UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 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 jurisdiction (I.R.S. Employer
of organization) Identification No.)
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 August 11, 1998 the Registrant had a total of 10,684,562 shares of Common
Stock, $.01 par value, outstanding.
INDEX
PROFESSIONAL DETAILING, INC.
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements...........................................
Balance Sheets
June 30, 1998 and December 31, 1997............................ 3
Statements of Operations -- Three and
Six Months Ended June 30, 1998 and 1997........................ 4
Statements of Cash Flows -- Six Months
Ended June 30, 1998 and 1997................................... 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 1. Legal Proceedings .............................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds...................... 15
Item 3. Default Upon Senior Securities.................. Not Applicable
Item 4. Submission of Matters to a Vote of
Security Holders............................. Not Applicable
Item 5. Other Information............................... Not Applicable
SIGNATURES................................................................ 17
2
PROFESSIONAL DETAILING, INC.
BALANCE SHEETS
As Of
---------------------------
December 31, June 30,
1997 1998
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents ................................. $ 5,759,918 $ 51,882,830
Contract payments receivable .............................. 2,073,356 8,488,406
Unbilled costs and accrued profits on contracts in progress 3,332,766 5,891
Receivable from affiliate, net ............................ 27,161 --
Deferred training ......................................... 407,255 1,692,832
Other current assets ...................................... 297,032 1,163,464
------------ ------------
Total current assets .............................. 11,897,488 63,233,423
Net property, plant & equipment ........................... 547,377 2,006,386
------------ ------------
Total assets .............................................. $ 12,444,865 $ 65,239,809
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .......................................... $ 473,832 $ 1,421,906
Payable to affiliate, net ................................. -- 172,242
Note payable .............................................. 68,365 --
Accrued incentives ........................................ 2,806,839 3,769,086
Accrued salaries and wages ................................ 1,417,789 1,671,950
Unearned contract revenue ................................. 6,635,769 11,293,916
Other accrued expenses .................................... 2,117,330 2,125,389
------------ ------------
Total current liabilities ......................... 13,519,924 20,454,489
------------ ------------
Shareholders' equity:
Common Stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding,
1997 - 7,464,562 and June 30, 1998 - 10,684,562 ....... 74,646 106,846
Additional paid-in capital ................................ 4,193,852 46,515,764
Retained deficit .......................................... (5,241,735) (330,107)
Deferred compensation ..................................... (101,822) (79,189)
Loan to officer ........................................... -- (1,427,994)
------------ ------------
Total shareholders' equity (deficit) .............. (1,075,059) 44,785,320
------------ ------------
Total liabilities & shareholders' equity .................. $ 12,444,865 $ 65,239,809
============ ============
The accompanying notes are an integral part of these financial statements
3
PROFESSIONAL DETAILING, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue .............................................. $ 12,500,540 $ 22,128,797 $ 22,481,035 $45,579,016
Program expenses, (including related party
amounts of $363,882 and $482,518 for
the quarter ended June 30, 1997 and 1998,
and $774,373 and $1,015,948 for the six
months ended June 30, 1997 and 1998) ............... 10,457,269 17,832,898 19,044,422 33,793,435
----------- ------------ ------------ -----------
Gross profit ......................................... 2,043,271 4,295,899 3,436,613 11,785,581
Compensation expense ................................. 1,224,697 2,272,820 2,519,315 4,270,131
Bonus to majority shareholder ........................ 560,750 -- 1,121,500 --
Stock grant expense .................................. -- -- 4,470,000 --
Other general, selling, and administrative expenses .. 632,611 858,905 1,318,544 1,460,708
------------ ------------ ------------ -----------
Total general, selling and administrative expenses ... 2,418,058 3,131,725 9,429,359 5,730,839
------------ ------------ ------------ -----------
Operating income (loss) .............................. (374,787) 1,164,174 (5,992,746) 6,054,742
Other income, net .................................... 38,067 464,511 48,936 554,385
------------ ------------ ------------ -----------
Income (loss) before provision for income taxes ...... (336,720) 1,628,685 (5,943,810) 6,609,127
Provision for income taxes ........................... -- 35,201 -- 35,201
------------ ------------ ------------ -----------
Net income (loss) .................................... $ (336,720) $ 1,593,484 $ (5,943,810) $ 6,573,926
============ ============ ============ ===========
Basic net income (loss) per share .................... $ (0.05) $ 0.18 $ (0.80) $ 0.80
============ ============ ============ ===========
Diluted net income (loss) per share .................. $ (0.05) $ 0.18 $ (0.80) $ 0.80
============ ============ ============ ===========
Basic weighted average number
of shares outstanding .............................. 7,464,562 8,872,254 7,464,562 8,168,408
============ ============ ============ ===========
Diluted weighted average number
of shares outstanding .............................. 7,464,562 8,984,372 7,464,562 8,254,678
============ ============ ============ ===========
Pro forma data (see note 3)
Income (loss) before provision for taxes ............. $ (336,720) $ 1,628,685 $ (5,943,810) $ 6,609,127
Pro forma provision for income tax ................... -- 651,474 -- 2,643,651
------------ ------------ ------------ -----------
Pro forma net income (loss) .......................... $ (336,720) $ 977,211 $ (5,943,810) $ 3,965,476
============ ============ ============ ===========
Pro forma basic net income (loss) per share .......... $ (0.05) $ (0.11) $ (0.80) $ 0.49
============ ============ ============ ===========
Pro forma diluted net income (loss) per share ........ $ (0.05) $ (0.11) $ (0.80) $ 0.48
============ ============ ============ ===========
Pro forma basic weighted average
number of shares outstanding ....................... 7,464,562 8,872,254 7,464,562 8,168,408
============ ============ ============ ===========
Pro forma diluted weighted average
number of shares outstanding ....................... 7,464,562 8,984,372 7,464,562 8,254,678
============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements
4
PROFESSIONAL DETAILING, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------------
1997 1998
---- ----
Cash Flows From Operating Activities
Net income (loss) from operations ..................... $(5,943,810) $ 6,573,926
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation .......................................... 53,519 115,697
Non-cash compensation expense - stock grant to
officer ............................................. 4,050,000 --
Deferred compensation ................................. 19,393 22,633
Other changes in assets and liabilities:
(Increase) decrease in contract payments receivable . (4,844,154) (6,415,049)
(Increase) decrease in unbilled costs ............... (544,951) 3,326,875
(Increase) decrease in deferred training ............ (229,519) (1,285,577)
(Increase) decrease in other current assets ......... (106,089) (866,432)
Increase (decrease) in accounts payable ............. (563,822) 948,074
Increase (decrease) in accounts payable to affiliate 6,453 199,403
Increase (decrease) in accrued liabilities .......... 1,374,706 1,224,467
Increase (decrease) in unearned contract revenue .... 5,837,351 4,658,147
----------- ------------
Net cash provided by (used in) operating activities (890,923) 8,502,164
----------- ------------
Cash Flows Used In Investing Activities
Purchase of property and equipment .................. (102,543) (1,574,707)
----------- ------------
Net cash used in investing activities ............. (102,543) (1,574,707)
----------- ------------
Cash Flows Provided By (Used In) Financing Activities
Proceeds from issuance of note payable .............. 100,000 --
Payments on note payable ............................ (16,053) (68,365)
Distributions to S Corporation shareholders ......... -- (5,846,325)
Net proceeds from the issuance of common stock ...... -- 46,538,139
Loan to shareholder ................................. -- (1,427,994)
----------- ------------
Net cash provided by (used in) financing activities 83,947 39,195,455
----------- ------------
Net increase (decrease) in cash and cash equivalents .... (909,519) 46,122,912
Cash and cash equivalents - beginning ................... 2,403,011 5,759,918
----------- ------------
Cash and cash equivalents - ending ...................... $ 1,493,492 $ 51,882,830
=========== ============
Cash paid for interest .................................. $ 3,511 $ 2,339
=========== ============
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 six month periods ended June 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 three months ended June 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 income for the three and
six months ended June 30, 1998 and 1997 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. The pro forma adjustment for income taxes does not include
the one-time tax provision related to the recognition of the net deferred tax
liability recorded by the Company upon terminating its S Corporation status.
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 six month periods ended
June 30, 1998 and 1997 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Average shares outstanding - basic ..... 8,872,254 7,464,562 8,168,408 7,464,562
Dilutive effect of stock options ....... 112,118 -- 86,270 --
--------- --------- --------- ---------
Average shares outstanding - diluted ... 8,984,372 7,464,562 8,254,678 7,464,562
========= ========= ========= =========
For the three and six month periods ended June 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 does not enter 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.
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
options 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
7
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.
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 outsourced 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. The Company has financed its growth primarily
with cash generated from operations.
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
9
Company delivering a specified package of services. Contracts typically include
performance 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 expense 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
10
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.
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 Six Months Ended
June 30, June 30,
------------------ --------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue ...................................... 100.0% 100.0% 100.0% 100.0%
Program expenses ............................. 83.7 80.6 84.7 74.1
----- ----- ----- -----
Gross profit ................................. 16.3 19.4 15.3 25.9
Compensation expense ......................... 9.8 10.2 11.2 9.4
Bonus to majority shareholder ................ 4.5 -- 5.0 --
Stock grant expense .......................... -- -- 19.9 --
Other general, selling, &
administrative expenses .................... 5.0 3.9 5.9 3.2
Total general, selling &
administrative expenses .................... 19.3 14.1 42.0 12.6
----- ----- ----- -----
Operating income (loss) ...................... (3.0) 5.3 (26.7) 13.3
Other income, net ............................ 0.3 2.1 0.2 1.2
----- ----- ----- -----
Income before provision for taxes ............ (2.7) 7.4 (26.5) 14.5
Provision for income taxes ................... -- 0.2 -- 0.1
----- ----- ----- -----
Net Income (loss) ............................ (2.7)% 7.2% (26.5)% 14.4%
===== ===== ===== =====
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenue. Revenue for the quarter ended June 30, 1998 was $22.1 million, an
increase of approximately 77.0% over revenue of $12.5 million for the quarter
ended June 30, 1997. The increase in revenue for the quarter ended June 30, 1998
was generated primarily from an expansion of the Company's client base and the
number of contracts awarded, an increase in average contract size, and the
expansion of services provided to clients.
Program expenses. Program expenses for the quarter ended June 30, 1998
were $17.8 million, an increase 70.5% over program expenses of $10.5 million for
the quarter ended June 30, 1997. As a percentage of revenue, program expenses
decreased to 80.6% in the second quarter of 1998 from 83.7% in the second
quarter of 1997. This decrease was primarily attributable to the Company
continuing to achieve greater efficiencies in executing its programs.
11
Compensation expense. Compensation expense for the quarter ended June 30,
1998 was $2.3 million compared to $1.2 million for the quarter ended June 30,
1997. As a percentage of revenue, compensation expense increased to 10.2% in the
second quarter of 1998 from 9.8% in the comparable 1997 period. This percentage
increase is primarily attributable to additional hirings in connection with
infrastructure expansion including in the areas of Business Development,
Training and Information Technology.
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 June 30, 1997. No such bonus is anticipated to be paid in 1998.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses for the quarter ended June 30, 1998 were $859,000,
compared to $633,000 for the quarter ended June 30, 1997. As a percentage of
revenue, other general, selling and administrative expenses decreased to 3.9% in
the second quarter of 1998 from 5.0% in the comparable 1997 period. This
percentage decline reflects the spreading of other general, selling and
administrative expenses over a larger base of revenue. The Company moved to its
new headquarters in May 1998; the larger rental costs associated with these
facilities will increase the expenses in this category in future periods.
However, as a percentage of revenue, it is not expected to have a material
effect.
Operating income (loss). Operating income for the quarter ended June 30,
1998 was $1.2 million compared to an operating loss of $375,000 for the quarter
ended June 30, 1997. Before bonus to majority shareholder, the operating income
for the quarter ended June 30, 1997 was $186,000 or 1.5% of revenue. As a
percentage of revenue, operating income for the second quarter of 1998 was 5.3%.
Other income, net. Other income consists primarily of income earned on the
Company's cash and cash equivalents. Other income for the quarter ended June 30,
1998 was $465,000, compared to other income of $38,000 for the quarter ended
June 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 June 30,
1998 consisted of federal and state corporate income taxes 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 Corporation's earnings during the period in 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. The Company expects its effective tax rate to approximate
40% in future periods.
Pro forma net income (loss). Pro forma net income for the quarter ended
June 30, 1998 was $977,000 compared to a pro forma net loss of $337,000 for the
quarter ended June 30, 1997. Pro forma net income (loss) for both periods
assumes the Company was taxed for Federal and state corporate income tax
purposes as a C Corporation. The pro forma effective tax rate for the quarter
ended June 30, 1998 was 40%.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Revenue. Revenue for the six months ended June 30, 1998 was $45.6 million,
an increase of approximately 102.7% over revenue of $22.5 million for the six
months ended June 30, 1997. The increase in revenue for the six months ended
June 30, 1998 was generated primarily from an
12
expansion of the Company's client base and the number of contracts awarded, an
increase in average contract size, and the expansion of services provided to
clients.
Program expenses. Program expenses for the six months ended June 30, 1998
were $33.8 million, an increase 77.4% over program expenses of $19.0 million for
the six months ended June 30, 1997. As a percentage of revenue, program expenses
decreased to 74.1% in the first half of 1998 from 84.7% in the first half of
1997. A significant portion of this decrease is attributable to the fact that
certain costs associated with the initiation of programs scheduled to begin in
the first half of 1998 were expensed as incurred in the fourth quarter of 1997.
Additionally, the Company benefited from providing ancillary services to several
clients; these services typically have higher margins than the Company's
standard programs. Also, the Company achieved greater than normal efficiencies
on several other programs.
Compensation expense. Compensation expense for the six months ended June
30, 1998 was $4.3 million compared to $2.5 million for the six months ended June
30, 1997. As a percentage of revenue, compensation expense decreased to 9.4% in
the first six months of 1998 from 11.2% 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 infrastructure.
Bonus to majority shareholder. In 1997, the Company paid a bonus of $2.2
million to its majority shareholder of which $1.1 million was charged to the six
months ended June 30, 1997. No such bonus is anticipated to be paid in 1998.
Stock grant expense. There were no stock option grants which generated
compensation expense in the first half of 1998. In the first half 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 six months ended June 30, 1998 were $1.5
million, compared to $1.3 million for the six months ended June 30, 1997. As a
percentage of revenue, other general, selling and administrative expenses
decreased to 3.2% in the first half of 1998 from 5.9% 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 six months ended June
30, 1998 was $6.1 million compared to an operating loss of $6.0 million for the
six months ended June 30, 1997. Before bonus to majority shareholder and stock
grant expense, both of which were non-recurring expenses, the operating loss for
the six months ended June 30, 1997 was $401,000. As a percentage of revenue,
operating income for the first half of 1998 was 13.3%.
Other income, net. Other income consists primarily of income earned on the
Company's cash and cash equivalents. Other income for the six months ended June
30, 1998 was $554,000, compared to other income of $49,000 for the six months
ended June 30, 1997. The increase is primarily due to the investment of the net
proceeds of the IPO.
Income tax provision. Income taxes for the six months ended June 30, 1998
consisted of Federal and state corporate income taxes 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 Corporation's earnings during the period in which it qualified as an S
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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. The Company expects its effective tax rate to approximate
40% in future periods.
Pro forma net income (loss). Pro forma net income for the six months ended
June 30, 1998 was $4.0 million as compared to a pro forma net loss of $5.9
million for the six months ended June 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 for the six months
ended June 30, 1998 is 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $51.9 million of cash and cash
equivalents and no bank indebtedness. As of June 30, 1998, working capital was
$42.8 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 six months ended June 30, 1998, cash provided from operating
activities was $8.5 million compared to cash used in operating activities of
$891,000 for the same period in 1997. The main component of cash provided from
operating activities for the six months ended June 30, 1998 was net income from
operations of $6.6 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 $6.4 million from December 31, 1997 to
June 30, 1998 because significant periodic payments for several contracts were
scheduled towards the end of the second quarter. Some of these invoices resulted
in an increase of $4.6 million in unearned contract revenue. Also, unbilled
costs decreased by $3.3 million during the same period because contract terms
provided for the billing of substantially all services performed through June
30, 1998.
Cash used in investing activities consisted entirely of the purchases of
property and equipment of $1.6 million.
Cash provided by financing activities for the six months ended June 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, 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.
Part II - Other Information
Item 1 - Not Applicable
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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.
(3) Not applicable.
(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. $1,375,000 of other expenses were incurred, including
estimated expenses.
(4)(vi) $46,538,600 of net Offering proceeds to the Issuer.
(4)(vii) Use of Proceeds:
$46,538,000 temporary investments with maturities of three months or
less as of June 30, 1998.
Item 3 - 5 - Not Applicable
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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.
August 11, 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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