income tax
 %
 
1.3
 %
 
(1.8
)%
 
(1.6
)%
Provision (benefit) for income tax
0.5
 %
 
0.2
 %
 
(0.5
)%
 
0.2
 %
Loss from continuing operations
(0.5
)%
 
1.1
 %
 
(1.3
)%
 
(1.8
)%
Loss from discontinued operations, net of tax
 %
 
(5.8
)%
 
 %
 
(2.5
)%
Net loss
(0.5
)%
 
(4.7
)%
 
(1.3
)%
 
(4.3
)%

23

PDI, Inc.

Group DCA Accounting Impacts
On the date of the Group DCA acquisition, we outlined certain acquisition accounting related items that would impact the Group DCA operating results in the future. The following is an updated summary of how accounting related to the Group DCA acquisition will impact our reported results:
As of the purchase date, Group DCA had deferred revenue on its historical closing balance sheet. Had Group DCA not been purchased, that amount would be recorded as revenue by Group DCA as projects were completed through 2011. However, as required by the rules of acquisition accounting, a large part of the deferred revenue at the date of the acquisition did not carry over to PDI after the acquisition, the majority of which impacts 2011, making reported revenue for the first nine months of 2011 lower than we believe it will be on a normal go-forward basis.
Acquisition accounting requires ongoing amortization of finite lived intangibles acquired and valued for accounting purposes as of the date of the acquisition. These include the acquired proprietary technology and the extensive health care provider database. Amortization of these intangibles will result in annual charges of approximately $0.9 million.
The accounting for potential earn-out payments is influenced by acquisition accounting. Up to $5.0 million of the potential $30.0 million of earn-out payments must be charged against earnings as they are earned over 2011 and 2012. However, in determining the amount that was recorded in the initial purchase price, acquisition accounting required the Company to estimate the fair value for the remainder of the $25.0 million of potential earn-out payments which we determined by estimating the present value of earn-out payments we think are probable on a weighted risk-adjusted basis. The amount we recorded as the fair value of these estimated earn-out payments was $1.6 million, which is considered part of the initial purchase price for accounting purposes. During the quarter ended June 30, 2011 we recognized a benefit of $0.2 million in our Marketing Services segment, as the amount we expect to pay as of September 30, 2011 is lower than our original estimate. Going forward, any difference between our September 30, 2011 estimate and our updated estimates of expected payments in 2012 and 2013 will be adjusted through the statement of operations. This will result in a charge if the amounts we expect to pay are higher than our September 30, 2011 estimate or an additional gain if the amounts we expect to pay are lower than our September 30, 2011 estimate.
Results of Continuing Operations for the Quarter Ended September 30, 2011 Compared to the Quarter Ended September 30, 2010
Overview
We operate in three business segments: Sales Services; Marketing Services; and Product Commercialization Services. While our quarter to quarter results can be impacted by the start or completion/termination of contracts, as was the case in the third quarter of 2011, we believe that long term trends in the pharmaceutical industry will result in a higher level of outsourcing of the types of services we provide.
 Revenue, net (in thousands)
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2011
 
2010
 
Change ($)
 
Change (%)
Sales Services
$
29,267

 
$
33,292

 
$
(4,025
)
 
(12.1
)%
Marketing Services
5,129

 
2,680

 
2,449

 
91.4
 %
PC Services
2,850

 

 
2,850

 

Total
$
37,246

 
$
35,972

 
$
1,274

 
3.5
 %
Consolidated revenue, net (revenue) for the quarter ended September 30, 2011 increased by $1.3 million, or 3.5%, to $37.2 million, compared to the quarter ended September 30, 2010. This increase was primarily attributable to the new contract in our PC Services segment and an increase in our Marketing Services segment revenue due to the addition of Group DCA.
Revenue in our Sales Services segment for the quarter ended September 30, 2011 decreased by $4.0 million, or 12.1%, to $29.3 million, compared to the quarter ended September 30, 2010. The decrease in Sales Services revenue was primarily due to new business wins in the second half of 2010 and 2011 of $7.5 million being more than offset by non-renewal of contracts totaling $10.5 million and a reduction in revenue from existing contracts of approximately $1.0 million.
Revenue in our Marketing Services segment for the quarter ended September 30, 2011 increased by $2.4 million, or 91.4%, to $5.1 million, compared to the quarter ended September 30, 2010.  This increase was primarily attributable to the addition of Group DCA, partially offset by a decrease of $1.3 million in revenue in our Pharmakon business unit when compared to the quarter ended September 30, 2010.

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PDI, Inc.

Revenue in our PC Services segment for the quarter ended September 30, 2011 of $2.9 million is related to our new fee for service arrangement. There was no revenue in the PC Services segment for the quarter ended September 30, 2010, as there were no ongoing product commercialization activities during that period.
Cost of services (in thousands)
Three Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2011
 
2010
 
Change ($)
 
Change (%)
Sales Services
$
23,693

 
$
25,955

 
$
(2,262
)
 
(8.7
)%
Marketing Services
3,056

 
1,534

 
1,522

 
99.2
 %
PC Services
2,324

 

 
2,324

 
NA

Total
$
29,073

 
$
27,489

 
$
1,584

 
5.8
 %

Consolidated cost of services for the quarter ended September 30, 2011 increased by $1.6 million, or 5.8%, to $29.1 million, compared to the quarter ended September 30, 2010. This increase was due to our new fee for service arrangement in our PC Services segment and the fourth quarter 2010 addition of Group DCA to our Marketing Services segment.
Cost of services in our Sales Services segment for the quarter ended September 30, 2011 decreased by $2.3 million, or 8.7%, to $23.7 million, compared to the quarter ended September 30, 2010. This decrease was directly attributable to the decrease in revenue discussed above.
Cost of services in our Marketing Services segment for the quarter ended September 30, 2011 increased by $1.5 million, or 99.2%, to $3.1 million, compared to the quarter ended September 30, 2010. The increase was attributable to $2.2 million of Group DCA cost of services, partially offset by reductions of $0.1 million at our Voice business unit and $0.5 million at our Pharmakon business unit, which was directly attributable to decreases in the number of programs/meetings executed.
Cost of services in our PC Services segment for the quarter ended September 30, 2011 was $2.3 million. There was no cost of services in the PC Services segment for the quarter ended September 30, 2010, as there were no ongoing product commercialization activities during that period.
Gross profit (in thousands)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Sales
 
% of
 
Marketing
 
% of
 
PC
 
 
% of
 
 
 
% of
September 30,
 
Services
 
Sales
 
Services
 
Sales
 
Services
 
Sales
 
Total
 
Sales
2011
 
$
5,574

 
19.0
%
 
$
2,073

 
40.4
%
 
$
526

 
18.5
%
 
$
8,173

 
21.9
%
2010
 
7,337

 
22.0
%
 
1,146

 
42.8
%
 

 

 
8,483

 
23.6
%
Change
 
$
(1,763
)
 
 

 
$
927

 
 

 
$
526

 
 

 
$
(310
)
 
 


Consolidated gross profit for the quarter ended September 30, 2011 decreased by $0.3 million, or 3.7%, to $8.2 million, compared to the quarter ended September 30, 2010. The change in consolidated gross profit was primarily attributable to our Shared Sales business unit and decline in revenue at our Pharmakon business unit.
The gross profit percentage in our Sales Services segment for the quarter ended September 30, 2011 decreased to 19.0%, from 22.0% in the quarter ended September 30, 2010. The decrease was primarily attributable to the decline in margin within our Shared Sales business unit as a result of fixed management costs over lower revenues in the quarter ended September 30, 2011.
The gross profit percentage in our Marketing Services segment for the quarter ended September 30, 2011 decreased to 40.4%, compared to 42.8% in the quarter ended September 30, 2010. This decrease was primarily attributable to the decline in revenue at our Pharmakon business unit over certain fixed costs.
Gross profit in our PC Services segment for the quarter ended September 30, 2011 was approximately $0.5 million. There was no gross profit in the PC Services segment for the quarter ended September 30, 2010, as there were no ongoing product commercialization activities during that period.

25

PDI, Inc.

Compensation expense (in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Sales
 
% of
 
Marketing
 
% of
 
PC
 
% of
 
 
 
% of
September 30,
 
Services
 
Sales
 
Services
 
Sales
 
Services
 
Sales
 
Total
 
Sales
2011
 
$
2,990

 
10.2
%
 
$
1,580

 
30.8
%
 
$
76

 
2.7
%
 
$
4,646

 
12.5
%
2010
 
3,623

 
10.9
%
 
895

 
33.4
%
 

 

 
4,518

 
12.6
%
Change
 
$
(633
)
 
 

 
$
685

 
 

 
$
76

 
 

 
$
128

 
 

 
Consolidated compensation expense for the quarter ended September 30, 2011 increased by $0.1 million, to $4.6 million, compared to the quarter ended September 30, 2010. As a percentage of consolidated revenue, consolidated compensation expense remained essentially flat, decreasing slightly to 12.5% for the quarter ended September 30, 2011, from 12.6% for the quarter ended September 30, 2010.
Compensation expense in our Sales Services segment for the quarter ended September 30, 2011 was relatively flat compared to the quarter ended September 30, 2010.  As a percentage of segment revenue, compensation expense decreased 0.7%, to 10.2% for the quarter ended September 30, 2011, from 10.9% for the quarter ended September 30, 2010. The decline in segment compensation expense as a percent of segment revenue was primarily driven by the decrease in incentive compensation accrued in the quarter ended September 30, 2011.
Compensation expense in our Marketing Services segment for the quarter ended September 30, 2011 increased by $0.7 million, to $1.6 million, compared to the quarter ended September 30, 2010.   As a percentage of segment revenue, compensation expense decreased 2.6%, to 30.8% for the quarter ended September 30, 2011, from 33.4% for the quarter ended September 30, 2010. The decrease in segment compensation expense as a percentage of segment revenue was primarily due to the addition of Group DCA.
Compensation expense in our PC Services segment for the quarter ended September 30, 2011 of $0.1 million is attributable to the allocation of corporate support costs. There was no compensation expense for the quarter ended September 30, 2010, as there were no ongoing product commercialization activities during that period.
Other selling, general and administrative expenses (in thousands)
 
 
 
 
 
 
Three Months Ended
 
Sales
 
% of
 
Marketing
 
% of
 
PC
 
% of
 
 
 
% of
September 30,
 
Services
 
Sales
 
Services
 
Sales
 
Services
 
Sales
 
Total
 
Sales
2011
 
$
2,045

 
7.0
%
 
$
1,368

 
26.7
%
 
$
82

 
2.9
%
 
$
3,495

 
9.4
%
2010
 
3,087

 
9.3
%
 
458

 
17.1
%
 

 

 
3,545

 
9.9
%
Change
 
$
(1,042
)
 
 

 
$
910

 
 

 
$
82

 
 

 
$
(50
)
 
 


Consolidated other selling, general and administrative expenses for the quarter ended September 30, 2011 decreased by $0.1 million, to $3.5 million, compared to the quarter ended September 30, 2010. As a percentage of consolidated revenue, consolidated other selling, general and administrative expenses decreased to 9.4% for the quarter ended September 30, 2011, from 9.9% in the quarter ended September 30, 2010, due to the increase in consolidated revenue.
Other selling, general and administrative expenses in our Sales Services segment for the quarter ended September 30, 2011 decreased by $1.0 million, to $2.0 million, compared to the quarter ended September 30, 2010. As a percentage of segment revenue, other selling, general and administrative expenses decreased 2.3%, to 7.0% for the quarter ended September 30, 2011, from 9.3% in the quarter ended September 30, 2010. This decrease was primarily attributable to lower allocated corporate costs in the three months ended September 30, 2011 as compared to the allocated corporate costs in the three months ended September 30, 2010, which included $0.7 million of Group DCA acquisition related costs.
Other selling, general and administrative expenses in our Marketing Services segment for the quarter ended September 30, 2011 increased by $0.9 million compared to the quarter ended September 30, 2010 due to the addition of Group DCA. Other selling, general and administrative expenses as a percentage of revenue increased 9.6%, to 26.7% for the quarter ended September 30, 2011, from 17.1% in the quarter ended September 30, 2010 due to the addition of Group DCA.
Other selling, general and administrative expense in our PC Services segment for the quarter ended September 30, 2011 of $0.1 million is attributable to the allocation of corporate support activities. There was no other selling, general and administrative expense for the quarter ended September 30, 2010, as there were no ongoing product commercialization activities during that period.
Operating income

26

PDI, Inc.

We had operating income of $32,000 and $0.4 million for the quarters ended September 30, 2011 and 2010, respectively.  The decrease in operating income was primarily due to the third quarter operating income of our PC Services segment being more than offset by the loss associated with our Group DCA business unit.
Provision for income tax
We had income tax expense of approximately $0.2 million for the quarter ended September 30, 2011, compared to income tax expense of $0.1 million for the quarter ended September 30, 2010. Income tax expense for the quarters ended September 30, 2011 and 2010 was primarily due to state and local taxes as we and our subsidiaries file separate income tax returns in numerous state and local jurisdictions.
Results of Continuing Operations for the Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
 Revenue, net (in thousands)
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2011
 
2010
 
Change ($)
 
Change (%)
Sales Services
$
106,207

 
$
91,937

 
$
14,270

 
15.5
%
Marketing Services
14,233

 
8,015

 
6,218

 
77.6
%
PC Services
3,534

 

 
3,534

 

Total
$
123,974

 
$
99,952

 
$
24,022

 
24.0
%
Consolidated revenue for the nine-month period ended September 30, 2011 increased by $24.0 million, or 24.0%, to $124.0 million, compared to the nine-month period ended September 30, 2010. This increase was primarily attributable to new business wins in our Sales Services segment on a year-over-year basis, an increase in our Marketing Services segment revenue due to the addition of Group DCA and the increase in our PC Services segment revenue as a result of our new contract within that segment.
Revenue in our Sales Services segment for the nine-month period ended September 30, 2011 increased by $14.3 million, or 15.5%, to $106.2 million, compared to the nine-month period ended September 30, 2010. The increase in Sales Services revenue was primarily due to business wins in the second half of 2010 totaling approximately $27.9 million and 2011 new business wins of $5.5 million, partially offset by a reduction in revenue from the expiration of certain existing contracts and the reduction in size of certain other existing contracts totaling approximately $19.1 million.
Revenue in the Marketing Services segment for the nine-month period ended September 30, 2011 increased by $6.2 million, or 77.6%, to $14.2 million, compared to the nine-month period ended September 30, 2010.  This increase was primarily attributable to the addition of $8.8 million of revenue from Group DCA, partially offset by revenue from our Pharmakon business unit decreasing approximately $2.6 million compared to the nine-month period ended September 30, 2010. Pharmakon’s decrease in revenue, net was the result of a decrease in program attendee revenue of $1.2 million, a decrease in direct mail campaign revenue of $0.9 million, and a decrease of $0.5 million in other ancillary revenues.  
Revenue in the PC Services segment for the nine-months ended September 30, 2011 was $3.5 million related to our new fee for service arrangement. There was no revenue in the PC Services segment in the nine-month period ended September 30, 2010, as there were no ongoing product commercialization activities during that period.
Cost of services (in thousands)
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2011
 
2010
 
Change ($)
 
Change (%)
Sales Services
$
85,494

 
$
72,454

 
$
13,040

 
18.0
%
Marketing Services
9,610

 
4,755

 
4,855

 
102.1
%
PC Services
2,724

 

 
2,724

 

Total
$
97,828

 
$
77,209

 
$
20,619

 
26.7
%

Consolidated cost of services for the nine-month period ended September 30, 2011 increased by $20.6 million, or 26.7%, to $97.8 million, compared to the nine-month period ended September 30, 2010. This increase was due to higher program expenses in the Sales Services segment in support of the increased revenues discussed above, the fourth quarter 2010 addition of Group DCA to our Marketing Services segment and costs associated with our new fee for service arrangement in our PC Services

27

PDI, Inc.

segment.
Cost of services in our Sales Services segment for the nine-month period ended September 30, 2011 increased by $13.0 million, or 18.0%, to $85.5 million, compared to the nine-month period ended September 30, 2010. This increase was directly attributable to the higher number of Sales Services engagements, which require a significant increase in headcount in order to deliver the additional services. The higher headcount resulted in corresponding increases in costs related to: recruiting, hiring and training new employees; employee compensation; employee-related benefits; automobile lease expense; and reimbursable travel expenses such as mileage and gas.
Cost of services in our Marketing Services segment for the nine-month period ended September 30, 2011 increased by $4.9 million, or 102.1%, to $9.6 million, compared to the nine-month period ended September 30, 2010. The increase was attributable to $6.7 million of Group DCA cost of services, partially offset by reductions of $0.8 million at our Voice business unit and $0.7 million at our Pharmakon business unit, which was directly attributable to decreases in the number of programs/meetings executed.
Cost of services in our PC Services segment for the nine-month period ended September 30, 2011 was approximately $2.7 million. There was no cost of services for this segment in nine-month period ended September 30, 2010, as there was no ongoing product commercialization activity during that