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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to _______
Commission File Number 0-24249
PROFESSIONAL DETAILING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2919486
- --------------------------- ------------------------
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of organization)
10 Mountainview Road
Upper Saddle River, New Jersey 07458
------------------------------------
(Address of principal executive office)
(201) 258-8450
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 10, 1998 the Registrant had a total of 10,689,562 shares of
Common Stock, $.01 par value, outstanding.
INDEX
PROFESSIONAL DETAILING, INC.
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Balance Sheets
December 31, 1997 and September 30, 1998................... 3
Statements of Operations -- Three and
Nine Months Ended September 30, 1997 and 1998.............. 4
Statements of Cash Flows -- Nine Months
Ended September 30, 1997 and 1998.......................... 5
Notes to Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations....................... 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 16
SIGNATURES ........................................................... 18
2
PROFESSIONAL DETAILING, INC.
BALANCE SHEETS
(unaudited)
As Of
----------------------------
December 31, September 30,
1997 1998
---- ----
Assets
Current assets:
Cash and cash equivalents .................................. $ 5,759,918 $ 54,316,486
Short-term investments ..................................... -- 1,000,000
Contract payments receivable ............................... 2,073,356 5,813,967
Unbilled costs and accrued profits on contracts in
progress ................................................ 3,332,766 5,921
Receivable from affiliate, net ............................. 27,161 --
Deferred training .......................................... 407,255 1,104,882
Other current assets ....................................... 297,032 757,750
------------ ------------
Total current assets ................................ 11,897,488 62,999,006
Net property, plant & equipment ............................ 547,377 2,083,202
------------ ------------
Total assets ............................................... $ 12,444,865 $ 65,082,208
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ........................................... $ 473,832 $ 1,057,311
Payable to affiliate, net .................................. -- 189,005
Note payable ............................................... 68,365 --
Accrued incentives ......................................... 2,806,839 5,333,854
Accrued salaries and wages ................................. 1,417,789 2,232,412
Unearned contract revenue .................................. 6,635,769 6,689,444
Other accrued expenses ..................................... 2,117,330 3,396,644
------------ ------------
Total current liabilities ........................... 13,519,924 18,898,670
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding,
1997 - 7,464,562 and September 30, 1998 - 10,684,562 .... 74,646 106,846
Additional paid-in capital ................................. 4,193,852 46,501,949
Retained earnings (deficit) ................................ (5,241,735) 1,070,610
Deferred compensation ...................................... (101,822) (67,873)
Loan to officer ............................................ -- (1,427,994)
------------ ------------
Total shareholders' equity (deficit) ................ (1,075,059) 46,183,538
------------ ------------
Total liabilities & shareholders' equity ................... $ 12,444,865 $ 65,082,208
============ ============
The accompanying notes are an integral part of these financial statements
3
PROFESSIONAL DETAILING, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue .......................................... $ 15,736,652 $ 24,608,978 $ 38,217,688 $ 70,187,995
Program expenses (including related party
amounts of $331,823 and $480,501 for
the quarters ended September 30, 1997 and 1998,
and $1,106,197 and $1,496,449 for the nine
months ended September 30, 1997 and 1998) ..... 11,509,197 19,162,103 30,553,620 52,955,538
------------ ------------ ------------ ------------
Gross profit ..................................... 4,227,455 5,446,875 7,664,068 17,232,457
Compensation expense ............................. 1,260,958 2,511,593 3,780,273 6,781,724
Bonus to majority shareholder .................... 560,750 -- 1,682,250 --
Stock grant expense .............................. -- -- 4,470,000 --
Other general, selling, and administrative
expenses ...................................... 744,134 1,389,550 2,062,679 2,850,258
------------ ------------ ------------ ------------
Total general, selling and administrative
expenses ...................................... 2,565,842 3,901,143 11,995,202 9,631,982
------------ ------------ ------------ ------------
Operating income (loss) .......................... 1,661,613 1,545,732 (4,331,134) 7,600,475
Other income, net ................................ 60,807 788,796 109,744 1,343,181
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes .. 1,722,420 2,334,528 (4,221,390) 8,943,656
Provision for income taxes ....................... -- 933,811 -- 969,013
------------ ------------ ------------ ------------
Net income (loss) ................................ $ 1,722,420 $ 1,400,717 $ (4,221,390) $ 7,974,643
============ ============ ============ ============
Basic net income (loss) per share ................ $ 0.23 $ 0.13 $ (0.57) $ 0.89
============ ============ ============ ============
Diluted net income (loss) per share .............. $ 0.23 $ 0.13 $ (0.57) $ 0.88
============ ============ ============ ============
Basic weighted average number
of shares outstanding ......................... 7,464,562 10,684,562 7,464,562 9,007,126
============ ============ ============ ============
Diluted weighted average number
of shares outstanding ......................... 7,464,562 10,857,585 7,464,562 9,122,128
============ ============ ============ ============
Pro forma data (see note 3)
Income (loss) before provision for taxes ......... $ 1,722,420 $ (4,221,390) 8,943,656
Pro forma provision for income tax ............... -- -- 3,577,462
------------ ------------ ------------
Pro forma net income (loss) ...................... $ 1,722,420 $ (4,221,390) $ 5,366,194
============ ============ ============
Pro forma basic net income (loss) per share ...... $ 0.23 $ (0.57) $ 0.60
============ ============ ============
Pro forma diluted net income (loss) per share .... $ 0.23 $ (0.57) $ 0.59
============ ============ ============
Pro forma basic weighted average
number of shares outstanding .................. 7,464,562 7,464,562 9,007,126
============ ============ ============
Pro forma diluted weighted average
number of shares outstanding .................. 7,464,562 7,464,562 9,122,128
============ ============ ============
The accompanying notes are an integral part of these financial statements
4
PROFESSIONAL DETAILING, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------------
1997 1998
---- ----
Cash Flows From Operating Activities
Net income (loss) from operations ............................ $ (4,221,390) $ 7,974,643
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation .......................................... 90,271 210,528
Non-cash compensation expense - stock grant
to officer ......................................... 4,050,000 --
Deferred compensation ................................. 30,710 33,949
Other changes in assets and liabilities:
(Increase) decrease in contract payments receivable ... (1,110,928) (3,740,611)
(Increase) decrease in unbilled costs ................. (440,247) 3,326,845
(Increase) decrease in deferred training .............. (375,872) (697,627)
(Increase) decrease in other current assets ........... 234,963 (460,718)
Increase (decrease) in accounts payable ............... (368,138) 583,479
Increase (decrease) in accounts payable to affiliate .. 490,467 216,166
Increase (decrease) in accrued liabilities ............ 3,015,498 4,620,952
Increase (decrease) in unearned contract revenue ...... 2,348,764 53,675
------------ ------------
Net cash provided by operating activities .................... 3,744,098 12,121,281
------------ ------------
Cash Flows From Investing Activities
Purchase of short-term investments .................... -- (1,000,000)
Purchase of property and equipment .................... (147,311) (1,746,353)
------------ ------------
Net cash used in investing activities ........................ (147,311) (2,746,353)
------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of note payable ................ 100,000 --
Payments on note payable .............................. (23,765) (68,365)
Distributions to S Corporation shareholders ........... -- (5,846,325)
Net proceeds from the issuance of common stock ........ -- 46,524,324
Loan to shareholder ................................... -- (1,427,994)
------------ ------------
Net cash provided by financing activities .................... 76,235 39,181,640
------------ ------------
Net increase in cash and cash equivalents .................... 3,673,022 48,556,568
Cash and cash equivalents - beginning ........................ 2,403,011 5,759,918
------------ ------------
Cash and cash equivalents - ending ........................... $ 6,076,033 $ 54,316,486
============ ============
The accompanying notes are an integral part of these financial statements
5
Professional Detailing, Inc.
Notes to Interim Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements and related notes
should be read in conjunction with the financial statements of Professional
Detailing, Inc. (the "Company") and related notes as included in the Company's
Prospectus dated May 19, 1998 (the "Prospectus") filed with the Securities and
Exchange Commission in conjunction with the Company's initial public offering.
The unaudited interim financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The unaudited interim financial statements include all adjustments (consisting
only of normal recurring adjustments) which, in the judgement of management, are
necessary for a fair presentation of such financial statements. Operating
results for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
2. Initial Public Offering of Common Stock
On May 19, 1998, the Company completed its initial public offering (the
"IPO") of 3,220,000 shares of Common Stock (including 420,000 shares in
connection with the exercise of the underwriters' over-allotment option) at a
price per share of $16.00. Net proceeds to the Company after expenses of the IPO
were approximately $46.5 million. As disclosed in the Prospectus, the Company
made a distribution of $5.8 million to the S Corporation shareholders,
representing shareholders' equity of the Company as of March 31, 1998, plus the
earnings of the Company from April 1, 1998 to May 18, 1998.
The Company was subject to taxation under Subchapter S of the Internal
Revenue Code. Certain events, including the Offering, automatically terminated
the Company's S Corporation status thereby subjecting the Company to Federal and
state income taxes. The net deferred income tax liability recorded as a one time
income tax provision for the nine months ended September 30, 1998, in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes," which
represents the tax effect of the cumulative differences between the financial
reporting and income tax basis of certain assets and liabilities as of the
termination of the S Corporation status, was immaterial.
3. Pro Forma Information
As a result of the termination of its status as an S Corporation, the
Company is subject to Federal and state income taxes. Accordingly, for
informational purposes, the accompanying statements of operations for the three
months ended September 30, 1997 and the nine months ended September 30, 1997 and
1998 include a pro forma adjustment for the income taxes which would have been
recorded if the Company had been a C Corporation for the entire period based on
the tax laws in effect during the respective periods.
6
4. Historical and Pro Forma Basic and Diluted Net Income (Loss) Per Share
Historical and pro forma basic and diluted net income (loss) per share was
calculated based on the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the three month and nine month periods ended
September 30, 1997 and 1998 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1998 1997 1998
---- ---- ---- ----
Average shares outstanding - basic 7,464,562 10,684,562 7,464,562 9,007,126
Dilutive effect of stock options -- 173,023 -- 115,002
---------- ---------- ---------- ----------
Average shares outstanding - diluted 7,464,562 10,857,585 7,464,562 9,122,128
========== ========== ========== ==========
For the three and nine month periods ended September 30, 1997, outstanding
options to purchase 67,181 shares of common stock with an exercise price of
$1.61 per share have not been included in the computation of historical and pro
forma net loss per share because to do so would have been antidilutive.
5. New Accounting Pronouncements
The Financial Accounting Standards Board released in June 1998, Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This statement
addresses the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. As the
Company has not entered into transactions involving derivative instruments, the
Company does not believe that the adoption of this new statement will have a
material effect on the Company's financial statements.
In the second quarter of 1998, the Accounting Standard Executive Committee
of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities." This statement provides guidance on financial reporting of
start-up costs and organizational costs. This Statement of Position is effective
for financial statements for fiscal years beginning after December 15, 1998.
This Statement of Position requires start-up costs to be expensed as incurred.
The Company does not believe that the adoption of this Statement of Position
will have a material impact on the Company's financial statements.
7
6. Stock Option Grants
During the second quarter of 1998, the Company granted 345,168 incentive
stock options to its employees and 22,500 non-qualified stock options to its
directors at an exercise price of $16.00 per share, the fair market value of
such stock on the date of grant. The grant was made pursuant to the Company's
1998 Stock Option Plan. One third of the employees' options will vest and become
exercisable on each of May 18, 1999, 2000 and 2001. The directors' options vest
and become exercisable one third on the date of grant, and one third on each of
May 19, 1999 and 2000. All stock options granted during the second quarter of
1998 will expire on May 18, 2008 or such earlier date as provided for in the
stock option agreements.
8
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, 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 the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded by the Company or any other
person that the objectives and plans of the Company will be achieved. Factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements include, but are not limited to, the
factors set forth in "Risk Factors," Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," found in the
Company's Prospectus, dated May 19, 1998, relating to its initial public
offering of Common Stock (the "IPO"), as filed with the Securities and Exchange
Commission.
GENERAL
Professional Detailing, Inc. (the "Company" or "PDI") is a leading
provider of comprehensive customized sales solutions on an outsource basis to
the United States pharmaceutical industry. The Company's primary objective is to
enhance its leadership position in the growing contract sales organization
("CSO") industry and to become the premier supplier of comprehensive sales
solutions to the pharmaceutical industry and other segments of the healthcare
market. The Company has demonstrated strong internal growth generated by
securing new business from leading pharmaceutical companies and by renewing and
expanding programs with existing clients. PDI is engaged by its clients to
design and implement customized product detailing programs for both prescription
and OTC pharmaceutical products, and believes that it is one of the largest CSOs
operating in the United States measured both by revenue and number of sales
representatives used in programs.
Given the Company's customized approach to its business, the Company
utilizes a variety of contract structures with its clients. Generally, contracts
provide for a fee to be paid based on the Company delivering a specified package
of services. Contracts typically include performance
9
benchmarks, such as a minimum number of sales representatives or a minimum
number of calls. Under certain contracts, the Company may be entitled to
additional compensation based upon the success of the program and/or subject to
penalties for failing to meet stated performance benchmarks. In addition,
contracts typically provide that the Company is entitled to a fee for each sales
representative hired by the client during or at the conclusion of a program.
Revenue is earned primarily by performing services under contracts and is
recognized as the services are performed and the right to receive payment for
such service is assured. Program expenses consist primarily of the costs
associated with the execution of a detailing program. Such expenses include
personnel costs and the initial direct costs associated with staffing a program.
Personnel costs, which constitute the largest portion of program expenses,
include all labor related costs, such as salaries, bonuses, fringe benefits and
payroll taxes for the sales representatives and managers who are directly
responsible for the rendering of services in connection with a particular
program. Initial direct program costs are those costs associated with initiating
a program, such as recruiting, hiring and training sales representatives who
staff a particular program. All personnel costs and initial direct program
costs, other than training costs, are expensed as incurred. Training costs
include costs of training the sales representatives and managers on a particular
program. Training costs are deferred and amortized on a straight-line basis over
the shorter of (i) the life of the contract to which they relate, or (ii) 12
months. The Company may incur significant initial direct costs prior to
recognizing revenue under a particular contract.
General, selling and administrative expenses include compensation expense,
bonus to majority shareholder, stock grant expense and other general, selling
and administrative expenses. Compensation expense consists primarily of salaries
and related fringe benefits for senior management and other administrative,
marketing, finance, information technology, recruiting and human resources
personnel who are not directly involved with the execution of a particular
program. Bonus to majority shareholder reflects the cash bonus paid to the
Company's majority shareholder and Chairman of the Board, John P. Dugan. The
Company will not pay bonuses to Mr. Dugan in any future periods. Stock grant
expense reflects the non-cash, non-recurring charges related to the grant of
1,119,684 shares of Common stock to the Company's President and Chief Executive
Officer, Charles T. Saldarini. Finally, other general, selling and
administrative expenses include corporate overhead such as facilities costs,
depreciation and amortization expenses and professional services fees.
The Company's growth strategy emphasizes: (i) enhancing its leadership
position in the growing CSO market by maintaining its historic focus on
high-quality contract sales services and by continuing to build and invest in
the Company's core competencies and operations; (ii) expanding both its
relationship with existing clients and its selling efforts to capture new
clients; (iii) offering additional promotional, marketing and educational
services and further developing its existing detailing services; (iv) entering
new geographic markets; and (v) investigating and pursuing appropriate
acquisitions of detailing or detailing-related companies.
The Company completed an initial public offering of 2,800,000 shares of
its common stock at $16.00 per share on May 19, 1998. Additionally, 420,000
shares of common stock were purchased from the Company at $16.00 per share by
the underwriters upon exercise of an over-allotment option. The net proceeds to
the Company, after deducting underwriting discounts and estimated expenses, were
approximately $46.5 million. The Company also granted 367,668 stock options on
May 18, 1998 to officers, directors and key employees in accordance with its
1998 Stock Option Plan. Additionally, the Company made $5.8 million of
distributions to the S Corporation shareholders, representing shareholders'
equity of the Company as of March 31, 1998 plus the earnings of the Company from
April 1, 1998 to May 18, 1998.
10
Prior to its IPO, the Company was an S Corporation and not subject to
Federal or New Jersey state income taxes other than a New Jersey state corporate
tax of approximately 2%. Accordingly, during such period the net income of the
Company has been reported by and taxed directly to the Company's shareholders,
rather than the Company. Pro forma net income has been computed as if the
Company had been subject to Federal and state corporate income taxes based on
the tax laws in effect during the representative periods.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
statements of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future results.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue ........................ 100.0% 100.0% 100.0% 100.0%
Program expenses ............... 73.1 77.9 79.9 75.5
------ ------ ------ ------
Gross profit ................... 26.9 22.1 20.1 24.5
Compensation expense ........... 8.0 10.2 9.9 9.6
Bonus to majority shareholder... 3.6 -- 4.4 --
Stock grant expense ............ -- -- 11.7 --
Other general, selling, &
administrative expenses.... 4.7 5.6 5.4 4.1
------ ------ ------ ------
Total general, selling &
administrative expenses.... 16.3 15.8 31.4 13.7
------ ------ ------ ------
Operating income (loss) ........ 10.6 6.3 (11.3) 10.8
Other income, net .............. 0.3 3.2 0.3 1.9
------ ------ ------ ------
Income before provision for
taxes .......................... 10.9 9.5 (11.0) 12.7
Provision for income taxes ..... -- 3.8 -- 1.4
------ ------ ------ ------
Net Income (loss) .............. 10.9% 5.7% (11.0)% 11.3%
====== ====== ====== ======
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Revenue. Revenue for the quarter ended September 30, 1998 was $24.6
million, an increase of approximately 56.4% over revenue of $15.7 million for
the quarter ended September 30, 1997. The increase in revenue for the quarter
ended September 30, 1998 was generated primarily from an expansion of contract
size within the Company's existing client base, as well as the awarding of
contracts from new clients and the expansion of services provided to clients.
Program expenses. Program expenses for the quarter ended September 30,
1998 were $19.2 million, an increase of 66.5% over program expenses of $11.5
million for the quarter ended September 30, 1997. As a percentage of revenue,
program expenses increased to 77.9% in the third quarter of 1998 from 73.1% in
the third quarter of 1997. The third quarter of 1997 benefited from the timing
of expenditures in that the earlier quarters of 1997 contained significant
recruiting and other initial direct costs while the third quarter of 1997 had
relatively few of these costs and as a result higher gross profit.
11
Compensation expense. Compensation expense for the quarter ended September
30, 1998 was $2.5 million compared to $1.3 million for the quarter ended
September 30, 1997. As a percentage of revenue, compensation expense increased
to 10.2% in the third quarter of 1998 from 8.0% in the comparable 1997 period.
This percentage increase is primarily attributable to the continued investment
in the area of employee training and development.
Bonus to majority shareholder. In 1997, the Company paid a bonus of $2.2
million to its majority shareholder of which $561,000 was charged to the quarter
ended September 30, 1997. No such bonus will be paid in 1998.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses for the quarter ended September 30, 1998 were $1.4
million, compared to $744,000 for the quarter ended September 30, 1997. As a
percentage of revenue, other general, selling and administrative expenses
increased to 5.6% in the third quarter of 1998 from 4.7% in the comparable 1997
period. This percentage increase is primarily due to higher rent and other costs
associated with the Company's move to its new headquarters, as well as higher
depreciation, leasing and professional service costs associated with investments
in information technology.
Operating income. Operating income for the quarter ended September 30,
1998 was $1.5 million compared to operating income of $1.7 million for the
quarter ended September 30, 1997. Before bonus to majority shareholder, the
operating income for the quarter ended September 30, 1997 was $2.2 million or
14.1% of revenue. As a percentage of revenue, operating income for the third
quarter of 1998 was 6.3%.
Other income, net. Other income consists primarily of income earned on the
Company's cash and cash equivalents. Other income for the quarter ended
September 30, 1998 was $789,000, compared to other income of $61,000 for the
quarter ended September 30, 1997. The increase is primarily due to the
investment of the net proceeds of the IPO.
Income tax provision. Income taxes for the three months ended September
30, 1998 consisted of Federal and state corporate income taxes at a combined
rate of 40% on the Company's taxable income. No taxes were required for the
three months ended September 30, 1997 because of the Company's S Corporation
status.
Pro forma net income. Net income for the quarter ended September 30, 1998
was $1.4 million compared to a pro forma net income of $1.7 million for the
quarter ended September 30, 1997. Pro forma net income assumes the Company was
taxed for Federal and state corporate income tax purposes as a C Corporation.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
Revenue. Revenue for the nine months ended September 30, 1998 was $70.2
million, an increase of approximately 83.7% over revenue of $38.2 million for
the nine months ended September 30, 1997. The increase in revenue for the nine
months ended September 30, 1998 was generated primarily from an expansion of
contract size within the Company's existing client base and the awarding of
contracts from new clients, as well as from the expansion of services provided
to clients.
12
Program expenses. Program expenses for the nine months ended September 30,
1998 were $53.0 million, an increase of 73.3% over program expenses of $30.6
million for the nine months ended September 30, 1997. As a percentage of
revenue, program expenses decreased to 75.5% in the first three quarters of 1998
from 79.9% in the first three quarters of 1997. A significant portion of this
decrease is attributable to certain costs associated with the initiation of
programs scheduled to begin in the first half of 1998 being expensed as incurred
in the fourth quarter of 1997. Additionally, the Company benefited from
providing ancillary services to several clients which typically have higher
margins than the Company's standard programs. The Company also achieved greater
efficiencies on several other programs.
Compensation expense. Compensation expense for the nine months ended
September 30, 1998 was $6.8 million compared to $3.8 million for the nine months
ended September 30, 1997. As a percentage of revenue, compensation expense
decreased to 9.6% in the first nine months of 1998 from 9.9% in the comparable
1997 period. This percentage decrease resulted primarily from the spreading of
management and administrative compensation expense over a larger base of
revenue, slightly offset by the Company's continued investments in its training
and development programs.
Bonus to majority shareholder. In 1997, the Company paid a bonus of $2.2
million to its majority shareholder of which $1.7 million was charged to the
nine months ended September 30, 1997. No such bonus will be paid in 1998.
Stock grant expense. There were no stock option grants which generated
compensation expense in the first three quarters of 1998. In the first three
quarters of 1997, the Company incurred a non-recurring, non-cash charge of $4.5
million related to stock issued to Charles T. Saldarini, the Company's President
and Chief Executive Officer.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses for the nine months ended September 30, 1998 were
$2.9 million, compared to $2.1 million for the nine months ended September 30,
1997. As a percentage of revenue, other general, selling and administrative
expenses decreased to 4.1% in the first three quarters of 1998 from 5.4% in the
comparable 1997 period. This percentage decline reflects the spreading of other
general, selling and administrative expenses over a larger base of revenue.
Operating income (loss). Operating income for the nine months ended
September 30, 1998 was $7.6 million compared to an operating loss of $4.3
million for the nine months ended September 30, 1997. Before bonus to majority
shareholder and stock grant expense, both of which were non-recurring expenses,
the operating income for the nine months ended September 30, 1997 was $1.8
million. As a percentage of revenue, operating income for the first three
quarters of 1998 was 10.8%.
Other income, net. Other income consists primarily of income earned on the
Company's cash and cash equivalents. Other income for the nine months ended
September 30, 1998 was $1.3 million, compared to other income of $110,000 for
the nine months ended September 30, 1997. The increase is primarily due to the
investment of the net proceeds of the IPO and the introduction of more
sophisticated cash management processes.
Income tax provision. Income taxes for the nine months ended September 30,
1998 consisted of Federal and state corporate income taxes at a combined rate of
40% on the portion of the Company's taxable income arising after the termination
of the S Corporation status, a provision for New Jersey state corporate tax of
approximately 2% on the Company's earnings during the period in
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which it qualified as an S Corporation, and a one time tax provision related to
the recognition of the net deferred tax liability recorded by the Company upon
terminating its S Corporation status.
Pro forma net income (loss). Pro forma net income for the nine months
ended September 30, 1998 was $5.4 million as compared to a pro forma net loss of
$4.2 million for the nine months ended September 30, 1997. Pro forma net income
(loss) for both periods assumes the Company was taxed for Federal and state
income tax purposes as a C Corporation. The pro forma effective tax rate was
40.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $54.3 million of cash and cash
equivalents, $1.0 million in short-term investments and no bank indebtedness. As
of September 30, 1998, working capital was $44.1 million. In May 1998, the
Company completed an initial public offering of its common stock. Net proceeds
to the Company from the offering, after expenses, were approximately $46.5
million.
For the nine months ended September 30, 1998, cash provided from operating
activities was $12.1 million compared to cash provided by operating activities
of $3.7 for the same period in 1997. The main component of cash provided from
operating activities for the nine months ended September 30, 1998 was net income
from operations of $8.0 million. Prior to the IPO, the Company's principal
source of funds had been cash flow from operations. Contracts generally provide
for advance payments, which typically fund the initial costs of a program.
Furthermore, the balances in certain current asset and current liability
accounts may fluctuate depending on a number of factors, including the number
and size of programs, contract terms and other timing issues. Accordingly,
contract payments receivable increased by $3.7 million from December 31, 1997 to
September 30, 1998 because significant periodic payments for several contracts
were scheduled towards the end of the third quarter. Similarly, unbilled costs
decreased by $3.3 million because contract terms provided for the billing of
substantially all services performed through September 30, 1998. There was an
increase of $4.6 million in accrued liabilities at September 30, 1998 primarily
due to an increase in the number and size of the programs in 1998 and the
resulting increase in accruals for payroll and payroll related expenses.
Cash used in investing activities of $2.7 million consisted of $1.7
million for capital expenditures and $1.0 million for the acquisition of
short-term investments.
Cash provided by financing activities for the nine months ended September
30, 1998 consisted of net proceeds of $46.5 million from the IPO, offset
partially by $5.8 million of distributions to the S Corporation shareholders,
representing shareholders' equity of the Company as of March 31, 1998 plus the
earnings of the Company from April 1, 1998 to May 18, 1998. Additionally, the
Company made a loan of $1.4 million to its President and Chief Executive Officer
in April 1998.
The Company presently believes that its cash and cash equivalents,
short-term investments, future cash flows generated from operations, and
borrowings available under its line of credit agreement will be sufficient to
meet its foreseeable operating and capital requirements. As part of the
Company's plan for the use of the proceeds from the Offering, the Company will
be evaluating and reviewing acquisition candidates in the ordinary course of
business.
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YEAR 2000 COMPLIANCE
The Company is on schedule with a project that addresses the Year 2000
issue of computer systems and other equipment with embedded chips or processors
not being able to properly recognize and process date-sensitive information
after December 31, 1999. Many systems use only two digits rather than four to
define the year and these systems will not be able to distinguish between the
year 1900 and the year 2000. This may lead to disruptions in the operations of
business and governmental entities resulting from miscalculations or system
failures. The Company's project to address the year 2000 issue has been divided
into two sections. One section addresses the Company's internal business
systems. The other section addresses the business systems of the Company's key
business partners. Key business partners are those clients and vendors that have
a material impact on the Company's operations.
The portion of the project that deals with the internal business systems
of the Company has six major phases: (i) inventorying all Y2K items; (ii)
prioritizing all Y2K items; (iii) assessing all Y2K items; (iv) repairing or
replacing all systems or hardware that are not Y2K compliant; (v) testing
repaired or replaced Y2K items; and (vi) designing and implementing contingency
plans for those systems that cannot be repaired or replaced by January 1, 2000.
As of September 30, 1998, the inventory, priority and assessment phases were
complete and the repair or replace phase was 70% complete. All phases are on
schedule to be completed by March 31, 1999.
The section of the project that deals with the business systems of key
business partners has three major phases: (i) identifying all key business
partners; (ii) evaluating the status of their Y2K compliance efforts; and (iii)
determining alternatives and contingency plan requirements. As of September 30,
1998, all key business partners have been identified and the Company is in the
process of determining their Y2K status. Contingency planning is expected to be
completed by June 30, 1999.
The total estimated additional cost of the required modifications for the
Company's internal business systems to achieve Y2K compliance is anticipated to
be in the range of $25,000 to $75,000.
Failure to make all internal business systems Y2K compliant could result
in an interruption in, or a failure of, some of the Company's business
activities or operations. In addition, Y2K disruptions in client operations
could result, among other things, in one or more clients missing scheduled
payments which could impact the Company's cash flow. Y2K disruptions in the
operations of key vendors could also impact the Company's ability to fulfill
some of its contractual obligations. If one or more of these situations occur,
the Company's financial position, results of operations or cash flows could be
materially and adversely affected.
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Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds On May 19, 1998, the Company
completed its initial public offering (the "IPO") of 3,220,000 shares of Common
Stock (including 420,000 shares in connection with the exercise of the
underwriters' over-allotment option) at a price per share of $16.00. Net
proceeds to the Company after expenses of the IPO were approximately $46.5
million.
(1) Effective date of Registration Statement: May 19, 1998 (File No.
333-46321).
(2) The Offering commenced on May 19, 1998 and was consummated on May
22, 1998.
(4)(i) All securities registered in the Offering were sold.
(4)(ii) The managing underwriters of the Offering were Morgan Stanley Dean
Witter, William Blair & Company and Hambrecht & Quist.
(4)(iii) Common Stock, $.01 par value
(4)(iv) Amount registered and sold: 3,220,000 shares
Aggregate purchase price: $51,520,000
All shares were sold for the account of the Issuer.
(4)(v) $3,606,400 in underwriting discounts and commissions were paid to
the underwriters. $1,389,276 of other expenses were incurred,
including estimated expenses.
(4)(vi) $46,524,000 of net Offering proceeds to the Issuer.
(4)(vii) Use of Proceeds:
$46,524,000 temporary investments with maturities of up to nine
months as of September 30, 1998.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
November 10, 1998 PROFESSIONAL DETAILING, INC.
By: /s/ Charles T. Saldarini
----------------------------------
Charles T. Saldarini, President
and Chief Executive Officer
By: /s/ Brian C. Boyle
----------------------------------
Brian C. Boyle
Chief Financial and Accounting
Officer
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